Quarterly Report (10-q)

Three Months Ended March 31,

Depreciation expense

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2023
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from to

Commission File Number: 000-26966

ADVANCED ENERGY INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

Delaware	84-0846841
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1595 Wynkoop Street, Suite 800, Denver, Colorado	80202
(Address of principal executive offices)	(Zip Code)

(970) 407-6626

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.001 par value	AEIS	NASDAQ Global Select Market

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No ◻

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ

Accelerated filer ◻

Non-accelerated filer ◻

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

As of April 28, 2023, there were 37,533,745 shares of the registrant’s common stock, par value $0.001 per share, outstanding.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS



	PART I FINANCIAL INFORMATION

ITEM 1.	UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS	3

	Consolidated Balance Sheets	3

	Consolidated Statements of Operations	4

	Consolidated Statements of Comprehensive Income	5

	Consolidated Statements of Stockholders’ Equity	6

	Consolidated Statements of Cash Flows	7

	Notes to Consolidated Financial Statements	8

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	22

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	35

ITEM 4.	CONTROLS AND PROCEDURES	37

	PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	37

ITEM 1A.	RISK FACTORS	37

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	38

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	38

ITEM 4.	MINE SAFETY DISCLOSURES	38

ITEM 5.	OTHER INFORMATION	38

ITEM 6.	EXHIBITS	39

	SIGNATURES	40

Table of Contents

PART I FINANCIAL INFORMATION

ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Balance Sheets

(In thousands, except per share amounts)


	March 31,		December 31,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	461,665	$	458,818
Accounts and other receivables, net		291,629		300,683
Inventories		401,530		376,012
Other current assets		55,486		53,001
Total current assets		1,210,310		1,188,514
Property and equipment, net		152,762		148,462
Operating lease right-of-use assets		95,861		100,177
Other assets		84,613		84,056
Intangible assets, net		182,591		189,526
Goodwill		282,564		281,433
TOTAL ASSETS	$	2,008,701	$	1,992,168

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	185,835	$	170,467
Accrued payroll and employee benefits		55,520		82,733
Other accrued expenses		77,830		76,750
Customer deposits and other		28,826		26,322
Current portion of long-term debt		20,000		20,000
Current portion of operating lease liabilities		16,249		16,771
Total current liabilities		384,260		393,043
Long-term debt, net		348,389		353,262
Operating lease liabilities		91,011		94,460
Pension benefits		45,162		44,031
Other long-term liabilities		43,966		41,105
Total liabilities		912,788		925,901

Commitments and contingencies (Note 17)

Stockholders' equity:
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding		—		—
Common stock, $0.001 par value, 70,000 shares authorized; 37,529 and 37,429 issued and outstanding at March 31, 2023 and December 31, 2022, respectively		37		37
Additional paid-in capital		139,192		134,640
Accumulated other comprehensive income		14,307		16,320
Retained earnings		942,377		915,270
Total stockholders' equity		1,095,913		1,066,267
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	2,008,701	$	1,992,168

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)



	Three Months Ended March 31,
	2023		2022
Sales, net	$	425,040	$	397,459
Cost of sales		269,929		253,143
Gross profit		155,111		144,316

Operating expenses:
Research and development		51,610		43,614
Selling, general, and administrative		55,358		49,318
Amortization of intangible assets		7,062		5,509
Restructuring		1,043		1,218
Total operating expenses		115,073		99,659
Operating income		40,038		44,657

Other expense, net		(550)		(842)
Income from continuing operations, before income taxes		39,488		43,815
Provision for income taxes		7,736		6,953
Income from continuing operations		31,752		36,862
Loss from discontinued operations, net of income taxes		(831)		(98)
Net income	$	30,921	$	36,764
Loss from continuing operations attributable to noncontrolling interest		-		(14)
Net income attributable to Advanced Energy Industries, Inc.	$	30,921	$	36,778

Basic weighted-average common shares outstanding		37,475		37,549
Diluted weighted-average common shares outstanding		37,757		37,770

Earnings per share:
Continuing operations:
Basic earnings per share	$	0.85	$	0.98
Diluted earnings per share	$	0.84	$	0.98
Discontinued operations:
Basic loss per share	$	(0.02)	$	—
Diluted loss per share	$	(0.02)	$	—
Net income:
Basic earnings per share	$	0.83	$	0.98
Diluted earnings per share	$	0.82	$	0.97

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)


	Three Months Ended March 31,
	2023		2022
Net income	$	30,921	$	36,764
Other comprehensive income (loss), net of income taxes
Foreign currency translation		(196)		(4,092)
Change in fair value of cash flow hedges		(1,817)		5,913
Minimum pension benefit retirement liability		—		145
Comprehensive income	$	28,908	$	38,730
Comprehensive income attributable to noncontrolling interest		—		(14)
Comprehensive income attributable to Advanced Energy Industries, Inc.	$	28,908	$	38,744

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Stockholders' Equity

(In thousands, except per share amounts)


	Advanced Energy Industries, Inc. Stockholders' Equity

	Common Stock
						Accumulated
				Additional		Other				Non-		Total
				Paid-in		Comprehensive		Retained		controlling		Stockholders'
	Shares	Amount		Capital		Income (Loss)		Earnings		Interest		Equity
Balances, December 31, 2021	37,589	$	38	$	115,706	$	(1,216)	$	756,323	$	645	$	871,496
Stock issued from equity plans	52		—		(2,430)		—		—		—		(2,430)
Stock-based compensation	—		—		3,906		—		—		—		3,906
Share repurchases	(82)		—		(254)		—		(6,340)				(6,594)
Dividends declared ($0.10 per share)	—		—		—		—		(3,789)		—		(3,789)
Other comprehensive income	—		—		—		1,966		—		—		1,966
Net income (loss)	—		—		—		—		36,778		(14)		36,764
Balances, March 31, 2022	37,559	$	38	$	116,928	$	750	$	782,972	$	631	$	901,319

Balances, December 31, 2022	37,429	$	37	$	134,640	$	16,320	$	915,270	$	—	$	1,066,267
Stock issued from equity plans	100		—		(1,991)		—		—		—		(1,991)
Stock-based compensation	—		—		6,543		—		—		—		6,543
Dividends declared ($0.10 per share)	—		—		—		—		(3,814)		—		(3,814)
Other comprehensive loss	—		—		—		(2,013)		—		—		(2,013)
Net income	—		—		—		—		30,921		—		30,921
Balances, March 31, 2023	37,529	$	37	$	139,192	$	14,307	$	942,377	$	—	$	1,095,913

The accompanying notes are an integral part of these unaudited consolidated financial statements.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Cash Flows

(In thousands)


	Three Months Ended March 31,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	30,921	$	36,764
Less: loss from discontinued operations, net of income taxes		(831)		(98)
Income from continuing operations, net of income taxes		31,752		36,862
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		16,523		13,888
Stock-based compensation expense		6,801		3,928
Provision for deferred income taxes		(617)		(1,060)
Loss on disposal and sale of assets		115		276
Changes in operating assets and liabilities, net of assets acquired
Accounts and other receivable, net		13,590		(12,579)
Inventories		(25,699)		(23,616)
Other assets		(8,971)		(3,840)
Accounts payable		16,770		(6,469)
Other liabilities and accrued expenses		(18,384)		2,523
Net cash from operating activities from continuing operations		31,880		9,913
Net cash from operating activities from discontinued operations		(2,069)		(92)
Net cash from operating activities		29,811		9,821

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(16,210)		(13,075)
Acquisitions, net of cash acquired		—		(600)
Net cash from investing activities		(16,210)		(13,675)

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term borrowings		(5,000)		(5,000)
Dividend payments		(3,814)		(3,789)
Purchase and retirement of common stock		—		(6,594)
Net payments related to stock-based awards		(1,991)		(2,430)
Net cash from financing activities		(10,805)		(17,813)

EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS		51		(1,469)

NET CHANGE IN CASH AND CASH EQUIVALENTS		2,847		(23,136)
CASH AND CASH EQUIVALENTS, beginning of period		458,818		544,372
CASH AND CASH EQUIVALENTS, end of period	$	461,665	$	521,236

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	2,590	$	1,123
Cash paid for income taxes	$	2,838	$	2,444

The accompanying notes are an integral part of these unaudited consolidated financial statements.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Advanced Energy Industries, Inc., a Delaware corporation, and its consolidated subsidiaries (“we,” “us,” “our,” “Advanced Energy,” or the “Company”) design, manufacture, sell, and support precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment.

Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data centers computing, networking, and telecommunications. We also supply related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets. Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies using our products.

In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly Advanced Energy’s financial position as of March 31, 2023, and the results of our operations and cash flows for the three months ended March 31, 2023 and 2022.

The unaudited consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted pursuant to such rules and regulations. These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and other financial information filed with the SEC.

Use of Estimates in the Preparation of the Consolidated Financial Statements

The preparation of our consolidated financial statements in conformity with U.S. GAAP requires us to make estimates, assumptions, and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The significant estimates, assumptions, and judgments include, but are not limited to:

●

excess and obsolete inventory;

●

pension obligations;

●

acquisitions and asset valuations; and

●

income taxes and other provisions.

Significant Accounting Policies

Our accounting policies are described in Note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022.

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.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

New Accounting Standards Adopted

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

Issuance Date	ASU	Title
March 2020	2020-04	Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
January 2021	2021-01	Reference Rate Reform (Topic 848): Scope
December 2022	2022-06	Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848

This collective guidance provides optional expedients and exceptions for applying U.S. 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.

Our Credit Facility (refer to Note 18. Credit Facility) and interest rate swap agreements (refer to Note 7. Derivative Financial Instruments) referenced the one-month USD LIBOR rate. On March 31, 2023, we executed agreements with our debt holders and the counterparties to our interest rate swap agreements to transition the benchmark interest rate from LIBOR to the one-month-USD Term Secured Overnight Financing Rate (“Term SOFR”). The impact of this transition and the adoption of the above guidance was not material to our consolidated financial statements.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 2. ACQUISITIONS

SL Power Electronics Corporation

On April 25, 2022, we acquired 100% of the issued and outstanding shares of capital stock of SL Power Electronics Corporation (“SL Power”), which is based in Calabasas, California. We accounted for this transaction as a business combination. This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.

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


Cash paid for acquisition	$	145,693
Less cash acquired		(3,484)
Total fair value of purchase consideration	$	142,209

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


	Fair Value
Current assets and liabilities, net	$	11,990
Property and equipment		3,567
Operating lease right-of-use assets		4,640
Deferred taxes and other liabilities		(2,335)
Intangible assets		57,600
Goodwill		71,387
Operating lease liability		(4,640)
Total fair value of net assets acquired	$	142,209

The following table summarizes the intangible assets acquired:


			Amortization	Useful Life
	Fair Value		Method	(in years)
Customer relationships	$	50,500	Straight-line	10
Technology		7,100	Straight-line	5
Total	$	57,600

To estimate the fair value of intangible assets, we used a multi-period excess earnings approach for the customer relationships and a relief from royalty approach for developed technology. Goodwill represents SL Power’s assembled workforce and the expected operating synergies from combining operations. We expect approximately 85% of goodwill to be deductible for tax purposes.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 3. REVENUE

Disaggregation of revenue

The following tables present additional information regarding our revenue:

Revenue by Market


	Three Months Ended March 31,
	2023		2022
Semiconductor Equipment	$	194,209	$	202,957
Industrial and Medical		123,020		82,898
Data Center Computing		59,659		76,238
Telecom and Networking		48,152		35,366
Total	$	425,040	$	397,459

Revenue by Region


	Three Months Ended March 31,
	2023		2022
North America	$	180,942	$	182,721
Asia		179,183		162,047
Europe		62,566		46,665
Other		2,349		6,026
Total	$	425,040	$	397,459

Revenue by Significant Countries


	Three Months Ended March 31,
	2023		2022
United States	$	153,506	$	158,742
China		37,456		44,692
All others		234,078		194,025
Total	$	425,040	$	397,459

We attribute sales to individual countries and regions based on the customer’s ship to location. Apart from the United States, no revenue attributable to any individual country exceeded 10% of our total consolidated revenues in the three months ended March 31, 2023. Apart from the United States and China, no revenue attributable to any individual country exceeded 10% of our total consolidated revenues in the three months ended March 31, 2022.

Revenue by Category


	Three Months Ended March 31,
	2023		2022
Product	$	379,274	$	362,876
Services		45,766		34,583
Total	$	425,040	$	397,459

Remaining Performance Obligations

Our remaining performance obligations primarily relate to customer purchase orders for products we have not yet shipped. We expect to fulfill the majority of these performance obligations within one year.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 4. INCOME TAXES

The following table summarizes tax expense and the effective tax rate for our income from continuing operations:


	Three Months Ended March 31,
	2023			2022
Income from continuing operations, before income taxes	$	39,488		$	43,815
Provision for income taxes	$	7,736		$	6,953
Effective tax rate		19.6	%		15.9	%

Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three months ended March 31, 2023 and 2022, respectively, primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S. tax on foreign operations. The effective tax rate for the three months ended March 31, 2023 was higher than the same period in 2022 primarily due to the impact of decreased earnings in 2023 and an unfavorable mix of earnings by geography, partially mitigated by reduced U.S. tax on foreign operations.

NOTE 5. EARNINGS PER SHARE

We compute basic earnings per share (“EPS”) by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The diluted EPS computation is similar to basic EPS except we increase the denominator to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods) if our outstanding stock options and restricted stock units had been converted to common shares (when such conversion is dilutive).

The following table summarizes our earnings per share:


	Three Months Ended March 31,
	2023		2022
Income from continuing operations	$	31,752	$	36,862
Less: income from continuing operations attributable to noncontrolling interest		—		(14)
Income from continuing operations attributable to Advanced Energy Industries, Inc.	$	31,752	$	36,876

Basic weighted-average common shares outstanding		37,475		37,549
Assumed exercise of dilutive stock options and restricted stock units		282		221
Diluted weighted-average common shares outstanding		37,757		37,770

Continuing operations:
Basic earnings per share	$	0.85	$	0.98
Diluted earnings per share	$	0.84	$	0.98

Share Repurchase

To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. The following table summarizes these repurchases:


	Three Months Ended March 31,
(in thousands, except per share amounts)	2023		2022
Amount paid or accrued to repurchase shares	$	—	$	6,594
Number of shares repurchased		—		82
Average repurchase price per share	$	—	$	80.02

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

There were no shares repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares.

At March 31, 2023, the remaining amount authorized by the Board of Directors for future share repurchases was $199.3 million with no time limitation.

NOTE 6. FAIR VALUE MEASUREMENTS

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


		March 31, 2023
Description	Balance Sheet Classification	Level 1		Level 2		Level 3		Total Fair Value
Certificates of deposit	Other current assets	$	—	$	164	$	—	$	164
Foreign currency forward contracts	Other current liabilities		—		(23)		—		(23)
Interest rate swaps	Other assets		—		12,890		—		12,890
Net assets measured at fair value on a recurring basis		$	—	$	13,031	$	—	$	13,031


		December 31, 2022
Description	Balance Sheet Classification	Level 1		Level 2		Level 3		Total Fair Value
Certificates of deposit	Other current assets	$	—	$	2,128	$	—	$	2,128
Interest rate swaps	Other assets		—		15,310		—		15,310
Net assets measured at fair value on a recurring basis		$	—	$	17,438	$	—	$	17,438

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

NOTE 7. 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. Typically, we execute these derivative instruments for one-month periods and do not designate them as hedges; however, they do partially offset the economic fluctuations of certain of our assets and liabilities due to foreign exchange rate changes.

The following table summarizes the notional amount of outstanding foreign currency forward contracts:


	March 31,		December 31,
	2023		2022
Foreign currency forward contracts	$	65,017	$	—

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 expense, net in our Consolidated Statements of Operations.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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). On March 31, 2023, we executed agreements with our debt holders and the counterparties to our interest rate swap agreements to transition the benchmark interest rate from LIBOR to Term SOFR. The interest rate swap contracts are accounted for as cash flow hedging instruments.

The interest rate swap contracts fix a portion of the outstanding principal balance on our term loan to a total interest rate of 1.172%. This is comprised of a 0.322% average fixed rate per annum in exchange for a variable interest rate based on Term SOFR plus the credit spread in our existing Credit Agreement (see Note 18. Credit Facility), which is 75 basis points at current leverage ratios plus a LIBOR to SOFR transitional rate adjustment of 0.10%.

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


	March 31,		December 31,
	2023		2022
Interest rate swap contracts	$	233,844	$	238,219

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


	March 31,		December 31,
	2023		2022
Interest rate swap contract gains	$	9,908	$	11,779

See Note 6. Fair Value Measurements for information regarding fair value of derivative instruments.

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

NOTE 8. ACCOUNTS AND OTHER RECEIVABLES, NET

We record accounts and other receivables at net realizable value. The following table summarizes the changes in expected credit losses related to receivables:


December 31, 2022	$	1,814
Additions		123
March 31, 2023	$	1,937

NOTE 9. INVENTORIES

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:


	March 31,		December 31,
	2023		2022
Parts and raw materials	$	299,132	$	286,955
Work in process		23,144		23,002
Finished goods		79,254		66,055
Total	$	401,530	$	376,012

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 10. PROPERTY AND EQUIPMENT, NET

Property and equipment, net is comprised of the following:


	Estimated Useful	March 31,		December 31,
	Life (in years)	2023		2022
Buildings, machinery, and equipment	5 to 25	$	170,724	$	165,673
Computer equipment, furniture, fixtures, and vehicles	3 to 5		38,114		36,281
Leasehold improvements	2 to 10		66,018		63,103
Construction in process			20,557		18,226
			295,413		283,283
Less: Accumulated depreciation			(142,651)		(134,821)
Property and equipment, net		$	152,762	$	148,462

The following table summarizes depreciation expense. All depreciation expense is recorded in income from continuing operations:

NOTE 11. GOODWILL

The following table summarizes the changes in goodwill:


December 31, 2022	$	281,433
Measurement period adjustments		701
Foreign currency translation		430
March 31, 2023	$	282,564

NOTE 12. INTANGIBLE ASSETS

Intangible assets consisted of the following:


	March 31, 2023
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Technology	$	97,446	$	(50,504)	$	46,942
Customer relationships		167,927		(48,272)		119,655
Trademarks and other		27,073		(11,079)		15,994
Total	$	292,446	$	(109,855)	$	182,591


	December 31, 2022
	Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount
Technology	$	97,237	$	(47,196)	$	50,041
Customer relationships		167,631		(44,774)		122,857
Trademarks and other		27,036		(10,408)		16,628
Total	$	291,904	$	(102,378)	$	189,526

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

At March 31, 2023, the weighted average remaining useful life of intangibles subject to amortization was approximately 9.0 years.

Amortization expense related to intangible assets is as follows:

Estimated amortization expense related to intangibles is as follows:


Year Ending December 31,
2023 (remaining)	$	21,210
2024		25,200
2025		20,995
2026		19,280
2027		17,372
Thereafter		78,534
Total	$	182,591

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 13. RESTRUCTURING COSTS

In the fourth quarter of 2022, we approved a restructuring plan (the “2022 Plan”), which is expected to further improve our operating efficiencies and drive the realization of synergies from business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, and reducing redundancies. We anticipate the 2022 Plan will be substantially completed, and associated expenses will be incurred, by the beginning of 2024.

In 2018, we committed to a restructuring plan (the “2018 Plan”) to optimize our manufacturing footprint and improve operating efficiencies and synergies related to business combinations. We incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, China and actions associated with synergies related to the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business. The Shenzhen facility closed in the first quarter of 2023, and the 2018 Plan is substantially complete.

The tables below summarize the charges related to our restructuring plans:



	Three Months Ended March 31,
	2023		2022
Severance and related charges	$	1,043	$	873
Facility relocation and closure charges		—		345
Total restructuring charges	$	1,043	$	1,218


	Cumulative Cost Through
	March 31, 2023
	2022 Plan		2018 Plan		Total
Severance and related charges	$	6,547	$	21,345	$	27,892
Facility relocation and closure charges		—		7,160		7,160
Total restructuring charges	$	6,547	$	28,505	$	35,052

Our restructuring liabilities are included in other accrued expenses in our Consolidated Balance Sheets. Changes in restructuring liabilities were as follows:


	2022 Plan		2018 Plan		Total
December 31, 2022	$	5,788	$	1,422	$	7,210
Costs incurred and charged to expense		759		284		1,043
Costs paid or otherwise settled		(924)		(947)		(1,871)
Foreign currency translation		—		(223)		(223)
March 31, 2023	$	5,623	$	536	$	6,159

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 14. WARRANTIES

Our sales agreements include customary product warranty provisions, which generally 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 were as follows:


December 31, 2022	$	5,702
Increases to accruals		1,016
Warranty expenditures		(1,212)
Effect of changes in exchange rates		(6)
March 31, 2023	$	5,500

NOTE 15. LEASES

Components of operating lease cost were as follows:


	Three Months Ended March 31,
	2023		2022
Operating lease cost	$	5,680	$	5,719
Short-term and variable lease cost		1,083		1,090
Total operating lease cost	$	6,763	$	6,809

Maturities of our operating lease liabilities are as follows:


Year Ending December 31,
2023 (remaining)	$	16,021
2024		19,469
2025		15,859
2026		13,590
2027		11,884
Thereafter		57,977
Total lease payments		134,800
Less: Interest		(27,540)
Present value of lease liabilities	$	107,260

The following tables present additional information about our lease agreements:


		March 31,			December 31,
	2023			2022
Weighted average remaining lease term (in years)		8.8			8.9
Weighted average discount rate		4.7	%		4.6	%


	Three Months Ended March 31,
	2023		2022
Cash paid for operating leases	$	5,820	$	5,626
Right-of-use assets obtained in exchange for operating lease liabilities	$	208	$	4,530

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 16. STOCK-BASED COMPENSATION

The Compensation Committee of our Board of Directors administers our stock plans. As of March 31, 2023, we have two active stock-based incentive compensation 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.

The 2017 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, unrestricted stock, and dividend equivalent rights. Any of the awards issued may be issued as performance-based awards to align stock compensation awards to the attainment of annual or long-term performance goals.

The following table summarizes information related to our stock-based incentive compensation plans:


		March 31, 2023
Shares available for future issuance under the 2017 Omnibus Incentive Plan		1,205
Shares available for future issuance under the Employee Stock Purchase Plan		619

Generally, we grant restricted stock units (“RSUs”) with a three-year time-based vesting schedule. Certain RSUs contain performance-based or market-based vesting conditions in addition to the time-based vesting requirements. RSUs are generally granted with a grant date fair value based on the market price of our stock on the date of grant.

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. Stock option awards generally have a term of ten years.

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

Changes in our RSUs were as follows:


	Three Months Ended March 31, 2023
		Weighted-
		Average
	Number of	Grant Date
	RSUs	Fair Value
RSUs outstanding at beginning of period	803	$	78.46
RSUs granted	295	$	96.70
RSUs vested	(97)	$	89.09
RSUs forfeited	(25)	$	68.29
RSUs outstanding at end of period	976	$	83.00

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

Changes in our stock options were as follows:


	Three Months Ended March 31, 2023
		Weighted-
		Average
	Number of	Exercise Price
	Options	per Share
Options outstanding at beginning of period	151	$	55.48
Options exercised	(36)	$	24.19
Options outstanding at end of period	115	$	65.14

NOTE 17. COMMITMENTS AND CONTINGENCIES

We are involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations. An unfavorable decision in intellectual property litigation also could require material changes in production processes and products or result in our inability to ship products or components found to have violated third-party intellectual property rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred, and the amount of the loss can be reasonably estimated. We are not currently a party to any legal action that we believe would reasonably have a material adverse impact on our business, financial condition, results of operations or cash flows.

NOTE 18. CREDIT FACILITY

Our credit agreement (“Credit Agreement”) consists of a senior unsecured term loan facility (“Term Loan Facility”) and a senior unsecured revolving facility (“Revolving Facility”). Both mature on September 9, 2026.

On March 31, 2023, we executed agreements pursuant to the Credit Agreement to transition the benchmark interest rate from LIBOR to Term SOFR. The impact of this transition was not material to our consolidated financial statements.

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


	March 31, 2023
	Balance		Interest Rate	Unused Line Fee
Term Loan Facility subject to a fixed interest rate due to interest rate swap	$	233,844	1.172%	—
Term Loan Facility subject to a variable interest rate		136,156	5.657%	—
Revolving Facility subject to a variable interest rate		—	5.657%	0.10%
Total borrowings under the Credit Agreement	$	370,000

For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 7. Derivative Financial Instruments. The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on the Base Rate or Term SOFR, as defined in the Credit Agreement, plus an applicable margin.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

For all periods presented, we were in compliance with the Credit Agreement covenants. The following table summarizes our availability to withdraw on the Revolving Facility.


	March 31,		December 31,
	2023		2022
Available capacity on Revolving Facility	$	200,000	$	200,000

In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may also request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $250.0 million at identical terms to our existing Credit Agreement.

The fair value of the Term Loan Facility approximates the outstanding balance of $370.0 million as of March 31, 2023.

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


	March 31,		December 31,
	2023		2022
Term Loan Facility	$	370,000	$	375,000
Less: debt discount		(1,611)		(1,738)
Total debt		368,389		373,262
Less current portion of long-term debt		(20,000)		(20,000)
Total long-term debt	$	348,389	$	353,262

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


Year Ending December 31,
2023 (remaining)	$	15,000
2024		20,000
2025		20,000
2026		315,000
Total	$	370,000

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


	Three Months Ended March 31,
	2023		2022
Interest expense	$	2,590	$	1,123
Amortization of debt issuance costs		133		135
Unused line of credit fees and other		51		54
Total interest expense	$	2,774	$	1,312

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the SEC on February 17, 2023.

Special Note on Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions, or circumstances will continue. The inclusion of words such as “anticipate,” “expect,” “estimate,” “can,” “may,” “might,” “continue,” “enable,” “plan,” “intend,” “should,” “could,” “would,” “likely,” “potential,” or “believe,” as well as statements that events or circumstances “will” occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control.

Risks and uncertainties to which our forward-looking statements are subject include:

●

macroeconomic risks, including supply chain cost increases and other inflationary pressures, recession, changes in financial markets, economic volatility and cyclicality, higher interest rates, labor shortages, foreign currency fluctuations, and pricing controls;

●

political risks, including trade and export controls, war, terrorism, international disputes and geopolitical tensions, and geographical risks including natural disasters, public health issues, and industrial accidents;

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sufficiency and availability of components and materials;

●

our level of and ability to manage backlog orders;

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our ability to develop new products expeditiously and be successful in the design win process with our customers;

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the ability to stay on the leading edge of innovation, and obtain and defend necessary intellectual property protections;

●

the ability to protect our trade secrets and confidential information from misappropriation or infringement;

●

our future sales;

●

our future profitability;

●

our competition;

●

market acceptance of, and demand for, our products;

●

the fair value of our assets and financial instruments;

●

research and development expenses;

●

selling, general, and administrative expenses;

●

sufficiency and availability of capital resources;

●

ability to obtain equity or debt financing on favorable terms;

●

capital expenditures;

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●

our production and operations strategy;

●

our share repurchase program;

●

our tax assets and liabilities;

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our other commitments and contingent liabilities;

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adequacy of our reserve for excess and obsolete inventory;

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adequacy of our warranty reserves;

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adequacy of reserves for bad debt, sales returns, and other reserves or impairments;

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our estimates of the fair value of assets acquired;

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restructuring activities and expenses;

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unanticipated costs in fulfilling our warranty obligations for solar inverters;

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the integration of our acquisitions;

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industry and market trends;

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our acquisition, divestiture, and joint venture activities; and

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cost fluctuations and pressures, including prices of components, commodities and raw materials, and costs of labor, transportation, energy, pension, and healthcare.

Actual results could differ materially and adversely from those expressed in any forward-looking statements. Neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements and readers are cautioned not to place undue reliance on forward-looking statements. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include the factors described in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2022. Other factors might also contribute to the differences between our forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or provide the reasons why our actual results might differ.

BUSINESS AND MARKET OVERVIEW

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 coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.

Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, industrial production, medical and life science equipment, data center computing, networking, and telecommunications. We also supply related sensing, control, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets. Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies using our products.

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Advanced Energy is organized on a global, functional basis and operates in the single segment for power electronics conversion products. Within this segment, our products are sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.

On April 25, 2022, we acquired 100% of the issued and outstanding shares of capital stock of SL Power Electronics Corporation (“SL Power”), which is based in Calabasas, California. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.” This acquisition added complementary products to Advanced Energy’s medical power offerings and extends our presence in several advanced industrial markets.

The demand environment in each of our markets is impacted by various market trends, customer buying patterns, design wins, macroeconomic and other factors. Fulfilling demand was difficult in 2022, as we were limited in our ability to fulfill demand due to supply chain shortages for critical integrated circuits, resulting in longer lead times for our products. These supply constraints continue into 2023 and have led to longer lead times in procuring materials and subcomponents and, in some cases, meaningfully higher costs for the subcomponents. We implemented measures to improve the supply of critical materials and components and to mitigate the impact of these higher input costs, and these actions have enabled us to better meet customer demand. In the fourth quarter of 2022 and through the first quarter of 2023, we entered into a cyclical downturn in the semiconductor market driven by overcapacity primarily in memory applications and export controls impacting customers in China, which has impacted our demand levels. As a result of lower demand levels and shortened lead times, primarily in our semiconductor market, our backlog in the first quarter continued to normalize, declining from $875.3 million at the end of 2022 to $755.9 million at the end of the first quarter of 2023. Demand in our other markets has remained relatively stable, however our ability to fulfill demand and reduce our backlog has been limited by ongoing supply constraints. It is not clear how long global supply constraints will continue, how quickly the supply chain will recover, the extent to which our mitigating actions will be successful, or to what extent we can recover our higher costs.

Semiconductor Equipment Market

The Semiconductor Equipment market is driven by the long-term growing need for more semiconductor production capacity and new process technologies. While the semiconductor and semiconductor equipment industries are inherently cyclical, over the long-term, integrated circuit content is growing across many industries driven by increased demand for processing, storing, and transmitting the growing amount of data. To meet the growing demand, the chip industry continues to invest in production capacity for both leading-edge and trailing-edge node logic devices, the latest memory devices, back-end test, and advanced wafer-level packaging. The industry’s transition to advanced technology nodes and to increased layers in memory devices require an increased number of plasma-based etch and deposition process tools and higher content of our advanced power solutions per tool. As etch and deposition processes become more challenging due to shrinking device geometry and increasing aspect ratios in advanced 3D devices, more advanced Radio Frequency (“RF”) and Direct Current (“DC”) plasma generation technologies are needed. We strive to provide a broad range of best-in-class, industry-leading RF and DC power solutions. Beyond etch and deposition processes, growing complexity at advanced nodes also drives a higher number of other process steps across the wafer fab, including inspection, metrology, thermal, ion implantation, and semiconductor test and assembly, where Advanced Energy is actively participating as a critical technology provider. In addition, our global support services group offers comprehensive local repair service, upgrade, and retrofit offerings to extend the usable life of our customers’ capital equipment for additional technology generations. Our strategy in the Semiconductor Equipment market is to defend our proprietary positions in our core applications by capturing new design and product generations, growing our market position in applications where we have lower market share, such as remote plasma source and dielectric etch, and leveraging our product portfolio in areas including embedded power, high voltage power systems, and critical sensing and controls to grow our market share and content at our original equipment manufacturer (“OEM”) customers.

The Semiconductor Equipment market continued to experience demand growth driven by investments in both leading and trailing edge semiconductor capacity throughout the first three quarters of 2022. Starting in the fourth quarter of 2022, the market entered a cyclical downturn due to changing macroeconomic conditions, overcapacity in the market for memory devices, general semiconductor inventory digestion resulting in falling fab utilization and reduced fab expansion plans, and new export restrictions to China for certain semiconductor equipment. During the first quarter of 2023, these factors continued to impact our demand, backlog, and revenue and are expected to continue throughout 2023. We believe long-term drivers for demand growth in this market will eventually resume, due to the need to invest

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in new fab capacity to support growing demand for semiconductor devices in a wide range of applications, the continued transition to next generation processing nodes, increased complexity of advanced processes requiring more complex and innovative power solutions, and the regionalization of some semiconductor capacity.

Industrial and Medical Markets

Advanced Energy serves the Industrial and Medical market with mission-critical power components that deliver high reliability, precise, low noise or differentiated power to the equipment they serve. Growth in the Industrial and Medical market is driven by investment in complex manufacturing processes or automation, increased adoption of smart power, sensing, and control solutions across many industrial applications, new investments in clean and sustainable technologies, and growing investment in medical devices and life science equipment. Our customers in the Industrial and Medical market are primarily global and regional original equipment manufacturers, incorporating our advanced power, embedded power, and measurement products into a wide variety of equipment used in applications, such as advanced material fabrication, medical devices, analytical instrumentation, test and measurement equipment, robotics, industrial production, and large-scale connected light-emitting diode applications. Examples of products sold into the Industrial and Medical market include high voltage and low voltage power supplies used in applications such as medical devices, scientific instrumentation and industrial equipment, power control modules and thermal instrumentation products for material fabrication, production process control and many precision industrial sensing applications. Our strategy in the Industrial and Medical market is to expand our product offerings and channel reach, leveraging common platforms, derivatives, and customizations to further penetrate a broader set of applications.

During 2022, we saw increased demand in the Industrial and Medical market as our customers increased investments in their production capacity and the medical technology industry recovered from the pandemic-related slowdown. Although overall customer demand increased, supply constraints of critical components limited our ability to fulfill product shipments at the level of customer demand and resulted in increased backlog. During the first quarter of 2023, we experienced continued demand from our Industrial and Medical customers and improved our ability to secure critical components. However, it is unclear how the macroeconomic conditions, including higher interest rates and potential recession, may affect our revenue in 2023, and product delivery and revenue levels will also be dependent on our ability to resolve the supply constraint condition.

Data Center Computing Markets

Advanced Energy serves the Data Center Computing market with industry leading power conversion products and technologies, which we sell to OEMs and original design manufacturers (“ODMs”) of data center server and storage systems, as well as cloud service providers and their partners. Driven by the growing adoption of cloud computing, market demand for server and storage equipment has shifted from traditional enterprise on-premises computing to the data center, driving investments in data center infrastructure. Beyond the cloud, demand for edge computing is also growing, driven by the need for faster processing, lower latency, and higher data security at edge applications. In addition, the data center industry has begun transitioning from 12 Volt to 48 Volt infrastructure in data center server racks to improve overall power efficiency. Advanced Energy benefits from these trends by being an industry leader in providing high-efficiency 48 Volt server power solutions to the data center industry. Further, the rapid growth and adoption of artificial intelligence and machine learning are accelerating demand for server and storage racks with increased power density and higher efficiency, which complements Advanced Energy’s strengths. With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, our strategy in the Data Center and Computing market is to penetrate selected customers and applications based on our differentiated capabilities and competitive strengths in power density, efficiency, and controls.

Although the supply environment continued to be constrained, revenue in the Data Center Computing market rose during 2022 compared to 2021 due to growing demand for cloud and enterprise applications and increased availability of critical components. During the first quarter of 2023, the ongoing supply constraints limited our ability to meet our customer demand, and some data center customers delayed their investment plans and timing of implementing new programs. It is not clear how long these supply chain constraints will persist or how quickly those data center customers will return to their historical level of investments.

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Telecom and Networking Markets

Our customers in the Telecom and Networking market include many leading vendors of wireless infrastructure equipment, telecommunication equipment and computer networking. The wireless telecom market continues to evolve with more advanced mobile standards. 5G wireless technology promises to drive substantial growth opportunities for the telecom industry as it enables new advanced applications such as autonomous vehicles and virtual/augmented reality. Telecom service providers are investing in 5G infrastructure, and this trend is expected to drive demand for our products into the Telecom and Networking market. In datacom, demand is driven by networking investments by telecom service providers and enterprises upgrading their networks, as well as cloud service providers and data centers investing in their networks for increased bandwidth. Our strategy in the Telecom and Networking market is to optimize our portfolio of products to more differentiated applications, and to focus on 5G infrastructure applications.

Revenues in the Telecom and Networking market increased in 2022 due to increased customer demand and our ability to secure additional critical components. During the first quarter of 2023, demand remained stable in this market and improved availability of critical components allowed us to increase shipments to meet demand. The supply chain remains dynamic, and it is not clear how long the industry-wide supply chain constraints will persist.

Results of Continuing Operations

The analysis presented below is organized to provide the information we believe will be helpful for understanding of our historical performance and relevant trends going forward and should be read in conjunction with our “Unaudited Consolidated Financial Statements” in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.

The following table sets forth certain data derived from our Consolidated Statements of Operations (in thousands):


	Three Months Ended March 31,
	2023		2022
Sales	$	425,040	$	397,459
Gross profit		155,111		144,316
Operating expenses		115,073		99,659
Operating income from continuing operations		40,038		44,657
Other expense, net		(550)		(842)
Income from continuing operations, before income taxes		39,488		43,815
Provision for income taxes		7,736		6,953
Income from continuing operations	$	31,752	$	36,862


	Three Months Ended March 31,
	2023			2022
Sales		100.0	%		100.0	%
Gross profit		36.5			36.3
Operating expenses		27.1			25.1
Operating income from continuing operations		9.4			11.2
Other expense, net		(0.1)			(0.2)
Income from continuing operations, before income taxes		9.3			11.0
Provision for income taxes		1.8			1.7
Income from continuing operations		7.5	%		9.3	%

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SALES, NET

The following tables summarize net sales and percentages of net sales, by markets (in thousands):


	Three Months Ended March 31,				Change 2023 v. 2022
	2023		2022		Dollar		Percent
Semiconductor Equipment	$	194,209	$	202,957	$	(8,748)	(4.3)	%
Industrial and Medical		123,020		82,898		40,122	48.4
Data Center Computing		59,659		76,238		(16,579)	(21.7)
Telecom and Networking		48,152		35,366		12,786	36.2
Total	$	425,040	$	397,459	$	27,581	6.9	%


	Three Months Ended March 31,
	2023			2022
Semiconductor Equipment		45.7	%		51.1	%
Industrial and Medical		28.9			20.9
Data Center Computing		14.0			19.2
Telecom and Networking		11.3			8.9
Total		100.0	%		100.0	%

OPERATING EXPENSES

The following tables summarize our operating expenses (in thousands) and as a percentage of sales:


	Three Months Ended March 31,
	2023				2022
Research and development	$	51,610	12.1	%	$	43,614	11.0	%
Selling, general, and administrative		55,358	13.0			49,318	12.4
Amortization of intangible assets		7,062	1.7			5,509	1.4
Restructuring charges		1,043	0.2			1,218	0.3
Total operating expenses	$	115,073	27.1	%	$	99,659	25.1	%

SALES AND BACKLOG

Total Sales

Sales increased $27.6 million, or 6.9%, to $425.0 million for the three months ended March 31, 2023 as compared to $397.5 million during the same period in the prior year.

We took measures to improve material availability and capacity that allowed us to better meet overall demand across our markets despite experiencing a decline in revenue in two of our markets partially due to lower demand. Revenues in the first three months of 2023 were also impacted by supply constraints for certain integrated circuits and other components, which limited our ability to fulfill product shipments to meet our total demand. In addition, the acquisition of SL Power contributed $15.0 million to our total sales during the three months ended March 31, 2023. For additional information, see Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

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Backlog

The following table summarizes our backlog (in thousands):


	March 31,		December 31,		Change from Year End
	2023		2022		Dollar		Percent
Backlog	$	755,873	$	875,346	$	(119,473)	(13.6)	%

Backlog represents outstanding orders for products we expect to deliver within the next 12 months. Backlog at March 31, 2023 decreased from the end of 2022 due primarily to lower demand in the Semiconductor Equipment market and our improved lead times, which allowed our customers to reduce placing new orders for products with targeted deliveries in the later part of the 12-month backlog period.

We believe the current backlog levels provide some level of revenue protection should demand decrease due to macroeconomic factors. We expect to bring our backlog back to more normalized levels of $400 million to $500 million over the next several quarters as parts availability improves and lead times are reduced.

Backlog at any particular date is not necessarily indicative of actual sales which may be generated for any succeeding period and may be adversely impacted by factors such as decreased demand or cancellations or export controls. In addition, there is uncertainty of the timing of when backlog can convert into revenue due to continuing supply constraints. Our customers can typically cancel, change, or delay product purchase commitments with little or no notice.

Sales by Market

Sales in the Semiconductor Equipment market decreased $8.7 million, or 4.3%, to $194.2 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The decrease in sales was primarily due to a cyclical downturn in the semiconductor industry and the U.S. export controls restricting shipments to Chinese semiconductor customers.

Sales in the Industrial and Medical market increased $40.1 million, or 48.4%, to $123.0 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The increase in sales was primarily due to increased demand for our portfolio of products across our industrial and medical applications and improved material availability. The remainder of the increase in revenue was due to the acquisition of SL Power, which added incremental sales of $14.9 million in this market.

Sales in the Data Center Computing market decreased $16.6 million, or 21.7%, to $59.7 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The decrease in Data Center Computing market sales was due to supply constraints of critical components and slowing demand at and some of our data center customers slowing demand.

Sales in the Telecom and Networking market increased $12.8 million, or 36.2%, to $48.2 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The increase in sales was primarily due to improved material availability, allowing us to meet customer demand.

GROSS PROFIT

For the three months ended March 31, 2023, gross profit increased $10.8 million to $155.1 million, or 36.5% of revenue, as compared to $144.3 million, or 36.3% of revenue, in the same period in the prior year.

The increase in gross profit as a percentage of revenue for the three months ended March 31, 2023 is largely due to sales growth, lower premiums and related recoveries for securing critical parts, partially offset by higher operating costs based on capacity and other investments made in 2022.

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OPERATING EXPENSE

Research and Development

We perform R&D of products to develop new or emerging applications, technological advances to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, as well as enhancements to existing products and related software to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.

R&D expenses increased $8.0 million to $51.6 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The increase in research and development expense is primarily driven by increased headcount and compensation costs of $4.3 million, including the addition of SL Power, and higher program and material costs as we invest in new programs of $3.7 million to maintain and increase our technological leadership and provide solutions to our customers’ evolving needs.

Selling, General, and Administrative

Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, corporate development, and human resource functions.

Selling, general and administrative (“SG&A”) expenses increased $6.0 million to $55.4 million for the three months ended March 31, 2023, as compared to the same period in the prior year. The increase in SG&A is primarily related to $5.5 million from increased headcount and associated costs, including sales commissions and other forms of compensation driven by higher revenue, and the addition of SL Power.

Amortization of Intangibles

Amortization expense increased $1.6 million to $7.1 million during the three months ended March 31, as compared to the same period in the prior year. The increase was primarily driven by incremental amortization of newly acquired intangible assets from the SL Power acquisition. For additional information, see Note 2. Acquisitions and Note 12. Intangible Assets in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

Restructuring

In the fourth quarter of 2022, we approved a restructuring plan (the “2022 Plan”), which is expected to further improve our operating efficiencies and drive the realization of synergies from our business combinations by consolidating our operations, optimizing our factory footprint, including moving certain production into our higher volume factories, and reducing redundancies. The majority of these actions impact our factory operations and should partially mitigate the impact of lower volumes on gross margins. We anticipate the 2022 Plan will be substantially completed, and associated expenses will be incurred, by the beginning of 2024.

In 2018, we committed to a restructuring plan (the “2018 Plan”) to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to business combinations. We incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, China and actions associated with synergies related to the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business (“Artesyn”). This plan is substantially complete with the closure of our Shenzhen facility in February 2023. For additional information, see Note 13. Restructuring Costs in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

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OTHER EXPENSE, NET

Other expense, net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items.

Other expense, net decreased $0.2 million to ($0.6) million for the three months ended March 31, 2023, as compared to the same period in the prior year. The decrease in expense between periods is primarily a result of higher interest income on our cash because of higher interest rates partially offset by higher unrealized foreign exchange losses.

PROVISION FOR INCOME TAXES

The following table summarizes tax expense (in thousands) and the effective tax rate for our income from continuing operations:


	Three Months Ended March 31,
	2023			2022
Income from continuing operations, before income taxes	$	39,488		$	43,815
Provision for income taxes	$	7,736		$	6,953
Effective tax rate		19.6	%		15.9	%

Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.

Non-GAAP Results

Management uses non-GAAP operating income and non-GAAP earnings per share (“EPS”) to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, make business decisions, including developing budgets and forecasting future periods. In addition, management’s incentive plans include these non-GAAP measures as criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers to evaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.

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The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based compensation and amortization of intangible assets. In addition, they exclude discontinued operations and other non-recurring items such as acquisition-related costs and restructuring expenses, as they are not indicative of future performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of their respective book and tax treatments.


Reconciliation of non-GAAP measure
Operating expenses and operating income from continuing	Three Months Ended March 31,
operations, excluding certain items (in thousands)	2023		2022
Gross profit from continuing operations, as reported	$	155,111	$	144,316
Adjustments to gross profit:
Stock-based compensation		383		231
Facility expansion, relocation costs and other		957		1,284
Acquisition-related costs		53		(502)
Non-GAAP gross profit		156,504		145,329
Non-GAAP gross margin		36.8%		36.6%

Operating expenses from continuing operations, as reported		115,073		99,659
Adjustments:
Amortization of intangible assets		(7,062)		(5,509)
Stock-based compensation		(6,418)		(3,697)
Acquisition-related costs		(878)		(1,668)
Restructuring		(1,043)		(1,218)
Non-GAAP operating expenses		99,672		87,567
Non-GAAP operating income	$	56,832	$	57,762
Non-GAAP operating margin		13.4%		14.5%


Reconciliation of non-GAAP measure
Income from continuing operations, excluding certain items	Three Months Ended March 31,
(in thousands, except per share amounts)	2023		2022
Income from continuing operations, less non-controlling interest, net of income taxes	$	31,752	$	36,876
Adjustments:
Amortization of intangible assets		7,062		5,509
Acquisition-related costs		931		1,166
Facility expansion, relocation costs, and other		957		1,284
Restructuring		1,043		1,218
Unrealized foreign currency gain		1,053		(1,285)
Tax effect of non-GAAP adjustments		(1,121)		(1,069)
Non-GAAP income, net of income taxes, excluding stock-based compensation		41,677		43,699
Stock-based compensation, net of taxes		5,304		3,025
Non-GAAP income, net of income taxes	$	46,981	$	46,724
Non-GAAP diluted earnings per share	$	1.24	$	1.24

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Impact of Inflation

In previous years, inflation did not have a material impact on our operations. However, more recently, we have experienced inflationary pressure from price increases in select components driven by factors such as higher global demand, supply chain disruptions, higher labor expenses, and increased freight costs. In this environment, we are actively working with our customers to adjust pricing that helps offset the inflationary pressure on the cost of our components. We have also been able to recover some premiums on pricing related to securing scarce materials with our customers, thus limiting the financial impact of inflationary pressures.

Liquidity and Capital Resources

Liquidity

Adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities, which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity are our available cash, investments, cash generated from current operations, and available borrowing capacity under the Revolving Facility (defined in Note 18. Credit Facility in Part I, Item 1 “Unaudited Consolidated Financial Statements”).

The following table summarizes our cash, cash equivalents, and marketable securities (in thousands):


	March 31, 2023
Cash and cash equivalents	$	461,665
Marketable securities		164
Total cash, cash equivalents, and marketable securities	$	461,829

We believe the above sources of liquidity will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, contractual obligations, debt repayment, share repurchase programs, and dividends for the next 12 months and on a long-term basis. In addition, we may, depending upon the number or size of additional acquisitions, seek additional debt or equity financing from time to time; however, such additional financing may not be available on acceptable terms, if at all.

Credit Facility

For information on our Credit Facility, see Note 18. Credit Facility and Note 7. Derivative Financial Instruments in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

The following table summarizes borrowings under our Credit Facility and the associated interest rate (in thousands, except for interest rates).


	March 31, 2023
	Balance		Interest Rate	Unused Line Fee
Term Loan Facility subject to a fixed interest rate due to interest rate swap	$	233,844	1.172%	—
Term Loan Facility subject to a variable interest rate		136,156	5.657%	—
Revolving Facility subject to a variable interest rate		—	5.657%	0.10%
Total borrowings under the Credit Agreement	$	370,000

As of March 31, 2023, we had $200.0 million in available funding under the Revolving Facility. The Term Loan Facility requires quarterly repayments of $5.0 million plus accrued interest, with the remaining balance due in September 2026.

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Dividends

During the three months ended March 31, 2023, we paid quarterly cash dividends of $0.10 per share, totaling $3.8 million. We currently anticipate that a cash dividend of $0.10 per share will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors (the “Board”) and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.

Share Repurchase

To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. The following table summarizes these repurchases:


	Three Months Ended March 31,
(in thousands, except per share amounts)	2023		2022
Amount paid or accrued to repurchase shares	$	—	$	6,594
Number of shares repurchased		—		82
Average repurchase price per share	$	—	$	80.02

At March 31, 2023, the remaining amount authorized by the Board for future share repurchases was $199.3 million with no time limitation.

Cash Flows

A summary of our cash from operating, investing, and financing activities is as follows (in thousands):


	Three Months Ended March 31,
	2023		2022
Net cash from operating activities from continuing operations	$	31,880	$	9,913
Net cash from operating activities from discontinued operations		(2,069)		(92)
Net cash from operating activities		29,811		9,821
Net cash from investing activities		(16,210)		(13,675)
Net cash from financing activities		(10,805)		(17,813)
Effect of currency translation on cash and cash equivalents		51		(1,469)
Net change in cash and cash equivalents		2,847		(23,136)
Cash and cash equivalents, beginning of period		458,818		544,372
Cash and cash equivalents, end of period	$	461,665	$	521,236

Net Cash From Operating Activities

Net cash from operating activities from continuing operations for the three months ended March 31, 2023, was $31.9 million, as compared to $9.9 million for the same period in the prior year. The increase of $22.0 million in net cash flows from operating activities as compared to the same period in the prior year is primarily due to a favorable decrease in net operating assets driven primarily by a decrease in accounts receivable and an increase in accounts payable.

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Net Cash From Investing Activities

Net cash from investing activities for the three months ended March 31, 2023 was ($16.2) million, primarily driven by the following:

●

($16.2) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity.

Net cash from investing for the three months ended March 31, 2022 was ($13.7) million, primarily driven by the following:

●

($13.1) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and

●

($0.6) million for business combinations.

Net Cash From Financing Activities

Net cash from financing activities for the three months ended March 31, 2023 was ($10.8) million and included the following:

●

($5.0) million for repayment of long-term debt;

●

($3.8) million for dividend payments; and

●

($2.0) million in net payments related to stock-based award activities.

Net cash from financing activities for the three months ended March 31, 2022 was ($17.8) million and included the following:

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($6.6) million related to repurchases of our common stock;

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($5.0) million for repayment of long-term debt;

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($3.8) million for dividend payments; and

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($2.4) million in net payments related to stock-based award activities.

Effect of Currency Translation on Cash

During the three months ended March 31, 2023, foreign currency translation had a minimal impact on cash. See “Foreign Currency Exchange Rate Risk” in Part I, Item 3 of this Form 10-Q for more information.

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Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1. Summary of Operations and Significant Accounting Policies and Estimates to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2022, describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Our critical accounting estimates, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, include:

●

estimates for the valuation of assets and liabilities acquired in business combinations;

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accounting for income taxes;

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inputs to actuarial models that measure our pension obligations; and

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assessing excess and obsolete inventories.

Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the consolidated financial statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Risk Management

In the normal course of business, we have exposure to interest rate risk from our investments and Credit Facility. We also have exposure to foreign exchange rate risk related to our foreign operations and foreign currency transactions.

See the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K and Part II, for more information about the market risks to which we are exposed. There have been no material changes in our exposure to market risk from December 31, 2022.

Foreign Currency Exchange Rate Risk

We are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when we sell products and purchase materials in currencies different from the currency in which product and manufacturing costs were incurred.

Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted by changes in foreign currency exchange rates. Assets and liabilities of substantially all our subsidiaries outside the U.S. are translated at period end rates of exchange for each reporting period. Operating results and cash flow statements are translated at average rates of exchange during each reporting period. Although these translation changes have no immediate cash impact, the translation changes may impact future borrowing capacity, and overall value of our net assets.

The functional currencies of our worldwide facilities primarily include the United States Dollar (USD), Euro, South Korean Won, New Taiwan Dollar, Japanese Yen, Pound Sterling, and Chinese Yuan. Our purchasing and sales activities are primarily denominated in the USD, Japanese Yen, Euro, and Chinese Yuan.

Currency exchange rates vary daily and often one currency strengthens against the USD while another currency weakens. Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the impact of a change in one or more particular exchange rates.

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As currencies fluctuate against each other we are exposed to foreign currency exchange rate risk on sales, purchasing transactions, and labor. Exchange rate fluctuations could require us to increase prices to foreign customers, which could result in lower net sales. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be adversely impacted. Changes in the relative buying power of our customers may impact sales volumes.

Acquisitions are a large component of our capital deployment strategy. A significant number of acquisition target opportunities are located outside the U.S., and their value may be denominated in foreign currency. Changes in exchange rates therefore may have a material impact on their valuation in USD and may impact our view of their attractiveness.

From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date, including foreign currency, which may be required for a potential foreign acquisition. Market risk arises from the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We may enter into foreign currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring parameters that limit the types and degree of our derivative contract instruments. We enter into derivative contract instruments for risk management purposes only. We do not enter into or issue derivatives for trading or speculative purposes.

Interest Rate Risk

Our market risk exposure relates primarily to changes in interest rates on our Credit Facility. The following table summarizes borrowings (in thousands) under our Credit Facility and the associated interest rate.


	March 31, 2023
	Balance		Interest Rate	Unused Line Fee
Term Loan Facility subject to a fixed interest rate due to interest rate swap	$	233,844	1.172%	—
Term Loan Facility subject to a variable interest rate		136,156	5.657%	—
Revolving Facility subject to a variable interest rate		—	5.657%	0.10%
Total borrowings under the Credit Agreement	$	370,000

For more information on the Term Loan Facility see Note 18. Credit Facility in Part I, Item 1 “Unaudited Consolidated Financial Statements.” For more information on the interest rate swap that fixes the interest rate for a portion of our Term Loan Facility, see Note 7. Derivative Financial Instruments in Part I, Item 1 “Unaudited Consolidated Financial Statements.” The Term Loan Facility and Revolving Facility bear interest, at our option, at a rate based on the Base Rate or Term SOFR, as defined in the Credit Agreement, plus an applicable margin.

Our interest payments are impacted by interest rate fluctuations. With respect to the portion of our Credit Facility that is subject to a variable interest rate, a hypothetical increase of 100 basis points (1%) in interest rates would have a $1.4 million annual impact on our interest expense. A change in interest rates does not have a material impact upon our future earnings and cash flow for fixed rate debt. However, increases in interest rates could impact our ability to refinance existing maturities and acquire additional debt on favorable terms.

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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer (Stephen D. Kelley, President and Chief Executive Officer) and Principal Financial Officer (Paul Oldham, Executive Vice President and Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2023. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit and Finance Committee. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We intend to continue to review and document our disclosure controls and procedures, including our internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the quarter covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

We are involved in disputes and legal actions arising in the normal course of our business. Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have a material adverse effect on our financial condition, results of operations, or liquidity.

ITEM 1A. RISK FACTORS

Information concerning our risk factors is contained in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. The risks described in our Annual Report on Form 10-K are not the only risks that we face; additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

To execute the repurchase of shares of our common stock, we periodically enter into stock repurchase agreements. We did not have any repurchases in the three months ended March 31, 2023. The following table summarizes actions by our Board of Directors in relation to the stock repurchase program:


Date		Action
September 2015		Authorized a program to repurchase up to $150.0 million of our common stock

May 2018		Approved a $50.0 million increase in the repurchase program

December 2019		Authorized the removal of the expiration date and increased the balance available for the repurchase program by $25.1 million

July 2021		Approved an increase to the repurchase program, which authorized Advanced Energy Industries, Inc. to repurchase up to $200.0 million with no time limitation

July 2022		Approved an increase to the repurchase program from its remaining authorization of $102.4 million, to repurchase up to $200.0 million with no time limitation

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

None

ITEM 5. OTHER INFORMATION

None

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ITEM 6. EXHIBITS

The exhibits listed in the following index are filed as part of this Quarterly Report on Form 10-Q.

Exhibit		Incorporated by Reference
Number	Description	Form	File No.	Exhibit	Filing Date


10.1	Amended Credit Agreement				Filed herewith

31.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				Filed herewith

31.2	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.				Filed herewith

32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				Filed herewith

32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.				Filed herewith

101.INS	Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.				Filed herewith

101.SCH	Inline XBRL Taxonomy Extension Schema Document.				Filed herewith

101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document.				Filed herewith

101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document.				Filed herewith

101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document.				Filed herewith

101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document.				Filed herewith

104	Cover Page Interactive Data File – formatted in Inline XBRL and contained in Exhibit 101.				Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.