[PART I FINANCIAL INFORMATION](index=4&type=section&id=PART%20I%20FINANCIAL%20INFORMATION) This part presents the unaudited consolidated financial statements and management's discussion and analysis for the period ended June 30, 2023, along with market risk disclosures and controls and procedures [ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS](index=4&type=section&id=ITEM%201.%20UNAUDITED%20CONSOLIDATED%20FINANCIAL%20STATEMENTS) This section presents the unaudited consolidated financial statements of Advanced Energy Industries, Inc. for the period ended June 30, 2023, including balance sheets, statements of operations, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining the company's business, significant accounting policies, acquisitions, revenue disaggregation, income taxes, earnings per share, fair value measurements, derivative instruments, and other financial details [Consolidated Balance Sheets](index=4&type=section&id=Consolidated%20Balance%20Sheets) This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific points in time | Metric | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :---------------------- | :--------------------------- | :------------------------------- | | Total Assets | $1,949,907 | $1,992,168 | | Total Liabilities | $824,628 | $925,901 | | Total Stockholders' Equity | $1,125,279 | $1,066,267 | - Total assets decreased by **$42.26 million** from December 31, 2022, to June 30, 2023, while total liabilities decreased by **$101.27 million**, and total stockholders' equity increased by **$59.01 million**[7](index=7&type=chunk) [Consolidated Statements of Operations](index=5&type=section&id=Consolidated%20Statements%20of%20Operations) This section details the company's financial performance over specific periods, including sales, gross profit, operating income, and net income | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales, net | $415,508 | $440,949 | $840,548 | $838,408 | | Gross profit | $147,080 | $162,158 | $302,191 | $306,474 | | Operating income | $29,825 | $52,765 | $69,863 | $97,422 | | Net income | $27,140 | $44,991 | $58,061 | $81,755 | | Diluted EPS | $0.72 | $1.19 | $1.54 | $2.17 | - For the three months ended June 30, 2023, net sales decreased by **5.8%** and net income decreased by **39.7%** compared to the same period in 2022. For the six months ended June 30, 2023, net sales slightly increased by **0.3%** but net income decreased by **29.0%** compared to the same period in 2022[10](index=10&type=chunk) [Consolidated Statements of Comprehensive Income](index=6&type=section&id=Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the total comprehensive income, reflecting net income and other comprehensive income items not recognized in the income statement | Metric (in thousands) | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $27,140 | $44,991 | $58,061 | $81,755 | | Foreign currency translation | $(1,533) | $(8,679) | $(1,729) | $(12,771) | | Change in fair value of cash flow hedges | $(201) | $2,026 | $(2,018) | $7,939 | | Comprehensive income | $25,114 | $38,607 | $54,022 | $77,337 | - Comprehensive income decreased by **35.0%** for the three months ended June 30, 2023, and by **30.2%** for the six months ended June 30, 2023, compared to the respective prior year periods[11](index=11&type=chunk) [Consolidated Statements of Stockholders' Equity](index=7&type=section&id=Consolidated%20Statements%20of%20Stockholders%27%20Equity) This section outlines changes in the company's equity, including common shares, additional paid-in capital, retained earnings, and accumulated other comprehensive income | Metric (in thousands) | June 30, 2023 | December 31, 2022 | | :-------------------- | :------------ | :---------------- | | Common Shares | 37,650 | 37,429 | | Common Stock Amount | $38 | $37 | | Additional Paid-in Capital | $147,221 | $134,640 | | Accumulated Other Comprehensive Income | $12,281 | $16,320 | | Retained Earnings | $965,739 | $915,270 | | Total Stockholders' Equity | $1,125,279 | $1,066,267 | - Total stockholders' equity increased by **$59.01 million** from December 31, 2022, to June 30, 2023, primarily driven by net income and stock-based compensation, partially offset by dividends declared and other comprehensive loss[15](index=15&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) This section reports the cash generated and used by the company across operating, investing, and financing activities | Metric (in thousands) | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash from operating activities | $52,414 | $47,596 | | Net cash from investing activities | $(36,751) | $(171,255) | | Net cash from financing activities | $(18,976) | $(42,840) | | Net change in cash and cash equivalents | $(3,566) | $(171,687) | | Cash and cash equivalents, end of period | $455,252 | $372,685 | - Net cash from operating activities increased by **$4.82 million** for the six months ended June 30, 2023, compared to the same period in 2022. Net cash used in investing activities significantly decreased, primarily due to lower acquisition spending in 2023[19](index=19&type=chunk) [Notes to Consolidated Financial Statements](index=9&type=section&id=Notes%20to%20Consolidated%20Financial%20Statements) This section provides detailed explanations and additional information supporting the consolidated financial statements [NOTE 1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION](index=9&type=section&id=NOTE%201.%20DESCRIPTION%20OF%20BUSINESS%20AND%20BASIS%20OF%20PRESENTATION) This note describes the company's core business, product applications, and the basis for presenting its financial statements, including adopted accounting standards - Advanced Energy Industries, Inc. designs, manufactures, sells, and supports precision power products that convert raw electrical power into highly controllable, usable power for complex equipment across various applications[22](index=22&type=chunk) - The company's products are used in semiconductor equipment, industrial production, medical and life science equipment, data centers, networking, and telecommunications, along with related sensing, controls, and instrumentation products[23](index=23&type=chunk) - The company adopted new accounting standards (ASU 2020-04, 2021-01, 2022-06) to facilitate the transition of benchmark interest rates from LIBOR to SOFR, which was not material to the consolidated financial statements[30](index=30&type=chunk)[31](index=31&type=chunk) [NOTE 2. ACQUISITIONS](index=12&type=section&id=NOTE%202.%20ACQUISITIONS) This note details the company's acquisition activities, including the purchase of SL Power Electronics Corporation and the recognition of related assets and goodwill - On April 25, 2022, Advanced Energy acquired **100%** of SL Power Electronics Corporation for **$145.693 million** in cash, net of cash acquired, to complement its medical power offerings and expand into advanced industrial markets[33](index=33&type=chunk)[34](index=34&type=chunk) | Acquired Intangible Asset | Fair Value (in thousands) | Amortization Method | Useful Life (in years) | | :------------------------ | :------------------------ | :------------------ | :--------------------- | | Customer relationships | $50,500 | Straight-line | 10 | | Technology | $7,100 | Straight-line | 5 | | Total | $57,600 | | | - Goodwill of **$71.039 million** was recognized, representing SL Power's assembled workforce and expected operating synergies, with virtually all expected to be tax deductible[35](index=35&type=chunk)[36](index=36&type=chunk) [NOTE 3. REVENUE](index=13&type=section&id=NOTE%203.%20REVENUE) This note disaggregates revenue by market and category, providing insights into sales performance across different segments and product/service types | Revenue by Market (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Semiconductor Equipment | $173,177 | $228,797 | $367,386 | $431,754 | | Industrial and Medical | $127,603 | $104,951 | $250,623 | $187,849 | | Data Center Computing | $59,076 | $69,161 | $118,735 | $145,399 | | Telecom and Networking | $55,652 | $38,040 | $103,804 | $73,406 | | Total | $415,508 | $440,949 | $840,548 | $838,408 | | Revenue by Category (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :--------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Product | $369,881 | $403,977 | $749,155 | $766,853 | | Services | $45,627 | $36,972 | $91,393 | $71,555 | | Total | $415,508 | $440,949 | $840,548 | $838,408 | - Semiconductor Equipment revenue decreased significantly (**24.3%** QoQ, **14.9%** YoY), while Industrial and Medical (**21.6%** QoQ, **33.4%** YoY) and Telecom and Networking (**46.3%** QoQ, **41.4%** YoY) markets showed strong growth. Product revenue decreased, but Services revenue increased for both periods[40](index=40&type=chunk)[42](index=42&type=chunk) [NOTE 4. INCOME TAXES](index=14&type=section&id=NOTE%204.%20INCOME%20TAXES) This note provides details on the company's income tax provision and effective tax rates for the reported periods | Metric (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Income from continuing operations, before income taxes | $32,250 | $56,014 | $71,738 | $99,829 | | Provision for income taxes | $4,795 | $11,203 | $12,531 | $18,156 | | Effective tax rate | 14.9% | 20.0% | 17.5% | 18.2% | - The effective tax rate for the three and six months ended June 30, 2023, was lower than the same periods in 2022, primarily due to beneficial discrete items in Q2 2023 relative to unfavorable discrete items in Q2 2022[46](index=46&type=chunk) [NOTE 5. EARNINGS PER SHARE](index=14&type=section&id=NOTE%205.%20EARNINGS%20PER%20SHARE) This note presents the basic and diluted earnings per share from continuing operations for the reported periods | Metric | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Basic EPS (Continuing Operations) | $0.73 | $1.19 | $1.58 | $2.18 | | Diluted EPS (Continuing Operations) | $0.73 | $1.19 | $1.57 | $2.16 | [NOTE 5. Share Repurchase](index=15&type=section&id=NOTE%205.%20Share%20Repurchase) This note details the company's share repurchase activities, including amounts paid and shares repurchased | Metric | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Amount paid to repurchase shares (in thousands) | $— | $17,019 | $— | $23,613 | | Number of shares repurchased | — | 230 | — | 312 | | Average repurchase price per share | $— | $74.12 | $— | $75.68 | - No shares were repurchased during the three and six months ended June 30, 2023. As of June 30, 2023, **$199.3 million** remained authorized for future share repurchases with no time limitation[51](index=51&type=chunk)[52](index=52&type=chunk) [NOTE 6. FAIR VALUE MEASUREMENTS](index=15&type=section&id=NOTE%206.%20FAIR%20VALUE%20MEASUREMENTS) This note provides information on assets and liabilities measured at fair value, including certificates of deposit, foreign currency contracts, and interest rate swaps | Description | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------- | :--------------------------- | :------------------------------- | | Certificates of deposit | $175 | $2,128 | | Foreign currency forward contracts | $(68) | $— | | Interest rate swaps | $12,630 | $15,310 | | Net assets measured at fair value | $12,737 | $17,438 | [NOTE 7. DERIVATIVE FINANCIAL INSTRUMENTS](index=16&type=section&id=NOTE%207.%20DERIVATIVE%20FINANCIAL%20INSTRUMENTS) This note describes the company's use of derivative instruments, such as foreign currency forward contracts and interest rate swaps, to manage market risks | Derivative Instrument | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :-------------------- | :--------------------------- | :------------------------------- | | Foreign currency forward contracts (notional amount) | $81,403 | $— | | Interest rate swap contracts (notional amount) | $229,469 | $238,219 | - The company uses foreign currency forward contracts to manage exchange rate risk and interest rate swap contracts to partially reduce the variability of cash flows in LIBOR indexed debt interest payments, with the benchmark rate transitioning from LIBOR to SOFR[57](index=57&type=chunk)[59](index=59&type=chunk) - Interest rate swap contracts fix a portion of the Term Loan Facility to a total interest rate of **1.172%** and expire on September 10, 2024[60](index=60&type=chunk) [NOTE 8. ACCOUNTS AND OTHER RECEIVABLES, NET](index=17&type=section&id=NOTE%208.%20ACCOUNTS%20AND%20OTHER%20RECEIVABLES%2C%20NET) This note details the composition of accounts and other receivables, net, including changes in expected credit losses | Expected Credit Losses (in thousands) | Amount | | :------------------------------------ | :----- | | December 31, 2022 | $1,814 | | Additions | $123 | | Deductions - write-offs, net of recoveries | $(251) | | Foreign currency translation | $8 | | June 30, 2023 | $1,694 | - Expected credit losses related to receivables decreased slightly from **$1.814 million** at December 31, 2022, to **$1.694 million** at June 30, 2023[65](index=65&type=chunk) [NOTE 9. INVENTORIES](index=17&type=section&id=NOTE%209.%20INVENTORIES) This note provides a breakdown of inventory components, including parts, raw materials, work in process, and finished goods | Inventory Component (in thousands) | June 30, 2023 | December 31, 2022 | | :--------------------------------- | :------------ | :---------------- | | Parts and raw materials | $292,430 | $286,955 | | Work in process | $18,080 | $23,002 | | Finished goods | $81,839 | $66,055 | | Total | $392,349 | $376,012 | - Total inventories increased by **$16.337 million** from December 31, 2022, to June 30, 2023, primarily driven by an increase in finished goods[67](index=67&type=chunk) [NOTE 10. PROPERTY AND EQUIPMENT, NET](index=17&type=section&id=NOTE%2010.%20PROPERTY%20AND%20EQUIPMENT%2C%20NET) This note details the company's property and equipment, net, including buildings, machinery, computer equipment, and accumulated depreciation | Property and Equipment (in thousands) | June 30, 2023 | December 31, 2022 | | :------------------------------------ | :------------ | :---------------- | | Buildings, machinery, and equipment | $180,331 | $165,673 | | Computer equipment, furniture, fixtures, and vehicles | $39,926 | $36,281 | | Leasehold improvements | $70,937 | $63,103 | | Construction in process | $19,396 | $18,226 | | Less: Accumulated depreciation | $(151,565) | $(134,821) | | Property and equipment, net | $159,025 | $148,462 | | Depreciation Expense (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :---------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Depreciation expense | $9,368 | $8,466 | $18,829 | $16,845 | [NOTE 11. GOODWILL](index=18&type=section&id=NOTE%2011.%20GOODWILL) This note outlines changes in goodwill, including measurement period adjustments and foreign currency translation effects | Goodwill (in thousands) | Amount | | :---------------------- | :----- | | December 31, 2022 | $281,433 | | Measurement period adjustments | $353 | | Foreign currency translation | $906 | | June 30, 2023 | $282,692 | - Goodwill increased by **$1.259 million** from December 31, 2022, to June 30, 2023, primarily due to foreign currency translation and measurement period adjustments[71](index=71&type=chunk) [NOTE 12. INTANGIBLE ASSETS](index=18&type=section&id=NOTE%2012.%20INTANGIBLE%20ASSETS) This note provides details on the net carrying amount and amortization expense of intangible assets, including technology, customer relationships, and trademarks | Intangible Asset (in thousands) | June 30, 2023 Net Carrying Amount | December 31, 2022 Net Carrying Amount | | :------------------------------ | :-------------------------------- | :------------------------------------ | | Technology | $43,821 | $50,041 | | Customer relationships | $116,307 | $122,857 | | Trademarks and other | $15,365 | $16,628 | | Total | $175,493 | $189,526 | | Amortization Expense (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :---------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Amortization expense | $7,075 | $6,523 | $14,137 | $12,032 | - The net carrying amount of intangible assets decreased by **$14.033 million** from December 31, 2022, to June 30, 2023. The weighted average remaining useful life of intangibles subject to amortization was approximately **8.8 years** at June 30, 2023[72](index=72&type=chunk) [NOTE 13. RESTRUCTURING COSTS](index=19&type=section&id=NOTE%2013.%20RESTRUCTURING%20COSTS) This note outlines the company's restructuring plans, including charges for severance and facility relocation, aimed at improving operating efficiencies - The company approved a 2022 restructuring plan to improve operating efficiencies, consolidate operations, optimize factory footprint, and reduce redundancies, expected to be substantially completed by early 2024[76](index=76&type=chunk) - The 2018 restructuring plan, aimed at optimizing manufacturing footprint and improving operating efficiencies, is substantially complete with the closure of the Shenzhen facility in Q1 2023[77](index=77&type=chunk) | Restructuring Charges (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :----------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Severance and related charges | $3,154 | $(161) | $4,197 | $712 | | Facility relocation and closure charges | $— | $— | $— | $345 | | Total restructuring charges | $3,154 | $(161) | $4,197 | $1,057 | [NOTE 14. WARRANTIES](index=20&type=section&id=NOTE%2014.%20WARRANTIES) This note details the company's estimated warranty obligations, including changes due to accruals and expenditures | Warranty Obligation (in thousands) | Amount | | :--------------------------------- | :----- | | December 31, 2022 | $5,702 | | Net increases to accruals | $1,375 | | Warranty expenditures | $(2,229) | | Effect of changes in exchange rates | $(16) | | June 30, 2023 | $4,832 | - The estimated warranty obligation decreased from **$5.702 million** at December 31, 2022, to **$4.832 million** at June 30, 2023, due to warranty expenditures exceeding net increases to accruals[83](index=83&type=chunk) [NOTE 15. LEASES](index=20&type=section&id=NOTE%2015.%20LEASES) This note provides information on lease costs, liabilities, weighted average remaining lease term, and discount rate | Lease Cost (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :------------------------ | :---------------- | :---------------- | :-------------- | :-------------- | | Operating lease cost | $5,656 | $5,729 | $11,336 | $11,448 | | Short-term and variable lease cost | $987 | $1,249 | $2,070 | $2,339 | | Total operating lease cost | $6,643 | $6,978 | $13,406 | $13,787 | | Lease Liabilities (in thousands) | Amount | | :------------------------------- | :----- | | Total lease payments | $128,914 | | Less: Interest | $(25,713) | | Present value of lease liabilities | $103,201 | - The weighted average remaining lease term was **8.8 years** at June 30, 2023, with a weighted average discount rate of **4.7%**[86](index=86&type=chunk) [NOTE 16. STOCK-BASED COMPENSATION](index=21&type=section&id=NOTE%2016.%20STOCK-BASED%20COMPENSATION) This note details the company's stock-based compensation plans, including shares available for issuance and related expenses | Metric (in thousands) | June 30, 2023 | | :-------------------- | :------------ | | Shares available for future issuance under 2023 Omnibus Incentive Plan | 2,383 | | Shares available for future issuance under Employee Stock Purchase Plan | 598 | | Stock-based Compensation Expense (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :---------------------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Stock-based compensation expense | $7,937 | $5,058 | $14,738 | $8,986 | - Stock-based compensation expense increased by **56.9%** for the three months and **64.0%** for the six months ended June 30, 2023, compared to the same periods in 2022[92](index=92&type=chunk) [NOTE 17. COMMITMENTS AND CONTINGENCIES](index=22&type=section&id=NOTE%2017.%20COMMITMENTS%20AND%20CONTINGENCIES) This note addresses the company's legal actions and other commitments, assessing their potential financial impact - The company is involved in legal actions arising in the normal course of business but does not believe the outcome of these proceedings will have a material adverse effect on its financial position, results of operations, or liquidity[96](index=96&type=chunk) [NOTE 18. CREDIT FACILITY](index=22&type=section&id=NOTE%2018.%20CREDIT%20FACILITY) This note describes the company's credit agreement, including the Term Loan Facility and Revolving Facility, and associated interest rates and compliance - The credit agreement consists of a senior unsecured Term Loan Facility and a senior unsecured Revolving Facility, both maturing on September 9, 2026[97](index=97&type=chunk) | Borrowing (in thousands) | Balance June 30, 2023 | Interest Rate | | :----------------------- | :-------------------- | :------------ | | Term Loan Facility (fixed) | $229,469 | 1.172% | | Term Loan Facility (variable) | $135,531 | 5.952% | | Revolving Facility (variable) | $— | 5.952% | | Total borrowings | $365,000 | | - As of June 30, 2023, the company had **$200.0 million** in available funding under the Revolving Facility and was in compliance with all Credit Agreement covenants[100](index=100&type=chunk)[99](index=99&type=chunk) [ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS](index=25&type=section&id=ITEM%202.%20MANAGEMENT%27S%20DISCUSSION%20AND%20ANALYSIS%20OF%20FINANCIAL%20CONDITION%20AND%20RESULTS%20OF%20OPERATIONS) This section provides management's perspective on the company's financial condition and results of operations, including an overview of its business and market trends, detailed analysis of sales, operating expenses, and other financial metrics, reconciliation of non-GAAP measures, and discussions on liquidity, capital resources, and critical accounting policies [Special Note on Forward-Looking Statements](index=25&type=section&id=Special%20Note%20on%20Forward-Looking%20Statements) This note cautions readers about forward-looking statements, highlighting various risks and uncertainties that could cause actual results to differ materially - The report contains forward-looking statements subject to various risks and uncertainties, including macroeconomic risks (inflation, recession, interest rates), political and geographical risks, supply chain issues, ability to develop new products, future sales and profitability, competition, market acceptance, and cost fluctuations[108](index=108&type=chunk)[109](index=109&type=chunk)[111](index=111&type=chunk) - Actual results could differ materially and adversely from those expressed in forward-looking statements, and readers are cautioned not to place undue reliance on them[112](index=112&type=chunk) [BUSINESS AND MARKET OVERVIEW](index=27&type=section&id=BUSINESS%20AND%20MARKET%20OVERVIEW) This section provides an overview of the company's business, its precision power solutions, and key market trends affecting demand and supply chain - Advanced Energy provides highly engineered, mission-critical, precision power conversion, measurement, and control solutions, operating in a single segment for power electronics conversion products across Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets[113](index=113&type=chunk)[115](index=115&type=chunk) - Supply chain constraints for critical integrated circuits continued into 2023, but improved material availability led to a normalization of the 12-month backlog from **$875.3 million** at the end of 2022 to **$644.7 million** at the end of Q2 2023[116](index=116&type=chunk)[140](index=140&type=chunk) - Demand in Semiconductor Equipment and Data Center Computing markets declined due to a cyclical downturn and reduced investments, while Industrial and Medical and Telecom and Networking markets saw continued or strong demand growth[116](index=116&type=chunk)[118](index=118&type=chunk)[120](index=120&type=chunk)[124](index=124&type=chunk)[126](index=126&type=chunk) [Results of Continuing Operations](index=32&type=section&id=Results%20of%20Continuing%20Operations) This section analyzes the financial results from the company's ongoing business activities, including sales, gross profit, and operating income | Metric (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Sales | $415,508 | $440,949 | $840,548 | $838,408 | | Gross profit | $147,080 | $162,158 | $302,191 | $306,474 | | Operating income | $29,825 | $52,765 | $69,863 | $97,422 | | Income from continuing operations | $27,455 | $44,811 | $59,207 | $81,673 | | Metric (% of Sales) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Gross profit | 35.4% | 36.8% | 36.0% | 36.6% | | Operating income | 7.2% | 12.0% | 8.3% | 11.6% | | Income from continuing operations | 6.6% | 10.2% | 7.0% | 9.7% | [SALES, NET](index=33&type=section&id=SALES%2C%20NET) This section analyzes the company's net sales performance, disaggregated by market, and discusses changes in backlog - Total sales decreased by **$25.4 million** (**5.8%**) for the three months ended June 30, 2023, but increased by **$2.1 million** (**0.3%**) for the six months ended June 30, 2023, compared to the prior year periods[136](index=136&type=chunk) | Sales by Market (in thousands) | Three Months 2023 | Change vs 2022 | Six Months 2023 | Change vs 2022 | | :------------------------------- | :---------------- | :------------- | :-------------- | :------------- | | Semiconductor Equipment | $173,177 | (24.3)% | $367,386 | (14.9)% | | Industrial and Medical | $127,603 | 21.6% | $250,623 | 33.4% | | Data Center Computing | $59,076 | (14.6)% | $118,735 | (18.3)% | | Telecom and Networking | $55,652 | 46.3% | $103,804 | 41.4% | - Backlog decreased by **$230.7 million** (**26.4%**) from **$875.3 million** at the end of 2022 to **$644.7 million** at June 30, 2023, due to lower demand and improved lead times[136](index=136&type=chunk)[140](index=140&type=chunk) [GROSS PROFIT](index=37&type=section&id=GROSS%20PROFIT) This section analyzes changes in gross profit and gross margin, attributing fluctuations to sales volume, product mix, and operating costs - Gross profit decreased by **$15.1 million** to **$147.1 million** (**35.4%** of revenue) for the three months ended June 30, 2023, and by **$4.3 million** to **$302.2 million** (**36.0%** of revenue) for the six months ended June 30, 2023, compared to the prior year periods[142](index=142&type=chunk) - The decrease in gross profit as a percentage of revenue was primarily due to a decline in sales, unfavorable product mix, and higher operating costs from 2022 investments, partially offset by lower premiums and related recoveries for critical parts[142](index=142&type=chunk) [OPERATING EXPENSES](index=33&type=section&id=OPERATING%20EXPENSES) This section analyzes the company's operating expenses, including research and development, selling, general, and administrative, amortization of intangibles, and restructuring charges | Operating Expenses (in thousands) | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Research and development | $51,413 | $48,009 | $103,023 | $91,623 | | Selling, general, and administrative | $55,613 | $55,022 | $110,971 | $104,340 | | Amortization of intangible assets | $7,075 | $6,523 | $14,137 | $12,032 | | Restructuring charges | $3,154 | $(161) | $4,197 | $1,057 | | Total operating expenses | $117,255 | $109,393 | $232,328 | $209,052 | - Total operating expenses increased by **$7.86 million** (**7.2%**) for the three months and **$23.28 million** (**11.1%**) for the six months ended June 30, 2023, compared to the prior year periods[134](index=134&type=chunk) [Research and Development](index=37&type=section&id=Research%20and%20Development) This section analyzes changes in research and development expenses, driven by headcount, compensation, and program costs - R&D expenses increased by **$3.4 million** (**7.1%**) to **$51.4 million** for the three months and by **$11.4 million** (**12.4%**) to **$103.0 million** for the six months ended June 30, 2023, driven by increased headcount, compensation costs (partially due to SL Power acquisition), and higher program and material costs[144](index=144&type=chunk) [Selling, General, and Administrative](index=37&type=section&id=Selling%2C%20General%2C%20and%20Administrative) This section analyzes changes in selling, general, and administrative expenses, primarily due to increased headcount and associated costs - SG&A expenses increased by **$0.6 million** (**1.1%**) to **$55.6 million** for the three months and by **$6.6 million** (**6.3%**) to **$111.0 million** for the six months ended June 30, 2023, primarily due to increased headcount and associated costs, including sales commissions and stock-based compensation[145](index=145&type=chunk)[146](index=146&type=chunk) [Amortization of Intangibles](index=39&type=section&id=Amortization%20of%20Intangibles) This section analyzes the amortization expense of intangible assets, primarily influenced by the SL Power acquisition - Amortization expense increased by **$0.6 million** (**9.2%**) to **$7.1 million** for the three months and by **$2.1 million** (**17.5%**) to **$14.1 million** for the six months ended June 30, 2023, primarily due to incremental amortization of acquired intangible assets from the SL Power acquisition[148](index=148&type=chunk) [Restructuring](index=39&type=section&id=Restructuring) This section discusses the company's restructuring plans, detailing their objectives and progress toward completion - The 2022 Plan aims to improve operating efficiencies, consolidate operations, optimize factory footprint, and reduce redundancies, with substantial completion expected by early 2024[149](index=149&type=chunk) - The 2018 Plan, focused on manufacturing footprint optimization and synergies, is substantially complete following the closure of the Shenzhen facility in February 2023[150](index=150&type=chunk) [OTHER INCOME (EXPENSE), NET](index=39&type=section&id=OTHER%20INCOME%20%28EXPENSE%29%2C%20NET) This section analyzes other income and expenses, net, including foreign exchange gains/losses and interest income/expense - Other income (expense), net decreased by **$0.8 million** to **$2.4 million** for the three months and by **$0.5 million** to **$1.9 million** for the six months ended June 30, 2023, compared to the prior year periods[151](index=151&type=chunk) - The decrease was primarily due to higher unrealized foreign exchange losses and increased interest expense from a higher variable interest rate on the Term Loan Facility, partially offset by higher interest income on cash[151](index=151&type=chunk) [PROVISION FOR INCOME TAXES](index=39&type=section&id=PROVISION%20FOR%20INCOME%20TAXES) This section analyzes the provision for income taxes and the effective tax rate, highlighting factors influencing changes | Metric | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Provision for income taxes (in thousands) | $4,795 | $11,203 | $12,531 | $18,156 | | Effective tax rate | 14.9% | 20.0% | 17.5% | 18.2% | - The effective tax rate for the three and six months ended June 30, 2023, was lower than the same periods in 2022, primarily due to beneficial discrete items in Q2 2023 relative to unfavorable discrete items in Q2 2022[152](index=152&type=chunk) [Non-GAAP Results](index=41&type=section&id=Non-GAAP%20Results) This section presents non-GAAP financial measures, including operating income and EPS, used by management to evaluate business performance - Management uses non-GAAP operating income and non-GAAP EPS to evaluate business performance by excluding non-cash charges (stock-based compensation, amortization of intangibles) and non-recurring items (acquisition-related costs, restructuring expenses)[156](index=156&type=chunk)[157](index=157&type=chunk) | Non-GAAP Metric | Three Months 2023 | Three Months 2022 | Six Months 2023 | Six Months 2022 | | :-------------------- | :---------------- | :---------------- | :-------------- | :-------------- | | Non-GAAP operating income (in thousands) | $49,313 | $69,595 | $106,145 | $127,357 | | Non-GAAP operating margin | 11.9% | 15.8% | 12.6% | 15.2% | | Non-GAAP diluted earnings per share | $1.11 | $1.44 | $2.35 | $2.68 | [Impact of Inflation](index=42&type=section&id=Impact%20of%20Inflation) This section discusses the inflationary pressures experienced by the company and its strategies to mitigate these impacts - The company has experienced inflationary pressure from price increases in select components, higher labor expenses, and increased freight costs[162](index=162&type=chunk) - Mitigation strategies include actively working with customers to adjust pricing and recovering premiums for scarce materials to offset inflationary pressures[162](index=162&type=chunk) [Liquidity and Capital Resources](index=42&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's liquidity sources, capital resources, and management's assessment of their adequacy for future needs [Liquidity](index=43&type=section&id=Liquidity) This section identifies the company's primary sources of liquidity and assesses their sufficiency for anticipated operational and financial obligations - Primary sources of liquidity are available cash, investments, cash generated from current operations, and available borrowing capacity under the Revolving Facility[163](index=163&type=chunk) | Metric (in thousands) | June 30, 2023 | | :-------------------- | :------------ | | Cash and cash equivalents | $455,252 | | Marketable securities | $175 | | Total cash, cash equivalents, and marketable securities | $455,427 | - Management believes current liquidity sources will be adequate to meet anticipated working capital needs, capital expenditures, contractual obligations, debt repayment, share repurchase programs, and dividends for the next 12 months and long-term[165](index=165&type=chunk) [Credit Facility](index=43&type=section&id=Credit%20Facility) This section details the company's credit facility, including borrowing balances, interest rates, available funding, and repayment terms | Borrowing (in thousands) | Balance June 30, 2023 | Interest Rate | | :----------------------- | :-------------------- | :------------ | | Term Loan Facility (fixed) | $229,469 | 1.172% | | Term Loan Facility (variable) | $135,531 | 5.952% | | Revolving Facility (variable) | $— | 5.952% | | Total borrowings | $365,000 | | - As of June 30, 2023, the company had **$200.0 million** in available funding under the Revolving Facility[168](index=168&type=chunk) - The Term Loan Facility requires quarterly repayments of **$5.0 million** plus accrued interest, with the remaining balance due in September 2026[168](index=168&type=chunk) [Dividends](index=43&type=section&id=Dividends) This section reports on dividend payments made and the company's anticipated future dividend policy - During the three months ended June 30, 2023, the company paid quarterly cash dividends of **$0.10 per share**, totaling **$3.8 million**[168](index=168&type=chunk) - The company anticipates continuing a quarterly cash dividend of **$0.10 per share**, subject to Board discretion based on financial condition and other factors[168](index=168&type=chunk) [Share Repurchase](index=43&type=section&id=Share%20Repurchase) This section details the company's share repurchase activities and the remaining authorization for future repurchases - No shares were repurchased during the three and six months ended June 30, 2023[170](index=170&type=chunk) - At June 30, 2023, **$199.3 million** remained authorized by the Board of Directors for future share repurchases with no time limitation[170](index=170&type=chunk) [Cash Flows](index=45&type=section&id=Cash%20Flows) This section provides an overview of the company's cash flow activities across operating, investing, and financing categories | Cash Flow Activity (in thousands) | Six Months 2023 | Six Months 2022 | | :-------------------------------- | :-------------- | :-------------- | | Net cash from operating activities | $52,414 | $47,596 | | Net cash from investing activities | $(36,751) | $(171,255) | | Net cash from financing activities | $(18,976) | $(42,840) | | Net change in cash and cash equivalents | $(3,566) | $(171,687) | | Cash and cash equivalents, end of period | $455,252 | $372,685 | [Net Cash From Operating Activities](index=45&type=section&id=Net%20Cash%20From%20Operating%20Activities) This section analyzes the net cash generated from the company's core business operations - Net cash from operating activities from continuing operations increased by **$8.0 million** to **$55.5 million** for the six months ended June 30, 2023, compared to the prior year[174](index=174&type=chunk) - The increase was primarily due to a favorable decrease in net operating assets, driven by a decrease in accounts receivable and inventories, partially offset by a decrease in accounts payable and accrued expenses and lower net income[174](index=174&type=chunk) [Net Cash From Investing Activities](index=45&type=section&id=Net%20Cash%20From%20Investing%20Activities) This section analyzes the net cash used in investing activities, including purchases of property, equipment, and investments - Net cash used in investing activities was **$(36.8) million** for the six months ended June 30, 2023, primarily due to **$33.6 million** in purchases of property and equipment and **$3.1 million** in purchases of investments[175](index=175&type=chunk) - This compares to **$(171.3) million** used in the prior year, which included **$145.8 million** for business combinations[175](index=175&type=chunk) [Net Cash From Financing Activities](index=45&type=section&id=Net%20Cash%20From%20Financing%20Activities) This section analyzes the net cash used in financing activities, including debt repayment, dividend payments, and stock-based awards - Net cash used in financing activities was **$(19.0) million** for the six months ended June 30, 2023, including **$10.0 million** for debt repayment, **$7.6 million** for dividend payments, and **$1.4 million** in net payments related to stock-based awards[176](index=176&type=chunk) - This compares to **$(42.8) million** used in the prior year, which included **$23.6 million** for common stock repurchases[177](index=177&type=chunk) [Effect of Currency Translation on Cash](index=46&type=section&id=Effect%20of%20Currency%20Translation%20on%20Cash) This section briefly notes the impact of foreign currency translation on the company's cash position - Foreign currency translation had a minimal impact on cash during the six months ended June 30, 2023[177](index=177&type=chunk) [Critical Accounting Policies and Estimates](index=46&type=section&id=Critical%20Accounting%20Policies%20and%20Estimates) This section highlights the company's critical accounting estimates that require significant judgment and assumptions, potentially impacting financial results - Critical accounting estimates include the valuation of assets and liabilities acquired in business combinations, accounting for income taxes, inputs to actuarial models for pension obligations, and assessing excess and obsolete inventories[178](index=178&type=chunk) - These estimates require significant judgments and assumptions, and actual results could differ materially[179](index=179&type=chunk) [ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK](index=47&type=section&id=ITEM%203.%20QUANTITATIVE%20AND%20QUALITATIVE%20DISCLOSURES%20ABOUT%20MARKET%20RISK) This section details the company's exposure to market risks, primarily interest rate risk from its investments and credit facility, and foreign exchange rate risk from its international operations and transactions. It also outlines the strategies used to manage these risks [Market Risk and Risk Management](index=47&type=section&id=Market%20Risk%20and%20Risk%20Management) This section identifies the company's primary market risk exposures, including interest rate and foreign exchange rate risks, and notes any material changes - The company is exposed to interest rate risk from investments and its Credit Facility, and foreign exchange rate risk from foreign operations and transactions[182](index=182&type=chunk) - There have been no material changes in market risk exposure from December 31, 2022[182](index=182&type=chunk) [Foreign Currency Exchange Rate Risk](index=47&type=section&id=Foreign%20Currency%20Exchange%20Rate%20Risk) This section discusses the impact of foreign currency exchange rate fluctuations on the company's financial results and its hedging strategies - Changes in foreign currency exchange rates impact sales, purchasing transactions, and reported financial results, including assets and liabilities of foreign subsidiaries[183](index=183&type=chunk) - Functional currencies primarily include USD, Euro, South Korean Won, New Taiwan Dollar, Japanese Yen, Pound Sterling, and Chinese Yuan[184](index=184&type=chunk) - The company may use foreign currency exchange rate contracts to hedge against changes in exchange rates for assets and liabilities, and for potential foreign acquisitions, but does not use derivatives for trading or speculative purposes[186](index=186&type=chunk) [Interest Rate Risk](index=49&type=section&id=Interest%20Rate%20Risk) This section details the company's exposure to interest rate risk, particularly from its variable-rate debt, and quantifies the potential impact of rate changes | Borrowing (in thousands) | Balance June 30, 2023 | Interest Rate | | :----------------------- | :-------------------- | :------------ | | Term Loan Facility (fixed) | $229,469 | 1.172% | | Term Loan Facility (variable) | $135,531 | 5.952% | | Revolving Facility (variable) | $— | 5.952% | | Total borrowings | $365,000 | | - A hypothetical **100 basis point (1%)** increase in interest rates would have a **$1.4 million** annual impact on the company's interest expense for the variable portion of its Credit Facility[189](index=189&type=chunk) [ITEM 4. CONTROLS AND PROCEDURES](index=49&type=section&id=ITEM%204.%20CONTROLS%20AND%20PROCEDURES) This section outlines the company's disclosure controls and procedures, including management's evaluation of their effectiveness, and reports on any changes in internal control over financial reporting [Evaluation of Disclosure Controls and Procedures](index=49&type=section&id=Evaluation%20of%20Disclosure%20Controls%20and%20Procedures) This section reports on the effectiveness of the company's disclosure controls and procedures as evaluated by management - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, ensuring timely and accurate reporting of required information[190](index=190&type=chunk)[191](index=191&type=chunk) [Changes in Internal Control over Financial Reporting](index=50&type=section&id=Changes%20in%20Internal%20Control%20over%20Financial%20Reporting) This section reports on any material changes in the company's internal control over financial reporting during the quarter - There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[192](index=192&type=chunk) [PART II OTHER INFORMATION](index=51&type=section&id=PART%20II%20OTHER%20INFORMATION) This part includes disclosures on legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, exhibits, and signatures [ITEM 1. LEGAL PROCEEDINGS](index=51&type=section&id=ITEM%201.%20LEGAL%20PROCEEDINGS) This section addresses the company's involvement in legal disputes and its assessment of their potential financial impact - The company is involved in legal actions arising in the normal course of business but believes the results will not have a material adverse effect on its financial condition, results of operations, or liquidity[194](index=194&type=chunk) [ITEM 1A. RISK FACTORS](index=51&type=section&id=ITEM%201A.%20RISK%20FACTORS) This section refers to the comprehensive list of risk factors detailed in the company's Annual Report on Form 10-K and confirms no material changes - Information concerning risk factors is contained in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2022[195](index=195&type=chunk) - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K[195](index=195&type=chunk) [ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS](index=51&type=section&id=ITEM%202.%20UNREGISTERED%20SALES%20OF%20EQUITY%20SECURITIES%20AND%20USE%20OF%20PROCEEDS) This section provides details on the company's stock repurchase programs and any related activities - The company did not have any repurchases of common stock in the six months ended June 30, 2023[196](index=196&type=chunk) - The Board of Directors has authorized various stock repurchase programs over time, with the latest increase in July 2022 authorizing repurchases up to **$200.0 million** with no time limitation[197](index=197&type=chunk) [ITEM 3. DEFAULTS UPON SENIOR SECURITIES](index=51&type=section&id=ITEM%203.%20DEFAULTS%20UPON%20SENIOR%20SECURITIES) This section confirms whether there have been any defaults upon senior securities - There were no defaults upon senior securities[197](index=197&type=chunk) [ITEM 4. MINE SAFETY DISCLOSURES](index=51&type=section&id=ITEM%204.%20MINE%20SAFETY%20DISCLOSURES) This section confirms whether there are any mine safety disclosures required - There were no mine safety disclosures[197](index=197&type=chunk) [ITEM 5. OTHER INFORMATION](index=52&type=section&id=ITEM%205.%20OTHER%20INFORMATION) This section provides other material information not covered elsewhere, including Rule 10b5-1 trading arrangements and changes to compensation plans - Anne DelSanto, a Board member, adopted a Rule 10b5-1 trading arrangement on June 13, 2023, for the sale of up to **1,776 shares** of common stock between October 1, 2023, and September 5, 2024[198](index=198&type=chunk) - The Compensation Committee approved non-material changes to the company's Amended and Restated Deferred Compensation Plan, curtailing eligibility of special bonuses for deferral, effective August 1, 2023[198](index=198&type=chunk) [ITEM 6. EXHIBITS](index=53&type=section&id=ITEM%206.%20EXHIBITS) This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q - Exhibits filed include the Advanced Energy Amended and Restated Deferred Compensation Plan, the 2023 Omnibus Incentive Plan, and certifications from the Chief Executive Officer and Chief Financial Officer[201](index=201&type=chunk) [SIGNATURES](index=54&type=section&id=SIGNATURES) This section contains the official signatures confirming the filing of the report - The report was signed on August 3, 2023, by Paul Oldham, Chief Financial Officer and Executive Vice President of Advanced Energy Industries, Inc[203](index=203&type=chunk)

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 ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 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 (Address of ...