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Item 7. Management’s Discussion and Analysis

2024-02-20 compared with 2023-02-17 · 245 added, 260 removed, 124 unchanged (80% of the section changed)

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The following section discusses our results of operations for 2023 and 2022 and year-to-year comparisons between those periods.

Discussions of 2020 and year-to-year comparisons between 2021 and 2020 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 Form 10-K for the year ended December 31, 2021.

Advanced Energy provides highly engineered, mission-critical, precision power conversion, measurement, and control solutions to our global customers.

Company Overview

Advanced Energy provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers.

We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment.

Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications .

Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition.

Our broad portfolio of high and low voltage power products are used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data centers computing, networking, and telecommunications.

We also supply related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets.

Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies using our products.

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.

Summary of Operations and 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.

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 intangible assets.

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 U.S.

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 .

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.”

Inventories are valued at the lower of cost (using the first-in, first-out method) or net realizable value.

General market conditions, as well as our design activities, can cause certain products to become obsolete and we adjust our inventory carrying value for estimated excess and obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based on projected end-user demand, which is determined by considering historical usage, customer orders and forecast, and qualitative considerations such as market and economic conditions.

The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product.

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.

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.

We believe 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 expenses.

Business Environment and Trends

Advanced Energy is organized on a global, functional basis and operates in the single segment for power electronics conversion products.

We are organized on a global, functional basis and operate as a single segment of power electronics conversion products.

Within this segment, our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.

In April 2022, we acquired SL Power.

Acquisitions in Part II, Item 8 “Financial Statements and Supplementary Data.” This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.

The demand environment in each of our markets is impacted by various market trends, customer buying patterns, design wins, macroeconomic and other factors.

During 2022, growth in all four of our markets was strong driven by investment in new technology, capacity, and macroeconomic recovery.

However, we were limited in our ability to fulfill this demand due to supply chain shortages for critical integrated circuits, resulting in longer lead times for our products.

These supply constraints have led to longer lead times in procuring materials and subcomponents and, in some cases, meaningfully higher costs for the subcomponents.

We have implemented measures to improve the supply of critical materials and components and to mitigate the impact of these higher input costs, and these actions have enabled us to better meet customer demand.

However, it is not clear how long global supply constraint conditions will continue, how quickly the supply chain will recover, the extent to which our mitigating actions will be successful, or to what extent we can recover our higher costs.

One result of the supply chain constraints is that our backlog throughout the first three quarters of the year remained above backlog at the end of 2021.

Backlog declined at the end of 2022 to $875.3 million, a decrease as compared to $1,093.0 million at the end of the third quarter of 2022, driven by approximately 40% of sequential decline from China-based semiconductor customers’ orders as a result of U.S.

export controls introduced in October 2022, and the remainder from lower demand and changes in ordering patterns from our semiconductor customers as we improved our lead times.

Despite the decline at the end of 2022, backlog remains high compared to previous years.

COVID related disruptions did materially impact our liquidity, ability to access capital, ability to comply with our debt covenants or the fair value of our assets in 2022.

On April 25, 2022, we acquired 100% of the issued and outstanding shares of capital stock of SL Power, which is based in Calabasas, California.

The results of operations of SL Power are included in our consolidated results from the acquisition date forward.

This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.

Acquisitions in Part II, Item 8 “Financial Statements and Supplementary Data.”

Business Environment and Trends

2023 Summary Results and Key Activities

For the year ended December 31, 2023, our revenue was $1,655.8 million, representing a decline of 10.3% as compared to 2022.

The decline was attributable to lower revenue from our Semiconductor Equipment and Data Center Computing markets, both of which experienced a reduced demand environment starting in the fourth quarter 2022 and continued into 2023.

These declines were partially offset by higher revenues in the Industrial and Medical and Telecom and Networking markets, as improved supply of critical components during 2023 enabled us to fulfill demand and reduce backlog for our products.

For more details on the trends in our end markets, see “End Markets Summary and Trends” elsewhere in this Item 7.

In 2023, we reported higher operating expenses of $478.7 million, primarily attributable to $27.0 million of charges related to our restructuring initiatives which are focused on optimizing manufacturing, support operations and to a lesser extent a general workforce reduction to align to our revenue levels.

These actions should largely be complete in 2024 and are expected to enable a more efficient and cost-effective operating structure.

Although we experienced a challenging demand environment related to our revenue, we achieved $212.9 million cash flow from continuing operating activities as we managed our working capital and core spending levels, resulting in a $25.4 million increase in cash flow from operating activities compared to 2022.

On September 12, 2023, we completed a private, unregistered offering of $575.0 million aggregate principal amount 2.50% convertible senior notes (“Convertible Notes”) and received net proceeds of approximately $561.1 million after the discount for the initial purchasers’ fees.

We intend to use the net proceeds to fund future growth, which

may include strategic acquisitions, opportunistically repay existing outstanding indebtedness, repurchase our common stock, or general corporate purposes.

Long-Term Debt in Part II, Item 8 “ Financial Statements and Supplementary Data ” and Liquidity and Capital Resources below.

Concurrent with the Convertible Notes issuance, we repurchased 0.4 million shares of common stock for $40.1 million and entered into hedge and warrant contracts with respect to our common stock (see Note 5.

Stockholders’ Equity and Earnings Per Share and Note 18.

Long-Term Debt in Part II, Item 8 “ Financial Statements and Supplementary Data ”).

End Markets Summary and Trends

As further described below, the demand environment in each of our markets is impacted by macroeconomic conditions, various market trends, customer buying patterns, design wins, and other factors.

Entering 2024, although we are experiencing a lower demand environment, we continue to believe that the long-term market growth drivers support our long-term strategy, research and development efforts, and capital investments.

However, in the short-term it is unclear how the macroeconomic conditions, including higher interest rates impacting end customer’s capital investment and potential macroeconomic weakness, will affect our customer demand and revenue.

Semiconductor Equipment Market

The Semiconductor Equipment market is driven by the long-term growing need for more semiconductor production capacity and new process technologies.

While the semiconductor and semiconductor equipment industries are inherently cyclical, over the long-term, integrated circuits content is growing across many industries driven by increased demand for processing, storing, and transmitting the growing amount of data.

To meet the growing demand, the chip industry continues to invest in production capacity for both leading-edge and trailing-edge nodes logic devices, the latest memory devices, back-end test, and advanced wafer-level packaging.

The industry’s transition to advanced technology nodes and to increased layers in memory devices require an increased number of plasma-based 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 shrinking device geometry and increasing aspect ratios in advanced 3D devices, more advanced RF and DC plasma generation technologies are needed.

We strive to provide a broad range of best-in-class, industry-leading RF and DC power solutions.

Beyond etch and deposition processes, growing complexity at advanced nodes also drives a higher number of other process steps across the wafer fab, including inspection, metrology, thermal, ion implantation, and semiconductor test and assembly, 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.

Our strategy in the Semiconductor Equipment market is to defend our proprietary positions in our core applications by capturing new design and product generations, growing our market position in applications where we have lower market share, such as remote plasma source and dielectric etch, and leveraging our product portfolio in areas including embedded power, high voltage power systems, and critical sensing and controls to grow our market share and content at our original OEM customers.

The Semiconductor Equipment market continued to experience demand growth driven by investments in both leading and trailing edge semiconductor capacity throughout the first three quarters of 2022.

Advanced Energy participated in the market growth while overcoming supply chain challenges and delivered record revenue from the Semiconductor Equipment market in 2022.

Starting in the fourth quarter of 2022, the market entered a cyclical downturn due to changing macroeconomic conditions, overcapacity in the market for memory devices, general semiconductor inventory digestion resulting in falling fab utilization and reduced fab expansion plans, and new export restrictions to China for certain semiconductor equipment.

These factors adversely impacted our demand, backlog, and revenue in the fourth quarter of 2022 and are expected to continue in 2023.

We believe long-term drivers for demand growth in this market will eventually resume, due to the need to invest in new fab capacity to support growing demand for semiconductor devices in a wide range of applications, the continued transition to next generation processing nodes, increased complexity of advanced processes requiring more complex and innovative power solutions, and the regionalization of some semiconductor capacity.

Beginning in the fourth quarter of 2022, the Semiconductor Equipment market entered a downturn due to a combination of unfavorable macroeconomic conditions, overcapacity in the market for memory devices, prolonged weakness in demand for consumer electronics, general semiconductor inventory consumption resulting in falling manufacturing utilization, and new U.S.

export restrictions to China for certain semiconductor equipment.

During 2023, these factors continued to impact our revenue, but we were able to partially offset the market weakness by growing revenues in areas such as high voltage and service.

Entering 2024, we expect the factors driving the market downturn to continue in the near-term.

As mentioned above, we believe the long-term growth drivers for demand in this market will resume, due to the need for more manufacturing capacity to support growing demand for semiconductor devices and the related capital equipment.

Industrial and Medical Market

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.

Growth in the Industrial and Medical market is driven by investment in complex manufacturing processes or automation, increased adoption of smart power, sensing, and control solutions across many industrial applications, new investments in clean and sustainable technologies, and growing investment in medical devices and life science equipment.

Our customers in the Industrial and Medical market are primarily global and regional original equipment manufacturers, incorporating 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, industrial production, and large-scale connected light-emitting diode applications.

Examples of products sold into the Industrial and Medical market include high voltage and low voltage power supplies used in applications such as medical devices, scientific instrumentation and industrial equipment, power control modules and thermal instrumentation products for material fabrication, production process control and many precision industrial sensing applications.

Our strategy in the Industrial and Medical market is to expand our product offerings and channel reach, leveraging common platforms, derivatives, and customizations to further penetrate a broader set of applications.

During 2022, we saw increased demand in the Industrial and Medical market as our customers increased investments in their production capacity and the medical technology industry recovered from the pandemic-related slowdown.

Although overall customer demand increased, supply constraints of critical components limited our ability to fulfill product shipments at the level of customer demand and resulted in increased backlog.

Going into 2023, we expect product delivery and revenue levels will depend on the level of customers’ demand and on resolving supply chain constraints.

It is not clear how long these supply chain constraints will persist or on what timeline our supply chain will recover.

We delivered record revenue in the Industrial and Medical market in 2023.

The year started with strong demand driven by customer investments in production capacity.

In addition, increased supply of critical components allowed us to fulfill the higher level of customer demand and drove the record quarterly revenues in both the first and second quarter of 2023.

However, in the second half of 2023 we began to see lower demand in this market largely driven by macroeconomic factors, including higher interest rates, which has adversely impacted end customer’s capital investment.

Entering 2024, we expect weaker macroeconomics condition to continue to impact our revenue in the near-term.

Data Center Computing Market

Advanced Energy serves the Data Center Computing market with industry leading power conversion products and technologies, which we sell to OEMs and original design manufacturers (“ODMs”) of data center server and storage systems, 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 traditional enterprise on-premises computing to the data center, driving investments in data center infrastructure.

Beyond the cloud, demand for edge computing is also growing, driven by the need for faster processing, lower latency, and higher data security at edge applications.

In addition, the data center industry has begun transitioning from 12 Volt to 48 Volt infrastructure in data center server racks to improve overall power efficiency.

Advanced Energy benefits from these trends by being an industry leader in providing high-efficiency 48 Volt server power solutions to the data center industry.

Further, the rapid growth and adoption of artificial intelligence and machine learning are driving accelerated demand for server and storage racks with increased power density and higher efficiency, which complements Advanced Energy’s strengths.

With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, our strategy in the Data Center and Computing market is to penetrate selected customers and applications based on our differentiated capability and competitive strengths in power density, efficiency, and controls.

Customer demand for our products rose during 2022 with continued demand for cloud and network applications.

In addition, we were able to secure additional critical components compared to the prior year, allowing us to deliver higher revenue in the Data Center Computing market.

Despite the improved performance, the supply of the critical components remains highly constrained, impacting our ability to fulfill product shipments at the level of customer demand.

Although we expect lower overall demand in 2023 as cloud and enterprise customers slow investments to digest capacity investments, we continue to be supply constrained and our performance will be partially dependent on our ability to secure critical components and customers’ timing of new programs.

It is not clear how long these supply chain constraints will persist or how quickly our supply chain will recover.

As compared to revenue levels exiting 2022, in the first half of 2023, we saw reduced revenues in the Data Center Computing market due to slowing demand in the enterprise server and storage market as customers delayed investments.

Increased demand for high end computing applications, such as artificial intelligence, from some of our customers led to increased revenue in the second half of 2023.

These investments can have disparate cycles, and it is not clear how quickly our enterprise server and storage customers will return to their historical level of investments.

Telecom and Networking Market

Our customers in the Telecom and Networking market 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 are investing in 5G infrastructure, and this trend is expected to drive demand for our products into the Telecom and Networking market.

In datacom, demand is driven by networking investments by telecom service providers and enterprises upgrading their networks, as well as cloud service providers and data centers investing in their networks for increased bandwidth.

Our strategy in the Telecom and Networking market is to optimize our portfolio of products to more differentiated applications, and to focus on 5G infrastructure applications.

Revenues in the Telecom and Networking market increased in 2022 compared to the same period in the prior year due to increased customer demand and our ability to secure additional critical components.

We expect demand to remain stable in this market in 2023, but supply chain constraints continue to prevent us from fulfilling product shipments at the level of customer demand.

It is not clear how long these supply shortages will persist or how quickly our supply chain will recover.

During the period, substantially improved supply of critical components allowed us to largely fulfill outstanding demand from the prior year and drove strong revenue growth in the Telecom and Networking market as compared to

However, leading companies in this market have reported end user weakness, and we expect and plan for a slower demand environment in 2024.

Results of Continuing Operations

The analysis presented below is organized to provide the information we believe will be helpful for 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 Part II, Item 8 “Financial Statements and Supplementary Data” of this annual report on Form 10-K.

The following table sets forth certain data derived from our Consolidated Statements of Operations (in thousands):

Year Ended December 31,

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

The following table sets forth the percentage of sales represented by certain items reflected in our Consolidated Statements of Operations:

Also included in the following analysis are measures that are not in accordance with accounting principles generally accepted in the United States of America (“U.S.

A reconciliation of the non-GAAP measures to U.S.

GAAP is provided below.

The following table summarizes our Consolidated Statements of Operations and as a percentage of revenue (in thousands):

Year Ended December 31,

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Operating income from continuing operations

Interest income

Interest expense

Other income (expense), net

Income from continuing operations, before income taxes

Provision for income taxes

Income from continuing operations, before income tax

Income tax provision (benefit)

Income from continuing operations

The following tables summarize net sales and percentages of sales by markets (in thousands):

The following tables summarize net revenue and percentages of revenue by markets (in thousands):

Year Ended December 31,

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Telecom and Networking

Total revenue decreased from the same period in the prior year due to market downturns in the Semiconductor Equipment and Data Center Computing markets, which were partially offset by revenue increases in the Industrial and Medical and the Telecom and Networking markets driven by improved supply of certain components.

Backlog represents outstanding orders for products we expect to deliver within the next 12 months.

As of December 31, 2023, our backlog was $406.8 million, which represents a decrease of $468.5 million or 53.5% compared to the $875.3 million balance as of December 31, 2022.

Backlog levels have historically averaged less than one quarter of revenue.

However, during the supply chain shortages backlog increased substantially due to long lead times.

Backlog at the end of 2023 returned to a normalized level and decreased from the end of 2022 primarily due to shorter lead times of our products, allowing some of our customers to substantially reduce placing orders for products that we have resumed stocking in customer-specific hubs or for targeted delivery beyond six months.

Backlog at any particular date is not necessarily indicative of actual revenue which may be generated for any succeeding period.

In addition, there is uncertainty of the timing of when backlog can convert into revenue, and our customers can cancel, change, or delay product purchase commitments with little or no notice.

Revenue by Market

Year Ended December 31,

Change 2023 v.

(in thousands)

Semiconductor Equipment

The decrease in Semiconductor Equipment revenue was primarily due to a cyclical downturn in the semiconductor industry and the U.S.

export controls restricting shipments of equipment to Chinese semiconductor customers.

The revenue decline was partially mitigated by strong service revenues and growth in certain applications, such as high voltage power supplies.

Year Ended December 31,

Change 2023 v.

(in thousands)

Industrial and Medical

The increase in Industrial and Medical revenue was primarily due to improved materials availability, relatively stable demand for our portfolio of products in the first half of the year, and incremental revenues on new design wins.

Year Ended December 31,

Change 2023 v.

(in thousands)

Data Center Computing

The decrease in Data Center Computing revenue was due to the cyclical downturn in the data center server and storage market, partially offset by increased demand for advanced computing applications by some customers.

Year Ended December 31,

Change 2023 v.

(in thousands)

Telecom and Networking

OPERATING EXPENSE

The following table summarizes our operating expenses (in thousands) and as a percentage of sales:

The increase in Telecom and Networking revenue was due to substantially improved material availability, allowing us to largely fulfill outstanding demand from the prior year.

Gross Profit and Gross Margin

Year Ended December 31,

Change 2023 v.

(in thousands)

The decrease in gross profit as a percentage of revenue was largely due to the decline in revenue, unfavorable product mix, and higher operating costs based on investments made in 2023, partially offset by lower premiums and related recoveries for securing critical parts.

Gross margin percentage declined year over year primarily due to unfavorable product mix.

This decline was partially offset by lower premiums paid to brokers for scarce parts.

Premium recoveries generate revenue but no gross profit.

As a result, they are dilutive to our gross margin.

Premium recoveries impacted gross margins by approximately 35 basis points in the current year, compared to approximately 140 basis points in the prior period.

Additionally, when including higher material costs not recovered, gross margin was impacted by approximately 70 basis points in the current year, compared to approximately 200 basis points in the prior period.

We expect that the amount of higher material costs and related recoveries will abate as the supply chain normalizes and scarce parts become more available from original manufacturers.

Operating Expenses

The following table summarizes our operating expenses (in thousands) and as a percentage of revenue:

Years Ended December 31,

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Amortization of intangible assets

Restructuring charges

Restructuring, asset impairments, and other charges

Total operating expenses

SALES AND BACKLOG

Sales increased $389.5 million, or 26.8%, to $1,845.4 million, as compared to $1,456.0 million in the prior year.

The increase in sales was primarily due to increased demand for our products across all four of our markets and measures we took to improve material availability and capacity, which allowed us to better meet higher demand.

In addition, premium recoveries, which are revenues we collected from our customers to partially reimburse us for premiums we paid to secure scarce materials, represented $68.3 million in revenue in 2022 compared to $14.3 million in 2021.

The acquisition of SL Power contributed $50.3 million to our total sales in 2022.

For additional information, see Note 2.

Acquisitions in Part II, Item 8 “Financial Statements and Supplementary Data.”

The following table summarizes our backlog (in thousands):

Backlog represents outstanding orders for products we expect to deliver within the next 12 months.

Backlog at the end of 2022 decreased from the end of 2021 primarily due to the impact of the China export controls regulation announced in October 2022 by the U.S.

Commerce Department, lower demand in the Semiconductor Equipment market, and changes in order patterns for our semiconductor customers as we improved lead times, which occurred in the fourth quarter of 2022.

Backlog in our other markets increased for the year.

We believe the current backlog levels provide some level of revenue protection if demand levels are reduced due to macroeconomic factors.

We expect to bring our backlog back into normalized levels of $400 million to $500 million over the next several quarters as parts availability improves and lead times are reduced.

Backlog at any particular date is not necessarily indicative of actual sales which may be generated for any succeeding period.

In addition, there is uncertainty of the timing of when backlog can convert into revenue due to continuing supply constraints.

Because our customers generally order on a purchase order basis, they can typically cancel, change, or delay product purchase commitments with little or no notice.

Sales by Market

Sales in the Semiconductor Equipment market increased $220.6 million, or 31.1%, to $930.8 million, as compared to $710.2 million in the prior year.

The increase in sales was primarily due to the growth in the Semiconductor Equipment market, particularly highlighted by the 40% increase in sales to our top two customers who are primarily in this market.

In addition, we improved our ability to secure critical components and increased delivery to our customers in this market.

Sales in the Industrial and Medical market increased $85.6 million, or 25.1%, to $426.8 million, as compared to $341.2 million in the prior year.

The increase in sales was primarily due to the acquisition of SL Power, which added incremental sales of $46.5 million in this market.

The remainder of the increase in revenue was due to increased demand for our portfolio of products across our medical and industrial applications and improved material availability.

Sales in the Data Center Computing market increased $56.5 million, or 20.9%, to $327.5 million, as compared to $270.9 million in the prior year.

The increase in Data Center Computing market sales was due to better supply availability, enabling us to partially fulfill product shipments against higher customer demand.

Sales in the Telecom and Networking market increased $26.7 million, or 20.0%, to $160.4 million as compared to $133.7 million in the prior year.

The increase in sales was primarily due to improved material availability, allowing us to meet the increased demand.

GROSS PROFIT AND GROSS MARGIN

Gross profit dollars in 2022 increased by $143.2 million to $675.5 million, or 36.6% of revenue, as compared to prior year’s $532.3 million, or 36.6% of revenue, primarily driven by higher revenue.

Gross margin percentage remained flat year over year as the benefit of higher volume and favorable mix was offset primarily by higher material costs related to premiums paid to brokers for scarce parts.

Premium recoveries, which represent revenue at zero gross margin, impacted gross margins by approximately 140 basis points, compared to approximately 35 basis points in the prior year.

Additionally, higher material costs not recovered impacted gross margins

by approximately 200 basis points, compared to approximately five basis points in the prior year.

We expect that the amount of higher material costs and related recoveries will abate as the supply chain normalizes and scarce parts become more available from original manufacturers.

OPERATING EXPENSE

Research and Development

We perform 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 increased $29.2 million to $191.0 million, as compared to $161.8 million in the prior year.

The increase in research and development expense is primarily driven by increased headcount and compensation costs of $20.4 million, as we invest in new programs to maintain and increase our technological leadership and provide solutions to our customers’ evolving needs.

Year Ended December 31,

Change 2023 v.

(in thousands)

Research and development

The increase in research and development was primarily driven by increased headcount and compensation costs of $9.0 million, which was partially due to the SL Power acquisition.

In addition, during 2023, we incurred $2.2 million in higher program and material 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 increased $26.5 million to $218.5 million, as compared to $192.0 million in the prior year.

The increase in SG&A is primarily related to $16.9 million from increased headcount and associated costs including sales commissions and compensation driven by higher revenue and $6.0 million from the addition of SL Power.

Acquisitions in Part II, Item 8 “Financial Statements and Supplementary Data” for additional details.

Amortization of Intangibles

Amortization expense increased $4.1 million to $26.1 million, as compared to $22.1 million in the prior year.

The increase was primarily driven by incremental amortization of newly acquired intangible assets from the SL Power acquisition.

Year Ended December 31,

Change 2023 v.

(in thousands)

Selling, general, and administrative

The increase in selling, general, and administrative was primarily related to higher stock-based compensation cost and the addition of SL Power, partially offset by lower employee variable compensation expense.

Amortization of Intangible Assets

Year Ended December 31,

Change 2023 v.

(in thousands)

Amortization of intangible assets

The increase in amortization was primarily driven by incremental amortization of acquired intangible assets from the SL Power acquisition.

For additional information, see Note 2.

Acquisitions and Note 11.

Intangible Assets in Part II, Item 8 “Financial Statements and Supplementary Data.”

Restructuring

In the fourth quarter of 2022, management approved a restructuring plan (the “2022 Plan”), which is expected to further improve our operating efficiencies and drive the realization of synergies from our business combinations by consolidating our operations, optimizing our factory footprint including moving certain production into our higher volume factories, and reducing redundancies.

The majority of these actions impact our factory operations and should partially mitigate the impact of lower volumes on gross margins.

We anticipate the 2022 Plan will be substantially completed, and associated expenses will be incurred by 2024.

In 2018, we committed to a restructuring plan (the “2018 Plan”) to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to business combinations.

We incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, China and actions associated with synergies related to the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business (“Artesyn”).

substantially complete with the closure of our Shenzhen facility expected in 2023.

Intangible Assets and Goodwill in Part II, Item 8 “Financial Statements and Supplementary Data.”

Restructuring, Asset Impairments and Other Charges

Year Ended December 31,

Change 2023 v.

(in thousands)

Restructuring, asset impairments, and other charges

The increase is primarily driven by the initiation of 2023 Plan for which we incurred charges of $27.0 million in 2023.

We have several restructuring plans in process, including the following:

In 2023, we approved a plan intended to optimize and consolidate our manufacturing operations and functional support groups as well as a general reduction-in-force to align to our expenses to revenue levels (the “2023 Plan”).

We expect additional charges of $1.0 million to $2.0 million to be incurred in future periods through the second quarter of 2025.

We anticipate the 2023 Plan will be substantially completed by the end of 2024, with the final activities concluding by June 2025.

This plan was approved to further improve our operating efficiencies and drive the realization of synergies from our business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, reducing redundancies, and lowering our cost structure.

We anticipate the 2022 Plan will be substantially completed by the end of 2024.

For additional information, see Note 12.

Restructuring Costs in Part II, 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 $8.6 million in 2022, as compared to ($3.0) million in the prior year.

The increase in income between periods is primarily a result of higher unrealized foreign exchange gains of $4.2 million due to the strengthening U.S.

dollar compared to our other foreign currencies and a one-time gain on the sale of intellectual property from a previous acquisition.

This was partially offset by higher interest expenses because of increasing interest rates.

Provision for Income Taxes

Restructuring, Asset Impairments, and Other Charges in Part II, Item 8 “Financial Statements and Supplementary Data.”

Interest Income, Interest Expense, and Other Income (Expense), net

Year Ended December 31,

Change 2023 v.

(in thousands)

Interest income

Interest expense

Other income (expense), net

We experienced an increase in interest income on higher cash balances, due in part to proceeds from our issuance of Convertible Notes in the third quarter of 2023, ability to concentrate cash in investment accounts, and higher short term interest rates.

We experienced an increase in interest expense due to a higher interest rate on the portion of our Term Loan Facility subject to a variable interest rate and the issuance of our Convertible Notes.

The interest rate swap contracts expire on September 10, 2024.

After that date, the entire balance of our Term Loan Facility will be subject to a variable interest rate.

In addition, should we have future borrowings under our Revolving Facility, those borrowings would be subject to a variable rate.

Other income (expense), net consists primarily of foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items.

The decrease in income between periods was primarily a result of lower unrealized foreign exchange gains and a gain in 2022 from the sale of intellectual property from a previous acquisition that did not recur in 2023.

Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data” for information regarding our debt.

Income Tax Provision (Benefit)

The following table summarizes tax provision (benefit) (in thousands) and the effective tax rate for our income from continuing operations:

Years Ended December 31,

Income from continuing operations, before income taxes

Provision for income taxes

Income from continuing operations, before income tax

Income tax provision (benefit)

Effective tax rate

Our effective tax rate increased in 2022 compared to 2021, primarily driven by a change in tax law from the 2017 Tax Cuts and Jobs Act related to the capitalization of R&D expenses, as it impacts the net U.S.

tax on foreign operations, that went into effect in January 2022, offset by the benefit of earnings in foreign jurisdictions which are subject to lower tax rates.

The Inflation Reduction Act (“IRA”) and CHIPS and Science Act (“CHIPS Act”) were both enacted in August 2022.

The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases.

The CHIPS Act provides a variety of incentives associated with investments in domestic semiconductor manufacturing and related activities.

The IRA and the CHIPS Act are applicable for tax years beginning after December 31, 2022 and had no benefit to our consolidated financial statements for any of the periods presented, and we do not expect them to have a direct material impact on our future results of operations, financial condition, or cash flows.

Our effective tax rates differ from the U.S.

federal statutory rate of 21% for 2023 and 2022, primarily due to a valuation allowance release for certain deferred tax assets in 2023 and the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S.

tax on foreign operations in 2022.

The effective tax rate for 2023 was lower than the same periods in 2022 primarily due to a $25.6 million release of a deferred tax asset valuation allowance in 2023.

Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income.

We carefully monitor these factors and adjust our effective income tax rate accordingly.

The Organization for Economic Cooperation and Development is coordinating negotiations among more than 140 countries with the goal of achieving consensus around substantial changes to international tax policies, including the implementation of a minimum global effective tax rate of 15%.

Various countries have implemented the legislation as of January 1, 2024, and we are still evaluating the impact.

As additional jurisdictions enact such legislation, our effective tax rate and cash tax payments could increase in future years.

Non-GAAP Results

Management uses non-GAAP operating income and non-GAAP earnings per share (“EPS”) to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations.

We use these non-GAAP measures to assess performance against business objectives, make business decisions, including developing budgets and forecasting future periods.

We use these non-GAAP measures to assess performance against business objectives, and make business decisions, including developing budgets and forecasting future periods.

In addition, management’s incentive plans include these non-GAAP measures as criteria for achievements.

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The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S.

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 2017 Tax Cuts and Jobs Act.

The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based compensation, amortization of intangible assets, and long-term unrealized foreign exchange gains and losses.

In addition, we exclude discontinued operations and other non-recurring items such as acquisition-related costs, facility expansion and related costs, restructuring, asset impairments, and other charges, 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.

In addition, the tax effect also includes a discrete tax benefit associated with the release of a portion of our deferred tax asset valuation allowance.

Reconciliation of non-GAAP measure

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Facility expansion, relocation costs and other

Restructuring

Restructuring, asset impairments, and other charges

Non-GAAP operating expenses

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(in thousands, except per share amounts)

Income from continuing operations, less non-controlling interest, net of income taxes

Income from continuing operations, less non-controlling interest, net of income tax

Amortization of intangible assets

1 unchanged sentence

Facility expansion, relocation costs, and other

Restructuring

Restructuring, asset impairments, and other charges

Unrealized foreign currency gain

Acquisition-related costs and other included in other income (expense), net

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

Tax effect of non-GAAP adjustments, including certain discrete tax benefits

Non-GAAP income, net of income tax, excluding stock-based compensation

Stock-based compensation, net of tax

Non-GAAP income, net of income tax

Non-GAAP diluted earnings per share

Impact of Inflation

In previous years, inflation did not have a material impact on our operations.

However, more recently, we have experienced inflationary pressure from price increases in select components driven by factors such as higher global demand, supply chain disruptions, higher labor expenses, and increased freight costs.

In this environment, we are actively working with our customers to adjust pricing that helps offset the inflationary pressure on the cost of our components.

We have also been able to recover some premiums on pricing related to securing scarce materials with our customers, thus limiting the financial impact of inflationary pressures.

Reconciliation of non-GAAP measure

Year Ended December 31,

Per share earnings excluding certain items

Diluted earnings per share from continuing operations, as reported

Per share impact of non-GAAP adjustments, net of tax

Non-GAAP earnings per share

Liquidity and Capital Resources

We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives.

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, cash generated from current operations, and available borrowing capacity under the Revolving Facility (defined below).

The following table summarizes our cash, cash equivalents, and marketable securities (in thousands):

December 31, 2022

Cash and cash equivalents

Marketable securities

Total cash, cash equivalents, and marketable securities

We believe the above sources of liquidity will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, contractual obligations, debt repayment, share repurchase programs, and dividends for the next 12 months and on a long-term basis.

Our primary sources of liquidity continue to be our available cash, investments, cash generated from operations, and available borrowing capacity under the Revolving Facility (defined in Note 18.

Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data”).

As of December 31, 2023, our cash and cash equivalents total $1,044.6 million, while our available funding under our Revolving Facility is $200.0 million.

Additionally, we generated $212.9 million of cash flow from continuing operations in 2023.

We believe our sources of liquidity will be adequate to meet anticipated debt service, share repurchase programs, and dividends.

During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected revenue and demand.

Our capital expenditures are primarily directed towards manufacturing and operations and can materially influence our available cash for other initiatives.

In addition, we may, depending upon the number or size of additional acquisitions, seek additional debt or equity financing from time to time;

however, such additional financing may not be available on acceptable terms, if at all.

Credit Facility

In September 2019, in connection with the acquisition of Artesyn, we 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” and together with the Term Loan Facility, the “Credit Facility”).

In April 2020, we 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.

The interest rate swap contracts fixed a portion of the outstanding principal balance on our term loan to a total interest rate of 1.271%.

For information additional information, see Note 8.

Derivative Financial Instruments in Part II, Item 8 “Financial Statements and Supplementary Data.”

In September 2021, we amended the Credit Agreement whereby we borrowed an additional $85.0 million, which increased the aggregate amount outstanding under the Term Loan Facility to $400.0 million.

In addition, we increased the Revolving Facility capacity by $50.0 million to $200.0 million.

Both the Term Loan Facility and Revolving Facility mature on September 9, 2026.

The following table summarizes borrowings under our Credit Facility and the associated interest rate (in thousands, except for interest rates).

On September 12, 2023, we completed a private, unregistered offering of $575.0 million Convertible Notes and received net proceeds of approximately $561.1 million after the discount for the initial purchasers’ fees.

We intend to use the net proceeds to fund future growth, which may include strategic acquisitions, opportunistically repay existing outstanding indebtedness, repurchase our common stock, or general corporate purposes.

The following table summarizes our borrowings (in thousands, except for interest rates).

December 31, 2023

Interest Rate

Unused Line Fee

Term Loan Facility subject to a fixed interest rate due to interest rate swap

Term Loan Facility subject to a variable interest rate

Revolving Facility subject to a variable interest rate

Total borrowings under the Credit Agreement

Convertible Notes

Term Loan Facility at fixed interest rate due to interest rate swap

Term Loan Facility at variable interest rate

Total borrowings

The interest rate swap contracts expire on September 10, 2024.

After that date, the entire balance of our Term Loan Facility will be subject to a variable interest rate.

In addition, should we have future borrowings under our Revolving Facility, those borrowings would be subject to a variable rate.

As of December 31, 2023, we had $200.0 million in available funding under the Revolving Facility.

The Term Loan Facility requires quarterly repayments of $5.0 million plus accrued interest, with the remaining balance due in September 2026.

In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may also request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $250.0 million at identical terms to our existing Credit Facility.

For additional information on our Credit Facility, see Note 21.

Credit Facility in Part II, Item 8 “Financial Statements and Supplementary Data.”

In March 2021, the Board of Directors (the “Board”) declared the first quarterly cash dividend since our inception as a public company.

In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $115.0 million.

Any requested increase is subject to lender approval.

For more information see Note 18 Long-Term Debt in Part II, Item 8 “Financial Statements and Supplementary Data.” For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 7.

Derivative Financial Instruments in Part II, Item 8 “Financial Statements and Supplementary Data.”

During 2023, we paid quarterly cash dividends of $0.10 per share, totaling $15.2 million for the full year.

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Share Repurchases

To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements.

To repurchase shares of our common stock, we periodically enter into stock repurchase agreements.

The following table summarizes these repurchases:

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Average repurchase price per share

In July 2022, the Board of Directors approved an increase to the share repurchase plan that increased the remaining amount authorized for future repurchases to a maximum of $200.0 million with no time limitation.

At December 31, 2022, the remaining amount authorized by the Board of Directors for future share repurchases was $199.3 million.

The above table reflects a $40.1 million repurchase of our common stock that was concurrent with the Convertible Notes issuance.

Long-Term Debt in Part II, Item 8 “ Financial Statements and Supplementary Data .” At December 31, 2023, the remaining amount authorized by the Board for future share repurchases was $199.2 million with no time limitation.

A summary of our cash from operating, investing, and financing activities was as follows (in thousands):

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Net cash from operating activities from continuing operations was $212.9 million, an increase of $29.2 million, compared to $183.7 million in the prior year.

The increase is primarily due to an increase in net income.

This was partially offset by an unfavorable increase in net operating assets driven primarily by an increase in accounts receivable due to our strong revenue growth.

The increase is primarily due to a favorable decrease in accounts receivable and inventory.

This was partially offset by a decrease in net income driven primarily by slowing market demand.

Net Cash From Investing Activities

Net cash from investing activities in 2022 was ($208.3) million, driven by the following:

Net cash used in investing activities in 2023 was $64.8 million, driven by the following:

● $61.0 million in purchases of property and equipment as we invested in our manufacturing footprint and capacity;

● ($149.4) million for business combinations.

Net cash from investing activities in 2021 was ($47.3) million, and primarily related to investment in facilities and capacity.

● $3.7 million in purchase of long-term investments.

Net cash used in investing activities in 2022 was $208.3 million, driven by the following:

● $149.4 million paid for business combinations;

● $58.9 million in purchases of property and equipment as we invested in our manufacturing footprint and capacity.

Net Cash From Financing Activities

Net cash from financing activities in 2022 was ($61.9) million and included:

● ($15.2) million for dividend payments;

● ($20.0) million for repayment of long-term debt;

Net cash provided by financing activities in 2023 was $445.7 million, driven by the following:

● $561.1 million net proceeds from issuance of long-term debt;

● $74.9 million proceeds from sale of warrants;

● $115.0 million payment for purchase of note hedges;

● $40.0 million related to repurchases of our common stock;

The net cash from financing activities in 2021 was ($25.4) million and included:

● $83.7 million in proceeds from borrowings, net of debt-issuance costs paid;

● $20.0 million for repayments on long-term borrowing;

● $15.2 million for dividend payments.

● ($13.8) million for repayment of long-term debt;

The net cash used in financing activities in 2022 was $61.9 million, driven by the following:

● $26.6 million related to repurchases of our common stock;

● ($1.8) million related to stock-based award activities.

● $20.0 million for repayment of long-term debt;

● $15.2 million for dividend payments.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures in conformity with U.S.

GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported.

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.

We value inventories at the lower of cost or net realizable value, computed on a first-in, first-out basis.

The determination of projected end-user demand requires the use of estimates and assumptions related to projected unit sales for each product.

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.

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 more likely than not realize the benefits of these deductible differences.

Due to uncertainties in any tax audit outcome, our estimates of the ultimate settlement of our unrecognized tax positions may change and the actual tax benefits may differ significantly from the estimates.

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.

For more details see Note 4.

Income Taxes in Part II, Item 8 “Financial Statements and Supplementary Data.”

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 intangible assets.

Pursuant to U.S.

Off-Balance Sheet Arrangements

As of December 31, 2022, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

As of December 31, 2023, we did not have any off-balance sheet arrangements pursuant to Regulation S-K.

Contractual Obligations

In the normal course of business, we enter into contracts and commitments that obligate us to make payments in the future.

Information regarding our obligations relating to income taxes, lease obligations, pension liabilities, and debt are provided in Note 5.

Information regarding our obligations relating to income taxes, lease obligations, pension liabilities, and debt is provided in Note 4.

Income Taxes , Note 14.

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Employee Retirement Plans and Postretirement Benefits, and Note 18.

Credit Facility , respectively, in Part II, Item 8 “Financial Statements and Supplementary Data.”

Long-Term Debt , respectively, in Part II, Item 8 “Financial Statements and Supplementary Data.”

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”).

From time to time, updates to the Accounting Standards Codification are communicated through issuance of an Accounting Standards Update.

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.

To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1.

To understand the impact of recently issued guidance from the Financial Accounting Standards Board (“FASB”) or other standards setting bodies, whether adopted or to be adopted, please review the information provided in Note 1.

Summary of Operations and Significant Accounting Policies and Estimates in Part II, Item 8 “Financial Statements and Supplementary Data.”

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis