Item 1. Business
ITEM 1. BUSINESS
Overview
Advanced Energy provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications .
Advanced Energy is organized on a global, functional basis and operates in the single segment of power electronics conversion products. Within this segment, our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.
We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. Our executive offices are located at 1595 Wynkoop Street, Suite 800, Denver, Colorado 80202, and our telephone number is 970-407-6555.
Recent Acquisitions
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. This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets. For additional information, see Note 2. Acquisitions in Part II, Item 8 “Financial Statements and Supplementary Data.”
Products and Services
Our precision power products and solutions are designed to enable new process technologies, improve productivity, lower the cost of ownership, and provide critical power capabilities for our customers. These products are designed to meet our customers’ demanding requirements in efficiency, flexibility, performance, and reliability. The majority of Advanced Energy’s products are capable of meeting various customer requirements. We also provide repair and maintenance services for our products.
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Our plasma power products offer solutions to enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. We have a broad portfolio of high and low voltage power products 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.
Our service group offers warranty and after-market repair services, providing our customers with preventive maintenance opportunities to support a lower cost of ownership and higher utilization for their capital equipment. We offer comprehensive repair service and customer support through our worldwide support organization in the United States, China, Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and the United Kingdom. Support services include warranty and non-warranty repair services, calibration, upgrades, and refurbishments of our products.
End Markets
Advanced Energy generates revenue from the sale of a broad range of advanced and embedded power products and services to global original equipment manufacturers (“OEM”) and end customers. Our customers select our products based on various performance metrics such as high power conversion efficiency, high power density, and low noise emission, as well as our ability to customize our solutions to meet the unique requirements of a wide range of critical applications. The future growth and demand for our products is driven by a combination of factors within each of the end markets we serve, as follows:
Semiconductor Equipment Market
The semiconductor equipment market supports and enables the long-term growing need for more production capacity and new process technologies to meet expanding demand for semiconductors across many applications driven by megatrends such as artificial intelligence, Internet of Things (IoT) and automobile electrification.
Advanced Energy is a critical technology leader in the industry and provides one of the broadest portfolios of power conversion and related products, including plasma power, high-voltage power, embedded power, and adjacent sensing solutions. Our plasma power solutions are used to create plasma-based etch and deposition processes, and transition to advanced technology nodes typically require higher content of our advanced power solutions per tool. Our other semiconductor market products are incorporated in a wide range of applications including ion implant, inspection, metrology, thermal, epitaxy, and back-end test and packaging.
Our strategy is to strengthen our proprietary positions in our core applications with leading market share, such as conductor etch and deposition, grow our market position in targeted applications with lower market share, such as dielectric etch and remote plasma source, and leverage our broad product portfolio to expand our content at our OEM customers.
Industrial and Medical Market
The growth in the industrial and medical market is fueled by continued investment in complex manufacturing processes, increased adoption of new industrial technologies such as automation and clean energy, and increased breadth and precision requirements of medical devices and life sciences equipment.
We supply this market with critical, precision power conversion products that deliver precise and highly reliable, low noise and/or differentiated power. In addition, our sensing, control, and instrumentation products complement our power solutions. Our products are used in a wide variety of applications, such as advanced material fabrication, medical devices, analytical instrumentation, test and measurement equipment, robotics, industrial production, and large-scale connected light-emitting diode applications. We serve our broad customer base through both our direct sales force and indirect sales channels including independent sales representatives, channel partners, and distributors.
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Our strategy in the market is to expand our product offerings and channel reach, leveraging common platforms, providing platform derivatives, and offering customizations to further penetrate a broader set of applications.
Data Center Computing Market
The Data Center Computing Market is driven by the growing adoption of cloud computing, as the market shifts from traditional enterprise on-premises computing to the data center. In addition, the rapid growth of artificial intelligence and machine learning are driving increased demand for substantially higher power in servers and racks, which has increased the importance of power efficiency and power density and accelerated the transition from 12 Volt to 48 Volt infrastructure in data center server racks.
Advanced Energy benefits from these trends as one of the leading providers of high-efficiency, high-density, 48 Volt server power conversion solutions and technologies. Our products are designed into data center server and storage systems, as well as used by cloud service providers and their partners in their custom designed server racks and power shelves.
Our strategy in the market is to penetrate selected customers and applications based on our differentiated capabilities and competitive strengths in power density, efficiency, and controls.
Telecom and Networking Market
Demand in the Telecommunication and Networking market is driven by adoption of more advanced mobile standards, such as 5G technologies, networking investments by telecommunication service providers, enterprises upgrading their communication networks, and data centers investing in their networks for increased bandwidth.
Advanced Energy serves this market by providing application-specific AC-DC and DC-DC power conversion products to many leading OEMs of wireless infrastructure equipment and computer networking equipment. Our solutions are often customized with unique features such as ruggedization for mobile radio in the field.
Our strategy in the market is to optimize our portfolio of power conversion products to more differentiated applications, and to focus on 5G infrastructure applications.
Customers
Our products are sold worldwide to OEMs, distributors, and directly to end users.
During the year ended December 31, 2023, Applied Materials, Inc. accounted for 22% of our total revenue. During the year ended December 31, 2022, Applied Materials, Inc. and Lam Research Corporation accounted for 20% and 14%, respectively, of our total revenue. We expect that the sale of products to our largest customers will continue to account for a significant percentage of our revenue for the foreseeable future. The loss of a large customer could have a material adverse effect on our results of operations .
For more information related to our expectations for the markets we serve, see Business Environment and Trends in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” For a discussion of our backlog, see Results of Continuing Operations in Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Marketing, Sales, and Distribution
We sell our products through direct and indirect sales channels. Our sales operations are primarily located in China, Germany, Hong Kong, India, Ireland, Israel, Japan, South Korea, Philippines, Singapore, Taiwan, the United Kingdom, and United States.
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In addition to a direct sales force, we have independent sales representatives, channel partners and distributors that support our selling efforts. We maintain customer service offices at many of the locations listed above, as well as other sites near our customers’ locations. We believe that customer service and technical support are important competitive factors and are essential to building and maintaining close, long-term relationships with our customers.
Refer to Note 3. Revenue in Part II, Item 8 “Financial Statements and Supplementary Data” for information regarding our revenue by geographic area. See Part I, Item 1A “Risk Factors” for a discussion of certain risks related to our sales and marketing operations.
Manufacturing
We manufacture our products primarily in the Philippines, Malaysia, Mexico, and China. We also perform limited specialty manufacturing for some of our products in the U.S., the United Kingdom, and Europe. In 2023, we announced that we would be expanding our presence in our Mexico factory and beginning construction of a new factory located near Bangkok, Thailand as part of our multi-year factory optimization and consolidation plans.
Our manufacturing requires raw materials, mainly a wide variety of mechanical and electrical components, which are often made to our specifications. We use numerous companies, including contract manufacturers, to supply parts for the manufacture and support of our products. Although we make reasonable efforts to ensure that parts are available from multiple qualified suppliers and at the lowest possible cost, some key parts may only be obtained from a sole supplier or a limited group of suppliers. We address supply challenges and reduce the associated risks to production by endeavoring to select and qualify alternate suppliers for key parts, maintain appropriate inventories of critical components, and competitively source parts through electronic bidding tools to find the lowest possible total cost.
See Part I, Item 1A, “Risk Factors” for a discussion of certain risks related to our manufacturing operations.
Intellectual Property
Protection of our technology assets through intellectual property rights is important for our competitive position. We believe that continued research and development of technologically advanced solutions and applications is critical for us to compete effectively in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products. Our investments in research and development enable us to create intellectual property, including patents, know-how and trade secrets. We hold numerous U.S. and foreign patents and have multiple patent applications pending in the U.S., Europe, and Asia.
See Part I, Item 1A, “Risk Factors” for a discussion of certain risks related to our reliance on our intellectual property.
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Competition
The markets we serve are highly competitive and characterized by rapid technological development and changing customer requirements. We face a wide variety of competitors, and no single company dominates any of our markets. Significant competitive factors in our markets include product performance, compatibility with adjacent products, price, quality, reliability, meeting customer demand, and level of customer service and support.
We encounter substantial competition from foreign and domestic companies for each of our product lines. Some of our competitors have greater financial and other resources than we do. Other competitors are smaller than we are but may be well established in specific product niches. Overall, our Industrial and Medical competitors tend to be smaller, and in other product markets we encounter mostly larger competitors. Competitors in each of our market verticals include, but are not limited to, the following:
Semiconductor Equipment
Industrial and Medical
Data Center Computing
Telecom and Networking
COMET Holding AG.
Daihen Corp.
MKS Instruments, Inc.
TRUMPF Hüttinger GmbH + Co. KG
Cosel Co., Ltd.
Delta Electronics, Inc.
MEAN WELL Enterprises
TDK-Lambda Americas Inc.
TRUMPF Hüttinger GmbH + Co. KG
XP Power Ltd.
Acbel Polytech Inc.
Delta Electronics, Inc.
Flex Ltd.
Lite-On Technology Corp.
Acbel Polytech Inc.
Delta Electronics, Inc.
Lite-On Technology Corp.
Research and Development
We perform research and development to develop products to address new or emerging applications, technological advances to provide higher performance, lower cost, or other attributes that we may expect to appeal to current or potential customers. We believe that continued development of technological applications, as well as enhancements to existing products and related software to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.
The following table summarizes research and development expenses and the percentage of these expenses as compared to total revenue (in thousands):
Years Ended December 31,
2023
2022
2021
Research and development
$
202,439
$
191,020
$
161,831
% of Revenue
12.2%
10.4%
11.1%
Human Capital
Our people are our strength, and we are committed to sustaining a culture grounded in our core values: innovation, integrity, empowerment, partnership, accountability, and execution. These core values are the foundation of how we operate. We have a globally diverse workforce with approximately 10,000 employees as of December 31, 2023. Our employees are located across the globe in more than 20 countries and are comprised of approximately 55% male and 45% female employees. Our employees are not represented by unions, except for statutory organization rights applicable to our employees in China, Germany, and Mexico.
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Diversity, Equity, and Inclusion
We are committed to creating an inclusive work environment where all of our employees feel respected, valued, and empowered. We remain committed to expanding our diversity through targeted hiring and development initiatives. Through a combination of internal promotions and external hiring, we continue to see increases in the number of female employees represented at the director and above level, as compared with 2022. We also have an active Corporate Diversity & Inclusion Steering Committee to further increase our commitment to gender, ethnic and racial diversity. We have an active Women’s Leadership Forum that is focused on career development and internal networking.
Health and Safety
We are committed to providing a safe work environment for our employees and have a global team that is responsible for health and safety related activities including hazard and risk identification. We also strive to follow the standards of the Responsible Business Alliance Code of Conduct at selected manufacturing sites, which promotes labor, health, safety, environmental, and ethics best practices.
Employee Engagement
We believe that our continued success depends, in part, on our ability to attract and retain qualified personnel. In 2022, we conducted our biennial confidential employee survey on topics relating to confidence in company leadership, ethical conduct, career growth opportunities, and suggestions on how we can make our company a great place to work. In 2023 we communicated the results of the employee survey with our employees, leaders, executive team, and Board of Directors. We continue to invest in improving our employee experience through strategies targeted at improving communication, providing internal career development opportunities, and simplifying our internal business processes.
Total Rewards
We provide market-competitive compensation and benefits to our employees to attract and retain a talented, highly engaged workforce. Our compensation programs are focused on equitable and fair pay practices, including market-based compensation. Additionally, we offer a discounted employee stock purchase plan.
Learning and Development
We create growth and development opportunities to support our employees and offer internal and external learning and development opportunities. We also perform internal talent reviews and succession planning. In 2023, Advanced Energy continued our 10-week leadership essential training program for our people leaders across all corporate levels. We also have internship and graduate development programs designed to develop a talent pipeline.
Community Involvement
We have an active Community Investment Steering Committee and offer employees paid time off to participate in company-organized initiatives and volunteer with a non-profit organization of their choice. Our Educational Scholarship Program, available to children of Advanced Energy employees, celebrates education accomplishments and provides financial support for them to pursue their career and learning goals. We also offer an annual Advanced Energy STEM (science, technology, engineering, and mathematics) Scholarship in the United States to support and develop emerging talent in STEM.
Environmental Matters
We are subject to federal, state, and local environmental laws and regulations, as well as the environmental laws and regulations of the foreign federal and local jurisdictions in which we have manufacturing and service facilities. We believe we are in material compliance with all such laws and regulations.
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Available Information
Our website address is www.advancedenergy.com . We make available, free of charge on our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing such reports with, or furnishing them to, the Securities and Exchange Commission (“SEC”). Such reports are also available at www.sec.gov . Information contained on our website is not incorporated by reference in, or otherwise part of, this annual report on Form 10-K nor any of our other filings with the SEC.
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