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Item 1. Business

2022-03-16 compared with 2021-02-24 · 121 added, 107 removed, 113 unchanged (67% of the section changed)

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

We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-controllable, usable power that is predictable, repeatable, and customizable.

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

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

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

Our products are primarily sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.

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

We sell our products into four markets or applications and provide revenue data by market to enable tracking of market trends.

Following the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business ("Artesyn") in September 2019, we have also provided information on an organic and inorganic basis, which in 2020 was limited to the Artesyn acquisition, to improve comparability during the periods.

During 2020, we saw the continued spread of COVID-19 which grew into a global pandemic.

Our first priority was to provide a healthy and safe working environment for our employees which led to intermittent shutdowns of our manufacturing facilities to implement new health and safety protocols and make additional investments to comply with government guidelines.

There were periods when some of our manufacturing facilities were not operating or were operating at reduced capacity due to government mandates to restrict travel, require social distancing and implement health and safety procedures.

Many of our engineers and non-manufacturing personnel transitioned largely to a work from home environment.

Additionally, the availability of materials, parts and subcomponents needed for production was also impacted during 2020.

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

Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip and deposition, high and low voltage applications such as semiconductor process control, data center computing, networking, telecommunication, medical equipment, life science applications, industrial technology and production, scientific instruments, clean technology production, advanced material production and temperature-critical thermal.

We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of radio frequency (“RF”) power and temperature, and electrostatic instrumentation products for test and measurement applications.

Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, refurbishments, and used equipment to companies using our products.

Our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets, and we provide revenue data by market vertical to enable tracking of trends.

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

At the beginning of 2020 we saw the spread of COVID-19, which grew into a global pandemic.

Our focus on providing a healthy and safe working environment for our employees led to intermittent shutdowns of our manufacturing facilities to implement new health and safety protocols and additional investments to comply with government guidelines.

During 2020 and 2021 there were periods when some of our manufacturing facilities were not operating or were operating at reduced capacity due to government mandates to restrict travel, maintain social distancing, and implement health and safety procedures.

Additionally, during 2021, ongoing restrictions related to COVID-19 and disruptions in an already challenged global supply chain limited the availability of certain materials, parts, subcomponents, and subassemblies needed for production, impacting our ability to ship product to meet customer demand and contributing to increased backlog.

The shortage of critical components was caused in part by the pandemic-driven rise in consumer demand for technology goods, increased demand for electronic components used in a wide variety of industries, logistics-related disruptions in shipping, capacity limitations at some suppliers due to COVID-19, its variants, labor shortages, and other factors.

We expect the challenges associated with this environment to continue into 2022.

Although COVID-19 has impacted our revenues and manufacturing efficiency over the course of 2020, COVID-19 has not materially impacted our liquidity, our ability to access capital, our ability to comply with our debt covenants or the fair value of our assets.

Although COVID-19 impacted our revenues and manufacturing efficiency over the last two years, COVID-19 has not materially impacted our liquidity, our ability to access capital, our ability to comply with our debt covenants or the fair value of our assets.

Additionally, we believe the accommodations we have made to our work environment, including employees utilizing work-from-home arrangements where necessary, will not impact our ability to maintain effective internal controls over financial reporting.

While COVID-19 has not had a material adverse effect on our business during 2020, it is unknown if COVID-19 will have a material adverse impact on our future operations, our financial results (including, but not limited to, gross profit, and cash generation) or liquidity.

Looking forward, we expect that customer demand in 2022 will remain strong across our served markets;

however, our ability to procure critical components to meet our customers’ needs will continue to be limited by the ongoing constraints in the global supply chain.

These supply constraints have led to longer lead times in procuring materials and subcomponents and, in some cases, higher costs and inventory level requirements.

We have implemented measures to improve supply of critical materials and components and to mitigate the impact of higher input costs and believe that our higher levels of inventory are well matched to meet our shippable customer demand.

However, it is not clear how long this supply chain condition will continue, how quickly it may recover, or the extent to which our mitigating actions will be able to improve supply or to compensate for our higher costs.

As such, our forward-looking projections of revenues, earnings, and cash flow may be adversely impacted if the situation continues or further deteriorates.

Please see the information under the caption "Risk Factors"

in Item 1A of this Annual Report on Form 10-K for additional discussion on the potential impacts of COVID-19 to the future operations of our business.

in Item 1A of this Annual Report on Form 10-K for additional discussion on the potential impacts of the ongoing constraints in the global supply chain and COVID-19 to the future operations of our business.

We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995.

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Recent Acquisitions

In December 2020, we completed the acquisition of Versatile Power, Inc.

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

In September 2019, we completed the acquisition of Artesyn.

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

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

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

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

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

In September 2019, we completed the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business (“Artesyn”), which was one of the world’s largest providers of highly engineered, application-specific AC-DC and DC-DC power supplies for demanding applications.

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

For additional information, see Note 2.

Business Acquisitions in Part II, Item 8 "Financial Statements and Supplementary Data."

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

Products and Services

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We principally serve global original equipment manufacturers ("OEM") and end customers in a wide range of semiconductor and industrial technology applications with a broad range of advanced and embedded power products.

Our advanced power products are solutions that are designed to deliver precise power, control and measurement of processes used in a diverse set of applications in semiconductor device manufacturing, thin film deposition of advanced materials, thermal power control, instrumentation and gas detection and monitoring.

Our embedded power products are solutions designed to provide stable and efficient power in mission critical applications across a variety of industrial technology applications such as telecommunication and networking equipment, data center servers and storage systems, medical equipment, robotics, motion control and test and measurement equipment.

Our process power solutions include direct current ("DC"), pulsed DC, low frequency alternating current ("AC"), high voltage, and RF power supplies, RF matching networks, remote plasma sources for reactive gas applications and RF instrumentation.

These solutions are used in a wide range of thin film processes across multiple semiconductor applications and for deposition of advanced materials in adjacent industries such as flat panel display, solar cell manufacturing, thin film coating, and hard coatings.

Our advanced power products include plasma power solutions, high voltage power systems, power control modules, temperature and other sensing solutions that are designed to deliver precise power, control and measurement of processes used in a diverse set of applications in semiconductor device manufacturing, thin film deposition of advanced materials, thermal power control, and instrumentation.

Our embedded power products include a wide range of high and low voltage, AC-DC, DC-DC, and board mounted power ("BMP") solutions designed to provide stable and efficient power in mission critical applications across a variety of industrial technology applications such as telecommunication and networking equipment, data center servers and storage systems, medical equipment, robotics, motion control and test and measurement equipment.

Our plasma power solutions include RF power supplies, RF matching networks, RF instrumentation, direct current ("DC") power systems, pulsed DC power systems, low frequency alternating current ("AC") power systems, and remote plasma sources for reactive gas applications.

These solutions are used in a wide range of thin film processes across multiple semiconductor applications, including plasma-based dry etch, dry strip, atomic layer etch, atomic layer deposition, chemical vapor deposition, physical vapor deposition, electro-chemical deposition, and ion implementation.

In addition, these solutions are used in the processing of advanced materials in adjacent industries such as flat panel display, solar cell manufacturing, architectural glass coating, thin film coating, optical coating, and hard coatings.

Our power control modules and thermal instrumentation products are used in the semiconductor and adjacent industries, in which time-temperature cycles affect material properties, productivity, and yield.

These products are used in processes such as rapid thermal processing, chemical vapor deposition and crystal growing, which require non-contact temperature measurement.

They are also used in many industrial production applications for chemical processing, metal and glass manufacturing, and numerous other industrial power applications.

Our gas detection and monitoring products utilize proven infrared technologies to detect and analyze gases in a wide range of industrial applications, including automotive, energy, environmental controls, aerospace, medical and research.

Our products offer cost-effective online monitoring, allowing our customers to automate manual monitoring or sampling processes that will improve process efficiency, reduce waste, and lower maintenance costs.

These products are used in processes such as rapid thermal processing, chemical vapor deposition, epitaxy, and crystal growing, which require non-contact temperature measurement.

They are also used in many industrial production applications for chemical processing, the manufacturing of metal, carbon fiber, and glass, as well as numerous other industrial power applications.

Our RF power, micro-ohm, and temperature metrology instruments and calibration systems are used to make critical measurements and calibrate customer hardware with speed and high accuracy in a wide range of applications, such as semiconductor manufacturing, medical, aerospace, and food processing industries.

Our embedded power products are designed to maximize energy conversion efficiency, minimize physical sizes, and to meet a variety of standards, such as IEC 60601-1 for medical equipment or IEC 60950-1 for information technology equipment.

Our low-voltage AC-DC and DC-DC power supplies are used in a wide variety of end markets such as data

center computing, telecom, networking, medical equipment, and broad industrial electronics.

Our lower power RF power supplies are designed into medical and surgical equipment for a range of therapeutic applications.

Our low-voltage AC-DC and DC-DC power supplies are used in a wide variety of end markets such as data center computing, telecom, networking, medical equipment, and broad industrial electronics.

These products feature industry leading efficiency and density, to maximize performance, lower energy costs, and minimize the form factor.

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Our DC-DC solutions and custom-built power conversion products offer high and low voltage topology, providing wide input and output operating ranges while retaining excellent stability and efficiencies ranging from benchtop and rackmount systems to micro-size printed circuit board mount modules.

The high voltage DC-DC products target applications including semiconductor wafer processing and metrology, electrostatic clamping of substrates, scientific instrumentation, mass spectrometry, and x-ray systems for industrial and analytical applications.

The high voltage power systems and high voltage DC-DC products target applications including semiconductor wafer processing and metrology, electrostatic clamping of substrates, scientific instrumentation, mass spectrometry, and x-ray systems for industrial and analytical applications.

The low voltage DC-DC board mounted solutions are designed for a wide range of industrial applications such as healthcare, telecommunications, test and measurement, instrumentation, industrial equipment and distributed power in server and storage systems.

Our programmable DC power supplies provide accurate power delivery and measurement for use in a wide range of test and measurement as well as scientific research applications.

PowerInsight, our big data analytics solution, transforms the data acquired from our power delivery systems into useable insights, through a combination of enhanced data sets and advanced analytics.

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

As of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product line representing a strategic shift in our business.

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

As of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product line, which represented a strategic shift in our business.

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

However, extended warranties historically sold and reflected as deferred revenue on our Consolidated Balance Sheets, represent future revenue and service costs to be incurred by our global services group and are reflected as continuing operations for historical periods and future periods.

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The majority of our markets are not generally subject to significant seasonality;

however, these markets are cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital.

however, these markets are cyclical due to changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital.

Other factors, such as global economic and market conditions and technological advances in the applications we serve can also have an impact on our financial results, both positively and negatively.

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SEMICONDUCTOR EQUIPMENT MARKET

Customers in the semiconductor capital equipment market incorporate our products into equipment that make integrated circuits.

Our process power conversion products and systems provide the energy to enable thin film plasma-

based processes, such as dry etch, strip, chemical and physical deposition.

Precise control over the energy delivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance.

Our high voltage products are used in applications such as ion implant, wafer inspection and metrology, electrostatic measurement, and electrostatic clamping of the wafers.

Our thermal instrumentation products measure the temperature of the processed substrate or the process chamber.

Our power control modules are used in thermal processing applications and for epitaxial growth of photonics or microelectronic devices.

Our remote plasma sources deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement.

Our low voltage power products deliver stable, clean, and reliable power and are used in semiconductor Automatic Test Equipment ("ATE"), wafer processing equipment, back-end assembly equipment, and auxiliary equipment such as wafer handling.

Our strategy in the Semiconductor Equipment market is to expand our content of power related products and grow share.

Growth in the Semiconductor Equipment market is driven by increasing integrated circuit content across many industries, higher demand for processing and storage in advanced applications such as artificial intelligence, cloud computing, and autonomous vehicles, and the rapid adoption of advanced mobile connectivity solutions, such as 5G, which enhances existing and enables new wireless applications.

To address the long-term growing demand for semiconductor devices, the industry continues to invest in production capacities for both leading-edge and trailing-edge nodes, logic devices, the latest memory devices including 3D-NAND, DRAM, and new emerging memories such as MRAM, and back-end test and advanced wafer-level packaging.

The industry’s transition to advanced technology nodes in logic and DRAM and to increased layers in 3D-NAND memory devices require an increased number of plasma-based etch and deposition process tools and higher content of our advanced power solutions per tool.

As etching and deposition processes become more challenging due to increasing aspect ratios in advanced 3D devices, more advanced RF, and DC technologies are needed.

We are meeting these challenges by providing a broader range of more complex RF and DC power solutions.

Beyond etch and deposition processes, the growing complexity at the advanced nodes also drive a higher number of other processes across the wafer fab, including inspection, metrology, thermal, ion implantation, and semiconductor test, where Advanced Energy actively participates as a critical technology provider.

In addition, our global support services group offers comprehensive local repair service, upgrade, and retrofit offerings to extend the useable life of our customers’ capital equipment for additional technology generations.

The acquisition of Artesyn in September 2019 expanded our reach within the Semiconductor Equipment market by adding a broad range of low voltage applications as well as back-end test and assembly equipment customers.

INDUSTRIAL AND MEDICAL MARKET

Customers in the Industrial and Medical market incorporate our advanced power, embedded power, and measurement products into a wide variety of equipment used in applications such as advanced material fabrication, medical devices, analytical instrumentation, test and measurement equipment, robotics, motor drives and connected light-emitting diodes.

OEM customers design equipment utilizing our process power technologies in a variety of industrial thin film applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, data storage, and decorative, hard and optical coatings.

Customers in the Industrial and Medical market incorporate our advanced power, embedded power, and measurement products into a wide variety of equipment used in applications such as advanced material processing, industrial production, medical devices, life science equipment, scientific analytical instrumentation, clean technology production, and a variety of industrial technology applications such as robotics, horticulture, motor drives, and connected light-emitting diodes.

The acquisition of Artesyn in September 2019 substantially expanded Advanced Energy’s portfolio of products and opportunities in the Industrial and Medical market.

OEM customers design equipment utilizing our advanced material process power technologies in a variety of industrial production applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, and similar thin film manufacturing, including data storage and decorative, hard and optical coatings.

These applications employ similar technologies to those used in the Semiconductor Equipment market to deposit films on non-semiconductor substrates.

Our strategy around these applications is to leverage our thin film deposition technologies into an expanded set of new materials and applications in adjacent markets.

We serve the Industrial and Medical market with mission-critical power components that deliver high reliability, precise, low noise or differentiated power to the equipment they serve.

Examples of products sold into the Industrial and Medical market include high voltage products for analytical instrumentation, and medical equipment, low voltage power supplies used in applications for medical devices, test and measurement, medical lasers, scientific instrumentation and industrial equipment, and power control modules and thermal instrumentation products for material fabrication, processing, and treatment.

Advanced Energy also serves the Industrial and Medical market with mission-critical power components that deliver high reliability, precise, low noise or differentiated power to the equipment they serve.

Examples of products sold into the Industrial and Medical market includes high voltage products for analytical instrumentation, medical equipment, low voltage power supplies used in applications for medical devices, test and measurement, medical lasers, scientific instrumentation and industrial equipment, and power control modules and thermal instrumentation products for material fabrication, processing, and treatment.

Our gas monitoring products serve multiple applications in the energy market, air quality monitoring, and automobile emission monitoring and testing.

Our strategy in the Industrial and Medical market is to expand our addressable market both organically through our global distribution channels and through acquisitions of products and technologies that are complimentary and adjacent to our core power conversion applications.

Our strategy in the Industrial and Medical market is to grow and expand our addressable market both organically through our global distribution channels and through acquisitions of products and technologies that are complimentary and adjacent to our core power conversion applications.

DATA CENTER COMPUTING MARKET

Following the acquisition of Artesyn in September 2019, Advanced Energy entered the Data Center Computing market with industry-leading products and low-voltage power conversion technologies.

We sell to many data center and hyperscale server and storage manufacturers, as well as cloud service providers and their partners.

Driven by the growing adoption of cloud computing, market demand for server and storage equipment has shifted from enterprise on-premise computing to data centers.

Our power systems, power shelves, AC-DC and DC-DC power conversion products feature industry-leading performance and are used in a variety of computing applications such as server rack power, back-up power and CPRS server power supply, including a wide range of standard and custom power solutions used in data center racks, server, and storage systems.

We offer our customers industry-leading technology with a strong reputation and deep customer relationships.

With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, we believe we are well positioned to continue to capitalize on the ongoing shift towards cloud computing.

Starting in late 2019 and through the end of 2020, demand for our embedded power products in the Data Center Computing market increased significantly driven by share gain and ramp at hyperscale customers.

In addition, we believe COVID-19 is having a positive impact on hyperscale demand given the increased need for cloud and network applications.

Demand for hyperscale products declined sequentially during the third and fourth quarter of 2020 based on customer digestion following large investments in the first half of the year but was offset by higher demand from enterprise computing customers, which had been cyclically down in the first half of 2020.

We expect this digestion period to continue into the first half of 2021.

Following the acquisition of Artesyn in September 2019, Advanced Energy entered the Data Center Computing market with industry leading power conversion products and technologies, which we sell to original equipment manufacturers ("OEMs") and original design manufacturers ("ODMs") of data center server and storage systems, as well as cloud service providers and their partners.

Driven by the growing adoption of cloud computing, market demand for server and storage equipment has shifted from enterprise on-premises computing to the data center, driving investments in data center infrastructure.

The data center industry has started to transition to 48 Volt infrastructure, where 48 Volt DC power replaces 12 Volt in server racks in order to improve overall power efficiency.

Advanced Energy benefits from these trends by leading the industry in providing 48 V server power solutions to the data center industry.

Further, demand for edge computing is growing, driven by the need for faster processing, lower latency, higher data security, and more reliability than traditional cloud computing.

With its wide range of many unique configurations and requirements, edge computing creates additional opportunities for Advanced Energy.

Lasty, the rapid growth and adoption of Artificial Intelligence and machine learning is driving accelerated demand for server and storage racks with increased power density and higher efficiency, which plays well to Advanced Energy’s strengths.

With a growing presence at both cloud service providers and industry leading data center server and storage vendors, we believe Advanced Energy is well positioned to continue to capitalize on the ongoing shift towards cloud computing.

TELECOM AND NETWORKING MARKET

The acquisition of Artesyn in September 2019 provided Advanced Energy with a portfolio of products and technologies that are used across the Telecom and Networking market.

Our customers include many leading vendors and original design manufacturers of wireless and wireline infrastructure equipment, telecommunication equipment and computer networking.

Our products serving telecom and networking applications are differentiated by their rugged design and high reliability, even in harsh outdoor environments.

Our wide range of AC-DC power supplies/rectifiers and DC-DC conversion modules are used by leading developers of telecom systems across fixed, mobile, and converged network applications.

Our products are designed into many wireless infrastructure applications such as remote radio heads, RF power amplifiers in base stations and multi-access edge computing equipment.

In networking, our products are designed into many core and edge networking systems, including gateways, application servers, switches, routers, and wireless networking.

Our customers include many leading vendors of wireless infrastructure equipment, telecommunication equipment and computer networking.

The wireless telecom market continues to evolve with more advanced mobile standards.

5G wireless technology promises to drive substantial growth opportunities for the telecom industry as it enables new advanced applications such as autonomous vehicles and virtual/augmented reality.

Telecom service providers have started to invest in 5G, and this trend is expected to drive demand for our products in the Telecom and Networking market over time.

In datacom, demand is driven by networking investments by telecom service providers and enterprise upgrading of their network, as well as cloud data center networking investments for increased bandwidth.

Demand in late 2019 and the first half of 2020 was lower as geopolitical issues and consolidation of wireless telecom providers drove slower global investment in cellular and network infrastructure;

however, we saw modest market growth off these reduced levels in the third and fourth quarter of 2020.

5G wireless technology promises to drive substantial growth opportunities for the telecom industry as it enables new advanced applications such as autonomous vehicles and

virtual/augmented reality.

Telecom service providers have started to invest in 5G, and this trend is expected to drive demand of our products into the Telecom and Networking market.

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

Our products are sold worldwide to OEMs, integrators, distributors and directly to end users.

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Ten largest customers

The following table summarizes sales to and percentage of total sales from Applied Materials, Inc.

and Lam Research Corp., our two largest customers (in thousands):

The following table summarizes sales to and percentage of total sales to our two largest customers (in thousands):

Years Ended December 31,

Applied Materials, Inc.

Lam Research Corporation

We expect that the sale of products to our largest customers will continue to account for a significant percentage of our sales for the foreseeable future.

The loss of a large customer could have a material adverse effect on our results of operations.

Our backlog was approximately $290.7 million on December 31, 2020, a 12.3% increase from $258.9 million on December 31, 2019.

For more information related to our expectations for the markets we serve, see Business Environment and Trends in Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

The following table summarizes our backlog:

Backlog orders are firm orders scheduled to be filled and shipped in the next 12 months.

Backlog increased year over year based on strong demand across our portfolio, particularly in our Semiconductor and Industrial & Medical markets, combined with supply chain shortages for critical components which limited our revenues.

Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and the significance of customer production demand pull systems to our business, which are not reflected in orders or backlog.

Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties.

Delays in delivery schedules and/or customer changes to backlog orders during any particular period could cause a decrease in sales and have a material adverse effect on our business and results of operations.

Marketing, Sales and Distribution

We sell our products through direct and indirect sales channels in North America, Europe, and Asia.

We sell our products through direct and indirect sales channels.

Our sales operations are primarily located in the U.S., the PRC, the United Kingdom, Germany, Israel, Japan, South Korea, India, Singapore, Philippines, Hong Kong, Ireland, and Taiwan.

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Years Ended December 31,

North America

Total sales to all countries outside of the U.S.

totaled $972.2 million, $467.1 million, and $348.1 million in the years ended December 31, 2020, 2019, and 2018, respectively.

United States

North America (excluding U.S.)

See Item 1A "Risk Factors"

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Manufacturing

The manufacturing of our products is primarily performed in major sites in the PRC and the Philippines and in 2020 we began to increase production at an additional major manufacturing site in Penang, Malaysia.

The manufacturing of our products is primarily performed at our major sites in the PRC, Philippines, and Malaysia.

In addition, we perform limited specialty manufacturing for some of our products in the U.S., United Kingdom, Germany, and Denmark.

Manufacturing in these locations, primarily in the PRC, exposes us to risks, such as exchange controls and currency restrictions, changes in local economic conditions, changes in laws and regulations, government actions, political conditions, and other regional risks including natural disasters and health risks, and an inability to meet customer demands if one of our facilities becomes impaired.

See Item 1A, "Risk Factors"

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Although we make reasonable efforts to assure that parts are available from multiple qualified suppliers, some key parts may be obtained from a sole supplier or a limited group of suppliers.

During 2020, COVID-19 impacted the availability of materials, parts, and subcomponents needed for production, and we expect the related supply chain challenges will continue into 2021.

We seek to reduce costs and to lower the risks of production and service interruptions, as well as shortages of key parts by:

During 2020 and 2021, COVID-19 impacted the availability of materials, parts, and subcomponents needed for production.

In some cases, we paid premiums or expedite fees to obtain critical parts to meet urgent customer needs.

In many instances, we passed these additional costs along to our customers.

We expect the related supply chain challenges will continue into 2022.

However, we seek to reduce costs, lower the risks of production and service interruptions, and mitigate key parts shortages by:

● selecting and qualifying alternate suppliers for key parts using rigorous technical and commercial evaluation of suppliers’ products and business processes including testing their components’ performance, quality, and reliability on our power conversion product at our customers’ and their customers’ processes.

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● maintaining appropriate inventories of key parts, including making last time purchases of key parts when notified by suppliers that they are ending the supply of those parts;

● qualifying new parts on a timely basis and in geographies that reduce costs without degradation in quality;

● qualifying new parts where possible and in geographies that reduce costs without degradation in quality;

● locating certain manufacturing operations in areas that are closer to suppliers and customers;

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Generally, our efforts to obtain international patents have been concentrated in the industrialized countries within Europe and Asia because there are other manufacturers and developers of power conversion and control systems in those countries, as well as customers for those systems for which our intellectual property applies.

We leverage our proprietary technology and trade secrets to deliver on our strategy of selling differentiated products for our most important customer solutions.

Litigation may, from time to time, be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us, to defend us against claimed infringement of the rights of others, or to determine the scope and validity of the proprietary rights of others.

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We encounter substantial competition from foreign and domestic companies for each of our product lines.

Our list of competitors has increased over the past year due to the acquisition of Artesyn, which competes in different markets and against different competitors.

Some of our competitors have greater financial and other resources than we do.

In some cases, competitors are smaller than we are, but are well established in specific product niches.

Adtec Plasma Tech.

Co., Ltd., COMET Holding AG., Daihen Corp., Kyosan Electric Mfg.

Co., Ltd., MKS Instruments, Inc., New Power Plasma Co., Ltd.

and TRUMPF Hüttinger GmbH + Co.

are primary competitors to our power conversion products for semiconductor and thin film processing.

Competitors to our low voltage AC-DC and DC-DC embedded power conversion offerings include, but are not limited to ABB Ltd., Acbel Polytech Inc., Cosel Co., Ltd., Delta Electronics, Inc., Flex Ltd., Lite-On Technology Corp., Murata Manufacturing, MEAN WELL Enterprises, TDK-Lambda Americas Inc., and XP Power Ltd.

In high voltage DC-DC, our competitors include, but are not limited to Crane Co., Matsusada Precision, Inc., and Spellman High Voltage Electronics Corp.

CD Automation, Control Concepts Inc., Eurotherm and Spang Power Electronics offer products that compete with our power control modules.

BASF SE., Fluke Corp., LayTec AG.

and Photon Control Inc.

offer products that compete with our thermal measurement and instrumentation products.

Honeywell International, Inc., Morgan Schaffer Ltd., Qualitrol Corp., and Williamson Corp.

offer products that compete with our gas detection and monitoring products.

Competitors in each of our market verticals include, but are not limited to, the following:

Semiconductor Equipment

Industrial and Medical

Data Center Computing

Telecom and Networking

COMET Holding AG.

Kyosan Electric Mfg.

MKS Instruments, Inc.

TRUMPF Hüttinger GmbH + Co.

Cosel Co., Ltd.

Delta Electronics, Inc.

MEAN WELL Enterprises

TDK-Lambda Americas Inc.

TRUMPF Hüttinger GmbH + Co.

XP Power Ltd.

Acbel Polytech Inc.

Delta Electronics, Inc.

Lite-On Technology Corp.

Vicor Corporation

Delta Electronics, Inc.

Lite-On Technology Corp.

Murata Manufacturing

In addition, a focus on local content is causing new competitors to emerge around the world, with strong support from local governments, industry leaders, and investors.

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Research and Development

The market for our products is characterized by ongoing technological changes and evolving customer requirements.

We believe that continued and timely development of new highly-differentiated products and enhancements to existing products to support end user and OEM requirements is necessary for us to maintain a competitive position in the markets we serve.

Accordingly, we continue to devote a significant portion of our personnel and financial resources to research and development projects and seek to maintain close relationships with our key customers and other industry leaders in order to remain responsive to their product requirements now and in the future.

Research and development expenses were $144.0 million in 2020, $101.5 million in 2019, and $76.0 million in 2018, representing 10.2% of our sales in 2020, 12.9% of our sales in 2019, and 10.6% of our sales in 2018.

We perform research and development ("R&D") of products to develop new or emerging applications, technological advances to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products.

We believe that continued development of technological applications, as well as enhancements to existing products and related software to support customer requirements, are critical for us to compete in the markets we serve.

Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.

The following table summarizes research and development expenses and the percentage of these expenses as compared to total sales (in thousands):

Years Ended December 31,

Research and Development Expenses

As of December 31, 2021, we had approximately 10,000 employees.

Our employees are not represented by unions, except for statutory organization rights applicable to our employees in the PRC and Germany.

Our employees are not represented by unions, except for statutory organization rights applicable to our employees in the PRC and in Germany.

We believe that our continued success depends, in part, on our ability to attract and retain qualified personnel.

We consider our relations with our employees to be good.

We recognize that our employees are our most important asset, and we know that each person’s diverse background and unique skill set are fundamental to our success.

We recognize that our employees are critical to our ongoing success and endeavor to maintain positive relationships with our employees at all levels.

We have a global diverse workforce with employees located in more than 24 countries across the globe and representative of many different cultural, racial, ethnic, and religious backgrounds.

See Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations"

for a discussion of human capital resources.

for a discussion of our human capital resources.

Advanced Energy encourages diversity and recognizes that each person’s background, experiences, and unique skill set are fundamental contributors to our success.

As part of our efforts to promote diversity and develop emerging talent in STEM (science, technology, engineering, and mathematics), we launched the Advanced Energy STEM Diversity Scholarship Program in 2020 to provide college students with tuition assistance, mentoring, and internship opportunities.

Environmental Matters

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Compliance with federal, state, and local laws and regulations has not had, and is not expected to have, an adverse effect on our capital expenditures, competitive position, financial condition, or results of operations.

Advanced Energy is dedicated to reducing the impact of manufacturing and procurement activities on the environment by reducing waste in our operations and improving the energy efficiency of our global factories.

Our factories in PRC and the Philippines monitor greenhouse gas emissions and report to the CDP, an international non-profit organization that helps companies disclose their environmental impact.

We also strive to reduce our customers' emissions as we develop and deliver increasingly efficient power-delivery products in our customers' applications.

We adhere to responsible minerals sourcing and commit to the social, environmental, and ethical standards set out in the Responsible Business Alliance Code of Conduct.

Available Information

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

What changed 10-K

Item 1. Business