What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-03-02 · 382 added, 541 removed, 771 unchanged (54% of the section changed)

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Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Report of Ind ependent Registered Public Accounting Firm

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

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc.

(the Company) as of December 31, 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019, and the results of its operations and its cash flows for the year ended December 31, 2019, in conformity with U.S.

We have audited the accompanying consolidated balance sheets of Advanced Energy Industries, Inc.

(the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with U.S.

generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 2, 2020 expressed an unqualified opinion thereon.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2021 expressed an unqualified opinion thereon.

Basis for Opinion

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We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Accounting for the acquisition of Artesyn

Description of the Matter

As described in Note 2 to the consolidated financial statements, during the year ended December 31, 2019, the Company completed the acquisition of Artesyn Embedded Technologies, Inc’s Embedded Power business (“Artesyn”) for a total purchase price of $361.3 million.

The transaction was accounted for as a business combination.

Auditing the Company's accounting for its acquisition of Artesyn was complex due to the significant estimation required by management in determining the fair value of the identified intangible assets, which primarily consisted of customer relationships of $75.0 million, technology of $28.0 million and tradenames of $21.0 million.

The significant estimation was primarily due to the judgmental nature of the inputs to the valuation models used to measure the fair value of these intangible assets, as well as the sensitivity of the respective fair values to the

underlying significant assumptions.

The significant assumptions used to estimate the fair value of the intangible assets included customer attrition, revenue growth rates, technology obsolescence rates and economic useful lives.

These significant assumptions are forward-looking and could be affected by future economic and market conditions.

How We Addressed the Matter in Our Audit

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s accounting for the acquisition.

For example, we tested controls over the valuation of intangible assets, including management’s review of the valuation model and underlying assumptions used to develop the estimated fair value of the intangible assets.

To test the estimated fair value of the intangible assets, we performed audit procedures that included, among others, evaluating the Company's valuation methodology and testing the significant assumptions used in the model, as described above, including the completeness and accuracy of the underlying data.

For example, we compared the significant assumptions to current industry and market trends, as well as historical results.

We also considered how the significant assumptions, specifically technology obsolescence rates, compared to the Company’s prior acquisitions and to Artesyn’s own products.

We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective or complex judgments.

The communication of the critical audit matter does not alter in any way our opinion on

the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Accounting for income taxes

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Denver, Colorado

March 2, 2020

February 23, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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Opinion on the financial statements

We have audited the accompanying consolidated balance sheet of Advanced Energy Industries, Inc.

(a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2018, the related consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows for years ended December 31, 2018 and 2017, and the related notes (collectively referred to as the “financial statements”).

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows for the years ended December 31, 2018 and 2017, in conformity with accounting principles generally accepted in the United States of America.

We have audited the accompanying consolidated statements of operations, comprehensive income, stockholders’ equity, and cash flows of Advanced Energy Industries Inc.

(a Delaware corporation) (and subsidiaries) (the "Company") for the year ended December 31, 2018, and the related notes (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the results of operations and cash flows of the Company for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Basis for opinion

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Our responsibility is to express an opinion on the Company’s financial statements based on our audits.

We are a public accounting firm registered with the Public Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

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Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

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/s/ GRANT THORNTON LLP

We served as the Company’s auditor from 2004 to 2019.

Denver, Colorado

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Marketable securities

Accounts and other receivable, net of allowances of $ 7,745 and $ 1,856 , respectively

Accounts and other receivable, net

Income taxes receivable

Other current assets

Current assets from discontinued operations

Total current assets

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Deferred income tax assets

Non-current assets from discontinued operations

LIABILITIES AND STOCKHOLDERS’ EQUITY

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Current portion of operating lease liabilities

Current liabilities from discontinued operations

Total current liabilities

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Other long-term liabilities

Non-current liabilities from discontinued operations

Total liabilities

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Common stock, $ 0.001 par value, 70,000 shares authorized;

38,358 and 38,164 issued and outstanding , respectively

38,293 and 38,358 issued and outstanding on December 31, 2020 and December 31, 2019, respectively

Additional paid-in capital

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Discontinued operations:

Basic earnings per share

Diluted earnings per share

Basic earnings (loss) per share

Diluted earnings (loss) per share

Basic earnings per share

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Years Ended December 31,

Other comprehensive income, net of income taxes

Other comprehensive income (loss), net of income taxes

Foreign currency translation

Unrealized loss on marketable securities

Change in fair value of cash flow hedges

Minimum benefit retirement liability

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(In thousands)

Accumulated Other

Comprehensive Income (Loss)

on Marketable

Advanced Energy Industries, Inc.

Stockholders' Equity

Comprehensive

Stockholders’

Balances, December 31, 2017

Adoption of new accounting standards

Non-controlling interest from acquisition

Stock issued from equity plans

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Stock buyback

Comprehensive income (loss):

Foreign currency translation

Unrealized gain on marketable securities

Minimum benefit retirement liability

Total comprehensive income (loss)

Other comprehensive income (loss)

Balances, December 31, 2018

Adoption of new accounting standards

Non-controlling interest from acquisition

Stock issued from equity plans

Stock-based compensation

Stock buyback

Comprehensive income (loss):

Foreign currency translation

Unrealized loss on marketable securities

Minimum benefit retirement liability

Total comprehensive income (loss)

Other comprehensive income (loss)

Balances, December 31, 2019

Adoption of new accounting standards

Stock issued from equity plans

Stock-based compensation

Comprehensive income (loss):

Foreign currency translation

Minimum benefit retirement liability

Total comprehensive income (loss)

Stock buyback

Other comprehensive income (loss)

Balances, December 31, 2020

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

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

Income from continuing operations, net of income taxes

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

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Stock-based compensation expense

Provision for deferred income taxes

Loss on foreign exchange hedge

Discount on notes receivable

Provision (benefit) for deferred income taxes

Gain on sale of central inverter service business

Discount on notes receivable

Net loss on disposal of assets

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Other liabilities and accrued expenses

Net cash provided by (used in) operating activities from continuing operations

Net cash provided by (used in) operating activities from discontinued operations

Net cash provided by operating activities

Net cash from operating activities from continuing operations

Net cash from operating activities from discontinued operations

Net cash from operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchases of marketable securities

Proceeds from sale of marketable securities

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Issuance of notes receivable

Purchase of foreign exchange hedge

Proceeds from sale of property and equipment

Purchases of property and equipment

Net cash provided by (used in) investing activities from continuing operations

Net cash from investing activities from continuing operations

Net cash from investing activities from discontinued operations

Net cash from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

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Purchase and retirement of common stock

Net payments related to stock-based award activities

Net cash provided by (used in) financing activities from continuing operations

Net receipts (payments) related to stock-based award activities

Net cash from financing activities from continuing operations

Net cash from financing activities from discontinued operations

Net cash from financing activities

EFFECT OF CURRENCY TRANSLATION ON CASH

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

NET CHANGE IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS, beginning of period

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We operate in a single segment structure for power electronics conversion products and we operate in four vertical markets or applications to enable tracking of market trends.

Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip, chemical and physical deposition, high and low voltage applications such as process control, computing, networking, telecommunication, analytical instrumentation, medical equipment, industrial technology and temperature-critical thermal applications such as material and chemical processing.

We also supply related instrumentation products for advanced temperature measurement and control, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets.

Our network of global service support centers provides local repair and field service capability in key regions as well as provide upgrades and refurbishment services, and sales of used equipment to businesses that use our products.

As of December 31, 2015, we discontinued our Inverter production, engineering, and sales product line.

As such, all Inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein.

Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip, chemical and physical deposition, high and low voltage applications such as process control, analytical instrumentation, medical equipment, and in temperature-critical thermal applications such as material and chemical processing.

Our network of service support centers provides local repair and field service capability in key regions, provide upgrades and refurbishment services, and sell used equipment to businesses that use our products.

In September 2019, we acquired Artesyn Embedded Technologies, Inc.’s embedded power business ("Artesyn") , which added new power products and technologies used in networking, computing, data center (including hyperscale), industrial, and medical applications.

As of December 31, 2015, we discontinued our engineering, production, and sales of our inverter product line.

As such, all inverter product revenues, costs, assets, and liabilities are reported in Discontinued Operations for all periods presented herein, and we currently report as a single unit.

Disposed and Discontinued Operations for more information.

Ongoing inverter repair and service operations are reported as part of our continuing operations.

Principles of Consolidation — Our consolidated financial statements include our accounts and the accounts of our wholly-owned subsidiaries.

All intercompany accounts and transactions have been eliminated.

Our Consolidated Financial Statements are stated in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S.

Our consolidated financial statements are stated in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States ("U.S.

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

GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.

We believe that the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory, warranty reserves, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made.

We believe at the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for expected credit loss, excess and obsolete inventory, warranty reserves, pension obligations, right-of-use assets and related operating lease liabilities, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made.

Actual results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.

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

Assets and liabilities of these foreign subsidiaries are translated to the United States dollar at prevailing exchange rates at the balance sheet date;

Assets and liabilities of these foreign subsidiaries are translated to the United States dollar at prevailing exchange rates on the balance sheet date;

revenues and expenses are translated at the average exchange rates in effect for each period.

Translation adjustments resulting from this process are reported as a separate component of Other Comprehensive Income.

For certain other subsidiaries the functional currency is the US Dollar.

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, net in our Consolidated Statements of Operations.

Subsequent changes in exchange rates for foreign currency denominated monetary assets and liabilities result in foreign currency transaction gains and losses which are

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

reflected as unrealized (based on period end remeasurement) or realized (upon settlement of the transactions) in Other income (expense), net in our Consolidated Statements of Operations.

Derivatives — The Company uses derivative financial instruments to manage risks associated with foreign currency and interest rate fluctuations.

Unless we meet specific hedge accounting criteria, changes in the fair value of derivative financial instruments are recognized in the Consolidated Statements of Operations within Other income (expense), net.

For derivatives designated as cash flow hedges, changes in fair value are recorded to Accumulated other comprehensive loss on the Consolidated Balance Sheets and are reclassified to earnings when the underlying forecasted transaction affects earnings.

We reassess the probability of the underlying forecasted transactions occurring on a quarterly basis.

Fair Value — We value our financial assets and liabilities using fair value measurements.

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The three levels of the hierarchy and the related inputs are as follows:

● Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.

● Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access on the measurement date.

● Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

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The Company categorizes fair value measurements within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value.

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

The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate fair value as recorded due to the short-term nature of these instruments.

The fair value of derivatives is estimated utilizing observable foreign exchange rates adjusted for non-performance credit risk associated with our counterparties.

The fair value of contingent consideration and other acquired assets and liabilities associated with the acquisition of Artesyn, are based on Level 3 inputs.

There were no transfers of financial assets or liabilities into or from Level 3.

The fair value of borrowings approximates the recorded borrowing value based upon market interest rates for similar facilities.

See Note 8 , Derivative Financial Instruments and Note 22, Credit Facility for additional information.

The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value.

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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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Cash, Cash Equivalents, and Marketable Securities — We consider all amounts on deposit with financial institutions and highly liquid investments with an original maturity of three months or less to be cash equivalents, and those with stated maturities of greater than three months as marketable securities.

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

The investments in money market funds are reported at fair value, with interest income recorded in earnings and are included in “Cash and cash equivalents.”

The investments in money market funds are reported at fair value, with interest income recorded in earnings and are included in "Cash and cash equivalents."

Concentrations of Credit Risk — Financial instruments, which potentially subject us to credit risk, include cash and cash equivalents, marketable securities, and trade accounts receivable.

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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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.

Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at net realizable value.

We have established a reserve for credit losses based upon factors surrounding the credit risk of specific customers, historical trends, and other information.

Accounts Receivable and Reserve for Credit Losses — Accounts receivable are recorded at net realizable value.

We maintain a credit approval process and we make significant judgments in connection with assessing our customers’ ability to pay.

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While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past.

For example, in the fourth quarter, we increased our allowance for doubtful accounts by $ 4.2 million relating to a customer exposure in China resulting from economic softness and funding delays causing uncertainty in large program timing which uncertainty is now exacerbated by the spreading Coronavirus.

A significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results.

Changes in allowance for doubtful accounts are summarized as follows:

Years Ended December 31,

Balances at beginning of period

Additions from acquisition

Additions - charged to expense

Deductions - write-offs, net of recoveries

Balances at end of period

Our principal customers are original equipment manufacturers ("OEM") and end user customers, which operate globally through wholly owned subsidiaries that purchase the Company’s products under substantially the same credit terms, with similar historical credit risks.

As a result, we assess credit risks as a single group.

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

an assessment of customer credit risk ratings utilizing third party credit risk data, analysis of historical aging and credit loss experience, and customer specific information.

Inventories — Inventories include costs of materials, direct labor, manufacturing overhead, in-bound freight, and duty.

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Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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

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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in other income, net, in our Consolidated Statements of Operations.

When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in Other income (expense), net, in our Consolidated Statements of Operations.

Purchase accounting — Business combinations are accounted for using the purchase method of accounting.

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Credit Facility for additional details.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Revenue Recognition — We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or services have been transferred to our customers.

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Shipping and handling fees billed to customers, if any, are recognized as revenue.

The related cost for shipping and handling fees are recognized in cost of sales.

We expense incremental costs of obtaining contracts when the amortization period of the costs is less than 1 year.

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

We expense incremental costs of obtaining contracts when the amortization period of the costs is less than one year.

These costs are included in selling, general, and administrative expenses.

Repairs that are covered under our standard warranty do not generate revenue.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We maintain a worldwide support organization in 10 countries, including the United States, the PRC, Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel and Great Britain.

We maintain a worldwide support organization in ten countries, including the United States, the Peoples Republic of China ("PRC"), Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain.

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

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We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the repairs.

The assumptions we use to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when appropriate, the accruals are adjusted.

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.

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Our expected volatility assumption is based on the historical daily closing price of our stock over a period equivalent to the expected life of the options.

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.

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We assess the recoverability of our net deferred tax assets and the need for a valuation allowance on a quarterly basis.

Our assessment includes a number of factors including historical results and taxable income projections for each jurisdiction.

Our assessment includes several factors including historical results and taxable income projections for each jurisdiction.

The ultimate realization of deferred income tax assets is dependent on the generation of taxable income in appropriate jurisdictions during the periods in which those temporary differences are deductible.

We consider the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in determining the amount of the valuation allowance.

Based on the level of historical taxable income and projections for

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

future taxable income over the periods in which the deferred income tax assets are deductible, we determine if we will realize the benefits of these deductible differences.

Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, we determine if we will realize the benefits of these deductible differences.

Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions.

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which could be material.

GAAP, an accounting policy election can be made to either recognize deferred taxes for temporary basis differences expected to reverse as global intangible low-tax income ("GILTI") in future years, or to provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only.

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

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

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Certain lease agreements may contain variable payments, which are expensed as incurred and not included in the right-of-use lease assets and operating lease liabilities.

Right-of-use assets and operating lease liabilities are recognized at the present value of the future lease payments at the lease commencement date.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Right-of-use assets and operating lease liabilities are recognized at the present value of the future lease payments on the lease commencement date.

The interest rate used to determine the present value of the future lease payments is our incremental borrowing rate, because the interest rate implicit in our leases is not readily determinable.

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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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

these uncertainties in a manner inconsistent with our expectations could have a significant impact on our results of operations and financial condition

Resolution of these uncertainties in a manner inconsistent with our expectations could have a significant impact on our results of operations and financial condition.

NEW ACCOUNTING STANDARDS

New Accounting Standards Adopted

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income"

to give companies the option to reclassify the income tax effects on items within accumulated other comprehensive income resulting from the Tax Act to retained earnings.

ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years.

We adopted ASU 2018-02 during the first quarter of fiscal year 2019 which did not materially impact our Consolidated Financial Statements.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718)", Improvements to Non-employee Share-based Payments (“ASU 2018-07”).

This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees.

ASU 2018-07 is effective for fiscal years beginning after December 15, 2018.

The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application.

We adopted ASU 2018-07 during the first quarter of fiscal year 2019 which did not materially impact our Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” to increase transparency and comparability among organizations by recognizing lease right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.

ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption.

We adopted ASU 2016-02 using the modified retrospective approach and recorded $ 38.2 million of operating lease right-of-use assets and $ 38.4 million of operating lease liabilities as the cumulative-effect in the first quarter of fiscal year 2019.

As of December 31, 2019, we had recorded $ 105.4 million of operating lease right-of-use assets and $ 108.9 million of operating lease liabilities.

The adoption of ASU 2016-02 did not materially impact the Company’s Consolidated Statement of Operations or Consolidated Statement of Cash Flows for the year ended December 31, 2019.

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers"

and has subsequently issued several supplemental and/or clarifying ASUs (collectively known as "ASC 606").

ASC 606 implements a five-step model for how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

We adopted ASC 606 during the first quarter of fiscal year 2018 using the modified retrospective approach and recorded an adjustment to reflect the cumulative-effect of its adoption on all contracts with customers.

New Accounting Standards Issued But Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)", Measurement of Credit Losses on Financial Instruments ("ASU 2016-13").

This ASU changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.

ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019.

Early adoption is permitted for fiscal years, and interim periods within those years, beginning after December 15, 2018.

We are currently assessing the impact ASU 2016-13 will have on our Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes"

("ASU 2019-12"), which is meant to simplify and reduce the cost of accounting for income taxes.

The FASB has stated that ASU 2019-12 is being issued in connection with its Simplification Initiative, which is meant to reduce complexity in accounting standards by improving certain areas of generally accepted accounting principles without compromising information provided to users of financial statements.

We early adopted ASU 2019-12 in the first quarter of 2020.

The impact of the adoption of ASU 2019-12 was not material to our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)"

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ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits.

ASU 2018-13 is effective for fiscal years ending after December 15, 2019 and shall be applied to all periods presented on a

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

retrospective basis.

Early adoption is permitted.

We are currently assessing and do not believe ASU 2018-13 will have a significant impact on our fair value measurements disclosure requirements.

ASU 2018-13 was effective for interim and annual periods ending after December 15, 2019 and shall be applied to all periods presented on a retrospective basis.

We adopted ASU 2018-13 in the first quarter of 2020.

The impact of the adoption of ASU 2018-13 was not material to our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments"

("ASU 2016-13").

ASU 2016-13 changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded.

ASU 2016-13 was effective for interim and annual periods, beginning after December 15, 2019.

We adopted ASU 2016-13 in the first quarter of 2020 through a cumulative-effect adjustment to beginning retained earnings using the modified retrospective approach.

The impact of the adoption of ASU 2016-13 was not material to our consolidated financial statements.

New Accounting Standards Issued But Not Yet Adopted

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)"

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ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans.

ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and shall be applied to all periods presented on a retrospective basis.

ASU 2018-14 is

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

effective for interim and annual periods ending after December 15, 2020 and shall be applied to all periods presented on a retrospective basis.

Early adoption is permitted.

We are currently assessing and do not believe ASU 2018-14 will have a significant impact on our defined benefit plan disclosure requirements.

In December 2019, the FASB issued authoritative guidance intended to simplify the accounting for income taxes (ASU 2019-12, “Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes”).

This guidance eliminates certain exceptions to the general approach to the income tax accounting model, and adds new guidance to reduce the complexity in accounting for income taxes.

This guidance is effective for annual periods after December 15, 2020, including interim periods within those annual periods.

We are currently evaluating the potential impact of this guidance on our financial statements.

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848):

Facilitation of the Effects of Reference Rate Reform on Financial Reporting"

("ASU 2020-04").

ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued.

ASU 2020-04 will be in effect through December 31, 2022.

We are currently assessing the potential impact of ASU 2020-04 on our consolidated financial statements.

BUSINESS ACQUISITIONS

2019 Acquisitions

In September 2019, we completed the acquisition of Artesyn pursuant to the Stock Purchase Agreement (“Acquisition Agreement”), as amended, dated May 14, 2019.

Pursuant to the Acquisition Agreement, we acquired all of Artesyn’s issued and outstanding shares for a preliminary purchase price of $ 361.3 million, net of cash acquired, including the assumption of certain liabilities and subject to an adjustment for net working capital.

The purchase price included the contingent consideration related to a potential payment back to the seller per the Acquisition Agreement for any tax benefit arising from the utilization of acquired net operating losses through 2021 at the federal income tax rate of 21.0 %.

The amount recorded represents our best estimate of the present value of the tax benefit we will achieve utilizing the acquired net operating losses through 2021.

In connection with the Acquisition Agreement, we entered into a credit agreement that provided us with aggregate financing of $ 500.0 million which was used to partially fund the Artesyn acquisition.

Credit Facility for additional details related to the credit agreement.

Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed related to the Artesyn acquisition.

Artesyn’s Embedded Power business is one of the world’s largest providers of highly engineered, application-specific power supplies for demanding applications.

This acquisition will diversify our product portfolio and give us access to additional growth markets, including hyperscale data centers, telecom infrastructure in next generation 5G networks, embedded industrial power applications and medical power for diagnostic and treatment applications.

The components of the fair value of the total consideration transferred for the acquisition is as follows:

Versatile Power, Inc

On December 31, 2020, we acquired 100 % of the issued and outstanding shares of Versatile Power, Inc., which is based in Campbell, California.

This acquisition added radio frequency ("RF") and programmable power supplies for medical and industrial applications to our product portfolio and further expands our presence in the medical market by adding proven technologies, deep customer relationships, expertise in medical design, and a medical-certified manufacturing center.

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

Cash paid for acquisition

Non-cash consideration

Contingent consideration and working capital adjustments

Contingent consideration

Total fair value of consideration transferred

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Total purchase price

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed from the acquisition in 2019:

September 10, 2019

Measurement Period Adjustments

December 31, 2019

Accounts and other receivable, net

The following table summarizes the estimated preliminary values of the assets acquired and liabilities assumed:

Fair Value December 31, 2020

Current asset and liabilities, net

Property and equipment

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Intangible assets

Deferred income tax assets

Total assets acquired

Accounts payable

Operating lease liability

Pension liability

Deferred income tax liabilities

Other liabilities

Total liabilities assumed

Total fair value of net assets acquired

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

Straight-line

Customer relationships

Straight-line

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date.

The goodwill represents expected operating synergies from combining operations with the acquired companies and the estimated value associated with the enhancements to our comprehensive product lines and access to new markets.

Advanced Energy is still evaluating the fair value for the assets acquired and liabilities assumed related to the Artesyn acquisition.

Accordingly, the purchase price allocation presented above is preliminary.

2018 Acquisitions

In September 2018, Advanced Energy acquired LumaSense Technologies Holdings, Inc.

("LumaSense"), a privately held company with primary operations in Santa Clara, California, Frankfurt, Germany, and Ballerup, Denmark for a purchase price of $ 84.7 million, net of cash acquired.

In May 2018, Advanced Energy acquired the electrostatic technology and product line (“Electrostatic Product Line”) from Monroe Electronics, Inc.

("Monroe"), a privately held electronics manufacturer in Lyndonville, New York for $ 3.0 million in cash.

Artesyn’s Embedded Power Business

In September 2019, we completed the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business pursuant to the Stock Purchase Agreement dated May 14, 2019 as amended (the "Acquisition Agreement").

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

In February 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan and Lockport, New York, for $ 6.1 million, net of cash acquired.

Trek has a 95 % ownership interest in its U.S.

subsidiary which is also its primary operation.

The components of the fair value of the total consideration transferred for our 2018 acquisitions are as follows:

Electrostatic

Pursuant to the Acquisition Agreement, we acquired 100 % of Artesyn’s issued and outstanding shares for a purchase price of $ 370.2 million, including the assumption of certain liabilities and the finalization of the net working capital adjustment.

In connection with the Acquisition Agreement, we entered into a credit agreement that provided us with aggregate financing of $ 500.0 million which was used to partially fund the Artesyn acquisition.

Credit Facility for additional details related to the credit agreement.

Artesyn’s embedded power business is one of the world’s largest providers of highly engineered, application-specific power supplies for demanding applications.

This acquisition diversified our product portfolio and gave us access to additional growth markets, such as data centers (including hyperscale), telecom infrastructure in next generation 5G networks, embedded industrial power applications and medical power for diagnostic and treatment applications.

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

Cash paid for acquisition

Contingent consideration

Total fair value of consideration transferred

Less cash acquired

Total purchase price

In 2019, Advanced Energy finalized the assessment of fair value for the assets acquired and liabilities assumed related to the LumaSense acquisition.

The following table summarizes the fair values of the assets acquired and liabilities assumed from the LumaSense acquisition, including measurement period adjustments.

December 31, 2018

Measurement Period Adjustments

The following table summarizes the final fair values of the assets acquired and liabilities assumed:

December 31, 2020

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Property and equipment

Intangible assets

Deferred income tax assets

Total assets acquired

Accounts payable

Deferred income tax liabilities

Other liabilities

Total liabilities assumed

Total fair value of net assets acquired

During 2019, we adjusted the estimated values of the assets acquired and liabilities assumed based upon the final valuation report.

These adjustments included additional liabilities, changes to deferred taxes and changes in the allocation of excess purchase price between goodwill and intangibles.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The final fair values of the assets acquired and liabilities assumed from our acquisitions in 2018 are as follows:

Electrostatic

Accounts and other receivable, net

Property and equipment

Operating lease right-of-use assets

Intangible assets

Deferred income tax assets

Total assets acquired

Accounts payable

Operating lease liability

Pension liability

Deferred income tax liabilities

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Total fair value of net assets acquired

A summary of the intangible assets acquired in 2018, amortization method and estimated useful lives are as follows:

Method and Useful life

Electrostatic

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

Straight-line

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Straight-line

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date.

The goodwill represents expected operating synergies from combining operations with the acquired companies and the estimated value associated with the enhancements to our comprehensive product lines.

Pro forma results for Advanced Energy Inc.

giving effect to the Artesyn Embedded Power Business and LumaSense Technologies Holdings, Inc.

The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy, LumaSense and Artesyn as if each of the acquisitions had been completed at the beginning of the fiscal year prior to their acquisition.

The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of the year prior to the acquisition dates, nor are they indicative of future results.

The unaudited pro forma financial information for the year ended December 31, 2019 includes Advanced Energy’s results, including the post-acquisition results of LumaSense, since September 1, 2018 and the post-acquisition results of Artesyn, since September 10, 2019.

The unaudited pro forma financial information for the year ended December 31, 2019 and 2018 combines Advanced Energy’s results with the pre-acquisition results of Artesyn and LumaSense for that period.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

The following table presents our unaudited pro forma results for the acquisitions of Artesyn and LumaSense:

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation on each balance sheet date.

The goodwill represents expected operating synergies from combining operations with the acquired company and the estimated value associated with the enhancements to our comprehensive product lines and access to new markets.

Advanced Energy settled the adjustment for the net working capital and finalized the fair value for the assets acquired and liabilities assumed related to the Artesyn acquisition.

Accordingly, the purchase price allocation presented above is final.

Pro forma results for Advanced Energy Inc.

giving effect to the Artesyn Transaction

The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and Artesyn as if the acquisition had been completed on January 1, 2019.

The unaudited pro forma financial information for the year ended December 31, 2019 combines Advanced Energy’s results with the pre-acquisition results of Artesyn for that period.

Year Ended December 31,

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Revenue Recognition

We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or services have been transferred to our customers.

We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or services has been transferred to our customers.

The transaction price is based upon the standalone selling price.

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Repairs that are covered under our standard warranty do not generate revenue.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Nature of goods and services

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We also supply thermal instrumentation products for advanced temperature measurement and control in these markets.

As a result of the Artesyn acquisition, we now sell precision power conversion products into the telecom and networking, data center, and additional medical and industrial markets.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

As a result of the Artesyn acquisition, we now sell precision power conversion products into the Telecom and Networking, Data Center Computing (including hyperscale), and Industrial and Medical markets.

Our products are designed to enable new process technologies, improve productivity, and lower the cost of ownership for our customers.

We also provide repair and maintenance services for all our products.

We principally serve original equipment manufacturers ("OEM") and end customers in the semiconductor, flat panel display, high voltage, solar panel, telecom and networking, data center, medical, and other industrial capital equipment markets.

We principally serve OEMs and end customers in the semiconductor, flat panel display, high voltage, solar panel, Telecom and Networking, Data Center Computing, Industrial and Medical markets.

Our advanced power products are used in diverse markets, applications, and processes including the manufacture of capital equipment for semiconductor device manufacturing, thin film applications for thin film renewables and architectural glass, and for other thin film applications including flat panel displays, and industrial coatings.

Our embedded power products are used in a wide range of applications, including 5G, datacenter including hyperscale and other industrial and medical applications.

Our global support services group offers warranty and after-market repair services in the regions in which we operate, providing us with preventive maintenance opportunities.

Our embedded power products are used in a wide range of applications, such as 5G, data center (including hyperscale) and other industrial and medical applications.

Our services group offers warranty and after-market repair services in the regions in which we operate, providing us with preventive maintenance opportunities.

Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the costs of system downtime.

They expect that suppliers offer comprehensive local repair service and customer support.

To meet these market requirements, we maintain a worldwide support organization comprising of both direct and indirect activities, through partnership with local distributors, primarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Germany, Singapore and United Kingdom.

To meet these market requirements, we maintain a worldwide support organization in ten countries, including the United States, the PRC, Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain.

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

As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties which had previously been offered on our discontinued inverter products.

We record a contract liability for payments received for extended warranties or maintenance plans for which we have not yet provided the services.

Any up-front fees received for extended warranties or maintenance plans are deferred.

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

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In connection with this sale, approximately $ 22.0 million of deferred revenue related to extended warranties and service contracts, were transferred to the buyer.

Disposed and Discontinued Operations below for additional information.

Contract liabilities related to our extended warranties and service contracts were $ 9.2 million as of December 31, 2019 and $ 33.4 million as of December 31, 2018.

We expect to recognize between $ 0.2 million and $ 1.0 million per year through 2031.

Disposed and Discontinued Operations for additional information in relation to this sale.

We have deferred revenue related to our extended warranties and service contract totaling $ 8.7 million as of December 31, 2020 and $ 9.2 million as of December 31, 2019.

We are expected to recognize this revenue ratably through year 2031.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Disaggregation of Revenue

The following table presents our sales by product line, which includes certain reclassifications to prior comparative periods to conform to our current year presentation:

The following table presents our sales by product line, inclusive of both products and services, which includes certain reclassification to prior comparative periods to conform to our current year presentation:

Years Ended December 31,

Semiconductor Equipment

Industrial & Medical

Industrial and Medical

Data Center Computing

Telecom & Networking

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Telecom and Networking

The following table presents our sales by geographic region:

7 unchanged sentences

Disposed Operations

In May 2019, we sold our grid-tied central solar inverter services business to Bold Renewables Holdings, LLC (“Buyer”) for $ 1.00 dollar and assumption of our initial product warranty and our extended warranty service obligations.

In connection with this transaction, we entered into a Loan and Security Agreement with the Buyer.

Under this agreement, we initially loaned $ 2.8 million to the buyer at closing and loaned an additional $ 1.5 million in the fourth quarter of 2019.

We have made available an additional $ 3.75 million that may be borrowed in the future, subject to certain operating and liquidity covenants, for operating needs over the next ten years .

In May 2019, we sold our grid-tied central solar inverter services business to Bold Renewables Holdings, LLC ("Bold") for $ 1.00 dollar and the assumption by Bold of our initial product warranty and our extended warranty service obligations.

In connection with this transaction, we entered into a Loan and Security Agreement with Bold (the "Loan and Security Agreement").

Under the Loan and Security Agreement, we loaned Bold an aggregate $ 5.3 million between May 2019 and the first quarter of 2020.

Under the terms of the Loan and Security Agreement and for the next ten years , we have made an additional $ 2.75 million available for borrowing, subject to the satisfaction of certain operating and liquidity covenants by Bold.

The borrowings under the Loan and Security Agreement bear interest at 0 % for the first seven years and 5 % thereafter.

Additionally, the Loan and Security Agreement provides for early payment discounts of 50 % during the first three years, 45 % for years four and five and 40 % thereafter up to 30 days prior to the maturity of the Loan and Security Agreement.

A discount on the initial $ 2.8 million funding under the Loan and Security Agreement of $ 2.3 million has been recognized as a reduction to the gain recognized on the sale.

As a result of the transaction, we reduced our liabilities held in discontinued operations approximately $ 10.9 million related to initial product warranty and reduced Other liabilities of our continuing operations of approximately $ 22.0 million related to extended warranty service obligations as well as other assets and liabilities associated with the continuing grid-tied central solar inverter service and repair business.

A $ 14.8 million non-cash gain was recognized in Other income (expense), net from continuing operations and an $ 8.6 million non-cash gain, net of tax expense of $ 2.4 million, was recognized in Income from discontinued operations.

Discontinued Operations

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

Accordingly, the results of our inverter business have been reflected as “Income (loss) from discontinued operations, net of income taxes” on our Consolidated Statements of Operations for all periods presented herein.

The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated Balance Sheets.

Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future

A discount of $ 2.3 million has been recognized as a reduction to our gain recognized on the sale.

As a result of the transaction, we reduced our discontinued operations liabilities by approximately $ 10.9 million that were related to initial product warranty and reduced our other liabilities by approximately $ 22.0 million that were related to extended warranty service obligations as well as reduced other assets and liabilities associated with the continuing grid-tied central solar inverter service and repair business.

Accordingly, a $ 14.8 million non-cash gain was

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associated services are rendered.

recognized in Other income (expense) from continuing operations and an $ 8.6 million non-cash gain, net of tax expense of $ 2.4 million, was recognized in “Income (loss) from discontinued operations."

Discontinued Operations

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

Accordingly, the results of our inverter business have been reflected as "Income (loss) from discontinued operations, net of income taxes"

on our Consolidated Statements of Operations for all periods presented herein.

The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated Balance Sheets.

Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associated services are rendered.

Extended warranties related to the inverter product line are no longer offered.

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

Assets and Liabilities of discontinued operations within the Consolidated Balance Sheets are comprised of the following:

Cash and cash equivalents

Accounts and other receivables, net

Current assets of discontinued operations

Deferred income tax assets

Non-current assets of discontinued operations

Accounts payable and other accrued expenses

Accrued warranty

Current liabilities of discontinued operations

Accrued warranty

Other liabilities

Non-current liabilities of discontinued operations

Assets and Liabilities of discontinued operations are not significant.

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

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Total current provision

Total deferred provision

Total deferred provision (benefit)

Total provision for income taxes

The Company’s effective tax rates differ from the U.S.

federal statutory rate of 21 % for the years ended December 31, 2019 and December 31, 2018, primarily due to the benefit of tax credits and earnings in foreign jurisdictions which are subject to lower tax rates, offset by additional GILTI tax in the US and withholding taxes.

The Company’s effective tax rate differs from the U.S.

federal statutory rate of 35 % for the year ended December 31, 2017, primarily due to the benefit related to the wind down of our solar inverter business and earnings in foreign jurisdictions, which are subject to lower tax rates, offset by the impact of U.S.

The principal causes of the difference between the federal statutory rate and the effective income tax rate for each the years below are as follows:

federal statutory rate of 21 % for the three years ended December 31, 2020 primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, offset by net U.S.

tax on foreign operations and withholding taxes.

The principal causes of the difference between the federal statutory rate and the effective income tax rate for each of the years below are as follows:

Years Ended December 31,

1 unchanged sentence

State income taxes, net of federal deduction

Transition tax - U.S.

Corporate tax rate changes - U.S.

Tax benefit associated with inverter business wind down

Stock based compensation

tax on foreign operations

Foreign derived intangible income deduction

Tax effect of foreign operations

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Excess and obsolete inventory

Accrued restructuring

Deferred revenue

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Net deferred tax assets

Of the $ 32.7 million and $ 40.2 million net deferred tax asset at December 31, 2019 and 2018, respectively, $ 42.7 million and $ 47.1 million is reflected as a net non-current deferred tax asset and $ 10.0 million and $ 7.0 million is reflected as a long-term liability at December 31, 2019 and 2018, respectively.

Of the $ 40.7 million and $ 32.7 million net deferred tax asset on December 31, 2020 and 2019, respectively, $ 50.8 million and $ 42.7 million is reflected as a net non-current deferred tax asset and $ 10.1 million and $ 10.0 million is reflected as a long-term liability on December 31, 2020 and 2019, respectively.

As of December 31, 2020, the Company has recorded a valuation allowance on $ 4.2 million of its U.S.

domestic deferred tax assets, largely attributable to acquired federal capital loss carryforwards for which the Company does not have sufficient income in the character to realize that attribute, and state carryforward attributes that are expected to expire before sufficient income can be realized in those jurisdictions.

The remaining valuation allowance on deferred tax assets approximates $ 60.2 million and is associated primarily with operations in Austria, Germany, Hong Kong and Switzerland.

domestic deferred tax assets, largely attributable to state carryforward attributes that are expected to expire before sufficient income can be realized in those jurisdictions.

The remaining valuation allowance on deferred tax assets approximates $ 42.5 million and is associated primarily with operations in Germany, Hong Kong, and Switzerland.

As of December 31, 2020, there is not sufficient positive evidence to conclude that such deferred tax assets, presently reduced by a valuation allowance, will be recognized.

The December 31, 2019 valuation allowance balance reflects an increase of $ 45.3 million during the year.

The change in the valuation allowance is primarily due to increases from acquired Artesyn positions and current year activity, partially offset by decreases due to foreign exchange movements

The December 31, 2020 valuation allowance balance reflects a decrease of $ 29.5 million during the year.

The change in the valuation allowance is primarily due to the dissolution of an Austrian entity, refinements in the determination of Artesyn attributes acquired in 2019, and the netting of Section 382 limited attributes that will never be available for utilization with their valuation allowance, partially offset by increases due to foreign exchange movements.

As of December 31, 2020, the Company had U.S., foreign and state tax loss carryforwards of $ 70.3 million, $ 129.6 million, and $ 117.7 million, respectively.

8 unchanged sentences

the case of the interest expense limitation amount, no expiration period.

The majority of the foreign jurisdiction, and $ 4.6 million of the federal net operating loss carry forwards, have no expiration period.

We operate under a tax holiday in one of our foreign jurisdictions.

This tax holiday is in effect through June 30, 2027.

Much of the foreign jurisdiction, and $ 8.0 million of the federal net operating loss carry forwards, have no expiration period.

We operate under a tax holiday in Singapore and China.

These tax holidays are in effect through June 30, 2027 and December 31, 2022, respectively.

The tax holiday is conditional upon our meeting certain employment and investment thresholds.

The impact of the tax holiday decreased foreign taxes by $ 4.0 million and $ 17.8 million for 2019 and 2018, respectively.

The impact of the tax holidays decreased foreign taxes by $ 13.0 million and $ 4.0 million for 2020 and 2019, respectively.

The benefit of the tax holiday on earnings per diluted share was $ 0.34 and $ 0.12 for 2020 and 2019, respectively.

In the third quarter of 2019, following a review of our operations, liquidity and funding, tax implications of cash repatriation, political risk, and investment opportunities, we determined that the ability to access certain amounts of foreign earnings that were previously indefinitely reinvested would provide greater investment returns, treasury controls, and other working capital needs if repatriated to the U.S.

Accordingly, in the third quarter of 2019, we withdrew the permanent reinvestment assertion on $ 123.9 million of earnings generated by certain of our operations through December 2018.

Resulting from this change in permanent reinvestment assertion, the Company recorded a deferred tax liability of $ 2.9 million related to withholding and state income taxes.

There is no certainty as to the timing of when such foreign earnings will be distributed to the United States in whole or in part.

Certain foreign subsidiary earnings are subject to U.S.

taxation under the U.S.

Tax Act, which also repeals U.S.

taxation on the subsequent repatriation of those earnings.

We have not provided for U.S.

state or foreign income taxes on $ 26.5 million of our subsidiaries’ undistributed earnings as of December 31, 2019.

The $ 26.5 million of undistributed foreign earnings continue to be reinvested in our foreign operations, as we have determined that these earnings are necessary to support our planned growth and strategic acquisitions in our foreign operations, and as a result, these earnings remain indefinitely reinvested in those operations.

In making this decision, we considered cash needs for investing in our existing businesses, currency controls, and the tax cost of cash repatriation.

Determination of the amount of unrecognized deferred income tax liability related to these earnings is not practicable.

As of December 31, 2020, we have undistributed earnings of certain foreign subsidiaries of approximately $ 58.9 million that we have indefinitely invested, and on which we have not recognized deferred taxes.

Estimating the amount of potential tax is not practicable because of the complexity and variety of assumptions necessary to compute the tax.

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

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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 $ 3.0 million and $ 1.2 million of accrued interest and penalties at December 31, 2019 and 2018, respectively.

We had $ 3.2 million and $ 3.0 million of accrued interest and penalties on December 31, 2020 and 2019, respectively.

We expect the total amount of tax contingencies will decrease by approximately $ 3.5 million in 2021 based on statute of limitation expiration.

With few exceptions, the Company is no longer subject to federal, state, or foreign income tax examinations by tax authorities for years before 2017.

EARNINGS PER SHARE

Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period.

The computation of our diluted EPS is similar to the computation of our basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

With few exceptions, the Company is no longer subject to federal, state or foreign income tax examinations by tax authorities for years before 2016.

EARNINGS PER SHARE

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

The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share for the years ended December 31, 2019, 2018 and 2017:

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share:

Years Ended December 31,

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In May 2018, our Board of Directors approved a $ 50 million increase in its authorization to repurchase shares of our common stock under this same program.

On December 18, 2019, the Board of Directors authorized to remove the expiration date to the Company’s share repurchase program and increase the authorized amount by $ 25.1 million.

As of December 31, 2019, the Company is authorized to repurchase shares of the Company’s common stock of up to a total of $ 50.0 million.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

On December 18, 2019, our Board of Directors authorized the removal of the expiration date to the Company’s share repurchase program and increased the authorized amount by $ 25.1 million.

As of December 31, 2020, the Company is authorized for the future repurchase of shares of our common stock of up to a total of $ 38.4 million.

In order to execute the repurchase of shares of our common stock, the Company periodically enters into stock repurchase agreements.

During the years ended December 31, 2019, 2018 and 2017 the Company has repurchased the following shares of common stock:

The Company has repurchased the following shares of common stock:

Years Ended December 31,

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Average repurchase price per share

There were no shares repurchased from related parties.

All shares repurchased were recognized as a reduction to Additional paid-in capital.

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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

FAIR VALUE MEASUREMENTS

The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis.

December 31, 2020

Balance Sheet Classification

Certificates of deposit

Marketable securities

As of December 31, 2019, and December 31, 2018, our marketable securities consisted of certificates of deposit and, due to their short-term nature, the fair value of these securities approximated their carrying values which were $ 2.6 million and $ 2.5 million at December 31, 2019 and 2018, respectively.

The maturities of our certificates of deposit as of December 31, 2019 ranged from March 18, 2020 to October 17, 2020.

The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded.

As of December 31, 2019, we do not believe any of the underlying issuers of our marketable securities are at risk of default.

Total assets measured at fair value on a recurring basis

Contingent consideration

Other current liabilities

Contingent consideration

Other long-term liabilities

Interest rate swaps

Other long-term liabilities

Total liabilities measured at fair value on a recurring basis

December 31, 2019

Balance Sheet Classification

Certificates of deposit

Marketable securities

Total assets measured at fair value on a recurring basis

Contingent consideration

Other long-term liabilities

Total liabilities measured at fair value on a recurring basis

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

Derivative Financial Instruments for additional information.

The fair value of contingent consideration is determined by estimating the net present value of the expected cash flows based on the probability of expected payment.

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

DERIVATIVE FINANCIAL INSTRUMENTS

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

During the years ended December 31, 2018 and 2017, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies.

These forward contracts manage the exchange rate risk associated with assets and liabilities denominated in nonfunctional currencies.

These derivative instruments are not designated as hedges;

however, they do economically offset the fluctuations of our intercompany debt due to foreign exchange rate changes.

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

These forward contracts are typically for one-month periods.

We did not have any currency exchange rate forward contracts outstanding as of December 31, 2019 and 2018.

At December 31, 2017, we had outstanding Euro and Pound Sterling forward contracts.

The notional amount of foreign currency exchange forward contracts outstanding at December 31, 2017 was $ 16.3 million and the fair value of these contracts was not significant at December 31, 2017.

During the years ended December 31, 2019, 2018, and 2017, the gains and losses recorded related to the foreign currency exchange rate forward contracts are as follows:

Years Ended December 31,

Foreign currency loss from foreign currency exchange rate forward contracts

These gains and losses were offset by corresponding foreign currency gains and losses on the related intercompany debt and both are included as a component of Other income (expense), net, in our Consolidated Statements of Operations.

As of December 31, 2020, and 2019, we did not have any currency exchange rate contracts outstanding.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

During the first quarter of 2017, we entered into a foreign currency exchange rate forward contract at a cost of $ 3.5 million, to mitigate the exchange rate risk associated with a planned offshore acquisition which was not consummated.

The hedge expired upon maturity in the first quarter of 2017.

The cost of the forward contract is recorded as a component of Other income (expense), net in our Consolidated Statement of Operations.

ACCOUNTS AND OTHER RECEIVABLE

Gains and losses related to foreign currency exchange contracts were offset by corresponding gains and losses on the revaluation of the underlying assets and liabilities.

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

In April 2020, the Company executed interest rate swap contracts with independent financial institutions to partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan Facility (under the Company’s existing Credit Agreement dated as of September 10, 2019).

These transactions are accounted for as cash flow hedging instruments.

The interest rate swap contracts fixed 85 % of the outstanding principal balance on our term loan to a total interest rate of 1.271 %.

This is comprised of 0.521 % average fixed rate per annum in exchange for a variable interest rate based on one-month USD-LIBOR-BBA plus the credit spread in the Company’s existing Credit Agreement, which is 75 basis points at current leverage ratios.

The following table summarizes the notional amount of the Company’s qualified hedging instruments:

Interest rate swap contracts

On December 31, 2020, Accumulated other comprehensive loss on the Consolidated Balance Sheets includes $ 2.1 million, net of tax, related to changes in fair value on the interest rate swap contracts.

Fair Value Measurements for information regarding fair value of derivative instruments.

As a result of the use of derivative financial instruments, the Company is exposed to the risk that counterparties to derivative contracts may fail to meet their contractual obligations.

The Company manages counterparty credit risk in derivative contracts by reviewing counterparty creditworthiness on a regular basis and limiting exposure to any single counterparty.

ACCOUNTS AND OTHER RECEIVABLE, NET

Accounts and other receivable are recorded at net realizable value.

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Total receivables, net

Amounts billed, net consist of amounts that have been invoiced to our customers in accordance with terms and conditions, and are shown net of an allowance for doubtful accounts.

Amounts billed, net consist of amounts that have been invoiced to our customers in accordance with terms and conditions and are shown net of an allowance for credit losses.

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

Unbilled receivables consist of amounts where we have satisfied our contractual obligations related to inventory stocking contracts with customers.

Such amounts are typically invoiced to the customer upon their consumption of the inventory managed under the stocking contracts.

Such amounts typically become billable to the customer upon their consumption of the inventory managed under the stocking contracts.

We anticipate that substantially all unbilled receivables will be invoiced and collected over the next twelve months.

These contracts do not include any financing components.

Our inventories are valued at the lower of cost or net realizable value and computed on a first-in, first-out (FIFO) basis.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes the changes in expected credit losses:

Balance as of December 31, 2019

Deductions - write-offs, net of recoveries

Balance as of December 31, 2020

Our inventories are valued at the lower of cost or net realizable value and computed on a first-in, first-out ("FIFO") basis.

Components of inventories are as follows:

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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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Property and equipment, net

Depreciation expense is recorded in continuing operations and allocated within Cost of Sales, Research and development expense and Selling, general and administrative expense in our Consolidated Statements of Operations as follows:

The following table summarizes depreciation expense.

All depreciation expense is recorded in income from continuing operations.

Years Ended December 31,

Depreciation expense

The following summarizes the changes in goodwill during the years ended December 31, 2019 and 2018:

December 31, 2017

Measurement period adjustments to preliminary purchase price allocation

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes the changes in goodwill:

Balance as of December 31, 2018

Measurement period adjustments to purchase price allocation

Additions from acquisition

Foreign currency translation

December 31, 2018

Measurement period adjustments to preliminary purchase price allocation

Balance as of December 31, 2019

Measurement period adjustments to purchase price allocation

Additions from acquisition

Foreign currency translation

December 31, 2019

Adjustments are the result of finalizing the LumaSense acquisition purchase price allocation along with measurement period adjustments to the purchase price allocation from the Artesyn acquisition with the residual adjustments getting recorded to goodwill.

Additions are the result of our acquisition of Artesyn during the year ended December 31, 2019 and our acquisitions of LumaSense, Trek and Monroe’s electrostatic technology and product line during the year ended December 31, 2018, as described in Note 2.

Balance as of December 31, 2020

Additions and adjustments are the result of finalizing the Artesyn acquisition and other allocations.

Refer to Note 2.

Business Acquisitions.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

INTANGIBLE ASSETS

Intangible assets consisted of the following as of December 31, 2019 and 2018:

Intangible assets consisted of the following:

Gross Carrying

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Amortization expense

Estimated amortization expense related to intangibles is as follows:

Year Ending December 31,

RESTRUCTURING COSTS

During the year ended December 31, 2019, we recorded a total pre-tax charge of $ 5.0 million for severance and facility relocation associated with our manufacturing footprint consolidation and optimization, acquisition integration, and reorganization for business efficiency improvement.

For the year ended December 31, 2018, we recorded total severance and related costs of $ 4.2 million.

The cumulative costs recognized under this restructuring plan are $ 9.3 million.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

The table below summarizes the restructuring charges for the years ended:

Estimated amortization expense related to intangibles is as follows:

Year Ending December 31,

RESTRUCTURING COSTS

During 2018, we committed to a restructuring plan to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to our recent acquisitions.

For the year ended December 31, 2020, we incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, PRC, and actions associated with synergies related to the Artesyn acquisition.

The table below summarizes the restructuring charges:

Cumulative Cost

Years Ended December 31,

Through December 31,

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Total restructuring charges

The following table summarizes our restructuring liabilities at December 31, 2019:

The following table summarizes our restructuring liabilities on December 31, 2020:

Total restructuring liabilities

Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months following installation.

The estimated cost of our warranty obligation is recorded when revenue is recognized and is based upon our historical experience by product, configuration and geographic region.

As of December 31, 2020, and 2019, the accrued restructuring liabilities related primarily to severance and related charges.

Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months after shipment.

The estimated cost of our warranty obligation is recorded when revenue is recognized and is based upon our historical experience by product, and configuration.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets.

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Balances at end of period

The Company adopted authoritative guidance related to leases effective January 1, 2019 using the modified retrospective method.

The comparative information presented in the Consolidated Financial Statements was not restated and is reported under the accounting standards in effect for the periods presented.

See the section Leases in Note 1.

Operations and Summary of Significant Accounting Policies and Estimates for a discussion of the significant changes resulting from adoption of the guidance.

The Company’s leases consist primarily of manufacturing and office space under non-cancelable operating leases expiring at various dates through 2033.

Leases with an original term of twelve months or less are not reported in the Consolidated Balance Sheet;

expense for these short-term leases is recognized on a straight-line basis over the lease term.

Most leases include one or more options to renew.

The exercise of these renewal options is at the Company’s

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in the lease term, the right-of-use assets and lease liabilities.

Due to the Company’s centralized treasury function, the Company utilizes a portfolio approach to discount its lease obligations.

The Company assesses the expected lease term at lease inception and discounts the lease using a fully secured annual incremental borrowing rate, adjusted for time value corresponding with the expected lease term.

The Company leases manufacturing and office space under non-cancelable operating leases.

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

For leases containing an option to renew, we regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease terms, along with the ROU assets and operating lease liabilities.

In many cases, we have lease terms that are less than one year, and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and operating lease liabilities.

New leases are negotiated and executed to meet business objectives on an on-going basis.

During the first fiscal quarter of 2020, we expect to record additional right of use assets and related liabilities for facilities in Fort Collins, Colorado, USA.

The lease extensions in Fort Collins, Colorado commenced in January 2020 and extended the expected lease terms to 16 years ;

the right of use asset and operating lease liability recorded at commencement will be $ 21.8 million.

Our leases do not provide an implicit rate.

Accordingly, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

We have a centrally managed treasury function;

therefore, we apply a portfolio approach for determining the incremental borrowing rate applicable to the lease term.

Components of operating lease cost were as follows:

December 31, 2019

Year Ended December 31,

Operating lease cost

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Total operating lease cost

Maturities of our lease liabilities for all operating leases at December 31, 2019 are as follows:

Maturities of our operating lease liabilities on December 31, 2020 are as follows:

Year Ending December 31,

1 unchanged sentence

Present value of lease liabilities

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

We have one lease agreement that commences in March 2021 with total payments of $ 3.5 million over five years .

Other information related to leases, including supplemental cash flow information, consists of:

December 31, 2019

Year Ended December 31,

Weighted average remaining lease term (in years)

Weighted average discount rate

Cash paid for operating leases

Cash paid for operating lease liabilities

Right-of-use assets obtained in exchange for operating lease liabilities (1)

(1) Included in 2019 are the right-of-use assets of $ 60.1 million obtained in connection with the acquisition of Artesyn in September 2019.

Business Combinations for more details.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Comparative Information as Reported Under Previous Accounting Standards

The following comparative information is reported based upon previous accounting standards in effect for the periods presented.

Future minimum lease payments under operating leases were:

Year Ending December 31,

Total lease payments

Rent expense for operating leases was approximately $ 7.4 million and $ 6.5 million during the years ended December 31, 2018 and 2017, respectively.

Subsequent measurement period adjustments that occurred in the year ended December 31, 2020 reduced this amount to $ 54.4 million.

Business Acquisitions for more details.

EMPLOYEE RETIREMENT PLANS AND POSTRETIREMENT BENEFITS

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Each plan is managed locally and in accordance with respective local laws and regulations.

In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates.

To measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates.

These assumptions are based on historical experience as well as facts and circumstances.

An actuarial analysis is used to measure the expense and liability associated with pension benefits.

In connection with the acquisition of Artesyn in September of 2019, the Company acquired certain pension plans and, as a result, started including the related balances in its Consolidated Balance Sheets at December 31, 2019 and the expenses attributable to these plans for the period from September 10, 2019 to December 31, 2019 in its Consolidated Statement of Operations.

Business Acquisitions for more details on this transaction.

The information provided below includes one pension plan which is part of discontinued operations.

As such, all related liabilities and expenses are reported in discontinued operations in the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations for all periods presented.

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

The information provided below includes one pension plan which is part of discontinued operations.

The Company’s projected benefit obligation and plan assets for defined benefit pension plans at December 31, 2019 and 2018 and the related assumptions used to determine the related liabilities are as follows:

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

Years Ended December 31,

1 unchanged sentence

Interest cost

Actuarial loss

Actuarial (gain) loss

Benefits paid

22 unchanged sentences

(in thousands, except per share amounts)

The fair value of the Company’s qualified pension plan assets by category for the years ended December 31, are as follows:

The fair value of the Company’s qualified pension plan assets by category are as follows:

December 31, 2020

1 unchanged sentence

Diversified Growth Fund

Index-Linked Gilts

Corporate Bonds

6 unchanged sentences

Insurance Contracts

At December 31, 2019 our plan’s assets of $ 14.9 million were invested in five separate funds including a multi-asset fund ( 32.4 %), a diversified growth fund ( 32.6 %), an index-linked gilt ( 13.0 %), corporate bonds ( 14.0 %), and insurance contracts ( 7 %).

The asset and growth funds aim to generate an ‘equity-like’ return over an economic cycle with significantly reduced volatility relative to equity markets and have scope to use a diverse range of asset classes, including equities, bonds, cash and alternatives, e.g.

property, infrastructure, high yield bonds, floating rate debt, private, equity, hedge funds and currency.

The bond fund and gilt fund are invested in index-linked gilts and corporate bonds.

On December 31, 2020, our plan’s assets of $ 17.3 million were invested in five separate funds including a multi-asset fund ( 29.8 %), a diversified growth fund ( 29.7 %), corporate bonds ( 28.4 %), and insurance contracts ( 6.4 %).

These investments are intended to provide a degree of protection against changes in the value of our plan’s liabilities related to changes in long-term expectations for interest rates and inflation expectations.

1 unchanged sentence

Expected Future Benefit Payments

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

STOCK-BASED COMPENSATION

As of December 31, 2020, we had two active stock-based incentive compensation plan:

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

the 2017 Omnibus Incentive Plan and the Employee Stock Purchase Plan ("ESPP").

All new equity compensation grants are issued under these two plans;

1 unchanged sentence

Our stock plans are administered by the Board of Directors Compensation Committee.

At December 31, 2019, there were 3.3 million shares reserved and 2.5 million shares available for future grant under our stock-based incentive plans.

On May 4, 2017, the stockholders approved the Company’s 2017 Omnibus Incentive Plan ("the 2017 Plan") and reserved 5.2 million shares under the plan.

The 2017 Plan replaced the 2008 Omnibus Incentive Plan ("the 2008 Plan"), and all awards previously granted under the 2008 Plan continue to vest and/or are exercisable under the 2017 Plan in accordance with their original terms and conditions.

On December 31, 2020, there were 3.0 million shares reserved and 2.3 million shares available for future grant under our stock-based incentive plans.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

On May 4, 2017, the stockholders approved the Company’s 2017 Omnibus Incentive Plan ("the 2017 Plan") and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan are now available for issuance under the 2017 Plan.

The 2017 Plan and 2008 Plan provide for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights.

Additionally, awards issued may be issued as performance-based awards to align stock compensation awards to the attainment of annual or long-term performance goals.

Any of the awards issued may be issued as performance-based awards to align stock compensation awards to the attainment of annual or long-term performance goals.

As of December 31, 2020, there were 2.1 million shares available for grant under the 2017 Plan.

7 unchanged sentences

We recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving the award.

Stock-based compensation for the three years ended December 31 is as follows:

Stock-based compensation was as follows:

Years Ended December 31,

1 unchanged sentence

Our stock-based compensation expense is based on the value of the portion of share-based payment awards that are ultimately expected to vest, assuming estimated forfeitures at the time of grant.

Estimated forfeiture rates for our stock-based compensation expense applicable to stock options and restricted stock units ("RSU’s") was approximately 10 %, 10 % and 17 % for the years ended December 31, 2019, 2018 and 2017, respectively.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Estimated forfeiture rates for our stock-based compensation expense applicable to stock options and restricted stock units ("RSU’s") were approximately 5 %, 10 % and 10 % for the years ended December 31, 2020, 2019 and 2018, respectively.

Restricted Stock Units

The fair value of our Restricted Stock Units ("RSUs") is determined based upon the closing fair market value of our common stock on the grant date.

Changes in the unvested RSU’s during the years ended December 31, 2019, 2018 and 2017 were as follows:

The fair value of our RSUs is determined based upon the closing fair market value of our common stock on the grant date.

Changes in the unvested RSUs were as follows:

RSUs outstanding at beginning of period

2 unchanged sentences

The total intrinsic value of RSUs converted to shares for the years ended December 31, 2020, 2019 and 2018 were $ 9.2 million, $ 8.3 million, and $ 13.6 million, respectively.

As of December 31, 2019, there was $ 5.9 million of total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected to be recognized through fiscal November 2022, with a weighted-average remaining vesting period of 1.3 years.

As of December 31, 2020, there was $ 7.8 million of total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected to be recognized through November 2023, with a weighted-average remaining vesting period of 1.0 years.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Stock Options

Stock option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant and with either a three or four-year vesting schedule or performance-based vesting as determined at the time of grant.

Stock option awards generally have a term of 10 years .

The fair value of options granted during the year ended December 31, 2015 was estimated on the date of grant using the Black-Scholes-Merton option pricing model using the following assumptions:

the risk-free interest rate was 1.1 % - 1.4 %, the expected term was 4.3 years and expected volatility was 43 %.

The risk-free interest rate was based on the five-year U.S.

Treasury Bill at the time of the grant.

We utilize our historical experience in determining the expected term of our stock options and volatility of our common stock.

We have not historically issued dividends.

Changes in our outstanding stock options during the years ended December 31, 2019, 2018 and 2017 were as follows:

Stock option awards generally have a term of ten years .

Changes in our outstanding stock options were as follows:

Options outstanding at beginning of period

3 unchanged sentences

Options outstanding at end of period

Options vested during the year

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The total intrinsic value of options exercised for the years ended December 31, 2020, 2019 and 2018 was $ 1.9 million, $ 1.6 million and $ 4.1 million, respectively.

All options outstanding at December 31, 2019 are vested and have aggregate intrinsic value of $ 9.2 million and weighted-average remaining contractual life of 4.1 years.

The following table summarizes information about the stock options outstanding at December 31, 2019:

Options Outstanding

Options Exercisable

All options outstanding on December 31, 2020 are vested and have aggregate intrinsic value of $ 10.8 million and weighted-average remaining contractual life of 3.9 years.

The following table summarizes information about the stock options outstanding on December 31, 2020:

Options Outstanding and Exercisable

Weighted-Average

2 unchanged sentences

Exercise Price

14.21 - 16.25

18.77 - 18.77

26.32 - 26.32

$ 9.51 to $ 12.44

$ 9.51 to $ 26.32

Employee Stock Purchase Plan

4 unchanged sentences

Currently, the plan period is six months.

The purchase price of common stock purchased under the ESPP is currently equal to the lower of:

1) 85 % of the fair market value of our common stock on the commencement date of each plan period or 2) 85 % of the fair market value of our common shares on each plan period purchase date.

At December 31, 2019, 0.2 million shares remained available for future issuance under the ESPP.

The purchase price of common stock purchased under the ESPP is currently equal to the lower of 1) 85 % of the fair market value of our common stock on the commencement date of each plan period or 2) 85 % of the fair market value of our common shares on each plan period purchase date.

On December 31, 2020, 0.2 million shares remained available for future issuance under the ESPP.

Purchase rights granted under the ESPP are valued using the Black-Scholes-Merton model.

1 unchanged sentence

Total compensation expense was $ 0.9 million for the year ended December 31, 2020 and $ 0.5 million for the year ended December 31, 2019, and $ 0.4 million for the year ended December 31, 2018.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The fair value of each purchase right granted under the ESPP was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions:

Years Ended December 31,

Risk-free interest rates

9 unchanged sentences

We have not historically issued dividends.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

COMMITMENTS AND CONTINGENCIES

6 unchanged sentences

The Company is currently not a party to any legal action that the Company believes would reasonably have a material adverse impact on its business, financial condition, results of operations or cash flows.

RELATED PARTY TRANSACTIONS

Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers.

During the years ended December 31, 2019, 2018, and 2017, we engaged in the following transactions with companies related to members of our Board of Directors, as described below:

Years Ended December 31,

Sales to related parties

Number of related party customers

Our accounts receivable balance from related party customers with outstanding balances as of December 31, 2019 and December 31, 2018 is as follows:

Accounts receivable from related parties

Number of related party customers

We did not have any outstanding accounts payable with our related parties as of December 31, 2019 or December 31, 2018.

GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION

The following table summarizes sales, and percentages of sales, by customers that individually accounted for 10% or more of our sales for the years ended December 31, 2019 and 2018:

The following table summarizes sales, and percentages of sales, by customers that individually accounted for 10% or more of our sales:

Years Ended December 31,

Applied Materials, Inc.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes the accounts receivable balances, and percentages of the total accounts receivable, for customers that individually accounted for 10% or more of accounts receivable as of December 31, 2019 and December 31, 2018:

Years Ended December 31,

The following table summarizes the accounts receivable balances, and percentages of the total accounts receivable, for customers that individually accounted for 10% or more of accounts receivable:

Applied Materials, Inc.

Nidec Motor Corporation

* Customer’s balance was less than 10% of the total accounts receivable balance.

Our sales to Applied Materials, Inc., LAM Research, and Nidec Corporation include precision power products used in semiconductor processing and solar and flat panel display.

Our sales to Applied Materials, Inc., Lam Research Corp., and Nidec Corporation include precision power products used in semiconductor processing and solar and flat panel display.

No other customer accounted for 10% or more of our sales or accounts receivable balances during these periods.

The following table summarizes long-lived assets by geographic area as of December 31, 2019 and December 31, 2018:

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes long-lived assets by geographic area:

United States

1 unchanged sentence

CREDIT FACILITY

In September 2019, in connection with the Artesyn Acquisition Agreement, the Company entered into a credit agreement (“Credit Agreement”) that provided aggregate financing of $ 500.0 million, consisting of a $ 350.0 million senior unsecured term loan facility (the “Term Loan Facility”) and a $ 150.0 million senior unsecured revolving facility the (“Revolving Facility”).

In September 2019, in connection with the Artesyn Acquisition Agreement, the Company entered into a credit agreement ("Credit Agreement") that provided aggregate financing of $ 500.0 million, consisting of a $ 350.0 million senior unsecured term loan facility (the "Term Loan Facility") and a $ 150.0 million senior unsecured revolving facility the ("Revolving Facility").

Both the Term Loan Facility and Revolving Facility mature on September 10, 2024.

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

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

Additionally, the Revolving Facility is subject to an unused line fee.

1 unchanged sentence

As of December 31, 2020, the Company had $ 150.0 million available to withdraw on the Revolving Facility and was in compliance with all covenants.

The fair value of the Company’s outstanding debt approximates its carrying value of $ 339.0 million as of December 31, 2019.

In connection with the entering into of the Credit Agreement, the Company terminated the Loan Agreement, as amended (the "Loan Agreement") which previously provided a revolving line of credit of up to $ 150.0 million subject to certain funding conditions.

The Company expensed all unused line of credit fees at the time of termination of the Loan Agreement.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

As of December 31, 2019, the debt obligation on our Consolidated Balance Sheets consists of the following:

The fair value of the Company’s outstanding debt approximates the carrying value of $ 322.0 million as of December 31, 2020.

In connection with entering into the Credit Agreement, the Company terminated the Loan Agreement, as amended (the "Loan Agreement") which previously provided a revolving line of credit of up to $ 150.0 million subject to certain funding conditions.

The Company recognized additional interest expense for the remaining unused line of credit fees at the time of termination of the Loan Agreement.

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

Term Loan Facility

debt issuance costs

Less current portion of debt

Less current portion of long-term debt

Total long-term debt

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Contractual maturities of the Company’s debt obligations, excluding amortization of debt issuance costs, as of are as December 31, 2020 follows:

Year Ending December 31,

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

4 unchanged sentences

Total interest expense

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)

The following tables present unaudited quarterly results for each of the eight quarters in the periods ended December 31, 2019 and 2018, in thousands.

We believe that all necessary adjustments have been included in the amounts stated below to present fairly such quarterly information.

Due to the volatility of the industries in which our customers operate, the operating results for any quarter are not necessarily indicative of results for any subsequent period.

Quarter Ended

September 30,

Restructuring Expense

Operating income

Income from continuing operations, net of income taxes

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

Income from continuing operations attributable to noncontrolling interest

Net income attributable to Advanced Energy Industries, Inc.

Earnings (Loss) Per Share:

Continuing Operations:

Basic earnings per share

Diluted earnings per share

Discontinued Operations:

Basic loss per share

Diluted loss per share

Basic earnings per share

Diluted earnings per share

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Quarter Ended

September 30,

Restructuring Expense

Operating income

Income from continuing operations, net of income taxes

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

Income from continuing operations attributable to noncontrolling interest

Net income attributable to Advanced Energy Industries, Inc.

Earnings (Loss) Per Share:

Continuing Operations:

Basic earnings per share

Diluted earnings per share

Discontinued Operations:

Basic loss per share

Diluted loss per share

Basic earnings per share

Diluted earnings per share

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

On March 25, 2019, the Audit Committee (the “Audit Committee”) of the Board of Directors (the “Board”) of Advanced Energy Industries, Inc.

(the “Company”) dismissed Grant Thornton LLP (“Grant Thornton”) as the Company’s independent registered public accounting firm, effective immediately, and provided Grant Thornton with notice of such dismissal.

During the Company’s two most recent fiscal years ended December 31, 2018 and December 31, 2017, and during the subsequent interim period through March 25, 2019, (i) there were no disagreements (as that term is described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure, which disagreement(s), if not resolved to Grant Thornton’s satisfaction, would have caused Grant Thornton to make reference to the subject matter of the disagreement(s) in connection with its reports, and (ii) there were no “reportable events” (as that term is defined in Item 304(a)(1)(v) of Regulation S-K).

On March 27, 2019, the Company engaged Ernst & Young LLP (“E&Y”) as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2019, which engagement was approved by the Audit Committee and effective on March 27, 2019.

Not applicable.

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