What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2024-02-20 compared with 2023-02-17 · 445 added, 423 removed, 651 unchanged (57% of the section changed)

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Notes to Consolidated Financial Statements

Report of In dependent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors of Advanced Energy Industries, Inc.

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As more fully described in Notes 1 and 9 to the consolidated financial statements, the Company has inventories with a carrying value of $336.1 million as of December 31, 2023.

The Company adjusts its inventory carrying value for estimated excess or 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.

Auditing management’s inventory valuation was complex and involved a high degree of judgment because a critical factor in determining excess and obsolete inventory requires management to determine projected end-user demand, which could be impacted by future market and economic conditions.

The Company adjusts its inventory carrying value for estimated excess or obsolescence equal to the difference between the cost of inventory and the estimated net realizable value based on projected customer demand, which is determined by considering historical usage, customer orders and forecast, and qualitative considerations such as market and economic conditions .

Auditing management’s inventory valuation was complex and involved a high degree of judgment because a critical factor in determining excess and obsolete inventory requires management to determine projected customer demand, which could be impacted by future market and economic conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls related to the Company’s process for evaluating inventory valuation inclusive of controls related to the development of and management’s review of the underlying data, including historical usage and the estimation of projected end-user demand.

We evaluated certain inventories for excess or obsolescence by testing key inputs, including historical usage and projected end-user demand, and by testing the completeness and accuracy of the underlying data supporting management’s inventory valuation assessment.

Specifically, we compared the Company’s projected end-user demand to historical sales and inventory usage.

We evaluated certain inventories for excess or obsolescence by testing key inputs, including historical usage and projected customer demand, and by testing the completeness and accuracy of the underlying data supporting management’s inventory valuation assessment.

Specifically, we compared the Company’s projected customer demand to historical sales and inventory usage.

We assessed historical trends of management’s estimates and performed analyses to evaluate management’s excess and obsolete inventory estimates and underlying assumptions.

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(the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on the COSO criteria.

As indicated in the accompanying Management’s Annual Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of SL Power Electronics, which is included in the 2022 consolidated financial statements of the Company and constituted 2% and 3% of total and net assets, respectively, as of December 31, 2022 and 3% and 3% of revenues and net income, respectively, for the year then ended.

Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of SL Power Electronics.

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, 2023 and 2022, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2022, and the related notes and our report dated February 20, 2024 expressed an unqualified opinion thereon.

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Cash and cash equivalents

Accounts and other receivable, net

Accounts receivable, net

Other current assets

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Additional paid-in capital

Accumulated other comprehensive income (loss)

Accumulated other comprehensive income

Retained earnings

Advanced Energy Industries, Inc.

stockholders' equity

Noncontrolling interest

Total stockholders' equity

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Years Ended December 31,

Cost of sales

Cost of revenue

Operating expenses:

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Amortization of intangible assets

Restructuring

Restructuring, asset impairments, and other charges

Total operating expenses

Operating income

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

Income (loss) from discontinued operations, net of income taxes

Income (loss) from discontinued operations, net of income tax

Income from continuing operations attributable to noncontrolling interest

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Discontinued operations:

Basic earnings (loss) per share

Diluted earnings (loss) per share

Basic loss per share

Diluted loss per share

Basic earnings per share

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Years Ended December 31,

Other comprehensive income (loss), net of income taxes

Other comprehensive income (loss), net of income tax

Foreign currency translation

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Balances, December 31, 2020

Adoption of new accounting standards

Stock issued from equity plans

Stock issued from equity plans, net

Stock-based compensation

Share repurchases

Dividends declared ($ 0.10 per share)

Other comprehensive income

Balances, December 31, 2021

Stock issued from equity plans

Stock issued from equity plans, net

Stock-based compensation

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Other comprehensive income

Acquisition of non-controlling interest

Balances, December 31, 2022

Stock issued from equity plans

Stock issued from equity plans, net

Stock-based compensation

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Other comprehensive income

Acquisition of non-controlling interest

Warrants and note hedges, net

Tax impact of convertible notes and note hedges

Balances, December 31, 2023

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CASH FLOWS FROM OPERATING ACTIVITIES:

income (loss) from discontinued operations, net of income taxes

Income from continuing operations, net of income taxes

income (loss) from discontinued operations, net of income tax

Income from continuing operations, net of income tax

Adjustments to reconcile net income to net cash from operating activities:

Depreciation and amortization

Stock-based compensation expense

Provision for deferred income taxes

Stock-based compensation

Deferred income tax provision (benefit)

(Gain) loss from discount on notes receivable

(Gain) loss on disposal and sale of assets

Loss (gain) on disposal and sale of assets

Changes in operating assets and liabilities, net of assets acquired

Accounts and other receivable, net

Accounts receivable, net

Accounts payable

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CASH FLOWS FROM INVESTING ACTIVITIES:

Receipt (issuance) of notes receivable

Purchases of long-term investments

Proceeds from the sale of assets

Purchases of property and equipment

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Proceeds from long-term borrowings

Payment of debt-issuance costs

Payment of fees for long-term borrowings

Payments on long-term borrowings

Dividend payments

Payment for purchase of note hedges

Proceeds from sale of warrants

Purchase and retirement of common stock

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SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

Advanced Energy Industries, Inc., a Delaware corporation, and its consolidated subsidiaries (“we,” “us,” “our,” “Advanced Energy,” or the “Company”) 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.

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.

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.

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 the Company and its subsidiaries.

Advanced Energy Industries, Inc., a Delaware corporation, and its consolidated subsidiaries (“we,” “us,” “our,” “Advanced Energy,” or the “Company”) 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 .

In December 2015, we completed the wind down of engineering, manufacturing, and sales of our solar inverter product line.

We have continuing involvement with regard to certain warranty obligations.

Accordingly, the results of our inverter business are reflected as income (loss) from discontinued operations, net of income taxes on our Consolidated Statements of Operations.

Principles of Consolidation

Our consolidated financial statements include the Company and its subsidiaries.

All intercompany accounts and transactions have been eliminated.

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We reclassified certain prior period amounts to conform to the current year presentation.

Use of Estimates in the Preparation of the Consolidated Financial Statements — The preparation of our consolidated financial statements in conformity with U.S.

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, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period.

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● excess and obsolete inventory;

pension obligations;

acquisitions and asset valuations, and

● income taxes and other provisions;

Segment Information — Our Chief Executive Officer is the chief operating decision maker who reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance.

● acquisitions and asset valuations

Segment Information

Our Chief Executive Officer is the chief operating decision maker who reviews financial information on a consolidated basis for purposes of allocating resources and evaluating financial performance.

Accordingly, we determined we operate in a single reporting segment.

Foreign Currency Translation — The functional currency of certain of our foreign subsidiaries is the local currency.

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.

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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.

Foreign currency transactions are recorded based on exchange rates at the time such transactions arise.

Subsequent changes in exchange rates for foreign

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

currency denominated monetary assets and liabilities result in foreign currency transaction gains and losses, which are reflected as unrealized (based on period end remeasurement) or realized (upon settlement of the transactions) in other income (expense), net in our Consolidated Statements of Operations.

Derivatives — We use derivative financial instruments to manage risks associated with foreign currency and interest rate fluctuations.

For certain other subsidiaries, the functional currency is the U.S.

Foreign currency transactions are recorded based on exchange rates at the time such transactions arise.

Subsequent changes in exchange rates for foreign currency denominated monetary assets and liabilities result in foreign currency transaction gains and losses, which are reflected as unrealized (based on period end remeasurement) or realized (upon settlement of the transactions) in other income (expense), net in our Consolidated Statements of Operations.

We use 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 income (loss) on the Consolidated Balance Sheets and are reclassified into 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.

We value certain financial assets and liabilities using fair value measurements.

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).

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Our assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We have various assets and liabilities measured at fair value on a recurring basis, including:

Category of Asset or Liability

Certificates of deposit

Observable market data for similar assets

Foreign currency forward contracts

We estimate the fair value based on the movement in the forward rates of foreign currency cash flows in which the hedging instrument is denominated.

Forecasted movement in the forward rates of foreign currency for the applicable duration in which the hedging instrument is denominated

Interest rate swaps

We determine the fair value by estimating the net present value of the expected cash flows based on market rates and the associated yield curves, adjusted for non-performance credit risk, as applicable.

Contingent consideration associated with business combinations

We determine the fair value by estimating the net present value of the expected cash flows based on the probability of expected payment.

Estimated net present value of the expected cash flows based on market rates and the associated yield curves, adjusted for non-performance credit risk, as applicable

Pension benefit obligations

Actuarial analysis, which includes various estimates and assumptions including, but not limited to, discount rates, expected return on plan assets, and future inflation rates

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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Our non-financial assets, which primarily consist of property and equipment, operating lease right-of-use assets, 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), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value.

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.

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.

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 at the time of purchase to be cash equivalents.

Intangible Assets and Goodwill for further discussion and presentation of these amounts.

Cash, Cash Equivalents, and Marketable Securities

We consider all amounts on deposit with financial institutions and highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

Cash and cash equivalents consist primarily of short-term money market instruments and demand deposits with insignificant interest rate risk.

In some instances, we invest excess cash in money market funds not insured by the Federal Deposit Insurance Corporation.

We believe the investments in money market funds are on deposit with credit-worthy financial institutions and the funds are highly liquid.

The investments in money market funds are on deposit with credit-worthy financial institutions and the funds are highly liquid.

These investments are reported at fair value and included in cash and cash equivalents.

We record interest income within other income (expense), net in our Consolidated Statement of Operations.

We classify investments with stated maturities of greater than three months at time of purchase as marketable securities.

Concentrations of Credit Risk — Financial instruments with potential credit risk include cash and cash equivalents, marketable securities, and trade accounts receivable.

We classify investments with stated maturities of greater than three months at time of purchase in other current assets on the Consolidated Balance Sheets.

Concentrations of Credit Risk

Financial instruments with potential credit risk include cash and cash equivalents 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 establish 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 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.

We do not require collateral from customers.

Our principal customers are original equipment manufacturers (“OEM”) and end user customers, which operate globally through wholly owned subsidiaries that purchase our 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 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

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

projected unit sales for each product.

Allowance for Credit Losses

We evaluate collection risk and establish expected credit loss primarily through a combination of the following:

continuous monitoring of customer credit, analysis of historical aging and credit loss experience, current economic conditions, and customer specific information.

Our standard payment terms are net 30 days.

Certain large volume customers have longer payment terms.

Generally, we do not require collateral from customers.

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.

Property and Equipment — Property and equipment are 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.

Property and Equipment

Property and equipment are stated at cost or estimated fair value if acquired in a business combination.

We compute depreciation over the estimated useful lives using the straight-line method.

Additions and improvements are capitalized, while maintenance and repairs are expensed as incurred.

We evaluate the useful life and test for impairment whenever events or changes in circumstances indicate the carrying amount of an asset group containing the property and equipment may not be recoverable.

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.

Business Combinations — 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 expensed as incurred.

Leases — We lease manufacturing and office space under non-cancelable operating leases.

Internal-Use Software Development Costs

We capitalize qualifying costs associated with software applications developed for internal use.

We begin capitalization after meeting two criteria:

(i) the preliminary project stage is completed and (ii) it is probable that the software will be completed and used for its intended function.

We also capitalize costs related to specific upgrades and enhancements when it is probable the expenditures will result in significant additional functionality.

We cease capitalization when the software is substantially complete and ready for its intended use, including the completion of all significant testing.

Costs related to preliminary project activities, post-implementation operating activities, maintenance, and minor upgrades are expensed as incurred.

We classify capitalized software development costs within property and equipment, net and other assets on the Consolidated Balance Sheets.

These costs are amortized on a straight-line basis over the software’s estimated useful life.

Amortization is included in both cost of revenue and operating expenses.

We evaluate the useful life and test for impairment whenever events or changes in circumstances indicate the carrying amount may not be recoverable.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We lease manufacturing and office space under non-cancelable operating leases.

Some of these leases contain provisions for landlord funded leasehold improvements, which we record as a reduction to right-of-use (“ROU”) assets and the related operating lease liabilities.

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Operating lease expense is recognized on a straight-line basis over the lease term.

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.

We evaluate the useful life and test for impairment whenever events or changes in circumstances indicate the carrying amount of an asset group containing the right-of-use assets may not be recoverable.

Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the identifiable net assets acquired in a business combination.

We evaluate goodwill for impairment as a single reporting unit annually during the fourth quarter or when events or changes in circumstances indicate the carrying value may not be recoverable.

Our goodwill impairment evaluation consists of a qualitative assessment.

If this assessment indicates it is more likely than not that the Company’s estimated fair value exceeds the carrying value of our net assets, we do not consider goodwill to be impaired.

Otherwise, we perform a quantitative assessment by comparing the Company’s fair value to the carrying value of our net assets, including goodwill.

If the carrying value of our net assets exceeds the fair value, we consider goodwill to be impaired.

Based on the facts and circumstances, we determine the fair value based on an income, market, or cost approach.

Each method is subjective in nature and involves the use of significant estimates and assumptions, which can include projected financial results, discount rates, long-term growth rates, and industry trends.

Our intangible assets consist of customer relationships, developed technology, trademarks, patents, and intellectual property, which are stated at cost less accumulated amortization.

Intangible assets, which are considered long-lived assets, are amortized over their estimated useful lives and reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset group containing these assets may not be recoverable.

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

We conduct an annual goodwill impairment analysis 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 — We incurred debt issuance costs in connection with our debt facilities.

Amounts paid directly to lenders are classified as issuance costs.

Commitment fees and other costs directly associated with obtaining credit facilities are classified as deferred financing costs, which are recorded in the Consolidated Balance Sheets and amortized over the term of the debt facility.

We allocated deferred debt issuance costs incurred for the 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.

We amortize the majority of deferred debt issuance costs to interest expense using the effective interest rate method.

Deferred debt issuance costs on the line of credit are amortized on the straight-line basis over the life of the debt agreement.

Amortization of debt issuance costs is reflected in other income (expense), net on the Consolidated Statements of Operations.

Credit Facility for additional details.

Revenue Recognition — Net sales consist of revenue from the sale of products and support services.

Debt Issuance Costs

We capitalize costs associated with issuing debt.

Depending on the nature of the agreement, we record these costs on the Consolidated Balance Sheets either in other assets or as a direct deduction from the carrying amount of the debt.

We amortize the costs over the term of the agreement using the effective interest method.

Amortization expense is reflected within interest expense on the Consolidated Statements of Operations.

Long-Term Debt for additional details.

Revenue Recognition

Net revenue consists of products and support services.

We recognize substantially all revenue at a point in time when we satisfy our performance obligations.

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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.

We recognize revenue net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

Surcharges, cost recoveries, and 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 the 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 in our Consolidated Statements of Operations.

Payment terms for customers’ extended credit are typically net 30 days.

The related cost for shipping and handling fees is recognized in cost of revenue.

Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell.

Repairs covered under our standard warranty do not generate revenue.

We recognize substantially all non-warranty revenue upon completion of service because that is the point in time when we satisfy our performance obligation.

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.

We recognize substantially all non-warranty revenue upon completion of the service because that is the point in time when we satisfy our performance obligation.

As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties.

Up-front fees received for extended warranties or maintenance plans are deferred and recorded in customer deposits and other on the Consolidated Balance Sheets.

Revenue under these arrangements is recognized ratably over the underlying terms, as we do not have historical information that would allow us to project the estimated service usage pattern at this time.

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.

We expense the 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 in our Consolidated Statements of Operations.

Our remaining performance obligations primarily relate to customer purchase orders for products we have not yet shipped.

We expect to fulfill the majority of these performance obligations within one year.

Research and Development Expenses

Costs incurred to advance, test, or otherwise modify our 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

Stock-Based Compensation

Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair value at the grant date.

We utilize the Black-Scholes Merton option pricing model to estimate the fair value of stock options.

This model requires various estimates and assumptions.

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

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.

Discontinued Operations for more information.

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 awards made to employees and directors based on estimated fair value at the grant date.

We utilize the Black-Scholes Merton option pricing model to estimate the fair value of stock options and Employee Stock Purchase Plan (“ESPP”) purchase rights.

This model requires various estimates and assumptions, including:

Fair value of the common stock

We use the market closing price of our common stock, as reported on the NASDAQ Exchange.

Expected term

The expected term is based on historical experience and represents the period we expect the stock option or ESPP purchase right to be outstanding.

Expected volatility

We derive the expected volatility from the historical volatility of our common stock over a period equivalent to the expected term.

Risk -free interest rate

We obtain the risk-free interest rate from the U.S.

Treasury yield curve in effect at the time of grant for zero coupon U.S.

Treasury notes with maturities approximately equal to the expected term of the stock-based award.

Expected dividend

The expected dividend is based on the assumption that future dividend payments will follow recent historical practice.

We estimate the fair value of restricted stock units (“RSUs”) on the grant date.

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We record stock-based compensation expense for awards with time-based vesting conditions on a straight-line basis over the requisite service period.

For awards with a performance-based vesting condition, we record stock-based compensation expense (based on management’s assessment of the probability of meeting the performance conditions) over the estimated period to achieve the performance conditions.

Upon forfeiture or expiration of these awards, we reverse the stock-based compensation expense.

For awards with a performance-based vesting condition, we record stock-based compensation expense (based on our assessment of the probability of meeting the performance conditions) over the estimated period to achieve the performance conditions.

If the awards are forfeited, we reverse the stock-based compensation expense.

Certain RSUs vest based on a market condition.

We estimate the fair value and probability of achievement for each tranche of these awards using a Monte Carlo simulation.

Because the probability of achievement is a factor in the Monte Carlo simulation, we recognize stock-based compensation expense over each tranche’s estimated achievement period even if some or all of the shares never vest.

Our stock-based compensation expense is based on an estimate of the fair value and probability of achievement for each tranche of these awards using a Monte Carlo simulation.

For these RSUs, we recognize stock-based compensation expense over each tranche’s estimated achievement period even if some or all of the shares never vest.

For all stock awards, we estimate forfeitures at the grant date and revise those estimates in subsequent periods if actual forfeitures differ from our estimates.

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.

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.

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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.

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.

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.

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We have elected to account for GILTI in the year that the tax is incurred.

Commitments and Contingencies — From time to time we are involved in disputes and legal actions arising in the normal course of our business.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Commitments and Contingencies

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.

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 intellectual property 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 intellectual property 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 such loss can be reasonably estimated.

We are not currently a party to any legal action that we believe would reasonably have a material adverse impact on our business, financial condition, results of operations or cash flows.

New Accounting Standards

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Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, will not have a material impact on the consolidated financial statements upon adoption.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

New Accounting Standards Adopted

In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 806) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers.” The amendments in ASU 2021-08 address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination.

ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers.

We adopted ASU 2021-08 on a prospective basis effective January 1, 2022.

The adoption will impact business combinations subsequent to that date and require recognition and measurement of acquired contract assets and liabilities in accordance with ASC 606.

Specifically, we will account for the related revenue contracts of the acquiree as if we originated the contracts.

Adoption of ASU 2021-08 did not impact acquired contract assets or liabilities from prior business combinations.

New Accounting Standards Issued But Not Yet Adopted

The FASB issued the following ASUs:

The FASB issued the following ASUs that we adopted in the current year:

Issuance Date

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GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference LIBOR or another reference rate that is expected to be discontinued.

The above accounting standards will be in effect through December 31, 2024.

Our Credit Facility (refer to Note 21.

Credit Facility ) and interest rate swap agreements (refer to Note 8.

Derivative Financial Instruments ) reference the one-month USD LIBOR rate.

Both agreements contain provisions for transition to a new reference rate upon discontinuance of LIBOR.

We expect the one-month USD LIBOR rate to be available through June 2023.

We are currently assessing the potential timing of transitioning to a replacement interest rate benchmark for our Credit Facility (refer to Note 21.

Credit Facility ) and do not expect the above guidance to materially impact our consolidated financial statements.

SL Power Electronics Corporation

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

We accounted for this transaction as a business combination.

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

Our Credit Agreement (see Note 18.

Long-Term Debt ) and interest rate swap agreements (see Note 7.

Derivative Financial Instruments ) referenced the one-month USD LIBOR rate.

On March 31, 2023, we executed agreements with our debt holders and the counterparties to our interest rate swap agreements to transition the benchmark interest rate from LIBOR to the one-month-USD Term Secured Overnight Financing Rate (“SOFR”).

The impact of this transition and the adoption of the above guidance was not material to our consolidated financial statements.

New Accounting Standards Issued But Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07 “Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures.” The amendments in ASU 2023-07 expand disclosure requirements to require additional information about significant segment expenses.

In addition, the ASU enhances interim disclosures, clarifies

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

circumstances in which an entity can disclose multiple segment measures of profit or loss, and provides new disclosures requirements for entities with a single reportable segment.

This guidance will be effective for us on January 1, 2024.

We do not expect the above guidance to materially impact our consolidated financial statements.

In December 2023, the FASB issued ASU 2023-09 “Improvements to Income Tax Disclosures.” The standard requires disaggregated information about a reporting entity’s effective tax rate reconciliation as well as additional disclosure on income taxes paid.

This guidance will be effective for us on January 1, 2025.

We do not expect the above guidance to materially impact our consolidated financial statements.

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

We accounted for this transaction as a business combination.

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

The components of the fair value of the total consideration transferred were as follows:

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Total fair value of purchase consideration

We allocated the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill.

We allocated the purchase price consideration to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill.

Current assets and liabilities, net

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Operating lease right-of-use assets

Deferred taxes and other liabilities

Deferred tax and other liabilities

Intangible assets

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Straight-line

To estimate the fair value of intangible assets, we used a multi-period excess earnings approach for the customer relationships and a relief from royalty approach for developed technology.

Goodwill represents SL Power’s assembled workforce and the expected operating synergies from combining operations.

We expect approximately 85 % of goodwill to be deductible for tax purposes.

We are still evaluating the fair value for the assets acquired and liabilities assumed.

Accordingly, the purchase price allocation presented above is preliminary.

We included SL Power’s results of operations in our consolidated financial statements from the date of acquisition.

The following table summarizes SL Power’s contribution to sales in our Consolidated Statements of Operations.

Year Ended December 31,

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

On June 1, 2021, we acquired 100 % of the issued and outstanding shares of capital stock of TEGAM, Inc., which is based in Geneva, Ohio.

We accounted for this transaction as a business combination.

This acquisition added metrology and calibration instrumentation to Advanced Energy’s RF process power solutions in our Semiconductor and Industrial and Medical markets.

The components of the fair value of the total consideration transferred were as follows:

Cash paid at closing

Cash paid for indemnity holdback released in June 2022

Less cash acquired

Total fair value of purchase consideration

We allocated the purchase consideration to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill.

Current assets and liabilities, net

Property and equipment

Operating lease right-of-use assets

Intangible assets

Goodwill (deductible for tax purposes)

Operating lease liability

Total fair value of net assets acquired

A summary of the intangible assets acquired, amortization method, and estimated useful lives follows:

Amortization Method

Straight-line

Customer relationships

Straight-line

Goodwill represents TEGAM’s assembled workforce and the expected operating synergies from combining operations.

We included TEGAM’s results of operations in our consolidated financial statements from the date of acquisition.

Intangible Assets Acquired

In January 2021, we acquired certain intangible assets related to the manufacturing of fiber optic sensing equipment for a total purchase price of $ 6.5 million in cash.

These intangible assets have an estimated useful life of five years .

Intangible Assets for additional details.

To estimate the fair value of intangible assets, we used a multi-period excess earnings approach for the customer relationships and a relief from royalty approach for developed technology.

Goodwill represents SL Power’s assembled workforce and the expected operating synergies from combining operations.

Virtually all of the goodwill is deductible for tax purposes.

We included SL Power’s results of operations in our consolidated financial statements from the date of acquisition.

During the years ended December 31, 2023 and 2022, SL Power contributed $ 54.9 million and $ 50.3 million, respectively, to our net revenue.

ADVANCED ENERGY INDUSTRIES, INC.

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Disaggregation of Revenue

The following tables presents additional information regarding our revenue:

The following tables present additional information regarding our revenue:

Revenue by Market

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United States

We attribute sales to individual countries and regions based on the customer’s ship to location.

Apart from the United States, no revenue attributable to any individual country exceeded 10% of our total consolidated revenues in 2022.

We attribute revenue to individual countries and regions based on the customer’s ship to location.

Apart from the United States and China, no revenue attributable to any individual country exceeded 10% of our total consolidated revenues during the periods presented.

Revenue by Category

Years Ended December 31,

Remaining Performance Obligations

Our remaining performance obligations primarily relate to customer purchase orders for products we have not yet shipped.

We expect to fulfill the majority of these performance obligations within one year.

Services and other

Other revenue includes certain spare parts and products sold by our service group.

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

DISCONTINUED OPERATIONS

In December 2015, we completed the wind down of engineering, manufacturing, and sales of our solar inverter product line.

Accordingly, the results of our inverter business are reflected as income (loss) from discontinued operations, net of income taxes on our Consolidated Statements of Operations.

We defer revenue associated with sales of extended inverter warranties and include them within customer deposits and other 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.

We no longer offer extended warranties related to the inverter product line.

Significant Customers

During the year ended December 31, 2023, Applied Materials, Inc.

accounted for 22 % of our total revenue.

During the years ended December 31, 2022 and 2021, Applied Materials Inc.

and Lam Research Corporation accounted for 20 % and 14 %, respectively, and 20 % and 10 %, respectively, of our total revenue.

As of December 31, 2023 and 2022, the account receivable balance from Applied Materials, Inc.

accounted for 26 % and 18 %, respectively, of our total accounts receivable.

No other customer’s account receivable exceeded 10% of our total accounts receivable in the periods presented.

The geographic distribution of pretax income from continuing operations was as follows:

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Income from continuing operations, before income taxes

The provision for income taxes from continuing operations is summarized as follows:

The income tax provision (benefit) from continuing operations is summarized as follows:

Years Ended December 31,

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Total deferred provision (benefit)

Total provision for income taxes

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.

Our effective tax rate decreased in 2021 compared to 2020, primarily driven by one-time tax benefits due to reductions in uncertain tax positions and increased tax credits.

Total income tax provision (benefit)

Effective tax rate

Our effective tax rate decreased in 2023 compared to 2022, primarily driven by a change in valuation allowance assessment in 2023.

ADVANCED ENERGY INDUSTRIES, INC.

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Audit settlements

Unremitted earnings

Change in valuation allowance assessment

Change in valuation allowance

Withholding taxes

Executive compensation limitation

Other permanent items, net

Total provision for income taxes

Total income tax provision (benefit)

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.

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Pension obligation

Bond hedge original issue discount

Employee bonuses and commissions

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Operating lease liabilities

Deferred tax assets

Total deferred tax assets

valuation allowance

Net deferred tax assets

Deferred tax assets, net of valuation allowance

Deferred tax liabilities

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Operating lease right-of-use assets

Deferred tax liabilities

Total deferred tax liabilities

Net deferred tax assets

Of the $ 38.7 million and $ 37.3 million net deferred tax asset on December 31, 2022 and 2021, respectively, $ 48.1 million and $ 47.2 million, respectively, are included as a net non-current deferred tax asset within other assets on the Consolidated Balance Sheets.

$ 9.4 million and $ 9.9 million, respectively, are included as a net non-current deferred tax liability within other long-term liabilities on the Consolidated Balance Sheets.

Of the $ 100.5 million and $ 38.7 million net deferred tax asset on December 31, 2023 and 2022, respectively, $ 107.9 million and $ 48.1 million, respectively, are included as a net non-current deferred tax asset within other assets on

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

As of December 31, 2022, we have recorded a valuation allowance on $ 2.9 million of our U.S.

the Consolidated Balance Sheets.

$ 7.4 million and $ 9.4 million, respectively, are included as a net non-current deferred tax liability within other long-term liabilities on the Consolidated Balance Sheets.

During the fourth quarter of 2023, we executed a tax planning strategy to facilitate the future utilization of deferred tax assets against which a valuation allowance had been previously recorded.

We simultaneously evaluated the need for a valuation allowance and determined that the tax planning strategy resulted in sufficient positive evidence to more likely than not realize the deferred tax assets.

As a result, we recorded at $ 25.6 million tax benefit from the release of the related valuation allowance.

As of December 31, 2023, we have recorded a total valuation allowance on $ 2.5 million of our 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 $ 35.5 million and is associated primarily with operations in Germany, Hong Kong, and Switzerland.

As of December 31, 2022, there is not sufficient positive evidence to conclude that such deferred tax assets, presently reduced by a valuation allowance, will be recognized.

As of December 31, 2023, there is not sufficient positive evidence to conclude that such deferred tax assets, presently reduced by a valuation allowance, will more likely than not be recognized.

The December 31, 2023 valuation allowance balance reflects a decrease of $ 1.9 million during the year.

The change in the valuation allowance is primarily due to decreases from foreign exchange movements and current year activity.

The change in the valuation allowance is primarily due to the release of valuation allowance in Germany, offset by increased losses in Hong Kong subject to a valuation allowance and increases from foreign exchange movements and current year’s activity.

As of December 31, 2023, we had U.S., foreign and state tax loss carryforwards of $ 36.7 million, $ 287.1 million, and $ 103.9 million, respectively.

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Much of the foreign loss carryforwards, 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 $ 19.4 million and $ 13.3 million for 2022 and 2021, respectively.

The benefit of the tax holiday on earnings per diluted share was $ 0.52 and $ 0.35 for 2022 and 2021, respectively.

We operate under a tax holiday in Singapore, China, and Malaysia.

These tax holidays are in effect through June 30, 2027, December 31, 2025, and January 31, 2025, respectively.

The tax holidays are conditional upon our meeting certain employment and investment thresholds.

For the years ended December 31, 2023, 2022 and 2021, the impact of the tax holidays decreased foreign taxes by $ 14.3 million, $ 19.4 million, and $ 13.3 million, respectively, and.

the benefit on earnings per diluted share was $ 0.38 , $ 0.52 , and $ 0.35 , respectively.

As of December 31, 2023, we have undistributed earnings in certain foreign subsidiaries of approximately $ 34.9 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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing these positions in the consolidated financial statements.

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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 $ 0.6 million and $ 0.4 million of accrued interest and penalties on December 31, 2022

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

and 2021, respectively.

We had $ 0.7 million and $ 0.6 million of accrued interest and penalties on December 31, 2023 and 2022, respectively.

With few exceptions, we are no longer subject to federal, state, or foreign income tax examinations by tax authorities for years before 2020.

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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.

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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

Accumulated Other Comprehensive Income

The following table summarizes the components of and changes in accumulated other comprehensive income (loss), net of income taxes.

Foreign Currency Translation

Change in Fair Value of Cash Flow Hedges

Minimum Pension Benefit Retirement Liability

Balance at December 31, 2020

Other comprehensive income prior to reclassifications

Amounts reclassified from accumulated other comprehensive income

Balance at December 31, 2021

Other comprehensive income prior to reclassifications

Amounts reclassified from accumulated other comprehensive income

Balance at December 31, 2022

Other comprehensive income prior to reclassifications

Amounts reclassified from accumulated other comprehensive income

Balance at December 31, 2023

Amounts reclassified from accumulated other comprehensive income (loss) to the specific caption within the Consolidated Statements of Operations were as follows:

Years Ended December 31,

To Caption on

Consolidated Statements of Operations

Change in fair value of cash flow hedges

Interest expense

Minimum pension benefit retirement liability

Other income (expense), net

Total reclassifications

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Earnings Per Share

We compute basic earnings per share (“EPS”) by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period.

The diluted EPS computation is similar to basic EPS except we increase the denominator 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 (when such conversion is dilutive).

The following table summarizes our earnings per share:

The following table summarizes our earnings per share (“EPS”):

Years Ended December 31,

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Basic weighted-average common shares outstanding

Assumed exercise of dilutive stock options and restricted stock units

Dilutive effect of stock awards

Diluted weighted-average common shares outstanding

Continuing operations:

Basic earnings per share

Diluted earnings per share

EPS from continuing operations

Anti-dilutive shares not included above

Total anti-dilutive shares

We compute basic earnings per share of common stock (“Basic EPS”) by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Long-Term Debt for information regarding our Convertible Notes, Note Hedges, and Warrants.

For diluted earnings per share of common stock (“Diluted EPS”), we increase the weighted-average number of common shares outstanding during the period, as needed, to include the following:

● Dilutive impact associated with the Convertible Notes using the if-converted method.

The Convertible Notes are repayable in cash up to par value and in cash or shares of common stock for the excess over par value, as such when the stock price is lower than the strike price, there is no dilutive or anti-dilutive impact.

Prior to conversion, we do not consider the Note Hedges for purposes of Diluted EPS as their effect would be anti-dilutive.

Upon conversion, we expect the Note Hedges to offset the dilutive effect of the Convertible Notes when the stock price is above $ 137.46 ;

● Additional common shares that would have been outstanding if our outstanding stock awards had been converted to common shares using the treasury stock method.

We exclude any stock awards that have an anti-dilutive effect;

● Dilutive effect of the Warrants issued concurrently with the Convertible Notes using the treasury stock method.

For all periods presented, the Warrants did not increase the weighted-average number of common shares outstanding because the exercise price of the Warrants exceeded the average market price of our common stock.

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

There were no shares repurchased from related parties.

Repurchased shares were retired and assumed the status of authorized and unissued shares.

At December 31, 2023, the remaining amount authorized by the Board of Directors (“our Board” or “the Board”) for future share repurchases was $ 199.2 million with no time limitation .

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

There were no shares repurchased from related parties.

Repurchased shares were retired and assumed the status of authorized and unissued shares.

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 .

FAIR VALUE MEASUREMENTS

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Interest rate swaps

Total assets measured at fair value on a recurring basis

Other current assets

Available for sale investments

Net assets measured at fair value on a recurring basis

December 31, 2022

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Interest rate swaps

Total assets measured at fair value on a recurring basis

Contingent consideration

Other current liabilities

Total liabilities measured at fair value on a recurring basis

For all periods presented, there were no transfers into or out of Level 3.

Net assets measured at fair value on a recurring basis

DERIVATIVE FINANCIAL INSTRUMENTS

Changes in foreign currency exchange rates impact us.

Changes in foreign currency exchange rates impact our results of operations and cash flows.

We may manage these risks through the use of derivative financial instruments, primarily forward contracts with banks.

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however, they do partially offset the economic fluctuations of certain of our assets and liabilities due to foreign exchange rate changes.

There were no foreign currency forward contracts outstanding at December 31, 2023 or 2022.

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),

Both are included as a component of other income (expense), net in our Consolidated Statements of Operations.

We have executed interest rate swap contracts that fix a portion of the interest payments related to the outstanding principal balance on our Term Loan Facility to a total interest rate of 1.172 %.

The interest rate swap contracts expire on September 10, 2024 and are accounted for as cash flow hedging instruments.

Long-term Debt for information regarding the Term Loan.

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

net in our Consolidated Statements of Operations.

As of December 31, 2022 and 2021, there were no foreign currency forward contracts outstanding.

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 (under our existing Credit Agreement dated September 10, 2019, as amended).

These transactions are accounted for as cash flow hedging instruments.

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 %.

This is comprised of an 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 our existing Credit Agreement (see Note 21.

Credit Facility ), which is 75 basis points at current leverage ratios.

The following table summarizes the notional amount of our qualified hedging instruments:

Interest rate swap contracts

The following table summarizes the amounts recorded in accumulated other comprehensive income (loss) on the Consolidated Balance Sheets for qualifying hedges.

The following table summarizes the amounts net of tax recorded in accumulated other comprehensive income on the Consolidated Balance Sheets for qualifying hedges.

Interest rate swap contract gains

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We manage this credit risk by reviewing counterparty creditworthiness on a regular basis and limiting exposure to any single counterparty.

ACCOUNTS AND OTHER RECEIVABLE, NET

We record accounts and other receivable at net realizable value.

Components of accounts and other receivable, net of reserves, were as follows:

Amounts billed, net

Unbilled receivables

Total receivables, net

“Amounts billed, net” represents amounts invoiced to customers in accordance with our terms and conditions.

These receivables are short term in nature and do not include any financing components.

“Unbilled receivables” consist of amounts where we satisfied our contractual obligations associated with customer inventory stocking agreements.

Such amounts typically become billable upon the customer’s consumption of the inventory.

We anticipate invoicing and collecting substantially all unbilled receivables within the next 12 months.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

ACCOUNTS RECEIVABLE, NET

We record accounts receivable at net realizable value.

The following table summarizes the changes in expected credit losses related to receivables:

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Balance at end of period

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

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

Components of inventories were as follows:

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Finished goods

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

PROPERTY AND EQUIPMENT, NET

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Leasehold improvements

Construction in process

Capital projects in process

Accumulated depreciation

Property and equipment, net

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes property and equipment by geographic area:

The following table summarizes property and equipment, net by geographic area:

United States

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Depreciation expense

The following table summarizes the changes in goodwill:

Balance at beginning of period

Measurement period adjustments

Additions from acquisition

Foreign currency translation

Balance at end of period

Additions and adjustments are the result of business combinations.

Refer to Note 2.

Acquisitions.

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

INTANGIBLE ASSETS

INTANGIBLE ASSETS AND GOODWILL

Intangible assets consisted of the following:

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Gross Carrying

Weighted Average Remaining

Useful Life (in years)

Customer relationships

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Trademarks and other

At December 31, 2022, the weighted average remaining useful life of intangibles subject to amortization was 9.1 years.

Amortization expense related to intangible assets was as follows:

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Amortization expense

Estimated amortization expense related to intangibles is as follows:

Estimated future amortization expense related to intangibles is as follows:

Year Ending December 31,

The following table summarizes the changes in goodwill:

Balance at beginning of period

Measurement period adjustments

Additions from acquisition

Foreign currency translation

Balance at end of period

Additions and adjustments are the result of business combinations.

Refer to Note 2.

Acquisitions.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

RESTRUCTURING COSTS

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 business combinations by consolidating our operations, optimizing our factory footprint including moving certain production into our higher volume factories, and reducing redundancies.

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”).

This plan is substantially complete with the final closure of our Shenzhen facility expected in early 2023.

The table below summarizes the charges related to our restructuring plans:

RESTRUCTURING, ASSET IMPAIRMENTS, AND OTHER CHARGES

Details of restructuring, asset impairments, and other charges are as follows:

Years Ended December 31,

Restructuring

Asset impairments

Other charges

Total restructuring, asset impairments, and other charges

Restructuring

We have several restructuring plans in process:

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.

The purpose of this plan is to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to business combinations.

This plan is complete with the closure of our Shenzhen facility in February 2023.

Charges related to our restructuring plans are as follows:

Years Ended December 31,

Severance and related charges

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Total restructuring charges

Cumulative Cost

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Cumulative Cost Through

December 31, 2023

Severance and related charges

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December 31, 2022

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Costs incurred and charged to expense

Costs paid or otherwise settled

December 31, 2023

Asset Impairments

In connection with vacating facilities, we remeasured the operating lease right-of-use assets at fair value using Level 2 measurements and recorded a $ 1.4 million impairment charge.

Our sales agreements include customary product warranty provisions, which generally range from 12 to 24 months after shipment.

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Additions from acquisitions

Increases to accruals

Net increases to accruals

Warranty expenditures

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Balance at end of period

Components of operating lease cost were as follows:

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Components of total operating lease cost were as follows:

Years Ended December 31,

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Total operating lease cost

Maturities of our operating lease liabilities are as follows:

Payments on our operating lease liabilities are as follows:

Year Ending December 31,

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Present value of lease liabilities

In addition to the above, we have lease agreements with total payments of $ 48.9 million that commence on various dates in 2024 and 2025 and extend through 2037.

The following tables present additional information about our lease agreements:

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Weighted average discount rate

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Year Ended December 31,

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Right-of-use assets obtained in exchange for operating lease liabilities

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

EMPLOYEE RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

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We have a 401(k) profit-sharing and retirement savings plan covering substantially all full-time U.S.

Participants may defer up to the maximum amount allowed permitted by law.

Participants may defer up to the maximum amount permitted by law.

Participants are immediately vested in both their own contributions and profit-sharing contributions.

Profit-sharing contributions, which are discretionary, are approved by the Board of Directors.

For the year ended December 31, 2022 we based our profit-sharing contribution on matching 100 % of employee contributions up to 3 % of compensation plus an additional match of 50 % on the next 2 % of compensation.

For the years ended December 31, 2021 and 2020 we based our profit-sharing contribution on matching 50 % of employee contributions up to 6 % of the employee’s compensation.

Profit-sharing contributions, which are discretionary, are approved by the Board.

For the years ended December 31, 2023 and 2022, we based our profit-sharing contribution on matching 100 % of employee contributions up to 3 % of compensation plus an additional match of 50 % on the next 2 % of compensation.

For the year ended December 31, 2021 we based our profit-sharing contribution on matching 50 % of employee contributions up to 6 % of the employee’s compensation.

During the years ended December 31, 2023, 2022, and 2021 we recognized total defined contribution plan costs of $ 5.1 million, $ 4.5 million, and $ 3.1 million, respectively.

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Our projected benefit obligation and plan assets for defined benefit pension plans and the related assumptions used to determine the related liabilities are as follows:

Years Ended December 31,

Projected benefit obligation, beginning of year

Interest cost

Actuarial gain

Actuarial loss (gain)

Benefits paid

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Years Ended December 31,

Discount rate

Discount rate used for net periodic pension costs

Discount rate used for pension benefit obligations

Expected long-term return on plan assets

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The fair value of our qualified pension plan assets by category was as follows:

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Insurance Contracts

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

December 31, 2022

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Insurance Contracts

The diversified growth fund aims to generate an “equity-like” return over an economic cycle with significantly reduced volatility relative to equity markets and has the 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.

Expected future payments during the next ten years for our defined benefit pension plans are as follows:

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STOCK-BASED COMPENSATION

The Board of Directors Compensation Committee administers our stock plans.

As of December 31, 2022, we had two active stock-based incentive compensation plans:

the 2017 Omnibus Incentive Plan (“the 2017 Plan”) and the ESPP.

The Compensation Committee of our Board administers our stock plans.

As of December 31, 2023, we have two active stock-based incentive compensation plans:

the 2023 Omnibus Incentive Plan (“the 2023 Plan”) and the Employee Stock Purchase Plan (“ESPP”).

The 2023 Plan was approved on April 27, 2023.

We issue all new equity compensation grants 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.

On May 4, 2017, the stockholders approved the 2017 Plan, and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan (“the 2008 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.

The 2023 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, 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.

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December 31, 2023

Shares available for future issuance under the 2017 Omnibus Incentive Plan

Shares available for future issuance under the Employee Stock Purchase Plan

Shares available for future issuance under the 2023 Plan

Shares available for future issuance under the ESPP

ADVANCED ENERGY INDUSTRIES, INC.

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Stock-based compensation expense

Estimated forfeiture rates for our stock-based compensation expense applicable to stock options and RSUs were approximately 9 %, 8 % and 5 % for the years ended December 31, 2022, 2021 and 2020, respectively.

Restricted Stock Units

Generally, we grant RSUs with a three-year time-based vesting schedule.

Generally, we grant restricted stock units (“RSUs”) with a three year time-based vesting schedule.

Certain RSUs contain performance-based or market-based vesting conditions in addition to the time-based vesting requirements.

RSUs are generally granted with a grant date fair value based on the market price of our stock on the date of grant.

Changes in our unvested RSUs were as follows:

Changes in our RSUs were as follows:

Year Ended December 31, 2023

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RSUs outstanding at end of period

The total intrinsic value of RSUs converted to shares for the years ended December 31, 2022, 2021 and 2020 was $ 13.6 million, $ 19.2 million, and $ 9.2 million, respectively.

The weighted-average grant date fair value for RSUs granted in the years ended December 31, 2023, 2022, and 2021 was $ 100.04 , $ 74.62 , and $ 94.60 , respectively.

The fair value of RSUs vested for the years ended December 31, 2023, 2022 and 2021 was $ 19.5 million, $ 13.5 million, and $ 11.2 million, respectively.

As of December 31, 2023, there was $ 40.5 million of total unrecognized compensation cost, net of expected forfeitures, related to non-vested RSUs, that we expect to recognize through December 2026, with a weighted-average remaining vesting period of 1.1 years.

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Options outstanding at beginning of period

Options granted

Options exercised

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The total intrinsic value of options exercised for the years ended December 31, 2023, 2022 and 2021 was $ 4.6 million, $ 2.6 million, and $ 2.6 million, respectively.

Options outstanding on December 31, 2022 have aggregate intrinsic value of $ 4.6 million.

As of December 31, 2023, the aggregate intrinsic value of options outstanding and exercisable was $ 2.9 million and $ 1.7 million, respectively.

As of December 31, 2023, there was $ 1.0 million of total unrecognized compensation cost, net of expected forfeitures, related to the unvested options that we expect to recognize over a remaining period of 1.2 years.

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As of December 31, 2023, there was $ 0.5 million of total unrecognized compensation cost related to the ESPP that we expect to recognize over a remaining period of five months .

Estimating Fair Value

We estimated the fair value of each stock option and ESPP purchase right on the grant date using the Black-Scholes-Merton option pricing model with the following assumptions:

Year Ended December 31,

Stock Options

Risk-free interest rate

Expected dividend yield rate

Expected term

Expected volatility

Weighted average grant date fair value of options granted

Years Ended December 31,

Risk-free interest rates

1.63 % - 4.65 %

0.04 % - 0.10

0.10 % - 0.18 %

Expected dividend yield rate

Expected term

Expected volatility

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

COMMITMENTS AND CONTINGENCIES

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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.

We are not currently a party to any legal action that we believe would reasonably have a material adverse impact on our business, financial condition, results of operations or cash flows.

SIGNIFICANT CUSTOMER INFORMATION

During the year ended December 31, 2022, Applied Materials, Inc.

and Lam Research Corporation accounted for 20 % and 14 %, respectively, of our total revenue compared to 20 % and 10 %, respectively, of our total revenue during the year ended December 31, 2021 and 18 % and 10 %, respectively, of our total revenue during the year ended December 31, 2020.

As of December 31, 2022 and 2021, the account receivable balance from Applied Materials, Inc.

accounted for 18 % of our total accounts receivable.

No other customer’s account receivable exceeded 10% of our total accounts receivable in the periods presented.

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 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.

December 31, 2022

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

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 8.

Derivative Financial Instruments .

The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on a reserve adjusted “Eurodollar Rate” or “Base Rate,” as defined in the Credit Agreement, plus an applicable margin.

For all periods presented, we were in compliance with the Credit Agreement covenants.

The following table summarizes our availability to withdraw on the Revolving Facility.

Available capacity on Revolving Facility

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.

The fair value of the Term Loan Facility approximates the outstanding balance of $ 375.0 million as of December 31, 202 2.

The debt obligation on our Consolidated Balance Sheets consists of the following:

Term Loan Facility

LONG-TERM DEBT

Long-term debt on our Consolidated Balance Sheets consists of the following:

Convertible Notes due 2028

Term Loan Facility due 2026

Gross long-term debt, including current maturities

debt discount

Less current portion of long-term debt

Total long-term debt

Contractual maturities of our debt obligations, excluding amortization of debt issuance costs, are as follows:

Net long-term debt, including current maturities

current maturities

Net long-term debt

For all periods presented, we were in compliance with the covenants under all debt agreements.

Contractual maturities of our gross long-term debt, including current maturities, are as follows:

Year Ending December 31,

Interest expense and unused line of credit fees were recorded in other income (expense), net in our Consolidated Statements of Operations as follows:

The following table summarizes our borrowings:

December 31, 2023

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, this portion of our Term Loan Facility will be subject to a variable interest rate.

For more information, see Note 7.

Derivative Financial Instruments .

The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on the Base Rate or SOFR, as defined in the Credit Agreement, plus an applicable margin.

The following table summarizes interest expense related to our debt:

Years Ended December 31,

1 unchanged sentence

Amortization of debt issuance costs

Unused line of credit fees and other

Total interest expense

Total interest expense related to debt

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Convertible Senior Notes due 2028

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 used $ 40.1 million of the net proceeds to repurchase approximately 0.4 million shares of common stock and $ 40.1 million to fund the net cost of convertible note hedge transactions (“Note Hedges”) after such costs were offset by the proceeds from the sale of warrants to purchase our common stock (“Warrants”).

The Convertible Notes mature on September 15, 2028, unless earlier repurchased, redeemed, or converted.

Interest is payable semi-annually in arrears in March and September.

We do not maintain a sinking fund.

We may redeem for cash all or any portion of the Convertible Notes, at our option, on or after September 20, 2026 if the last reported sale price of our common stock has been at least 130 % of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading-day period (including the last trading day of such period).

The redemption price is 100 % of the principal amount plus accrued and unpaid interest.

Prior to May 15, 2028, holders have the option to convert all or a portion of their Convertible Notes under the following circumstances:

● during any calendar quarter if the last reported sale price of our common stock, for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days is greater than or equal to 130 % of the conversion price on each applicable trading day;

● during the five business day period immediately after any five consecutive trading day period in which the trading price per $ 1,000 principal amount of the Convertible Notes for each trading day was less than 98 % of the product of the last reported sale price of our common stock on each such trading day and the conversion rate on each such trading day;

● if Advanced Energy calls any or all of the Convertible Notes for redemption;

● upon the occurrence of specified corporate transactions or events described in the indenture.

From May 15, 2028 through the maturity date, holders have the option to convert at any time regardless of circumstances.

The initial conversion rate is 7.2747 shares of common stock per $ 1,000 principal amount, which is equivalent to an initial conversion price of approximately $ 137.46 per share of common stock.

The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the indenture.

Upon conversion, Advanced Energy will do the following:

● pay cash up to the aggregate principal amount to be converted;

● pay or deliver cash, shares of our common stock, or a combination (at our election) with respect to the remainder, if any, of the conversion obligation in excess of the aggregate principal amount being converted.

Concurrent with the Convertible Notes issuance, we entered into the Note Hedges with respect to our common stock.

We will exercise the Note Hedges simultaneously when the Convertible Notes are settled.

The Note Hedges have a $ 137.46 per share initial exercise price and cover, subject to customary anti-dilution adjustments, the number of shares

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

of common stock that initially underlie the Convertible Notes and are expected to reduce the potential dilution to the common stock and/or offset potential cash payments in excess of the principal amount upon conversion of the Convertible Notes.

We paid approximately $ 115.0 million in cash for the Note Hedges, which we recorded to additional paid-in capital in our Statements of Stockholders’ Equity .

Also concurrent with the issuance of our Convertible Notes, we sold Warrants, which provide the counterparties the option to acquire approximately 4.2 million aggregate shares of our common stock (subject to customary anti-dilution adjustments), which is the same number of shares of our common stock covered by the Note Hedges at a $ 179.76 per share initial exercise price, which represents a 70 % premium over the $ 105.74 closing price of our common stock on September 7, 2023.

The Warrants expire on July 7, 2029.

We received aggregate proceeds of $ 74.9 million for the sale of Warrants, which we recorded to additional paid-in capital in our Statements of Stockholders’ Equity.

If the market value per share of our common stock exceeds the exercise price of the Warrants during the measurement period at the maturity of such Warrants, the Warrants will have a dilutive effect on our earnings per share as we will owe the counterparties a number of shares of common stock in an amount based on the excess of such market price per share of the common stock over the Warrants’ exercise price.

The Note Hedge and Warrants are separate from the Convertible Notes.

The Convertible Notes holders have no rights with respect to the Note Hedges and Warrants.

Counterparties in the Note Hedge and Warrants transactions have no rights with respect to the Convertible Notes.

However, in combination, the Note Hedges and Warrants synthetically increase the initial conversion price on the Convertible Notes from $ 137.46 to $ 179.76 , reducing the potential dilutive effect of the Convertible Notes.

We recorded a $ 26.1 million deferred tax asset to reflect the impact of the Convertible Notes and Note Hedges.

Credit Agreement

Our credit agreement dated as of September 10, 2019, as amended (the “Credit Agreement”) consists of a senior unsecured term loan facility (“Term Loan Facility”) and a senior unsecured revolving facility (“Revolving Facility”).

Both mature on September 9, 2026.

On March 31, 2023, we executed agreements pursuant to the Credit Agreement to transition the benchmark interest rate from LIBOR to SOFR.

The impact of this transition was not material to our consolidated financial statements.

On September 7, 2023, we entered into an additional amendment to the Credit Agreement to amend certain definitions, covenants, and events of default to enable the issuance of the Convertible Notes and the entry into the Note Hedges and Warrants.

The following table summarizes our availability to withdraw on the Revolving Facility:

Available capacity on Revolving Facility

As part of our 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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We use level 2 measurements to estimate the fair value of our debt.

As of December 31, 2023, we estimate the fair value of our Convertible Notes to be $ 598.7 million, and the par value of the Term Loan Facility approximates its fair value.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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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 8. Financial Statements and Supplementary Data