2019
Annual Report
Powering the 4th Industrial Revolution
A Message from Our CEO
“We enable
customer
innovation by
delivering highly-
engineered,
application-
critical, precision
power solutions
for the 4th
Industrial
Revolution.”
Dear Stockholders:
Fiscal 2019 was a transformational year for Advanced Energy as we accelerated
our strategy to be a diversified global leader of precision electric power conversion
solutions. Through the acquisition of Artesyn Embedded Power, Advanced Energy
is now a leading supplier in each of the four major market verticals we serve:
Semiconductor Equipment, Industrial & Medical applications, Data Center
Computing, and Telecom & Networking. At the same time, we took actions to
streamline our Company while increasing investment in our critical power
technologies. As a result, we delivered record revenue and solid profitability during
a period of served market weakness and believe we are positioned for accelerated
earnings growth going forward.
We are in the midst of the 4th Industrial Revolution. The ability to collect, compute,
store and transmit data continues to transform our lives. The use of data analytics
is impacting many industries such as health care, automation, manufacturing,
security, safety, entertainment and education. These complex analytics are
enabled by innovations in technologies such as advanced computing, data storage,
Internet of Things and high-speed connectivity. Our broad portfolios of power
delivery solutions are at the center of these essential technologies and applications
that enable the 4th Industrial Revolution.
During fiscal 2019, we:
• Delivered record revenue with nearly 10% growth over 2018
• Acquired Artesyn Embedded Power and increased our served applications
• Increased our market presence and content
• Invested in next generation technologies, scale and business continuity
• Continued to develop our culture across our growing global organization
• Developed initiatives around our environment & sustainability goals
As we continue to pursue our growth strategy, with our increased addressable
market, new verticals, additional applications, continuing focused innovation, and
the efficiency gains we can achieve through the integration of Artesyn Embedded
Power, we are very excited about the future of Advanced Energy.
On behalf of our employees and directors, we thank you for your continued support
and confidence in our Company.
Regards,
Yuval Wasserman
President & Chief Executive Officer
March 10, 2020
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☑
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the fiscal year ended December 31, 2019.
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
(State or other jurisdiction of incorporation or organization)
1595 Wynkoop Street, Suite 800, Denver, CO
(Address of principal executive offices)
84 - 0846841
(I.R.S. Employer Identification No.)
80202
(Zip Code)
Registrant’s telephone number, including area code: (970) 407 - 4670
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par
value
Trading Symbol(s)
AEIS
Name of each exchange on which registered
NASDAQ Global Select Market
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes No
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 No
Indicate by check mark whether the registrant has submitted every 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 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. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
(Do not check if a smaller
reporting company)
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
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $2,135,524,772 as of June 28, 2019,
based upon the price at which such common stock was last sold on such date.
As of February 28, 2020, there was 38,407,225 shares of the registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10 - K incorporates information by reference from the registrant’s definitive proxy statement for its
2020 Annual Meeting of Stockholders (to be filed with the Commission under Regulation 14A no later than 120 days after the end of the registrant’s
fiscal year ended December 31, 2019).
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10 - K
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
5
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
31
32
32
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . . .
33
34
36
50
52
97
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . . . 102
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
ITEM 16. FORM 10 - K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
2
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10 - K includes or incorporates by reference “forward-looking statements” within
the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act
of 1934, as amended. All statements contained or incorporated by reference in this Annual Report on Form 10 - K, other
than statements of historical fact, are “forward-looking statements.” For example, statements relating to our beliefs,
expectations, plans, projections, forecasts, goals, and estimates are forward-looking statements, as are statements that
specified actions, conditions, or circumstances will continue or change. Forward-looking statements involve risks and
uncertainties. In some cases, forward-looking statements can be identified by the inclusion of words such as "believe,"
"expect," "plan," "anticipate," "estimate," "may," "might," "could," "should," "will," "continue," "intend," "goal," and
similar words.
Some of the forward-looking statements in this Annual Report on Form 10 - K are, or reflect, our expectations or
projections relating to:
our future revenues;
our future sales, including backlog orders;
our ability to be successful in the design win process with our customers;
unanticipated costs in fulfilling our warranty obligations for solar inverters;
our future gross profit;
our competition;
•
•
•
•
•
•
• market acceptance of, and demand for, our products;
•
the fair value of our assets and financial instruments;
•
research and development expenses;
•
selling, general, and administrative expenses;
•
sufficiency and availability of capital resources;
•
capital expenditures;
•
our production and factory strategy;
•
our share repurchase program;
•
our tax assets and liabilities;
•
our other commitments and contingent liabilities;
•
adequacy of our reserve for excess and obsolete inventory;
•
adequacy of our warranty reserves;
•
our estimates of goodwill and related fair value of assets acquired;
•
restructuring activities and expenses;
•
the integration of our acquisitions;
•
general global political and economic conditions; and
•
industry trends.
Our actual results could differ materially from those projected or assumed in our forward-looking statements
because forward-looking statements by their nature are subject to risks and uncertainties. Factors that could contribute to
these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include
the factors described in Item 1A “Risk Factors.” Other factors might also contribute to the differences between our
forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or
the reasons why our actual results might differ.
3
Market and Industry Data
The market and industry data used in this Annual Report on Form 10-K are based on independent industry
publications, customers, trade or business organizations, reports by market research firms and other published statistical
information from third parties, as well as information based on management’s good faith estimates, which we derive
from our review of internal information and independent sources. Although we believe these sources to be reliable, we
have not independently verified the accuracy or completeness of the information.
4
PART I
Unless the context otherwise requires, as used in this Form 10 - K, references to “Advanced Energy”, “the
Company”, “we”, “us” or “our” refer to Advanced Energy Industries, Inc. and its consolidated subsidiaries.
ITEM 1. BUSINESS
Overview
Advanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and
control solutions to our global customers. We design, manufacture, sell and support precision power products that
transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-
controllable, usable power that is predictable, repeatable and customizable. Our power solutions enable innovation in
complex semiconductor and thin film plasma processes such as dry etch, strip, chemical and physical deposition, high
and low voltage applications such as process control, computing, networking, telecommunication, analytical
instrumentation, medical equipment, industrial technology and temperature-critical thermal applications such as material
and chemical processing. We also supply related instrumentation products for advanced temperature measurement and
control, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring
solutions for multiple industrial markets. Our network of global service support centers provides local repair and field
service to our customers in key regions as well as upgrade and refurbishment services, and sales of used equipment to
businesses that use our products. Our products are primarily sold into the semiconductor equipment, industrial and
medical, data center computing, and telecom networking markets. Our recently-launched PowerInsight software product
uses data analytics and advanced algorithms to provide our customers with actionable information, such as predictive
failure, preventive maintenance and process performance. Advanced Energy operates in a single segment structure for
power electronics conversion products, and we operate in four vertical markets or applications to enable tracking of
market trends.
We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. Our executive offices are located
at 1595 Wynkoop Street, Suite 800, Denver, Colorado 80202, and our telephone number is 970 - 407 - 4670.
Recent Acquisitions
In September 2019, we completed the acquisition of Artesyn Embedded Technologies, Inc.’s (“Artesyn”)
Embedded Power business. Artesyn’s Embedded Power business is one of the world’s largest providers of highly
engineered, application-specific AC-DC and DC-DC power supplies for demanding applications. This acquisition
diversifies our product portfolio and gave us access to attractive growth markets, including hyperscale data centers,
telecom infrastructure in next generation 5G networks, embedded industrial power applications and medical diagnostic
and treatment applications.
In September 2018, we acquired LumaSense Technologies Holdings, Inc. ("LumaSense"). LumaSense designs,
manufactures and sells a line of photonic-based measurement and monitoring solutions that are synergistic with the
Company’s precision power control technologies in both semiconductor and industrial markets allowing customers’ the
ability to better control critical parameters of thermal and material processes. The acquisition of LumaSense
complements our leading pyrometry solutions with additional fiber optic thermometry for an extended range of
semiconductor applications, provides integrated industrial temperature control and metrology applications for both thin
films coating and thermal processing, and adds complementary industrial pyrometry and gas sensing technologies to our
portfolio of solutions to the semiconductor and industrial markets.
In May 2018, we acquired the electrostatic technology and product line from Monroe Electronics, Inc. located
in Lyndonville, New York. The electrostatic detection and measurement instrumentation products serve specific areas of
testing and monitoring of ionization systems across a variety of applications. In addition, the non-contact electrostatic
5
voltmeters and field meters complement those of Trek. Production of these electrostatic products has been integrated into
Trek’s manufacturing facility in nearby Lockport, New York.
In February 2018, we acquired Trek Holding Co., Ltd ("Trek"), a privately held company with operations in
Tokyo, Japan and Lockport, New York. Trek has a 95% ownership interest in its U.S. subsidiary which is also its
primary operation. Trek designs, manufactures and sells high-voltage amplifiers, power supplies and generators, high-
performance electrostatic measurement instruments and electrostatic discharge (ESD) sensors and monitors to the global
marketplace. Trek’s standard and custom-OEM products are used in production and research in aerospace, automotive,
electronics, electrostatics, medical, military, nanotechnology, photovoltaic/solar, plasma, semiconductor and test and
measurement applications. Trek’s comprehensive portfolio of power supply products strengthens and accelerates
Advanced Energy’s growth in high voltage applications.
For additional information, see Note 2. Business Acquisitions in Part II, Item 8 "Financial Statements and
Supplementary Data".
Products and Services
PRODUCTS
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 must
meet demanding requirements in efficiency, flexibility, performance and reliability. We also provide repair and
maintenance services for our products.
We principally serve global original equipment manufacturers ("OEM") and end customers in a wide range of
semiconductor and industrial technology applications with a broad range of advanced and embedded power products.
Our advanced power products are solutions that are designed to deliver precise power, control and measurements of
processes used in a diverse set of applications in semiconductor device manufacturing, thin film deposition of advanced
materials, thermal power control, instrumentation and gas detection and monitoring. Our embedded power products are
solutions designed to provide stable and efficient power in mission critical applications across a variety of industrial
technology applications such as telecommunication and networking equipment, servers and storage systems, medical
equipment, robotics, motion control and test and measurement equipment.
Our process power solutions include direct current ("DC"), pulsed DC, low frequency alternating current
(“AC”), high voltage, and radio frequency ("RF") power supplies, RF matching networks, remote plasma sources for
reactive gas applications and RF instrumentation. These solutions are used in a wide range of thin film processes across
multiple semiconductor applications and for deposition of advanced materials in adjacent industries such as flat panel
display, solar cell manufacturing, thin film coating, and hard coatings.
Our power control modules and thermal instrumentation products are used in the semiconductor and adjacent
industries, in which time-temperature cycles affect material properties, productivity, and yield. These products are used
in processes such as rapid thermal processing, chemical vapor deposition and crystal growing, which require non-contact
temperature measurement. They are also used in many industrial production applications for chemical processing, metal
and glass manufacturing, and numerous other general industrial power applications.
Our gas detection and monitoring products are based on proven infrared technologies to detect and analyze
gases in a wide range of industrial applications, including automotive, energy, environmental controls, aerospace,
medical and research. Our products offer cost-effective online monitoring, allowing our customers to automate manual
monitoring or sampling processes that will achieve process efficiency, waste reduction, and lower costs of maintenance.
Our embedded power products are designed to maximize energy conversion efficiency, minimize physical
sizes, and to meet a variety of standards, such as IEC 60601-1 for medical equipment or IEC 60950-1 for information
technology equipment. Our low-voltage AC-DC and DC-DC power supplies are used in a wide variety of end markets
such as data center computing, telecom, networking, medical equipment, and broad industrial electronics. These
6
products feature industry-leading efficiency and density, to maximize performance, lower energy costs, and minimize
the form factor. These products target applications where energy usage is high, such as data centers, but also applications
that require a highly reliable and rugged design for use in demanding climate conditions, such as a wireless cellular
tower.
Our high and lower voltage DC-DC products are designed to meet the demanding requirements of OEMs
worldwide. Our DC-DC solutions and custom-built power conversion products offer high and low voltage topology,
providing wide input and output operating ranges while retaining excellent stability and efficiencies ranging from
benchtop and rackmount systems to micro-size printed circuit board mount modules. The high voltage DC-DC products
target applications including semiconductor wafer processing and metrology, electrostatic clamping of substrates,
scientific instrumentation, mass spectrometry, and analytical x-ray systems for industrial and analytical applications. The
low voltage DC-DC board mounted solutions are designed for a wide range of industrial applications such as healthcare,
telecommunications, test and measurement, instrumentation, industrial equipment and distributed power in server and
storage systems.
Our big data analytics solution transforms the data acquired from our power delivery systems into useable
insights, through a combination of enhanced data sets and advanced analytics. These capabilities allow our customers to
maximize performance, reduce costs and improve yield in their manufacturing processes.
GLOBAL SUPPORT
Our global support services group offers in-warranty and out-of-warranty repair services in the regions in which
we operate, providing us with revenue opportunities from repair, upgrades and retrofit offerings to our installed base.
Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the
significant costs of system downtime. They expect suppliers to offer comprehensive local repair service and customer
support. In addition to product repairs our customers look for upgrade and retrofit offerings to extend the useable life of
their capital equipment for additional technology generations. To meet these market requirements, we maintain a
worldwide support organization comprising both direct and indirect activities through partnership with local distributors
primarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Israel,
Germany, and United Kingdom.
As of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product
line representing a strategic shift in our business. As such, all inverter revenues, costs, assets and liabilities are reported
in Discontinued Operations for all periods presented herein and we currently report as a single unit. However, extended
warranties historically sold and reflected as “Deferred Revenue” on our Consolidated Balance Sheets, represent future
revenue and service costs to be incurred by our global services group and are reflected as continuing operations for
historical periods and future periods. In May of 2019, we divested the US central inverter repair and support business to
Bold Renewables. See Note 4. Disposed and Discontinued Operations in Part II, Item 8 "Financial Statements and
Supplementary Data."
Markets
Our products compete in markets for high tech applications using capital equipment. The majority of our
markets are not generally subject to significant seasonality; however, these markets are cyclical due to sudden changes in
customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for
customers’ products, inventory levels relative to demand, government incentives and subsidies, and access to affordable
capital. Other factors, such as global economic and market conditions and technological advances in the applications we
serve can also have an impact on our financial results, both positively and negatively. For more information related to
the markets in which we compete and the current environment in those markets, see Business Environment and Trends in
Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations."
7
SEMICONDUCTOR EQUIPMENT MARKET
Customers in the semiconductor capital equipment market incorporate our products into equipment that make
integrated circuits. Our process power conversion products and systems provide the energy to enable thin film plasma-
based processes, such as dry etch, strip, chemical and physical deposition. Precise control over the energy delivered to
plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and
performance. Our high voltage products are used in applications such as ion implant, wafer inspection and metrology,
electrostatic measurement, and electrostatic clamping of the wafers. Our thermal instrumentation products measure the
temperature of the processed substrate or the process chamber. Our power control modules are used in thermal
processing applications and for epitaxial growth of photonics or microelectronic devices. Our remote plasma sources
deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement. Our low
voltage power products deliver stable, clean, and reliable power and are used in semiconductor Automatic Test
Equipment (ATE), wafer processing equipment, back-end assembly equipment, and auxiliary equipment such as wafer
handling equipment. Our strategy in the semiconductor market is to expand our content of power related products and
grow share.
INDUSTRIAL & MEDICAL MARKETS
Customers in the Industrial & Medical markets incorporate our advanced power, embedded power and
measurement products into a wide variety of equipment used in applications such as advanced material fabrication,
medical devices, analytical instrumentation, test and measurement equipment, robotics, motor drives and connected
light-emitting diodes.
OEM customers design equipment utilizing our process power technologies in a variety of industrial
applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, and
similar thin film manufacturing, including data storage, and decorative, hard and optical coatings. These applications
employ similar technologies to those used in the semiconductor market to deposit films on non-semiconductor
substrates. Our strategy around these applications is to leverage our thin film deposition technologies into an expanded
set of new materials and applications in adjacent markets.
We serve Industrial & Medical markets with mission-critical power components that deliver high reliability,
precise, low noise or differentiated power to the equipment they serve. Examples of products sold into Industrial &
Medical markets include high voltage products for analytical instrumentation, and medical equipment, low voltage
power supplies used in applications for medical devices, test and measurement, medical lasers, scientific instrumentation
and industrial equipment, and power control modules and thermal instrumentation products for material fabrication,
processing and treatment. Our gas monitoring products serve multiple applications in the energy market, air quality
monitoring and automobile emission monitoring and testing. Our strategy in the Industrial & Medical markets is to grow
and expand our addressable market both organically through our global distribution channels and through acquisitions of
products and technologies that are complimentary and adjacent to our core power conversion applications.
DATA CENTER COMPUTING MARKETS
As a result of the acquisition of Artesyn in September 2019, we entered the Data Center Computing market
with industry-leading products and low-voltage power conversion technologies. We sell to many data center server and
storage manufacturers, original design manufacturers of server and storage systems and cloud service providers or
hyperscalers, who are designing and deploying their own data center server and storage equipment. Our power systems,
power shelves, AC-DC and DC-DC power conversion products feature industry-leading performance and are used in a
variety of computing applications such as server rack power, back-up power and CPRS server power supply, including a
wide range of standard and custom power solutions used in data center racks, server and storage systems. We offer our
customers industry-leading technology with a strong reputation and deep customer relationships. Our strategy in data
center computing is to penetrate the growing hyperscale market and leverage our leading capabilities in power density
and efficiency to grow share in the broader data center market.
8
TELECOM & NETWORKING MARKETS
The acquisition of Artesyn in September 2019 brought us a portfolio of products and technologies that are used
across the Telecommunications & Networking markets. Our customers include many leading vendors and original
design manufacturers of wireless and wireline infrastructure equipment, telecommunication equipment and computer
networking. Our products serving telecom and networking applications are differentiated by their rugged design and
high reliability, even in harsh outdoor environments. Our wide range of AC-DC power supplies/rectifiers and DC-DC
conversion modules are used by leading developers of telecom systems across fixed, mobile and converged network
applications. Our products are designed into many wireless infrastructure applications such as remote radio head, RF
power amplifier in base stations and multi-access edge computing equipment. In networking, our products are designed
into many core and edge networking systems, including gateways, application servers, switches, routers and wireless
networking. Our strategy in Telecom & Networking is to target growing applications related to 5G investments, create
new designs in next generation computer networking equipment, and leverage our customer relationships and
differentiated capability in rugged design to grow market share.
Customers
Our products are sold worldwide to OEMs, integrators, distributors and directly to end users. Our ten largest
customers accounted for approximately 57.3% of our sales in 2019, 62.5% of our sales in 2018, and 70.4% of our sales
in 2017. We expect that the sale of products to our largest customers will continue to account for a significant percentage
of our sales for the foreseeable future.
Applied Materials Inc., our largest customer, accounted for 20.9% of our sales in 2019, 35.9% of our sales in
2018, and 33.5% of our sales in 2017. Lam Research Corp. accounted for 11.2% of our sales in 2019, 15.2% of our sales
in 2018, and 23.1% of our sales in 2017. No other customer accounted for greater than 10% of our sales in 2019, 2018,
or 2017. The loss of Applied Materials, Inc. or Lam Research Corp. as a customer could have a material adverse effect
on our results of operations.
Backlog
Our backlog was approximately $258.9 million at December 31, 2019, a 246.6% increase from $74.7
million at December 31, 2018. Backlog increased primarily due to the Artesyn acquisition, which added new backlog in
the Data Center Computing and Telecom & Networking markets and incremental backlog in Industrial & Medical, as
well as strengthening demand for semiconductor equipment late in the fiscal year. For more information related to our
expectations for the markets we serve, see Business Environment and Trends in Item 7 "Management’s Discussion and
Analysis of Financial Condition and Results of Operations." Backlog orders are firm orders scheduled to be filled and
shipped in the next 12 months.
Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and
customer production demand pull systems, which are not reflected in orders or backlog. Customers may delay delivery
of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules
and/or customer changes to backlog orders during any particular period could cause a decrease in sales and have a
material adverse effect on our business and results of operations.
Marketing, Sales and Distribution
We sell our products through direct and indirect sales channels in North America, Europe and Asia. Our sales
operations are primarily located in the United States, the PRC, the United Kingdom, Germany, Israel, Japan, South
Korea, India, Singapore, Philippines, Hong Kong, Ireland and Taiwan. In addition to a direct sales force, we have
independent sales representatives, channel partners and distributors that support our selling efforts. We maintain
customer service offices at many of the locations listed above, as well as other sites near our customers’ locations. We
believe that customer service and technical support are important competitive factors and are essential to building and
maintaining close, long-term relationships with our customers.
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The following table presents our sales by geographic region for the years ended December 31, 2019, 2018, and
2017. Sales are attributed to individual countries based on customer location (in thousands).
2019
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 373,634 47.4 % $ 372,834 51.8 % $ 377,347 56.2 %
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,690
71,796
179
250,574
94,793
691
295,155
119,427
732
34.9
13.2
0.1
33.1
10.7
—
37.4
15.1
0.1
2017
Years Ended December 31,
2018
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 100.0 % $ 718,892 100.0 % $ 671,012 100.0 %
Total sales to all countries outside of the U.S. totaled $467.1 million, $348.1 million, and $295.1 million in
the years ended December 31, 2019, 2018, and 2017, respectively.
See Item 1A "Risk Factors" for a discussion of certain risks related to our foreign operations.
Manufacturing
The manufacturing of our products is primarily performed in major sites in the PRC and the Philippines. We
have begun pilot production and expect to open an additional major manufacturing site in Penang, Malaysia in 2020. In
addition, we perform limited specialty manufacturing for some of our products in the United States of America, United
Kingdom, Germany and Denmark. Manufacturing in these locations, primarily the PRC, exposes us to risks, such as
exchange controls and currency restrictions, changes in local economic conditions, changes in laws and regulations,
government actions, political conditions, and other regional risks including natural disasters and health risks, and an
inability to meet customer demands if one of our facilities becomes impaired.
Manufacturing requires raw materials, including a wide variety of mechanical and electrical components, to be
manufactured to our specifications. We use numerous companies, including contract manufacturers, to supply parts for
the manufacture and support of our products. Although we make reasonable efforts to assure that parts are available from
multiple qualified suppliers, some key parts may be obtained from a sole supplier or a limited group of suppliers. We
seek to reduce costs and to lower the risks of production and service interruptions, as well as shortages of key parts by:
•
selecting and qualifying alternate suppliers for key parts using rigorous technical and commercial
evaluation of suppliers’ products and business processes including testing their components’ performance,
quality, and reliability on our power conversion product at our customers’ and their customers’ processes.
The qualification process for our process power products, particularly as it pertains to semiconductor
customers, follows semiconductor industry standard practices, such as “copy exact”;
• monitoring the financial condition and overall performance of key suppliers;
• maintaining appropriate inventories of key parts, including making last time purchases of key parts when
notified by suppliers that they are ending the supply of those parts;
•
•
•
qualifying new parts on a timely basis and in geographies that reduce costs without degradation in quality;
locating certain manufacturing operations in areas that are closer to suppliers and customers; and
competitively sourcing parts through electronic bidding tools to ensure the lowest total cost is achieved for
the parts needed in our products.
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Intellectual Property
We seek patent protection for inventions governing new products or technologies as part of our ongoing
research and development. We currently hold 273 United States patents and 341 foreign issued patents, and have 119
patent applications pending in the United States, Europe and Asia. A substantial majority of our patents are related to our
process power products and solutions business. Generally, our efforts to obtain international patents have been
concentrated in the industrialized countries within Europe and Asia because there are other manufacturers and
developers of power conversion and control systems in those countries, as well as customers for those systems for which
our intellectual property applies.
Litigation may, from time to time, be necessary to enforce patents issued to us, to protect trade secrets or know-
how owned by us, to defend us against claimed infringement of the rights of others, or to determine the scope and
validity of the proprietary rights of others. See "We are highly dependent on our intellectual property" in Item 1A "Risk
Factors."
Competition
The markets we serve are highly competitive and characterized by rapid technological development and
changing customer requirements. We face a wide variety of competitors and no single company dominates any of our
markets. Significant competitive factors in our markets include product performance, compatibility with adjacent
products, price, quality, reliability, and level of customer service and support.
We encounter substantial competition from foreign and domestic companies for each of our product lines. Our
list of competitors has increased over the past year due to the acquisition of Artesyn’s Embedded Power business, which
competes in different markets and against different competitors. Some of our competitors have greater financial and
other resources than we do. In some cases, competitors are smaller than we are, but are well established in specific
product niches. Adtec Plasma Tech. Co., Ltd., COMET Holding AG., Daihen Corp., Kyosan Electric Mfg. Co., Ltd.,
MKS Instruments, Inc., New Power Plasma Co., Ltd. and TRUMPF Hüttinger GmbH + Co. KG. are primary
competitors to our power conversion products for semiconductor and thin film processing. Competitors to our low
voltage AC-DC and DC-DC embedded power conversion offerings include, but are not limited to ABB Ltd., Acbel
Polytech Inc., Cosel Co., Ltd., Delta Electronics, Inc., Flex Ltd., Lite-On Technology Corp., Murata Manufacturing,
MEAN WELL Enterprises, TDK-Lambda Americas Inc. and XP Power Ltd. In high voltage DC-DC, our competitors
include, but are not limited to Crane Co., Matsusada Precision, Inc., and Spellman High Voltage Electronics Corp. CD
Automation, Control Concepts Inc., Eurotherm and Spang Power Electronics offer products that compete with our power
control modules. BASF SE., Fluke Corp., LayTec AG. and Photon Control Inc. offer products that compete with our
thermal measurement and instrumentation products. Honeywell International, Inc., Morgan Schaffer Ltd., Qualitrol
Corp. and Williamson Corp. offer products that compete with our gas detection and monitoring products.
In addition, a focus on local content is causing new competitors to emerge around the world, with strong
support from local governments, industry leaders, and investors. Our ability to continue to compete successfully in these
markets depends on our ability to make timely introduction of new products and enhancements to existing products, to
localize these development and production activities in key world regions close to our customers, and to produce high
quality products. We expect our competitors will continue to improve the design and performance of their products and
introduce new products with competitive performance characteristics. We believe that we compete effectively with
respect to these factors, although we cannot assure that we will be able to compete effectively in the future.
Research and Development
The market for our products is characterized by ongoing technological changes and evolving customer
requirements. We believe that continued and timely development of new highly-differentiated products and
enhancements to existing products to support end user and OEM requirements is necessary for us to maintain a
competitive position in the markets we serve. Accordingly, we continue to devote a significant portion of our personnel
and financial resources to research and development projects and seek to maintain close relationships with our key
customers and other industry leaders in order to remain responsive to their product requirements now and in the future.
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Research and development expenses were $101.5 million in 2019, $76.0 million in 2018, and $58.0 million in
2017, representing 12.9% of our sales in 2019, 10.6% of our sales in 2018, and 8.6% of our sales in 2017.
Employees
As of December 31, 2019, we had a total of 10,917 employees. Our employees are not represented by unions,
except for statutory organization rights applicable to our employees in the PRC and Germany. We believe that our
continued success depends, in part, on our ability to attract and retain qualified personnel. We consider our relations with
our employees to be good.
Environmental Matters
We are subject to federal, state, and local environmental laws and regulations, as well as the environmental laws
and regulations of the foreign federal and local jurisdictions in which we have manufacturing and service facilities. We
believe we are in material compliance with all such laws and regulations.
Compliance with federal, state, and local laws and regulations has not had, and is not expected to have, an
adverse effect on our capital expenditures, competitive position, financial condition, or results of operations.
Available Information
Our website address is www.advancedenergy.com. We make available, free of charge on our website, our
Annual Report on Form 10 - K, quarterly reports on Form 10 - Q, current reports on Form 8 - K, and all amendments to
these reports as soon as reasonably practicable after filing such reports with, or furnishing them to, the Securities and
Exchange Commission (“SEC”). Such reports are also available at www.sec.gov. Information contained on our website is
not incorporated by reference in, or otherwise part of, this Annual Report on Form 10 - K nor any of our other filings with
the SEC.
ITEM 1A. RISK FACTORS
Our business, financial condition, operating results and cash flows can be impacted by a number of factors,
including, but not limited to, those set forth below, any of which could cause our results to be adversely impacted and
could result in a decline in the value or loss of an investment in our common stock. Other factors may also exist that we
cannot anticipate or that we currently do not consider to be significant based on information that is currently available.
These risks and uncertainties have the potential to materially affect our business, financial condition, results of
operations, cash flows and future results. Such risks and uncertainties may also impact the accuracy of forward-looking
statements included in this Form 10 - K and other reports we file with the SEC.
COVID-19 (“Coronavirus”) and the Impact on our Business
As we have grown our locations worldwide, our risk to regional and worldwide viruses and diseases has also
grown. For example, the continuing spread in early 2020 of the Coronavirus and related government actions may
adversely affect our manufacturing locations in China and worldwide. If the Coronavirus continues on its current path,
we may see adverse impact on our ability (a) to manufacture, test, service and ship our products, (b) to get required
materials and sub-assemblies to build and service our products and (c) to staff labor and management for manufacturing,
research and development, supply chain, service and administrative operations. Further, we may experience adverse
impact with our global supply chain partners and transportation service providers. Our customers may also delay orders
should our products be included as a subsystem into their systems. The Coronavirus could adversely impact our near-
term and long-term revenues, earnings and cash flow and will require expenditures in the short-term to address the
current situation in Asia. This situation is developing rapidly, and other impacts may arise that we are not aware of
currently. We have created a rapid response team to mitigate risks we are aware of and as they arise.
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The industries in which we compete are subject to volatile and unpredictable cycles.
As a supplier to the global semiconductor equipment, telecom & networking, data center computing and
industrial & medical industries, we are subject to business cycles, the timing, length, and volatility of which can be
difficult to predict. Certain of these industries historically have been cyclical due to sudden changes in customers’
manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’
products, inventory levels relative to demand, and access to affordable capital. These changes have affected the timing
and amounts of customers’ purchases and investments in technology, and continue to affect our orders, net sales,
operating expenses, and net income. In addition, we may not be able to respond adequately or quickly to the declines in
demand by reducing our costs. We may be required to record significant reserves for excess and obsolete inventory as
demand for our products changes.
To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources
and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align
our cost structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key
employees. During periods of increasing demand, we must have enough manufacturing capacity and inventory to fulfill
customer orders, effectively manage our supply chain, and attract, retain, and motivate a sufficient number of qualified
individuals. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately
assess where we are positioned within a business cycle, our business, financial condition, or results of operations may be
materially and adversely affected. For example, following record levels of demand in the first half of 2018, the
semiconductor equipment market experienced a decline, and, as a result, Advanced Energy’s revenue from the
semiconductor equipment market declined 24.5% during 2019, as compared to 2018. Although the semiconductor
equipment market improved during the fourth quarter of 2019, it is unclear at this time if the market will recover to
previous levels. In addition, the market may be characterized in the future with more “mini-ramps” rather than sustained
growth periods as experienced during 2015-2017. In addition, our Data Center Computing and Telecom Networking
markets are characterized by large program investments, which can cause variations in quarterly or annual revenues.
Deterioration of economic conditions could negatively impact our business.
Our business may be adversely affected by changes in national or global economic conditions, including
inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs (including
fuel surcharges) and the effects of government initiatives to manage economic conditions. Any such changes could
adversely affect the demand for our products both in domestic and export markets, or the cost and availability of our
needed raw materials and packaging materials, thereby negatively affecting our financial results.
A disruption in credit and other financial markets and deterioration of national and global economic conditions,
could, among other things:
•
negatively impact global demand for our products, which could result in a reduction of sales, operating
income and cash flows;
• make it more difficult or costly for us to obtain financing for our operations or investments or to refinance
our debt in the future;
cause our lenders to depart from prior credit industry practice and make more difficult or expensive the
granting of any technical or other waivers under our debt agreements to the extent we may seek them in the
future;
decrease the value of our investments; and impair the financial viability of our insurers.
•
•
Our long-term success and results of operations depend on our ability to successfully integrate Artesyn’s business and
operations and realize the anticipated benefits from the acquisition.
In September 2019, we acquired Artesyn Embedded Technologies, Inc.’s (“Artesyn”) Embedded Power
business, and we are currently in the early stages of combining Artesyn’s Embedded Power business with our business.
The acquisition of Artesyn’s Embedded Power business has significantly increased our embedded power product
offerings, increased our exposure to the industrial and medical, datacenter computing, and telecom networking end
markets, and significantly increased the number of employees and facilities. We believe there is minimal product overlap
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between Artesyn’s Embedded Power business and our other acquisitions, including the acquisition of Excelsys
Technologies in 2017. To realize the anticipated benefits of the acquisition, we must successfully combine our
businesses in an efficient and effective manner and realize our synergy and cost-savings targets. Integrating Artesyn’s
Embedded Power business and operations with ours will require significant management attention, efforts and
expenditures, and we may not be able to achieve the integration in an effective, complete, timely or cost-efficient
manner.
Potential risks related to our acquisition of Artesyn’s Embedded Power business include our ability to:
• maintain and improve Artesyn’s financial and operating results while integrating and optimizing our
•
•
•
•
•
•
•
•
•
•
•
•
•
combined sales, marketing, manufacturing and corporate administrative organizations;
avoid lost revenue due to customer confusion, alienation or misinformation regarding the transaction, and
retain and expand Artesyn’s customer base with aligning our sales efforts;
avoid lost revenue resulting from the distraction or confusion of our personnel as a consequence of the
acquisition and ongoing integration efforts;
optimize our combined worldwide manufacturing footprint while utilizing Artesyn’s vertically integrated
manufacturing model for a broader set of company products;
realize expected synergies and cost savings across the organization while managing our existing
businesses, contracts and relationships;
successfully eliminate fixed costs previously absorbed by other businesses prior to the transaction;
recognize and capitalize on anticipated product sales and technology enhancement opportunities presented
by our combined businesses;
expand our financial and management controls and reporting systems and procedures to integrate and
manage Artesyn;
integrate our information technology systems to mitigate cyber-security risks and enable the management
and operation of the combined business;
effectively manage risks related to Artesyn’s foreign operations, including foreign currency risk,
geographic risks, and local employee related risks;
integrate Artesyn into our global tax structure and manage the related impact on our current and future tax
rates as a result of the acquisition;
identify and retain key Artesyn personnel and transition their critical knowledge;
adequately familiarize us with Artesyn’s products and technology and certain of its markets and customer
base such that we can manage Artesyn’s business effectively;
successfully integrate our respective corporate cultures such that we achieve the benefits of acting as a
unified company; and
• meet target deadlines in achieving regulatory compliance.
Other potential risks related to our acquisition of Artesyn’s Embedded Power business include:
•
•
the assumption of unknown or contingent liabilities, or other unanticipated events or circumstances; and
the potential to incur or record significant cash or non-cash charges or write down the carrying value of
intangible assets and goodwill obtained in the Artesyn acquisition, which could adversely impact our cash
flow or lower our earnings in the period or periods for which we incur such charges or write down such
assets.
If we are unable to successfully or timely integrate the operations of Artesyn’s Embedded Power business into
our business, we may be unable to realize the revenue growth, synergies, cost-savings and other anticipated benefits
resulting from the acquisition and our business could be adversely affected. Additionally, we have incurred and will
continue to incur transaction-related costs, including legal, regulatory and other costs associated with implementing
integration plans, including facilities and systems consolidation costs and employment-related costs. Although we expect
that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the
businesses, should allow us to offset transaction and integration-related costs over time, this net benefit may not be
achieved in the near term, or at all. Further, we may not realize the expected benefits from the acquisition. Artesyn’s
14
Embedded Power business and operations may not achieve the anticipated revenues and operating results. Any of the
foregoing risks could materially harm our business, financial condition and results of operations.
Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to
operate our business or pursue our business strategies, could adversely affect our business, financial condition, results
of operations, and cash flows, and could significantly reduce stockholder benefits from a change of control event.
As of December 31, 2019, our total debt was $341.3 million, excluding unamortized debt issuance costs, of
which $17.5 million was classified as current. We are contractually obligated to make quarterly payments of $4.4
million, plus accrued interest, with any outstanding balance due in September 2024. Our debt obligations could make us
more vulnerable to general adverse economic and industry conditions and could limit our flexibility in planning for, or
reacting to, changes in our business and the industries in which we operate, thereby placing us at a disadvantage to our
competitors that have less indebtedness.
Our debt obligations impose financial covenants on us and our subsidiaries that require us to maintain a certain
leverage ratio. The financial covenants place certain restrictions on our business that may affect our ability to execute
our business strategy successfully or take other actions that we believe would be in the best interests of our Company.
These restrictions include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries
to:
•
•
incur additional indebtedness;
pay dividends or make distributions on our capital stock or certain other restricted payments or
investments;
• make domestic and foreign investments and extend credit;
•
•
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engage in transactions with affiliates;
transfer and sell assets;
effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our
assets; and
create liens on our assets to secure debt.
•
Our debt obligations contain certain customary events of default. Any breach of the covenants or other event of default
could cause a default on our debt obligations, which could restrict our ability to borrow under our revolving credit
facility. If there were an event of default under certain provisions of our debt arrangements that was not cured or waived,
the holders of the defaulted debt may be able to cause all amounts outstanding with respect to the debt instrument, plus
any required settlement costs, to be due and payable immediately. Our assets and cash flow may not be sufficient to fully
repay borrowings under our outstanding debt instruments if accelerated upon an event of default. If we are unable to
repay, refinance, or restructure our indebtedness as required, or amend the covenants contained in these agreements, the
lenders can exercise all rights and remedies available under such outstanding debt instruments or applicable laws or
equity. Any of these events could have a material adverse effect on our business, financial condition, results of
operations, and cash flows.
Significant developments stemming from recent U.S. government actions and proposals concerning tariffs and other
economic proposals could have a material adverse effect on us.
Recent U.S. government actions are imposing greater restrictions and economic disincentives on international
trade impacting imports and exports. The U.S. government has adopted changes, and intends to adopt further changes, to
trade policy and in some cases, to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade
agreements. It has initiated the imposition of additional tariffs on certain foreign goods, including steel and aluminum,
semiconductor manufacturing equipment and spare parts thereof. Additionally, the government may also propose export
rule changes that lower the percentage of permissible U.S. content for certain non-U.S. manufactured goods being sold
to companies on the U.S. Entity List, further restrict the sale of foreign-made goods that are based on U.S. technology,
and regulate the use of any U.S. origin content in certain manufacturing equipment used to produce goods for certain
companies.
15
Examples of recent actions are tariffs on steel and aluminum product imports announced by the U.S.
Department of Commerce in March 2018, the scope of which increased on Feb. 8, 2020, and a 25% tariff on certain
products that originate in China announced by the United States Trade Representative (“USTR”) in June 2018. The
USTR also announced in June and July 2018 two additional supplemental lists of products that are subject to tariffs if the
goods imported into the United States originate in China, which would increase the cost of imported products. These
supplemental lists issued by the USTR added an additional 25% on certain semiconductor equipment and parts
originating in China that are sold by us or used in our business in the United States. In August 2018, the second list was
made effective with a 25% tariff and in September 2018 the third list was made effective with a 10% tariff, increasing to
25% in May 2019. A fourth list was proposed by USTR in May 2019 for all remaining items originating in China. A
portion of the fourth list (“4a”), was made effective September 1, 2019, with an additional tariff of 15%, reduced to 7.5%
on February 14, 2020. The remainder of the fourth list (“4b”) was scheduled to have an additional tariff of 15% go into
effect on December 15, 2019, however on December 13, 2019, the tariffs for list 4b were suspended after the U.S.
announced it would enter into a trade agreement with China (the “Phase 1 Agreement”). The Phase 1 Agreement is
expected to have no impact on the tariffs imposed on Company products. Any increase in the cost of importing such
goods and parts could decrease our margins, reduce the competitiveness of our products, or inhibit our ability to sell
products or purchase necessary parts, which could have a material adverse effect on our business results, results of
operations, or financial condition.
The U.S. Department of Commerce is currently considering proposed rules that decrease the amount of U.S.
origin content allowed for non-U.S. manufactured products that are sold to companies on the U.S. Entity List, expand the
restrictions on the sale of foreign-made goods that are based on U.S. technology or software, and regulate the use of U.S.
origin semiconductor manufacturing equipment that produces semiconductor devices for certain companies. At this time,
the potential rule changes are not anticipated to impact the Company’s sales of non-U.S. products; however, the
developments in this area are fast-moving and any unpredicted rule changes could adversely affect our business results,
operations or financial condition.
Changes in U.S. trade policy could result in one or more U.S. trading partners adopting responsive trade policy
making it more difficult or costly for us to export our products to those countries. As indicated above, these measures
could also result in increased costs for goods imported into the U.S. This in turn could require us to increase prices to our
customers which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on goods and
services sold. To the extent that trade tariffs and other restrictions imposed by the U.S. increase the price of
semiconductor equipment and related parts imported into the U.S., the cost of our materials may be adversely affected
and the demand from customers for products and services may be diminished, which could adversely affect our revenues
and profitability.
We cannot predict future trade policy, the terms of any renegotiated trade agreements or additional imposed
tariffs and their impact on our business. The adoption and expansion of trade restrictions, the occurrence of a trade war,
or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact
demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely
impact our business, financial condition and results of operations.
Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign
trade, manufacturing, development and investment in the territories and countries where we currently develop and sell
products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our
business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S.
employees or prospective employees could adversely affect sales or hiring and retention, respectively.
Our operations in the People’s Republic of China are subject to significant political and economic uncertainties over
which we have little or no control and we may be unable to alter our business practice in time to avoid reductions in
revenues.
A significant portion of our operations outside the United States are located in the PRC, which exposes us to
risks, such as exchange controls and currency restrictions, changes in local economic conditions, changes in customs
regulations and tariffs, changes in tax policies, changes in PRC laws and regulations, possible expropriation or other
16
PRC government actions, and unsettled political conditions including potential changes in U.S. policy regarding
overseas manufacturing. In addition, Artesyn added a significant additional footprint in both facilities and resources in
the PRC. These factors may have a material adverse effect on our operations, business, results of operations, and
financial condition. See "We are exposed to risks associated with worldwide financial markets and the global economy"
risk factor below.
The PRC’s economy differs from the economies of most developed countries in many respects, including with
respect to the amount of government involvement, level of development, rate of growth, control of foreign exchange and
allocation of resources. While the economy of the PRC has experienced significant growth in the past 20 years, growth
has been uneven across different regions and amongst various economic sectors of the PRC. The PRC government has
implemented various measures to encourage economic development and guide the allocation of resources. Strikes by
workers and picketing in front of the factory gates of certain companies in Shenzhen have caused unrest among some
workers seeking higher wages, which could impact our manufacturing facility in Shenzhen. While some of the
government’s measures may benefit the overall economy of the PRC, they may have a negative effect on us. For
example, our financial condition and results of operations may be materially and adversely affected by government
control over capital investments or changes in tax regulations that are applicable to us as well as work stoppages.
We are subject to risks inherent in international operations.
Sales to our customers outside the United States were approximately 59.2% and 48.4% of our total sales for the
year ended December 31, 2019 and 2018, respectively. The international acquisitions have increased our presence in
international locations. Our success producing goods internationally and competing in international markets is subject to
our ability to manage various risks and difficulties, including, but not limited to:
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our ability to effectively manage our employees at remote locations who are operating in different business
environments from the United States;
our ability to develop and maintain relationships with suppliers and other local businesses;
compliance with product safety requirements and standards that are different from those of the United
States;
variations and changes in laws applicable to our operations in different jurisdictions, including
enforceability of intellectual property and contract rights;
trade restrictions, political instability, disruptions in financial markets, and deterioration of economic
conditions;
customs regulations and the import and export of goods (including customs audits in various countries that
occur from time to time);
the ability to provide enough levels of technical support in different locations;
our ability to obtain business licenses that may be needed in international locations to support expanded
operations;
timely collecting accounts receivable from foreign customers including significant balances in accounts
receivable from foreign customers as of December 31, 2019;
collection of accounts receivable from foreign customers can also be unexpectedly delayed beyond our
payment terms if the project itself is delayed and/or government funded. For example, tariffs and slower
growth have impacted certain of our Chinese markets which have delayed projects. If these projects are
permanently delayed or cancelled it could have a negative impact on our financial results or projections;
changes in tariffs, taxes, and foreign currency exchange rates; and
recent protests and rioting in Hong Kong have affected travel in the region and may result in governmental
actions that could impact business in the region.
Our profitability and ability to implement our business strategies, maintain market share and compete
successfully in international markets will be compromised if we are unable to manage these and other international risks
successfully.
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Our product lines are manufactured only at a few sites and our sites are not generally interchangeable.
Our power products for the semiconductor industry are manufactured in Shenzhen, PRC. Our high voltage
products are manufactured in Ronkonkoma and Lockport, New York, Littlehampton, United Kingdom and Shenzhen,
PRC. Our thermal instrumentation products are manufactured in Vancouver, Washington, Santa Clara, California,
Littlehampton, United Kingdom and Frankfurt, Germany. Our pyrometry solutions are manufactured in Ballerup,
Denmark and Santa Clara, California. Our Telecom & Networking and Data Center Computing products are
manufactured in Zhongshan, PRC, Rosario, Philippines and Santa Rosa, Philippines. Some of Artesyn’s Embedded
Power business’ products will be contract manufactured by the carved-out former Artesyn consumer group at their
Luoding, China facility until September 2020. Each facility is under operating lease and interruptions in operations could
be caused by early termination of existing leases by landlords or failure by landlords to renew existing leases upon
expiration, including the possibility that suitable operating locations may not be available in proximity to existing
facilities which could result in labor or supply chain risks. Each facility manufactures different products, and therefore,
is not interchangeable. Natural, uncontrollable occurrences or other operational issues at any of our manufacturing
facilities could significantly reduce our productivity at such site and could prevent us from meeting our customers’
requirements in a timely manner, or at all. For example, recent concerns regarding the spread of the Coronavirus and
related government actions may result in temporary shut-down of our facilities and impact availability of materials
supply and manufacturing employees, particularly in our China operations. Any potential losses from such occurrences
could significantly affect our relationship with customers, operations and results of operations for a prolonged period. As
a result, we are investing in additional production options in Malaysia. We believe this investment will help to mitigate
our exposure to regional risks, improve our business continuity profile and lower costs over time.
Our restructuring and other cost reduction efforts have included transitioning manufacturing operations to our
facility in Shenzhen from other manufacturing facilities, such as Fort Collins, Colorado and Littlehampton, United
Kingdom, which renders us increasingly reliant upon our Shenzhen facility. We have been notified that we will be
required to relocate our Shenzhen, PRC manufacturing facility by December 2021. A disruption in manufacturing at our
Shenzhen facility, from whatever cause, could have a significantly adverse effect on our ability to fulfill customer
orders, our ability to maintain customer relationships, our costs to manufacture our products and, as a result, our results
of operations and financial condition. To mitigate these risks, we are investing in a dual manufacturing facility in
Penang, Malaysia that will be capable of manufacturing our semiconductor and other products. We have begun pilot
production for qualification and expect to open the facility in 2020.
Our evolving manufacturing footprint may increase our risk.
The nature of our manufacturing is evolving as we continue to grow by acquisition. Historically, our principal
manufacturing location has been in Shenzhen, PRC; however, we have also added specialized manufacturing at our
Littlehampton, United Kingdom, Ballerup, Denmark, Frankfurt, Germany, Ronkonkoma and Lockport, New York and
Santa Clara, California facilities. From time to time we may be required to or we may choose to relocate manufacturing
or migrate manufacturing of specific products between facilities or to third party manufacturers as part of our cost
consolidation efforts. A disruption in supply because of these manufacturing relocations could have a significantly
adverse effect on our ability to fulfill customer orders. We have been notified that we will be required to relocate our
Shenzhen, PRC manufacturing facility by December 2021. If we do not successfully coordinate the timely
manufacturing and distribution of our products during this time, we may have insufficient supply of products to meet
customer demand, we could lose sales, we may experience a build-up in inventory, or we may incur additional costs. In
addition, we are investing in a second factory in Malaysia to help mitigate business continuity, geopolitical and other
risks. If we do not successfully implement this factory it could result in increased expenses and disruption of supply to
our customers during the transition period.
In addition, the acquisition of Artesyn’s Embedded Power business added significant vertically integrated
manufacturing sites in China and the Philippines. These sites represent large fixed costs which are difficult to flex as
economic and other conditions change. If we do not successfully integrate these operations and operate them in an
efficient manner, we could experience greater losses in times of revenue reduction.
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With the acquisition of Artesyn, our strategy is to optimize and reduce our manufacturing footprint over the
next several years primarily in China and the Philippines. Our strategy will require the expenditure on facilities,
employee severance and other related operations. If we are not successful in this strategy, we may impact our
manufacturing capability and not reduce long-term costs as we had planned.
Raw material, part, component, and subassembly shortages, exacerbated by our dependence on sole and limited source
suppliers, could affect our ability to manufacture products and systems and could delay our shipments.
Our business depends on our ability to manufacture products that meet the rapidly changing demands of our
customers. Our ability to timely manufacture our products depends in part on the timely delivery of raw materials, parts,
components, and subassemblies from suppliers. We rely on sole and limited source suppliers for some of our raw
materials, parts, components, and subassemblies that are critical to the manufacturing of our products.
This reliance involves several risks, including the following:
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the inability to obtain an adequate supply of required parts, components, or subassemblies;
supply shortages, if a sole or limited source provider ceases operation;
the need to fund the operating losses of a sole or limited source provider;
reduced control over pricing and timing of delivery of raw materials and parts, components, or
subassemblies;
the need to qualify alternative suppliers;
suppliers that may provide parts, components or subassemblies that are defective, contain counterfeit goods
or are otherwise misrepresented to us in terms of form, fit or function;
the inability of our suppliers to develop technologically advanced products to support our growth and
development of new products;
the impact of geopolitical issues or tariffs that could affect the cost and availability of required parts,
components, or subassemblies; and
the impact of regional or global health issues and related actions could affect the availability of required
parts, components, or subassemblies.
From time to time, our sole or limited source suppliers have given us notice that they are ending supply of
critical parts, components, and subassemblies that are required for us to deliver product. If we cannot qualify alternative
suppliers before ending supply of critical parts from the sole or limited source suppliers, we may be required to make a
last-time-buy(s) and take possession of material amounts of inventory in advance of customer demand. In some
instances, the last-time-buy materials required to be purchased may be for several years which in turn exposes us to
additional excess and obsolescence risk. If we cannot qualify alternative suppliers before the last-time-buy materials are
utilized in our products or legacy inverter warranty operations, we may be unable to deliver further product or legacy
inverter warranty service to our customers.
Qualifying alternative suppliers could be time consuming and lead to delays in, or prevention of delivery of
products to our customers, as well as increased costs. If we are unable to qualify additional suppliers and manage
relationships with our existing and future suppliers successfully, if our suppliers experience financial difficulties
including bankruptcy, or if our suppliers cannot meet our performance or quality specifications or timing requirements,
we may experience shortages, delays, or increased costs of raw materials, parts, components, or subassemblies. This in
turn could limit or prevent our ability to manufacture and ship our products, which could materially and adversely affect
our relationships with our current and prospective customers and our business, financial condition, and results of
operations.
Our orders of raw materials, parts, components, and subassemblies are based on demand forecasts.
We place orders with many of our suppliers based on our customers’ quarterly forecasts and our annual
forecasts. These forecasts are based on our customers’ and our expectations as to demand for our products. As the
quarter and the year progress, such demand can change rapidly or we may realize that our customers’ expectations were
overly optimistic or pessimistic, especially when industry or general economic conditions change. Orders with our
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suppliers cannot always be amended in response. In addition, in order to assure availability of certain components or to
obtain priority pricing, we have entered into contracts with some of our suppliers that require us to purchase a specified
amount of components and subassemblies each quarter, even if we are not able to use such components or
subassemblies. Moreover, we have obligations to some of our customers to hold a minimum amount of finished goods in
inventory, in order to fulfill just in time orders, regardless of whether the customers expect to place such orders. We
currently have firm purchase commitments and agreements with various suppliers to ensure the availability of
components. If demand for our products does not continue at current levels, we might not be able to use all of the
components that we are required to purchase under these commitments and agreements, and our reserves for excess and
obsolete inventory may increase, which could have a material adverse effect on our results of operations. If demand for
our products exceeds our customers’ and our forecasts, we may not be able to timely obtain enough raw materials, parts,
components, or subassemblies, on favorable terms or at all, to fulfill the excess demand.
Increased governmental action on income tax regulations could negatively impact our business.
International governments have heightened their review and scrutiny of multinational businesses like ours
which could increase our compliance costs and future tax liability to those governments. As governments continue to
look for ways to increase their revenue streams, they could increase audits of companies to accelerate the recovery of
monies perceived as owed to them under current or past regulations. Such an increase in audit activity could have a
negative impact on companies which operate internationally, as we do.
Activities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful
than anticipated.
We have completed acquisitions in the past and we may acquire other businesses in the future. The success of
such transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these
transactions and to apply our internal controls process to these acquired businesses. The integration of acquisitions may
require significant attention from our management, and the diversion of management’s attention and resources could
have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or
timing of benefits we anticipated when we first entered into the acquisition transaction. If actual integration costs are
higher than amounts originally anticipated, if we are unable to integrate the assets and personnel acquired in an
acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial
condition, results of operations, and cash flows could be materially adversely affected. Additionally, our efforts to
optimize our manufacturing footprint through consolidation and relocation resulting from acquisitions may result in a
disruption in our ability to supply our customers which could adversely affect our operations.
We have historically made acquisitions and divestitures. However, we may not find suitable acquisition candidates in the
future and we may not be able to successfully integrate and manage acquired businesses. In either an acquisition or a
divestiture, we may be required to make fundamental changes in our ERP, business processes and tools which could
disrupt our core business and harm our financial condition.
In the past, we have made strategic acquisitions of other corporations and entities, as well as asset purchases,
and we continue to evaluate potential strategic acquisitions of complementary companies, products, and technologies.
We have also divested businesses. In the future, we could:
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issue stock that would dilute our current stockholders’ percentage ownership;
pay cash that would decrease our working capital;
incur debt;
assume liabilities; or
incur expenses related to impairment of goodwill and amortization.
Acquisitions and divestitures also involve numerous risks, including:
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problems combining or separating the acquired/divested operations, systems, technologies, or products;
an inability to realize expected sales forecasts, operating efficiencies or product integration benefits;
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difficulties in coordinating and integrating geographically separated personnel, organizations, systems, and
facilities;
difficulties integrating business cultures;
unanticipated costs or liabilities;
diversion of management’s attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
potential loss of key employees, particularly those of purchased organizations;
incurring unforeseen obligations or liabilities in connection with either acquisitions or divestitures; and
the failure to complete acquisitions even after signing definitive agreements which, among other things,
would result in the expensing of potentially significant professional fees and other charges in the period in
which the acquisition or negotiations are terminated.
We may not be able to successfully identify appropriate acquisition candidates, to integrate any businesses,
products, technologies, or personnel that we might acquire in the future or achieve the anticipated benefits of such
transactions, which may harm our business.
We may be unable to realize expected benefits from our cost reduction and restructuring efforts
In order to operate more efficiently and control costs, we announce from time to time restructuring plans, which
include workforce reductions, global facility optimizations or consolidations and other cost reduction initiatives. These
plans are intended to generate operating expense savings through reductions in direct and indirect expenses as well as
improved efficiencies. These types of cost reduction and restructuring activities are complex. If we do not successfully
manage our current restructuring activities, or any future restructuring activities, expected efficiencies and benefits might
be delayed or not realized, and our operations and business could be disrupted.
Changes in tax laws, tax rates, or mix of earnings in tax jurisdictions in which we do business, could impact our future
tax liabilities and related corporate profitability
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws,
regulations, and administrative practices in various jurisdictions may be subject to significant change due to economic,
political, and other conditions, and significant judgment is required in evaluating and estimating our provision and
accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the
ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by earnings being lower than
anticipated in jurisdictions where we have lower statutory rates and earnings higher than anticipated in jurisdictions
where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax
benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our
existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and
liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative
practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate
multinationals. The U.S., many countries in the European Union, and several other countries are actively considering
changes in this regard. The acquisition of Artesyn may change our mix of earnings in various tax jurisdictions and may
impact our overall current or future tax rate.
Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns
could adversely affect our results
Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower
than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates;
by changes in the valuation of our deferred tax assets and liabilities; by changes, regulations, and interpretations of
foreign-derived intangible income (FDII), global intangible low-tax income (GILTI) and base erosion and anti-abuse tax
laws (BEAT); by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of
acquisitions on our legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany
realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations
thereof, including changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses
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attributable to foreign income, and the foreign tax credit rules. Significant judgment is required to determine the
recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The
Organization for Economic Co-operation and Development (OECD), an international association comprised of 36
countries, including the United States, has made changes to numerous long-standing tax principles. There can be no
assurance that these changes, once adopted by countries, will not have an adverse impact on our provision for income
taxes. Further, as a result of certain of our ongoing employment and capital investment actions and commitments, our
income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely
impact our provision for income taxes. In addition, we are subject of regular examination of our income tax returns by
tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine
the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous
examinations will not have an adverse effect on our operating results and financial condition.
We are exposed to risks associated with worldwide financial markets and the global economy.
Our business depends on the expansion of manufacturing capacity in our end markets and the installation base
for the products we sell. In the past, severe tightening of credit markets, turmoil in the financial markets, and a
weakening global economy have contributed to slowdowns in the industries in which we operate. Some of our key
markets depend largely on consumer spending. Economic uncertainty, such as that recently experienced in the PRC,
exacerbates negative trends in consumer spending and may cause our customers to push out, cancel, or refrain from
placing orders.
Difficulties in obtaining capital and uncertain market conditions may also lead to a reduction of our sales and
greater instances of nonpayment. These conditions may similarly affect our key suppliers, which could affect their
ability to deliver parts and result in delays for our products. Further, these conditions and uncertainty about future
economic conditions could make it challenging for us to forecast our operating results and evaluate the risks that may
affect our business, financial condition, and results of operations. As discussed in "Our orders of raw materials, parts,
components, and subassemblies are based on demand forecasts," a significant percentage of our expenses are relatively
fixed and based, in part, on expectations of future net sales. If a sudden decrease in demand for our products from one or
more customers were to occur, the inability to adjust spending quickly enough to compensate for any shortfall would
magnify the adverse impact of a shortfall in net sales on our results of operations. Conversely, if market conditions were
to unexpectedly improve and demand for our products were to increase suddenly, we might not be able to respond
quickly enough, which could have a negative impact on our results of operations and customer relations.
Our results of operations could be affected by natural disasters and other events in the locations in which we or our
customers or suppliers operate.
We have manufacturing and other operations in locations subject to natural occurrences such as severe weather
and geological events including earthquakes or tsunamis that could disrupt operations. In addition, our suppliers and
customers also have operations in such locations. A natural disaster, fire, explosion, public health issue (for example, an
outbreak of a pandemic disease such as Coronavirus, avian influenza, measles or Ebola) or other event that results in a
prolonged disruption to our operations, or the operations of our customers or suppliers, may materially adversely affect
our business, results of operations, or financial condition.
We transitioned a significant amount of our supply base to Asian suppliers.
We transitioned the purchasing of a substantial portion of components for our products to Asian suppliers to
lower our materials costs and shipping expenses. These components might require us to incur higher than anticipated
testing or repair costs, which would have an adverse effect on our operating results. Customers who have strict and
extensive qualification requirements might not accept our products if these lower-cost components do not meet their
requirements. A delay or refusal by our customers to accept such products, as well as an inability of our suppliers to
meet our purchasing requirements, might require us to purchase higher-priced components from our existing suppliers or
might cause us to lose sales to these customers, either of which could lead to decreased revenue and gross margins and
have an adverse effect on our results of operations.
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We must continually design and introduce new products into the markets we serve to respond to competition and rapid
technological changes.
We operate in a highly competitive environment where innovation is critical, our future success depends on
many factors, including the effective commercialization and customer acceptance of our products and services. The
development, introduction and support of a broadening set of products is critical to our continued success. Our results of
operations could be adversely affected if we do not continue to develop new products (including software and firmware
capabilities), improve and develop new applications for existing products, and differentiate our products from those of
competitors resulting in their adoption by customers.
We must achieve design wins to retain our existing customers and to obtain new customers, although design wins
achieved do not necessarily result in substantial sales.
Driven by continuing technology migration and changing customers demand the markets we serve are
constantly changing in terms of advancement in applications, core technology and competitive pressures. New products
we design for capital equipment manufacturers typically have a lifespan of five to ten years. Our success and future
growth depend on our products being designed into our customers new generations of equipment as they develop new
technologies and applications. We must work with these manufacturers early in their design cycles to modify, enhance
and upgrade our products or design new products that meet the requirements of their new systems. The design win
process is highly competitive, and we may win or lose new design wins for our existing customers or new customers
next generations of equipment. In case existing or new customers do not choose our products as a result of the
development, evaluation and qualification efforts related to the design win process, our market share will be reduced, the
potential revenues related to the lifespan of our customers’ products, which can be five to ten years, will not be realized,
and our business, financial condition and results of operations would be materially and adversely impacted.
We generally have no long-term contracts with our customers requiring them to purchase any specified quantities from
us.
Our sales are primarily made on a purchase order basis, and we generally have no long-term purchase
commitments from our customers, which is typical in the industries we serve. As a result, we are limited in our ability to
predict the level of future sales or commitments from our current customers, which may diminish our ability to allocate
labor, materials, and equipment in the manufacturing process effectively. In addition, we may purchase inventory in
anticipation of sales that do not materialize, resulting in excess and obsolete inventory write-offs.
If we are unable to adjust our business strategy successfully for some of our product lines to reflect the increasing price
sensitivity on the part of our customers, our business and financial condition could be harmed.
Our business strategy for many of our product lines has been focused on product performance and technology
innovation to provide enhanced efficiencies and productivity. As a result of recent economic conditions and changes in
various markets that we serve, our customers have experienced significant cost pressures. We have observed increased
price sensitivity on the part of our customers. If competition against any of our product lines should come to focus solely
on price rather than on product performance and technology innovation, we will need to adjust our business strategy and
product offerings accordingly, and if we are unable to do so, our business, financial condition, and results of operations
could be materially and adversely affected.
Our competitive position could be weakened if we are unable to convince end users to specify that our products be used
in the equipment sold by our customers.
The end users in our markets may direct equipment manufacturers to use a specified supplier’s product in their
equipment at a particular facility. This occurs with frequency because our products are critical in manufacturing process
control for thin-film applications. Our success, therefore, depends in part on our ability to have end users specify that our
products be used at their facilities. In addition, we may encounter difficulties in changing established relationships of
competitors that already have a large installed base of products within such facilities.
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The markets we operate in are highly competitive.
We face substantial competition, primarily from established companies, some of which have greater financial,
marketing, and technical resources than we do. We expect our competitors will continue to develop new products in
direct competition with ours, improve the design and performance of their products, and introduce new products with
enhanced performance characteristics including software and firmware capabilities. In order to remain competitive, we
must improve and expand our products and product offerings. In addition, we may need to maintain a high level of
investment in research and development and expand our sales and marketing efforts, particularly outside of the United
States. We might not be able to make the technological advances and investments necessary to remain competitive. If we
were unable to improve and expand our products and product offerings, our business, financial condition, and results of
operations could be materially and adversely affected.
A significant portion of our sales and accounts receivable are concentrated among a few customers.
Our ten largest customers accounted for 57.3%, 62.5% and 70.4% of our sales for the year ended
December 31, 2019, 2018 and 2017, respectively. During the year ended December 31, 2019, sales to Applied
Materials, Inc. and Lam Research were $164.7 million and $88.3 million, respectively. During the year ended
December 31, 2018 sales to Applied Materials, Inc., and Lam Research were $258.0 million and $109.0 million,
respectively. During the year ended December 31, 2017, sales to Applied Materials, Inc., and Lam Research
were $224.8 million and $155.3 million, respectively. A new customer, Nidec Motor Corporation, acquired in
connection with the acquisition of Artesyn’s Embedded Power business, had a $38.1 million accounts receivable balance
as of December 31, 2019. Applied Material, Inc. had a $36.8 million and $34.3 million accounts receivable balance as of
December 31, 2019 and December 31, 2018, respectively. In addition, the Company has several large customers in
China dependent on the Chinese government for project funding. A significant decline in sales from these or other large
customers, or the Company’s inability to collect on these sales, could materially and adversely impact our business,
results of operations and financial condition.
We maintain significant amounts of cash in international locations.
Given the global nature of our business, we have both domestic and international concentrations of cash and
investments. The value of our cash, cash equivalents, and marketable securities can be negatively affected by liquidity,
credit deterioration, financial results, economic risk, political risk, sovereign risk or other factors. The Company intends
to utilize its foreign cash to expand our international operations through internal growth and strategic acquisitions. If our
intent changes or if these funds are needed for our U.S. operations, or we are negatively impacted by any of the factors
above, our financial condition and results of operations could be materially adversely affected.
Globalization of sales increases risk of compliance with policy.
We operate in an increasingly complex sales environment around the world which places greater importance on
our global control environment and imposes additional oversight risk. Such increased complexity could adversely affect
our operating results by increasing compliance costs in the near-term and by increasing the risk of control failures in the
event of non-compliance.
Market pressures and increased low-cost competition may reduce or eliminate our profitability.
Our customers continually exert pressure on us to reduce our prices and extend payment terms. Given the
nature of our customer base and the highly competitive markets in which we compete, we may be required to reduce our
prices or extend payment terms to remain competitive. We have recently seen pricing pressure from our largest
customers due in part to low-cost competition and market consolidation. As a result of the competitive markets we serve,
from time to time we may enter into long term pricing agreements with our largest customers that results in reduced
product pricing. Such reduced product pricing may result in product margin declines unless we are successful in
reducing our product costs ahead of such price reductions. In addition, our newly acquired business competes in markets
that are more price competitive which may include dual or multi sourcing. We believe some of our Asian competitors
benefit from local governmental funding incentives and purchasing preferences from end-user customers in their
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respective countries. Moreover, in order to be successful in the current competitive environment, we are required to
accelerate our investment in research & development to meet time-to-market, performance and technology adoption
cycle needs of our customers simply in order to compete for design wins, and if successful, receive potential purchase
orders. Given such up-front investments we must make and the competitive nature of our markets, we may not be able to
reduce our expenses in an amount enough to offset potential margin declines or loss of business and may not be able to
meet customer product time-line expectations. The potential decrease in cash flow could materially and adversely impact
our financial condition.
We are highly dependent on our intellectual property.
Our success depends significantly on our proprietary technology. We attempt to protect our intellectual property
rights through patents and non-disclosure agreements; however, we might not be able to protect our technology, and
competitors might be able to develop similar technology independently. In addition, the laws of some foreign countries
might not afford our intellectual property the same protections as do the laws of the United States. Our intellectual
property is not protected by patents in several countries in which we do business, and we have limited patent protection
in other countries, including the PRC. The cost of applying for patents in foreign countries and translating the
applications into foreign languages requires us to select carefully the inventions for which we apply for patent protection
and the countries in which we seek such protection. Generally, our efforts to obtain international patents have been
concentrated in the European Union and certain industrialized countries in Asia, including Korea, Japan, and Taiwan. If
we are unable to protect our intellectual property successfully, our business, financial condition, and results of operations
could be materially and adversely affected.
The PRC commercial law is relatively undeveloped compared to the commercial law in the United States.
Limited protection of intellectual property is available under PRC law. Consequently, manufacturing our products in the
PRC may subject us to an increased risk that unauthorized parties may attempt to copy our products or otherwise obtain
or use our intellectual property. We may not be able to protect our intellectual property rights effectively. Additionally,
we may not have adequate legal recourse if we encounter infringements of our intellectual property in the PRC.
Our legacy inverter products may suffer higher than anticipated litigation, damage or warranty claims.
Our legacy inverter products (of which we discontinued the manufacture, engineering, and sale in
December 2015 and which are reflected as Discontinued Operations in this filing) contain components that may contain
errors or defects and were sold with original product warranties ranging from one to ten years with an option to purchase
additional warranty coverage for up to 20 years. If any of our products are defective or fail because of their design, we
might be required to repair, redesign or recall those products or to pay damages (including liquidated damages) or
warranty claims, and we could suffer significant harm to our reputation. We are experiencing increasing claims from
customers and suppliers and increasing litigation related to the legacy inverter product line. We review such claims and
vigorously defend against such lawsuits in the ordinary course of our business. We cannot assure that any such claims or
litigation brought against us will not have a material adverse effect on our business or financial statements. Our
involvement in such litigation could result in significant expense to us and divert the efforts of our technical and
management personnel. We also accrue a warranty reserve for estimated costs to provide warranty services including the
cost of technical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of
costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the
extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our
warranty accrual will increase, resulting in additional expenses in the line "Income (loss) from discontinued operations,
net of tax” on our Consolidated Statement of Operations in future periods. We plan to continue supporting inverter
customers with service maintenance and repair operations. This includes performing service to fulfill obligations under
existing service maintenance contracts. There is no certainty that these can be performed profitably and could be
adversely affected by higher than anticipated product failure rates, loss of critical service technician skills, an inability to
obtain service parts, customer demands and disputes and cost of repair parts, among other factors. See Note 4. Disposed
and Discontinued Operations in Part II, Item 8 "Financial Statements and Supplementary Data" contained herein.
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Our products may suffer from defects or errors leading to damage or warranty claims.
Our products use complex system designs and components that may contain errors or defects, particularly when
we incorporate new technology into our products or release new versions. If any of our products are defective or fail
because of their design, we might be required to repair, redesign or recall those products, pay damages (including
liquidated damages) or warranty claims, and we could suffer significant harm to our reputation. We accrue a warranty
reserve for estimated costs to provide warranty services including the cost of technical support, product repairs, and
product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is based on
historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity
or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross
profit. In recent years, we have experienced increased warranty costs for our legacy inverter product lines, which is
reflected in "Income from discontinued operations, net of income taxes." See Note 4. Disposed and Discontinued
Operations in Part II, Item 8 "Financial Statements and Supplementary Data" contained herein.
Unfavorable currency exchange rate fluctuations may lead to lower operating margins, or may cause us to raise prices,
which could result in reduced sales.
Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations, and we
could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency
fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to such
customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations,
our results of operations could be materially and adversely affected. In addition, most sales made by our foreign
subsidiaries are denominated in the currency of the country in which these products are sold and the currency in which
they receive payment for such sales could be less valuable at the time of receipt as a result of exchange rate fluctuations.
Given recent acquisitions in Europe and Asia, our exposure to fluctuations in the value of the Euro and Chinese Yuan is
becoming more significant. From time to time, we enter into forward exchange contracts and local currency purchased
options to reduce currency exposures related to likely or pending transactions including those arising from intercompany
sales of inventory. However, we cannot be certain that our efforts will be adequate to protect us against significant
currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could materially and
adversely affect our results of operations.
Recent developments relating to the United Kingdom’s referendum vote in favor of leaving the European Union and
related actions could adversely affect us.
On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the
European Union ("EU"). On January 23, 2020, the UK left the EU, which is commonly referred to as "Brexit". The UK
and the EU are now in a transitionary period through the end of 2020. Negotiation on the UK’s withdrawal from the EU
as well as its relationship with the EU going forward, including the terms of trade between the UK and the EU, is
unclear. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports
and exports between the UK and EU countries and increased regulatory complexities. These changes may adversely
affect our sales, operations and financial results. Our operations in the UK may be adversely affected by extreme
fluctuations in the UK exchange rates. Moreover, the imposition of any import restrictions and duties levied on our UK
products as imported for EU customers may make our products more expensive for such customers and less competitive
from a pricing perspective.
Changes in the value of the Chinese yuan could impact the cost of our operation in the PRC and our sales growth in our
PRC markets.
The PRC government is continually pressured by its trading partners to allow its currency to float in a manner
like other major currencies. Any change in the value of the Chinese yuan may impact our ability to control the cost of
our products in the world market. Specifically, the decision by the PRC government to allow the yuan to begin to float
against the United States dollar could significantly increase the labor and other costs incurred in the operation of our
Shenzhen and Zhongshan facilities and the cost of raw materials, parts, components, and subassemblies that we source in
the PRC, thereby having a material and adverse effect on our financial condition and results of operations.
26
Difficulties with our enterprise resource planning ("ERP") system and other parts of our global information technology
system could harm our business and results of operation.
Like many multinational corporations, we maintain a global information technology system, including software
products licensed from third parties. The acquisition of Artesyn’s Embedded Power business adds additional information
systems that are initially different from current systems. Any system, network or Internet failures, misuse by system
users, government intervention, the hacking into or disruption caused by unauthorized access or loss of license rights
could disrupt our ability to timely and accurately manufacture and ship products or to report our financial information in
compliance with the timelines mandated by the SEC. Any such failure, misuse, hacking, unauthorized access,
disruptions or loss would likely cause a diversion of management’s attention from the underlying business and could
harm our operations. In addition, a significant failure of our global information technology system could adversely affect
our ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002.
If our network security measures are breached and unauthorized access is obtained to a customer’s data or our data or
our information technology systems, we may incur significant legal and financial exposure and liabilities.
As part of our day-to-day business, we store our data and certain data about our customers in our global
information technology system. Unauthorized access to our data, including any regarding our customers, could expose
us to a risk of loss of this information, loss of business, litigation and possible liability. These security measures may be
breached by intentional misconduct by computer hackers, as a result of third-party action, employee error, malfeasance
or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing
sensitive information such as usernames, passwords or other information in order to gain access to our customers’ data
or our data, including our intellectual property and other confidential business information, or our information
technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change
frequently and generally are not recognized until launched against a target, we may be unable to anticipate these
techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence by
our customers, damage our reputation, disrupt our business, lead to legal liability and negatively impact our future sales.
Our business is subject to complex and evolving U.S. and international laws and regulations regarding privacy and data
protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in
claims, changes to our business practices, penalties, increased cost of operations, or declines in user growth or
engagement, or otherwise harm our business.
Regulatory authorities around the world are considering several legislative and regulatory proposals concerning
data protection, including measures to ensure that encryption of users’ data does not hinder law enforcement agencies’
access to that data. In addition, the interpretation and application of consumer and data protection laws in the U.S.,
Europe and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a
manner that is inconsistent with our data practices. These legislative and regulatory proposals, if adopted, and such
interpretations could, in addition to the possibility of fines, result in an order requiring that we change our data practices,
which could have an adverse effect on our business and results of operations. Complying with these various laws could
cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
Recent legal developments in Europe have created compliance uncertainty regarding certain transfers of
personal data from Europe to the United States. For example, the General Data Protection Regulation ("GDPR"),
effective in the EU starting on May 25, 2018, applies to all our activities conducted from an establishment in the EU or
related to products and services that we offer to EU users. The GDPR creates a range of new compliance obligations,
which could cause us to change our business practices, and will significantly increase financial penalties for
noncompliance (including possible fines of up to 4% of global annual turnover for the preceding financial year or €20
million (whichever is higher) for the most serious infringements). Moreover, the China cybersecurity law enacted in
2017 and subsequent regulations and interpretations create compliance and data access risks for multinational
corporations such as our Company.
27
The loss of any of our key personnel could significantly harm our results of operations and competitive position.
Our success depends to a significant degree upon the continuing contributions of our key management,
technical, marketing, and sales employees. We may not be successful in retaining our key employees or attracting or
retaining additional skilled personnel as required. Failure to retain or attract key personnel could significantly harm our
results of operations and competitive position. Our success in hiring and retaining employees depends on a variety of
factors, including the attractiveness of our compensation and benefit programs, global economic or political and industry
conditions, our organizational structure, our reputation, culture and working environment, competition for talent and the
availability of qualified employees, the availability of career development opportunities, and our ability to offer a
challenging and rewarding work environment. We must develop our personnel to provide succession plans capable of
maintaining continuity during the inevitable unpredictability of personnel retention. While we have plans for key
management succession and long-term compensation plans designed to retain our senior employees, if our succession
plans do not operate effectively, our business could be adversely affected.
We have been, and in the future may again be, involved in litigation. Litigation is costly and could result in further
restrictions on our ability to conduct business or make use of market relationships we have developed, or an inability to
prevent others from using technology.
Litigation may be necessary to enforce our commercial or property rights, to defend ourselves against claimed
violations of such rights of others, or to protect our interests in regulatory, tax, customs, commercial, and other disputes
or similar matters. In particular, we have been experiencing increased litigation related to our legacy inverter product
line and an adverse court ruling in any of our cases could adversely affect our financial condition and results of
operations. Litigation often requires a substantial amount of our management’s time and attention, as well as financial
and other resources, including:
•
•
•
•
substantial costs in the form of legal fees, fines, and royalty payments;
restrictions on our ability to sell certain products or in certain markets;
an inability to prevent others from using technology we have developed; and
a need to redesign products or seek alternative marketing strategies.
Any of these events could have a significant adverse effect on our business, financial condition, and results of
operations.
Return on investments or interest rate declines on plan investments could result in additional unfunded pension
obligations for our pension plans.
We currently have unfunded obligations to our pension plans. The extent of future contributions to the pension
plan depends heavily on market factors such as the discount rate used to calculate our future obligations and the actual
return on plan assets which enable future payments. We estimate future contributions to the plans using assumptions
with respect to these and other items. Changes to those assumptions could have a significant effect on future
contributions. Additionally, a material deterioration in the funded status of the plan could increase pension expenses and
reduce our profitability. See Note 17. Pension Liability in Part II, Item 8 "Financial Statements and Supplementary Data"
contained herein.
Funds associated with our marketable securities that we have traditionally held as short-term investments may not be
liquid or readily available.
In the past, certain of our investments have been affected by external market conditions that impacted the
liquidity of the investment. We do not currently have investments with reduced liquidity, but external market conditions
that we cannot anticipate or mitigate may impact the liquidity of our marketable securities. Any changes in the liquidity
associated with these investments may require us to borrow funds at terms that are not favorable or repatriate cash from
international locations at a significant cost. We cannot be certain that we will be able to borrow funds or continue to
repatriate cash on favorable terms, or at all. If we are unable to do so, our available cash may be reduced until those
investments can be liquidated. The lack of available cash may prevent us from taking advantage of business
28
opportunities that arise and may prevent us from executing some of our business plans, either of which could cause our
business, financial condition or results of operations to be materially and adversely affected.
Our intangible assets may become impaired.
As of December 31, 2019, we have $202.9 million of goodwill and $184.0 million in intangible assets. We
periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or
circumstances that might result in either a diminished fair value, or for intangible assets, a revised useful life. The events
and circumstances include significant changes in the business climate, legal factors, operating performance indicators,
and competition. Any impairment or revised useful life could have a material and adverse effect on our financial position
and results of operations and could harm the trading price of our common stock.
We are subject to numerous governmental regulations.
We are subject to federal, state, local and foreign regulations, including environmental regulations and
regulations relating to the design and operation of our products and control systems and regulations governing the
import, export and customs duties related to our products. We might incur significant costs as we seek to ensure that our
products meet safety and emissions standards, many of which vary across the states and countries in which our products
are used. In the past, we have invested significant resources to redesign our products to comply with these directives.
Compliance with future regulations, directives, and standards could require us to modify or redesign some products,
make capital expenditures, or incur substantial costs. Also, we may incur significant costs in complying with the
numerous imports, exports and customs regulations as we seek to sell our products internationally. If we do not comply
with current or future regulations, directives, and standards:
• we could be subject to fines and penalties;
•
• we could be prohibited from offering particular products in specified markets.
our production or shipments could be suspended; and
If we were unable to comply with current or future regulations, directives and standards, our business, financial
condition and results of operations could be materially and adversely affected.
Financial reform legislation will result in new laws and regulations that may increase our costs of operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various
federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and
reports for Congress. On August 22, 2012, under the Dodd-Frank Act, the SEC adopted new requirements for companies
that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are
manufactured by third parties. These requirements require companies to perform due diligence, disclose and report
whether or not such minerals originate from the Democratic Republic of Congo and adjoining countries. We must
perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. With
regard to our acquisition of Artesyn, we will need to complete due diligence over the minerals used in the manufacture
of those products. In addition, we incur costs to comply with the disclosure requirements, including costs related to
determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is
complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through
the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face
difficulties in satisfying customers who require that all the components of our products are certified as conflict mineral
free.
The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which we have no
control.
The stock market has from time to time experienced, and is likely to continue to experience, extreme price and
volume fluctuations. Prices of securities of technology companies have been especially volatile and have often fluctuated
for reasons that are unrelated to their operating performance. In the past, companies that have experienced volatility in
29
the market price of their stock have been the subject of securities class action litigation. If we were the subject of
securities class action litigation, it could result in substantial costs and a diversion of management’s attention and
resources.
Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or
investors, our share price may decrease significantly.
Our annual and quarterly results may vary significantly depending on various factors, many of which are
beyond our control. Because our operating expenses are based on anticipated revenue levels, our sales cycle for
development work is relatively long, and a high percentage of our expenses are fixed for the short term, a small variation
in the timing of recognition of revenue can cause significant variations in operating results from period to period. If our
earnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
30
ITEM 2. PROPERTIES
Information concerning our principal properties at December 31, 2019 is set forth below:
Principal Activity
Location
Corporate headquarters, general and administrative
Denver, CO
Research and development, distribution, sales, and service
Fort Collins, CO
Manufacturing, distribution, service, and research and development
Lockport, NY
Research and development, sales, and service
Milpitas, CA
Manufacturing, distribution, service, and research and development
Ronkonkoma, NY
Research and development, manufacturing, distribution, sales, and service
Vancouver, WA
Sales
Georgetown, MA
Engineering, and research and development
Eden Prairie, MN
Sales and administration
Tempe, AZ
Sales
Beijing, China
Sales and distribution
Shanghai, China
Manufacturing, distribution, service, and research and development
Shenzhen, China
Service
Xian, China
Manufacturing
Zhongshan, China
Sales
Pune, India
Tokyo, Japan
Sales and service
Seoul, South Korea Sales and service
Bukit Minak,
Malaysia
Manufacturing and distribution
Quezon, Philippines Engineering, research and development, administration and support
Rosario, Philippines Manufacturing
Santa Rosa,
Philippines
Manufacturing
Singapore,
Singapore
Taipei, Taiwan
Hong Kong, Hong
Sales and service
Sales, distribution, and service
Kong
Distribution and general & administrative
Ballerup, Denmark Manufacturing, distribution, sales, service, and research and development
Erstein, France
Metzingen,
Germany
Distribution, sales, and service
Sales
Warstein-Belecke,
Germany
Research and development, distribution, sales, and service
Frankfurt, Germany Manufacturing, distribution, sales, service, and research and development
Magdeburg,
Germany
Cork, Ireland
Caesarea, Israel
Villaz-St-Pierre,
Switzerland
Littlehampton,
Manufacturing and distribution
Sales, service, and research and development
Research and development and service
Research and development
United Kingdom
Manufacturing, distribution, sales, service, and research and development
Ownership
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased/Owned
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
We consider the properties that we own or lease as adequate to meet our current and future requirements. We
regularly assess the size, capability, and location of our global infrastructure and periodically make adjustments based on
these assessments.
31
ITEM 3. LEGAL PROCEEDINGS
We are presently 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 patent litigation
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 patent rights. An unfavorable decision in a collection action against a
customer we sold products to, or a claim or counterclaim from a customer related to alleged product failures, could also
have a material adverse effect on our financial position or reported results of operations. We are engaged presently in
such disputes and legal actions with customers and supplier for the inverter product line. We accrue loss contingencies in
connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred,
and the amount of the loss can be reasonably estimated. For further information see Note 19. Commitments and
Contingencies in Part II, Item 8 “Financial Statements and Supplementary Data.”
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
32
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
Our common stock is listed on the NASDAQ Global Select Market under the symbol “AEIS.” At February 28,
2020, the number of common stockholders of record was 303.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock in our history as a public company. We
currently intend to retain all future earnings to finance our business or make stock repurchases and do not anticipate
paying cash or other dividends on our common stock in the foreseeable future.
Purchases of Equity Securities by the Issuer
In September 2015, our Board of Directors (the “Board”) authorized a program to repurchase up to $150.0
million of our stock over a thirty-month period. In November 2017, the Board approved an extension of the share
repurchase program to December 2019 from its original maturity of March 2018. In May 2018, the Board approved
a $50 million increase in the repurchase authorization.
On December 18, 2019, the Board authorized to remove the expiration date from the repurchase program and
increased the balance available for stock repurchase by $25.1 million. As of December 31, 2019, the Company was
authorized to repurchase shares of the Company’s common stock of up to a total of $50.0 million.
The following table summarizes the stock repurchase activity for the three months ended December 31, 2019 (in
thousands, except per share amounts):
October 1, 2019 - October 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . .
November 1, 2019 - November 30, 2019 . . . . . . . . . . . . . . . . . . . . .
December 1, 2019 - December 31, 2019 . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
—
— $
—
—
—
—
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
Maximum
Dollar Value
of Shares
that
May Yet be
Purchased
Under the
Plans or
Programs
— $ 24,902
—
24,902
50,000
—
— $ 50,000
In order to execute the repurchase of shares of our common stock, the Company periodically enters into stock
repurchase agreements. All shares repurchased were executed in the open market, and no shares were repurchased from
related parties. Repurchased shares are retired and assumed the status of authorized and unissued shares. Accordingly,
the associated cost of the repurchased shares was recognized as a reduction to additional paid-in capital.
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on our common stock
during the period from December 31, 2014 through December 31, 2019. This is compared with the cumulative total
33
return of the NASDAQ Composite Index and the Philadelphia Semiconductor Index (PHLX) over the same period. The
comparison assumes $100 was invested on December 31, 2014 in Advanced Energy common stock and in each of the
foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest
whole dollar. The performance shown in the graph represents past performance and should not be considered an
indication of future performance.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Advanced Energy Industries, Inc., the NASDAQ Composite Index,
the PHLX Semiconductor Index and the RDG Semiconductor Composite Index
$350
$300
$250
$200
$150
$100
$50
$0
12/14
12/15
12/16
12/17
12/18
12/19
Advanced Energy Industries, Inc.
NASDAQ Composite
PHLX Semiconductor
RDG Semiconductor Composite
(1) $100 invested on 12/31/2014 in our stock or index, including reinvestment of dividends. Indices and our stock
performance are calculated on a calendar year-end basis.
12/14
12/15
12/16
12/17
12/18
12/19
Advanced Energy Industries, Inc. . . . . . . . . . . . . . $ 100.00 $ 119.11 $ 231.01 $ 284.73 $ 181.14 $ 300.42
200.49
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . . . .
295.57
PHLX Semiconductor . . . . . . . . . . . . . . . . . . . . . . .
234.06
RDG Semiconductor Composite . . . . . . . . . . . . . .
146.67
181.04
153.35
100.00
100.00
100.00
106.96
98.41
91.76
116.45
137.10
122.76
150.96
192.69
169.41
Information relating to compensation plans under which our equity securities are authorized for issuance is set
forth in Part III, Item 12 of this Annual Report on Form 10 - K.
ITEM 6. SELECTED FINANCIAL DATA
The selected Consolidated Statements of Operations and related Consolidated Balance Sheets data were derived
from our audited Consolidated Financial Statements. The information below is not necessarily indicative of results of
future operations and should be read in conjunction with Item 7 “Management’s Discussion and Analysis of Financial
34
Condition and Results of Operations” of this Form 10 - K in order to understand more fully the factors that may affect the
comparability of the information presented below (in thousands, except per share amounts):
2019
Years Ended December 31,
2017
2018
2016
2015
Consolidated Statements of Operations Data:
Sales, net (1) (2) (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 $ 718,892 $ 671,012 $ 483,704 $ 414,811
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
54,388 $ 171,553 $ 200,770 $ 126,857 $ 106,656
Income from continuing operations before income
taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
67,194 $ 172,376 $ 198,191 $ 128,076 $ 105,442
Income from continuing operations, net of income
taxes (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
56,495 $ 147,149 $ 136,101 $ 116,948 $ 83,482
Income (loss) from discontinued operations, net of
income taxes (5) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations attributable to
(38) $ 1,760 $ 10,506 $ (241,968)
8,480 $
64,975 $ 147,111 $ 137,861 $ 127,454 $ (158,486)
noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . $
34 $
86 $
— $
— $
—
Net income (loss) attributable to Advanced Energy
Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
64,941 $ 147,025 $ 137,861 $ 127,454 $ (158,486)
Earnings per Share:
Continuing Operations:
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . $
1.47 $
1.47 $
3.76 $
3.74 $
3.42 $
3.39 $
2.94 $
2.92 $
2.05
2.03
Discontinued Operations:
Basic earnings (loss) per share . . . . . . . . . . . . . . . . $
Diluted earnings (loss) per share . . . . . . . . . . . . . . . $
0.22 $
0.22 $
— $
— $
0.04 $
0.04 $
0.26 $
0.26 $
(5.94)
(5.94)
Net Income (Loss):
Basic earnings (loss) per share . . . . . . . . . . . . . . . . $
Diluted earnings (loss) per share . . . . . . . . . . . . . . . $
1.70 $
1.69 $
3.76 $
3.74 $
3.47 $
3.43 $
3.21 $
3.18 $
(3.89)
(3.89)
Basic weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,281
39,081
39,754
39,720
40,746
Diluted weighted-average common shares
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,495
39,352
40,176
40,031
41,077
Consolidated Balance Sheets Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,532,406 $ 816,484 $ 733,308 $ 571,529 $ 462,503
Total long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . $ 534,814 $ 98,873 $ 106,548 $ 84,409 $ 95,024
(1) Included in sales for 2019 is $220.3 million related to the acquisition of all outstanding shares of Artesyn as of
September 10, 2019.
(2) Included in sales for 2018 is $17.4 million related to the acquisition of all outstanding shares of LumaSense
Technologies Holdings, Inc. as of September 1, 2018 and $21.3 million related to the acquisition of all the
outstanding shares of Trek Holding Co. Ltd as of February 2, 2018 and the acquisition of the electrostatic
technology and product line from Monroe Electronics, Inc as of May 1, 2018.
(3) Included in sales for 2017 is $7.6 million related to the acquisition of all the outstanding shares of Excelsys
Holding Ltd. as of July 1, 2017.
(4) We recognized tax expense of $5.7 million, or $0.14 per diluted share, and $72.9 million, or $1.81 per diluted share,
for 2018 and 2017, respectively, associated with the impacts of the enactment of the U.S. Tax Cuts and Jobs Act
legislation in December 2017. We recognized a tax benefit of $33.8 million, or $0.84 per diluted share, in 2017
related to the continued wind down of our solar inverter business which was discontinued in 2015.
35
(5) In 2015, we discontinued the development, sales and distribution of our solar inverter product line.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain statements set forth below under this caption constitute forward-looking statements. See “Special
Note Regarding Forward-Looking Statements” in this Annual Report on Form 10 - K for additional factors relating to
such statements and see “Risk Factors” in Item 1A for a discussion of certain risks applicable to our business, financial
condition and results of operations.
This section of this Form 10-K discusses and compares the results of operations for 2019 and 2018. The
discussion and analysis comparing the results of operations for 2017 to 2018 are not included in this Form 10-K and can
be found within Part II, Item 7, Management’s Discussion and Analysis for Financial Condition and Results of
Operations in our 2018 Form 10-K for the fiscal year ended December 31, 2018.
Overview
We design, manufacture, sell, and support power conversion products that transform power into various usable
forms. Our highly-engineered, mission-critical, precision power conversion, measurement and control solutions enable
innovative complex semiconductor manufacturing processes, power medical equipment, control industrial
manufacturing processes, provide high efficiency power to data center equipment and deliver efficient and reliable
power to communication infrastructure and to a wide range of industrial equipment. Our network of global service
support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and
refurbishments and used equipment to companies using our products.
Driven by continuing technology migration and changing customer demands, the markets we serve are
constantly changing in terms of advancement in applications, core technology and competitive pressures. New products
we design for capital equipment manufacturers typically have a lifespan of five to ten years. Our success and future
growth depend on our products being designed into our customers’ new generations of equipment as they develop new
technologies and applications. We work with these original equipment manufacturers early in their design cycles to
modify, enhance and upgrade our products or design new products that meet the requirements of their new systems. The
design win process is highly competitive, and we may win or lose new designs for our existing customers’ or new
customers’ next generations of equipment. If existing or new customers do not choose our products as a result of the
development, evaluation and qualification efforts related to the design win process, our market share may be reduced,
our potential revenues related to the lifespan of our customers’ products, which can be 5 - 10 years, may not be realized,
and our business, financial condition and results of operations may be materially and adversely impacted.
CRITICAL ACCOUNTING ESTIMATES
The preparation of Consolidated Financial Statements and related disclosures in conformity with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) requires us to make judgments,
assumptions, and estimates that affect the amounts reported. Note 1. Operations and Summary of Significant Accounting
Policies and Estimates in Part II, Item 8 "Financial Statements and Supplementary Data" describes the significant
accounting policies used in the preparation of our Consolidated Financial Statements. The accounting positions
described below are significantly affected by critical accounting estimates. Such accounting positions require significant
judgments, assumptions, and estimates to be used in the preparation of the Consolidated Financial Statements, actual
results could differ materially from the amounts reported based on variability in factors affecting these statements.
Defined Benefit Pension Plans
Accounting for pension plans requires that we make assumptions that involve considerable judgment which are
significant inputs in the actuarial models that measure our net pension obligations and ultimately impact our earnings.
These include the discount rate, long-term expected rate of return on assets, compensation trends, inflation considerations,
36
health care cost trends and other assumptions, as well as determining the fair value of assets in our funded plans.
Specifically, the discount rates, as well as the expected rates of return on assets and plan asset fair value determination,
are important assumptions used in determining the plans' funded status and annual net periodic pension and benefit costs.
We evaluate these critical assumptions at least annually on a plan and country-specific basis. We also, with the help of
actuaries, periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and
turnover, and update them to reflect our experience and expectations for the future. The Company believes the
accounting estimates related to our pension plans are critical accounting estimates because they are highly susceptible to
change from period to period based on the performance of plan assets, actuarial valuations, market conditions and
contracted benefit changes. While we believe that our assumptions are appropriate, significant differences in our actual
experience or significant changes in our assumptions may materially affect our net pension and postretirement benefit
obligations and related expense.
Revenue Recognition
We recognize revenue when we have satisfied our performance obligations which typically occurs when control
of the products or completion of services have been transferred to our customers. The transaction price is based upon the
standalone selling price. In most transactions, we have no obligations to our customers after the date products are
shipped, other than pursuant to warranty obligations. Revenue is recognized net of any taxes collected from customers,
which are subsequently remitted to governmental authorities. Shipping and handling fees, if any, are recognized as
revenue. The related shipping and handling costs are recognized in cost of sales. Support services include warranty and
non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our
standard warranty do not generate revenue.
We maintain a credit approval process and we make significant judgments in connection with assessing our
customers’ ability to pay. Despite this assessment, from time to time, our customers are unable to meet their payment
obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision
for estimated credit losses based upon our historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our expectations and the provisions established, a
significant change in the liquidity or financial position of our customers could have a material adverse impact on the
collectability of accounts receivable and our future operating results. Additionally, if our credit loss rates prove to be
greater than we currently estimate, we record additional reserves for doubtful accounts.
Business Combinations
We record the assets acquired and liabilities assumed in a business combination at their acquisition date fair
values. Fair values of assets acquired, and liabilities assumed are based upon available information and may involve
engaging an independent third party to perform an appraisal. Estimating fair values can be complex and subject to
significant business judgment. We must also identify and include in the allocation all acquired tangible and intangible
assets that meet certain criteria, including assets that were not previously recorded by the acquired entity. The estimates
most commonly involve property, plant and equipment and intangible assets, including those with indefinite lives. The
estimates also include the fair value of contracts including commodity purchase and sale agreements, storage contracts,
and transportation contracts. The excess of the purchase price over the net fair value of acquired assets and assumed
liabilities is recorded as goodwill, which is not amortized but instead is evaluated for impairment at least annually.
Pursuant to GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information
necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination.
Inventory
We value our inventory at the lower of cost (first-in, first-out method) or net realizable value. We regularly
review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated
net realizable value, if less than cost, based primarily on our estimated forecast of product demand. Our industry is
subject to technological change, new product developments, and changes in end-user demand for our products which can
fluctuate significantly. Any significant changes in end-user demand, technology or new product developments could
have a significant impact on the value of our inventory and our reported operating results.
37
Warranty Costs
We offer warranty coverage for a majority of our products for periods typically ranging from 12 to 24 months
after shipment. We provided warranties on our inverter products for five to ten years and also provided the option to
purchase additional warranty coverage up to 20 years. Our standard inverter product warranty expense is reported within
discontinued operations. We estimate the anticipated costs of repairing our products under such warranties based on the
historical costs of the repairs. The assumptions we use to estimate warranty accruals are reevaluated periodically, in light
of actual experience, and when appropriate, the accruals are adjusted. Should product failure rates differ from our
estimates, actual costs could vary significantly from our expectations. See Note 4. Disposed and Discontinued
Operations in Part II, Item 8 "Financial Statements and Supplementary Data" for more information on our discontinued
operations and Note 15. Warranties in Part II, Item 8 "Financial Statements and Supplementary Data" for more
information.
Contingencies and Legal Reserves
Contingencies and legal reserves are recorded, when probable, using our best estimate of loss. Estimates of loss,
when required, are made based on an evaluation of the range of loss related to such matters and where the amount and
range can be reasonably estimated. Any such matters are generally resolved over future periods and only when one or
more future events occur or fail to occur. Following our initial determination, we regularly reassess and revise the
potential liability related to any pending matters as new information becomes available. We disclose pending loss
contingencies when the loss is deemed reasonably possible, which requires significant judgment. As a result of the
inherent uncertainty of these matters, the ultimate conclusion and actual cost of settlement may materially differ from
our estimates. We did not record any significant contingencies or legal reserves during the years ended December 31,
2019 or 2018. See Note 18. Commitments and Contingencies in Part II, Item 8 "Financial Statements and Supplementary
Data" for further information.
Goodwill, Intangible and Other Long-Lived Assets
We evaluate the carrying value of our goodwill for impairment at least annually or when an interim triggering
event occurs that would indicate that impairment may have taken place. Our annual impairment test was performed as of
December 31st, the last day of our last fiscal quarter. We evaluate our other definite-lived intangible assets for
impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of
these assets may not be recoverable. Significant judgments and assumptions are required in such impairment evaluations.
The annual impairment test of goodwill may be performed using an assessment of qualitative factors if it is
considered more likely than not that goodwill is not impaired. If this qualitative assessment indicates that it is more
likely than not that goodwill is impaired, then the next step of impairment testing compares the fair value of a reporting
unit to its carrying value. If fair value exceeds carrying value, the we conclude that no goodwill impairment has
occurred. Conversely, if carrying value exceeds fair value, we recognize am impairment loss.
We evaluate definite-lived intangible assets and other long-lived assets whenever there is an indicator of
impairment. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable
based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method
to determine whether an impairment exists, and then measure the impairment using discounted cash flows . If our
expectations of future results and cash flows are significantly diminished, intangible assets, long-lived assets, and
goodwill may be impaired and the resulting charge to operations may be material. Changes in these estimates could
result in significant revisions to the carrying value of these assets and may result in material charges to our results of
operations.
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is
required in determining our provision for income taxes and income tax assets and liabilities, including evaluating
uncertainties in the application of accounting principles and complex tax laws. We record a provision for income taxes
38
for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this
method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to
taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We calculate
tax expense consistent with intraperiod tax allocation methodology resulting in an allocation of current year tax
expense/benefit between continuing operations and discontinued operations. We record a valuation allowance to reduce
our deferred tax assets to the net amount that we believe is more likely than not to be realized. We recognize tax benefits
from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on
examination by the taxing authorities based on the technical merits of the position. Although we believe that we have
adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these
matters will not be materially different. We adjust these reserves when facts and circumstances change, such as the
closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is
different than the amounts recorded, such differences will affect the provision for income taxes in the period in which
such determination is made and could have a material impact on our financial condition and operating results. The
provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net
interest and penalties. For more details see Note. 5 Income Taxes in Part II, Item 8 "Financial Statements and
Supplementary Data."
On December 22, 2017, the U.S. enacted the Tax Act into law. Due to the complexity and scope of the Tax Act,
the SEC issued SAB 118, which provided for a one-year measurement period from the date of enactment in which to
complete the associated tax analysis. This analysis included finalization of the transition tax, re-measuring our U.S.
deferred tax assets and liabilities based on the reduction of the corporate income tax rate to 21%, as well as reassessing
our indefinite reinvestment position. The analysis of the impact of the Tax Act was completed within the SAB 118
measurement period and are included in the results of operations as of December 31, 2019.
Business Environment and Trends
Advanced Energy operates in a single segment structure for power electronics conversion products. The
acquisition of Artesyn’s Embedded Power business added additional products and market verticals to our business.
Following the acquisition, we have continued to be organized on a global, functional basis in order to achieve the
anticipated synergies associated with the acquisition. We operate in four vertical markets or applications and provide
revenue information to enable tracking of market trends. We also provide information on an organic basis, which is
comprised of the Company without Artesyn and LumaSense, and on an inorganic basis, which consists of Artesyn and
LumaSense, to improve comparability during the interim periods.
The demand environment in each of our markets is impacted by various market trends, customer buying
patterns, design wins, macro-economic and other factors. In the fourth quarter of 2019 we saw strengthening demand in
semiconductor and datacenter computing markets and weakening demand in our telecom networking market. See below
for a further discussion of our market trends.
In the beginning of the first quarter of 2020, we began to see an impact of COVID-19 on our operations
particularly in China, which has affected both our own workforce and supply chain. This situation is developing rapidly
and may continue to affect our operations. See further discussion in Risk Factors above.
SEMICONDUCTOR MARKET
Growth in the semiconductor market is driven by growing integrated circuits (IC) content across many
industries, increased demand for processing and storage in advanced applications such as artificial intelligence or
autonomous vehicles, and the rapid adoption of advanced mobile connectivity solutions such as 5G, enhancing existing
and enabling new wireless applications. To address the long-term growing demand for semiconductor devices, the
industry continues to invest in production capacities for advanced logic devices at the 14nm technology node and
beyond, the latest memory devices including 3D-NAND, DRAM and new emerging memories such as MRAM, and
back-end test and advanced wafer-level packaging. The industry’s transition to advanced technology nodes in logic and
39
DRAM and to increased layers in 3D memory devices is requiring an increased number of etch and deposition process
tools and higher content of our advanced power solutions per tool. As etching and deposition face new challenges such
as increasing aspect ratios in advanced 3D devices, more advanced radio frequency (RF) and direct current (DC)
technologies are needed, and we are meeting these challenges by providing a broader range of more complex RF and DC
power solutions. Beyond etch and deposition processes, the growing complexity at the advanced nodes also drive a
higher number of other processes across the fab, including inspection, metrology, thermal, ion implantation, and
semiconductor test, where Advanced Energy is actively participating as a critical technology provider. In addition, our
global support services group offers comprehensive local repair service, upgrade and retrofit offerings to extend the
useable life of our customers’ capital equipment for additional technology generations. The acquisition of Artesyn’s
Embedded Power business in September 2019 expanded Advanced Energy’s reach within the Semiconductor Equipment
market by targeting back-end test and assembly equipment makers and providing low voltage embedded power content
used in auxiliary power applications in semiconductor equipment.
Starting in the second half of 2018 and continuing into the first half of 2019, the semiconductor industry went
through a period of weakening equipment investment as a result of slowing growth in end market demand for
semiconductor devices, ongoing digestion of equipment capacity, and consumption of existing inventory. In the second
half of 2019, demand from the semiconductor equipment markets improved from the first half of 2019 as a result of
increased investments in advanced logic and foundry equipment and by increased investment by Chinese fabricators,
which drove higher demand for our products. Based on limited visibility, we expect demand from the Semiconductor
Equipment markets will continue to improve in 2020. However, it is difficult to determine when or if overall market
investment in semiconductor capital equipment will return to first half 2018 levels.
INDUSTRIAL & MEDICAL MARKETS
Customers in the Industrial & Medical markets incorporate our industrial advanced power, embedded power
and measurement products into a wide variety of equipment used in applications such as advanced material fabrication,
medical devices, analytical instrumentation, test and measurement equipment, robotics, motor drives and connected
light-emitting diodes.
OEM customers design equipment utilizing our process power technologies in a variety of industrial
applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, and
similar thin film manufacturing, including data storage and decorative, hard and optical coatings. These applications
employ similar technologies to those used in the semiconductor market to deposit films on non-semiconductor
substrates. Our strategy around these applications is to leverage our thin film deposition technologies into an expanded
set of new materials and applications in adjacent markets.
Advanced Energy serves Industrial & Medical markets with mission-critical power components that deliver
high reliability, precise, low noise or differentiated power to the equipment they serve. Examples of products sold into
Industrial & Medical markets include high voltage products for analytical instrumentation, medical equipment, low
voltage power supplies used in applications for medical devices, test and measurement, medical lasers, scientific
instrumentation and industrial equipment, and power control modules and thermal instrumentation products for material
fabrication, processing and treatment. Our gas monitoring products serve multiple applications in the energy market, air
quality monitoring and automobile emission monitoring and testing. Our strategy in the Industrial & Medical markets is
to grow and expand our addressable market both organically through our global distribution channels and through
acquisitions of products and technologies that are complimentary and adjacent to our core power conversion
applications.
In 2019 we saw weakening demand for our thin film industrial products driven by macro weakness offset by
improvements in medical and other embedded power products and the addition of Artesyn Embedded Power products
during the third and fourth quarter of 2019.
40
DATA CENTER COMPUTING MARKETS
Following the acquisition of Artesyn’s Embedded Power business in September 2019, Advanced Energy
entered the Data Center Computing market with industry-leading products and low-voltage power conversion
technologies. We sell to many data center server and storage manufacturers, original design manufacturers of server and
storage systems, and cloud service providers, or hyperscalers, who are designing and deploying their own data center
server and storage equipment. Driven by the growing adoption of cloud computing and increased consumer internet
traffic, market demand for server and storage equipment has shifted from enterprise on-premise computing to the data
center. This trend drove a strong year of data center investments in 2018, but the industry moderated investments in the
first half of 2019 before recovering in the second half of 2019. With a growing presence at both cloud service providers,
hyperscalers, and industry-leading data center server and storage vendors, we believe Advanced Energy is well
positioned to continue to capitalize on the ongoing shift towards cloud computing. We generated revenue from the Data
Center Computing market during the third and fourth quarters of 2019.
TELECOM & NETWORKING MARKETS
The acquisition of Artesyn’s Embedded Power business in September 2019 brought us a portfolio of products
and technologies that are used across the Telecom & Networking markets. Our customers include many leading vendors
and original design manufacturing of wireless and wireline infrastructure equipment, telecommunication equipment and
computer networking. The wireless telecom market continues to evolve with more advanced mobile standards. 5G
wireless technology promises to drive substantial growth opportunities for the telecom industry as it enables new
advanced applications such as autonomous vehicles and virtual/augmented reality. Telecom service providers have
started to invest in 5G, and this trend is expected to drive demand of our products into the Telecom & Networking
markets. In networking, demand is driven by networking investments by telecom service providers and enterprises
upgrading of their network, as well as cloud data center networking investments. In the third and fourth quarters of 2019,
we generated revenue from the Telecom & Networking markets following the acquisition of Artesyn.
Results of Continuing Operations
The analysis presented below is organized to provide the information we believe will facilitate an understanding
of our historical performance and relevant trends going forward, and should be read in conjunction with our
Consolidated Financial Statements, including the notes thereto, in Item 8 "Financial Statements and Supplementary
Data" of this Annual Report on Form 10 - K.
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements
of Operations (in thousands):
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 $ 718,892
365,607
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
194,054
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,553
Operating income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
823
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172,376
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,227
Income from continuing operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,495 $ 147,149
315,652
261,264
54,388
12,806
67,194
10,699
Year Ended December 31,
2019
2018
41
The following table sets forth, for the periods indicated, the percentage of sales represented by certain items
reflected in our Consolidated Statements of Operations:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2019
100.0 %
40.0
33.1
6.9
1.6
8.5
1.4
7.2 %
2018
100.0 %
50.9
27.0
23.9
0.1
24.0
3.5
20.5 %
SALES, NET
The following tables summarize annual sales and percentages of sales, by product line, for each of the years
ended 2019 and 2018 (in thousands):
Years Ended December 31,
Change 2019 v. 2018
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,018
245,992
Industrial & Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
91,438
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,500
Telecom & Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948
2019
2018
$ 533,770
185,122
—
—
$ 718,892
Dollar
$ (130,752)
60,870
91,438
48,500
$ 70,056
Percent
(24.5)%
32.9
—
—
9.7 %
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial & Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecom & Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51.1 %
31.2
11.6
6.1
100.0 %
74.2 %
25.8
-
-
100.0 %
Years Ended December 31,
2019
2018
OPERATING EXPENSE
The following table summarizes our operating expense as a percentage of sales for the years ended
December 31, 2019 and 2018 (in thousands):
Years Ended December 31,
2018
2019
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 101,503 12.9 % $ 76,008 10.6 %
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 261,264 33.1 % $ 194,054 27.0 %
108,033 15.0
0.8
0.6
142,555 18.1
1.5
12,168
0.6
5,038
5,774
4,239
42
2019 Results Compared To 2018
SALES
Total sales for the year ended December 31, 2019 increased 9.7% to $788.9 million from $718.9 million for
the year ended December 31, 2018. Revenue in fiscal 2019 benefited from $220.3 million in inorganic sales from the
acquisition of Artesyn’s Embedded Power business and $38.0 million associated with our acquisition of LumaSense.
Organic sales in fiscal 2019 decreased $170.8 million primarily due to the overall decline in demand in the
semiconductor capital equipment market and lower sales of our industrial thin film products due to a weaker overall
macroeconomic environment. Sales in fiscal 2018 includes $17.4 million associated with our acquisition of LumaSense.
In 2019, sales to the semiconductor equipment market decreased 24.5% to $403.0 million from $533.8 million
in 2018, and decreased to 51.1% of total sales compared to 74.2% of total sales in 2018. The decrease in sales during
2019 is primarily due to an overall decrease in production and demand for semiconductor equipment used in deposition
and etch applications, related to advanced memory, and the timing of new technology investment. This was partially
offset by strengthening demand for foundry logic equipment late in the fiscal year.
Sales to the industrial & medical markets increased 32.9% to $246.0 million in 2019 from $185.1 million in
2018. Our customers in these markets are primarily global and regional original equipment and device manufacturers.
Inorganic growth contributed $111.7 million in 2019, while organic sales in the industrial and medical markets
decreased $35.8 million, or 21.1%. The decrease in organic sales was primarily due to slowing macro-economic
conditions and lower demand in the consumer hard coating and flat panel display markets impacting our thin film
deposition markets partially offset by growth in medical and other embedded power products.
Sales in the data center computing market were $91.4 million in fiscal 2019 and $0.0 million in fiscal 2018. The
increase in data center computing sales is due to the addition of new product verticals through inorganic growth.
Sales in the telecom and networking market were $48.5 million in fiscal 2019 and $0.0 million in fiscal 2018.
The increase in telecom and networking sales is due to the addition of new product verticals through inorganic growth.
Sales to Applied Materials Inc. and Lam Research Corp., our two largest customers, decreased $114.1 million
to $253.0 million, and 31.9% of sales, in 2019 from $367.0 million, and 51.1% of sales in 2018. Our sales to Applied
Materials Inc. and Lam Research Corp. included sales for the semiconductor capital equipment market, as well as
industrial capital equipment used in the solar and flat panel display markets.
Backlog
Our backlog was $258.9 million at December 31, 2019 as compared to $74.7 million at December 31, 2018.
Backlog increased primarily due to the Artesyn acquisition, which added new backlog in the Data Center Computing and
Telecom & Networking markets and incremental backlog in Industrial & Medical, as well as strengthening demand for
semiconductor equipment late in the fiscal year.
GROSS PROFIT
Gross profit decreased $50.0 million to $315.6 million, or 40.0%, in 2019 as compared to $365.6 million, or
50.9%, in 2018. The decrease in gross profit as a percent of revenue is due primarily to the mix of products from
Artesyn, which carry a lower gross margin, as well as the impact of lower volume, organic product mix and higher
freight and customs costs. Gross profit in fiscal 2019 includes $44.8 million and $22.7 million, respectively, from our
acquisitions of Artesyn and LumaSense. Gross profit in fiscal 2018 includes 8.3 million associated with our acquisition
of LumaSense.
43
OPERATING EXPENSE
Research and Development
We perform research and development of products to develop new or emerging applications, technological
advances to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’
products. We believe that continued development of technological applications, as well as enhancements to existing
products and related software to support customer requirements, are critical for us to compete in the markets we serve.
Accordingly, we devote significant personnel and financial resources to the development of new products and the
enhancement of existing products, and we expect these investments to continue.
Research and development expenses in 2019 increased $25.5 million to $101.5 million, from $76.0 million in
2018, and increased as a percentage of total revenue to 12.9% in 2019 from 10.6% in 2018. Research and development
expenses include $14.2 million and $7.4 million, respectively, from our acquisitions of Artesyn and LumaSense.
Research and development expenses in fiscal 2018 include $3.0 million from our acquisition of LumaSense. The
increase in research and development expenses is primarily due to increased headcount and material costs as we invest in
new programs to maintain and increase our technological leadership and provide solutions to our customers’ evolving
needs.
Selling, General and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel,
trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our
general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative,
information systems, and human resource functions in addition to our general management, including acquisition-related
activities.
Selling, general and administrative ("SG&A") expenses increased $34.6 million to $142.6 million in 2019 as
compared to $108.0 million in 2018. SG&A expenses include $19.3 million and $11.3 million, respectively, from our
acquisitions of Artesyn’s Embedded Power business and LumaSense. SG&A expenses in 2018 include $6.1 million from
our acquisition of LumaSense. Organic SG&A expenses increased by $8.4 million for legal, professional, and transition
costs primarily related to the acquisition of Artesyn’s Embedded Power business, as well as a $4.2 million increase in
allowance for doubtful accounts related to exposure in China as a result of deferred programs due in part to the recent
Coronavirus. Excluding these items, SG&A decreased $2.6 million primarily due to reductions in travel, selling
expenses and other outside services as we were able to implement certain cost reduction measures while still preserving
recent infrastructure investments in personnel and geographic footprint.
Amortization of Intangibles
Amortization expense increased $6.4 million to $12.2 million in 2019 from $5.8 million in 2018. The increase
in 2019 is primarily driven by incremental amortization of intangible assets related to our acquisition of LumaSense and
Artesyn, which we acquired in September of 2018 and 2019, respectively.
Restructuring
In connection with the restructuring actions management previously put in place to optimize our manufacturing
footprint to lower-cost regions, and improvements in operating efficiencies and synergies related to our recent
acquisitions including Artesyn, during 2019, we recognized $2.6 million in restructuring charges primarily related to
employee termination benefits and recognition of excess lease space as we optimize our facility footprint. During 2019,
we paid approximately $5.0 million in severance related costs.
44
Other Income (Expense), net
Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and
losses, gains and losses on sales of fixed assets, and other miscellaneous items. Other income (expense), net was $12.8
million in 2019, as compared to $0.8 million in 2018. In May 2019 we sold our central solar inverter repair and service
operation and recorded a one-time gain of $14.8 million. Other income (expense) excluding the effect of the sale of the
central inverter service and repair business was $2.0 million of expense in 2019 as compared to $0.8 million of income
in 2018. The decrease in other income is primarily due to higher interest expenses in the second half of 2019 related to
the debt issued in connection with the acquisition of Artesyn’s Embedded Power business.
Provision for Income Taxes
In 2019, we recorded income tax expense for our continuing operations of $10.7 million or an effective tax rate
of 15.9%. Income tax expense in 2018 was $25.2 million or an effective tax rate of 14.6%. Included in our 2018 tax
expense is $5.7 million of expense associated with finalization of the Tax Act items within the SAB 118 measurement
period. After giving consideration to the above item, tax expense in 2018 for our continuing operations would have been
$19.5 million or an effective tax rate of 11.3%. The 2019 effective tax rate differs from the federal statutory rate of 21%
primarily due to the benefit of tax credits and earnings in foreign jurisdictions which are subject to lower tax rates, offset
by additional GILTI tax in the US and withholding taxes.
Discontinued Operations
In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter
product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as “Income
(loss) from discontinued operations, net of income taxes” on our Consolidated Statements of Operations for all periods
presented herein.
The effect of our sales of the remaining extended inverter warranties to our customers continues to be reflected
in deferred revenue in our Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the
associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing
operations in future periods in our Consolidated Statement of Operations, as the deferred revenue is earned and the
associated services are rendered. Extended warranties related to the inverter product line are no longer offered.
In May 2019, we divested our grid-tied central solar inverter repair and service operation. In conjunction with
the divesture, the initial product warranty for the previously sold grid-tied central solar inverters was transferred to the
buyer. Accordingly, a gain of $8.6 million net of tax expense of $2.4 million was recognized in Other income (expense)
and Provision (benefit) for income taxes, respectively, in our discontinued operations for the year December 31, 2019.
Operating income from discontinued operations for the year ended December 31, 2019 and 2018, also includes the
impacts of changes in our estimated product warranty liability, the recovery of accounts receivable and foreign exchange
gain or (losses).
Income (loss) from discontinued operations, net of income taxes (in thousands):
Years Ended December 31,
2019
2018
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $
(901)
1,022
(121)
10,895
10,774
2,294
8,480 $
— $
—
(88)
96
(8)
(24)
(32)
6
(38)
45
Non-GAAP Results
Management uses non-GAAP operating income and non-GAAP EPS to evaluate business performance without
the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-
GAAP measures to assess performance against business objectives, make business decisions, including developing
budgets and forecasting future periods. In addition, management’s incentive plans include these non-GAAP measures as
criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-
GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures
provide additional information that enables readers to evaluate our business from the perspective of management. The
presentation of this additional information should not be considered a substitute for results prepared in accordance with
U.S. GAAP.
The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based
compensation and amortization of intangible assets. In addition, they exclude discontinued operations and other non-
recurring items such as acquisition-related costs and restructuring expenses, as they are not indicative of future
performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each
non-GAAP adjustment after consideration of their respective book and tax treatments and effect of adoption of the Tax
Act.
Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing
operations, excluding certain items (in thousands)
Years Ended December 31,
2019
2018
Gross profit from continuing operations, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 315,652 $ 365,607
Adjustments to gross profit:
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility expansion and relocation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses from continuing operations, as reported. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
525
3,891
8,290
328,358
41.6%
261,264
742
1,328
569
368,246
51.2%
194,054
(5,774)
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(8,961)
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,726)
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(518)
Facility expansion and relocation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(4,239)
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
172,836
Non-GAAP operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 104,053 $ 195,410
27.2%
Non-GAAP operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(12,168)
(6,803)
(12,002)
(948)
(5,038)
224,305
13.2%
46
Reconciliation of Non-GAAP measure - income from continuing operations, excluding certain items
Years Ended December 31,
2019
2018
Income from continuing operations, less non-controlling interest, net of income taxes . . . . . . . $ 56,461 $ 147,063
Adjustments:
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility expansion and relocation costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax Cuts and Jobs Act Impact . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Central inverter services business sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of non-GAAP adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP income, net of income taxes, excluding stock-based compensation . . . . . . . . . . .
Stock-based compensation, net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,774
2,295
1,846
4,239
5,703
—
(2,344)
164,576
7,421
Non-GAAP income, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 93,864 $ 171,997
4.37
Non-GAAP diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12,168
20,263
4,838
5,038
—
(13,737)
3,206
88,237
5,627
2.44 $
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations. However, we continuously monitor
operating price increases, particularly in connection with the supply of component parts used in our manufacturing
process. To the extent permitted by competition, we pass increased costs on to our customers by increasing sales prices
over time. Sales price increases, however, were not significant in any of the years presented herein.
Liquidity and Capital Resources
LIQUIDITY
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives.
Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on
our ability to generate cash from operating activities which is subject to future operating performance, as well as general
economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our
control. Our primary sources of liquidity are our available cash, investments and, cash generated from current
operations.
At December 31, 2019, we had $346.4 million in cash, cash equivalents, and marketable securities. We believe
that adequate liquidity and cash generation will be important to the execution of our strategic initiatives. We believe that
our current cash levels and our cash flows from future operations will be adequate to meet anticipated working capital
needs, anticipated levels of capital expenditures, and contractual obligations for the next twelve months.
At December 31, 2019, we had $125.1 million in cash, cash equivalents, and marketable securities held by
foreign subsidiaries. As a result of the recent Tax Act, we have provided for U.S. tax on all foreign unremitted earnings.
Accordingly, cash related to these unremitted earnings could be repatriated to the U.S. with minimal additional taxes.
Additional taxes would include foreign withholding taxes and U.S. state income taxes. During 2018 and 2019, the
Company changed its policy regarding indefinite investment of unremitted earnings, and recognized the tax expense
associated with this change in election. Consistent with the Company’s capital deployment initiatives, the Company
intends to utilize foreign cash to expand our operations through internal growth and strategic acquisitions, provide for
service of existing debt, and opportunistically return cash to stockholders.
Credit Facility
In connection with the acquisition of Artesyn’s Embedded Power business in 2019, the Company entered into a
credit agreement (“Credit Agreement”) that provided aggregate financing of $500.0 million, consisting of a $350.0
million senior unsecured term loan facility (the “Term Loan Facility”) and a $150.0 million senior unsecured revolving
47
facility (“Revolving Facility”). Both the Term Loan Facility and Revolving Facility mature on September 10, 2024. At
December 31, 2019, we had $150.0 million in available funding under the Revolving Facility.
In connection with the entry into the Credit Agreement, the Company terminated its then-existing Loan
Agreement, as amended (the "Loan Agreement"), which previously provided a revolving line of credit of up to $150.0
million subject to certain funding conditions. The Company expensed all unused line of credit fees at the time of
termination of the Loan Agreement. See Note 22. Credit Facility in Part II, Item 8 "Financial Statements and
Supplemental Data" for additional information.
Share Repurchase
On December 18, 2019, the Board of Directors authorized to remove the expiration date to the Company’s
common stock share repurchase program and increase the authorized amount by $25.1 million increasing the.
authorization to repurchase shares up to a total of $50.0 million. As of December 31, 2019, a total of $50.0 million
remained available for future share repurchases. We repurchased 1.7 million shares for $95.1 million and 0.4 million
shares for $30.0 million in fiscal 2018 and 2017, respectively. There were no shares repurchased in fiscal 2019.
CASH FLOWS
A summary of our cash provided by and used in operating, investing, and financing activities is as follows (in
thousands):
Years Ended December 31,
Net cash provided by (used in) operating activities from continuing operations . . . . . . . . . . . . $
Net cash provided by (used in) operating activities from discontinued operations . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities from continuing operations . . . . . . . . . . . .
Net cash provided by (used in) financing activities from continuing operations . . . . . . . . . . . .
EFFECT OF CURRENCY TRANSLATION ON CASH . . . . . . . . . . . . . . . . . . . . . . . . . . .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash and cash equivalents from discontinued operations . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of
2018
2019
47,899 $ 151,427
(156)
151,271
(113,592)
(97,134)
(1,030)
(60,485)
415,037
354,552
5,251
493
48,392
(393,847)
338,840
(1,496)
(8,111)
354,552
346,441
—
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 346,441 $ 349,301
2019 Compared To 2018
Net cash provided by operating activities
Net cash provided by operating activities in 2019 was $48.4 million, a decrease of $102.9 million, or 68.0%
compared to $151.3 million in 2018. The decrease in net cash flows from operating activities was primarily due to
overall decreases in sales to the semiconductor equipment market resulting in decreased earnings from continuing
operations.
Net cash provided by operating activities in the fourth quarter and full year of 2019 was impacted by net
payments due to acquisition related activities and assumed liabilities of approximately $27.0 million, partially offset by
receipt of approximately $10.0 million in cash related to the transfer of inventory and other current assets to Smart
Global Holdings, Inc. in connection with the completion of the pre-acquisition carve-out of the Embedded Computing
business.
48
Net cash used in investing activities
Net cash used in investing activities in 2019 was $393.8 million, compared to $113.6 million in 2018. In 2019,
we used $366.1 million for the acquisition of Artesyn’s Embedded Power business, as compared to $93.8 million used in
2018 to acquire LumaSense, Trek and the electrostatic technology and product line from Monroe Electronics, Inc.
Capital expenditures increased $5.0 million from $20.3 million in 2018 to $25.3 million in 2019 to support new facilities
and manufacturing operations.
Net cash used in financing activities
Net cash provided by financing activities in 2019 was $338.8 million and included the effect of cash proceeds
of $350.0 million, net of financing costs of $2.5 million, from our Term Loan Facility, partially offset by $8.8 million in
principal repayments. Net cash used in financing activities in 2018 was $97.1 million, which included $95.1 million for
the repurchase of company stock.
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii)
of Regulation S-K.
Contractual Obligations
The following table sets forth our future payments due under contractual obligations as of December 31, 2019
(in thousands):
Total
Less than
1 year
Debt obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,250 $ 17,500
Interest payments associated with debt obligations(1) . . . . .
8,532
Operating lease obligations(2) . . . . . . . . . . . . . . . . . . . . . . . .
22,727
Purchase obligations(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
192,803
Income tax obligations(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,117
Pension funding commitment(5) . . . . . . . . . . . . . . . . . . . . . .
6,113
—
—
76,389
—
3,489
134,802
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 909,118 $ 248,792 $ 99,125 $ 346,521 $ 214,680
36,555
152,778
192,981
11,724
173,830
1-3 years
35,000
15,726
33,275
178
2,234
12,712
3-5 years
288,750
12,297
20,387
—
4,884
20,203
More
than 5
years
(1) Our debt obligations consist of principal and interest repayments due on our Credit Facility based on current interest
rates.
(2) Amounts represent the minimum contractual cash commitments, including the effects of fixed rental escalation
clauses and deferred rent, exclusive of certain contingent rents that are not determinable for future periods.
(3) Our purchase obligations consist of purchase commitments with various manufacturing suppliers to ensure the
availability of components.
(4) Income tax obligations are a result of the Tax Act and include a transition tax on unremitted foreign earnings and
profits, of which we have elected to pay the estimated amount over an eight-year period.
(5) Our pension funding commitments represent the amounts that we are required to pay to fund our pension plans.
Recent Accounting Pronouncements
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
49
of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on
our Consolidated Financial Statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the
information provided in Note 1. Operations and Summary of Significant Accounting Policies and Estimates in Part II,
Item 8 "Financial Statements and Supplementary Data."
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
In the normal course of business, we have exposures to interest rate risk from our investments, credit facility,
and foreign exchange rate risk related to our foreign operations and foreign currency transactions.
Interest Rate Risk
Our market risk exposure relates to changes in interest rates in our investment portfolio and credit facility. We
generally place our investments with high-credit quality issuers and by policy are averse to principal loss and seek to
protect and preserve our invested funds by limiting default risk, market risk, and reinvestment risk.
As of December 31, 2019, our investments consisted primarily of certificates of deposit with maturity of less
than 1 year. As a measurement of the sensitivity of our portfolio and assuming that our investment portfolio balances
remain constant, a hypothetical decrease of 100 basis points (1%) in interest rates would decrease annual pre-tax
earnings by a nominal amount.
As of December 31, 2019, we had $341.3 million of borrowings under our Credit Facility at a rate based on a
reserve adjusted Eurodollar Rate or a Base Rate plus an applicable margin. Our quarterly commitments of interest
payments are impacted by an increase or decrease of interest rate fluctuations. If our $341.3 million in borrowings had
been outstanding for the full year ended December 31, 2019, a hypothetical increase of 100 basis points (1%) in interest
rates would increase our commitments by $3.4 million.
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when
we sell products and purchase materials in currencies different from the currency in which product and manufacturing
costs were incurred. The functional currencies of our worldwide facilities primarily include the USD, EUR, KRW,
TWD, ILS, GBP, and CNY. Our purchasing and sales activities are primarily denominated in the USD, JPY, EUR and
CNY. We may be impacted by changes in the relative buying power of our customers, which may impact sales volumes
either positively or negatively. As these currencies fluctuate against each other, and other currencies, we are exposed to
foreign currency exchange rate risk on sales, purchasing transactions and labor.
Acquisitions are a large component of our capital deployment strategy. A significant number of acquisition
target opportunities are located outside the U.S. and their value may be denominated in foreign currency. Changes in
exchange rates therefore may have a material impact on their valuation in USD and therefore may impact our view of
their attractiveness.
From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in
foreign currency exchange rates on assets and liabilities expected to be settled at a future date, including foreign
currency, which may be required for a potential foreign acquisition. Market risk arises from the potential adverse effects
on the value of derivative instruments that result from a change in foreign currency exchange rates. We may enter into
foreign currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in
nonfunctional currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by
establishing and monitoring parameters that limit the types and degree of our derivative contract instruments. We enter
50
into derivative contract instruments for risk management purposes only. We do not enter into or issue derivatives for
trading or speculative purposes.
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 of 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 weighted-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.
Currency exchange rates vary daily and often one currency strengthens against the USD while another currency
weakens. Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is
difficult to quantify the impact of a change in one or more particular exchange rates.
Effect of currency translation on cash
The effect of foreign currency translations on cash had a $1.5 million unfavorable impact for the year ended
December 31, 2019 compared to a $1.0 million unfavorable impact for the year ended December 31, 2018. Our foreign
operations primarily sell product and incur expenses in the related local currency. Exchange rate fluctuations could
require us to increase prices to foreign customers, which could result in lower net sales by us to such customers.
Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results
of operations could be adversely impacted. The functional currencies of our worldwide operations include U.S. dollar
("USD"), Canadian Dollar ("CAD"), Swiss Franc ("CHF"), Chinese Yuan ("CNY"), Danish Krone ("DKK"), Euro
("EUR"), Pound Sterling ("GBP"), Israeli New Shekel ("ILS"), Indian Rupee ("INR"), Japanese Yen ("JPY"),
Philippines Peso ("PHP"), South Korean Won ("KRW"), Singapore Dollar ("SGD") and New Taiwan Dollar ("TWD").
Our purchasing and sales activities are primarily denominated in USD, CNY, EUR, and JPY.
The change in these key currency rates during the years ended December 31, 2019 and 2018 are as follows:
Years Ended December 31,
To 2019 2018
From
4.7 % (7.9)%
CAD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
CHF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
1.7 % (0.8)%
CNY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD (1.3)% (5.4)%
DKK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD (2.1)% (4.7)%
EUR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD (2.0)% (4.5)%
3.5 % (5.6)%
GBP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
ILS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
8.5 % (7.2)%
INR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD (2.5)% (8.2)%
1.2 % 2.4 %
JPY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
KRW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD (3.6)% (4.2)%
PHP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
SGD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD
TWD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . USD N/A
3.5 % N/A
1.3 % (2.0)%
(2.9)%
51
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
52
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Advanced Energy Industries, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc. (the Company) as
of December 31, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity
and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated
financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year
ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) and our report dated March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the
PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate
to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially
challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our
opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit
matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they
relate.
Accounting for the acquisition of Artesyn
Description of the
Matter
As described in Note 2 to the consolidated financial statements, during the year ended December 31,
2019, the Company completed the acquisition of Artesyn Embedded Technologies, Inc’s Embedded
Power business (“Artesyn”) for a total purchase price of $361.3 million. The transaction was
accounted for as a business combination.
Auditing the Company's accounting for its acquisition of Artesyn was complex due to the significant
estimation required by management in determining the fair value of the identified intangible assets,
which primarily consisted of customer relationships of $75.0 million, technology of $28.0 million
and tradenames of $21.0 million. The significant estimation was primarily due to the judgmental
nature of the inputs to the valuation models used to measure the fair value of these intangible assets,
as well as the sensitivity of the respective fair values to the underlying significant assumptions. The
53
significant assumptions used to estimate the fair value of the intangible assets included customer
attrition, revenue growth rates, technology obsolescence rates and economic useful lives. These
significant assumptions are forward-looking and could be affected by future economic and market
conditions.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the
controls over the Company’s accounting for the acquisition. For example, we tested controls over
the valuation of intangible assets, including management’s review of the valuation model and
underlying assumptions used to develop the estimated fair value of the intangible assets.
To test the estimated fair value of the intangible assets, we performed audit procedures that included,
among others, evaluating the Company's valuation methodology and testing the significant
assumptions used in the model, as described above, including the completeness and accuracy of the
underlying data. For example, we compared the significant assumptions to current industry and
market trends, as well as historical results. We also considered how the significant assumptions,
specifically technology obsolescence rates, compared to the Company’s prior acquisitions and to
Artesyn’s own products. We involved our valuation specialists to assist with our evaluation of the
methodology used by the Company and significant assumptions included in the fair value estimates.
Accounting for income taxes
Description of the
Matter
As described in Notes 1 and 5 to the consolidated financial statements, the Company is subject to
income taxes in the U.S. and numerous foreign jurisdictions, which affect the Company’s provision
for income taxes. Specifically, the Company is entitled to claim US foreign tax credits for taxes paid
in international tax paying jurisdictions. The Company is also subject to taxation of global intangible
low-taxed income (GILTI) earned by foreign subsidiaries. For the year ended December 31, 2019,
the Company’s provision for income taxes was $10.7 million.
Auditing the Company's provision for income taxes, particularly the effects of foreign tax credits
and GILTI, was especially challenging because interpretation of the relevant foreign tax regulations
and the application of these interpretations to the calculation of the foreign tax credits and GILTI is
highly complex.
How We
Addressed the
Matter in Our
Audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of the
controls over the Company’s accounting for income taxes. For example, we tested controls over
management’s identification and assessment of changes in applicable tax regulations. We also tested
controls over the calculation of the foreign tax credits and GILTI, including review of the
completeness and accuracy of the inputs and underlying data.
To test the Company’s provision for income taxes, we performed audit procedures that included,
among others, evaluating the Company's assessment of applicable tax regulations and testing the
calculation of the provision, including the completeness and accuracy of the underlying data. We
also evaluated the Company’s significant assumptions and the completeness and accuracy of the
data used to determine the amount of the foreign tax credits and GILTI, including foreign earnings
and profits, and tested the accuracy of such calculations. As part of these procedures, we engaged
tax subject matter professionals with knowledge of and experience with international and local
income tax laws to evaluate the application of these regulations to the Company’s tax positions. We
have also evaluated the Company’s income tax disclosures included in Note 5 of the consolidated
financial statements in relation to these matters.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2019.
Denver, Colorado
March 2, 2020
54
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Advanced Energy Industries, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc. (a Delaware
corporation) and subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of
operations, comprehensive income, stockholders’ equity, and cash flows for years ended December 31, 2018 and 2017,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of
its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting
principles generally accepted in the United States of America.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the
Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material
misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
Denver, Colorado
February 21, 2019
55
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
December 31,
2019
2018
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 346,441 $ 349,301
2,470
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100,442
Accounts and other receivable, net of allowances of $7,745 and $1,856, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,987
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,220
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,173
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,855
Current assets from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
568,448
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31,269
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,874
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
101,900
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
54,910
47,099
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,984
Non-current assets from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,532,406 $ 816,484
2,614
246,564
230,019
4,245
36,825
30
866,738
108,109
105,404
22,287
202,932
184,011
42,656
269
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 170,671 $ 39,646
13,258
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,775
Accrued payroll and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
22,999
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,345
Customer deposits and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Current portion of operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,286
Current liabilities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
110,309
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,407
Pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,988
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,318
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,108
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
18,337
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10,715
Non-current liabilities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
209,182
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,687
51,545
40,777
10,926
17,500
18,312
914
320,332
321,527
90,538
68,169
9,952
16,055
8,011
19,675
887
855,146
Commitments and contingencies (Note 19)
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; 38,358 and 38,164 issued and outstanding, respectively . . . .
38
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
97,418
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,449)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
512,783
Advanced Energy stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
606,790
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
512
607,302
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,532,406 $ 816,484
—
38
104,849
(5,897)
577,724
676,714
546
677,260
The accompanying notes are an integral part of these Consolidated Financial Statements
56
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Sales, net:
Years Ended December 31,
2018
2019
2017
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 678,061 $ 610,326 $ 578,650
92,362
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
671,012
Total sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108,566
718,892
110,887
788,948
Cost of sales:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
416,976
56,320
473,296
315,652
298,597
54,688
353,285
365,607
267,587
47,044
314,631
356,381
57,999
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,262
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,350
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
155,611
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
200,770
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,579)
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
198,191
Income from continuing operations, before income taxes . . . . . . . . . . . . . . . . . . . . .
62,090
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
136,101
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,760
Income (loss) from discontinued operations, net of income taxes . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,975 $ 147,111 $ 137,861
Income from continuing operations attributable to noncontrolling interest . . . . . . .
—
Net income attributable to Advanced Energy Industries, Inc. . . . . . . . . . . . . . . $ 64,941 $ 147,025 $ 137,861
76,008
108,033
5,774
4,239
194,054
171,553
823
172,376
25,227
147,149
(38)
101,503
142,555
12,168
5,038
261,264
54,388
12,806
67,194
10,699
56,495
8,480
34
86
Basic weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . .
38,281
38,495
39,081
39,352
39,754
40,176
Earnings per share:
Continuing operations:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.47 $
1.47 $
3.76 $
3.74 $
Discontinued operations:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.22 $
0.22 $
— $
— $
Net income:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.70 $
1.69 $
3.76 $
3.74 $
3.42
3.39
0.04
0.04
3.47
3.43
The accompanying notes are an integral part of these Consolidated Financial Statements.
57
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Comprehensive Income
(In thousands)
Years Ended December 31,
2018
2017
2019
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,975 $ 147,111 $ 137,861
Other comprehensive income, net of income taxes
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized loss on marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum benefit retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8,305
(2)
1,163
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,527 $ 141,129 $ 147,327
Comprehensive income attributable to noncontrolling interest . . . . . . . . . . . . . . . . . .
—
Comprehensive income attributable to Advanced Energy Industries, Inc. . . . . . . . . . $ 62,493 $ 141,043 $ 147,327
(2,523)
—
75
(5,285)
—
(697)
86
34
The accompanying notes are an integral part of these Consolidated Financial Statements.
58
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands)
Common Stock
Accumulated Other
Comprehensive Income (Loss)
Additional
Minimum
Benefit
Paid-in Currency on Marketable Retirement Retained controlling Stockholders’
Unrealized
Gain (Loss)
Foreign
Total
Non-
Shares Amount Capital Translation
Securities
Liability Earnings
Interest
Equity
Balances, December 31, 2016 . . . . . . . . . . . . . 39,712 $
Stock issued from equity plans . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Stock buyback . . . . . . . . . . . . . . . . . . . . . .
314
—
(422)
40 $ 203,603 $
—
—
—
(1,316)
12,549
(29,993)
(3,610) $
—
—
—
Comprehensive income (loss):
Foreign currency translation . . . . . . . . . . . . .
Unrealized gain on marketable securities . . . .
Minimum benefit retirement liability . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . . . .
Balances, December 31, 2017 . . . . . . . . . . . . .
Adoption of new accounting standards . . . . .
Non-controlling interest from acquisition . . . .
Stock issued from equity plans . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
Stock buyback . . . . . . . . . . . . . . . . . . . . . .
—
—
—
—
—
39,604 $
—
—
256
—
(1,696)
Comprehensive income (loss):
Foreign currency translation . . . . . . . . . . . . .
Unrealized loss on marketable securities . . . .
Minimum benefit retirement liability . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . . . .
Balances, December 31, 2018 . . . . . . . . . . . . .
Stock issued from equity plans . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . .
—
—
—
—
—
38,164 $
194
—
Comprehensive income (loss):
—
—
—
—
—
—
—
—
—
—
40 $ 184,843 $
—
—
—
—
(2)
—
—
(2,005)
9,703
(95,123)
—
—
—
—
—
—
—
—
—
—
38 $ 97,418 $
—
—
104
7,327
8,305
—
—
—
8,305
4,695 $
—
—
—
—
—
(5,285)
—
—
—
(5,285)
(590) $
—
—
Foreign currency translation . . . . . . . . . . . . .
Minimum benefit retirement liability . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Total comprehensive income (loss) . . . . . .
Balances, December 31, 2019 . . . . . . . . . . . . .
—
—
—
—
38,358 $
—
—
—
—
38 $ 104,849 $
—
—
—
—
(2,523)
—
—
(2,523)
(3,113) $
2 $
—
—
—
—
(2)
—
—
(2)
— $
—
—
—
—
—
—
—
—
—
—
— $
—
—
—
—
—
—
— $
(3,325) $ 195,364 $
—
—
—
—
—
—
—
—
1,163
—
—
—
— 137,861
1,163 137,861
(2,162) $ 333,225 $
—
—
—
—
—
32,533
—
—
—
—
—
—
(697)
—
—
—
— 147,025
(697) 147,025
(2,859) $ 512,783 $
—
—
—
—
—
—
75
—
— 64,941
75 64,941
(2,784) $ 577,724 $
— $
—
—
—
—
—
—
—
—
— $
—
426
—
—
—
—
—
—
86
86
512 $
—
—
—
—
34
34
546 $
392,074
(1,316)
12,549
(29,993)
8,305
(2)
1,163
137,861
147,327
520,641
32,533
426
(2,005)
9,703
(95,125)
(5,285)
—
(697)
147,111
141,129
607,302
104
7,327
(2,523)
75
64,975
62,527
677,260
The accompanying notes are an integral part of these Consolidated Financial Statements.
59
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Years Ended December 31,
2018
2019
2017
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,975 $ 147,111 $ 137,861
1,760
Income (loss) from discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . . .
136,101
Income (loss) from continuing operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on foreign exchange hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of central inverter service business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of assets acquired:
26,147
7,327
1,015
—
1,100
(14,795)
700
13,592
9,703
5,618
—
—
—
481
9,424
12,549
28,765
3,489
—
—
122
(38)
147,149
8,480
56,495
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities from continuing operations . . . . . . .
Net cash provided by (used in) operating activities from discontinued operations . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(18,879)
3,687
23,544
(16,094)
(12,486)
(9,862)
47,899
493
48,392
3,445
(11,276)
(2,975)
(12,618)
(3,239)
1,547
151,427
(156)
151,271
(7,497)
(19,261)
(1,030)
1,812
7,159
18,323
189,956
(7,255)
182,701
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of foreign exchange hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) investing activities from continuing operations . . . . . . .
—
1,742
(366,101)
(4,300)
—
(25,188)
(393,847)
(95)
589
(93,756)
—
—
(20,330)
(113,592)
(107)
1,903
(17,347)
—
(3,489)
(9,042)
(28,082)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net payments related to stock-based award activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities from continuing operations . . . . . . .
EFFECT OF CURRENCY TRANSLATION ON CASH . . . . . . . . . . . . . . . . . . . . . . . . . .
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS, end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash and cash equivalents from discontinued operations . . . . . . . . . . . . . . . . . . . . . .
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of
347,486
(8,750)
—
104
338,840
(1,496)
(8,111)
354,552
346,441
—
—
—
(95,125)
(2,009)
(97,134)
(1,030)
(60,485)
415,037
354,552
5,251
—
—
(29,993)
(1,314)
(31,307)
2,208
125,520
289,517
415,037
7,754
period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 346,441 $ 349,301 $ 407,283
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received for refunds of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,479 $
228 $
18,594
1,762
16,190
1,135
66
5,314
1,448
The accompanying notes are an integral part of these Consolidated Financial Statements.
60
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND
ESTIMATES
Advanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and
control solutions to our global customers. We design, manufacture, sell and support precision power products that
transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-
controllable usable power that is predictable, repeatable and customizable. We operate in a single segment structure for
power electronics conversion products and we operate in four vertical markets or applications to enable tracking of
market trends. Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as
dry etch, strip, chemical and physical deposition, high and low voltage applications such as process control, computing,
networking, telecommunication, analytical instrumentation, medical equipment, industrial technology and temperature-
critical thermal applications such as material and chemical processing. We also supply related instrumentation products
for advanced temperature measurement and control, electrostatic instrumentation products for test and measurement
applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service
support centers provides local repair and field service capability in key regions as well as provide upgrades and
refurbishment services, and sales of used equipment to businesses that use our products. As of December 31, 2015, we
discontinued our Inverter production, engineering, and sales product line. As such, all Inverter revenues, costs, assets
and liabilities are reported in Discontinued Operations for all periods presented herein. See Note 4. Disposed and
Discontinued Operations for more information.
Principles of Consolidation — Our Consolidated Financial Statements include our accounts and the accounts
of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Our Consolidated
Financial Statements are stated in United States dollars and have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”).
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, and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that
the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for
doubtful accounts, excess and obsolete inventory, warranty reserves, acquisitions, asset valuations, asset life,
depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock
grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual
results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.
Foreign Currency Translation — The functional currency of certain of our foreign subsidiaries is the local
currency. Assets and liabilities of these foreign subsidiaries are translated to the United States dollar at prevailing
exchange rates at the balance sheet date; revenues and expenses are translated at the average exchange rates in effect for
each period. Translation adjustments resulting from this process are reported as a separate component of Other
Comprehensive Income.
For certain other subsidiaries the functional currency is the US Dollar. Foreign currency transactions are
recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates for foreign
currency denominated monetary assets and liabilities result in foreign currency transaction gains and losses which are
reflected as unrealized (based on period end remeasurement) or realized (upon settlement of the transactions) in other
income, net in our Consolidated Statements of Operations.
61
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Fair Value — We value our financial assets and liabilities using fair value measurements.
U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of
inputs used for the various valuation techniques (market approach, income approach, and cost approach). The
Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The
three levels of the hierarchy and the related inputs are as follows:
• Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity
can access at the measurement date.
• Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly.
• Level 3 — Unobservable inputs for the asset or liability.
The Company categorizes fair value measurements within the fair value hierarchy based upon the lowest level
of the most significant inputs used to determine fair value. The carrying amounts of our cash and cash equivalents,
accounts receivable, accounts payable and other current assets and liabilities approximate fair value as recorded due to
the short-term nature of these instruments. The fair value of derivatives is estimated utilizing observable foreign
exchange rates adjusted for non-performance credit risk associated with our counterparties. The fair value of contingent
consideration and other acquired assets and liabilities associated with the acquisition of Artesyn, are based on Level 3
inputs. There were no transfers of financial assets or liabilities into or from Level 3. The fair value of borrowings
approximates the recorded borrowing value based upon market interest rates for similar facilities. See Note 8, Derivative
Financial Instruments and Note 22, Credit Facility for additional information.
The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other
intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value.
However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not
be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments
are assessed for impairment and, if applicable, written down to and recorded at fair value. See Note 12. Goodwill and
Note 13. Intangible Assets for further discussion and presentation of these amounts.
Cash, Cash Equivalents, and Marketable Securities — We consider all amounts on deposit with financial
institutions and highly liquid investments with an original maturity of three months or less to be cash equivalents, and
those with stated maturities of greater than three months as marketable securities. Cash and cash equivalents are highly
liquid investments that consist primarily of short-term money market instruments and demand deposits with insignificant
interest rate risk and original maturities of three months or less at the time of purchase.
Sometimes we invest excess cash in money market funds not insured by the Federal Deposit Insurance
Corporation. We believe that the investments in money market funds are on deposit with credit-worthy financial
institutions and that the funds are highly liquid. The investments in money market funds are reported at fair value, with
interest income recorded in earnings and are included in “Cash and cash equivalents.”
Concentrations of Credit Risk — Financial instruments, which potentially subject us to credit risk, include cash
and cash equivalents, marketable securities, and trade accounts receivable. To preserve capital and maintain liquidity, we
invest with financial institutions we deem to be of high quality and sound financial condition. Our investments are in
low-risk instruments and we limit our credit exposure in any one institution or type of investment instrument based upon
criteria including creditworthiness.
62
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of
specific customers, historical trends, and other information.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at net
realizable value. We maintain a credit approval process and we make significant judgments in connection with assessing
our customers’ ability to pay. Despite this assessment, from time to time, our customers are unable to meet their payment
obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision
for estimated credit losses based upon our historical experience and any specific customer collection issues that we have
identified. While such credit losses have historically been within our expectations and the provisions established, there is
no assurance that we will continue to experience the same credit loss rates that we have in the past. For example, in the
fourth quarter, we increased our allowance for doubtful accounts by $4.2 million relating to a customer exposure in
China resulting from economic softness and funding delays causing uncertainty in large program timing which
uncertainty is now exacerbated by the spreading Coronavirus. A significant change in the liquidity or financial position
of our customers could have a material adverse impact on the collectability of accounts receivable and our future
operating results.
Changes in allowance for doubtful accounts are summarized as follows:
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions - charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions - write-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019
1,856 $
1,884
4,207
(202)
7,745 $
2018
1,748
416
109
(417)
1,856
Years Ended December 31,
Inventories — Inventories include costs of materials, direct labor, manufacturing overhead, in-bound freight,
and duty. Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value and are presented
net of reserves for excess and obsolete inventory.
We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete
inventory to its estimated net realizable value, if less than cost, based primarily on historical usage and our estimated
forecast of product demand. Demand for our products can fluctuate significantly. A significant decrease in demand could
result in an increase in the charges for excess inventory quantities on hand.
In addition, our industry is subject to technological change, new product development, and product
technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand.
Therefore, any significant unanticipated changes in demand or technological developments could have a significant
impact on the value of our inventory and our reported operating results.
Property and Equipment — Property and equipment is stated at cost or estimated fair value if acquired in a
business combination. Depreciation is computed over the estimated useful lives using the straight-line method.
Estimated useful lives for financial reporting purposes are as follows: buildings, 20 to 40 years; machinery, equipment,
furniture and fixtures and vehicles, 3 to 15 years; and computer and communication equipment, 3 years.
Amortization of leasehold improvements is calculated using the straight-line method over the lease term or the
estimated useful life of the assets, whichever period is shorter. Leasehold additions and improvements are capitalized,
while maintenance and repairs are expensed as incurred.
63
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts and any related gains or losses are included in other income, net, in our Consolidated
Statements of Operations.
Purchase accounting — Business combinations are accounted for using the purchase method of accounting.
Under the purchase method, assets and liabilities, including intangible assets, are recorded at their fair values as of the
acquisition date. Acquisition costs in excess of amounts assigned to assets acquired and liabilities assumed are recorded
as goodwill. Transaction related costs associated with business combinations are expenses as incurred.
Intangible Assets, Goodwill and Other Long-Lived Assets — As a result of our acquisitions, we identified and
recorded intangible assets and goodwill. Intangible assets are valued based on estimates of future cash flows and
amortized over their estimated useful lives. Goodwill is subject to annual impairment testing, as well as testing upon the
occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets are subject to
an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is
dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our
expectations of future results and cash flows are significantly diminished, intangible assets and goodwill may be
impaired and the resulting charge to operations may be material. When we determine that the carrying value of
intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of
impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then
measure the impairment using discounted cash flows.
The estimation of useful lives and expected cash flows requires us to make judgments regarding future periods
that are subject to some factors outside of our control. Changes in these estimates can result in revisions to our carrying
value of these assets and may result in material charges to our results of operations.
The annual impairment test for goodwill can be performed using an assessment of qualitative factors in
determining if it is more likely than not that goodwill is impaired. If this assessment indicates that it is more likely than
not that goodwill is impaired, the next step of impairment testing compares the fair value of a reporting unit to its
carrying value. Goodwill would be impaired if the resulting implied fair value of goodwill was less than the recorded
carrying value of the goodwill.
Debt Issuance Costs — The Company has incurred debt issuance costs in connections it its debt facilities.
Amounts paid directly to lenders are classified as issuance costs. Commitment fees and other costs directly associated
with obtaining credit facilities are deferred financing costs which are recorded in the Consolidated Balance Sheets and
amortized over the term of the facility. The Company allocates deferred debt issuance costs incurred for its current credit
facility between the revolver and term loan based on their relative borrowing capacity. Deferred debt issuance costs
associated with the revolving credit facility are recorded within other assets and those associated with the term loan are
recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets. All deferred debt issuance
costs are amortized using the effective interest rate method to interest expense within Other income (expense), net on the
Company’s Consolidated Statements of Operations. See Note 22. Credit Facility for additional details.
Revenue Recognition — We recognize revenue when we have satisfied our performance obligations which
typically occurs when control of the products or services have been transferred to our customers. The transaction price is
based upon the standalone selling price. In most transactions, we have no obligations to our customers after the date
products are shipped, other than pursuant to warranty obligations. Revenue is recognized net of any taxes collected from
customers, which are subsequently remitted to governmental authorities. Shipping and handling fees billed to customers,
if any, are recognized as revenue. The related cost for shipping and handling fees are recognized in cost of sales. We
expense incremental costs of obtaining contracts when the amortization period of the costs is less than 1 year. These
costs are included in selling, general, and administrative expenses. Repairs that are covered under our standard warranty
do not generate revenue.
64
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
We maintain a worldwide support organization in 10 countries, including the United States, the PRC, Japan,
Korea, Taiwan, Germany, Ireland, Singapore, Israel and Great Britain. Support services include warranty and non-
warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our
standard warranty do not generate revenue.
As part of our ongoing service business, we satisfy our service obligations under extended warranties and
preventive maintenance contracts. Extended warranties had previously been offered on our discontinued inverter
products. Any up-front fees received for extended warranties or maintenance plans are deferred and recognized ratably
over the service periods, as defined in the agreements.
Research and Development Expenses — Costs incurred to advance, test or otherwise modify our proprietary
technology or develop new technologies are considered research and development costs and are expensed when
incurred. These costs are primarily comprised of costs associated with the operation of our laboratories and research
facilities, including internal labor, materials, and overhead.
Warranty Costs — We provide for the estimated costs to fulfill customer warranty obligations upon the
recognition of the related revenue. We offer warranty coverage for a majority of our Precision Power products for
periods typically ranging from 12 to 24 months after shipment. We warranted our inverter products for five to ten years
and provided the option to purchase additional warranty coverage for up to 20 years. The warranty expense accrued
related to our standard inverter product warranties is now considered part of our discontinued operations and is recorded
as such on our Consolidated Balance Sheets. See Note 4. Disposed and Discontinued Operations for more information.
See Note 15. Warranties for more information on our warranties from continuing operations. We estimate the anticipated
costs of repairing our products under such warranties based on the historical costs of the repairs. The assumptions we use
to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when appropriate, the
accruals are adjusted. Should product failure rates differ from our estimates, actual costs could vary significantly from
our expectations.
Stock-Based Compensation — Accounting for stock-based compensation requires the measurement and
recognition of compensation expense for all stock-based payment awards made to employees and directors based on
estimated fair values. We have estimated the fair value of all stock options and awards on the date of grant using the
Black-Scholes-Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of
complex and subjective variables. These variables include our expected stock price volatility over the term of the
awards, actual and projected employee option exercise behaviors, risk-free interest rates and expected dividends. We
also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ
from our estimates. Our expected volatility assumption is based on the historical daily closing price of our stock over a
period equivalent to the expected life of the options.
Income Taxes — We follow the liability method of accounting for income taxes under which deferred tax
assets and liabilities are recognized for future tax consequences. A deferred tax asset or liability is computed for both the
expected future impact of differences between the financial statement and tax basis of assets and liabilities and for the
expected future tax benefit to be derived from tax loss and tax credit carryforwards. Tax rate changes are reflected in the
period such changes are enacted.
We assess the recoverability of our net deferred tax assets and the need for a valuation allowance on a quarterly
basis. Our assessment includes a number of factors including historical results and taxable income projections for each
jurisdiction. The ultimate realization of deferred income tax assets is dependent on the generation of taxable income in
appropriate jurisdictions during the periods in which those temporary differences are deductible. We consider the
scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in
determining the amount of the valuation allowance. Based on the level of historical taxable income and projections for
65
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
future taxable income over the periods in which the deferred income tax assets are deductible, we determine if we will
realize the benefits of these deductible differences.
Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions. In
general, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax
authorities. The first step is to evaluate the tax position for recognition by determining, if based on the technical merits, it
is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of
being realized upon ultimate settlement. We regularly assess the likelihood of favorable or unfavorable outcomes
resulting from these examinations to determine the adequacy of our provision for income taxes. This evaluation is based
on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues
under audit, and new audit activity.
On December 22, 2017, the Tax Act was enacted into law and the new legislation contains several key tax
provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a
reduction of the corporate income tax rate to 21%, among others. In conjunction with the Tax Act enactment, the SEC
issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB
118"), which allowed for the recording of provisional amounts related to the Tax Act and subsequent adjustments related
to the Tax Act during an up to one-year measurement period. The Company recorded what it believed to be reasonable
estimates during the SAB 118 measurement period which lasted from December 2017 to December 2018. During the
quarter ended December 31, 2018, the Company finalized the accounting treatment of the income tax effects of the Tax
Act. Although the SAB 118 measurement period has ended, there may be some aspects of the Tax Act that remain
subject to future regulations and/or notices which may further clarify certain provisions of the Tax Act. Accordingly, the
Company may need to adjust its previously recorded amounts to reflect the recognition and measurement of its tax
accounting positions in accordance with Accounting Standards Codification Topic - 740, "Income Taxes" which could be
material.
Leases — We lease manufacturing and office space under non-cancelable operating leases. Our lease
agreements generally contain lease and non-lease components and we combine fixed payments for non-lease
components with lease payments and account for them together as a single lease component. Certain lease agreements
may contain variable payments, which are expensed as incurred and not included in the right-of-use lease assets and
operating lease liabilities.
Right-of-use assets and operating lease liabilities are recognized at the present value of the future lease
payments at the lease commencement date. The interest rate used to determine the present value of the future lease
payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable.
Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms
and payments. Our lease terms include periods under options to extend or terminate the lease when it is reasonably
certain that we will exercise that option. Right-of-use assets also include any prepaid lease payments and lease
incentives. Operating lease expense is recognized on a straight-line basis over the lease term.
Commitments and Contingencies — From time to time 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
in a particular period. An unfavorable decision, particularly in patent litigation, 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 patent rights. We accrue loss contingencies when it is probable that a loss has occurred or will occur, and the
amount of the loss can be reasonably estimated. Our estimates of probability of losses are subjective, involve significant
judgment and uncertainties, and are based on the best information we have at any given point in time. Resolution of
66
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
these uncertainties in a manner inconsistent with our expectations could have a significant impact on our results of
operations and financial condition
NEW ACCOUNTING STANDARDS
New Accounting Standards Adopted
In February 2018, the FASB issued ASU 2018 - 02, "Income Statement—Reporting Comprehensive Income" to
give companies the option to reclassify the income tax effects on items within accumulated other comprehensive income
resulting from the Tax Act to retained earnings. ASU 2018 - 02 is effective for fiscal years beginning after December 15,
2018, including interim periods within those years. We adopted ASU 2018 - 02 during the first quarter of fiscal year 2019
which did not materially impact our Consolidated Financial Statements.
In June 2018, the FASB issued ASU 2018 - 07, "Compensation-Stock Compensation (Topic 718)",
Improvements to Non-employee Share-based Payments (“ASU 2018 - 07”). This ASU expands the scope of Topic 718 to
include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018 - 07 is
effective for fiscal years beginning after December 15, 2018. The new guidance is required to be applied retrospectively
with the cumulative effect recognized at the date of initial application. We adopted ASU 2018 - 07 during the first quarter
of fiscal year 2019 which did not materially impact our Consolidated Financial Statements.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” to increase transparency and
comparability among organizations by recognizing lease right-of-use assets and lease liabilities on the balance sheet and
disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, including interim periods within the year of adoption. We adopted ASU 2016-02 using the modified
retrospective approach and recorded $38.2 million of operating lease right-of-use assets and $38.4 million of operating
lease liabilities as the cumulative-effect in the first quarter of fiscal year 2019. As of December 31, 2019, we had
recorded $105.4 million of operating lease right-of-use assets and $108.9 million of operating lease liabilities. The
adoption of ASU 2016-02 did not materially impact the Company’s Consolidated Statement of Operations or
Consolidated Statement of Cash Flows for the year ended December 31, 2019.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" and has subsequently
issued several supplemental and/or clarifying ASUs (collectively known as "ASC 606"). ASC 606 implements a five-
step model for how an entity should recognize revenue in order to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those
goods or services. We adopted ASC 606 during the first quarter of fiscal year 2018 using the modified retrospective
approach and recorded an adjustment to reflect the cumulative-effect of its adoption on all contracts with customers.
New Accounting Standards Issued But Not Yet Adopted
In June 2016, the FASB issued ASU 2016 - 13, "Financial Instruments—Credit Losses (Topic 326)",
Measurement of Credit Losses on Financial Instruments ("ASU 2016 - 13"). This ASU changes the methodology for
measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016 - 13 is
effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is
permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018. We are currently
assessing the impact ASU 2016 - 13 will have on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018 - 13, "Fair Value Measurement (Topic 820)" ("ASU
2018 - 13"). ASU 2018 - 13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value
Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU
2018 - 13 is effective for fiscal years ending after December 15, 2019 and shall be applied to all periods presented on a
67
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
retrospective basis. Early adoption is permitted. We are currently assessing and do not believe ASU 2018 - 13 will have a
significant impact on our fair value measurements disclosure requirements.
In August 2018, the FASB issued ASU 2018 - 14, "Compensation—Retirement Benefits—Defined Benefit
Plans—General (Subtopic 715 - 20)" ("ASU 2018 - 14"). ASU 2018 - 14 eliminates requirements for certain disclosures and
requires additional disclosures under defined benefit pension plans and other post-retirement plans. ASU 2018 - 14 is
effective for fiscal years ending after December 15, 2020 and shall be applied to all periods presented on a retrospective
basis. Early adoption is permitted. We are currently assessing and do not believe ASU 2018 - 14 will have a significant
impact on our defined benefit plan disclosure requirements.
In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income
taxes (ASU 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes”). This guidance
eliminates certain exceptions to the general approach to the income tax accounting model, and adds new guidance to
reduce the complexity in accounting for income taxes. This guidance is effective for annual periods after December 15,
2020, including interim periods within those annual periods. We are currently evaluating the potential impact of this
guidance on our financial statements.
NOTE 2. BUSINESS ACQUISITIONS
2019 Acquisitions
In September 2019, we completed the acquisition of Artesyn pursuant to the Stock Purchase Agreement
(“Acquisition Agreement”), as amended, dated May 14, 2019. Pursuant to the Acquisition Agreement, we acquired all of
Artesyn’s issued and outstanding shares for a preliminary purchase price of $361.3 million, net of cash acquired,
including the assumption of certain liabilities and subject to an adjustment for net working capital. The purchase price
included the contingent consideration related to a potential payment back to the seller per the Acquisition Agreement for
any tax benefit arising from the utilization of acquired net operating losses through 2021 at the federal income tax rate of
21.0%. The amount recorded represents our best estimate of the present value of the tax benefit we will achieve utilizing
the acquired net operating losses through 2021. In connection with the Acquisition Agreement, we entered into a credit
agreement that provided us with aggregate financing of $500.0 million which was used to partially fund the Artesyn
acquisition. See Note 22. Credit Facility for additional details related to the credit agreement. Advanced Energy is in the
process of finalizing the assessment of fair value for the assets acquired and liabilities assumed related to the Artesyn
acquisition.
Artesyn’s Embedded Power business is one of the world’s largest providers of highly engineered, application-
specific power supplies for demanding applications. This acquisition will diversify our product portfolio and give us
access to additional growth markets, including hyperscale data centers, telecom infrastructure in next generation 5G
networks, embedded industrial power applications and medical power for diagnostic and treatment applications.
The components of the fair value of the total consideration transferred for the acquisition is as follows:
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 389,326
2,000
Non-cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration and working capital adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,848)
384,478
Total fair value of consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(23,225)
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 361,253
68
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities
assumed from the acquisition in 2019:
Preliminary:
September 10,
2019
Measurement
Period
Adjustments
Preliminary:
December 31,
2019
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 128,221 $
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 367,798 $
140,678
65,016
60,217
143,262
125,000
14,767
61,511
738,672
144,652
59,634
48,494
37,218
80,876
370,874
- $ 128,221
139,778
(900)
63,032
(1,984)
60,073
(144)
113,040
(30,222)
124,000
(1,000)
—
(14,767)
64,018
2,507
692,162
(46,510)
144,702
50
60,111
477
48,686
192
5,846
(31,372)
71,564
(9,312)
(39,965)
330,909
(6,545) $ 361,253
A summary of the intangible assets acquired, amortization method and estimated useful lives are as follows:
Artesyn
Amortization
Method
Useful Life
5
15
10
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28,000 Straight-line
75,000 Straight-line
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,000 Straight-line
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,000
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes
due to translation at each balance sheet date. The goodwill represents expected operating synergies from combining
operations with the acquired companies and the estimated value associated with the enhancements to our comprehensive
product lines and access to new markets. Advanced Energy is still evaluating the fair value for the assets acquired and
liabilities assumed related to the Artesyn acquisition. Accordingly, the purchase price allocation presented above is
preliminary.
2018 Acquisitions
In September 2018, Advanced Energy acquired LumaSense Technologies Holdings, Inc. ("LumaSense"), a
privately held company with primary operations in Santa Clara, California, Frankfurt, Germany, and Ballerup, Denmark
for a purchase price of $84.7 million, net of cash acquired.
In May 2018, Advanced Energy acquired the electrostatic technology and product line (“Electrostatic Product
Line”) from Monroe Electronics, Inc. ("Monroe"), a privately held electronics manufacturer in Lyndonville, New York
for $3.0 million in cash.
69
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
In February 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with
operations in Tokyo, Japan and Lockport, New York, for $6.1 million, net of cash acquired. Trek has a 95% ownership
interest in its U.S. subsidiary which is also its primary operation.
The components of the fair value of the total consideration transferred for our 2018 acquisitions are as follows:
Trek
Electrostatic
Product Line LumaSense
Total
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,723 $
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,072 $
(5,651)
3,000 $ 94,946 $ 109,669
(15,913)
3,000 $ 84,684 $ 93,756
(10,262)
—
In 2019, Advanced Energy finalized the assessment of fair value for the assets acquired and liabilities assumed
related to the LumaSense acquisition. The following table summarizes the fair values of the assets acquired and
liabilities assumed from the LumaSense acquisition, including measurement period adjustments.
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Preliminary:
December 31,
2018
7,167 $
9,372
1,353
48,032
26,000
8,116
5,126
105,166
5,734
7,984
6,764
20,482
84,684 $
Measurement
Period
Adjustments
Adjusted:
December 31,
2019
7,167
9,372
1,353
36,258
43,240
6,331
6,004
109,725
5,734
11,699
7,608
25,041
84,684
- $
-
-
(11,774)
17,240
(1,785)
878
4,559
-
3,715
844
4,559
- $
During 2019, we adjusted the estimated values of the assets acquired and liabilities assumed based upon the
final valuation report. These adjustments included additional liabilities, changes to deferred taxes and changes in the
allocation of excess purchase price between goodwill and intangibles.
70
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The final fair values of the assets acquired and liabilities assumed from our acquisitions in 2018 are as follows:
Trek
Electrostatic
Product Line LumaSense
77 $
Total
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,818 $
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,072 $
3,941
594
—
788
606
854
9,601
747
—
2,782
3,529
292
50
1,220
1,400
—
—
3,039
39
—
—
39
7,167 $ 10,062
13,605
9,372
1,353
1,997
37,478
36,258
45,428
43,240
6,937
6,331
6,858
6,004
122,365
109,725
5,734
6,520
11,699
11,699
10,390
7,608
28,609
25,041
3,000 $ 84,684 $ 93,756
A summary of the intangible assets acquired in 2018, amortization method and estimated useful lives are as
follows:
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 671 $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
117
—
Electrostatic
Trek Product Line LumaSense
Method and Useful life
Amortization
Method
Useful Life
1,200 $ 35,530 Straight-line 10 - 15
10
4,360 Straight-line
10
3,350 Straight-line
200
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788 $
1,400 $ 43,240
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes
due to translation at each balance sheet date. The goodwill represents expected operating synergies from combining
operations with the acquired companies and the estimated value associated with the enhancements to our comprehensive
product lines.
Pro forma results for Advanced Energy Inc. giving effect to the Artesyn Embedded Power Business and LumaSense
Technologies Holdings, Inc. Transactions
The following unaudited pro forma financial information presents the combined results of operations of
Advanced Energy, LumaSense and Artesyn as if each of the acquisitions had been completed at the beginning of the
fiscal year prior to their acquisition. The unaudited pro forma financial information is presented for informational
purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken
place at the beginning of the year prior to the acquisition dates, nor are they indicative of future results.
The unaudited pro forma financial information for the year ended December 31, 2019 includes Advanced
Energy’s results, including the post-acquisition results of LumaSense, since September 1, 2018 and the post-acquisition
results of Artesyn, since September 10, 2019. The unaudited pro forma financial information for the year ended
December 31, 2019 and 2018 combines Advanced Energy’s results with the pre-acquisition results of Artesyn and
LumaSense for that period.
71
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table presents our unaudited pro forma results for the acquisitions of Artesyn and LumaSense:
Year Ended December 31,
2019
2018
As Reported Pro Forma
Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 $ 1,202,790 $ 718,892 $ 1,350,037
Net income attributable to Advanced Energy Industries, Inc. . . . . $ 64,941 $
83,104 $ 147,025 $ 158,422
Earnings per share:
As Reported Pro Forma
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.70 $
1.69 $
2.17 $
2.16 $
3.76 $
3.74 $
4.05
4.03
The unaudited pro forma results for all periods presented include adjustments made to account for certain costs
and transactions that would have been incurred had the acquisitions been completed at the beginning of the year prior to
the year of acquisition. These include adjustments to amortization charges for acquired intangible assets, interest and
financing expenses, transaction costs, amortization of purchased gross profit and the alignment of various accounting
policies. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results
above.
Artesyn’s operating results have been included in the Advanced Energy’s operating results for the periods
subsequent to the completion of the acquisition on September 10, 2019. During the year ended December 31, 2019,
Artesyn contributed total sales of $220.3 million and net income of $7.1 million, including interest and other expense
associated with the financing of the transaction.
NOTE 3. REVENUE
Revenue Recognition
We recognize revenue when we have satisfied our performance obligations which typically occurs when control
of the products or services have been transferred to our customers. The transaction price is based upon the standalone
selling price. In most transactions, we have no obligations to our customers after the date products are shipped, other
than pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue.
The related shipping and handling costs are recognized in cost of sales. Support services include warranty and non-
warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our
standard warranty do not generate revenue.
Nature of goods and services
Products
Advanced Energy provides highly engineered, mission-critical, precision power conversion, measurement and
control solutions to our global customers. We design, manufacture, sell and support precision power products that
transform electrical power into various usable forms. Our power conversion products refine, modify and control the raw
electrical power from a utility and convert it into power that is predictable, repeatable and customizable. Our products
enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for
various semiconductor and industrial products, industrial thermal applications for material and chemical processes, and
specialty power for critical industrial technology applications. We also supply thermal instrumentation products for
advanced temperature measurement and control in these markets. As a result of the Artesyn acquisition, we now sell
precision power conversion products into the telecom and networking, data center, and additional medical and industrial
markets.
72
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Our products are designed to enable new process technologies, improve productivity, and lower the cost of
ownership for our customers. We also provide repair and maintenance services for all our products. We principally serve
original equipment manufacturers ("OEM") and end customers in the semiconductor, flat panel display, high voltage,
solar panel, telecom and networking, data center, medical, and other industrial capital equipment markets. Our advanced
power products are used in diverse markets, applications, and processes including the manufacture of capital equipment
for semiconductor device manufacturing, thin film applications for thin film renewables and architectural glass, and for
other thin film applications including flat panel displays, and industrial coatings. Our embedded power products are used
in a wide range of applications, including 5G, datacenter including hyperscale and other industrial and medical
applications.
Services
Our global support services group offers warranty and after-market repair services in the regions in which we
operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of
ownership of their capital equipment and are increasingly sensitive to the costs of system downtime. They expect that
suppliers offer comprehensive local repair service and customer support. To meet these market requirements, we
maintain a worldwide support organization comprising of both direct and indirect activities, through partnership with
local distributors, primarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea,
Taiwan, Germany, Singapore and United Kingdom.
As part of our ongoing service business, we satisfy our service obligations under preventative maintenance
contracts and extended warranties which had previously been offered on our discontinued inverter products. We record a
contract liability for payments received for extended warranties or maintenance plans for which we have not yet
provided the services. Revenue under these arrangements is recognized ratably over the underlying terms as we do not
have historical information which would allow us to project the estimated service usage pattern at this time.
In May 2019, we sold our grid-tied central inverter repair and service operation to a third party. In connection
with this sale, approximately $22.0 million of deferred revenue related to extended warranties and service contracts,
were transferred to the buyer. See Note 4. Disposed and Discontinued Operations below for additional
information. Contract liabilities related to our extended warranties and service contracts were $9.2 million as of
December 31, 2019 and $33.4 million as of December 31, 2018. We expect to recognize between $0.2 million and $1.0
million per year through 2031.
Disaggregation of Revenue
The following table presents our sales by product line, which includes certain reclassifications to prior
comparative periods to conform to our current year presentation:
Years Ended December 31,
2018
2019
2017
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 403,018 $ 533,770 $ 554,063
116,949
Industrial & Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Telecom & Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 $ 718,892 $ 671,012
245,992
91,438
48,500
185,122
—
—
73
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table presents our sales by geographic region:
2017
North America . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 373,634 47.4 % $ 372,834 51.8 % $ 377,347
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
221,690
71,796
179
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 100.0 % $ 718,892 100.0 % $ 671,012
250,574
94,793
691
295,155
119,427
732
34.9
13.2
0.1
37.4
15.1
0.1
2019
56.2 %
33.1
10.7
—
100.0 %
Years Ended December 31,
2018
The following table presents our net sales by extended warranty and service contracts recognized over time and
our product and service revenue recognized at a point in time:
Years Ended December 31,
2018
2019
2017
Product and service revenue recognized at point in time . . . . . . . . . . . . . . . . . . . . . . $ 786,918 $ 715,055 $ 667,440
3,572
Extended warranty and service contracts recognized over time . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 788,948 $ 718,892 $ 671,012
2,030
3,837
NOTE 4. DISPOSED AND DISCONTINUED OPERATIONS
Disposed Operations
In May 2019, we sold our grid-tied central solar inverter services business to Bold Renewables Holdings, LLC
(“Buyer”) for $1.00 dollar and assumption of our initial product warranty and our extended warranty service obligations.
In connection with this transaction, we entered into a Loan and Security Agreement with the Buyer. Under this
agreement, we initially loaned $2.8 million to the buyer at closing and loaned an additional $1.5 million in the fourth
quarter of 2019. We have made available an additional $3.75 million that may be borrowed in the future, subject to
certain operating and liquidity covenants, for operating needs over the next ten years. The borrowings under the Loan
and Security Agreement bear interest at 0% for the first seven years and 5% thereafter. Additionally, the Loan and
Security Agreement provides for early payment discounts of 50% during the first three years, 45% for years four and
five and 40% thereafter up to 30 days prior to the maturity of the Loan and Security Agreement. A discount on the initial
$2.8 million funding under the Loan and Security Agreement of $2.3 million has been recognized as a reduction to the
gain recognized on the sale. As a result of the transaction, we reduced our liabilities held in discontinued operations
approximately $10.9 million related to initial product warranty and reduced Other liabilities of our continuing operations
of approximately $22.0 million related to extended warranty service obligations as well as other assets and liabilities
associated with the continuing grid-tied central solar inverter service and repair business. A $14.8 million non-cash gain
was recognized in Other income (expense), net from continuing operations and an $8.6 million non-cash gain, net of tax
expense of $2.4 million, was recognized in Income from discontinued operations.
Discontinued Operations
In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter
product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as “Income
(loss) from discontinued operations, net of income taxes” on our Consolidated Statements of Operations for all periods
presented herein.
The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred
revenue in our Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs
of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future
74
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associated services are
rendered. Extended warranties related to the inverter product line are no longer offered.
The significant items included in "Income (loss) from discontinued operations, net of income taxes" are as
follows:
Years Ended December 31,
2019
2018
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income (loss) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $
(901)
1,022
(121)
10,895
10,774
2,294
8,480 $
— $
—
(88)
96
(8)
(24)
(32)
6
(38)
Assets and Liabilities of discontinued operations within the Consolidated Balance Sheets are comprised of the
following:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accounts and other receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current assets of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable and other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-current liabilities of discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOTE 5. INCOME TAXES
The geographic distribution of pretax income from continuing operations is as follows:
December 31,
2019
2018
5,251
— $
406
—
198
30
5,855
30
67
—
5,917
269
5,984
269
350
—
4,936
914
5,286
914
10,429
698
189
286
887 $ 10,715
Years Ended December 31,
2018
2017
2019
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (20,597) $ 22,325 $ 29,088
169,103
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
150,051
$ 67,194 $ 172,376 $ 198,191
87,791
75
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The provision for income taxes from continuing operations is summarized as follows:
Years Ended December 31,
2018
2017
2019
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (9,627) $ 1,423 $ 26,550
601
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9,621
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,684 $ 15,207 $ 36,772
12
13,772
882
18,429
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,822 $ 4,021 $ 28,297
(1,000)
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,979)
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25,318
Total deferred provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,699 $ 25,227 $ 62,090
2,363
3,636
10,020
(178)
(2,629)
1,015
The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the years ended
December 31, 2019 and December 31, 2018, primarily due to the benefit of tax credits and earnings in foreign
jurisdictions which are subject to lower tax rates, offset by additional GILTI tax in the US and withholding taxes.
The Company’s effective tax rate differs from the U.S. federal statutory rate of 35% for the year ended
December 31, 2017, primarily due to the benefit related to the wind down of our solar inverter business and earnings in
foreign jurisdictions, which are subject to lower tax rates, offset by the impact of U.S. tax reform. The principal causes
of the difference between the federal statutory rate and the effective income tax rate for each the years below are as
follows:
Years Ended December 31,
2018
2017
2019
Income taxes per federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,111 $ 36,199 $ 69,348
1,794
State income taxes, net of federal deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61,690
Transition tax - U.S. Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11,177
Corporate tax rate changes - U.S. Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(33,837)
Tax benefit associated with inverter business wind down . . . . . . . . . . . . . . . . . . . . . .
(5,263)
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
GILTI Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(47,482)
Tax effect of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,948
Uncertain tax position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(658)
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
841
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other permanent items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(468)
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,699 $ 25,227 $ 62,090
2,372
1,174
(652)
—
(974)
13,064
(19,162)
(3,088)
2,564
(9,844)
(1,306)
1,371
3,509
10
—
—
—
(97)
8,796
(13,086)
(4,487)
1,624
(6,280)
7,222
6,500
(3,614)
76
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the
carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in
which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:
Deferred tax assets
Years Ended December 31,
2019
2018
Stock based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating loss and tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess and obsolete inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee bonuses and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,757 $
86,879
7,620
13,473
3,217
3,305
2,537
29,015
23,451
9,685
180,939
(76,206)
104,733
1,337
38,622
—
3,302
2,161
6,903
1,874
29,525
—
9,961
93,685
(30,924)
62,761
Deferred tax liabilities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,723
3,529
—
1,267
22,519
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,704 $ 40,242
41,549
4,740
22,774
2,966
72,029
Of the $32.7 million and $40.2 million net deferred tax asset at December 31, 2019 and 2018, respectively,
$42.7 million and $47.1 million is reflected as a net non-current deferred tax asset and $10.0 million and $7.0 million is
reflected as a long-term liability at December 31, 2019 and 2018, respectively.
As of December 31, 2019, the Company has recorded a valuation allowance on $16.0 million of its
U.S. domestic deferred tax assets, largely attributable to acquired federal capital loss carryforwards for which the
Company does not have sufficient income in the character to realize that attribute, and state carryforward attributes that
are expected to expire before sufficient income can be realized in those jurisdictions. The remaining valuation allowance
on deferred tax assets approximates $60.2 million and is associated primarily with operations in Austria, Germany, Hong
Kong and Switzerland. As of December 31, 2019, there is not sufficient positive evidence to conclude that such deferred
tax assets, presently reduced by a valuation allowance, will be recognized. The December 31, 2019 valuation allowance
balance reflects an increase of $45.3 million during the year. The change in the valuation allowance is primarily due to
increases from acquired Artesyn positions and current year activity, partially offset by decreases due to foreign exchange
movements
As of December 31, 2019, the Company had U.S., foreign and state tax loss carryforwards of $54.4 million,
$206.8 million, and $146.2 million, respectively. Additionally, the Company had $40.7 million and $32.9 million of
capital loss and interest expense limitation carryforwards, respectively. Finally, the Company had U.S. and state tax
credit carryforwards of $3.8 million and $1.8 million, respectively. The U.S. and state net operating losses, tax credits,
and interest expense limitation are subject to various utilization limitations under Section 382 of the Internal Revenue
Code and applicable state laws. These Section 382 limited attributes have various expiration periods through 2036 or, in
77
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
the case of the interest expense limitation amount, no expiration period. The majority of the foreign jurisdiction, and
$4.6 million of the federal net operating loss carry forwards, have no expiration period.
We operate under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through June 30,
2027. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of the
tax holiday decreased foreign taxes by $4.0 million and $17.8 million for 2019 and 2018, respectively. The benefit of the
tax holiday on earnings per diluted share was $0.12 and $0.47 for 2019 and 2018, respectively.
In the third quarter of 2019, following a review of our operations, liquidity and funding, tax implications of
cash repatriation, political risk, and investment opportunities, we determined that the ability to access certain amounts of
foreign earnings that were previously indefinitely reinvested would provide greater investment returns, treasury controls,
and other working capital needs if repatriated to the U.S. Accordingly, in the third quarter of 2019, we withdrew the
permanent reinvestment assertion on $123.9 million of earnings generated by certain of our operations through
December 2018. Resulting from this change in permanent reinvestment assertion, the Company recorded a deferred tax
liability of $2.9 million related to withholding and state income taxes.
There is no certainty as to the timing of when such foreign earnings will be distributed to the United States in
whole or in part.
Certain foreign subsidiary earnings are subject to U.S. taxation under the U.S. Tax Act, which also repeals U.S.
taxation on the subsequent repatriation of those earnings. We have not provided for U.S. state or foreign income taxes on
$26.5 million of our subsidiaries’ undistributed earnings as of December 31, 2019. The $26.5 million of undistributed
foreign earnings continue to be reinvested in our foreign operations, as we have determined that these earnings are
necessary to support our planned growth and strategic acquisitions in our foreign operations, and as a result, these
earnings remain indefinitely reinvested in those operations. In making this decision, we considered cash needs for
investing in our existing businesses, currency controls, and the tax cost of cash repatriation. Determination of the amount
of unrecognized deferred income tax liability related to these earnings is not practicable.
We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before
recognizing these positions in the financial statements. The reconciliation of our total gross unrecognized tax benefits is
as follows:
Years Ended December 31,
2018
2017
2019
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,162 $ 15,990 $ 11,401
1,258
Additions based on tax positions taken during a prior period . . . . . . . . . . . . . . . . . . . . .
—
Additions based on tax positions taken during a prior period - acquisitions . . . . . . . . . .
4,433
Additions based on tax positions taken during the current period . . . . . . . . . . . . . . . . . .
—
Reductions based on tax positions taken during a prior period . . . . . . . . . . . . . . . . . . . .
Reductions related to a lapse of applicable statute of limitations . . . . . . . . . . . . . . . . . .
(1,102)
—
Reductions related to a settlement with taxing authorities . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,009 $ 13,162 $ 15,990
94
757
—
(153)
(3,144)
(382)
484
4,479
—
(4,295)
(821)
—
The unrecognized tax benefits of $13.0 million, if recognized, will impact the Company’s effective tax rate. In
accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits
as a component of tax expense. We had $3.0 million and $1.2 million of accrued interest and penalties at December 31,
2019 and 2018, respectively. We expect the total amount of tax contingencies will decrease by approximately $3.5
million in 2020 based on statute of limitation expiration.
78
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
With few exceptions, the Company is no longer subject to federal, state or foreign income tax examinations by
tax authorities for years before 2016.
NOTE 6. EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to
the computation of basic EPS except that the denominator is increased to include the number of additional common
shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstanding stock
options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and
diluted earnings per share for the years ended December 31, 2019, 2018 and 2017:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,495 $ 147,149 $ 136,101
Income from continuing operations attributable to noncontrolling interest . . . . . . . .
—
Income from continuing operations attributable to Advanced Energy
86
34
Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56,461 $ 147,063 $ 136,101
Years Ended December 31,
2018
2017
2019
Basic weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .
Assumed exercise of dilutive stock options and restricted stock units . . . . . . . . . . . .
Diluted weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . .
Continuing operations:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.47 $
38,281
214
38,495
39,081
271
39,352
39,754
422
40,176
3.76 $
3.74 $
3.42
3.39
The following stock options and restricted units were excluded in the computation of diluted earnings per share
because they were anti-dilutive:
Years Ended December 31,
2018
2017
2019
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
2
—
Share Repurchase
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our
common stock over a thirty-month period. In November 2017, our Board of Directors approved an extension of the share
repurchase program to December 2019 from its original maturity of March 2018. In May 2018, our Board of Directors
approved a $50 million increase in its authorization to repurchase shares of our common stock under this same program.
On December 18, 2019, the Board of Directors authorized to remove the expiration date to the Company’s
share repurchase program and increase the authorized amount by $25.1 million. As of December 31, 2019, the Company
is authorized to repurchase shares of the Company’s common stock of up to a total of $50.0 million.
79
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
In order to execute the repurchase of shares of our common stock, the Company periodically enters into stock
repurchase agreements. During the years ended December 31, 2019, 2018 and 2017 the Company has repurchased the
following shares of common stock:
(in thousands, except per share amounts)
Amount paid to repurchase shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Number of shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average repurchase price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOTE 7. MARKETABLE SECURITIES
Years Ended December 31,
2018
2017
2019
— $ 95,125 $ 29,993
—
422
1,696
— $ 56.07 $ 71.07
As of December 31, 2019, and December 31, 2018, our marketable securities consisted of certificates of deposit
and, due to their short-term nature, the fair value of these securities approximated their carrying values which were $2.6
million and $2.5 million at December 31, 2019 and 2018, respectively.
The maturities of our certificates of deposit as of December 31, 2019 ranged from March 18, 2020 to
October 17, 2020.
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the
ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the
markets in which these securities are traded. As of December 31, 2019, we do not believe any of the underlying issuers
of our marketable securities are at risk of default.
NOTE 8. DERIVATIVE FINANCIAL INSTRUMENTS
We are impacted by changes in foreign currency exchange rates. We may manage these risks through the use of
derivative financial instruments, primarily forward contracts with banks. During the years ended December 31, 2018 and
2017, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with
intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges;
however, they do economically offset the fluctuations of our intercompany debt due to foreign exchange rate changes.
These forward contracts are typically for one-month periods. We did not have any currency exchange rate forward
contracts outstanding as of December 31, 2019 and 2018. At December 31, 2017, we had outstanding Euro and Pound
Sterling forward contracts.
The notional amount of foreign currency exchange forward contracts outstanding at December 31,
2017 was $16.3 million and the fair value of these contracts was not significant at December 31, 2017.
During the years ended December 31, 2019, 2018, and 2017, the gains and losses recorded related to the foreign
currency exchange rate forward contracts are as follows:
Foreign currency loss from foreign currency exchange rate forward contracts . . . . . $
2019
Years Ended December 31,
2018
(750) $ (1,438)
— $
2017
These gains and losses were offset by corresponding foreign currency gains and losses on the related
intercompany debt and both are included as a component of Other income (expense), net, in our Consolidated Statements
of Operations.
80
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
During the first quarter of 2017, we entered into a foreign currency exchange rate forward contract at a cost of
$3.5 million, to mitigate the exchange rate risk associated with a planned offshore acquisition which was not
consummated. The hedge expired upon maturity in the first quarter of 2017. The cost of the forward contract is recorded
as a component of Other income (expense), net in our Consolidated Statement of Operations.
NOTE 9. ACCOUNTS AND OTHER RECEIVABLE
Accounts and other receivable are recorded at net realizable value. Components of accounts and other
receivable, net of reserves, are as follows:
December 31, December 31,
2018
80,709
Amounts billed, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 227,528 $
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,733
Total receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 246,564 $ 100,442
19,036
2019
Amounts billed, net consist of amounts that have been invoiced to our customers in accordance with terms and
conditions, and are shown net of an allowance for doubtful accounts. These receivables are all short term in nature and
do not include any financing components.
Unbilled receivables consist of amounts where we have satisfied our contractual obligations related to inventory
stocking contracts with customers. Such amounts are typically invoiced to the customer upon their consumption of the
inventory managed under the stocking contracts. We anticipate that substantially all unbilled receivables will be invoiced
and collected over the next twelve months. These contracts do not include any financing components.
NOTE 10. INVENTORIES
Our inventories are valued at the lower of cost or net realizable value and computed on a first-in, first-out
(FIFO) basis. Components of inventories are as follows:
Parts and raw materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,816 $ 76,647
6,644
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
14,696
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 230,019 $ 97,987
10,269
84,934
December 31,
2019
2018
81
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 11. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
December 31,
2019
2018
Buildings and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,693 $ 1,737
41,330
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24,051
Computer and communication equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,203
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
282
20,593
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
867
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
92,063
(60,794)
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 108,109 $ 31,269
108,945
29,106
4,119
262
33,041
9,089
186,255
(78,146)
Depreciation expense is recorded in continuing operations and allocated within Cost of Sales, Research and
development expense and Selling, general and administrative expense in our Consolidated Statements of Operations as
follows:
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,979 $ 7,818 $ 5,074
Years Ended December 31,
2018
2019
2017
NOTE 12. GOODWILL
The following summarizes the changes in goodwill during the years ended December 31, 2019 and 2018:
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53,812
—
Measurement period adjustments to preliminary purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . .
49,252
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,164)
101,900
December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(41,996)
Measurement period adjustments to preliminary purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . .
143,262
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(234)
December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 202,932
Adjustments are the result of finalizing the LumaSense acquisition purchase price allocation along with
measurement period adjustments to the purchase price allocation from the Artesyn acquisition with the residual
adjustments getting recorded to goodwill.
Additions are the result of our acquisition of Artesyn during the year ended December 31, 2019 and our
acquisitions of LumaSense, Trek and Monroe’s electrostatic technology and product line during the year ended
December 31, 2018, as described in Note 2. Business Acquisitions.
82
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 13. INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31, 2019 and 2018:
Gross Carrying Accumulated Net Carrying
December 31, 2019
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
Amortization
Amount
69,118
83,368 $ (14,250) $
90,798
(18,197)
108,995
26,888
24,095
(2,793)
219,251 $ (35,240) $ 184,011
December 31, 2018
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
Amortization
39,879 $
35,509
2,501
77,889 $ (22,979) $
(7,927) $
(13,484)
(1,568)
Amount
31,952
22,025
933
54,910
Gross Carrying Accumulated Net Carrying
At December 31, 2019, the weighted average remaining useful life of intangibles subject to amortization was
approximately 11.2 years.
Amortization expense related to intangible assets is as follows:
Years Ended December 31,
2019
2018
2017
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,168 $ 5,774 $ 4,350
Estimated amortization expense related to intangibles is as follows:
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,109
20,009
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,745
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19,727
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
16,888
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
87,533
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 184,011
NOTE 14. RESTRUCTURING COSTS
During the year ended December 31, 2019, we recorded a total pre-tax charge of $5.0 million for severance and
facility relocation associated with our manufacturing footprint consolidation and optimization, acquisition integration,
and reorganization for business efficiency improvement. For the year ended December 31, 2018, we recorded total
severance and related costs of $4.2 million. The cumulative costs recognized under this restructuring plan are $9.3
million.
83
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The table below summarizes the restructuring charges for the years ended:
Severance and related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,041
Facility relocation and closure charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,996
Total restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,038
$ 4,239
—
$ 4,239
$
$
7,280
1,996
9,277
2019
2018
Cumulative Cost
Through December 31,
2019
The following table summarizes our restructuring liabilities at December 31, 2019:
Cost
Balance at
Incurred Cost Paid Effect of
Changes in
or
and
Balance at
December 31, Charged to Otherwise Exchange December 31,
Total restructuring liabilities . . . . . . . . . . . . . . . . . . . . . . . . $
NOTE 15. WARRANTIES
2018
3,806 $ 5,038 $ (6,673) $
Expense
Settled
Rates
1 $
2019
2,172
Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months
following installation. The estimated cost of our warranty obligation is recorded when revenue is recognized and is
based upon our historical experience by product, configuration and geographic region.
Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets.
Changes in our product warranty obligation are as follows:
Years Ended December 31,
2018
2019
2017
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,084 $ 2,312 $ 2,329
118
Warranty acquired in business combinations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,029
Increases to accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(2,184)
Warranty expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
20
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,413 $ 2,084 $ 2,312
4,818
1,752
(2,249)
8
305
1,606
(2,127)
(12)
NOTE 16. LEASES
The Company adopted authoritative guidance related to leases effective January 1, 2019 using the modified
retrospective method. The comparative information presented in the Consolidated Financial Statements was not restated
and is reported under the accounting standards in effect for the periods presented. See the section Leases in Note 1.
Operations and Summary of Significant Accounting Policies and Estimates for a discussion of the significant changes
resulting from adoption of the guidance.
The Company’s leases consist primarily of manufacturing and office space under non-cancelable operating
leases expiring at various dates through 2033. Leases with an original term of twelve months or less are not reported in
the Consolidated Balance Sheet; expense for these short-term leases is recognized on a straight-line basis over the lease
term. Most leases include one or more options to renew. The exercise of these renewal options is at the Company’s
84
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
discretion. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the
renewal period in the lease term, the right-of-use assets and lease liabilities.
Due to the Company’s centralized treasury function, the Company utilizes a portfolio approach to discount its
lease obligations. The Company assesses the expected lease term at lease inception and discounts the lease using a fully
secured annual incremental borrowing rate, adjusted for time value corresponding with the expected lease term.
New leases are negotiated and executed to meet business objectives on an on-going basis. During the first fiscal
quarter of 2020, we expect to record additional right of use assets and related liabilities for facilities in Fort Collins,
Colorado, USA. The lease extensions in Fort Collins, Colorado commenced in January 2020 and extended the expected
lease terms to 16 years; the right of use asset and operating lease liability recorded at commencement will be $21.8
million.
Components of operating lease cost were as follows:
Year Ended
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term and variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31, 2019
$
11,052
4,726
15,778
Maturities of our lease liabilities for all operating leases at December 31, 2019 are as follows:
Year Ending December 31,
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,351
19,771
13,503
10,786
9,601
56,355
132,367
(23,517)
108,850
Other information related to leases, including supplemental cash flow information, consists of:
Weighted average remaining lease term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Right-of-use assets obtained in exchange for operating lease liabilities(1) . . . . . . . . . . . . . . . . . . . . . $
Year Ended
December 31, 2019
7.50
4.05 %
12,101
84,551
(1) Included in 2019 are the right-of-use assets of $60.1 million obtained in connection with the acquisition of Artesyn
in September 2019. See Note 2. Business Combinations for more details.
85
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Comparative Information as Reported Under Previous Accounting Standards
The following comparative information is reported based upon previous accounting standards in effect for the
periods presented.
Future minimum lease payments under operating leases were:
Year Ending December 31,
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
9,093
7,561
6,938
3,862
3,448
18,349
49,251
Rent expense for operating leases was approximately $7.4 million and $6.5 million during the years ended
December 31, 2018 and 2017, respectively.
NOTE 17. EMPLOYEE RETIREMENT PLANS AND POSTRETIREMENT BENEFITS
Defined Contribution Plans
We have a 401(k) profit-sharing and retirement savings plan covering substantially all full-time
U.S. employees. Participants may defer up to the maximum amount allowed as determined by law. Participants are
immediately vested in their contributions. Profit-sharing contributions to the plan, which are discretionary, are approved
by the Board of Directors. Vesting in the profit-sharing contribution account is based on years of service, with most
participants fully vested after four years of credited service. For the years ended December 31, 2019, 2018, and 2017 our
contribution for participants in our 401(k) plan was based on matching 50% of contributions made by employees up to
6% of the employee’s compensation.
During the years ended December 31, 2019, 2018, and 2017 we recognized total defined contribution plan costs
of $1.6 million, $1.4 million, and $1.1 million, respectively.
Defined Benefit Plan
We maintain defined benefit pension plans for certain of our non-U.S. employees in the U.K., Germany, and
Philippines. Each plan is managed locally and in accordance with respective local laws and regulations.
In order to measure the expense and related benefit obligation, various assumptions are made including
discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated
future inflation rates. These assumptions are based on historical experience as well as facts and circumstances. An
actuarial analysis is used to measure the expense and liability associated with pension benefits.
In connection with the acquisition of Artesyn in September of 2019, the Company acquired certain pension
plans and, as a result, started including the related balances in its Consolidated Balance Sheets at December 31, 2019
and the expenses attributable to these plans for the period from September 10, 2019 to December 31, 2019 in its
Consolidated Statement of Operations. See Note 2. Business Acquisitions for more details on this transaction.
86
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The information provided below includes one pension plan which is part of discontinued operations. As such,
all related liabilities and expenses are reported in discontinued operations in the Company’s Consolidated Balance
Sheets and Consolidated Statements of Operations for all periods presented.
The Company’s projected benefit obligation and plan assets for defined benefit pension plans at December 31,
2019 and 2018 and the related assumptions used to determine the related liabilities are as follows:
Years Ended December 31,
2019
2018
Projected benefit obligation, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,178 $ 34,498
1,063
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
841
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
802
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(988)
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,113)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,925)
Projected benefit obligation, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 83,262 $ 33,178
Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,433 $ 14,181
981
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
675
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
828
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,086)
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,357)
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(789)
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,903 $ 13,433
Funded status of plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (68,359) $ (19,745)
48,350
272
1,211
(193)
(1,779)
2,223
102
380
644
(1,176)
1,064
456
The components of net periodic pension benefit cost recognized in our Consolidated Statements of Operations
for the periods presented are as follows:
Years Ended December 31,
2017
2018
—
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 272 $ 841 $
809
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(597)
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
503
Amortization of actuarial gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,279 $ 1,456 $ 715
1,211
(615)
411
802
(665)
478
2019
Assumptions used in the determination of the net periodic pension cost are:
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2017
2019
2.6 %
4.8 %
2018
2.8 %
4.8 %
2.7 %
4.6 %
87
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The fair value of the Company’s qualified pension plan assets by category for the years ended December 31, are
as follows:
December 31, 2019
Level 1 Level 2
Level 3 Total
Multi-Asset Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 4,825 $
Diversified Growth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index-Linked Gilts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 4,825
4,855
—
1,934
—
2,090
—
1,045
1,045
154
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154 $ 13,704 $ 1,045 $ 14,903
4,855
1,934
2,090
—
—
—
—
—
—
154
December 31, 2018
Level 1 Level 2
Level 3 Total
Multi-Asset Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 4,570 $ — $ 4,570
4,650
Diversified Growth Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,044
Index-Linked Gilts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,044
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
72
Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 53 $ 13,308 $ 72 $ 13,433
4,650
2,044
2,044
—
—
—
—
—
72
—
—
—
—
—
53
At December 31, 2019 our plan’s assets of $14.9 million were invested in five separate funds including a multi-
asset fund (32.4%), a diversified growth fund (32.6%), an index-linked gilt (13.0%), corporate bonds (14.0%), and
insurance contracts (7%). The asset and growth funds aim to generate an ‘equity-like’ return over an economic cycle
with significantly reduced volatility relative to equity markets and have scope to use a diverse range of asset classes,
including equities, bonds, cash and alternatives, e.g. property, infrastructure, high yield bonds, floating rate debt, private,
equity, hedge funds and currency. The bond fund and gilt fund are invested in index-linked gilts and corporate bonds.
These investments are intended to provide a degree of protection against changes in the value of our plan’s liabilities
related to changes in long-term expectations for interest rates and inflation expectations.
Expected future payments under defined benefit pension plans, based on foreign exchange rates as of
December 31, 2019, are as follows:
Expected Future Benefit Payments
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,113
7,039
5,673
5,716
14,487
134,802
88
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 18. STOCK-BASED COMPENSATION
As of December 31, 2019, we had two active stock-based incentive compensation plan: the 2017 Omnibus
Incentive Plan and the Employee Stock Purchase Plan (“ESPP”). All new equity compensation grants are issued under
these two plans; however, outstanding awards previously issued under inactive plans will continue to vest and remain
exercisable in accordance with the terms of the respective plans. Our stock plans are administered by the Board of
Directors Compensation Committee. At December 31, 2019, there were 3.3 million shares reserved and 2.5 million
shares available for future grant under our stock-based incentive plans.
On May 4, 2017, the stockholders approved the Company’s 2017 Omnibus Incentive Plan ("the 2017 Plan")
and reserved 5.2 million shares under the plan. The 2017 Plan replaced the 2008 Omnibus Incentive Plan ("the 2008
Plan"), and all awards previously granted under the 2008 Plan continue to vest and/or are exercisable under the 2017
Plan in accordance with their original terms and conditions. The 2017 Plan and 2008 Plan provide for the grant of stock
options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and
dividend equivalent rights. Additionally, awards issued may be issued as performance-based awards to align stock
compensation awards to the attainment of annual or long-term performance goals. As of December 31, 2019, there were
2.3 million shares available for grant under the 2017 Plan.
The Company grants restricted stock units and performance stock units. The grant date fair values of restricted
stock units and performance stock units are based on the closing market price of our common stock on the grant date.
Our restricted stock units vest based on continued service. Our performance stock units vest based on achievement of
certain performance goals and certification of performance achievement by the Compensation Committee of the Board
of Directors. Stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the
requisite service period. For performance stock units, compensation expense is updated for the Company’s expected
performance level against performance goals at the end of each reporting period, which involves judgment as to
achievement of certain performance metrics.
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. Stock-based compensation for the three years ended December 31 is as
follows:
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,327 $ 9,703 $ 12,549
Our stock-based compensation expense is based on the value of the portion of share-based payment awards that
are ultimately expected to vest, assuming estimated forfeitures at the time of grant. Estimated forfeiture rates for our
stock-based compensation expense applicable to stock options and restricted stock units ("RSU’s") was approximately
10%, 10% and 17% for the years ended December 31, 2019, 2018 and 2017, respectively.
Years Ended December 31,
2017
2018
2019
89
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Restricted Stock Units
The fair value of our Restricted Stock Units ("RSUs") is determined based upon the closing fair market value of
our common stock on the grant date. Changes in the unvested RSU’s during the years ended December 31, 2019, 2018
and 2017 were as follows:
2017
Weighted-
Average
Grant
Value
354 $ 29.60
386 $ 51.06
352 $ 58.17
RSUs outstanding at beginning of period . . . . . . . . . . . . . . . . . .
63.63
64.48
52.24
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
252
245
380
30.62
54.94 (211)
50.95 (207)
RSUs vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (155)
33.91
(9)
50.79
(72)
51.82
(43)
RSUs forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
386 $ 51.06
352 $ 58.17
534 $ 56.56
RSUs outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . .
2019
Weighted-
Average
Grant
Value
2018
Weighted-
Average
Grant
Value
Shares
Shares
Shares
The total intrinsic value of RSUs converted to shares for the years ended December 31, 2019, 2018 and 2017
were $8.3 million, $13.6 million and $14.8 million, respectively. As of December 31, 2019, there was $5.9 million of
total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected
to be recognized through fiscal November 2022, with a weighted-average remaining vesting period of 1.3 years.
Stock Options
Stock option awards are generally granted 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 as determined at the
time of grant. Stock option awards generally have a term of 10 years.
The fair value of options granted during the year ended December 31, 2015 was estimated on the date of grant
using the Black-Scholes-Merton option pricing model using the following assumptions: the risk-free interest rate was
1.1% - 1.4%, the expected term was 4.3 years and expected volatility was 43%. The risk-free interest rate was based on
the five-year U.S. Treasury Bill at the time of the grant. We utilize our historical experience in determining the expected
term of our stock options and volatility of our common stock. We have not historically issued dividends.
Changes in our outstanding stock options during the years ended December 31, 2019, 2018 and 2017 were as
follows:
2019
Weighted-
Average
Exercise
Price
2018
Weighted-
Average
Exercise
Price
2017
Weighted-
Average
Exercise
Shares
Shares
Shares
Price
Options outstanding at beginning of period. . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . .
Options vested during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
230 $ 20.73 317 $ 18.97
(42)
—
(3)
—
11.97
185 $ 21.56 230 $ 20.73
17.73
—
9.91
(83)
—
(4)
14.41 (152)
(2)
(3)
474 $ 17.47
14.32
26.32
11.09
317 $ 18.97
—
2
9
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The total intrinsic value of options exercised for the years ended December 31, 2019, 2018 and 2017 was $1.6
million, $4.1 million and $9.7 million, respectively. All options outstanding at December 31, 2019 are vested and have
aggregate intrinsic value of $9.2 million and weighted-average remaining contractual life of 4.1 years.
The following table summarizes information about the stock options outstanding at December 31, 2019:
Options Outstanding
Number
Weighted-Average Weighted-
Average
Remaining
Options Exercisable
Number
Weighted-
Average
Range of Exercise Prices
9.51 - 13.85
14.21 - 16.25
18.77 - 18.77
26.32 - 26.32
9.51 - 26.32
Employee Stock Purchase Plan
Outstanding Contractual Life Exercise Price Exercisable Exercise Price
12.00
15.06
18.77
26.32
21.56
1.42 years $
0.72 years
4.75 years
5.10 years
4.09 years $
23 $
20
43
99
185 $
12.00
15.06
18.77
26.32
21.56
23
20
43
99
185
The ESPP, a stockholder-approved plan, provides for the issuance of rights to purchase up to 1,000,000 shares
of common stock. In May 2010, stockholders approved an increase from 500,000 to 1,000,000 shares authorized for sale
under our ESPP. Employees below the Vice President level are eligible to participate in the ESPP if employed by us for
at least 20 hours per week during at least five months per calendar year. Participating employees may contribute up to
the lesser of 15% of their eligible earnings or $5,000 during each plan period. Currently, the plan period is six months.
The purchase price of common stock purchased under the ESPP is currently equal to the lower of: 1) 85% of the fair
market value of our common stock on the commencement date of each plan period or 2) 85% of the fair market value of
our common shares on each plan period purchase date. At December 31, 2019, 0.2 million shares remained available for
future issuance under the ESPP.
Purchase rights granted under the ESPP are valued using the Black-Scholes-Merton model. As of December 31,
2019, there was $0.2 million of total unrecognized compensation cost related to the ESPP that is expected to be
recognized over a remaining period of five months. Total compensation expense was $0.5 million for the year ended
December 31, 2019 and $0.4 million for the year ended December 31, 2018, and $0.2 million for the year ended
December 31, 2017.
The fair value of each purchase right granted under the ESPP was estimated on the date of grant using the
Black-Scholes-Merton option pricing model with the following assumptions:
2019
2018
2017
Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.62% - 2.31 % 2.10% - 2.56 % 1.07% - 1.45 %
Expected dividend yield rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— %
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.5 years
0.5 years
0.5 years
41.3 %
38.0 %
— %
33.3 %
— %
The risk-free interest rate is based on the six-month U.S. Treasury Bill at the time of the grant. We utilize our
historical experience in determining the expected term of our stock options and volatility of our common stock. We have
not historically issued dividends.
91
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 19. COMMITMENTS AND CONTINGENCIES
Disputes and Legal Actions
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 patent 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 patent rights. We accrue loss contingencies in connection with our commitments and
contingencies, including litigation, when it is probable that a loss has occurred, and the amount of the loss can be
reasonably estimated. The Company is currently not a party to any legal action that the Company believes would
reasonably have a material adverse impact on its business, financial condition, results of operations or cash flows.
NOTE 20. RELATED PARTY TRANSACTIONS
Members of our Board of Directors hold various executive positions and serve as directors at other companies,
including companies that are our customers. During the years ended December 31, 2019, 2018, and 2017, we engaged in
the following transactions with companies related to members of our Board of Directors, as described below:
Years Ended December 31,
2017
2018
2019
Sales to related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,340 $ 1,028 $ 1,425
1
Number of related party customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
1
Our accounts receivable balance from related party customers with outstanding balances as of December 31,
2019 and December 31, 2018 is as follows:
December 31, December 31,
2019
2018
Accounts receivable from related parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Number of related party customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
1
109
1
We did not have any outstanding accounts payable with our related parties as of December 31, 2019 or
December 31, 2018.
NOTE 21. GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
The following table summarizes sales, and percentages of sales, by customers that individually accounted for
10% or more of our sales for the years ended December 31, 2019 and 2018:
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,724 20.9 % $ 258,027 35.9 %
88,251 11.2 % 109,005 15.2 %
LAM Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2018
2019
92
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table summarizes the accounts receivable balances, and percentages of the total accounts
receivable, for customers that individually accounted for 10% or more of accounts receivable as of December 31, 2019
and December 31, 2018:
Years Ended December 31,
2018
2019
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 36,849 14.9 % $ 34,301 34.2 %
Nidec Motor Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* %
* % 12,181 12.1 %
LAM Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38,071
*
15.4
*
* Customer’s balance was less than 10% of the total accounts receivable balance.
Our sales to Applied Materials, Inc., LAM Research, and Nidec Corporation include precision power products
used in semiconductor processing and solar and flat panel display. No other customer accounted for 10% or more of our
sales or accounts receivable balances during these periods.
The following table summarizes long-lived assets by geographic area as of December 31, 2019 and
December 31, 2018:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239,511 $ 115,869
12,274
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59,936
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600,456 $ 188,079
301,020
59,925
December 31,
2019
2018
Long-lived assets include property and equipment, operating lease right-of-use assets, goodwill and other
intangible assets.
NOTE 22. CREDIT FACILITY
In September 2019, in connection with the Artesyn Acquisition Agreement, the Company entered into a credit
agreement (“Credit Agreement”) that provided aggregate financing of $500.0 million, consisting of a $350.0 million
senior unsecured term loan facility (the “Term Loan Facility”) and a $150.0 million senior unsecured revolving facility
the (“Revolving Facility”). Both the Term Loan Facility and Revolving Facility mature on September 10, 2024.
The Revolving Facility and Term Loan Facility bear interest, at the option of the Company, at a rate based on a
reserve adjusted Eurodollar Rate or a Base Rate, as defined in the Credit Agreement, plus an applicable margin.
Additionally, the Revolving Facility is subject to an unused line fee. As of December 31, 2019, the effective interest rate
for the Revolving Facility and Term Loan Facility was 2.55% and the effective rate for the unused line fee was 0.10%.
As of December 31, 2019, the Company had $150.0 million available to withdraw on the Revolving Facility and was in
compliance with all covenants.
The fair value of the Company’s outstanding debt approximates its carrying value of $339.0 million as of
December 31, 2019.
In connection with the entering into of the Credit Agreement, the Company terminated the Loan Agreement, as
amended (the "Loan Agreement") which previously provided a revolving line of credit of up to $150.0 million subject to
certain funding conditions. The Company expensed all unused line of credit fees at the time of termination of the Loan
Agreement.
93
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
As of December 31, 2019, the debt obligation on our Consolidated Balance Sheets consists of the following:
Debt:
Amount
Term Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,250
(2,223)
Less: debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
339,027
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(17,500)
Less current portion of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 321,527
Contractual maturities of the Company’s debt obligations, excluding amortization of debt issuance costs, as of
are as December 31, 2019 follows:
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,500
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,500
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,500
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17,500
271,250
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,250
Amount
Interest expense and unused line of credit fees were recorded in Other income (expense), net, in our
Consolidated Statements of Operations as follows:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,994 $ — $
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused line of credit fees and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,416 $ 228 $
—
228
2019
2018
Years Ended December 31,
2017
—
—
66
66
186
236
94
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 23. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited quarterly results for each of the eight quarters in the periods ended
December 31, 2019 and 2018, in thousands. We believe that all necessary adjustments have been included in the
amounts stated below to present fairly such quarterly information. Due to the volatility of the industries in which our
customers operate, the operating results for any quarter are not necessarily indicative of results for any subsequent
period.
December 31, September 30, June 30,
March 31,
Quarter Ended
Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 338,268 $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,295 $
Restructuring Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,418 $
22,202 $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations, net of income taxes . . . . . . . . $
10,479 $
Loss (income) from discontinued operations, net of
2019
2019
2019
2019
175,127 $ 134,810 $ 140,743
73,491 $ 64,126 $ 65,740
152 $ 1,795 $ 1,673
9,390 $ 11,005 $ 11,791
7,256 $ 23,373 $ 15,387
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations attributable to
noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to Advanced Energy Industries, Inc. . . . . $
Earnings (Loss) Per Share:
Continuing Operations:
(210) $
10,269 $
375 $ 8,324 $
(9)
7,631 $ 31,697 $ 15,378
5 $
10,264 $
10 $
8
7,621 $ 31,686 $ 15,370
11 $
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.27 $
0.27 $
0.19 $
0.19 $
0.61 $
0.61 $
0.40
0.40
Discontinued Operations:
Basic loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.01) $
(0.01) $
0.01 $
0.01 $
0.22 $
0.22 $
—
—
Net Income:
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.27 $
0.27 $
0.20 $
0.20 $
0.83 $
0.82 $
0.40
0.40
95
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
December 31, September 30, June 30,
March 31,
Quarter Ended
2018
Sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 154,161 $
75,188 $
Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,836 $
Restructuring Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
19,570 $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations, net of income taxes . . . . . . . . $
19,222 $
Income (loss) from discontinued operations, net of
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income from continuing operations attributable to
noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to Advanced Energy Industries, Inc. . . . . $
Earnings (Loss) Per Share: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
188 $
19,410 $
4 $
19,406 $
Continuing Operations:
2018
2018
2018
173,082 $ 196,032 $ 195,617
85,539 $ 101,235 $ 103,645
—
39,862 $ 56,018 $ 56,103
35,157 $ 46,400 $ 46,370
403 $
— $
(371) $
140
34,786 $ 46,405 $ 46,510
5 $
7 $
31
34,779 $ 46,361 $ 46,479
44 $
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.50 $
0.50 $
0.90 $
0.90 $
1.18 $
1.17 $
1.17
1.16
Discontinued Operations:
Basic loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
(0.01) $
(0.01) $
— $
— $
—
—
Net Income:
Basic earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
0.51 $
0.50 $
0.89 $
0.89 $
1.18 $
1.17 $
1.17
1.16
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On March 25, 2019, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) of
Advanced Energy Industries, Inc. (the “Company”) dismissed Grant Thornton LLP (“Grant Thornton”) as the
Company’s independent registered public accounting firm, effective immediately, and provided Grant Thornton with
notice of such dismissal. During the Company’s two most recent fiscal years ended December 31, 2018 and
December 31, 2017, and during the subsequent interim period through March 25, 2019, (i) there were no disagreements
(as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) with Grant Thornton on
any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which
disagreement(s), if not resolved to Grant Thornton’s satisfaction, would have caused Grant Thornton to make reference
to the subject matter of the disagreement(s) in connection with its reports, and (ii) there were no “reportable events” (as
that term is defined in Item 304(a)(1)(v) of Regulation S-K).
On March 27, 2019, the Company engaged Ernst & Young LLP (“E&Y”) as the Company’s independent
registered public accounting firm for the fiscal year ending December 31, 2019, which engagement was approved by the
Audit Committee and effective on March 27, 2019.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, which are designed to ensure that information required
to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the "Act") is recorded,
processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s
rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed
to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and
communicated to management, including our Principal Executive Officer (Yuval Wasserman, Chief Executive Officer)
and Principal Financial Officer (Paul Oldham, Chief Financial Officer & Executive Vice President), 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, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of December 31, 2019. The conclusions of the Chief Executive Officer and Chief Financial
Officer from this evaluation were communicated to the Audit Committee. We intend to continue to review and document
our disclosure controls and procedures, including our internal controls and procedures for 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.
Management’s Annual Report on Internal Control over Financial Reporting
It is management’s responsibility to establish and maintain effective internal control over our financial
reporting, which is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer
and effected by our Board of Directors, management, and other personnel. Our internal control over financial reporting
is designed to provide reasonable assurance concerning the reliability of our financial reporting and the preparation of
our financial statements for external purposes in accordance with generally accepted accounting principles.
In September 2019, we acquired Artesyn Embedded Technologies, Inc.’s Embedded Power business
(“Artesyn”), as discussed in Note 2. Business Acquisitions in Item 8 "Financial Statements and Supplementary
Data." The objectives of Artesyn established internal controls over financial reporting is consistent, in all material
97
respects, with Advanced Energy’s objectives. We are in the process of completing a more comprehensive review of
Artesyn’s internal control over financial reporting and will be implementing changes to better align their reporting and
controls with the rest of Advanced Energy. As a result of the timing of the acquisition and the changes that are
anticipated to be made, and in accordance with the general guidance issued by the SEC regarding exclusion of certain
acquired businesses, we have excluded Artesyn from the December 31, 2019 assessment of Advanced Energy’s internal
controls over financial reporting. Artesyn accounted for approximately 45% of Advanced Energy’s total assets at
December 31, 2019, and 28% of Advanced Energy’s total net sales for the fiscal year ended December 31, 2019.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our internal control over financial reporting as of December 31, 2019, using the criteria described in
Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based upon this evaluation, management concluded that our internal control over financial reporting was
effective as of December 31, 2019.
Ernst & Young LLP, an independent registered public accounting firm, has audited our Consolidated Financial
Statements included in this Form 10 - K, and as part of the audit, has issued an attestation report, included herein, on the
effectiveness of our internal control over financial reporting as of December 31, 2019.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during 2019 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls and Procedures
Management has concluded that our disclosure controls and procedures and internal control over financial
reporting provide reasonable assurance that the objectives of our control system are met. We do not expect, however,
that our disclosure controls and procedures or internal control over financial reporting will prevent or detect all
misstatements, errors, or fraud, if any. All control systems, no matter how well designed and implemented, have inherent
limitations, and therefore no evaluation can provide absolute assurance that every misstatement, error, or instance of
fraud, if any, or risk thereof, has been or will be prevented or detected. The occurrence of a misstatement, error, or fraud,
if any, would not necessarily require a conclusion that our controls and procedures are not effective.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Advanced Energy Industries, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Advanced Energy Industries, Inc.’s internal control over financial reporting as of December 31, 2019,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Advanced Energy
Industries, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2019, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting,
management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not
include the internal controls of Artesyn Embedded Technologies, Inc.’s Embedded Power business which was acquired
during the year ended December 31, 2019, which are included in the 2019 consolidated financial statements of the
Company and constituted 45% of total assets as of December 31, 2019 and 28% of sales for the year then ended. Our
audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control
over financial reporting of this entity.
98
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, the related consolidated
statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31,
2019, and the related notes and our report dated March 2, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that
our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
/s/ Ernst & Young LLP
Denver, Colorado
March 2, 2020
ITEM 9B. OTHER INFORMATION
In an effort to address volatility in the markets the Company serves, on March 2, 2020 the Compensation
Committee recommended and the Board of Directors approved changes to the Short Term Incentive Plan (“2020 STI
Plan”) to (1) provide for two six-month performance periods (January 1 - June 30 and July 1 – December 31) instead of
a fiscal year performance period (January 1 – December 31), (2) replace the operational cash flow target to a realized
acquisition synergies target, (3) change the weighting of the three performance targets such that revenue, non-GAAP
operating income from continuing operations and realized acquisition synergies would be weighted 40%, 40% and 20%,
respectively and (4) the funding of the realized acquisition synergies amount is not dependent on meeting any other
99
financial threshold. As with prior short-term incentive plans, threshold, target and stretch performance goals have an
opportunity for a 50%, 100% and 200% payout.
Eligible participants in the 2020 STI Plan must continue to be employees on the payment date which is
expected to be within 90 days after the end of the 2020 fiscal year. The eligible participants in the 2020 STI Plan
include senior management and the named executive officers at their respective bonus percentage targets. Specifically,
for the named executive officers, the President & Chief Executive Officer, the Executive Vice President & Chief
Financial Officer, the Executive Vice President & Chief Operating Officer and the Executive Vice President & General
Counsel have a target bonus opportunity under the 2020 STI Plan of 100%, 70%, 70% and 60% of their 2020 base
salary, respectively.
PART III
In accordance with General Instruction G(3) of Form 10 - K, certain information required by this Part III is
incorporated by reference to the definitive proxy statement relating to our 2020 Annual Meeting of Stockholders (the
“2020 Proxy Statement”), as set forth below. The 2020 Proxy Statement will be filed with the Securities and Exchange
Commission within 120 days after the end of our fiscal year.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information set forth in the 2020 Proxy Statement under the heading “Proposal No. 1/Election of Directors”
is incorporated herein by reference.
The Company has adopted a Code of Ethical Conduct that applies to all of the Company’s employees, including
the Company’s Chief Executive Officer and Chief Financial Officer and other persons performing similar functions. The
Company has posted a copy of the Code of Ethical Conduct on its website at www.advancedenergy.com, and such Code
of Ethical Conduct is available, in print, without charge, to any stockholder who requests it from the Company’s
Secretary. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8 - K regarding
amendments to, or waivers from, the Code of Ethical Conduct by posting such information on its website at
www.advancedenergy.com. The Company is not including the information contained on its website as part of, or
incorporating it by reference into, this report.
Executive Officers
Our executive officers, their positions and their ages as of December 31, 2019 were as follows:
Yuval Wasserman, 65, has served as President & Chief Executive Officer, and as a director of Advanced
Energy since October 2014. Mr. Wasserman joined us in August 2007 as Senior Vice President, Sales, Marketing and
Service. In October 2007, Mr. Wasserman was promoted to Executive Vice President, Sales, Marketing and Service. In
April 2009, he was promoted to Executive Vice President and Chief Operating Officer of the Company, and then in
August 2011, he was promoted to President of the Thin Films Business Unit. Mr. Wasserman was on the Board of
Directors of Syncroness, Inc., an outsourced engineering and product development company, from 2010 to 2017 when it
was sold, and joined the Board of Directors of FARO Technologies, Inc., a publicly traded manufacturer of three-
dimensional (3D) measurement, imaging and realization systems, in December 2017. Mr. Wasserman is a National
Association of Corporate Directors (NACD) Governance Fellow. Mr. Wasserman has a BSc degree in chemical
engineering from Ben Gurion University in Israel.
Paul Oldham, 56, joined the Company in May 2018 as its Executive Vice President & Chief Financial Officer.
Previously Mr. Oldham served as the Senior Vice President of Administration, Chief Financial Officer and Corporate
Secretary of Electro Scientific Industries, Inc., a developer and manufacturer of laser-based production equipment
(“ESI”), from February 17, 2016 until December 4, 2017, and as the Vice President of Administration, Chief Financial
Officer and Corporate Secretary of ESI from January 7, 2008 until February 16, 2016. Prior to joining ESI, Mr. Oldham
was employed at Tektronix, Inc., a test, measurement, and monitoring company, since 1988, where he held several
senior leadership positions, including Vice President Finance and Corporate Controller, Vice President - Treasurer and
100
Investor Relations and European Operations Controller. Mr. Oldham has a bachelor’s degree in Accounting and an MBA
in accounting and finance from Brigham Young University.
Neil Brinker, 44, joined the Company in June 2018 as its Executive Vice President & Chief Operating Officer.
Previously, Mr. Brinker served as the Group President of the IDEX Corporation (“IDEX”), from July 2015, and was
Platform President of IDEX’s Material Processing Technologies from May 2014 to July 2015 and General Manager of
IDEX’s Fluid Management business from April 2012 to May 2014. Prior to IDEX, Mr. Brinker was a Director of Global
Operations at Danaher Corporation (“Danaher”) from July 2009 to April 2012 and held several other operations
management leadership positions at Danaher from February 2007 to July 2009. Prior to Danaher, Mr. Brinker held
various management positions at General Motors Company from 2001 to 2007. Mr. Brinker holds a B.S.M.E. degree
from Michigan State University, a Master of Engineering from the University of Michigan and an MBA from Eastern
Michigan University.
Thomas O. McGimpsey, 58, joined the Company in April 2009 and serves as its Executive Vice President -
General Counsel, Government Affairs & Corporate Secretary. Mr. McGimpsey was the interim Chief Financial Officer
from January to May in 2018, the Corporate Development M&A Officer from 2011 to 2015 and he managed the IT
Department from 2010 to 2013, all while serving as General Counsel. Prior to joining the Company, Mr. McGimpsey
was a Vice President of Operations at First Data Corporation from February 2008 to April 2009. During 2007,
Mr. McGimpsey was a consultant and legal advisor to various companies. Prior to that, Mr. McGimpsey was the
Executive Vice President of Business Development & Chief Legal Officer for McDATA Corporation from July 2000 to
January 2007 when the company was sold. From February 1998 until its sale in June 2000, Mr. McGimpsey held the
position of Director and Senior Corporate Attorney at US WEST, Inc. From 1991 to 1998, Mr. McGimpsey was in
private practice at national law firms. From 1984 to 1988, Mr. McGimpsey was a Senior Engineer for Software
Technology, Inc. (a Harris company). Mr. McGimpsey has been on the Board of Directors of CPP, Inc., an international
engineering services company, since August 2015 and has been a Commissioner on the Colorado Commission on Higher
Education since July 2015. Mr. McGimpsey received his MBA (with distinction) from Colorado State University, his
Juris Doctor degree from the University of Colorado and his B.S. degree in Computer Science from Embry-Riddle
Aeronautical University. Mr. McGimpsey was a National Association of Corporate Directors (NACD) Board Leadership
Fellow and is licensed to practice law in New York, Colorado, Florida and before the U.S. Supreme Court.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 2020 Proxy Statement under the headings “Executive Compensation” is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The information set forth in the 2020 Proxy Statement under the headings “Security Ownership of Certain
Beneficial Owners and Management” and “Equity Compensation Plan Information” is incorporated herein by reference.
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about the equity incentive compensation plans as of December 31,
2019. All outstanding awards in the table shown below relate to our common stock.
101
(A)
(B)
Plan Category
Equity compensation plans approved by security holders . . . . . . . . . . . . . .
Equity compensation plans not approved by security holders . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
185,084
—
185,084
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
21.56
—
21.56
(C)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column A)
2,543,919 (1)
—
2,543,919
(1) This number includes 236,628 shares available for future issuance under the Employee Stock Purchase Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is set forth in Note 20. Related Party Transactions in Item 8 "Financial Statements and
Supplementary Data," and in the 2020 Proxy Statement under the captions "Election of Directors" and “Certain
Relationships and Related Transactions” is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth in the 2020 Proxy Statement under the caption “Ratification of the Appointment of
Ernst & Young LLP as Advanced Energy’s Independent Registered Public Accounting Firm for 2020” is incorporated
herein by reference.
102
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Documents filed as part of this Annual Report on Form 10 - K are as follows:
1. Financial Statements:
Report of Ernst & Young LLP as of and for the year ended December 31, 2019
Report of Grant Thornton LLP as of December 31, 2018 and for the years ended December 31, 2018 and 2017
Consolidated Balance Sheets at December 31, 2019 and 2018
Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Income for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
2. Financial Statement Schedules for the years ended December 31, 2019, 2018 and 2017
NOTE: All schedules have been omitted because they are either not applicable or the required information is
included in the financial statements and notes thereto.
(B) Exhibits:
2.1 Agreement and Plan of Merger by and among Advanced Energy Industries, Inc., Eclipse Merger Sub, Inc.,
LumaSense Technologies Holdings, Inc., and Shareholder Representative Services LLC, dated July 26,
2018.(14)**
2.2 Stock Purchase Agreement by and among Advanced Energy Industries, Inc., Artesyn Embedded
Technologies, Inc., Pontus Intermediate Holdings II, LLC and Pontus Holdings, LLC, dated May 14,
2019. (18)**
2.3 First Amendment to the Stock Purchase Agreement by and among Advanced Energy Industries, Inc.,
Artesyn Embedded Technologies, Inc., Pontus Intermediate Holdings II, LLC and Pontus Holdings, LLC,
dated September 9, 2019. (20)**
3.1 Amended and Restated Certificate of Incorporation of Advanced Energy Industries, Inc. (19)
3.2 Amended and Restated By-Laws of Advanced Energy Industries, Inc. (17)
4.1 Form of Specimen Certificate for Common Stock. (1)
4.2 Description of Advanced Energy Industries, Inc. Securities.
103
10.1 Lease dated January 16, 2003, by and between China Great Wall Computer Shenzhen Co., Ltd., Great
Wall Limited and Advanced Energy Industries (Shenzhen) Co., Ltd., for a building located in Shenzhen,
China. (2)
10.2 Form of Indemnification Agreement. (1)
10.3 Form of Director Indemnification Agreement. (4)
10.4 Form of Notice of Grant for Restricted Stock Unit. (7)*
10.5 Form of Restricted Stock Unit Agreement. (7)*
10.6 Form of Notice of Grant of Stock Option. (7)*
10.7 Form of Incentive Stock Option Agreement. (7)*
10.8 Form of Non-Qualified Stock Option Agreement. (7)*
10.9 Form of LTI Notice of Grant. (7)*
10.10 Form of LTI Performance Stock Option Agreement pursuant to the 2008 Omnibus Incentive Plan. (7)*
10.11 Form of LTI Performance Stock Unit Agreement pursuant to the 2008 Omnibus Incentive Plan. (7)*
10.13 Form of 2020 Short-Term Incentive Plan.*
10.14 2017 Long-Term Incentive (LTI) Plan. (10)*
10.15 2017 Short-Term Incentive (STI) Plan. (11)*
10.16 2017 Omnibus Incentive Plan. (10)*
10.17 2008 Omnibus Incentive Plan, as amended May 4, 2010. (5)*
10.18 Employee Stock Purchase Plan. (1)*
10.19 Offer Letter, dated September 28, 2014, by and among Advanced Energy Industries, Inc. and Yuval
Wasserman. (8)*
10.20 Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials Inc.
dated August 29, 2005. (3)+
10.21 Shipping Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc.
and Applied Materials Inc. dated August 29, 2005. (3)+
10.22 Bridge Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc.
and Applied Materials Inc. dated January 28, 2011. (6)+
10.23 Fixed Dollar Accelerated Share Repurchase Transaction, dated November 6, 2015, between Advanced
Energy Industries, Inc. and Morgan Stanley & Co. LLC. (9)
10.24 Offer Letter to Paul Oldham, dated March 26, 2018. (12)
10.25 Offer Letter to Neil Brinker, dated May 7, 2018. (13)
104
10.26 Form of Executive Change in Control & General Severance Agreement. (15)
10.27 Credit Agreement, dated September 10, 2019, by and among Advanced Energy Industries, Inc., Bank of
America N.A. as the Administrative Agent, Bank of America N.A., Bank of the West and HSBC Bank
USA, N.A. as the Joint Lead Arrangers and Joint Book Runners, and Citibank N.A., as the Co-Manager.
(20)
16.1 Letter from Grant Thornton LLP. (16)
21.1 Subsidiaries of Advanced Energy Industries, Inc.
23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.
23.2 Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.
31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act
of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal 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 XBRL Instance Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
104 Cover Page Interactive Data File
Attached as Exhibit 101 to this report are the following materials from Advanced Energy, Inc.’s Annual
Report on Form 10-K for the year ended December 31, 2019, formatted in iXBRL (Inline eXtensible
Business Reporting Language): (i) the Consolidated Statements of Operations, (ii) the Consolidated
Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated
Statements of Cash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to
the Consolidated Financial Statements.
(1)
(2)
(3)
Incorporated by reference to the Registrant’s Registration Statement on Form S - 1 (File No. 33 - 97188), filed
September 21, 1995.
Incorporated by reference to the Registrant’s Annual Report on Form 10 - K for the year ended December 31, 2003
(File No. 000 - 26966), filed February 24, 2004.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10 - Q for the quarter ended September 30,
2005 (File No. 000 - 26966), filed November 7, 2005.
105
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966), filed
December 14, 2009.
Incorporated by reference to the Registrant’s Annual Report on Form 10 - K for the year ended December 31, 2010
(File No. 000 - 26966), filed March 2, 2011.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10 - Q for the quarter ended March 31,
2011 (File No. 000 - 26966), filed May 6, 2011.
Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966) filed May 10,
2013.
Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966) filed October 1,
2014.
Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966) filed
November 6, 2015.
(10) Incorporated by reference to Appendix A of the Registrant’s Proxy Statement for the Registrant’s 2017 Annual
Meeting of Stockholders (File No. 000 - 26966), filed March 14, 2017.
(11) Incorporated by reference to Appendix B of the Registrant’s Proxy Statement for the Registrant’s 2017 Annual
Meeting of Stockholders (File No. 000 - 26966), filed March 14, 2017.
(12) Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966), filed March 29,
2018.
(13) Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966), filed May 9,
2018.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966), filed July 30,
2018.
(15) Incorporated by reference to the Registrant’s Current Report on Form 8 - K (File No. 000 - 26966), filed August 6,
2018.
(16) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed March 27,
2019.
(17) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2019 (File No. 000-26966), filed May 6, 2019.
(18) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed May 15,
2019.
(19) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2019
(File No. 000-26966), filed August 5, 2019.
(20) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed
September 10, 2019.
* Compensation Plan
** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Advanced Energy Industries, Inc.
undertakes to furnish supplemental copies of any of the omitted schedules upon request by the Securities and
Exchange Commission.
+ Confidential treatment has been granted for portions of this agreement.
ITEM 16. FORM 10 - K SUMMARY
None.
106
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this Annual Report on Form 10 - K to be signed on its behalf by the undersigned, thereunto duly authorized.
ADVANCED ENERGY INDUSTRIES, INC.
(Registrant)
/s/ Yuval Wasserman
Yuval Wasserman
Chief Executive Officer
Date: March 2, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below
by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Yuval Wasserman
Chief Executive Officer and Director (Principal Executive
March 2, 2020
Yuval Wasserman
Officer)
/s/ Paul Oldham
Chief Financial Officer & Executive Vice President
March 2, 2020
(Principal Financial and Accounting Officer)
Paul Oldham
/s/ Grant H. Beard
Grant H. Beard
/s/ Frederick A. Ball
Frederick A. Ball
/s/ Tina M. Donikowski
Tina M. Donikowski
/s/ Ronald C. Foster
Ronald C. Foster
/s/ Edward C. Grady
Edward C. Grady
/s/ Thomas M. Rohrs
Thomas M. Rohrs
/s/ John A. Roush
John A. Roush
Chairman of the Board
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
March 2, 2020
Director
Director
Director
Director
Director
Director
107
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Advanced Energy Industries, Inc.
1595 Wynkoop Street, Suite 800
Denver, CO 80202
advancedenergy.com