What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2022-03-16 compared with 2021-02-24 · 406 added, 496 removed, 657 unchanged (58% of the section changed)

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm

Report of Grant Thornton LLP, Independent Registered Public Accounting Firm

Report of Ernst & Young LLP, Independent Registered Public Accounting Firm (PCAOB ID No.

Consolidated Balance Sheets

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Notes to Consolidated Financial Statements

Report of Ind ependent Registered Public Accounting Firm

Report of In dependent Registered Public Accounting Firm

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

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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.

(the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 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.

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, 2021, 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 16, 2022 expressed an unqualified opinion thereon.

Basis for Opinion

These financial statements are the responsibility of the Company’s management.

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

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 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.

We conducted our audit in accordance with the standards of the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audit 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.

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 regarding the amounts and disclosures in the financial statements.

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

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

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.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

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(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.

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

Description of the Matter

As described in Notes 1 and 5 to the consolidated financial statements, the Company is subject to income taxes in the U.S.

and numerous foreign jurisdictions, which affect the Company’s provision for income taxes.

Specifically, the Company is entitled to claim US foreign tax credits for taxes paid in international tax paying jurisdictions.

The Company is also subject to taxation of global intangible low-taxed income (GILTI) earned by foreign subsidiaries.

For the year ended December 31, 2020, the Company’s provision for income taxes was $23.0 million.

Auditing the Company's provision for income taxes, particularly the effects of foreign tax credits and GILTI, was especially challenging because interpretation of the relevant foreign tax regulations and the application of these interpretations to the calculation of the foreign tax credits and GILTI is highly complex.

For the year-ended December 31, 2021, the Company recognized a provision for income taxes of $14.0 million.

As described in Notes 1 and 5 to the consolidated financial statements, the Company is subject to income taxes in the United States and various foreign jurisdictions, which affect the Company’s provision for income taxes.

Management exercises judgment in interpretation and application of complex tax law when determining the Company’s provision for income taxes.

Evaluating management’s application of current tax regulations in various tax jurisdictions and the impact of those regulations on the Company’s foreign and United States federal income tax provisions required complex auditor judgment and the use of tax subject matter professionals with specialized skills.

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 income taxes.

For example, we tested controls over management’s identification and assessment of changes in applicable tax regulations.

We also tested controls over the calculation of the foreign tax credits and GILTI, including review of the completeness and accuracy of the inputs and underlying data.

To test the Company’s provision for income taxes, we performed audit procedures that included, among others, evaluating the Company's assessment of applicable tax regulations and testing the calculation of the provision, including the completeness and accuracy of the underlying data.

We also evaluated the Company’s significant assumptions and the completeness and accuracy of the data used to determine the amount of the foreign tax credits and GILTI, including foreign earnings and profits, and tested the accuracy of such calculations.

For example, we tested controls over management’s review of the tax provision which includes their review of the underlying data used in the provision, foreign income inclusions reflected in the United States federal income tax provision and the basis by which the Company achieves certain tax holidays in foreign jurisdictions.

To test the Company’s provision for income taxes, we performed audit procedures that included, among others, testing the calculation of the provision, including the completeness and accuracy of the underlying data.

We tested the tax rates used by management in the computation of the provision including compliance with tax holiday requirements.

We assessed the reasonableness of profit margin by tax jurisdiction related to intercompany transactions.

We also tested calculations of foreign income inclusions included in the Company’s United States federal income tax provision.

As part of these procedures, we engaged tax subject matter professionals with knowledge of and experience with international and local income tax laws to evaluate the application of these regulations to the Company’s tax positions.

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Denver, Colorado

February 23, 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Stockholders

Advanced Energy Industries, Inc.

Opinion on the financial statements

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

These financial statements are the responsibility of the Company’s management.

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 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.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

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.

We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

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

Denver, Colorado

February 21, 2019

March 16, 2022

ADVANCED ENERGY INDUSTRIES, INC.

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Total current liabilities

Long-term debt

Long-term debt, net

Operating lease liabilities

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

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

37,589 and 38,293 issued and outstanding at December 31, 2021 and 2020, respectively

Additional paid-in capital

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Years Ended December 31,

Total sales, net

Cost of sales

Total cost of sales

Operating expenses:

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Balances, December 31, 2018

Adoption of new accounting standards

Non-controlling interest from acquisition

Stock issued from equity plans

Stock-based compensation

Stock buyback

Other comprehensive income (loss)

Balances, December 31, 2019

Adoption of new accounting standards

Stock issued from equity plans

Stock-based compensation

Other comprehensive income (loss)

Share repurchase

Other comprehensive income

Balances, December 31, 2020

Adoption of new accounting standards

Stock issued from equity plans

Stock-based compensation

Stock buyback

Other comprehensive income (loss)

Share repurchase

Dividends declared ($ 0.10 per share)

Other comprehensive income

Balances, December 31, 2021

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Income from continuing operations, net of income taxes

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

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

Depreciation and amortization

Stock-based compensation expense

Provision (benefit) for deferred income taxes

Provision for deferred income taxes

(Gain) loss from discount on notes receivable

Gain on sale of central inverter service business

Discount on notes receivable

Net loss on disposal of assets

Loss on disposal of assets

Changes in operating assets and liabilities, net of assets acquired:

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CASH FLOWS FROM INVESTING ACTIVITIES:

Proceeds from sale of marketable securities

Acquisitions, net of cash acquired

Issuance of notes receivable

Proceeds from sale of property and equipment

Net proceeds from sale of marketable securities

Receipt (issuance) of notes receivable

Proceeds from sale of assets

Purchases of property and equipment

Net cash from investing activities from continuing operations

Net cash from investing activities from discontinued operations

Acquisitions, net of cash acquired

Net cash from investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Net proceeds from long-term borrowings

Proceeds from long-term borrowings

Payment of debt-issuance costs

Payments on long-term borrowings

Dividend payments

Purchase and retirement of common stock

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 payments related to stock-based awards

Net cash from financing activities

EFFECT OF CURRENCY TRANSLATION ON CASH

EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS

NET CHANGE IN CASH AND CASH EQUIVALENTS

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CASH AND CASH EQUIVALENTS, end of period

Less cash and cash equivalents from discontinued operations

CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

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OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES

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.

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, analytical instrumentation, medical equipment, and in 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 several industrial markets.

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.

Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries ("we,"

"us,"

"our,"

"Advanced Energy,"

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

Our 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 applications.

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.

In September 2019, we acquired the Artesyn Embedded Power business ("Artesyn") , which added new power products and technologies used in networking and computing, data center, including hyperscale, and 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.

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

Disposed and Discontinued Operations for more information.

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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 ("U.S.") 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 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.

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

The significant estimates, assumptions, and judgments include, but are not limited to:

excess and obsolete inventory;

pension obligations;

acquisitions and asset valuations, and

taxes and other provisions.

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

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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

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

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.

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

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

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GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach).

The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy.

Our financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy.

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

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● Level 3 — Unobservable inputs for the asset or liability.

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.

We categorize 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 judgment 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 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.

However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value.

Our 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.

However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value.

Goodwill and Note 13.

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The fair value of contingent consideration and other acquired assets and liabilities associated with our acquisitions are based on Level 3 inputs.

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

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

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

Cash and cash equivalents are highly liquid investments that consist primarily of short-term money market instruments and demand deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase.

Sometimes we invest excess cash in money market funds not insured by the Federal Deposit Insurance Corporation.

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."

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

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

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

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

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

Concentrations of Credit Risk — Financial instruments 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.

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

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

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

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Despite this assessment, from time to time, our customers are unable to meet their payment obligations.

We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified.

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.

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.

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.

We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for estimated credit losses.

We do not require collateral from customers.

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

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

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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.

Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value and are presented net of reserves for excess and obsolete inventory.

We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on historical usage and our estimated forecast of product demand.

Inventories — Inventories are valued at the lower of cost (first-in, first-out method) or net realizable value and are presented net of reserves for excess and obsolete inventory.

General market conditions, as well as our design activities, can cause certain products to become obsolete.

We regularly review inventory quantity and write down excess and obsolete inventories based upon a regular analysis of inventory on hand compared to historical and projected end-user demands.

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

Demand for our products can fluctuate significantly.

A significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand.

In addition, our industry is subject to technological change, new product development, and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand.

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.

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

Depreciation is computed over the estimated useful lives using the straight-line method.

Estimated useful lives for financial reporting purposes are as follows:

buildings, 20 to 40 years ;

machinery, equipment, furniture and fixtures and vehicles, 3 to 15 years ;

and computer and communication equipment, 3 years .

Amortization of leasehold improvements is calculated using the straight-line method over the lease term or the estimated useful life of the assets, whichever period is shorter.

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

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

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.

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Acquisition costs in excess of amounts assigned to assets acquired and liabilities assumed are recorded as goodwill.

Transaction related costs associated with business combinations are expenses as incurred.

Transaction related costs associated with business combinations are expensed as incurred.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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

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

Our lease agreements generally contain lease and non-lease components, and we combine fixed payments for non-lease components with lease payments and account for them together as a single lease component.

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.

When renewal options are reasonably certain of exercise, we include the renewal period in the lease term.

In many cases, we have leases with a term of less than one year.

We elected the practical expedient to exclude these short-term leases from our ROU assets and operating lease liabilities.

On an ongoing basis, we negotiate and execute new leases to meet business objectives.

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.

Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and 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.

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

Intangible Assets, Goodwill, and Other Long-Lived Assets — As a result of our acquisitions, we identified and recorded intangible assets and goodwill.

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Changes in these estimates can result in revisions to our carrying value of these assets and may result in material charges to our results of operations.

The annual impairment test for goodwill can be performed using an assessment of qualitative factors in determining if it is more likely than not that goodwill is impaired.

We conduct an annual goodwill impairment analysis using an assessment of qualitative factors in determining if it is more likely than not that goodwill is impaired.

If this assessment indicates that it is more likely than not that goodwill is impaired, the next step of impairment testing compares the fair value of a reporting unit to its carrying value.

Goodwill would be impaired if the resulting implied fair value of goodwill was less than the recorded carrying value of the goodwill.

Debt Issuance Costs — The Company has incurred debt issuance costs in connections it its debt facilities.

Debt Issuance Costs — We incurred debt issuance costs in connection with our debt facilities.

Amounts paid directly to lenders are classified as issuance costs.

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

The Company allocates deferred debt issuance costs incurred for its current credit facility between the revolver and term loan based on their relative borrowing capacity.

Deferred debt issuance costs associated with the revolving credit facility are recorded within other assets and those associated with the term loan are recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets.

All deferred debt issuance costs are amortized using the effective interest rate method to interest expense within Other income (expense), net on the Company’s Consolidated Statements of Operations.

Credit Facility for additional details.

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

We allocated deferred debt issuance costs incurred for the current credit facility between the revolver and term loan based on their relative borrowing capacity.

Deferred debt issuance costs associated with the revolving credit facility are recorded within Deposits and other assets and those associated with the term loan are recorded as a reduction of the carrying value of the debt on the Consolidated Balance Sheets.

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

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

ADVANCED ENERGY INDUSTRIES, INC.

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(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.

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

Credit Facility for additional details.

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

Typically, this occurs on shipment of goods or completion of service because, at that point, we transfer control to our customer.

The transaction price is based upon the standalone selling price.

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Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.

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

Surcharges, cost recoveries, and shipping and handling fees billed to customers, if any, are recognized as revenue.

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

We expense 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.

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.

These costs are included in Selling, general, and administrative expenses in our Consolidated Statements of Operations.

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

We maintain a worldwide support organization in ten countries, including the U.S., the People's 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.

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

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

Extended warranties had previously been offered on our discontinued inverter products.

Any up-front fees received for extended warranties or maintenance plans are deferred and recognized ratably over the service periods, as defined in the agreements.

Research and Development Expenses — Costs incurred to advance, test, or otherwise modify our proprietary technology or develop new technologies are considered research and development costs and are expensed when incurred.

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Should product failure rates differ from our estimates, actual costs could vary significantly from our expectations.

Stock-Based Compensation — Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees and directors based on estimated fair values.

We have estimated the fair value of all stock options and awards on the date of grant using the Black-Scholes-Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables.

These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk-free interest rates and expected dividends.

We also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates.

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.

Stock-Based Compensation — Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all stock-based awards made to employees and directors based on estimated fair values.

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

For RSUs that contain a time-based and/or performance-based vesting condition, we estimate fair value using the closing share price on the grant date.

We record stock-based compensation expense for awards with time-based vesting conditions over the term of the award.

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

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

Certain RSUs vest based on a market condition.

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

Because the probability of achievement is a factor in the

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

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

We estimate the fair value of the purchase rights in our employee stock purchase plan using a Black-Scholes Merton option pricing model and recognize compensation expense over the term of the purchase right.

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

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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This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.

On December 22, 2017, the Tax Act was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21 %, among others.

In conjunction with the Tax Act enactment, the SEC issued Staff Accounting Bulletin No.

118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act ("SAB 118"), which allowed for the recording of provisional amounts related to the Tax Act and subsequent adjustments related to the Tax Act during an up to one-year measurement period.

The Company recorded what it believed to be reasonable estimates during the SAB 118 measurement period which lasted from December 2017 to December 2018.

During the quarter ended December 31, 2018, the Company finalized the accounting treatment of the income tax effects of the Tax Act.

Although the SAB 118 measurement period has ended, there may be some aspects of the Tax Act that remain subject to future regulations and/or notices which may further clarify certain provisions of the Tax Act.

Accordingly, the Company may need to adjust its previously recorded amounts to reflect the recognition and measurement of its tax accounting positions in accordance with Accounting Standards Codification Topic-740, "Income Taxes"

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.

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.

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.

Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments.

Our lease terms include periods under options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

Right-of-use assets also include any prepaid lease payments and lease incentives.

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

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

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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

NEW ACCOUNTING STANDARDS

New Accounting Standards

From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements.

Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update ("ASU").

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

New Accounting Standards Adopted

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)"

("ASU 2018-13").

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 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

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.

ASU 2018-14 was effective for us on January 1, 2021.

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

New Accounting Standards Issued But Not Yet Adopted

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

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("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

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:

In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848):

("ASU 2021-01").

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

ASU 2020-04 and ASU 2021-01 will be in effect through December 31, 2022.

Our Credit Facility (refer to Note 21.

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

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

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

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

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

Credit Facility ) and do not expect ASU 2020-04 and ASU 2020-01 to materially impact our consolidated financial statements.

In October 2021, the FASB issued ASU 2021-08, "

Business Combinations (Topic 806) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers."

The amendments in ASU 2021-08 will improve the accounting for acquired revenue contracts with customers in a business combination.

This pronouncement will be effective for us on January 1, 2023.

We are still evaluating the impact, if any, that the adoption of ASU 2021-08 may have on our consolidated financial statements.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Intangible Assets Acquired

In January 2021, we acquired certain intangible assets related to the manufacturing of fiber optic sensing equipment.

As of December 31, 2021, we paid $ 6.1 million in cash and expect to pay an additional $ 0.4 million within one year of the closing.

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

Intangible Assets for additional details.

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.

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

Cash paid for acquisition

Contingent consideration

Total fair value of consideration transferred

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Total purchase price

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

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

Current assets and liabilities, net

Property and equipment

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Intangible assets

Goodwill (deductible for tax purposes)

Other non-current assets

Total assets acquired

Other non-current liabilities

Operating lease liability

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Total fair value of net assets acquired

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").

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

Straight-line

Customer relationships

Straight-line

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

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:

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.

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

Cash paid for acquisition

Contingent consideration

Total fair value of consideration transferred

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Total purchase price

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

December 31, 2020

Accounts and other receivable, net

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

Current assets and liabilities, net

Property and equipment

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Intangible assets

Goodwill (deductible for tax purposes)

Total assets acquired

Accounts payable

Other non-current liabilities

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:

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

Straight-line

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Straight-line

ADVANCED ENERGY INDUSTRIES, INC.

1 unchanged sentence

(in thousands, except per share amounts)

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 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 combines Advanced Energy’s results with the pre-acquisition results of Artesyn for that period.

Year Ended December 31,

Net income attributable to Advanced Energy Industries, Inc.

Earnings per share:

Basic earnings per share

Diluted earnings per share

The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisitions been completed at the beginning of the year prior to the year of acquisition.

These include adjustments to amortization charges for acquired intangible assets, interest and financing expenses, transaction costs, amortization of purchased gross profit and the alignment of various accounting policies.

These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.

Artesyn’s operating results have been included in the Advanced Energy’s operating results for the periods subsequent to the completion of the acquisition on September 10, 2019.

During the year ended December 31, 2019, Artesyn contributed total sales of $ 220.3 million and net income of $ 7.1 million, including interest and other expense associated with the financing of the transaction.

Revenue Recognition

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.

In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations.

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

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

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

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

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 electrical power into various usable forms.

Our power conversion products refine, modify, and control the raw electrical power from a utility and convert it into power that is predictable, repeatable, and customizable.

Our products enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for various semiconductor and industrial products, industrial thermal applications for material and chemical processes, and specialty power for critical industrial technology applications.

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 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 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, such as 5G, data center (including hyperscale) and other industrial and medical applications.

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 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 applications such as material and chemical processing.

We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of radio RF power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets.

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

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

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.

To meet these market requirements, we maintain a worldwide support organization in the U.S., 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.

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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.

In May 2019, we sold our grid-tied central inverter repair and service operation to a third party.

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 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.

The following table summarizes deferred revenue, which relates to extended warranties and service contracts.

We expect to recognize this revenue ratably through the year 2031.

Deferred revenue

ADVANCED ENERGY INDUSTRIES, INC.

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Disaggregation of Revenue

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:

The following tables present additional information regarding our revenue:

Years Ended December 31,

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Telecom and Networking

The following table presents our sales by geographic region:

Years Ended December 31,

North America

The following table presents our net sales by extended warranty and service contracts recognized over time and our product and service revenue recognized at a point in time:

United States

North America (excluding U.S.)

Years Ended December 31,

Product and service revenue recognized at point in time

Extended warranty and service contracts recognized over time

DISPOSED AND DISCONTINUED OPERATIONS

Disposed Operations

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 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

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

In connection with this transaction, we entered into a Loan and Security Agreement whereby we loaned Bold an aggregate $ 5.3 million between May 2019 and the first quarter of 2020.

During the year ended December 31, 2021, Bold repaid the amount borrowed at a discounted amount in accordance with the terms of the agreement.

The loan is now fully repaid, and the Loan and Security Agreement has been cancelled.

As a result of the transaction, during the year ended December 31, 2019, 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, we recognized a $ 14.8 million non-cash gain in Other income (expense) from continuing operations and an $ 8.6 million non-cash gain, net of tax expense of $ 2.4 million, 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.

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

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

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.

The significant items included in "Income (loss) from discontinued operations, net of income taxes"

are as follows:

Years Ended December 31,

Cost of sales

Total operating expense

Operating income (loss) from discontinued operations

Other income (expense)

Income (loss) from discontinued operations before income taxes

Provision (benefit) for income taxes

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

Assets and Liabilities of discontinued operations are not significant.

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

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

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

Years Ended December 31,

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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

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Total provision for income taxes

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

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.

Our effective tax rates differ from the U.S.

federal statutory rate of 21 % for the years ended December 31, 2021, 2020, and 2019 primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates as well as reductions in uncertain tax positions and tax credits, offset by net U.S.

tax on foreign operations, withholding taxes, and audit settlements.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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:

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Tax effect of foreign operations

Uncertain tax position

Uncertain tax positions

Audit settlements

Unremitted earnings

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Withholding taxes

Executive compensation limitation

Other permanent items, net

Total provision for income taxes

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed.

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Employee bonuses and commissions

Depreciation and amortization

Operating lease liabilities

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Net deferred tax assets

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Of the $ 37.3 million and $ 40.7 million net deferred tax asset on December 31, 2021 and 2020, respectively, $ 47.2 million and $ 50.8 million is reflected as a net non-current deferred tax asset and $ 9.9 million and $ 10.1 million is reflected as a long-term liability on December 31, 2021 and 2020, respectively.

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

As of December 31, 2021, we have recorded a valuation allowance on $ 4.0 million of our U.S.

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

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The December 31, 2021 valuation allowance balance reflects a decrease of $ 4.7 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.

Additionally, the Company had $ 0.2 million and $ 30.5 million of capital loss and interest expense limitation carryforwards, respectively.

Finally, the Company had U.S.

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

As of December 31, 2021, we had U.S., foreign and state tax loss carryforwards of $ 56.9 million, $ 129.0 million, and $ 117.1 million, respectively.

Additionally, we had $ 0.8 million and $ 30.5 million of capital loss and interest expense limitation carryforwards, respectively.

Finally, we had U.S.

and state tax credit carryforwards of $ 1.5 million and $ 1.7 million, respectively.

and state net operating losses, tax credits, and interest expense limitation are subject to various utilization limitations under Section 382 of the Internal Revenue Code and applicable state laws.

These Section 382 limited attributes have various expiration periods through 2036 or, in

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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

These Section 382 limited attributes have various expiration periods through 2036 or, in the case of the interest expense limitation amount, no expiration period.

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

17 unchanged sentences

Balance at end of period

The unrecognized tax benefits of $ 9.7 million, if recognized, will impact the Company’s effective tax rate.

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 $ 3.2 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)

The unrecognized tax benefits of $ 5.5 million, if recognized, will impact our effective tax rate.

In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense.

We had $ 0.4 million and $ 3.2 million of accrued interest and penalties on December 31, 2021 and 2020, respectively.

With few exceptions, we are no longer subject to federal, state, or foreign income tax examinations by tax authorities for years before 2018.

EARNINGS PER SHARE

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

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

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

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Diluted earnings per share

The following stock options and restricted units were excluded in the computation of diluted earnings per share because they were anti-dilutive:

Years Ended December 31,

Restricted stock units

Share Repurchase

In September 2015, our Board of Directors authorized a program to repurchase up to $ 150.0 million of our common stock over a thirty-month period.

In November 2017, our Board of Directors approved an extension of the share repurchase program to December 2019 from its original maturity of March 2018.

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, 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.

The Company has repurchased the following shares of common stock:

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

The following table summarizes these repurchases:

Years Ended December 31,

3 unchanged sentences

Average repurchase price per share

Remaining authorized by Board of Directors for future repurchases as of period end

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.

On July 29, 2021, the Board of Directors approved an increase to the share repurchase program, which authorized the Company to repurchase up to $ 200 million in shares of our common stock with no time limitation.

ADVANCED ENERGY INDUSTRIES, INC.

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FAIR VALUE MEASUREMENTS

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

The following tables present information about our assets and liabilities measured at fair value on a recurring basis.

December 31, 2021

2 unchanged sentences

Marketable securities

Interest rate swaps

Deposits and other assets

Total assets measured at fair value on a recurring basis

1 unchanged sentence

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

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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

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

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.

2 unchanged sentences

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

DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates.

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

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 offset the fluctuations of our assets and liabilities due to foreign exchange rate changes.

These forward contracts are typically for one-month periods.

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)

DERIVATIVE FINANCIAL INSTRUMENTS

Changes in foreign currency exchange rates impact us.

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

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

These derivative instruments are typically executed for one-month periods and not designated as hedges;

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

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).

As of December 31, 2021 and 2020, there were no foreign currency forward contracts outstanding.

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

These transactions are accounted for as cash flow hedging instruments.

The interest rate swap contracts fixed 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:

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

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

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

Interest rate swap contracts

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.

The following table summarizes the amounts recorded in Accumulated other comprehensive loss on the Consolidated Balance Sheets for qualifying hedges.

Interest rate swap contracts - gains (losses)

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.

As a result of using derivative financial instruments, we are exposed to the risk that counterparties to contracts could fail to meet their contractual obligations.

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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

ACCOUNTS AND OTHER RECEIVABLE, NET

Accounts and other receivable are recorded at net realizable value.

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

We record accounts and other receivable at net realizable value.

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

Amounts billed, net

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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 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 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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

"Amounts billed, net"

represents amounts invoiced to customers in accordance with our terms and conditions and reflects an allowance for expected credit losses.

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

"Unbilled receivables"

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

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

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

The following table summarizes the changes in expected credit losses:

Balance as of December 31, 2019

Balance at beginning of period

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:

Foreign currency translation

Balance at end of period

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

Components of inventories were as follows:

Parts and raw materials

1 unchanged sentence

Finished goods

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

PROPERTY AND EQUIPMENT, NET

Property and equipment, net is comprised of the following:

Buildings and land

Estimated Useful

Life (in years)

Machinery and equipment

Computer and communication equipment

Furniture and fixtures

Computer equipment, furniture, fixtures, and vehicles

Leasehold improvements

6 unchanged sentences

Depreciation expense

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

Balance as of December 31, 2019

Measurement period adjustments to purchase price allocation

Balance at beginning of period

Measurement period adjustments to purchase price allocations

Additions from acquisition

Foreign currency translation

Balance as of December 31, 2020

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

Balance at end of period

Additions and adjustments are the result of business combinations.

Refer to Note 2.

Business Acquisitions.

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:

Gross Carrying

December 31, 2021

Gross Carrying

Customer relationships

Trademarks and other

Gross Carrying

December 31, 2020

Gross Carrying

Customer relationships

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At December 31, 2021, the weighted average remaining useful life of intangibles subject to amortization was approximately 9.8 years.

Amortization expense related to intangible assets is as follows:

Amortization expense related to intangible assets was as follows:

Years Ended December 31,

Amortization expense

Estimated amortization expense related to intangibles is as follows:

Year Ending December 31,

ADVANCED ENERGY INDUSTRIES, INC.

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(in thousands, except per share amounts)

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

For the periods presented, 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 restructuring charges:

Years Ended December 31,

Through December 31,

Severance and related charges

1 unchanged sentence

Total restructuring charges

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

Total restructuring liabilities

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)

Cumulative Cost

Severance and related charges

Facility relocation and closure charges

Total restructuring charges

Our restructuring liabilities are included in other accrued expenses in our Consolidated Balance Sheets and related primarily to severance and associated costs.

Changes in restructuring liabilities were as follows:

Balance at beginning of period

Costs incurred and charged to expense

Costs paid or otherwise settled

Effects of changes in exchange rate

Balance at end of period

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

We record the estimated warranty obligations cost when we recognize revenue.

This estimate is based on historical experience by product and configuration.

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

Changes in our product warranty obligation are as follows:

Changes in our product warranty obligation were as follows:

Years Ended December 31,

Balances at beginning of period

Balance at beginning of period

Warranty acquired in business combinations

2 unchanged sentences

Effect of changes in exchange rates

Balances at end of period

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.

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.

Balance at end of period

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Components of operating lease cost were as follows:

Year Ended December 31,

Years Ended December 31,

Operating lease cost

1 unchanged sentence

Total operating lease cost

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

Maturities of our operating lease liabilities 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:

We have lease agreements that commence in the future between 2022 and 2023 with total payments of $ 4.3 million through 2029.

Year Ended December 31,

1 unchanged sentence

Weighted average discount rate

Cash paid for operating lease liabilities

Year Ended December 31,

Cash paid for operating leases

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

(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.

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

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

Participants are immediately vested in their contributions.

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

Vesting in the profit-sharing contribution account is based on years of service, with most participants fully vested after four years of credited service.

For the years ended December 31, 2020, 2019, and 2018 our contribution for participants in our 401(k) plan was based on matching 50 % of contributions made by employees up to 6 % of the employee’s compensation.

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

Effective January 1, 2022, participants are immediately vested in both their own contributions and profit-sharing contributions.

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

For the years ended December 31, 2021, 2020, and 2019 we based our profit-sharing contribution on matching 50 % of employee contributions up to 6 % of the employee’s compensation.

During the years ended December 31, 2021, 2020, and 2019 we recognized total defined contribution plan costs of $ 3.1 million, $ 2.6 million, and $ 1.6 million, respectively.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Defined Benefit Plan

2 unchanged sentences

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

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.

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

We base these assumptions on historical experience as well as facts and circumstances.

We use an actuarial analysis to measure the expense and liability associated with pension benefits.

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.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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:

As such, for all periods presented, all related expenses are reported in discontinued operations in the Consolidated Statements of Operations.

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

Years Ended December 31,

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Net periodic pension cost

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

Assumptions used in the determination of the net periodic pension cost are:

2 unchanged sentences

Expected long-term return on plan assets

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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

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

December 31, 2021

Multi-Asset Fund

Diversified Growth Fund

4 unchanged sentences

Diversified Growth Fund

Index-Linked Gilts

Corporate Bonds

Insurance Contracts

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 %).

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.

On December 31, 2021, our plan’s assets of $ 18.5 million were invested in cash plus three separate funds including, a diversified growth fund ( 66.1 %), corporate bonds ( 25.1 %), and insurance contracts ( 5.3 %).

The growth fund aims to generate an "equity-like"

return over an economic cycle with significantly reduced volatility relative to equity markets and has the scope to use a diverse range of asset classes, including equities, bonds, cash, and alternatives (e.g., property, infrastructure, high yield bonds, floating rate debt, private, equity, hedge funds and currency).

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

Expected future payments under defined benefit pension plans, based on foreign exchange rates as of December 31, 2020, are as follows:

Expected Future Benefit Payments

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

Year Ending December 31,

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

STOCK-BASED COMPENSATION

As of December 31, 2021, we had two active stock-based incentive compensation plan:

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

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

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

We issue all new equity compensation grants under these two plans;

however, outstanding awards previously issued under inactive plans will continue to vest and remain exercisable in accordance with the terms of the respective plans.

1 unchanged sentence

On December 31, 2021, there were 3.3 million shares reserved and 2.6 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.

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

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

1 unchanged sentence

As of December 31, 2021, there were 1.9 million shares available for grant under the 2017 Plan.

The Company grants restricted stock units and performance stock units.

The grant date fair values of restricted stock units and performance stock units are based on the closing market price of our common stock on the grant date.

Our restricted stock units vest based on continued service.

Our performance stock units vest based on achievement of certain performance goals and certification of performance achievement by the Compensation Committee of the Board of Directors.

Stock-based compensation expense, net of forfeitures, is recognized on a straight-line basis over the requisite service period.

For performance stock units, compensation expense is updated for the Company’s expected performance level against performance goals at the end of each reporting period, which involves judgment as to achievement of certain performance metrics.

Stock-based Compensation Expense

2 unchanged sentences

Years Ended December 31,

Equity classified awards

Liability classified awards

Stock-based compensation expense

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") were approximately 5 %, 10 % and 10 % for the years ended December 31, 2020, 2019 and 2018, respectively.

Estimated forfeiture rates for our stock-based compensation expense applicable to stock options and RSUs were approximately 8 %, 5 % and 10 % for the years ended December 31, 2021, 2020 and 2019, respectively.

Restricted Stock Units

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:

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

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

Changes in our unvested RSUs were as follows:

Year Ended December 31, 2021

RSUs outstanding at beginning of period

1 unchanged sentence

RSUs outstanding at end of period

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, 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.

1 unchanged sentence

(in thousands, except per share amounts)

The total intrinsic value of RSUs converted to shares for the years ended December 31, 2021, 2020 and 2019 were $ 19.2 million, $ 9.2 million, and $ 8.3 million, respectively.

As of December 31, 2021, there was $ 21.4 million of total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected to be recognized through December 2024, with a weighted-average remaining vesting period of 1.1 years.

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.

Generally, we grant stock option awards 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;

however, no stock options were granted in 2021.

Stock option awards generally have a term of ten years .

Changes in our outstanding stock options were as follows:

Changes in our stock options were as follows:

Year Ended December 31, 2021

Exercise Price

Options outstanding at beginning of period

Options exercised

Options forfeited

Options expired

Options outstanding at end of period

8 unchanged sentences

$ 18.77 to $ 26.32

$ 9.51 to $ 26.32

Employee Stock Purchase Plan

6 unchanged sentences

On December 31, 2021, 0.7 million shares remained available for future issuance under the ESPP.

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

As of December 31, 2020, there was $ 0.4 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a remaining period of five months .

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.

1 unchanged sentence

(in thousands, except per share amounts)

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

As of December 31, 2021, there was $ 0.6 million of total unrecognized compensation cost related to the ESPP that we expect to recognize over a remaining period of five months .

The following table summarizes compensation expense related to the ESPP.

Years Ended December 31,

Stock-based compensation expense related to the ESPP

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:

9 unchanged sentences

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.

Our term is 0.5 years as purchases are made biannually.

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

COMMITMENTS AND CONTINGENCIES

Disputes and Legal Actions

We are involved in disputes and legal actions arising in the normal course of our business.

3 unchanged sentences

We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred, and the amount of the loss can be reasonably estimated.

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.

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

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

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:

The following table summarizes sales and percentages of total sales from customers who individually accounted for 10% or more of our sales:

Years Ended December 31,

Applied Materials, Inc.

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:

Lam Research Corporation

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

Applied Materials, Inc.

Nidec Motor Corporation

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.

* Customer’s balance was less than 10% of total

Our sales to Applied Materials, Inc.

and Lam Research Corporation are reflected in the Semiconductor Equipment and Industrial and Medical market.

Our sales to Nidec Motor Corporation are reflected in the Industrial and Medical market.

For more information on our markets, see Note 3.

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

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

Long-lived assets include property and equipment, operating lease right-of-use assets , goodwill, and other intangible assets.

Long-lived assets include property and equipment, operating lease right-of-use assets , goodwill, and intangible assets.

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, we entered into a credit agreement ("Credit Agreement") that provided aggregate financing of $ 500.0 million, consisting of a $ 350.0 million senior unsecured term loan facility (the "Term Loan Facility") and a $ 150.0 million senior unsecured revolving facility (the "Revolving Facility"

and together with the Term Loan Facility, the “Credit Facility”).

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

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

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

The 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.

As of December 31, 2020, the effective interest rate for the Revolving Facility and Term Loan Facility was 1.26 %, and the effective rate for the unused line fee was 0.10 %.

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 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.

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (continued)

(in thousands, except per share amounts)

The following table summarizes borrowings under our Credit Facility and the associated interest rate.

December 31, 2021

Interest Rate

Unused Line Fee

Term Loan Facility subject to a fixed interest rate

Term Loan Facility subject to a variable interest rate

Revolving Facility subject to a variable interest rate

Total borrowings under the Credit Agreement

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

Derivative Financial Instruments .

The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on a reserve adjusted "Eurodollar Rate"

or "Base Rate,"

as defined in the Credit Agreement, plus an applicable margin.

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

As of December 31, 2021 and December 31, 2020, we had $ 200.0 million and $ 150.0 million, respectively, available to withdraw on the Revolving Facility.

The fair value of the Term Loan Facility approximates the outstanding balance of $ 395.0 million as of December 31, 2021 .

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

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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:

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

Year Ending December 31,

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data