2020
Annual Report
Powering the 4th
Industrial Revolution
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, 2020.
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)
84-0846841
(I.R.S. Employer Identification No.)
1595 Wynkoop Street, Suite 800, Denver, Colorado
(Address of principal executive offices)
80202
(Zip Code)
Registrant’s telephone number, including area code: (970) 407-6626
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Trading Symbol(s)
AEIS
Name of each exchange on which registered
NASDAQ Global Select Market
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
Securities registered pursuant to section 12(g) of the Act: None
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
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
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 $2,563,579,586 as of June 30, 2020, based upon the
price at which such common stock was last sold on such date.
As of February 18, 2021, there were 38,300,076 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 2021 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, 2020).
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A. RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B. UNRESOLVED STAFF COMMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4. MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
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 . . . . .
ITEM 9A. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . . . . . . . . . . . . . . . . .
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16. FORM 10-K SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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4
11
24
25
26
26
26
26
29
29
44
46
86
86
88
88
88
89
89
90
90
90
90
94
95
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 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 materials;
•
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.
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.
3
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, data center 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 and Networking markets. Advanced Energy is organized on a global,
functional basis and operates in a single segment structure for electrical power conversion and control products. We sell our
products into four markets or applications and provide revenue data by market to enable tracking of market trends.
Following the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business ("Artesyn") in September
2019, we have also provided information on an organic and inorganic basis, which in 2020 was limited to the Artesyn
acquisition, to improve comparability during the periods.
During 2020, we saw the continued spread of COVID-19 which grew into a global pandemic. Our first priority
was to provide a healthy and safe working environment for our employees which led to intermittent shutdowns of our
manufacturing facilities to implement new health and safety protocols and make additional investments to comply with
government guidelines. There were periods when some of our manufacturing facilities were not operating or were operating
at reduced capacity due to government mandates to restrict travel, require social distancing and implement health and safety
procedures. Many of our engineers and non-manufacturing personnel transitioned largely to a work from home
environment. Additionally, the availability of materials, parts and subcomponents needed for production was also impacted
during 2020. We expect the challenges associated with this environment to continue into 2021.
Although COVID-19 has impacted our revenues and manufacturing efficiency over the course of 2020,
COVID- 19 has not materially impacted our liquidity, our ability to access capital, our ability to comply with our debt
covenants or the fair value of our assets. Additionally, we believe the accommodations we have made to our work
environment, including employees utilizing work-from-home arrangements where necessary, will not impact our ability to
maintain effective internal controls over financial reporting. While COVID-19 has not had a material adverse effect on our
business during 2020, it is unknown if COVID-19 will have a material adverse impact on our future operations, our
financial results (including, but not limited to, gross profit, and cash generation) or liquidity. Please see the information
under the caption "Risk Factors" in Item 1A of this Annual Report on Form 10-K for additional discussion on the potential
impacts of COVID-19 to the future operations of our business.
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) 407-6555.
4
Recent Acquisitions
In December 2020, we completed the acquisition of Versatile Power, Inc. This acquisition added radio frequency
("RF") and programmable power supplies for medical and industrial applications to our product portfolio and further
expands our presence in the medical market by adding proven technologies, deep customer relationships, expertise in
medical design, and a medical-certified manufacturing center.
In September 2019, we completed the acquisition of Artesyn. Artesyn’s embedded power business was one of the
world’s largest providers of highly engineered, application-specific AC-DC and DC-DC power supplies for demanding
applications. This acquisition diversified our product portfolio and gave us access to attractive growth markets, including
data centers (including hyperscale), telecom infrastructure in next generation 5G networks, embedded industrial power
applications and medical diagnostic and treatment 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 are
designed to meet our customers’ 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 measurement 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, data center 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 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 industrial power applications.
Our gas detection and monitoring products utilize 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 improve process efficiency, reduce waste, and lower maintenance costs.
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
5
center computing, telecom, networking, medical equipment, and broad industrial electronics. These 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 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.
PowerInsight, 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 wish to lower the 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 in ten countries, including the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, Korea,
Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain. Support services include warranty and non-warranty repair
services, upgrades, and refurbishments on the products we sell.
As 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 2019, we divested the U.S. 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, 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."
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-
6
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. Our strategy in the
Semiconductor Equipment market is to expand our content of power related products and grow share.
INDUSTRIAL AND MEDICAL MARKET
Customers in the Industrial and Medical market incorporate our advanced power, embedded power, and
measurement products into a wide variety of equipment used in applications such as advanced material fabrication, medical
devices, analytical instrumentation, test and measurement equipment, robotics, motor drives and connected light-emitting
diodes.
OEM customers design equipment utilizing our process power technologies in a variety of industrial thin film
applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, data
storage, and decorative, hard and optical coatings. These applications employ similar technologies to those used in the
Semiconductor Equipment 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 the Industrial and Medical market with mission-critical power components that deliver high reliability,
precise, low noise or differentiated power to the equipment they serve. Examples of products sold into the Industrial and
Medical market 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 and Medical market is to 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 MARKET
Following the acquisition of Artesyn 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 and
hyperscale server and storage manufacturers, as well as cloud service providers and their partners. Driven by the growing
adoption of cloud computing, market demand for server and storage equipment has shifted from enterprise on-premise
computing to data centers. 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. With a growing presence at both cloud service providers and industry-leading data center server and
storage vendors, we believe we are well positioned to continue to capitalize on the ongoing shift towards cloud computing.
Starting in late 2019 and through the end of 2020, demand for our embedded power products in the Data Center Computing
market increased significantly driven by share gain and ramp at hyperscale customers. In addition, we believe COVID-19 is
having a positive impact on hyperscale demand given the increased need for cloud and network applications. Demand for
hyperscale products declined sequentially during the third and fourth quarter of 2020 based on customer digestion
following large investments in the first half of the year but was offset by higher demand from enterprise computing
customers, which had been cyclically down in the first half of 2020. We expect this digestion period to continue into the
first half of 2021.
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TELECOM AND NETWORKING MARKET
The acquisition of Artesyn in September 2019 provided Advanced Energy with a portfolio of products and
technologies that are used across the Telecom and Networking market. 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 heads, RF
power amplifiers 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. 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 for our products in the Telecom and Networking market over time. In
datacom, demand is driven by networking investments by telecom service providers and enterprise upgrading of their
network, as well as cloud data center networking investments for increased bandwidth. Demand in late 2019 and the first
half of 2020 was lower as geopolitical issues and consolidation of wireless telecom providers drove slower global
investment in cellular and network infrastructure; however, we saw modest market growth off these reduced levels in the
third and fourth quarter of 2020.
Customers
Our products are sold worldwide to OEMs, integrators, distributors and directly to end users. The following table
summarizes the percentage of our total sales derived from our ten largest customers:
Ten largest customers . . . . . . . . . . . . . . . . . . . . . . .
2020
58.0 %
Years Ended December 31,
2019
57.3 %
2018
62.5 %
The following table summarizes sales to and percentage of total sales from Applied Materials, Inc. and Lam
Research Corp., our two largest customers (in thousands):
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . .
Lam Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Years Ended December 31,
2019
$ 248,350 17.5 % $ 164,724 20.9 % $ 258,027 35.9 %
109,005 15.2 %
88,251 11.2 %
141,778 10.0 %
2018
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. The loss of a large customer could have a material adverse effect on our results of
operations.
Backlog
Our backlog was approximately $290.7 million on December 31, 2020, a 12.3% increase from $258.9
million on December 31, 2019. 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 the
significance of customer production demand pull systems to our business, 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.
8
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 U.S., 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.
The following table presents our sales by geographic region. Sales are attributed to individual countries based on
customer location (in thousands).
North America . . . . . . . . . . $
Asia . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . $ 1,415,826
2020
687,814
606,893
117,990
3,129
48.6 % $
42.9
8.3
0.2
100.0 % $
Years Ended December 31,
2019
373,634
295,155
119,427
732
788,948
47.4 % $
37.4
15.1
0.1
100.0 % $
2018
372,834
250,574
94,793
691
51.8 %
34.9
13.2
0.1
718,892 100.0 %
Total sales to all countries outside of the U.S. totaled $972.2 million, $467.1 million, and $348.1 million in
the years ended December 31, 2020, 2019, and 2018, 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 and in
2020 we began to increase production at an additional major manufacturing site in Penang, Malaysia. In addition, we
perform limited specialty manufacturing for some of our products in the U.S., United Kingdom, Germany, and Denmark.
Manufacturing in these locations, primarily in 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. See Item 1A, "Risk Factors" for a discussion of certain risks related to our
manufacturing operations.
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. During
2020, COVID-19 impacted the availability of materials, parts, and subcomponents needed for production, and we expect
the related supply chain challenges will continue into 2021. 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;
9
• 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.
Intellectual Property
We seek patent protection for inventions governing new products or technologies as part of our ongoing research
and development. We currently hold 285 U.S. issued patents and 340 foreign issued patents, and we have 337 patent
applications pending in the U.S., Europe, and Asia. Most patents are active for 20 years, and our patents expire on various
dates through 2039. 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, 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 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.
10
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.
Research and development expenses were $144.0 million in 2020, $101.5 million in 2019, and $76.0 million in
2018, representing 10.2% of our sales in 2020, 12.9% of our sales in 2019, and 10.6% of our sales in 2018.
Employees
As of December 31, 2020, we had approximately 10,000 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. We recognize that our employees are our most important asset, and we know that each person’s
diverse background and unique skill set are fundamental to our success. See Item 7 "Management’s Discussion and
Analysis of Financial Condition and Results of Operations" for a discussion of human capital resources.
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 material 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 Securities and Exchange Commission.
11
COVID-19, natural disasters, and related risks
COVID-19 could further materially adversely affect our business, workforce, supply chain, results of operations, financial
condition and/or cash flows.
The continuing spread in 2020 of COVID-19 and related foreign and domestic government actions restricting
travel, commerce and gathering has adversely affected our manufacturing locations. COVID-19 has also resulted in
economic recessions and high unemployment in many countries which could negatively impact future customer purchases
of our products. If COVID-19 continues to spread and restrictions remain in place or are reinstituted, we may continue to
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 which may result in increased costs and material
shortages. In addition, much of our workforce is now working remotely. While we have been successful in transitioning to
this remote environment, the long-term impact on productivity and innovation is not yet clear. As a result, COVID-19 could
adversely impact our near-term and long-term revenues, earnings and cash flow and could require further expenditures.
This situation continues to evolve, and other impacts may arise that we are not aware of currently. We have an active rapid
response team to mitigate risks we are aware of currently and as they arise.
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, 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.
Industry-related risks
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, industrial, and
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.
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 enough 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 and throughout 2020, it is unclear how long this recovery will last. In addition, the market may be
characterized in the future with more "mini-ramps" rather than sustained growth periods as experienced during 2015-2017
given market dynamics, inventory levels, and geopolitical changes. In addition, our Data Center Computing and Telecom
12
and Networking markets are characterized by large program investments, which can cause variations in quarterly or annual
revenues. For example, during 2020 our growth in data center computing and telecom networking has been driven by share
gains at specific customer accounts. Towards the end of 2020, we began to experience a period of digestion by our major
customers resulting in lower demand. We expect this digestion to continue into the first half of 2021 and overall business
levels may not continue to be realized at these levels each quarter.
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. Increasingly, we are required to accelerate
our investment in research and development to meet time-to-market, performance and technology adoption cycle needs of
our customers simply to compete for design wins. Given such up-front investments we make to develop, evaluate, and
qualify products in the design win process, 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. If existing or new customers do not
choose us during 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.
Business model, acquisitions, and capital structure related risks
Despite the continued evolution of our manufacturing footprint our product lines are manufactured at only a few sites and
our sites are not generally interchangeable.
Our power products for the semiconductor industry are manufactured in Shenzhen, PRC and Penang, Malaysia.
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, Littlehampton,
United Kingdom and Frankfurt, Germany. Our pyrometry solutions are manufactured in Ballerup, Denmark, Frankfurt,
Germany, Magdeburg, Germany and Vancouver, Washington. Our telecom, networking, data center computing, and
medical products are manufactured in Zhongshan, PRC, Rosario, Philippines and Santa Rosa, Philippines. Most facilities
are 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 or disrupt our productivity at such site
and could prevent us from meeting our customers’ requirements in a timely manner, or at all.
Additionally, we have a plan to relocate our Shenzhen, PRC manufacturing facility by December 2021. As a
result, we are investing in a dual manufacturing facility in Penang, Malaysia capable of manufacturing our semiconductor
and other products. We believe this investment will help to mitigate our exposure to regional risks, improve our business
continuity profile and lower costs over time. We opened this facility in 2020; however, it may take additional time to
realize the facility’s full production capacity given the impact of COVID-19.
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, and we are continuing to combine Artesyn’s business with our business.
The acquisition of Artesyn has significantly increased our embedded power product offerings, increased our exposure to the
Industrial and Medical, Data Center Computing, and Telecom and Networking markets, and significantly increased the
number of employees and facilities.
13
To realize the anticipated benefits of the acquisition, we must continue to combine our businesses in an efficient
and effective manner and realize our synergy and cost-savings targets. Integrating Artesyn’s business and operations with
ours requires significant management attention, effort, and expenditures, and we may not be able to achieve the longer-term
integration goals in an effective, complete, timely or cost-efficient manner.
Potential risks related to the successful integration of Artesyn’s 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;
optimize our combined worldwide manufacturing footprint while utilizing Artesyn’s vertically integrated
manufacturing model for a broader set of company products;
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;
integrate our information technology systems to mitigate cyber-security risks and enable the management and
operation of the combined business.
If we are unable to successfully or timely integrate the operations of Artesyn’s business into our business over the
long-term, we may be unable to realize the long-term revenue growth, synergies, cost-savings, and other anticipated
benefits resulting from the acquisition and our business could be adversely affected. Additionally, we have and may
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. Artesyn’s 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.
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
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;
•
•
•
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
14
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 our Credit Agreement or applicable laws or equity.
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 suppliers
cannot always be amended in response. In addition, 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 number 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, 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 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. For example, entering 2021 there is global shortage of certain electronics and
semiconductor parts given higher global demand and the impact of COVID-19 on the global supply chain. If we are not
able to obtain parts in a reasonable timeframe our business may be adversely impacted.
Activities necessary to integrate acquisitions may result in costs more than 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 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.
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.
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
15
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. Our customers continually exert pressure on us to reduce our
prices and extend payment terms and we may be required to enter into long term reduced pricing agreements with our
largest customers to remain competitive. In addition, we compete in markets in which customers may include dual or
multi-sourcing of power. We believe some of our Asian competitors benefit from local governmental funding incentives
and purchasing preferences from end-user customers in their respective countries. 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, product offerings and product costs accordingly, and if we are unable to do so, 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.
The following table summarizes the percentage of total sales derived from our ten largest customers:
Ten largest customers . . . . . . . . . . . . . . . . . . . . . . .
2020
58.0 %
Years Ended December 31,
2019
57.3 %
2018
62.5 %
The following table summarizes sales to and percentage of total sales from Applied Materials, Inc. and Lam
Research Corp., our two largest customers (in thousands):
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . .
Lam Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 248,350
141,778
17.5%
10.0%
$ 164,724
88,251
20.9 %
11.2 %
$ 258,027
109,005
35.9 %
15.2 %
2020
Years Ended December 31,
2019
2018
We have an accounts receivable balance from Applied Materials, Inc. of $33.4 million and $36.8 million as of
December 31, 2020 and 2019, respectively. A significant decline in sales from this 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.
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.
16
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 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.
Commercial and financial related risks
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
customers or 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 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.
Our operations in the People’s Republic of China (PRC) and the Asia Pacific region 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 PRC government
actions, and unsettled political conditions including potential changes in U.S. policy regarding overseas manufacturing. At
various times during recent years, the U.S. and PRC have had significant disagreements over geopolitical, trade and
economic issues. Controversies may arise in the future between these two countries. Any escalating political controversies
between the U.S. and PRC, whether or not directly related to our business, could 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.
Additionally, there is inherent risk, based on the complex relationships among PRC, Hong Kong, Taiwan, and the
United States, that political, diplomatic, and national security influences might lead to trade, technology, or capital disputes,
17
and/or disruptions, in particular those affecting the semiconductor industry. This would adversely affect our business with
PRC, Hong Kong, and/or Taiwan and perhaps the entire Asia Pacific region or global economy.
Actions by the Chinese government extending its territorial claims, such as the recent passage of the national
security law in Hong Kong and the planned establishment of an Air Defense Identification Zone over the South China Sea,
raises the fear of conflict that could result in international reprisal. Actions by the U.S. government on trade policy against
the PRC and companies like Huawei Technologies Co., Ltd. have also escalated tensions. Lastly, the recent U.S. and PRC
consulate closures and the continuing Hong Kong political unrest is creating more uncertainty. Should the PRC take any
actions against Taiwan, we could see additional risks to diplomatic and trade relations in the region. Given our expanded
presence in the PRC and Hong Kong, the company’s business results, operations and financial condition could be adversely
affected by these developments and other changes to political, diplomatic, and social conditions. Moreover, PRC’s policies
towards, and treatment of, U.S. companies operating in PRC and Hong Kong could change quickly resulting in an adverse
impact on the Company.
We are subject to risks inherent in international operations.
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.
Sales to our customers outside the United States were approximately 68.7% and 59.2% of our total sales for the
year ended December 31, 2020 and 2019, respectively. Our 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:
•
•
•
•
•
•
•
•
•
•
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, 2020;
changes in tariffs, taxes, and foreign currency exchange rates; and
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.
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 and has negatively impacted the
global demand for our products. Some of our key markets depend largely on consumer spending. Economic uncertainty
exacerbates negative trends in consumer spending and may cause our customers to push out, cancel, or refrain from placing
orders.
18
Difficulties or increased costs 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 including inflation, interest rates, availability of capital markets, consumer spending rates, energy
availability and costs and the effects of government initiatives to manage 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.
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 impact of control failures in the
event of non-compliance.
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 income taxes" 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.
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 (loss) 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.
19
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, we have large, long term liabilities such as
local lease and pension liabilities in Europe and Asia creating more significant exposure to fluctuations in the value of the
Euro, Philippine Peso, and Chinese Yuan. The company does not attempt to hedge these exposures given the long-term
nature of the underlying liabilities and the non-cash nature of the foreign exchange gain or loss.
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 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, which could materially and adversely affect our results of operations.
The United Kingdom’s exit from 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," and was in a
transitionary period through December 31, 2020. As of January 1, 2021, EU Trade Agreements no longer apply to the UK.
The UK has taken steps to reproduce the effects of trading agreements that previously applied through the provisional
application of new trade agreements not yet ratified and has introduced the UK Global Tariff. These changes result in
increased regulatory complexities on imports and exports between the UK and EU countries and may adversely affect our
sales, operations, and financial results. Our operations in the UK may be adversely affected by significant fluctuations in
the UK exchange rates and increased administrative costs and tariffs on the importation of parts for manufacturing and
repair services. 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.
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 added additional information systems that are initially
different from current systems. Any system, network or Internet failures, misuse by system users, 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, 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, because 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
20
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.
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 our 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. We have been experiencing increased litigation related to our legacy inverter product line. Litigation often
requires a substantial amount of our management’s time and attention, as well as financial and other resources, including:
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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 plan.
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 plan 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. Employee Retirement Plans and Postretirement Benefits in Part II, Item 8 "Financial Statements
and Supplementary Data" contained herein.
Our intangible assets may become impaired.
As of December 31, 2020, we have $210.0 million of goodwill and $168.9 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.
International trade, tax, and regulatory related risks
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.
U.S. government actions are imposing greater restrictions and economic disincentives on international trade. It has
initiated the imposition of additional tariffs on certain foreign goods, including steel and aluminum, semiconductor
manufacturing equipment and spare parts thereof and has also announced the imposition of import license requirements on
aluminum articles. The government has amended and expanded export regulations regarding sales to companies on the U.S.
Entity List. These changes prevent sales of foreign produced direct product of the U.S. that is manufactured using
controlled U.S.-origin equipment, technology, and software located outside the United States to companies on the U.S.
Entity List. Additionally, the U.S. Department of Defense continues to issue lists of companies it has determined to be
owned or controlled by China’s People’s Liberation Army on which sanctions could be levied by executive order, and the
21
Department of Commerce has published their "first tranche" of designated military end users from China and Russia for
whom export licenses are now required.
Furthermore, the government has determined that the Special Administrative Region of Hong Kong is no longer
sufficiently autonomous to justify being treated as separate from China and has eliminated certain license exceptions for the
export of controlled goods to Hong Kong and has removed Hong Kong as a separate shipping destination under the Export
Administration Regulations ("EAR").
In response to U.S. Government actions, China passed the Export Control Law of the People’s Republic of China,
effective December 1, 2020. The Export Control Law provides the Chinese government with the framework to ban exports
of strategic materials and advanced technologies to specific foreign entities on its Control List and also provides a
counterweight to the U.S. government’s restrictions through provisions for retaliatory action and extraterritorial
jurisdiction.
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.
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.
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.
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 by their nature are complex and 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
22
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.
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 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, because 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.
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 have implemented or 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.
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. In addition, with our
acquisition of Versatile Power, Inc., we expanded our presence in the medical market to include more highly regulated
applications and added its medical-certified manufacturing center to our operating footprint. We may encounter increased
costs to maintain compliance with the quality systems and other regulations and requirements that apply to the acquired
business. 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
23
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 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 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 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. Regarding our acquisition of Artesyn, we
will need to complete due diligence on the minerals used in the manufacture of those products and include our due
diligence results in our next conflict minerals report. 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.
General Risk Factors
Our failure to maintain appropriate environmental, social, and governance ("ESG") practices and disclosures could result
in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.
Governments, investors, customers, and employees are enhancing their focus on ESG practices and disclosures,
and expectations in this area are rapidly evolving and increasing. While we monitor the various and evolving standards and
associated reporting requirements, failure to adequately maintain appropriate ESG practices that meet diverse stakeholder
expectations may result in the loss of business, diluted market valuation, an inability to attract customers, and an inability to
attract and retain top talent.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
Information concerning our principal properties is set forth below:
Principal Activity
Location
Ownership
Denver, Colorado
Leased
Corporate headquarters, general and administrative
Fort Collins, Colorado
Leased
Research and development, distribution, sales, and service
Lockport, New York
Leased
Manufacturing, distribution, service, and research and development
Campbell, California
Manufacturing, distribution, service, and research and development
Leased
Milpitas, California
Leased
Research and development, sales, and service
Ronkonkoma, New York
Leased
Manufacturing, distribution, service, and research and development
Vancouver, Washington
Leased
Research and development, manufacturing, distribution, sales, and service
Georgetown, Massachusetts
Leased
Sales
Eden Prairie, Minnesota
Engineering, and research and development
Leased
Tempe, Arizona
Leased
Sales and administration
Beijing, China
Leased
Sales
Shanghai, China
Leased
Sales and distribution
Shenzhen, China
Manufacturing, distribution, service, and research and development
Leased
Xian, China
Leased
Service
Zhongshan, China
Leased
Manufacturing
Pune, India
Leased
Sales
Tokyo, Japan
Leased
Sales and service
Seoul, South Korea
Leased
Sales and service
Bukit Minak, Malaysia
Leased
Manufacturing and distribution
Quezon, Philippines
Engineering, research and development, administration, and support
Leased
Rosario, Philippines
Manufacturing
Owned
Santa Rosa, Philippines
Manufacturing
Leased
Singapore, Singapore
Global operations headquarters (sales, service, and research and development) Leased
Taipei, Taiwan
Leased
Sales, distribution, and service
Hong Kong, Hong Kong
Leased
Distribution and general and administrative
Ballerup, Denmark
Leased
Manufacturing, distribution, sales, service, and research and development
Metzingen, Germany
Leased
Distribution, sales, and service
Warstein-Belecke, Germany
Leased
Research and development, distribution, sales, and service
Frankfurt, Germany
Leased
Manufacturing, distribution, sales, service, and research and development
Magdeburg, Germany
Leased
Manufacturing and distribution
Cork, Ireland
Leased
Sales, service, and research and development
Leased
Research and development and service
Caesarea, Israel
Littlehampton, United Kingdom Manufacturing, distribution, sales, service, and research and development
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.
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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.
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." On January
31, 2021, the number of common stockholders of record was approximately 300.
Dividend Policy
We have not declared or paid any cash dividends on our capital stock in our history as a public company.
However, on December 15, 2020, our Board of Directors ("the Board") approved the initiation of a cash dividend program
under which we intend to pay a regular quarterly dividend of $0.10 per share, starting in the first quarter of 2021. On
February 1, 2021, the Board declared a quarterly dividend of $0.10 per share payable to shareholders of record as of
February 22, 2021. Future dividend payments are subject to approval by the Board.
Purchases of Equity Securities by the Issuer
In September 2015, 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, 2020, the Company was
authorized to repurchase shares of the Company’s common stock of up to a total of $38.4 million.
26
The following table summarizes the stock repurchase activity for the three months ended December 31, 2020 (in
thousands, except per share amount):
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
Total
Number of
Shares
Purchased as
Part of Publicly
Announced
Plans or
Programs
$
(in thousands, except per share amount)
1
—
—
1
61.91
—
—
61.91
$
1
—
—
1
Maximum
Dollar
Value of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs
$
$
38,369
—
—
38,369
October 1, 2020 - October 31, 2020 . . . . . . . . . . . . . .
November 1, 2020 - November 30, 2020 . . . . . . . . . .
December 1, 2020 - December 31, 2020 . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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.
27
Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on our common stock in
comparison with various other indices during the period from December 31, 2015 through December 31, 2020. The
comparison assumes $100 was invested on December 31, 2015 in Advanced Energy common stock and in each of the
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 RDG Semiconductor Composite Index and the S&P 1000 Index
$400
$350
$300
$250
$200
$150
$100
$50
$0
12/15
12/16
12/17
12/18
12/19
12/20
Advanced Energy Industries, Inc.
NASDAQ Composite
RDG Semiconductor Composite
S&P 1000
*$100 invested on 12/31/15 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
*
$100 invested on December 31, 2015 in our stock or index, including reinvestment of dividends. Indices and our stock performance
are calculated on a calendar year-end basis.
2015
2016
2017
2018
2019
2020
December 31,
Advanced Energy Industries, Inc. . . . . . . . . . . . $ 100.00 $ 193.94 $ 239.04 $ 152.07 $ 252.21 $ 343.50
271.64
NASDAQ Composite . . . . . . . . . . . . . . . . . . . . 100.00
351.91
RDG Semiconductor Composite . . . . . . . . . . . 100.00
179.15
100.00
S&P 1000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
108.87
131.64
122.49
141.13
177.48
141.26
187.44
242.61
158.57
137.12
164.63
126.71
Information relating to compensation plans under which our equity securities are authorized for issuance is set
forth in Part III, Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters" of this Annual Report on Form 10-K.
28
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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 2020 and 2019. The discussion
and analysis comparing the results of operations for 2018 to 2019 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
2019 Form 10-K for the year ended December 31, 2019.
Overview
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, data center computing, networking, telecommunication, analytical instrumentation, medical equipment, industrial
technology, and temperature-critical thermal applications such as material and chemical processing. 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 evolution 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 could 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 and future 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.
29
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 credit losses.
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.
30
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 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."
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.
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,
considering 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.
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 with no indication of impairment. 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.
31
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, then we conclude no goodwill impairment has occurred. Conversely, if
carrying value exceeds fair value, we recognize an 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.
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,
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.
Human Capital Resources
Our corporate citizenship, social responsibility and commitment to our employees extends beyond the products we
make. We recognize that our employees are our most important asset, and with approximately 10,000 employees located
across the globe, we know that each person’s diverse background and unique skill set are fundamental to our success. We
regularly conduct anonymous surveys to seek feedback from our employees on important topics related to confidence in
company leadership, career growth opportunities, and improvements on how we can make our company a great place to
work. In addition, the results of the survey are shared with our Board. To further increase our commitment to diversity and
equity, in 2020, we announced the launch of our inaugural Advanced Energy STEM Diversity Scholarship, which is aimed
at developing emerging talent and promoting greater ethnic, racial and gender diversity in STEM. The annual program will
begin in the 2021 academic year and will accept applications from undergraduate and post-graduate students attending five
leading institutions in the field of power technologies.
Total Rewards
As part of our total rewards philosophy, we believe in offering and maintaining competitive compensation and
benefits programs for our employees in order to attract and retain a talented, highly engaged workforce. Our compensation
programs are focused on equitable, fair pay practices including market-based base pay, an annual pay-for-performance
incentive plan, and discounted Employee Stock Purchase Plan. In addition to our competitive compensation practices, we
offer a strong benefits package in each of the countries in which we operate. In the majority of our non-U.S. operations, we
offer additional benefits that supplement governmental statutory benefits. In the U.S., we offer a competitive benefits
package that includes four different health care plan options with employee premiums lower than the market average,
32
dental, vision, disability and life insurance, health savings and flexible spending accounts, paid-time off, 8-weeks of paid
parental leave for both parents, company matched 401(k), flexible work schedules, expanded mental health coverage and
employee assistance programs. With the challenging times created by COVID-19, we made the commitment to ensure our
employees maintained financial security and provided employees the ability to work from home and paid leave time for our
hourly employees who may have been impacted by temporary site closures.
Learning and Development
To support our employees in reaching their full potential and to build internal capabilities, we offer a wide range
of internal and external learning and development opportunities. We have a program for education assistance
reimbursement that provides financial support to employees who seek to expand their skills and abilities. We support a
women’s leadership forum conducted by our employees that discusses, among other things, career development, leadership
topics, and the opportunities for mentorship. We also have an internship program designed to help support a pipeline of
talent for the Company. We have a robust succession planning process to develop internal leadership capabilities and
technical bench strength, ensuring we have a strong workforce for the future.
Health and Safety
We are committed to providing a safe work environment for our employees. We provide regular health and safety
training both on-site as needed and through our virtual training tool that assigns training requirements based on job profiles
and site-specific requirements. Our Environmental, Health and Safety organization is a global team responsible for health
and safety related to on-site operations including hazard and risk identification. Workplace safety is also addressed in
operations meetings and monthly business reviews. We are also committed to the standards of the Responsible Business
Alliance Code of Conduct which promotes labor, health and safety, environmental and ethics best practices.
Community Involvement
Our charitable contributions committee, founded in 2010, is supported and led by our employees. The committee
provides financial support for 501(c)(3) corporations, non-profit institutions, and organizations that improve education, the
environment, health and social services across the communities in which we operate and where our employees live. We
provide financial support to workforce initiatives led by the local chamber of commerce in Northern Colorado and have
partnered with a community college to provide equipment and funding to train technicians and develop skilled labor that
may lead to employment opportunities with us or other local companies. We offer each employee eight hours of paid-time
off to volunteer with a 501(c)(3) organization of the employee’s choosing. Our Educational Scholarship Program, available
to children of AE employees, celebrates education accomplishments and facilitates career and learning goals. In 2020, we
received a record number of submissions and recognized ten employees’ students across multiple countries.
Business Environment and Trends
Advanced Energy operates in a single segment structure for power electronics conversion products. The
acquisition of Artesyn added additional products and market verticals to our business. Following the acquisition, we have
continued to be organized on a global, functional basis 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.
Following the acquisition of Artesyn in September of 2019, we also provide information on an organic and inorganic basis
to improve comparability during the periods.
The demand environment in each of our markets is impacted by various market trends, customer buying patterns,
design wins, macroeconomic and other factors. During 2020 we saw strengthening demand in Semiconductor Equipment
and Data Center Computing Markets and weakening demand in our general industrial markets.
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 remains dynamic and
may continue to affect our operations. See Item 1A "Risk Factors" for a discussion of certain risks related to COVID-19.
33
SEMICONDUCTOR EQUIPMENT MARKET
Growth in the Semiconductor Equipment market is driven by growing integrated circuits content across many
industries, increased demand for processing and storage in advanced applications such as artificial intelligence or
autonomous vehicles, the rapid adoption of advanced mobile connectivity solutions such as 5G and 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 7nm 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 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 processes become more challenging due to
increasing aspect ratios in advanced 3D devices, more advanced radio frequency ("RF") and direct current ("DC")
technologies are needed. 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 in September 2019
expanded Advanced Energy’s reach within the Semiconductor Equipment market by adding a broad range of low voltage
applications as well as back-end test and assembly equipment makers.
In 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. Demand for semiconductor equipment has continued to grow through the fourth quarter
of 2020 driven by foundry logic and certain memory investments and has returned to prior peak levels. In addition, the
demand for semiconductor devices for a wide range of applications is expected to drive investment into 2021. However,
due to limited visibility and uncertainty arising from COVID-19 and its impact on the global economy and supply chain,
geopolitical uncertainty, overall levels of current investment by our customers, and the cyclical nature of the market it is
difficult to determine the extent or duration to which the increased demand for semiconductor equipment will continue.
INDUSTRIAL AND MEDICAL MARKET
Customers in the Industrial and Medical market incorporate our advanced power, embedded power, and
measurement products into a wide variety of equipment used in applications such as advanced material fabrication, medical
devices, analytical instrumentation, test and measurement equipment, robotics, 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 Equipment 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 the Industrial and Medical market with mission-critical power components that deliver
high reliability, precise, low noise or differentiated power to the equipment they serve. Examples of products sold into the
Industrial and Medical market includes 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 and Medical market 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.
34
Revenue for Industrial and Medical products improved in the second half of 2020 after lower revenues in the first
half of 2020 primarily due to recessionary macroeconomic conditions, and production and supply chain delays related to
COVID-19 that pushed shipments into the third and fourth quarter of 2020. Additionally, we saw modest improvement in
industrial markets as global economic growth resumed and our customers were able to increase capacity after governmental
restrictions were relaxed during the second half of 2020.
DATA CENTER COMPUTING MARKET
Following the acquisition of Artesyn 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, as well as cloud service providers and their partners. Driven by the growing adoption of cloud
computing, market demand for server and storage equipment has shifted from enterprise on-premise computing to the data
center. Nevertheless, with a growing presence at both cloud service providers and industry-leading data center server and
storage vendors, we believe Advanced Energy is well positioned to continue to capitalize on the ongoing shift towards
cloud computing. In late 2019 and through 2020, demand for our embedded power products in the data center computing
market increased significantly driven by share gains and a capacity ramp at hyperscale customers. In addition, we believe as
a consequence of COVID-19, hyperscale demand has risen in the near term given the increased need for cloud and network
applications in the current environment. Demand for hyperscale products declined sequentially during the latter half of
2020, as a result of market digestion following a ramp of investment earlier in the year. This digestion period is expected to
continue into the first part of 2021.
TELECOM AND NETWORKING MARKET
The acquisition of Artesyn in September 2019 provided Advanced Energy with a portfolio of products and
technologies that are used across the Telecom and Networking market. Our customers include many leading vendors of
wireless infrastructure equipment, telecommunication equipment and computer networking. The wireless telecom market
continues to evolve with more advanced mobile standards. 5G wireless technology promises to drive substantial growth
opportunities for the telecom industry as it enables new advanced applications such as autonomous vehicles and
virtual/augmented reality. Telecom service providers have started to invest in 5G, and this trend is expected to drive
demand of our products into the Telecom and Networking market. In datacom, demand is driven by networking
investments by telecom service providers and enterprises upgrading of their network, as well as cloud data center
networking investments for increased bandwidth. Demand in late 2019 and the first half of 2020 was lower as geopolitical
issues and consolidation of wireless telecom providers drove slower global investment in cellular and network
infrastructure. Revenue increased sequentially in the third and fourth quarters primarily as a result of modest improvement
in market conditions and improved manufacturing capacity amid COVID-19.
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.
35
The following table sets forth certain data derived from our Consolidated Statements of Operations (in thousands):
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,415,826 $
Year Ended December 31,
2019
2020
788,948
315,652
261,264
54,388
12,806
67,194
10,699
56,495
541,869
365,846
176,023
(17,876)
158,147
22,996
135,151
$
The following table sets forth 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
2020
100.0 %
38.3
25.8
12.4
(1.3)
11.2
1.6
9.5 %
100.0 %
40.0
33.1
6.9
1.6
8.5
1.4
7.2 %
SALES, NET
The following tables summarize annual sales and percentages of sales, by product line (in thousands):
Percent
Change 2020 v. 2019
Dollar
208,846
67,654
231,101
119,277
626,878
51.8%
27.5
252.7
245.9
79.5%
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Industrial and Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecom and Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,415,826 $
2020
611,864 $
313,646
322,539
167,777
2019
403,018 $
245,992
91,438
48,500
788,948 $
Year Ended December 31,
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial and Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecom and Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2020
2019
43.2%
22.1
22.8
11.9
100.0%
51.1%
31.2
11.6
6.1
100.0%
36
OPERATING EXPENSE
The following table summarizes our operating expense as a percentage of sales (in thousands):
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general, and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2020
$ 143,961
188,590
20,129
13,166
$ 365,846
2019
10.2 % $ 101,503
142,555
13.3
12,168
1.4
5,038
0.9
25.8 % $ 261,264
12.9 %
18.1
1.5
0.6
33.1 %
2020 Results Compared To 2019
SALES
Total sales for the year ended December 31, 2020 increased $626.9 million, or 79.5% to $1,415.8 million from
$788.9 million for the year ended December 31, 2019. Revenue in 2020 benefited from $670.8 million in inorganic sales
from the acquisition of Artesyn. Organic sales in 2020 increased $176.4 million primarily due to increased demand in the
Semiconductor Equipment market offset by lower sales of our industrial thin film products due to a weaker overall
macroeconomic environment and the impact of COVID-19. Sales in 2019 include $220.3 million in sales from our
acquisition of Artesyn.
In 2020, sales to the Semiconductor Equipment market increased $208.8 million, or 51.8% to $611.9 million from
$403.0 million in 2019. The increase in sales during 2020 is primarily due to an overall increase in demand for
semiconductor equipment used in deposition and etch applications, increasing power content in semiconductor
manufacturing tools, and market share gains in RF match and remote plasma sources.
Sales to the Industrial and Medical market increased $67.7 million, or 27.5% to $313.6 million in 2020 from
$246.0 million in 2019. Our customers in this market are primarily global and regional original equipment and device
manufacturers. Inorganic growth contributed $97.9 million in 2020, while organic sales in the Industrial and Medical
market decreased $30.3 million, or 17.9%. The increase in inorganic sales is primarily due to inclusion of full year results
for Artesyn in 2020 compared to a partial year during 2019. The decrease in organic sales was primarily due to slowing
macroeconomic conditions, the impact of COVID-19 on global manufacturing, 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 $322.5 million in 2020 and $91.4 million in 2019. The increase
in Data Center Computing market sales is primarily due to inclusion of full year results for Artesyn in 2020 compared to a
partial year during 2019 and revenue increases driven by growth in hyperscale customers and market share gains.
Sales in the Telecom and Networking market were $167.8 million in 2020 and $48.5 million in 2019. The increase
in telecom and networking sales is due to the addition of new product verticals through inorganic growth. Since early 2019,
demand for telecom and networking equipment has been impacted by reduced investment in current generation networks
given geopolitical issues, consolidation of network providers, and slowing global growth. Demand in the Telecom and
Networking market started to recover in the second half of 2020, and over time 5G infrastructure investments and upgrades
to enterprise networks are expected to drive growth in this market.
Sales to Applied Materials, Inc. and Lam Research Corp., our two largest customers, increased $137.1 million to
$390.1 million, and 27.5% of sales, in 2020 from $253.0 million, and 32.1% of sales in 2019. Our sales to Applied
Materials, Inc. and Lam Research Corp. included sales in the Semiconductor Equipment market, as well as sales in the
Industrial and Medical market for equipment used in flat panel displays.
37
Backlog
Our backlog was $290.7 million on December 31, 2020 as compared to $258.9 million on December 31, 2019.
GROSS PROFIT
Gross profit increased $226.2 million to $541.9 million, or 38.3%, in 2020 as compared to $315.7 million, or
40.0%, in 2019. The decrease in gross profit as a percent of revenue is largely related to the mix of embedded power
products acquired from Artesyn, which carry a lower gross margin, offset partially by the impact of increased volume from
our organic product mix, improvements in material cost, and synergies from the combined company. Gross profit in 2020
includes $160.8 million from our acquisitions of Artesyn. Gross profit in 2019 includes $44.8 million associated with our
acquisition of Artesyn.
OPERATING EXPENSE
Research and Development
We perform research and development ("R&D") of products to develop new or emerging applications,
technological advances to provide higher performance, lower cost, or other attributes that we may expect to advance our
customers’ products. We believe that continued development of technological applications, as well as enhancements to
existing products and related software to support customer requirements, are critical for us to compete in the markets we
serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the
enhancement of existing products, and we expect these investments to continue.
R&D expenses in 2020 increased $42.5 million to $144.0 million, from $101.5 million in 2019, and decreased as
a percentage of total revenue to 10.2% in 2020 from 12.9% in 2019. R&D expenses in 2020 include $47.2 million from our
acquisition of Artesyn. R&D expenses in 2019 include $14.2 million from our acquisition of Artesyn. R&D excluding the
acquisition of Artesyn increased $9.7 million primarily due to increased payroll, consulting and material and supplies costs
as we invested 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 in 2020 increased $46.0 million to $188.6 million from
$142.6 million in 2019 and decreased as a percentage of total revenue to 13.3% in 2020 from 18.1% in 2019. SG&A
expenses include $57.0 million from our acquisition of Artesyn. SG&A expenses in 2019 include $19.3 million from our
acquisition of Artesyn. Organic SG&A expenses increased by $8.3 million primarily due to increased incentive and
stock- based compensation, offset partially by decrease in reserve for credit losses related to prior year credit exposure in the
PRC as a result of deferred programs due in part to COVID-19, and lower headcount, professional services, and synergies
related to the Artesyn integration.
Amortization of Intangibles
Amortization expense in 2020 increased $8.0 million to $20.1 million from $12.2 million in 2019. The increase in
2020 is primarily driven by incremental amortization of intangible assets for a full year related to our acquisition of
Artesyn.
38
Restructuring
Restructuring charges relate to previously announced management plans to optimize our manufacturing footprint
to lower-cost regions, improvements in operating efficiencies, and synergies related to acquisitions. For the year ended
December 31, 2020, we incurred $13.2 million in restructuring charges which relate to severance costs for the transition and
exit of our facility in Shenzhen, PRC and actions associated with Artesyn synergies. Refer to Note 14. Restructuring Costs
in Item 8. Financial Statements and Supplementary Data.
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 ($17.9) million in
2020, as compared to $12.8 million in 2019. 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 in 2019. The increase in other income (expense) is primarily due to foreign
exchange losses as our exposure to foreign currencies increased with the Artesyn acquisition and higher interest expense
related to a full year of interest in 2020 compared to approximately four months interest in the second half of 2019 related
to the debt issued in connection with the acquisition of Artesyn.
Provision for Income Taxes
In 2020, we recorded income tax expense for our continuing operations of $23.0 million or an effective tax rate of
14.5%. Income tax expense in 2019 was $10.7 million or an effective tax rate of 15.9%. The 2020 effective tax rate differs
from the federal statutory rate of 21% primarily due to the benefit of earnings in foreign jurisdictions which are subject to
lower tax rates, offset by net U.S. tax on foreign operations 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 Statements 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), net 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, 2020 and 2019, also includes the impacts
of changes in our estimated product warranty liability, the recovery of accounts receivable and foreign exchange gain or
(losses).
39
Income (loss) from discontinued operations, net of income taxes (in thousands):
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 . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2020
— $
—
620
(620)
65
(555)
(134)
(421) $
2019
—
(901)
1,022
(121)
10,895
10,774
2,294
8,480
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)
Gross profit from continuing operations, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to gross profit:
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility expansion, relocation costs and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses from continuing operations, as reported . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments:
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility expansion, relocation costs and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP operating income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-GAAP operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2019
315,652
2020
541,869 $
567
4,349
5,381
552,166
39.0%
525
3,891
8,290
328,358
41.6%
365,846
261,264
(20,129)
(11,705)
(10,209)
(2,213)
(13,166)
308,424
243,742 $
17.2%
(12,168)
(6,803)
(12,002)
(948)
(5,038)
224,305
104,053
13.2%
40
Reconciliation of Non-GAAP measure – income from continuing operations, excluding certain items (in
thousands)
Income from continuing operations, less non-controlling interest, net of income taxes . . . . $
Adjustments:
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Facility expansion, relocation costs and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign currency (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related and other costs included in Other income (expense), net . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-GAAP income, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Non-GAAP diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2020
135,096 $
2019
56,461
20,129
15,590
6,562
13,166
8,384
716
—
(7,611)
192,032
9,418
201,450 $
5.23 $
12,168
20,292
4,838
5,038
—
(29)
(13,737)
3,206
88,237
5,627
93,864
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.
On December 31, 2020, we had $483.0 million in cash, cash equivalents, and marketable securities. 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.
On December 31, 2020, we had $179.6 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 certain 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.
41
Credit Facility
In connection with the acquisition of Artesyn 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 facility ("Revolving Facility"). Both the
Term Loan Facility and Revolving Facility mature on September 10, 2024. On December 31, 2020, we had $150.0 million
in available funding under the Revolving Facility. See Note 21. Credit Facility in Part II, Item 8 "Financial Statements and
Supplemental Data" for additional information.
Dividends
We have not declared or paid any cash dividends on our capital stock in our history as a public company.
However, on December 15, 2020, our Board approved the initiation of a cash dividend program under which we intend to
pay a regular quarterly dividend of $0.10 per share, starting in the first quarter of 2021. On February 1, 2021, the Board
declared a quarterly dividend of $0.10 per share payable to shareholders of record as of February 22, 2021. Future dividend
payments are subject to approval by the Board.
Share Repurchase
On December 18, 2019, the Board authorized to remove the expiration date to the Company’s common stock share
repurchase program and increase the authorized amount by $25.1 million, which increased the. authorization to repurchase
shares up to a total of $50.0 million. As of December 31, 2020, a total of $38.4 million remained available for future share
repurchases. During the year ended December 31, 2020, we repurchased 244 thousand shares for $11.6 million at an
average price of $47.75 per share. There were no share repurchases during the year ended December 31, 2019.
Cash Flows
A summary of our cash from operating, investing, and financing activities is as follows (in thousands):
Net cash from operating activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities from discontinued operations . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . .
Net cash from 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities
Years Ended December 31,
2020
202,159 $
(923)
201,236
(42,840)
(29,612)
5,143
133,927
346,441
480,368 $
2019
47,899
493
48,392
(393,847)
338,840
(1,496)
(8,111)
354,552
346,441
$
$
Net cash from operating activities in 2020 was $201.2 million, an increase of $152.8 million, or 315.7% compared
to $48.4 million in 2019. The increase in net cash from operating activities was primarily due to overall increases in sales
and net income.
Net cash from operating activities in the fourth quarter and full year of 2019 was impacted by net payments for
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 Artesyn’s embedded computing business.
42
Net cash from investing activities
Net cash from investing activities in 2020 was ($42.8) million, compared to ($393.8) million in 2019. Net cash
from investing activities in 2020 includes ($36.5) million in purchases of property and equipment as we invested in our
manufacturing footprint and capacity, and ($5.5) million related to business acquisitions. Net cash from investing activities
in 2019 includes ($366.1) million associated with the acquisition of Artesyn.
Net cash from financing activities
Net cash from financing activities in 2020 was ($29.6) million, which consists primarily of ($17.5) million in
principal repayments on our Term Loan Facility and ($11.6) million in stock repurchases. The net cash from financing
activities in 2019 was $338.8 million which 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.
Off-Balance Sheet Arrangements
As of December 31, 2020, 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, 2020 (in
thousands):
Debt obligations(1) . . . . . . . . . . . . . . . . . . . . . . $
Interest payments associated with debt
obligations(1) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease obligations(2) . . . . . . . . . . . . .
Purchase obligations(3) . . . . . . . . . . . . . . . . . . .
Income tax obligations(4) . . . . . . . . . . . . . . . . .
Pension funding commitment(5) . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total
323,750 $
Less than
1 year
17,500 $
1-3 years
35,000 $
3-5 years
271,250 $
More
than 5
years
—
13,956
148,471
191,765
10,608
60,701
749,251 $
4,038
21,916
191,205
1,117
2,255
238,031 $
7,478
30,397
560
3,211
4,156
80,802 $
2,440
22,936
—
6,280
5,192
308,098 $
—
73,222
—
—
49,098
122,320
(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 plan
obligations.
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 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.
43
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, 2020, our investments consisted primarily of certificates of deposit with maturity of less than
one year. As a measurement of the sensitivity of our portfolio and if 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, 2020, we had $323.8 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.
In April 2020, the Company executed interest rate swap contracts with independent financial institutions to
partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan Facility (under
the Company’s existing Credit Agreement dated as of September 10, 2019). These transactions are accounted for as cash
flow hedging instruments.
The interest rate swap contracts fixed 85% of the outstanding principal balance on our term loan to a total interest
rate of 1.271%. This is comprised of 0.521% average fixed rate per annum in exchange for a variable interest rate based on
one-month USD-LIBOR-BBA plus the credit spread in the Company’s existing Credit Agreement, which is 75 basis points
at current leverage ratios.
If our $323.8 million in borrowings had been outstanding for the full year ended December 31, 2020, a
hypothetical increase of 100 basis points (1%) in interest rates would increase our commitments by $3.2 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 may impact our view of their attractiveness.
44
From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in foreign
currency exchange rates on assets and liabilities expected to be settled at a future date, including foreign currency, which
may be required for a potential foreign acquisition. Market risk arises from the potential adverse effects on the value of
derivative instruments that result from a change in foreign currency exchange rates. We may enter into foreign currency
forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional
currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and
monitoring parameters that limit the types and degree of our derivative contract instruments. We enter into derivative
contract instruments for risk management purposes only. We do not enter into or issue derivatives for trading or speculative
purposes.
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 $5.1 million favorable impact for the year ended
December 31, 2020 compared to a $1.5 million unfavorable impact for the year ended December 31, 2019. 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") and the
currencies noted in the table below. Our purchasing and sales activities are primarily denominated in USD, CNY, EUR, and
JPY.
The change in these key currency rates are as follows:
From
Canadian Dollar (CAD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Swiss Franc (CHF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chinese Yuan (CNY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Danish Krone (DKK) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Euro (EUR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pound Sterling (GBP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Israeli New Shekel (ILS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
India Rupee (INR) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Japanese Yen (JPY) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South Korean Won (KRW) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Philippine Peso (PHP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Singapore Dollar (SGD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
New Taiwan Dollar (TWD) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
To
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
USD
Years Ended December 31,
2020
2019
2.2 %
9.6 %
6.7 %
9.8 %
9.4 %
3.5 %
7.6 %
(2.4) %
5.3 %
6.3 %
5.6 %
1.8 %
6.7 %
4.7 %
1.7 %
(1.3)%
(2.1)%
(2.0)%
3.5 %
8.5 %
(2.5)%
1.2 %
(3.6)%
3.5 %
1.3 %
N/A %
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Report of Grant Thornton LLP, Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47
49
50
51
52
53
54
55
46
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 sheets of Advanced Energy Industries, Inc. (the Company)
as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’
equity and cash flows for each of the two years in the period ended December 31, 2020, 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, 2020 and 2019, and the results of its operations
and its cash flows for each of the two years in the period ended December 31, 2020, 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, 2020, 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 February 23, 2021 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 Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated
financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 the critical audit matter does not alter in any way our opinion on
47
the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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, 2020, the
Company’s provision for income taxes was $23.0 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
February 23, 2021
48
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 statements of operations, comprehensive income, stockholders’
equity, and cash flows of Advanced Energy Industries Inc. (a Delaware corporation) (and subsidiaries) (the "Company") for
the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements"). In our
opinion, the financial statements present fairly, in all material respects, the results of operations and cash flows of the
Company for the year ended December 31, 2018, 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 Company 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 regarding 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
We served as the Company’s auditor from 2004 to 2019.
Denver, Colorado
February 21, 2019
49
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
December 31,
2020
2019
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deposits and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
480,368 $
2,654
235,178
221,346
4,804
35,899
980,249
114,731
103,858
19,101
209,983
168,939
50,801
1,647,662 $
346,441
2,614
246,564
230,019
4,245
36,855
866,738
108,109
105,404
22,556
202,932
184,011
42,656
1,532,406
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued payroll and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer deposits and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
125,224 $
11,850
63,487
49,565
12,179
17,500
16,592
296,397
304,546
95,993
80,447
10,088
12,839
7,352
24,660
832,322
170,671
9,687
51,545
41,691
10,926
17,500
18,312
320,332
321,527
90,538
68,169
9,952
16,055
8,011
20,562
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; 38,293 and 38,358 issued and
outstanding on December 31, 2020 and December 31, 2019, respectively . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advanced Energy stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . $
—
—
38
105,009
(2,605)
712,297
814,739
601
815,340
1,647,662 $
38
104,849
(5,897)
577,724
676,714
546
677,260
1,532,406
The accompanying notes are an integral part of these consolidated financial statements
50
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
Years Ended December 31,
2019
2020
2018
Sales, net:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,296,867 $
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total sales, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
118,959
1,415,826
678,061 $
110,887
788,948
610,326
108,566
718,892
Cost of sales:
Product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selling, general and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, before income taxes . . . . . . . . . . . . . . . .
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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. . . . . . . . . . . $
816,329
57,628
873,957
541,869
143,961
188,590
20,129
13,166
365,846
176,023
(17,876)
158,147
22,996
135,151
(421)
134,730 $
55
134,675 $
416,976
56,320
473,296
315,652
101,503
142,555
12,168
5,038
261,264
54,388
12,806
67,194
10,699
56,495
8,480
64,975 $
34
64,941 $
298,597
54,688
353,285
365,607
76,008
108,033
5,774
4,239
194,054
171,553
823
172,376
25,227
147,149
(38)
147,111
86
147,025
Basic weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average common shares outstanding . . . . . . . . . . . . . . . . . .
38,314
38,542
38,281
38,495
39,081
39,352
Earnings per share:
Continuing operations:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.53 $
3.51 $
1.47 $
1.47 $
Discontinued operations:
Basic earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings (loss) per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(0.01) $
(0.01) $
0.22 $
0.22 $
Net income:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.52 $
3.50 $
1.70 $
1.69 $
3.76
3.74
—
—
3.76
3.74
The accompanying notes are an integral part of these consolidated financial statements.
51
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Comprehensive Income
(In thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 134,730 $
Other comprehensive income (loss), net of income taxes
2020
Years Ended December 31,
2019
64,975 $ 147,111
2018
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minimum benefit retirement liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,095
(2,139)
(7,664)
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,022 $
Comprehensive income attributable to noncontrolling interest . . . . . . . . . . . . . . .
Comprehensive income attributable to Advanced Energy Industries, Inc. . . . . . . $ 137,967 $
55
(2,523)
—
75
(5,285)
—
(697)
62,527 $ 141,129
86
62,493 $ 141,043
34
The accompanying notes are an integral part of these consolidated financial statements.
52
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands)
Advanced Energy Industries, Inc. Stockholders' Equity
Common Stock
Balances, December 31, 2017 . . . . . . . . . . . . . . . . .
Adoption of new accounting standards . . . . . . . . . .
Non-controlling interest from acquisition . . . . . . . .
Stock issued from equity plans . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Stock buyback . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances, December 31, 2018 . . . . . . . . . . . . . . . . .
Stock issued from equity plans . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances, December 31, 2019 . . . . . . . . . . . . . . . . .
Adoption of new accounting standards . . . . . . . . . .
Stock issued from equity plans . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . .
Stock buyback . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances, December 31, 2020 . . . . . . . . . . . . . . . . .
$
Shares
39,604 $
—
—
256
—
(1,696)
—
—
38,164
194
—
—
—
38,358
—
179
—
(244)
—
—
38,293
$
$
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Amount
Non-
Total
Retained
Earnings
controlling Stockholders’
Interest
Equity
$
40 $
—
—
—
—
(2)
—
—
38
—
—
—
—
38
—
—
—
—
—
—
38
$
$
$
184,843 $
—
—
(2,005)
9,703
(95,123)
—
—
97,418
104
7,327
—
—
104,849
—
(482)
12,272
(11,630)
—
—
105,009
$
$
2,533 $ 333,225 $
—
—
—
—
—
(5,982)
—
(3,449)
—
—
(2,448)
—
(5,897)
—
—
—
—
3,292
—
(2,605)
32,533
—
—
—
—
—
147,025
$ 512,783
—
—
—
64,941
$ 577,724
(102)
—
—
—
—
134,675
$ 712,297
$
$
$
— $
—
426
—
—
—
—
86
512 $
—
—
—
34
546 $
—
—
—
—
—
55
601 $
520,641
32,533
426
(2,005)
9,703
(95,125)
(5,982)
147,111
607,302
104
7,327
(2,448)
64,975
677,260
(102)
(482)
12,272
(11,630)
3,292
134,730
815,340
The accompanying notes are an integral part of these consolidated financial statements.
53
ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
Years Ended December 31,
2019
2020
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income (loss) from discontinued operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
$
134,730
(421)
135,151
$
64,975
8,480
56,495
147,111
(38)
147,149
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision (benefit) for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of central inverter service business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount on notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss on disposal of assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of assets acquired:
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . .
Net cash from operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of marketable securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments on long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase and retirement of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net receipts (payments) related to stock-based award activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities from discontinued operations . . . . . . . . . . . . . . . . . . . . . . .
Net cash from financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
47,770
12,272
(622)
—
721
1,296
15,412
11,658
1,750
(48,163)
24,520
394
202,159
(923)
201,236
3
(5,476)
(1,000)
116
(36,483)
(42,840)
—
(42,840)
—
(17,500)
(11,630)
(482)
(29,612)
—
(29,612)
26,147
7,327
1,015
(14,795)
1,100
700
(18,879)
3,687
23,544
(16,094)
(12,486)
(9,862)
47,899
493
48,392
1,742
(366,101)
(4,300)
—
(25,188)
(393,847)
—
(393,847)
347,486
(8,750)
—
104
338,840
—
338,840
13,592
9,703
5,618
—
—
481
3,445
(11,276)
(2,975)
(12,618)
(3,239)
1,547
151,427
(156)
151,271
494
(93,756)
—
—
(20,330)
(113,592)
—
(113,592)
—
—
(95,125)
(2,009)
(97,134)
—
(97,134)
EFFECT OF CURRENCY TRANSLATION ON CASH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,143
(1,496)
(1,030)
NET CHANGE 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 period . . . . $
133,927
346,441
480,368
—
480,368
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received for refunds of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,278
21,032
1,569
(8,111)
354,552
346,441
—
346,441
3,479
18,594
1,762
$
$
(60,485)
415,037
354,552
5,251
349,301
228
16,190
1,135
$
$
The accompanying notes are an integral part of these consolidated financial statements.
54
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, analytical
instrumentation, medical equipment, and in 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 several industrial markets. Our network of service support centers provides local repair and field service capability in
key regions, provide upgrades and refurbishment services, and sell used equipment to businesses that use our products.
In September 2019, we acquired Artesyn Embedded Technologies, Inc.’s embedded power business ("Artesyn"), which
added new power products and technologies used in networking, computing, data center (including hyperscale),
industrial, and medical applications. As of December 31, 2015, we discontinued our engineering, production, and sales
of our inverter product line. As such, all inverter product revenues, costs, assets, and liabilities are reported in
Discontinued Operations for all periods presented herein, and we currently report as a single unit. See Note 4. Disposed
and Discontinued Operations for more information. Ongoing inverter repair and service operations are reported as part
of our continuing operations.
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 at the
significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for
expected credit loss, excess and obsolete inventory, warranty reserves, pension obligations, right-of-use assets and
related operating lease liabilities, 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 on 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 U.S. 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
55
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
reflected as unrealized (based on period end remeasurement) or realized (upon settlement of the transactions) in Other
income (expense), net in our Consolidated Statements of Operations.
Derivatives — The Company uses derivative financial instruments to manage risks associated with foreign
currency and interest rate fluctuations. Unless we meet specific hedge accounting criteria, changes in the fair value of
derivative financial instruments are recognized in the Consolidated Statements of Operations within Other income
(expense), net.
For derivatives designated as cash flow hedges, changes in fair value are recorded to Accumulated other
comprehensive loss on the Consolidated Balance Sheets and are reclassified to earnings when the underlying forecasted
transaction affects earnings. We reassess the probability of the underlying forecasted transactions occurring on a
quarterly basis.
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 on 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. Our assessment of the significance of a particular input to the
fair value measurement requires judgement and may affect the valuation of the fair value of assets and liabilities and
their placement within the fair value hierarchy levels.
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 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.
The fair value of borrowings approximates the recorded borrowing value based upon market interest rates for
similar facilities. See Note 21. Credit Facility for additional information. The fair value of contingent consideration and
other acquired assets and liabilities associated with our acquisitions are based on Level 3 inputs.
56
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share 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.
We have established a reserve for credit losses based upon factors surrounding the credit risk of specific
customers, historical trends, and other information.
Accounts Receivable and Reserve for Credit Losses — 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. 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.
Our principal customers are original equipment manufacturers ("OEM") and end user customers, which operate
globally through wholly owned subsidiaries that purchase the Company’s products under substantially the same credit
terms, with similar historical credit risks. As a result, we assess credit risks as a single group. We evaluate collection risk
and establish expected credit loss primarily through a combination of the following: an assessment of customer credit
risk ratings utilizing third party credit risk data, analysis of historical aging and credit loss experience, and customer
specific information.
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.
57
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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.
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 (expense), 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 21. Credit Facility for additional details.
58
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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 is recognized in cost of sales. We
expense incremental costs of obtaining contracts when the amortization period of the costs is less than one year. These
costs are included in selling, general, and administrative expenses.
We maintain a worldwide support organization in ten countries, including the United States, the Peoples
Republic of China ("PRC"), Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain. Support
services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell.
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, considering 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.
59
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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 several 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
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.
Under U.S. GAAP, an accounting policy election can be made to either recognize deferred taxes for temporary
basis differences expected to reverse as global intangible low-tax income ("GILTI") in future years, or to provide for the
tax expense related to GILTI in the year the tax is incurred as a period expense only. We have elected to account for
GILTI in the year the tax is incurred.
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.
60
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Right-of-use assets and operating lease liabilities are recognized at the present value of the future lease payments
on 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
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 December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)—Simplifying the Accounting
for Income Taxes" ("ASU 2019-12"), which is meant to simplify and reduce the cost of accounting for income taxes. The
FASB has stated that ASU 2019-12 is being issued in connection with its Simplification Initiative, which is meant to
reduce complexity in accounting standards by improving certain areas of generally accepted accounting principles
without compromising information provided to users of financial statements. We early adopted ASU 2019-12 in the first
quarter of 2020. The impact of the adoption of ASU 2019-12 was not material to 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 was effective for interim and annual periods ending after December 15, 2019 and shall be applied to all periods
presented on a retrospective basis. We adopted ASU 2018-13 in the first quarter of 2020. The impact of the adoption of
ASU 2018-13 was not material to our consolidated financial statements.
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"). ASU 2016-13 changes the methodology for
measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 was
effective for interim and annual periods, beginning after December 15, 2019. We adopted ASU 2016-13 in the first
quarter of 2020 through a cumulative-effect adjustment to beginning retained earnings using the modified retrospective
approach. The impact of the adoption of ASU 2016-13 was not material to our consolidated financial statements.
New Accounting Standards Issued But Not Yet Adopted
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
61
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
effective for interim and annual periods 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 March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects
of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). ASU 2020-04 provides optional expedients and
exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria,
that reference LIBOR or another rate that is expected to be discontinued. ASU 2020-04 will be in effect through
December 31, 2022. We are currently assessing the potential impact of ASU 2020-04 on our consolidated financial
statements.
NOTE 2. BUSINESS ACQUISITIONS
Versatile Power, Inc
On December 31, 2020, we acquired 100% of the issued and outstanding shares of Versatile Power, Inc., which
is based in Campbell, California. This acquisition added radio frequency ("RF") and programmable power supplies for
medical and industrial applications to our product portfolio and further expands our presence in the medical market by
adding proven technologies, deep customer relationships, expertise in medical design, and a medical-certified
manufacturing center.
The components of the fair value of the total consideration transferred are as follows:
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Holdback . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,594
950
1,500
7,044
(245)
6,799
The following table summarizes the estimated preliminary values of the assets acquired and liabilities assumed:
Current asset and liabilities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Artesyn’s Embedded Power Business
Preliminary
Fair Value
December 31, 2020
1,015
$
35
453
4,000
1,749
7,252
453
453
6,799
$
In September 2019, we completed the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power
business pursuant to the Stock Purchase Agreement dated May 14, 2019 as amended (the "Acquisition Agreement").
62
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Pursuant to the Acquisition Agreement, we acquired 100% of Artesyn’s issued and outstanding shares for a purchase
price of $370.2 million, including the assumption of certain liabilities and the finalization of the net working capital
adjustment. 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 21. Credit
Facility for additional details related to the credit agreement.
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 diversified our product portfolio and gave us access
to additional growth markets, such as data centers (including hyperscale), 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 are as follows:
Cash paid for acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
390,453
3,008
393,461
(23,225)
370,236
The following table summarizes the final fair values of the assets acquired and liabilities assumed:
Accounts and other receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Final Fair
Value
December 31, 2020
132,466
$
156,407
63,321
54,439
114,998
124,000
63,214
708,845
152,635
54,515
48,315
1,695
81,449
338,609
370,236
$
A summary of the intangible assets acquired, amortization method and estimated useful lives are as follows:
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tradename . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 124,000
28,000 Straight-line
75,000 Straight-line
21,000 Straight-line
5
15
10
Amortization
Method
Useful Life
63
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes
due to translation on each balance sheet date. The goodwill represents expected operating synergies from combining
operations with the acquired company and the estimated value associated with the enhancements to our comprehensive
product lines and access to new markets. Advanced Energy settled the adjustment for the net working capital and
finalized the fair value for the assets acquired and liabilities assumed related to the Artesyn acquisition. Accordingly, the
purchase price allocation presented above is final.
Pro forma results for Advanced Energy Inc. giving effect to the Artesyn Transaction
The following unaudited pro forma financial information presents the combined results of operations of
Advanced Energy and Artesyn as if the acquisition had been completed on January 1, 2019. 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 combines Advanced
Energy’s results with the pre-acquisition results of Artesyn for that period.
Total sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Advanced Energy Industries, Inc. . . . . . . . . . . . . . .
Earnings per share:
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
Year Ended December 31,
2019
As Reported
Pro Forma
788,948 $
64,941 $
1,202,790
83,104
1.70
1.69
$
$
2.17
2.16
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 has 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.
64
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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 Computing
(including hyperscale), and Industrial and Medical markets.
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
OEMs and end customers in the semiconductor, flat panel display, high voltage, solar panel, Telecom and Networking,
Data Center Computing, Industrial and Medical 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, such as
5G, data center (including hyperscale) and other industrial and medical applications.
Services
Our services group offers warranty and after-market repair services in the regions in which we operate,
providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of
their capital equipment and are increasingly sensitive to the costs of system downtime. They expect that suppliers offer
comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide
support organization in ten 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.
As part of our ongoing service business, we satisfy our service obligations under preventative maintenance
contracts and extended warranties which had previously been offered on our discontinued inverter products. Any up-
front fees received for extended warranties or maintenance plans are deferred. Revenue under these arrangements is
recognized ratably over the underlying terms as we do not have historical information which would allow us to project
the estimated service usage pattern at this time.
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 for additional information in relation
to this sale. We have deferred revenue related to our extended warranties and service contract totaling $8.7 million as of
December 31, 2020 and $9.2 million as of December 31, 2019. We are expected to recognize this revenue ratably
through year 2031.
65
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Disaggregation of Revenue
The following table presents our sales by product line, inclusive of both products and services, which includes
certain reclassification to prior comparative periods to conform to our current year presentation:
Semiconductor Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Industrial and Medical . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data Center Computing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Telecom and Networking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
The following table presents our sales by geographic region:
Years Ended December 31,
2020
611,864
313,646
322,539
167,777
1,415,826
2019
2018
$ 403,018 $ 533,770
185,122
—
—
$ 788,948 $ 718,892
245,992
91,438
48,500
North America . . . $
Asia . . . . . . . . . . .
Europe . . . . . . . . .
Other . . . . . . . . . . .
Total . . . . . . . . . . . $
Years Ended December 31,
2020
687,814
606,893
117,990
3,129
1,415,826
48.6 % $
42.9
8.3
0.2
100.0 % $
2019
373,634
295,155
119,427
732
788,948
47.4 % $
37.4
15.1
0.1
100.0 % $
2018
372,834
250,574
94,793
691
718,892
51.8 %
34.9
13.2
0.1
100.0 %
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:
Product and service revenue recognized at point in time . . . . . . . . . . . . . . . $ 1,414,982 $
Extended warranty and service contracts recognized over time . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,415,826 $
844
2020
Years Ended December 31,
2019
786,918 $
2,030
788,948 $
2018
715,055
3,837
718,892
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
("Bold") for $1.00 dollar and the assumption by Bold 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 Bold (the "Loan
and Security Agreement"). Under the Loan and Security Agreement, we loaned Bold an aggregate $5.3 million between
May 2019 and the first quarter of 2020. Under the terms of the Loan and Security Agreement and for the next ten years,
we have made an additional $2.75 million available for borrowing, subject to the satisfaction of certain operating and
liquidity covenants by Bold. 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 of $2.3 million has been recognized as a reduction to our gain recognized on
the sale. As a result of the transaction, we reduced our discontinued operations liabilities by approximately $10.9 million
that were related to initial product warranty and reduced our other liabilities by approximately $22.0 million that were
related to extended warranty service obligations as well as reduced other assets and liabilities associated with the
continuing grid-tied central solar inverter service and repair business. Accordingly, a $14.8 million non-cash gain was
66
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
recognized in Other income (expense) from continuing operations and an $8.6 million non-cash gain, net of tax expense
of $2.4 million, was recognized in “Income (loss) 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
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:
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 . . . . . . . . . . . . . . . . . . . . .
$
$
Assets and Liabilities of discontinued operations are not significant.
Years Ended December 31,
2020
— $
—
620
(620)
65
(555)
(134)
(421) $
2019
—
(901)
1,022
(121)
10,895
10,774
2,294
8,480
NOTE 5. INCOME TAXES
The geographic distribution of pretax income from continuing operations is as follows:
Years Ended December 31,
2019
(20,597)
87,791
67,194
2020
17,526
140,621
158,147
$
$
$
$
2018
22,325
150,051
172,376
Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
67
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,
2019
2020
2018
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred provision (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
5,475
1,927
16,216
23,618
(312)
1,270
(1,580)
(622)
22,996
$
$
$
$
(9,627)
882
18,429
9,684
3,822
(178)
(2,629)
1,015
10,699
$
$
$
$
1,423
12
13,772
15,207
4,021
2,363
3,636
10,020
25,227
The Company’s effective tax rates differ from the U.S. federal statutory rate of 21% for the three years ended
December 31, 2020 primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates,
offset by net U.S. tax on foreign operations and withholding taxes. The principal causes of the difference between the
federal statutory rate and the effective income tax rate for each of the years below are as follows:
Years Ended December 31,
2020
2019
Income taxes per federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,211 $ 14,111 $
State income taxes, net of federal deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. tax on foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign derived intangible income deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax effect of foreign operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Uncertain tax position . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Withholding taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other permanent items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,996 $ 10,699 $
10
5,805
–
(13,086)
(4,487)
1,624
(2,088)
7,222
6,500
(4,912)
2,793
9,666
(4,070)
(20,527)
(3,215)
(567)
(2,292)
(1,175)
4,265
4,907
2018
36,199
2,372
6,943
(261)
(19,162)
(3,088)
2,564
(1,484)
(1,306)
1,371
1,079
25,227
68
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:
Years Ended December 31,
2020
2019
Deferred tax assets
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net operating loss and tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense limitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Excess and obsolete inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee bonuses and commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,130 $
57,590
7,344
14,297
3,722
2,468
3,048
5,388
28,786
20,267
8,925
153,965
(46,702)
107,263
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
Deferred tax liabilities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unremitted earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease right-of-use assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
40,266
4,173
18,731
3,380
66,550
40,713 $
41,549
4,740
22,774
2,966
72,029
32,704
Of the $40.7 million and $32.7 million net deferred tax asset on December 31, 2020 and 2019, respectively,
$50.8 million and $42.7 million is reflected as a net non-current deferred tax asset and $10.1 million and $10.0 million is
reflected as a long-term liability on December 31, 2020 and 2019, respectively.
As of December 31, 2020, the Company has recorded a valuation allowance on $4.2 million of its
U.S. domestic deferred tax assets, largely attributable to 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 $42.5 million and is associated primarily with operations in Germany, Hong Kong, and Switzerland. As of
December 31, 2020, 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, 2020 valuation allowance balance reflects a decrease of
$29.5 million during the year. The change in the valuation allowance is primarily due to the dissolution of an Austrian
entity, refinements in the determination of Artesyn attributes acquired in 2019, and the netting of Section 382 limited
attributes that will never be available for utilization with their valuation allowance, partially offset by increases due to
foreign exchange movements.
As of December 31, 2020, the Company had U.S., foreign and state tax loss carryforwards of $70.3 million,
$129.6 million, and $117.7 million, respectively. Additionally, the Company had $0.2 million and $30.5 million of
capital loss and interest expense limitation carryforwards, respectively. Finally, the Company had U.S. and state tax
credit carryforwards of $1.3 million and $1.7 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
69
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. Much of the foreign jurisdiction, and $8.0
million of the federal net operating loss carry forwards, have no expiration period.
We operate under a tax holiday in Singapore and China. These tax holidays are in effect through June 30, 2027
and December 31, 2022, respectively. The tax holiday is conditional upon our meeting certain employment and
investment thresholds. The impact of the tax holidays decreased foreign taxes by $13.0 million and $4.0 million for 2020
and 2019, respectively. The benefit of the tax holiday on earnings per diluted share was $0.34 and $0.12 for 2020 and
2019, respectively.
As of December 31, 2020, we have undistributed earnings of certain foreign subsidiaries of approximately
$58.9 million that we have indefinitely invested, and on which we have not recognized deferred taxes. Estimating the
amount of potential tax is not practicable because of the complexity and variety of assumptions necessary to compute the
tax.
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:
Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions taken during a prior period . . . . . . . . . .
Additions based on tax positions taken during a prior period –
acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . .
Reductions related to a settlement with taxing authorities . . . . . . . . . . . . .
Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Years Ended December 31,
2019
13,162
484
2020
13,009
219
$
$
—
—
—
(3,555)
—
9,673
$
4,479
—
(4,295)
(821)
—
13,009
$
2018
15,990
94
757
—
(153)
(3,144)
(382)
13,162
The unrecognized tax benefits of $9.7 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 $3.2 million and $3.0 million of accrued interest and penalties on
December 31, 2020 and 2019, respectively. We expect the total amount of tax contingencies will decrease by
approximately $3.5 million in 2021 based on statute of limitation expiration.
With few exceptions, the Company is no longer subject to federal, state, or foreign income tax examinations by
tax authorities for years before 2017.
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 our diluted EPS is
similar to the computation of our 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.
70
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and
diluted earnings per share:
Years Ended December 31,
2019
2020
2018
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,151 $ 56,495 $ 147,149
Income from continuing operations attributable to noncontrolling interest . . .
86
Income from continuing operations attributable to Advanced Energy
Industries, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 135,096 $ 56,461 $ 147,063
34
55
Basic weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . . . .
Assumed exercise of dilutive stock options and restricted stock units . . . . . . .
Diluted weighted-average common shares outstanding . . . . . . . . . . . . . . . . . . .
Continuing operations:
38,314
228
38,542
38,281
214
38,495
39,081
271
39,352
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.53 $
3.51 $
1.47 $
1.47 $
3.76
3.74
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,
2019
2020
2018
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, our Board of Directors authorized the removal of the expiration date to the Company’s
share repurchase program and increased the authorized amount by $25.1 million. As of December 31, 2020, the
Company is authorized for the future repurchase of shares of our common stock of up to a total of $38.4 million.
In order to execute the repurchase of shares of our common stock, the Company periodically enters into stock
repurchase agreements. The Company has repurchased the following shares of common stock:
(in thousands, except per share amounts)
Amount paid to repurchase shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,630 $
Number of shares repurchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average repurchase price per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
244
47.75 $
2020
— $ 95,125
1,696
—
56.07
— $
Years Ended December 31,
2019
2018
There were no shares repurchased from related parties. All shares repurchased were recognized as a reduction
to Additional paid-in capital. Repurchased shares were retired and assumed the status of authorized and unissued shares.
71
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 7. FAIR VALUE MEASUREMENTS
The following tables present information about the Company’s assets and liabilities measured at fair value on a
recurring basis.
Description
Assets:
Certificates of deposit . . . . . . . . . . . . . . . . . . Marketable securities
Total assets measured at fair value on a
recurring basis . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Classification
December 31, 2020
Level 1
Level 2
Level 3
Total
Fair Value
$
— $ 2,654 $
— $
2,654
$
— $ 2,654 $
— $
2,654
Liabilities:
Contingent consideration . . . . . . . . . . . . . . . . Other current liabilities
Contingent consideration . . . . . . . . . . . . . . . . Other long-term liabilities
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . Other long-term liabilities
Total liabilities measured at fair value on a
recurring basis . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
— $
—
—
— $ 2,009 $
2,940
—
—
2,811
2,009
2,940
2,811
— $ 2,811 $ 4,949 $
7,760
Description
Assets:
Certificates of deposit . . . . . . . . . . . . . . . . . . Marketable securities
Total assets measured at fair value on a
recurring basis . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance Sheet Classification
December 31, 2019
Level 1
Level 2
Level 3
Total
Fair Value
$
$ 2,614 $
— $
2,614
$
— $ 2,614 $
— $
2,614
Liabilities:
Contingent consideration . . . . . . . . . . . . . . . . Other long-term liabilities $
Total liabilities measured at fair value on a
recurring basis . . . . . . . . . . . . . . . . . . . . . . . . . .
$
— $
— $ 1,377 $
1,377
— $
— $ 1,377 $
1,377
We determine the fair value of interest rate swaps by estimating the net present value of the expected cash flows
based on market rates and associated yield curves, adjusted for non-performance credit risk, as applicable. See Note 8.
Derivative Financial Instruments for additional information. The fair value of contingent consideration is determined by
estimating the net present value of the expected cash flows based on the probability of expected payment.
For all periods presented, there were no transfers into or out of Level 3.
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. These forward contracts manage the exchange
rate risk associated with assets and liabilities denominated in nonfunctional currencies. These derivative instruments are
not designated as hedges; however, they do offset the fluctuations of our assets and liabilities due to foreign exchange
rate changes. These forward contracts are typically for one-month periods. As of December 31, 2020, and 2019, we did
not have any currency exchange rate contracts outstanding.
72
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Gains and losses related to foreign currency exchange contracts were offset by corresponding gains and losses
on the revaluation of the underlying assets and liabilities. Both are included as a component of Other income (expense),
net, in our Consolidated Statements of Operations.
In April 2020, the Company executed interest rate swap contracts with independent financial institutions to
partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan Facility (under
the Company’s existing Credit Agreement dated as of September 10, 2019). These transactions are accounted for as cash
flow hedging instruments.
The interest rate swap contracts fixed 85% of the outstanding principal balance on our term loan to a total
interest rate of 1.271%. This is comprised of 0.521% average fixed rate per annum in exchange for a variable interest
rate based on one-month USD-LIBOR-BBA plus the credit spread in the Company’s existing Credit Agreement, which
is 75 basis points at current leverage ratios.
The following table summarizes the notional amount of the Company’s qualified hedging instruments:
Interest rate swap contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2020
273,219 $
2019
—
December 31, December 31,
On December 31, 2020, Accumulated other comprehensive loss on the Consolidated Balance Sheets includes
$2.1 million, net of tax, related to changes in fair value on the interest rate swap contracts.
See Note 7. Fair Value Measurements for information regarding fair value of derivative instruments.
As a result of the use of derivative financial instruments, the Company is exposed to the risk that counterparties
to derivative contracts may fail to meet their contractual obligations. The Company manages counterparty credit risk in
derivative contracts by reviewing counterparty creditworthiness on a regular basis and limiting exposure to any single
counterparty.
NOTE 9. ACCOUNTS AND OTHER RECEIVABLE, NET
Accounts and other receivable are recorded at net realizable value. Components of accounts and other
receivable, net of reserves, are as follows:
Amounts billed, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unbilled receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
213,560 $
21,618
235,178 $
December 31,
2019
227,528
19,036
246,564
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 credit losses. 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 typically become billable 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.
73
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table summarizes the changes in expected credit losses:
Balance as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deductions - write-offs, net of recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7,745
368
(511)
7,602
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
NOTE 11. PROPERTY AND EQUIPMENT, NET
Property and equipment, net is comprised of the following:
Buildings and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer and communication equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vehicles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2020
141,337 $
13,702
66,307
221,346 $
2019
134,816
10,269
84,934
230,019
December 31,
2020
1,776 $
115,404
26,623
4,352
262
42,984
3,693
195,094
(80,363)
114,731 $
2019
1,693
108,945
29,106
4,119
262
33,041
9,089
186,255
(78,146)
108,109
The following table summarizes depreciation expense. All depreciation expense is recorded in income from
continuing operations.
Years Ended December 31,
2019
2020
2018
7,818
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,641 $ 13,979 $
74
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
NOTE 12. GOODWILL
The following table summarizes the changes in goodwill:
Balance as of December 31, 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Measurement period adjustments to purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Measurement period adjustments to purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions from acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
101,900
(41,996)
143,262
(234)
202,932
1,957
1,749
3,345
209,983
Additions and adjustments are the result of finalizing the Artesyn acquisition and other allocations. Refer to
Note 2. Business Acquisitions.
NOTE 13. INTANGIBLE ASSETS
Intangible assets consisted of the following:
December 31, 2020
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
Amortization
Amount
85,075 $
114,171
27,021
226,267 $
(24,999) $
(26,880)
(5,449)
(57,328) $
60,076
87,291
21,572
168,939
Gross Carrying Accumulated Net Carrying
December 31, 2019
Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Amount
Amortization
Amount
83,368 $
108,995
26,888
219,251 $
(14,250) $
(18,197)
(2,793)
(35,240) $
69,118
90,798
24,095
184,011
Gross Carrying Accumulated Net Carrying
At December 31, 2020, the weighted average remaining useful life of intangibles subject to amortization was
approximately 10.5 years.
Amortization expense related to intangible assets is as follows:
Years Ended December 31,
2019
2020
2018
5,774
Amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,129 $ 12,168 $
75
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Estimated amortization expense related to intangibles is as follows:
Year Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
20,565
20,276
20,257
17,334
12,822
77,685
168,939
NOTE 14. RESTRUCTURING COSTS
During 2018, we committed to a restructuring plan to optimize our manufacturing footprint and to improve our
operating efficiencies and synergies related to our recent acquisitions. For the year ended December 31, 2020, we
incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, PRC, and actions
associated with synergies related to the Artesyn acquisition.
The table below summarizes the restructuring charges:
Severance and related charges . . . . . . . . . . . . . . . . . . . . . . . . . $
Facility relocation and closure charges . . . . . . . . . . . . . . . . . .
Total restructuring charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,166 $ 5,038 $ 4,239 $
1,996
—
Years Ended December 31,
2019
2020
9,632 $ 3,042 $ 4,239 $
3,534
2018
Cumulative Cost
Through December 31,
2020
16,913
5,530
22,443
The following table summarizes our restructuring liabilities on December 31, 2020:
Total restructuring liabilities . . . . . . . . . . . . . . . . . . . . $
2,172 $ 13,166 $ (4,714) $
17 $
2019
Expense
Settled
Rates
2020
10,641
Cost
Incurred Cost Paid
Effect of
Balance at
and
or
Changes in
Balance at
December 31, Charged to Otherwise Exchange December 31,
As of December 31, 2020, and 2019, the accrued restructuring liabilities related primarily to severance and
related charges.
NOTE 15. WARRANTIES
Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months
after shipment. The estimated cost of our warranty obligation is recorded when revenue is recognized and is based upon
our historical experience by product, and configuration.
76
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets.
Changes in our product warranty obligation are as follows:
Balances at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Warranty acquired in business combinations . . . . . . . . . . . . . . . . . . . . . . . . .
Increases to accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warranty expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of changes in exchange rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balances at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2019
2,084 $
4,818
1,752
(2,249)
8
6,413 $
2020
6,413 $
15
2,996
(4,688)
44
4,780 $
2018
2,312
305
1,606
(2,127)
(12)
2,084
NOTE 16. LEASES
The Company leases manufacturing and office space under non-cancelable operating leases. Some of these
leases contain provisions for landlord funded leasehold improvements, which are recorded as a reduction to right-of-use
("ROU") assets and the related operating lease liabilities. For leases containing an option to renew, we regularly evaluate
the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease terms,
along with the ROU assets and operating lease liabilities. In many cases, we have lease terms that are less than one year,
and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and
operating lease liabilities. New leases are negotiated and executed to meet business objectives on an on-going basis.
Our leases do not provide an implicit rate. Accordingly, we use our incremental borrowing rate based on the
information available at the lease commencement date in determining the present value of the lease payments. We have a
centrally managed treasury function; therefore, we apply a portfolio approach for determining the incremental borrowing
rate applicable to the lease term.
Components of operating lease cost were as follows:
Operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Short-term and variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Year Ended December 31,
2020
2019
22,920
1,895
24,815
$
$
11,052
4,726
15,778
Maturities of our operating lease liabilities on December 31, 2020 are as follows:
Year Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Present value of lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
21,126
16,177
12,979
11,593
10,133
74,635
146,643
(34,058)
112,585
77
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
We have one lease agreement that commences in March 2021 with total payments of $3.5 million over five
years. 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 lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Right-of-use assets obtained in exchange for operating lease liabilities(1) . . . . . . . . . . . . $
Year Ended December 31,
2020
10.65
4.63 %
21,877 $
33,741 $
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. Subsequent measurement period adjustments that occurred in the year ended
December 31, 2020 reduced this amount to $54.4 million. See Note 2. Business Acquisitions for more details.
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, 2020, 2019, and 2018 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, 2020, 2019, and 2018 we recognized total defined contribution plan costs
of $2.6 million, $1.6 million, and $1.4 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.
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.
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.
78
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The Company’s projected benefit obligation and plan assets for defined benefit pension plans and the related
assumptions used to determine the related liabilities are as follows:
Projected benefit obligation, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefit obligation, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Years Ended December 31,
2020
83,262 $
—
1,068
1,716
7,591
(1,199)
5,302
97,740
2019
33,178
48,350
272
1,211
(193)
(1,779)
2,223
83,262
Fair value of plan assets, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funded status of plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
14,903
—
682
1,827
(993)
180
694
17,293
(80,447) $
13,433
102
380
644
(1,176)
1,064
456
14,903
(68,359)
The components of net periodic pension benefit cost recognized in our Consolidated Statements of Operations
for the periods presented are as follows:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of actuarial gains and losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Assumptions used in the determination of the net periodic pension cost are:
Years Ended December 31,
2019
2018
2020
1,068 $
1,716
(683)
459
2,560 $
272 $
1,211
(615)
411
1,279 $
841
802
(665)
478
1,456
Years Ended December 31,
2019
2018
2020
Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected long-term return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.8 %
3.7 %
2.7 %
4.6 %
2.8 %
4.8 %
79
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 are as follows:
Multi-Asset Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diversified Growth Fund . . . . . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-Asset Fund . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diversified Growth Fund . . . . . . . . . . . . . . . . . . . . . .
Index-Linked Gilts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Level 1
Level 2
Level 3
Total
December 31, 2020
$
$
$
$
—
—
—
—
995
995
Level 1
—
—
—
—
—
154
154
$
$
$
$
5,149
5,134
4,906
—
—
15,189
$
$
—
—
—
1,109
—
1,109
December 31, 2019
Level 2
Level 3
4,825
4,855
1,934
2,090
—
—
13,704
$
$
—
—
—
—
1,045
—
1,045
$
$
$
$
5,149
5,134
4,906
1,109
995
17,293
Total
4,825
4,855
1,934
2,090
1,045
154
14,903
On December 31, 2020, our plan’s assets of $17.3 million were invested in five separate funds including a
multi-asset fund (29.8%), a diversified growth fund (29.7%), corporate bonds (28.4%), and insurance contracts (6.4%).
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. 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, 2020, are as follows:
Expected Future Benefit Payments
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2026 - 2030 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,255
1,972
2,184
2,891
2,301
49,098
NOTE 18. STOCK-BASED COMPENSATION
As of December 31, 2020, 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. On December 31, 2020, there were 3.0 million shares reserved and 2.3 million
shares available for future grant under our stock-based incentive plans.
80
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
On May 4, 2017, the stockholders approved the Company’s 2017 Omnibus Incentive Plan ("the 2017 Plan")
and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan are now available for
issuance under the 2017 Plan. The 2017 Plan and 2008 Plan provide for the grant of stock options, stock appreciation
rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights.
Any of the awards issued may be issued as performance-based awards to align stock compensation awards to the
attainment of annual or long-term performance goals. As of December 31, 2020, there were 2.1 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 was as follows:
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,272 $
2020
Years Ended December 31,
2019
7,327 $
2018
9,703
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") were approximately
5%, 10% and 10% for the years ended December 31, 2020, 2019 and 2018, respectively.
Restricted Stock Units
The fair value of our RSUs is determined based upon the closing fair market value of our common stock on the
grant date. Changes in the unvested RSUs were as follows:
RSUs outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RSUs outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Weighted-
Average
Grant
Value
Shares
534 $
342
(152)
(116)
608 $
56.56
59.51
57.14
58.10
58.15
The total intrinsic value of RSUs converted to shares for the years ended December 31, 2020, 2019 and 2018
were $9.2 million, $8.3 million, and $13.6 million, respectively. As of December 31, 2020, there was $7.8 million of
total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected
to be recognized through November 2023, with a weighted-average remaining vesting period of 1.0 years.
81
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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 ten years.
Changes in our outstanding stock options were as follows:
Options outstanding at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020
Weighted-
Average
Exercise
Price
Shares
185 $
(33)
—
(5)
147 $
21.56
13.43
—
15.43
23.63
The total intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018 was $1.9
million, $1.6 million and $4.1 million, respectively. All options outstanding on December 31, 2020 are vested and have
aggregate intrinsic value of $10.8 million and weighted-average remaining contractual life of 3.9 years.
The following table summarizes information about the stock options outstanding on December 31, 2020:
Range of Exercise Prices
$9.51 to $12.44 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$18.77 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$26.32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$9.51 to $26.32 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number
Outstanding
Options Outstanding and Exercisable
Weighted-Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
5
43
99
147
0.67 years
3.75 years
4.10 years
3.89 years
$
$
11.18
18.77
26.32
23.63
Employee Stock Purchase Plan
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. On December 31, 2020, 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, 2020, there was $0.4 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 $0.9 million for the year
ended December 31, 2020 and $0.5 million for the year ended December 31, 2019, and $0.4 million for the year ended
December 31, 2018.
82
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
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:
2020
Years Ended December 31,
2019
2018
Risk-free interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield rates . . . . . . . . . . . . . . . . . . . . . . . .
Expected term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.10% - 0.18% % 1.62% - 2.31 % 2.10% - 2.56 %
— %
— %
— %
0.5 years
70.1 %
0.5 years
41.3 %
0.5 years
38.0 %
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.
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. 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:
Applied Materials, Inc. . . . . . . . . . . . . . . . .
Lam Research . . . . . . . . . . . . . . . . . . . . . . .
2020
Years Ended December 31,
2019
$ 248,350 17.5 % $ 164,724 20.9 % $ 258,027 35.9 %
15.2 %
141,778
109,005
10.0 %
11.2 %
88,251
2018
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:
December 31,
2020
2019
Applied Materials, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 33,402 14.2 % $ 36,849 14.9 %
15.4 %
Nidec Motor Corporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.4 % 38,071
24,344
Our sales to Applied Materials, Inc., Lam Research Corp., 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.
83
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
The following table summarizes long-lived assets by geographic area:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31,
2019
2020
253,115 $ 239,511
301,020
283,549
60,847
59,925
597,511 $ 600,456
Long-lived assets include property and equipment, operating lease right-of-use assets, goodwill, and other
intangible assets.
NOTE 21. 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 Term Loan Facility and Revolving 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, 2020, the effective interest rate
for the Revolving Facility and Term Loan Facility was 1.26%, and the effective rate for the unused line fee was 0.10%.
As of December 31, 2020, 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 the carrying value of $322.0 million as of
December 31, 2020.
In connection with entering into 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 recognized additional interest expense for the remaining unused line of credit
fees at the time of termination of the Loan Agreement.
The debt obligation on our Consolidated Balance Sheets consists of the following:
Debt:
Term Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Less: debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
323,750 $
(1,704)
322,046
(17,500)
304,546 $
341,250
(2,223)
339,027
(17,500)
321,527
December 31,
2020
December 31,
2019
84
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)
(in thousands, except per share amounts)
Contractual maturities of the Company’s debt obligations, excluding amortization of debt issuance costs, as of
are as December 31, 2020 follows:
Year Ending December 31,
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Amount
17,500
17,500
17,500
271,250
323,750
Interest expense and unused line of credit fees were recorded in Other income (expense), net, in our
Consolidated Statements of Operations as follows:
Years Ended December 31,
2019
2,994 $
186
236
3,416 $
2020
5,080 $
519
153
5,752 $
2018
—
—
228
228
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unused line of credit fees and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
85
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 and 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, 2020. 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
respects, with Advanced Energy’s objectives. We have completed a comprehensive review of Artesyn’s internal control
over financial reporting and implemented changes to better align and integrate Artesyn’s reporting and controls with the
rest of Advanced Energy.
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, 2020, 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, 2020.
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, 2020.
86
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during 2020 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, 2020, 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, 2020, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States) (PCAOB), the Consolidated Balance Sheets of the Company as of December 31, 2020 and 2019, the
related Consolidated Statements of Operations, Comprehensive Income, Stockholders’ Equity, and Cash Flows for each
of the two years in the period ended December 31, 2020, and the related notes and our report dated February 23,
2021 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
87
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
February 23, 2021
ITEM 9B. OTHER INFORMATION
None.
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 2021 Annual Meeting of Stockholders (the
"2021 Proxy Statement"), as set forth below. The 2021 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 2021 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, 2020 were as follows:
Yuval Wasserman, 66, has served as President and 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
88
Association of Corporate Directors ("NACD") Governance Fellow. Mr. Wasserman has a BSc degree in chemical
engineering from Ben Gurion University in Israel.
Paul Oldham, 57, joined the Company in May 2018 as its Executive Vice President and 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
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.
Thomas O. McGimpsey, 59, joined the Company in April 2009 and currently serves as its Chief Administration
Officer, Executive Vice President of Corporate Development & Corporate Secretary. Mr. McGimpsey was previously
the Executive Vice President – General Counsel, Government Affairs & Corporate Secretary. Mr. McGimpsey was also
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 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.
Dana Huth, 59, is Advanced Energy’s Executive Vice President & Chief Revenue Officer. Prior, Mr. Huth
served as President of Artesyn Embedded Power from May 2019 until September 2019 when acquired by Advanced
Energy in September 2019. Before leading Embedded Power, Mr. Huth served as President of consumer business and
global sales at Artesyn Embedded Technologies from January 2014 to May 2019, and as President of global sales, key
accounts and distribution at Emerson Embedded Power from January 2008 to January 2014. At Motorola, Mr. Huth held
senior management positions from February 2004 to January 2008, including Vice President of worldwide sales and
market development, Vice President of global accounts, and Vice President of sales for the Asia Pacific region and
Japan. Mr. Huth also spent more than 19 years with Avnet, Inc., one of the world’s largest value-added distributors and
systems integrators of electronic components, computer products, and embedded technology. He held various positions
which included Senior Vice President and leading Avnet’s global partnership with IBM.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth in the 2021 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 2021 Proxy Statement under the headings “Security Ownership of Certain
Beneficial Owners and Management" and "Equity Compensation Plan Information" is incorporated herein by reference.
89
Securities Authorized for Issuance under Equity Compensation Plans
The following table summarizes information about the equity incentive compensation plans as of December
31, 2020. All outstanding awards in the table shown below relate to our common stock.
Plan Category
Equity compensation plans approved by security holders . . . . . . . . . . . . .
Equity compensation plans not approved by security holders . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(A)
(B)
Number of
securities to
be issued
upon
exercise of
outstanding
options,
warrants
and rights
146,614 $
—
146,614 $
Weighted
average
exercise
price of
outstanding
options,
warrants
and rights
23.63
—
23.63
(C)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column A)
2,286,448 (1)
—
2,286,448
(1) This number includes 200,409 shares available for future issuance under the Employee Stock Purchase Plan
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not applicable.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information set forth in the 2021 Proxy Statement under the caption "Ratification of the Appointment of
Ernst & Young LLP as Advanced Energy’s Independent Registered Public Accounting Firm for 2021" is incorporated
herein by reference.
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:
See Index to Financial Statements at Item 8 herein.
2. Financial Statement Schedules for the years ended December 31, 2020, 2019 and 2018
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.
90
(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. (13)**
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. (16)**
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. (18)**
3.1 Amended and Restated Certificate of Incorporation of Advanced Energy Industries, Inc. (17)
3.2 Second Amended and Restated By-Laws of Advanced Energy Industries, Inc. (21)
4.1 Form of Specimen Certificate for Common Stock. (1)
4.2 Description of Advanced Energy Industries, Inc. Securities. (19)
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)*
10.12 Form of 2020 Short-Term Incentive Plan. (19)*
10.13 2017 Long-Term Incentive (LTI) Plan. (10)*
10.14 2017 Short-Term Incentive (STI) Plan. (11)*
10.15 2017 Omnibus Incentive Plan. (10)*
91
10.16 2008 Omnibus Incentive Plan, as amended May 4, 2010. (5)*
10.17 Employee Stock Purchase Plan. (1)*
10.18 Offer Letter, dated September 28, 2014, by and among Advanced Energy Industries, Inc. and Yuval
Wasserman. (8)*
10.19 Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials, Inc.
dated August 29, 2005. (3)+
10.20 Shipping Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc.
and Applied Materials, Inc. dated August 29, 2005. (3)+
10.21 Bridge Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc.
and Applied Materials, Inc. dated January 28, 2011. (6)+
10.22 Fixed Dollar Accelerated Share Repurchase Transaction, dated November 6, 2015, between Advanced
Energy Industries, Inc. and Morgan Stanley & Co. LLC. (9)
10.23 Offer Letter to Paul Oldham, dated March 26, 2018. (12)*
10.24 Form of Executive Change in Control and General Severance Agreement. (14)
10.25 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.
(18)
10.26
ISDA 2002 Master Agreement, by and between Advanced Energy Industries, Inc. and HSBC Bank USA,
National Association, dated as of April 2, 2020 (the "HSBC ISDA Master Agreement"). (20)
10.27
ISDA 2002 Master Agreement, by and between Advanced Energy Industries, Inc. and Citibank, N.A.,
dated as of April 7, 2020 (the "Citibank ISDA Master Agreement"). (20)
10.28 Schedule to the HSBC ISDA Master Agreement. (20)
10.29 Schedule to the Citibank ISDA Master Agreement. (20)
10.30 Rate Swap Transaction Confirmation, by and between Advanced Energy Industries, Inc. and HSBC Bank
USA, National Association, dated April 7, 2020. (20)
10.31 Rate Swap Transaction Confirmation, by and between Advanced Energy Industries, Inc. and Citibank,
N.A., dated April 9, 2020. (20)
10.32 Amendment dated January 11, 2021 to the Schedule to the ISDA 2002 Master Agreement dated
April 2, 2020 between HSBC Bank USA, National Association and Advanced Energy Industries, Inc.
16.1 Letter from Grant Thornton LLP. (15)
21.1 Subsidiaries of Advanced Energy Industries, Inc.
23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.
92
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.SCH XBRL Taxonomy Extension Schema 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 (formatted as Inline XBRL with applicable taxonomy extension
information contained in Exhibits 101)
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
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.
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.
93
(13) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed
July 30, 2018.
(14) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed
August 6, 2018.
(15) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed March
27, 2019.
(16) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed May
15, 2019.
(17) 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.
(18) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed
September 10, 2019.
(19) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2019
(File No. 000-26966), filed March 2, 2020.
(20) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed April
10, 2020.
(21) Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed May
20, 2020.
* Compensation Plan
** Schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K.
+ Confidential treatment has been granted for portions of this agreement.
ITEM 16. FORM 10-K SUMMARY
None.
94
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: February 23, 2021
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
Chief Executive Officer and Director
(Principal Executive Officer)
Date
February 23, 2021
/s/ Yuval Wasserman
Yuval Wasserman
/s/ Paul Oldham
Paul Oldham
/s/ Grant H. Beard
Grant H. Beard
Chief Financial Officer and Executive Vice President
February 23, 2021
(Principal Financial and Accounting Officer)
Chairman of the Board
February 23, 2021
/s/ Frederick A. Ball
Frederick A. Ball
Director
/s/ Anne DelSanto
Anne DelSanto
Director
/s/ Tina M. Donikowski
Tina M. Donikowski
Director
/s/ Ronald C. Foster
Ronald C. Foster
Director
/s/ Edward C. Grady
Edward C. Grady
Director
/s/ Lanesha Minnix
Lanesha Minnix
Director
/s/ Thomas M. Rohrs
Thomas M. Rohrs
Director
/s/ John A. Roush
John A. Roush
Director
95
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
February 23, 2021
Advanced Energy Industries, Inc.
1595 Wynkoop Street, Suite 800
Denver, CO 80202
advancedenergy.com