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,~~September 30, 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
(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)

Registrant’s telephone number, including area code: (970) 407-6626

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"~~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 30,~~October 27, 2022, there were ~~37,559,319~~37,383,115 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	2425

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	3739

ITEM 4.	CONTROLS AND PROCEDURES	3841

	PART II OTHER INFORMATION

ITEM 1.	LEGAL PROCEEDINGS	3941

ITEM 1A.	RISK FACTORS	3941

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	3942

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	3942

ITEM 4.	MINE SAFETY DISCLOSURES	4043

ITEM 5.	OTHER INFORMATION	4043

ITEM 6.	EXHIBITS	4143

	SIGNATURES	4244

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,		September 30,		December 31,
	2022		2021		2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	521,236	$	544,372	$	409,053	$	544,372
Marketable securities		2,282		2,296
Accounts and other receivable, net		248,732		237,227		307,018		237,227
Inventories		360,801		338,410		409,422		338,410
Other current assets		41,429		39,929		56,289		42,225
Total current assets		1,174,480		1,162,234		1,181,782		1,162,234
Property and equipment, net		117,287		114,830		136,502		114,830
Operating lease right-of-use assets		101,581		101,769		102,226		101,769
Deposits and other assets		27,175		19,669		33,364		19,669
Goodwill		211,493		212,190		279,226		212,190
Intangible assets, net		153,608		159,406		195,807		159,406
Deferred income tax assets		46,734		47,242		45,148		47,242
TOTAL ASSETS	$	1,832,358	$	1,817,340	$	1,974,055	$	1,817,340

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	183,085	$	193,708	$	219,770	$	193,708
Income taxes payable		15,627		9,226		33,040		9,226
Accrued payroll and employee benefits		49,618		55,833		74,035		55,833
Other accrued expenses		49,704		53,445		44,898		53,445
Customer deposits and other		29,643		22,141		24,913		22,141
Current portion of long-term debt		20,000		20,000		20,000		20,000
Current portion of operating lease liabilities		15,718		15,843		16,299		15,843
Total current liabilities		363,395		370,196		432,955		370,196
Long-term debt, net		367,868		372,733		358,132		372,733
Operating lease liabilities		95,123		95,180		94,575		95,180
Pension benefits		65,956		67,255		58,208		67,255
Deferred income tax liabilities		9,346		9,921		9,194		9,921
Other long-term liabilities		29,351		30,559		31,043		30,559
Total liabilities		931,039		945,844		984,107		945,844

Commitments and contingencies (Note 17)

Stockholders' equity:
Preferred stock, $0.001 par value, 1,000 shares authorized, NaN issued and outstanding		—		—
Common stock, $0.001 par value, 70,000 shares authorized; 37,559 and 37,589 issued and outstanding at March 31, 2022 and December 31, 2021, respectively		38		38
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding						—		—
Common stock, $0.001 par value, 70,000 shares authorized; 37,393 and 37,589 issued and outstanding at September 30, 2022 and December 31, 2021, respectively						37		38
Additional paid-in capital		116,928		115,706		128,079		115,706
Accumulated other comprehensive income (loss)		750		(1,216)
Accumulated other comprehensive loss						(14,797)		(1,216)
Retained earnings		782,972		756,323		875,968		756,323
Advanced Energy stockholders' equity		900,688		870,851		989,287		870,851
Noncontrolling interest		631		645		661		645
Total stockholders’ equity		901,319		871,496
Total stockholders' equity						989,948		871,496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	1,832,358	$	1,817,340	$	1,974,055	$	1,817,340

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,

2022

2021
Sales, net

$
397,459

$
351,620
Cost of sales

253,143

214,117
Gross profit

144,316

137,503

Operating expenses:

Research and development

43,614

40,168
Selling, general, and administrative

49,318

46,731
Amortization of intangible assets

5,509

5,384
Restructuring expense

1,218

1,038
Total operating expenses

99,659

93,321
Operating income

44,657

44,182

Other income (expense), net

(842)

(507)
Income from continuing operations, before income taxes

43,815

43,675
Provision for income taxes

6,953

5,284
Income from continuing operations

36,862

38,391
Income (loss) from discontinued operations, net of income taxes

(98)

310
Net income

$
36,764

$
38,701
Income (loss) from continuing operations attributable to noncontrolling interest

(14)

33
Net income attributable to Advanced Energy Industries, Inc.

$
36,778

$
38,668

Basic weighted-average common shares outstanding

37,549

38,328
Diluted weighted-average common shares outstanding

37,770

38,583

Earnings per share:

Continuing operations:

Basic earnings per share

$
0.98

$
1.00
Diluted earnings per share

$
0.98

$
0.99
Discontinued operations:

Basic earnings (loss) per share

$
—

$
0.01
Diluted earnings (loss) per share

$
—

$
0.01
Net income:

Basic earnings per share

$
0.98

$
1.01
Diluted earnings per share

$
0.97

$
1.00



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Sales, net	$	516,274	$	346,093	$	1,354,682	$	1,059,024
Cost of sales		325,056		226,054		856,990		666,449
Gross profit		191,218		120,039		497,692		392,575

Operating expenses:
Research and development		49,760		40,578		141,383		120,865
Selling, general, and administrative		56,716		48,373		161,056		143,214
Amortization of intangible assets		7,049		5,607		19,081		16,504
Restructuring expense		121		1,272		1,178		2,521
Total operating expenses		113,646		95,830		322,698		283,104
Operating income		77,572		24,209		174,994		109,471

Other income (expense), net		8,940		495		11,347		(3,674)
Income from continuing operations, before income taxes		86,512		24,704		186,341		105,797
Provision for income taxes		11,639		3,657		29,795		10,817
Income from continuing operations		74,873		21,047		156,546		94,980
Income (loss) from discontinued operations, net of income taxes		(697)		(37)		(615)		171
Net income	$	74,176	$	21,010	$	155,931	$	95,151
Income from continuing operations attributable to noncontrolling interest		9		6		16		70
Net income attributable to Advanced Energy Industries, Inc.	$	74,167	$	21,004	$	155,915	$	95,081

Basic weighted-average common shares outstanding		37,379		38,183		37,482		38,296
Diluted weighted-average common shares outstanding		37,630		38,363		37,725		38,517

Earnings per share:
Continuing operations:
Basic earnings per share	$	2.00	$	0.55	$	4.18	$	2.48
Diluted earnings per share	$	1.99	$	0.55	$	4.15	$	2.46
Discontinued operations:
Basic earnings (loss) per share	$	(0.02)	$	—	$	(0.02)	$	—
Diluted earnings (loss) per share	$	(0.02)	$	—	$	(0.02)	$	—
Net income:
Basic earnings per share	$	1.98	$	0.55	$	4.16	$	2.48
Diluted earnings per share	$	1.97	$	0.55	$	4.13	$	2.47

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,


2022

2021

Net income

$
36,764

$
38,701

Other comprehensive income (loss), net of income taxes





Foreign currency translation

(4,092)

(6,941)

Change in fair value of cash flow hedges

5,913

2,009

Minimum pension benefit retirement liability

145

(36)

Comprehensive income

$
38,730

$
33,733

Comprehensive income (loss) attributable to noncontrolling interest

(14)

33

Comprehensive income attributable to Advanced Energy Industries, Inc.

$
38,744

$
33,700


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income	$	74,176	$	21,010	$	155,931	$	95,151
Other comprehensive income (loss), net of income taxes
Foreign currency translation		(11,671)		(3,661)		(24,442)		(9,534)
Change in fair value of cash flow hedges		2,508		172		10,447		2,179
Minimum pension benefit retirement liability		—		313		414		246
Comprehensive income	$	65,013	$	17,834	$	142,350	$	88,042
Comprehensive income attributable to noncontrolling interest		9		6		16		70
Comprehensive income attributable to Advanced Energy Industries, Inc.	$	65,004	$	17,828	$	142,334	$	87,972

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’~~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, 2020

38,293

$
38

$
105,009

$
(2,605)

$
712,297

$
601

$
815,340
Stock issued from equity plans

93

—

(4,645)

—

—

—

(4,645)
Stock-based compensation

—

—

5,701

—

—

—

5,701
Dividends declared ($0.10 per share)

—

—

—

—

(3,854)

—

(3,854)
Other comprehensive income (loss)

—

—

—

(4,968)

—

—

(4,968)
Net income

—

—

—

—

38,668

33

38,701
Balances, March 31, 2021

38,386

$
38

$
106,065

$
(7,573)

$
747,111

$
634

$
846,275

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 repurchase

(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


	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, 2020	38,293	$	38	$	105,009	$	(2,605)	$	712,297	$	601	$	815,340
Stock issued from equity plans	93		—		(4,645)		—		—		—		(4,645)
Stock-based compensation	—		—		5,701		—		—		—		5,701
Dividends declared ($0.10 per share)	—		—		—		—		(3,854)		—		(3,854)
Other comprehensive loss	—		—		—		(4,968)		—		—		(4,968)
Net income	—		—		—		—		38,668		33		38,701
Balances, March 31, 2021	38,386		38		106,065		(7,573)		747,111		634		846,275
Stock issued from equity plans	67		—		956		—		—		—		956
Stock-based compensation	—		—		3,277		—		—		—		3,277
Share repurchase	(72)		—		(199)		—		(6,304)		—		(6,503)
Dividends declared ($0.10 per share)	—		—		—		—		(3,874)				(3,874)
Other comprehensive income	—		—		—		1,035		—		—		1,035
Net income	—		—		—		—		35,409		31		35,440
Balances, June 30, 2021	38,381		38		110,099		(6,538)		772,342		665		876,606
Stock issued from equity plans	14		—		223		—		—		—		223
Stock-based compensation	—		—		3,540		—		—		—		3,540
Share repurchase	(605)		—		(1,635)		—		(50,920)		—		(52,555)
Dividends declared ($0.10 per share)	—		—		—		—		(3,857)		—		(3,857)
Other comprehensive loss	—		—		—		(3,176)		—		—		(3,176)
Net income	—		—		—		—		21,004		6		21,010
Balances, September 30, 2021	37,790	$	38	$	112,227	$	(9,714)	$	738,569	$	671	$	841,791

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 repurchase	(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
Stock issued from equity plans	63		—		763		—		—		—		763
Stock-based compensation	—		—		5,016		—		—		—		5,016
Share repurchase	(230)		(1)		(725)		—		(16,293)		—		(17,019)
Dividends declared ($0.10 per share)	—		—		—		—		(3,806)		—		(3,806)
Other comprehensive loss	—		—		—		(6,384)		—		—		(6,384)
Net income	—		—		—		—		44,970		21		44,991
Balances, June 30, 2022	37,392		37		121,982		(5,634)		807,843		652		924,880
Stock issued from equity plans	35		—		256		—		—		—		256
Stock-based compensation	—		—		5,953		—		—		—		5,953
Share repurchase	(34)		—		(112)		—		(2,230)		—		(2,342)
Dividends declared ($0.10 per share)	—		—		—		—		(3,812)		—		(3,812)
Other comprehensive loss	—		—		—		(9,163)		—		—		(9,163)
Net income	—		—		—		—		74,167		9		74,176
Balances, September 30, 2022	37,393	$	37	$	128,079	$	(14,797)	$	875,968	$	661	$	989,948

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,


2022

2021

CASH FLOWS FROM OPERATING ACTIVITIES:





Net income

$
36,764

$
38,701

Less: income (loss) from discontinued operations, net of income taxes

(98)

310

Income from continuing operations, net of income taxes

36,862

38,391

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





Depreciation and amortization

13,888

12,721

Stock-based compensation expense

3,928

5,701

Provision for deferred income taxes

(1,060)

(5)

Loss on disposal of assets

276

275

Changes in operating assets and liabilities, net of assets acquired

Accounts and other receivable, net

(12,579)

(4,984)

Inventories

(23,616)

(27,503)

Other assets

(3,840)

(1,406)

Accounts payable

(6,469)

40,483

Other liabilities and accrued expenses

(5,183)

(12,534)

Income taxes

7,706

3,125

Net cash from operating activities from continuing operations

9,913

54,264

Net cash from operating activities from discontinued operations

(92)

(185)

Net cash from operating activities

9,821

54,079

CASH FLOWS FROM INVESTING ACTIVITIES:





Proceeds from sale of assets

—

6

Purchases of property and equipment

(13,075)

(8,817)

Acquisitions, net of cash acquired

(600)

(3,604)

Net cash from investing activities

(13,675)

(12,415)

CASH FLOWS FROM FINANCING ACTIVITIES:





Payments on long-term borrowings

(5,000)

(4,375)

Dividend payments

(3,789)

(3,854)

Purchase and retirement of common stock

(6,594)

—

Net payments related to stock-based awards

(2,430)

(4,214)

Net cash from financing activities

(17,813)

(12,443)

EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS

(1,469)

321

NET CHANGE IN CASH AND CASH EQUIVALENTS

(23,136)

29,542

CASH AND CASH EQUIVALENTS, beginning of period

544,372

480,368

CASH AND CASH EQUIVALENTS, end of period

$
521,236

$
509,910

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:





Cash paid for interest

$
1,123

$
979

Cash paid for income taxes

$
2,444

$
1,873

Cash received for refunds of income taxes

$
2,366

$
109


	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	155,931	$	95,151
Less: income (loss) from discontinued operations, net of income taxes		(615)		171
Income from continuing operations, net of income taxes		156,546		94,980
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization		44,433		39,225
Stock-based compensation expense		15,008		12,819
Provision for deferred income taxes		(2,496)		(1,404)
Gain from discount on notes receivable		—		(638)
(Gain) loss on disposal and sale of assets		(4,058)		923
Changes in operating assets and liabilities, net of assets acquired
Accounts and other receivable, net		(68,591)		14,957
Inventories		(70,407)		(118,562)
Other assets		(11,858)		1,958
Accounts payable		21,630		63,404
Other liabilities and accrued expenses		7,281		8,963
Income taxes payable		25,494		(10,215)
Net cash from operating activities from continuing operations		112,982		106,410
Net cash from operating activities from discontinued operations		(81)		(523)
Net cash from operating activities		112,901		105,887

CASH FLOWS FROM INVESTING ACTIVITIES:
Receipt of notes receivable		—		802
Purchases of property and equipment		(39,507)		(21,184)
Acquisitions, net of cash acquired		(145,779)		(18,739)
Net cash from investing activities		(185,286)		(39,121)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings		—		85,000
Payment of debt-issuance costs		—		(1,350)
Payments on long-term borrowings		(15,000)		(8,750)
Dividend payments		(11,407)		(11,585)
Purchase and retirement of common stock		(25,955)		(56,625)
Net payments related to stock-based awards		(1,411)		(3,136)
Net cash from financing activities		(53,773)		3,554

EFFECT OF CURRENCY TRANSLATION ON CASH AND CASH EQUIVALENTS		(9,161)		(2,765)

NET CHANGE IN CASH AND CASH EQUIVALENTS		(135,319)		67,555
CASH AND CASH EQUIVALENTS, beginning of period		544,372		480,368
CASH AND CASH EQUIVALENTS, end of period	$	409,053	$	547,923

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	2,965	$	2,896
Cash paid for income taxes	$	5,393	$	25,271

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

Table of Contents

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 ~~wholly-owned~~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, strip and ~~deposition,~~deposition. Our broad portfolios of high and low voltage power products are used in a wide range of applications, such as semiconductor ~~process control,~~equipment, industrial production, medical and life science equipment, data center ~~computing, networking, telecommunication, medical equipment, life science applications, industrial technology~~ and ~~production, scientific instruments, clean technology production, advanced material production and temperature-critical thermal applications.~~telecommunication. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of radio frequency ~~("RF"~~("RF") power and temperature, ~~and~~ electrostatic instrumentation products for test and measurement ~~applications.~~applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, refurbishments, and used equipment to companies using our products.

In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly ~~the~~Advanced Energy’s financial position ~~of the Company~~ as of ~~March 31,~~September 30, 2022, and the results of our operations and cash flows for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021.

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, 2021 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

●

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, 2021.

We reclassified certain prior period amounts within these consolidated financial statements to conform to the current year presentation.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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.

~~Table of Contents~~

~~ADVANCED ENERGY INDUSTRIES, INC.~~

~~NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

~~(In thousands, except per share data)~~

New Accounting Standards Adopted

In October 2021, the FASB issued ASU 2021-08, "Business Combinations (Topic 806) Accounting for Contract Assets and Contract Liabilities from Contracts with Customers." The amendments in ASU 2021-08 address diversity and inconsistency related to the recognition and measurement of contract assets and contract liabilities acquired in a business combination. ASU 2021-08 requires an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606, Revenue from Contracts with Customers.

We adopted ASU 2021-08 on a prospective basis effective January 1, 2022. The adoption will impact ~~future~~ business combinations subsequent to that date and require recognition and measurement of acquired contract assets and liabilities in accordance with ASC 606. Specifically, we will account for the related revenue contracts of the acquiree as if we originated the contracts. Adoption of ASU 2021-08 did not impact acquired contract assets or liabilities from prior business combinations.

New Accounting Standards Issued But Not Yet Adopted

In March 2020, the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"). In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope" ("ASU 2021-01"). This collective guidance provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another reference rate that is expected to be discontinued. ASU 2020-04 and ASU 2021-01 will be in effect through December 31, 2022. ~~We are currently assessing the potential impact of ASU 2020-04 and ASU 2021-01 on our consolidated financial statements.~~

Our Credit Facility (refer to Note 18. Credit Facility) and interest rate swap agreements (refer to Note 7. Derivative Financial Instruments) reference the one-month USD LIBOR rate. Both agreements contain provisions for transition to a new reference rate upon discontinuance of LIBOR. We expect the one-month USD LIBOR rate to be available through June 2023. We are currently assessing the potential timing of transitioning to a replacement interest rate benchmark for our Credit Facility and do not expect ASU 2020-04 and ASU 2020-01 to materially impact 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	$	146,863
Less cash acquired		(3,484)
Total fair value of purchase consideration	$	143,379

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


	Preliminary Fair Value September 30, 2022
Current assets and liabilities, net	$	12,013
Property and equipment		3,927
Operating lease right-of-use assets		4,996
Deferred taxes and other liabilities		(1,164)
Intangible assets		57,600
Goodwill		71,003
Operating lease liability		(4,996)
Total fair value of net assets acquired	$	143,379

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 expected operating synergies from combining operations and approximately 85% is expected to be deductible for tax purposes. We are still evaluating the fair value for the assets acquired and liabilities assumed. Accordingly, the purchase price allocation presented above is preliminary.

We included SL Power’s results of operations in our consolidated financial statements from the date of acquisition. The following table summarizes SL Power’s contribution to sales in our Consolidated Statements of Operations.


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022		2022
Sales, net	$	16,659	$	29,604

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

TEGAM, Inc.

On June 1, 2021, we acquired 100% of the issued and outstanding shares of capital stock of TEGAM, Inc., which is based in Geneva, Ohio. We accounted for this transaction as a business combination. This acquisition added metrology and calibration instrumentation to Advanced Energy’s RF process power solutions in our Semiconductor and Industrial and Medical markets.

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

Cash paid for acquisition

$
15,430
Holdback

1,800
Total fair value of consideration transferred

17,230
Less cash acquired

(177)
Total purchase price

$
17,053


Cash paid at closing	$	15,430
Cash paid for indemnity holdback released in June 2022		1,800
Less cash acquired		(177)
Total fair value of purchase consideration	$	17,053

We allocated the purchase price to the assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date, with the excess allocated to goodwill. The following table summarizes the ~~preliminary~~ values of the assets acquired and liabilities assumed.


	Preliminary Fair Value		Fair Value
Current assets and liabilities, net	$	3,475	$	3,475
Property and equipment		734		755
Operating lease right-of-use assets		425		425
Intangible assets		6,900		6,900
Goodwill (deductible for tax purposes)		5,938		5,917
Other non-current assets		31
Total assets acquired		17,503
Other non-current liabilities		25
Other				6
Operating lease liability		425		(425)
Total liabilities assumed		450
Total fair value of net assets acquired	$	17,053	$	17,053

Goodwill represents TEGAM’s assembled workforce and expected operating synergies from combining operations. We included TEGAM’s results of operations in our consolidated financial statements from the date of acquisition.

NOTE 3. REVENUE

Nature of goods and services

Products

Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip and deposition, high and low voltage applications such as process control, ~~data center computing, networking, telecommunication,~~ medical equipment, life science applications, industrial technology and production, scientific instruments, clean technology production, advanced material production, ~~and~~ temperature-critical ~~thermal applications such as~~ material processing, data center computing, networking, and chemical processing. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of RF power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

telecommunication. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of RF power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, refurbishments, and used equipment to companies using our products.

Services

Our services group offers warranty and after-market repair services in the regions in which we operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the costs of system downtime. They expect that suppliers offer comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide support organization in the U.S., the People’s Republic of China ("PRC"), Japan, Korea, Taiwan, Germany, Ireland, Singapore, Israel, and Great Britain. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell.

As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties which had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenance plans are deferred. Revenue under these arrangements is recognized ratably over the underlying terms as we do not have historical information which would allow us to project the estimated service usage pattern at this time.

~~The following table summarizes deferred revenue, which relates~~Remaining Performance obligations

Our remaining performance obligations primarily relate to ~~extended warranties and service contracts.~~customer purchase orders for products we have not yet shipped. We expect to ~~recognize this revenue ratably through~~fulfill the ~~year 2031. Deferred revenue is included in customer deposits and other long-term liabilities on our Consolidated Balance Sheets.~~

March 31,

December 31,

2022

2021
Deferred revenue

$
6,165

$
7,067

majority of these performance obligations within one year. As a result, we elected not to disclose the amount of these remaining performance obligations.

Disaggregation of ~~Revenue~~revenue

The following tables present additional information regarding our revenue:


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021
Semiconductor Equipment	$	202,957	$	180,716	$	266,600	$	173,441	$	698,354	$	530,828
Industrial and Medical		82,898		78,415		119,587		80,800		307,436		242,412
Data Center Computing		76,238		59,154		87,542		62,231		232,941		190,843
Telecom and Networking		35,366		33,335		42,545		29,621		115,951		94,941
Total	$	397,459	$	351,620	$	516,274	$	346,093	$	1,354,682	$	1,059,024


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021
Product	$	362,876	$	318,879	$	471,627	$	312,389	$	1,238,480	$	956,790
Services		34,583		32,741		44,647		33,704		116,202		102,234
Total	$	397,459	$	351,620	$	516,274	$	346,093	$	1,354,682	$	1,059,024

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

Three Months Ended March 31,

2022

2021

United States

$
158,742

$
131,598

North America (excluding U.S.)

23,979

26,247

Asia

162,047

149,591

Europe

46,665

40,422

Other

6,026

3,762

Total

$
397,459

$
351,620


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
United States	$	197,205	$	139,089	$	530,240	$	410,212
North America (excluding U.S.)		40,910		24,708		96,713		77,067
Asia		215,401		135,838		557,629		434,232
Europe		61,456		44,838		157,972		129,751
Other		1,302		1,620		12,128		7,762
Total	$	516,274	$	346,093	$	1,354,682	$	1,059,024

During the three months ended ~~March 31,~~September 30, 2022, Applied Materials, Inc. and Lam Research Corporation accounted for ~~22%~~19% and ~~13%~~15%, respectively, of our total revenue compared to ~~19%~~22% and 11%, respectively, of our total revenue during the same period in the prior year. During the nine months ended September 30, 2022, Applied Materials, Inc. and Lam Research Corporation accounted for 20% and 14%, respectively, of our total revenue compared to 21% and 10%, respectively, of our total revenue during the same period in the prior year.

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,						Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021			2022			2021
Income from continuing operations, before income taxes	$	43,815		$	43,675		$	86,512		$	24,704		$	186,341		$	105,797
Provision for income taxes	$	6,953		$	5,284		$	11,639		$	3,657		$	29,795		$	10,817
Effective tax rate		15.9	%		12.1	%		13.5	%		14.8	%		16.0	%		10.2	%

Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, 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 ~~first~~ three months ended September 30, 2022 was lower than the same period in 2021 primarily due to the cumulative year to date impact of increased earnings in 2022 and the resulting mix of earnings by geography. The effective tax rate for the nine months ended September 30, 2022 was higher than the same period in 2021 primarily due to beneficial discrete items occurring in 2021 not recurring in 2022, and by the ~~January 1,~~capitalization and amortization of research and development expenses rather than immediately expensing them starting in 2022 ~~effective date of a certain provision enacted~~ as ~~part of~~required by the 2017 Tax Cuts and Jobs Act.

Under the 2017 Tax Cuts and Jobs Act enacted in December 2017, research and development expenses incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes. Although Congress is considering legislation that would defer the capitalization and amortization requirement, there is no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it may materially increase future cash taxes beginning in 2023.

The Inflation Reduction Act (“IRA”) and CHIPS and Science Act (“CHIPS Act”) were both enacted in August 2022. The IRA introduced new provisions including a 15% corporate alternative minimum tax for certain large corporations that have at least an average of $1 billion adjusted financial statement income over a consecutive three-tax-year period and a 1% excise tax surcharge on stock repurchases. The CHIPS Act provides a variety of incentives associated with investments in domestic semiconductor manufacturing and related activities. Both Acts are applicable for tax years beginning after December 31, 2022 and had no impact to our consolidated financial statements in the nine months ended September 30, 2022.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021
Income from continuing operations	$	36,862	$	38,391	$	74,873	$	21,047	$	156,546	$	94,980
Less: income (loss) from continuing operations attributable to noncontrolling interest		(14)		33
Less: income from continuing operations attributable to noncontrolling interest						9		6		16		70
Income from continuing operations attributable to Advanced Energy Industries, Inc.	$	36,876	$	38,358	$	74,864	$	21,041	$	156,530	$	94,910

Basic weighted-average common shares outstanding		37,549		38,328		37,379		38,183		37,482		38,296
Assumed exercise of dilutive stock options and restricted stock units		221		255		251		180		243		221
Diluted weighted-average common shares outstanding		37,770		38,583		37,630		38,363		37,725		38,517

Continuing operations:
Basic earnings per share	$	0.98	$	1.00	$	2.00	$	0.55	$	4.18	$	2.48
Diluted earnings per share	$	0.98	$	0.99	$	1.99	$	0.55	$	4.15	$	2.46

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,				Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2022		2021		2022		2021		2022		2021
Amount paid to repurchase shares	$	6,594	$	—
Amount paid or accrued to repurchase shares					$	2,342	$	52,555	$	25,955	$	59,058
Number of shares repurchased		82		—		34		605		346		677
Average repurchase price per share	$	80.02	$	—	$	69.39	$	86.93	$	75.07	$	87.30
Remaining authorized by Board of Directors for future repurchases as of period end	$	121,783	$	38,369

There were 0no shares repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares.

In July 2022, the Board of Directors approved an increase to the share repurchase plan that increased the remaining amount authorized for future repurchases to a maximum of $200.0 million with no time limitation. At September 30, 2022, the remaining amount authorized by the Board of Directors for future share repurchases was $200.0 million.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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, 2022									September 30, 2022
Description	Balance Sheet Classification	Level 1		Level 2		Level 3		Total Fair Value		Balance Sheet Classification	Level 1		Level 2			Level 3		Total Fair Value
Assets:
Certificates of deposit	Marketable securities	$	—	$	2,282	$	—	$	2,282	Other current assets	$	—	$	2,120		$	—	$	2,120
Foreign currency forward contracts										Other current assets		—		208			—		208
Interest rate swaps	Deposits and other assets		—		10,396		—		10,396	Deposits and other assets		—		16,113			—		16,113
Total assets measured at fair value on a recurring basis		$	—	$	12,678	$	—	$	12,678		$	—	$	18,441		$	—	$	18,441

Liabilities:
Foreign currency forward contracts	Other current liabilities	$	—		35		—	$	35
Contingent consideration	Other current liabilities		—		—		1,779		1,779	Other current liabilities	$	—	$	—	$		1,779	$	1,779
Total liabilities measured at fair value on a recurring basis		$	—	$	35	$	1,779	$	1,814		$	—	$	—		$	1,779	$	1,779


		December 31, 2021									December 31, 2021
Description	Balance Sheet Classification	Level 1		Level 2		Level 3		Total Fair Value		Balance Sheet Classification	Level 1		Level 2			Level 3		Total Fair Value
Assets:
Certificates of deposit	Marketable securities	$	—	$	2,296	$	—	$	2,296	Other current assets	$	—	$	2,296		$	—	$	2,296
Interest rate swaps	Deposits and other assets		—		2,739		—		2,739	Deposits and other assets		—		2,739			—		2,739
Total assets measured at fair value on a recurring basis		$	—	$	5,035	$	—	$	5,035		$	—	$	5,035		$	—	$	5,035

Liabilities:
Contingent consideration	Other current liabilities	$	—	$	—	$	1,738	$	1,738	Other current liabilities	$	—	$	—		$	1,738	$	1,738
Total liabilities measured at fair value on a recurring basis		$	—	$	—	$	1,738	$	1,738		$	—	$	—		$	1,738	$	1,738

The fair value of foreign currency forward contracts is based on the movement in the forward rates of foreign currency cash flows in which the hedging instrument is denominated. We determine the fair value of interest rate swaps by estimating the net present value of the expected cash flows based on market rates and associated yield curves, adjusted for non-performance credit risk, as applicable. See Note 7. Derivative Financial Instruments for additional information. The fair value of contingent consideration is determined by estimating the net present value of the expected cash flows based on the probability of expected payment. For all periods presented, there were 0no transfers into or out of Level 3.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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 ~~economically~~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,		September 30,		December 31,
	2022		2021		2022		2021
Foreign currency forward contracts	$	63,756	$	—	$	83,760	$	—

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 components of other income (expense), net in our Consolidated Statements of Operations.

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

The interest rate swap contracts fixed a portion of the outstanding principal balance on our term loan to a total interest rate of 1.271%. This is comprised of 0.521% average fixed rate per annum in exchange for a variable interest rate based on one-month USD-LIBOR-BBA plus the credit spread in our existing Credit Agreement (see Note 18.18. Credit Facility), which is 75 basis points at current leverage ratios.

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


	March 31,		December 31,		September 30,		December 31,
	2022		2021		2022		2021
Interest rate swap contracts	$	251,344	$	255,719	$	242,594	$	255,719

The following table summarizes the balances recorded in accumulated other comprehensive ~~income (loss)~~loss on the Consolidated Balance Sheets for qualifying hedges.


	March 31,		December 31,		September 30,		December 31,
	2022		2021		2022		2021
Interest rate swap contract gains	$	7,998	$	2,107	$	12,427	$	2,107

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.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 8.    ACCOUNTS AND OTHER ~~RECEIVABLE,~~RECEIVABLES, NET
We record accounts and other receivables at net realizable value. Components of accounts and other receivables, net of reserves, were as follows:

March 31,

December 31,

September 30,

December 31,


2022

2021

2022

2021
Amounts billed, net

$
233,034

$
217,549

$
289,007

$
217,549
Unbilled receivables

15,698

19,678

18,011

19,678
Total receivables, net

$
248,732

$
237,227

$
307,018

$
237,227

"Amounts billed, net" represents amounts invoiced to customers in accordance with our terms and conditions and ~~reflects~~includes an allowance for expected credit losses. These receivables are short term in nature and do not include any financing components.
"Unbilled receivables" consist of amounts where we satisfied our contractual obligations associated with customer inventory stocking agreements. Such amounts typically become billable upon the customer’s consumption of the inventory. We anticipate invoicing and collecting substantially all unbilled receivables within the next twelve months.

The following table summarizes the changes in expected credit losses:

December 31, 2021

$
5,784

$
5,784
Additions

161

441
Deductions - write-offs, net of recoveries

(4,170)
Foreign currency translation

2

(30)
March 31, 2022

$
5,947
September 30, 2022

$
2,025

NOTE 9.    INVENTORIES
Inventories are valued 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,

September 30,

December 31,


2022

2021

2022

2021
Parts and raw materials

$
273,435

$
261,365

$
311,748

$
261,365
Work in process

29,393

24,222

28,860

24,222
Finished goods

57,973

52,823

68,814

52,823
Total

$
360,801

$
338,410

$
409,422

$
338,410

1617

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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,

Estimated Useful

September 30,

December 31,


Life (in years)

2022

2021

Life (in years)

2022

2021
Buildings

25

$
1,591

$
1,625
Machinery and equipment

5 to 8

136,610

133,010
Buildings, machinery, and equipment

5 to 25

$
149,877

$
134,635
Computer equipment, furniture, fixtures, and vehicles

3 to 5

33,806

33,490

3 to 5

34,557

33,490
Leasehold improvements

2 to 10

49,838

48,370

2 to 10

61,804

48,370
Construction in process

10,788

5,914

16,787

5,914

232,633

222,409

263,025

222,409
Less: Accumulated depreciation

(115,346)

(107,579)

(126,523)

(107,579)
Property and equipment, net

$
117,287

$
114,830

$
136,502

$
114,830

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

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Depreciation expense

$
8,379

$
7,337

$
8,507

$
7,874

$
25,352

$
22,721

NOTE 11.    GOODWILL
The following table summarizes the changes in goodwill:

December 31, 2021

$
212,190

$
212,190
Measurement period adjustments to purchase price allocations

61
Measurement period adjustments

40
Additions from acquisition

71,003
Foreign currency translation

(758)

(4,007)
March 31, 2022

$
211,493
September 30, 2022

$
279,226

~~Additions and adjustments are the result of business combinations. Refer to~~ ~~Note 2. Acquisitions~~.

1718

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 12.    INTANGIBLE ASSETS
Intangible assets consisted of the following:

March 31, 2022

September 30, 2022


Gross Carrying

Accumulated

Net Carrying

Gross Carrying

Accumulated

Net Carrying

Amount

Amortization

Amount

Amount

Amortization

Amount
Technology

$
91,088

$
(38,391)

$
52,697

$
96,027

$
(43,146)

$
52,881
Customer relationships

118,181

(35,879)

82,302

166,018

(40,325)

125,693
Trademarks and other

27,178

(8,569)

18,609

26,864

(9,631)

17,233
Total

$
236,447

$
(82,839)

$
153,608

$
288,909

$
(93,102)

$
195,807

December 31, 2021


Gross Carrying

Accumulated

Net Carrying

Amount

Amortization

Amount
Technology

$
91,461

$
(35,854)

$
55,607
Customer relationships

118,706

(34,187)

84,519
Trademarks and other

27,244

(7,964)

19,280
Total

$
237,411

$
(78,005)

$
159,406

At ~~March 31,~~September 30, 2022, the weighted average remaining useful life of intangibles subject to amortization was approximately ~~9.6~~9.3 years.
Amortization expense related to intangible assets is as follows:

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Amortization expense

$
5,509

$
5,384

$
7,049

$
5,607

$
19,081

$
16,504

Estimated amortization expense related to intangibles is as follows:

Year Ending December 31,




2022 (remaining)

16,461

$
7,014
2023

21,936

28,058
2024

19,105

25,072
2025

14,618

20,905
2026

12,902

19,189
Thereafter

68,586

95,569
Total

$
153,608

$
195,807

1819

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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
During 2018, we committed to a restructuring plan to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to our recent acquisitions. For the periods presented, we incurred severance costs primarily related to the transition and exit of our facility in Shenzhen, PRC and actions associated with synergies related to the Artesyn acquisition. The table below summarizes restructuring charges:

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

2022

2021

Severance and related charges

$
873

$
404


$
121

$
676

$
833

$
1,270

Facility relocation and closure charges

345

634

—

596

345

1,251

Total restructuring charges

$
1,218

$
1,038

$
121

$
1,272

$
1,178

$
2,521

Cumulative Cost

Cumulative Cost

Through

Through

March 31,

September 30,

2022

2022
Severance and related charges

$
21,253

$
21,213
Facility relocation and closure charges

7,160

7,160
Total restructuring charges

$
28,413

$
28,373

Our restructuring liabilities are included in other accrued expenses in our Consolidated Balance Sheets and related primarily to severance and ~~associated costs.~~related charges. Changes in restructuring liabilities were as follows:

December 31, 2021

$
9,263

$
9,263
Costs incurred and charged to expense

1,218

1,178
Costs paid or otherwise settled

(2,438)

(8,623)
Effects of changes in exchange rate

(3)

(24)
March 31, 2022

$
8,040
September 30, 2022

$
1,794

NOTE 14.    WARRANTIES
Our sales agreements include customary product warranty provisions, which range from 12to 24 months after shipment. We record the estimated warranty obligations cost when we recognize revenue. This estimate is based on our 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:

Three Months Ended


March 31, 2022

December 31, 2021

$
3,350

$
3,350
Additions from acquisitions

181
Increases to accruals

880

4,820
Warranty expenditures

(693)

(2,431)
Effect of changes in exchange rates

(7)

(98)
March 31, 2022

$
3,530
September 30, 2022

$
5,822

1920

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

NOTE 15.    LEASES
Components of operating lease cost were as follows:

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Operating lease cost

$
5,719

$
5,921

$
5,613

$
5,735

$
17,061

$
17,708

Short-term and variable lease cost

1,090

842

1,177

578

3,516

1,704

Total operating lease cost

$
6,809

$
6,763

$
6,790

$
6,313

$
20,577

$
19,412

Maturities of our operating lease liabilities are as follows:

Year Ending December 31,




2022 (remaining)

$
15,589

$
5,421
2023

18,733

20,029
2024

16,247

17,518
2025

13,280

14,515
2026

11,903

13,190
Thereafter

66,528

68,353
Total lease payments

142,280

139,026
Less: Interest

(31,439)

(28,152)
Present value of lease liabilities

$
110,841

$
110,874

Three Months Ended March 31,

September 30,

December 31,


2022

2021


2022

2021

Weighted average remaining lease term (in years)

9.6

10.6

9.1

9.8

Weighted average discount rate

4.5
%

4.6
%

4.6
%

4.5
%

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021

2022

2021

2022

2021

Cash paid for operating leases

$
5,626

$
5,958

$
5,557

$
6,058

$
16,642

$
18,037

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

$
4,530

$
2,192

$
2,222

$
7,169

$
14,433

$
14,402

NOTE 16.    STOCK-BASED COMPENSATION
As of ~~March 31,~~September 30, 2022, we had 2two active stock-based incentive compensation plans: the 2017 Omnibus Incentive Plan ~~("the 2017~~(the "2017 Plan") and the Employee Stock Purchase Plan ("ESPP"). We issue all new equity compensation grants under these 2two 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.
On May 4, 2017, the stockholders approved the 2017 Plan and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan ("the 2008 Plan") are now available for issuance under the 2017 Plan. The 2017 Plan and 2008 Plan provide for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights. 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.

2021

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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

~~March 31,~~September 30, 2022
Shares available for future issuance under the 2017 Omnibus Incentive Plan

~~1,629~~1,536
Shares available for future issuance under the Employee Stock Purchase Plan

~~665~~642

Restricted stock units ("RSU’s") are generally granted with a grant date fair value equal to the market price of our stock on the date of grant and with generally a ~~three~~ ~~year~~three-year vesting schedule. Certain RSUs contain performance-based or market-based vesting conditions in addition to the ~~time based~~time-based requirements.

Stock option awards are generally granted with an exercise price equal to the market price of our stock on the date of grant and with either a three or four-year vesting schedule or performance-based vesting as determined at the time of grant. Stock option awards generally have a term of 10 years.

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~~:follows:

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Equity classified awards

$
3,906

$
5,701

Liability classified awards

22

—

Stock-based compensation expense

$
3,928

$
5,701

$
6,022

$
3,674

$
15,008

$
12,819

Changes in our RSUs were as follows:

Three Months Ended March 31, 2022

Nine Months Ended September 30, 2022




Weighted-



Weighted-

Average

Average

Number of

Grant Date

Number of

Grant Date

RSUs

Fair Value

RSUs

Fair Value
RSUs outstanding at beginning of period

627

$
76.37

627

$
76.37
RSUs granted

361

$
73.79

525

$
73.38
RSUs vested

(82)

$
76.55

(145)

$
84.99
RSUs forfeited

(176)

$
54.71

(248)

$
60.74
RSUs outstanding at end of period

730

$
80.31

759

$
77.77

Changes in our stock options were as follows:

Three Months Ended March 31, 2022

Nine Months Ended September 30, 2022




Weighted-



Weighted-

Average

Average

Number of

Exercise Price

Number of

Exercise Price

Options

per Share

Options

per Share
Options outstanding at beginning of period

112

$
24.41

112

$
24.41
Options granted

76

$
85.97

76

$
85.97
Options exercised

(25)

$
23.30
Options outstanding at end of period

188

$
49.12

163

$
53.10

2122

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

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 ~~patent~~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 ~~patent~~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 ~~its~~our business, financial condition, results of operations or cash flows.

NOTE 18.    CREDIT FACILITY
In September 2019, in connection with the Artesyn Acquisition Agreement, we entered into a credit agreement ("Credit Agreement") that provided aggregate financing of $500.0 million, consisting of a $350.0 million senior unsecured term loan facility (the "Term Loan Facility") and a $150.0 million senior unsecured revolving facility (the "Revolving Facility" and together with the Term Loan Facility, the "Credit Facility").
In September 2021, we amended the Credit Agreement whereby we borrowed an additional $85.0 million, which increased the aggregate amount outstanding under the Term Loan Facility to $400.0 million. In addition, we increased the Revolving Facility capacity by $50.0 million to $200.0 million. Both the Term Loan Facility and Revolving Facility mature on September 9, 2026.
The following table summarizes borrowings under our Credit Facility and the associated interest rate.


March 31, 2022

September 30, 2022

Balance

Interest Rate

Unused Line Fee

Balance

Interest Rate

Unused Line Fee
Term Loan Facility subject to a fixed interest rate

$
251,344

1.271%

—

$
242,594

1.271%

—
Term Loan Facility subject to a variable interest rate

138,656

1.207%

—

137,406

3.865%

—
Revolving Facility subject to a variable interest rate

—

1.207%

0.10%

—

3.865%

0.10%
Total borrowings under the Credit Agreement

$
390,000

$
380,000

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 a reserve adjusted "Eurodollar Rate" or "Base Rate," as defined in the Credit Agreement, plus an applicable margin.
For all periods presented, we were in compliance with the Credit Agreement covenants. The following table summarizes our availability to withdraw on the Revolving Facility.

March 31,

December 31,

September 30,

December 31,


2022

2021

2022

2021
Available capacity on Revolving Facility

$
200,000

$
200,000

$
200,000

$
200,000

~~The fair value~~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 ~~approximates the outstanding balance of $390.0~~or Revolving Facility by an aggregate amount not to exceed $250.0 million ~~as of March 31, 2022.~~at identical terms to our existing Credit Facility.

2223

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(In thousands, except per share data)

The fair value of the Term Loan Facility approximates the outstanding balance of $380.0 million as of September 30, 2022.
The debt obligation on our Consolidated Balance Sheets consists of the following:

March 31,

December 31,

September 30,

December 31,


2022

2021

2022

2021
Term Loan Facility

$
390,000

$
395,000

$
380,000

$
395,000
Less: debt issuance costs

(2,132)

(2,267)
Less: debt discount

(1,868)

(2,267)
Total debt

387,868

392,733

378,132

392,733
Less current portion of long-term debt

(20,000)

(20,000)

(20,000)

(20,000)
Total long-term debt

$
367,868

$
372,733

$
358,132

$
372,733

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

Year Ending December 31,




2022 (remaining)

$
15,000

$
5,000
2023

20,000

20,000
2024

20,000

20,000
2025

20,000

20,000
2026

315,000

315,000
Total

$
390,000

$
380,000

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

Three Months Ended March 31,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Interest expense

$
1,123

$
985

$
1,842

$
1,009

$
4,303

$
2,973

Amortization of debt issuance costs

135

126

136

420

413

669

Unused line of credit fees and other

54

37

51

41

152

116

Total interest expense

$
1,312

$
1,148

$
2,029

$
1,470

$
4,868

$
3,758

~~NOTE 19.    SUBSEQUENT EVENT~~
On April 1, 2022, we entered into a definitive agreement to acquire 100% of the issued and outstanding shares of capital stock of SL Power Electronics Corporation, a Delaware corporation, for a purchase price of $144.5 million in cash. This amount is subject to customary adjustments for net working capital and other items. This transaction closed on April 25, 2022.

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Table of Contents

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, 2021, which was filed with the SEC on March 16, 2022.
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," "enables," "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:
● ~~global~~macroeconomic risks, including ~~geopolitical instability, actions of governments,~~supply chain cost increases and other inflationary pressures, recession, changes in financial markets, economic volatility ~~terrorism, disease outbreaks, or~~and cyclicality, higher interest rates, labor shortages, foreign currency fluctuations, orand pricing controls;
● political and geographical risks, including trade and export controls, war, terrorism, international disputes and geopolitical tensions, natural disasters, public health issues, and industrial accidents;
● sufficiency and availability of components and materials;
● our ~~future sales;~~
● ~~managing~~level of and ability to manage backlog orders;
● our ability to develop new products expeditiously and be successful in the design win process with our customers;
● the ability to stay on the leading edge of innovation and obtain and defend necessary intellectual property protections;
● our future ~~gross profit;~~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 ~~materials;~~capital resources;
● ~~sufficiency and availability of capital resources;~~ability to obtain equity or debt financing on favorable terms;
● capital expenditures;
● our production and ~~factory~~operations strategy;

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●

our share repurchase program;

●

our tax assets and liabilities;

●

our other commitments and contingent liabilities;

●

adequacy of our reserve for excess and obsolete inventory;

●

adequacy of our warranty reserves;

~~Table of Contents~~

●

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

●

our estimates of the fair value of assets acquired;

●

restructuring activities and expenses;

●

~~the impact of changes in interest rates or inflation;~~

●

unanticipated costs in fulfilling our warranty obligations for solar inverters;

●

the integration of our acquisitions;

●

~~general global political and economic conditions;~~

●

industry trends;

●

our acquisition, divestiture, and joint venture activities; and

●

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

●

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

For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and, in Part I, Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2021. We undertake no obligation to revise or update any forward-looking statements for any reason.

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.
Our plasma power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip and ~~deposition,~~deposition. Our broad portfolios of high and low voltage power products are used in a wide range of applications, such as semiconductor ~~process control,~~equipment, industrial production, medical and life science equipment, data center ~~computing, networking, telecommunication, medical equipment, life science applications, industrial technology~~ and ~~production, scientific instruments, clean technology production, advanced material production and temperature-critical thermal applications.~~telecommunication. We also supply related sensing, controls, and instrumentation products for advanced measurement and calibration of radio frequency ~~(“RF”~~("RF") power and temperature, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, refurbishments, and used equipment to companies using our products.
~~Our~~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, and we~~markets. We provide market revenue data to enable tracking of trends.

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In April 2022, we acquired SL Power Electronics Corporation ("SL Power"). See Note 2. Acquisitions in Part I, Item 1 "Unaudited Consolidated Financial Statements." This acquisition added complementary products to Advanced ~~Energy is organized on a global, functional basis~~Energy’s medical power offerings and ~~operates~~extends our presence in ~~a single segment structure for power electronics conversion products.~~several advanced industrial markets.

At the beginning of 2020 we saw the spread of COVID-19, which grew into a global pandemic. Our focus on providing a healthy and safe working environment for our employees led to intermittent shutdowns of our manufacturing facilities to implement new health and safety protocols and additional investments to comply with government guidelines. Since 2020, there have been periods when some of our manufacturing facilities were not operating or were

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operating at reduced capacity due to government mandates to restrict travel, maintain social distancing, and implement health and safety procedures. Additionally, during ~~the first quarter of~~ 2022, ~~there were ongoing~~ restrictions related to COVID-19, particularly in China, and disruptions in an already challenged global supply chain that disrupted our workforce and limited the availability of certain materials, parts, subcomponents, and subassemblies needed for production, ~~which~~have impacted our ability to ~~ship~~fulfill product shipments to meet customer demand and contributed to increased backlog. The shortage of critical components was caused by a variety of factors including the pandemic-driven rise in consumer demand for technology goods, increased demand for electronic components used in a wide variety of industries, logistics-related disruptions in shipping, and capacity limitations at some suppliers due to COVID-19 and its variants, labor shortages, and other factors. We expect the challenges associated with this environment to continue for the remainder of 2022.

Although COVID-19 has impacted our revenues and manufacturing efficiency for ~~the last two~~almost three years, COVID-19 has not materially impacted our liquidity, our ability to access capital, our ability to comply with our debt covenants or the fair value of our assets. Additionally, we believe the accommodations we have made to our work environment, including employees utilizing work-from-home arrangements where necessary, will not impact our ability to maintain effective internal controls over financial reporting.

~~Looking forward, we expect that for the remainder~~The shortage of ~~2022 customer demand will remain strong across our served markets; however, our ability to procure~~ critical components was caused by a variety of factors including increased demand for electronic components used in a wide variety of industries, the pandemic-driven rise in consumer demand for technology goods, logistics-related disruptions in shipping, and capacity limitations at some suppliers due to ~~meet our customers’ needs will continue to be limited by the ongoing constraints in the global supply chain.~~COVID-19 and its variants, labor shortages, and other factors. These supply constraints have led to longer lead times in procuring materials and subcomponents and, in some cases, higher costs and inventory level requirements. We have implemented measures to improve supply of critical materials and components and to mitigate the impact of these higher input costs, and ~~believe that our higher levels of inventory are well matched~~these actions have enabled us to better meet ~~our~~ customer demand. However, it is not clear how long ~~this~~ supply ~~chain condition~~constraint conditions will continue, how quickly it may recover, or the extent to which our mitigating actions will be ~~able~~successful, or to ~~compensate for~~what extent we can recover our higher costs.

Looking forward, we expect that for the remainder of 2022 customer demand will remain strong across many of our served markets; however, our ability to procure critical components to meet our customers’ needs will continue to be limited by the ongoing constraints in the global supply chain. In addition, recent increases in global inflation, interest rates, financial market volatility, geopolitical tensions, additional export controls, and other factors impacting macroeconomic growth may impact future demand and our cost base. Most recently, in October of 2022, additional restrictions were announced by the US Commerce Department related to the export of semiconductor equipment for advanced computing chips that may have a negative impact on our semiconductor demand, backlog, and revenues. As such, our forward-looking projections of revenues, earnings, and cash flow may be adversely impacted if ~~the situation continues~~any of these situations continue or further deteriorates.

~~For additional discussion on the potential impacts~~Table of ~~COVID-19 to the future operations of our business, please see the information under the caption "Risk Factors" in Part II, in Item 1A of this Quarterly Report on Form 10-Q and~~ Contents~~Part I, Item 1A in~~ ~~our Annual Report on Form 10-K for the year ended December 31, 2021~~.

Semiconductor Equipment Market

Growth in the Semiconductor Equipment market is driven by growing integrated circuits content across many industries ~~increased demand for~~such as processing and storage in advanced applications ~~such as~~including artificial intelligence, edge and cloud computing, autonomous and ~~autonomous~~electric vehicles, and the rapid adoption of advanced mobile connectivity solutions such as 5G which enhances existing and enables new wireless applications. To address the long-term growing demand for semiconductor devices, the industry continues to invest in production capacities for both leading-edge and trailing-edge nodes, logic devices, the latest memory devices, ~~including 3D-NAND, DRAM, and new emerging memories such as MRAM, and~~ back-end test, and advanced wafer-level packaging. The industry’s transition to advanced technology nodes in logic and DRAM and to increased layers in 3D NAND memory devices require an increased number of plasma-based etch and deposition process tools and higher content of our advanced power solutions per tool. As etching and deposition processes become more challenging due to increasing aspect ratios in advanced 3D devices, more advanced ~~RF,~~radio frequency ("RF") and direct current ("DC") plasma generation technologies are needed. We strive to meet these challenges by providing a broader range of more complex RF and DC power solutions. Beyond etch and deposition processes, the growing complexity at the advanced nodes also drive a higher number of other processes across the wafer fab, including inspection, metrology, thermal, ion implantation, and semiconductor test 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 useable 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 including with new design and product generations, grow our market position in applications where we have lower share, ~~including~~such as remote plasma source and dielectric etch, and leverage our product portfolio in areas such as embedded power, high voltage power ~~system,~~systems, and critical sensing and controls to grow our share and contents at our key ~~Original Equipment Manufacturer (“OEM”~~original equipment manufacturer ("OEM") customers.

The Semiconductor Equipment market ~~has experienced continued~~continues to experience demand growth ~~since 2019, which has been~~ driven by higher semiconductor contents across many industries, increased capital intensity at the leading-edge process

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nodes, semiconductor device makers investing in the trailing-edge nodes due to supply constraints and increased regional investments of semiconductor capacities. Advanced Energy participated in this market growth by delivering record revenue from the Semiconductor Equipment market in 2021 and in the first ~~quarter~~nine months of 2022, even with the negative impact of the global supply constraints. ~~Throughout~~While demand continued to be strong through the ~~remainder~~third quarter of 2022, ~~we expect increased~~overcapacity in the memory market, changing macroeconomic conditions, and new export restrictions to China for certain semiconductor equipment may negatively impact our demand, ~~as chipmakers invest~~backlog, and revenue levels. Long-term drivers for demand growth in this market include investment in new fab capacities driven by growing demand for semiconductor devices for a wide range of applications, the continued transition to next generation processing nodes, and ~~the need to resolve supply constraints in the industry. As a result,~~increased complexity of advanced process requiring more complex and innovative power solutions. Overall, we expect to continue to invest in both increasing our capacity and capability to meet the expected long-term market demand for our products.

Industrial and Medical Markets

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

OEM customers design equipment utilizing our process power technologies in a variety of industrial production applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, and similar thin film manufacturing, including data storage and decorative, hard and optical coatings. These applications employ similar technologies to those used in the Semiconductor Equipment market to deposit films on non-semiconductor substrates. Our strategy around these applications is to leverage our thin film deposition technologies into an expanded set of new materials and applications in adjacent markets.diode applications.

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. Our customers in this market are primarily global and regional original equipment and device manufacturers. These OEM customers incorporate our products and solutions into their equipment. Examples of products sold into the Industrial and Medical market include high voltage ~~products~~ and low voltage power supplies used in applications ~~for~~such as medical devices, analytical instruments, test and measurement, medical lasers, scientific instrumentation and industrial equipment, ~~and~~ power control modules and thermal instrumentation products for material fabrication, ~~processing,~~production process controls, and ~~treatment.~~ many precision industrial sensing applications.

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Growth in the Industrial and Medical market is ~~being~~ driven by ~~the overall macro-economic~~ growth investments 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 investments in medical devices and life science equipment. 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, such as medical, test and measurement, ~~horticulture,~~indoor farming, and many other ~~industrial~~ applications.

During 2021 and the first ~~quarter~~nine months of 2022, we saw ~~improvement~~increased demand in the Industrial and Medical market as ~~global economic growth resumed and~~ our customers ~~were able to increase capacity.~~increased investments in their production capacity and the medical technology industry recovered from the pandemic-related slowdown. In the first ~~three~~nine months of 2022, overall customer demand increased compared to the same period in the prior year, but supply constraints of critical components limited our ability to ~~ship~~fulfill product shipments at the level of customer demand. We expect ~~demand in the Industrial~~product delivery and ~~Medical market to~~revenue levels will continue to ~~grow in the remainder of 2022, but product delivery will~~ be primarily dependent on resolving ~~our~~ supply ~~constraint condition.~~constraints. It is not clear how long these supply ~~shortages~~constraints will persist or on what timelines our supply may recover.
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~~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. In addition, the data center industry ~~has~~ started to transition to 48 Volt infrastructure, where 48 Volt DC power replaces 12 Volt in server racks ~~in order~~ to improve overall power efficiency. Advanced Energy benefits from these trends by leading the industry in providing high-efficiency 48 Volt server power solutions to the data center industry. Further, demand for edge computing is growing, driven by the need for faster processing, lower latency, higher data security, and more reliability than traditional cloud computing. Due to its wide range of many unique configurations and requirements, edge computing

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creates additional opportunities for Advanced Energy. Lastly, the rapid growth and adoption of artificial intelligence and machine learning are driving accelerated demand for server and storage racks with increased power density and higher efficiency, which ~~compliments~~complements Advanced Energy’s strengths. With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, we believe Advanced Energy is well positioned to continue to capitalize on the ongoing shift towards cloud computing. Our strategy in the Data Center and Computing market is to penetrate selected additional customers and profitable applications based on our differentiated capability and competitive strengths in power density, efficiency, and controls.

Customer demand for our products ~~has risen~~rose during the past two years as COVID-19 accelerated demand for cloud and network applications. However, our 2021 revenue declined year over year due to the limited availability of parts given global supply constraints, which prevented us from producing products to meet the growing customer demand. Revenue in this market in the first ~~quarter~~nine months of 2022 increased compared to the same period in the prior year as ~~our~~ demand grew ~~but~~and we were able to secure additional critical components. However, the supply ~~constraint condition has extended into~~of the ~~year,~~critical components remains highly constrained, impacting our ability to ~~ship to~~fulfill product shipments at the level of customer demand. It is not clear how long these supply ~~shortages~~constraints will persist or how quickly our supply may recover.

With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, we believe Advanced Energy is well positioned to continue to capitalize on the ongoing shift towards cloud and edge computing from enterprise on-premises computing. Our strategy in the Data Center Computing market is to penetrate additional customers and applications based on our differentiated capability and competitive strengths in power density, efficiency, and controls.

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 ~~have started to invest~~are investing in 5G infrastructure, and this trend is expected to drive demand of our products into the Telecom and Networking market. In datacom, demand is driven by networking investments by telecom service providers and enterprises upgrading their 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.

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During 2021, revenue declined on an annual basis as a result of the limited availability of parts given global supply constraints and our internal decision to optimize our portfolio toward higher margin and value-added applications for the Telecom and Networking market. Revenue ~~has~~ increased in the first ~~quarter~~nine months of 2022 compared to the same period in the prior year due to increased customer ~~demand.~~demand and our ability to secure additional critical components. For the remainder of 2022, we expect demand to remain strong in this market ~~to continue to recover,~~ driven by ~~increased~~ investments in 5G infrastructure in the U.S. and Europe and new design wins but the supply constraint condition continues to negatively impact our ability to ~~ship~~fulfill product shipments at the level of customer demand. It is not clear how long these supply shortages will persist or how quickly our supply may recover. In addition, deteriorating macroeconomic conditions including higher interest rates and potential recession may impact our demand levels in 2023.

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.

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


	Three Months Ended March 31,				Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021		2022		2021
Sales	$	397,459	$	351,620	$	516,274	$	346,093	$	1,354,682	$	1,059,024
Gross profit		144,316		137,503		191,218		120,039		497,692		392,575
Operating expenses		99,659		93,321		113,646		95,830		322,698		283,104
Operating income from continuing operations		44,657		44,182		77,572		24,209		174,994		109,471
Other income (expense), net		(842)		(507)		8,940		495		11,347		(3,674)
Income from continuing operations before income taxes		43,815		43,675		86,512		24,704		186,341		105,797
Provision for income taxes		6,953		5,284		11,639		3,657		29,795		10,817
Income from continuing operations, net of income taxes	$	36,862	$	38,391
Income from continuing operations					$	74,873	$	21,047	$	156,546	$	94,980


	Three Months Ended March 31,						Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021			2022			2021
Sales		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%
Gross profit		36.3			39.1			37.0			34.7			36.7			37.1
Operating expenses		25.1			26.5			22.0			27.7			23.8			26.7
Operating income from continuing operations		11.2			12.6			15.0			7.0			12.9			10.3
Other income (expense), net		(0.2)			(0.1)			1.7			0.1			0.8			(0.3)
Income from continuing operations before income taxes		11.0			12.4			16.8			7.1			13.8			10.0
Provision for income taxes		1.7			1.5			2.3			1.1			2.2			1.0
Income from continuing operations, net of income taxes		9.3	%		10.9	%
Income from continuing operations								14.5	%		6.1	%		11.6	%		9.0	%

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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 2022 v. 2021				Three Months Ended September 30,				Change 2022 v. 2021
	2022		2021		Dollar		Percent		2022		2021		Dollar		Percent
Semiconductor Equipment	$	202,957	$	180,716	$	22,241	12.3	%	$	266,600	$	173,441	$	93,159	53.7	%
Industrial and Medical		82,898		78,415		4,483	5.7			119,587		80,800		38,787	48.0
Data Center Computing		76,238		59,154		17,084	28.9			87,542		62,231		25,311	40.7
Telecom and Networking		35,366		33,335		2,031	6.1			42,545		29,621		12,924	43.6
Total	$	397,459	$	351,620	$	45,839	13.0	%	$	516,274	$	346,093	$	170,181	49.2	%


	Three Months Ended March 31,						Nine Months Ended September 30,				Change 2022 v. 2021
	2022			2021			2022		2021		Dollar		Percent
Semiconductor Equipment		51.1	%		51.4	%	$	698,354	$	530,828	$	167,526	31.6	%
Industrial and Medical		20.9			22.3			307,436		242,412		65,024	26.8
Data Center Computing		19.2			16.8			232,941		190,843		42,098	22.1
Telecom and Networking		8.9			9.5			115,951		94,941		21,010	22.1
Total		100.0	%		100.0	%	$	1,354,682	$	1,059,024	$	295,658	27.9	%

Three Months Ended September 30,

Nine Months Ended September 30,

2022

2021

2022

2021

Semiconductor Equipment

51.6
%

50.1
%


51.6
%

50.1
%
Industrial and Medical

23.2

23.3

22.7

22.9

Data Center Computing

17.0

18.0

17.2

18.0

Telecom and Networking

8.2

8.6

8.5

9.0

Total

100.0
%

100.0
%


100.0
%

100.0
%
29

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OPERATING EXPENSES

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


	Three Months Ended March 31,								Three Months Ended September 30,
	2022				2021				2022				2021
Research and development	$	43,614	11.0	%	$	40,168	11.4	%	$	49,760	9.6	%	$	40,578	11.7	%
Selling, general, and administrative		49,318	12.4			46,731	13.3			56,716	11.0			48,373	14.0
Amortization of intangible assets		5,509	1.4			5,384	1.5			7,049	1.4			5,607	1.6
Restructuring charges		1,218	0.3			1,038	0.3			121	—			1,272	0.4
Total operating expenses	$	99,659	25.1	%	$	93,321	26.5	%	$	113,646	22.0	%	$	95,830	27.7	%

									Nine Months Ended September 30,
									2022				2021
Research and development									$	141,383	10.4	%	$	120,865	11.4	%
Selling, general, and administrative										161,056	11.9			143,214	13.5
Amortization of intangible assets										19,081	1.4			16,504	1.6
Restructuring charges										1,178	0.1			2,521	0.2
Total operating expenses									$	322,698	23.8	%	$	283,104	26.7	%

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SALES AND BACKLOG

Total Sales

Sales increased ~~$45.8~~$170.2 million, or ~~13.0%~~49.2%, to ~~$397.5~~$516.3 million for the three months ended ~~March 31,~~September 30, 2022 and $295.7 million, or 27.9%, to $1,354.7 million for the nine months ended September 30, 2022 as compared to ~~$351.6 million during~~ the same ~~period~~periods in the prior year.

The increase in sales was primarily due to increased demand for our products across all our markets and ~~shipments~~ measures we took to improve material availability and capacity, which allowed us to better meet the higher demand. During the three and nine months ended September 30, 2022, the acquisition of SL Power contributed $16.7 million and $29.6 million, respectively, to our total sales. For additional information, see Note 2. Acquisitions in ~~the Semiconductor Equipment and Data Center Computing markets. Sales in the Industrial and Medical and Telecom and Networking markets also increased.~~ Part I, Item 1 "Unaudited Consolidated Financial Statements."

Revenues in the first ~~quarter~~nine months of 2022 continued to be ~~constrained~~impacted relative to demand across ~~all of~~ our markets by supply ~~chain shortages~~constraints for certain integrated circuits and other components, which limited our ability to ~~ship~~fulfill product shipments to meet our total demand. As a result, we saw an increase in backlog, ~~increased to $1.0 billion from $927.8 million~~as indicated in the ~~fourth quarter of 2021 and from $405.7 million in the first quarter of 2021.~~table below.

Sales in the Semiconductor Equipment market increased $22.2 million, or 12.3%, to $203.0 million for the three months ended March 31, 2022, as compared to $180.7 million during the same period in the prior year. The increase in sales during 2022 is primarily due to an overall increase in demand in the semiconductor equipment market, increasing power content in semiconductor manufacturing tools, market share gains in selected areas, and expansion of our product portfolio, along with improving parts availability.
Sales in the Industrial and Medical market increased $4.5 million, or 5.7%, to $82.9 million for the three months ended March 31, 2022, as compared to $78.4 million during the same period in the prior year. Our customers in this market are primarily global and regional original equipment and device manufacturers. The increase in sales relative to the same period in the prior year was primarily due to improving macroeconomic conditions and the continued recovery from the COVID-19 pandemic driving stronger demand.
Sales in the Data Center Computing market increased $17.1 million, or 28.9%, to $76.2 million for the three months ended March 31, 2022, as compared to $59.2 million during the same period in the prior year. The increase in Data Center Computing market sales is due in part to digestion of equipment at key accounts in early 2021 and better supply availability, which enabled us to partially ship against more normalized customer demand.
Sales in the Telecom and Networking market increased $2.0 million, or 6.1%, to $35.4 million for the three months ended March 31, as compared to $33.3 million during the same period in the prior year. The increase in sales was due to in part to our decision to optimize our product portfolio towards higher margin applications and production limitations due to supply constraints, which impacted our revenue in the first quarter of 2021. Over time, we expect that 5G infrastructure investments and upgrades to enterprise networks will drive growth in this market.

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Backlog

The following table summarizes our backlog (in thousands):


March 31,

December 31,

Change


September 30,

December 31,

September 30,

Change from
Year End

Change from
Same Period
One Year Ago


2022

2021

Dollar

Percent


2022

2021

2021

Dollar

Percent


Dollar

Percent

Backlog

$
1,012,432

$
927,810

$
84,622

9.1
%

$
1,093,026

$
927,810

$
771,433

$
165,216

17.8
%

$
321,593

41.7
%

~~Our~~Backlog represents outstanding orders for products we expect to deliver within the next 12 months. Backlog increased from the end of last year and the same period one year ago due to the global supply constraint environment, resulting in customers placing larger orders than historical levels in anticipation of longer-term demand and our lead time extending. We believe these higher backlog levels provide some level of revenue protection if demand levels are reduced due to macroeconomic factors.
Backlog at any particular date is not necessarily indicative of actual sales which may be generated for any succeeding period. In addition, there is uncertainty of the timing of when backlog can convert into revenue due to supply constraints. Because our customers generally order on a purchase order basis, they can typically cancel, change, or delay product purchase commitments with little or no notice.
Sales by Market
Sales in the Semiconductor Equipment market increased $93.2 million, or 53.7%, to $266.6 million for the three months ended September 30, 2022 and $167.5 million, or 31.6%, to $698.4 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in sales during 2022 is primarily due to growth in the Semiconductor Equipment market, improving parts availability, increases in factory output, market share gains in selected areas, and expansion of our product portfolio.
Sales in the Industrial and Medical market increased $38.8 million, or 48.0%, to $119.6 million for the three months ended September 30, 2022 and $65.0 million, or 26.8%, to $307.4 million for the nine months ended September 30, 2022, as compared to the same periods in the prior year. The increase in sales relative to the same period in the prior year is primarily due to increased demand for our products, improving material availability, market share gains in selected areas, and the incremental sales from our acquisition of SL Power.
Sales in the Data Center Computing market increased $25.3 million, or 40.7%, to $87.5 million for the three months ended September 30, 2022 and increased $42.1 million, or 22.1%, to $232.9 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in Data Center Computing market

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sales during the nine months ended September 30, 2022 is due in part to the early 2021 digestion of equipment at key accounts and better supply availability, which enabled us to partially fulfill product shipments against higher customer demand.

Sales in the Telecom and Networking market increased $12.9 million, or 43.6%, to $42.5 million for the three months ended September 30, 2022 and $21.0 million, or 22.1%, to $116.0 million for the nine months ended September 30, 2022 as compared to the same periods in the prior year. The increase in sales was primarily due to increased demand in the Telecom and Networking market and improved material availability.
GROSS PROFIT
For the three months ended ~~March 31,~~September 30, 2022, gross profit increased ~~$6.8~~$71.2 million to ~~$144.3~~$191.2 million, or ~~36.3%~~37.0% of revenue, as compared to ~~$137.5~~$120.0 million, or ~~39.1%~~34.7% of revenue, in the same period in the prior year. For the nine months ended September 30, 2022, gross profit increased $105.1 million to $497.7 million, or 36.7% of revenue, as compared to $392.6 million, or 37.1% of revenue, in the same period in the prior year.
The increase in gross profit as a percent of revenue for the three months ended September 30, 2022 is largely due to operational leverage on sales growth.The decrease in gross profit as a percent of revenue for the nine months ended September 30, 2022 is largely related to higher material and freight ~~costs. Additional drivers of our decrease in gross profit include~~costs, productivity inefficiencies, ~~resulting from~~and other supply ~~constraints, COVID-19 capacity restrictions, and the transition of our Shenzhen, Peoples Republic of China ("PRC") manufacturing to Penang, Malaysia.~~chain related costs. These factors ~~were partly offset by increased volume and favorable product mix.~~began to affect Advanced Energy primarily in the second quarter of 2021.
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.
Research and development expenses increased ~~$3.4~~$9.2 million to ~~$43.6~~$49.8 million for the three months ended ~~March 31,~~September 30, 2022 and increased $20.5 million to $141.4 million for the nine months ended September 30, 2022 as compared to ~~$40.2 million during~~ the same ~~period~~periods in the prior year. The increase in research and development expense is related to the acquisitions of SL Power and TEGAM, increased headcount and associated costs, outside technical services, ~~and~~ engineering materials and higher variable compensation related costs, as we ~~invested~~invest in new programs 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, and human resource functions in addition to our general management, including acquisition-related activities.
Selling, general and administrative ("SG&A") expenses increased ~~$2.6~~$8.3 million to ~~$49.3~~$56.7 million for the three months ended ~~March 31,~~September 30, 2022 and increased $17.8 million to $161.1 million for the nine months ended September 30, 2022 as compared to ~~$46.7 million in~~ the same ~~period~~periods in the prior year. The increase in SG&A ~~for the three-month period ended March 31, 2022,~~ is principally related to acquisition related ~~activity,~~activities, sales commissions driven by higher revenue, an increase in headcount, and an increase in variable compensation.

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Amortization of Intangibles

Amortization expense increased ~~$0.1~~$1.4 million to ~~$5.5~~$7.0 million during the three months ended ~~March 31,~~September 30, 2022 and increased $2.6 million to $19.1 million for the nine months ended September 30, 2022, as compared to ~~$5.4 million during~~ the same ~~period~~periods in the prior year. The increase is primarily driven by incremental amortization of newly acquired intangible assets. For additional information, see Note 2. Acquisitions and Note 12. Intangible Assets in Part I, Item 1 "Unaudited Consolidated Financial Statements."

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Restructuring

Restructuring charges relate to previously announced management plans to optimize our manufacturing footprint to lower cost regions, improvements in operating efficiencies, and synergies related to acquisitions. For additional information, see Note 13. Restructuring Costs in Part I, Item 1 "Unaudited Consolidated Financial Statements."

OTHER INCOME (EXPENSE), NET
Other income (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.
~~For~~Other income (expense), net increased $8.4 million to $8.9 million for the three months ended ~~March 31,~~September 30, 2022 ~~other income (expense), net~~and increased ~~($0.3)~~$15.0 million to ~~($0.8)~~$11.3 million for the nine months ended September 30, 2022 as compared to ~~other income (expense), net of ($0.5) million for~~ the same ~~period~~periods in the prior year. The increase in ~~expense~~income between periods is primarily a result of higher unrealized foreign exchange gains due to ~~increased~~the strengthening US dollar compared to our other foreign currencies and a one-time gain on the sale of intellectual property from a previous acquisition. This was partially offset by higher interest expense ~~related to our term note because of higher borrowing levels following the extension of our debt agreement last year and higher~~on increasing interest rates. ~~For additional details see~~ ~~Note 18. Credit Facility~~ ~~in Part I, Item 1 "Unaudited Consolidated Financial Statements."~~
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,

Three Months Ended September 30,

Nine Months Ended September 30,


2022

2021


2022

2021

2022

2021

Income from continuing operations, before income taxes

$
43,815

$
43,675

$
86,512

$
24,704

$
186,341

$
105,797

Provision for income taxes

$
6,953

$
5,284

$
11,639

$
3,657

$
29,795

$
10,817

Effective tax rate

15.9
%

12.1
%

13.5
%

14.8
%

16.0
%

10.2
%

Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three and nine months ended ~~March 31,~~September 30, 2022 and 2021, 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 ~~first~~ three months ended September 30, 2022 was lower than the same period in 2021 primarily due to the cumulative year to date impact of increased earnings in 2022 and the resulting mix of earnings by geography. The effective tax rate for the nine months ended September 30, 2022 was higher than the same period in 2021 primarily due to beneficial discrete items occurring in 2021 not recurring in 2022, and by the ~~January 1,~~capitalization and amortization of research and development expenses rather than immediately expensing them starting in 2022 ~~effective date of certain provision enacted~~ as ~~part of~~required by the 2017 Tax Cuts and Jobs Act.

Under the 2017 Tax Cuts and Jobs Act enacted in December 2017, research and development expenses incurred for tax years beginning after December 31, 2021 must be capitalized and amortized ratably over five or fifteen years for tax purposes. Although Congress is considering legislation that would defer the capitalization and amortization requirement, there is no assurance that the provision will be repealed or otherwise modified. If the requirement is not modified, it may materially increase future cash taxes beginning in 2023.

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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, amortization of intangible assets, and non-economic foreign exchange ~~gains/~~gains and losses. 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 and effect of adoption of the 2017 Tax Cuts and Jobs Act.

Reconciliation of non-GAAP measure - operating expenses and operating income from

Three Months Ended March 31,

continuing operations, excluding certain items (in thousands)

2022

2021

Gross profit from continuing operations, as reported

$
144,316

$
137,503

Adjustments to gross profit:





Stock-based compensation

231

350

Facility expansion, relocation costs and other

1,284

1,838

Acquisition-related costs

(502)

8

Non-GAAP gross profit

145,329

139,699

Non-GAAP gross margin

36.6%

39.7%

Operating expenses from continuing operations, as reported

99,659

93,321

Adjustments:





Amortization of intangible assets

(5,509)

(5,384)

Stock-based compensation

(3,697)

(5,351)

Acquisition-related costs

(1,668)

(2,028)

Facility expansion, relocation costs and other

—

(51)

Restructuring charges

(1,218)

(1,038)

Non-GAAP operating expenses

87,567

79,469

Non-GAAP operating income

$
57,762

$
60,230

Non-GAAP operating margin

14.5%

17.1%

Reconciliation of non-GAAP measure - income from continuing operations,

Three Months Ended March 31,
excluding certain items (in thousands, except per share amounts)

2022

2021
Income from continuing operations, less non-controlling interest, net of income taxes

$
36,876

$
38,358
Adjustments:




Amortization of intangible assets

5,509

5,384
Acquisition-related costs

1,166

2,036
Facility expansion, relocation costs, and other

1,284

1,889
Restructuring charges

1,218

1,038
Unrealized foreign currency (gain) loss

(1,285)

(2,202)
Acquisition-related costs and other included in other income (expense), net

—

87
Tax effect of non-GAAP adjustments

(1,069)

(1,284)
Non-GAAP income, net of income taxes, excluding stock-based compensation

43,699

45,306
Stock-based compensation, net of taxes

3,025

4,362
Non-GAAP income, net of income taxes

$
46,724

$
49,668
Non-GAAP diluted earnings per share

$
1.24

$
1.29

Reconciliation of non-GAAP measure

Operating expenses and operating income from continuing

Three Months Ended September 30,

Nine Months Ended September 30,

operations, excluding certain items (in thousands)

2022

2021

2022

2021

Gross profit from continuing operations, as reported

$
191,218

$
120,039

$
497,692

$
392,575

Adjustments to gross profit:









Stock-based compensation

454

218

1,087

783

Facility expansion, relocation costs and other

1,662

1,357

4,133

5,192

Acquisition-related costs

66

3,259

(372)

3,351

Non-GAAP gross profit

193,400

124,873

502,540

401,901

Non-GAAP gross margin

37.5%

36.1%

37.1%

38.0%

Operating expenses from continuing operations, as reported

113,646

95,830

322,698

283,104

Adjustments:









Amortization of intangible assets

(7,049)

(5,607)

(19,081)

(16,504)

Stock-based compensation

(5,568)

(3,456)

(13,921)

(12,036)

Acquisition-related costs

(1,150)

(1,768)

(6,977)

(6,124)

Facility expansion, relocation costs and other

—

(98)

—

(212)

Restructuring charges

(121)

(1,272)

(1,178)

(2,521)

Non-GAAP operating expenses

99,758

83,629

281,541

245,707

Non-GAAP operating income

$
93,642

$
41,244

$
220,999

$
156,194

Non-GAAP operating margin

18.1%

11.9%

16.3%

14.7%

3335

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Reconciliation of non-GAAP measure

Income from continuing operations, excluding certain items

Three Months Ended September 30,

Nine Months Ended September 30,
(in thousands, except per share amounts)

2022

2021

2022

2021
Income from continuing operations, less non-controlling interest, net of income taxes

$
74,864

$
21,041

$
156,530

$
94,910
Adjustments:




Amortization of intangible assets

7,049

5,607

19,081

16,504
Acquisition-related costs

1,216

5,027

6,605

9,475
Facility expansion, relocation costs, and other

1,662

1,455

4,133

5,404
Restructuring charges

121

1,272

1,178

2,521
Unrealized foreign currency (gain) loss

(6,169)

(2,092)

(13,023)

(3,409)
Acquisition-related costs and other included in other income (expense), net

(4,685)

(79)

(4,600)

907
Tax effect of non-GAAP adjustments

855

(1,036)

(966)

(4,363)
Non-GAAP income, net of income taxes, excluding stock-based compensation

74,913

31,195

168,938

121,949
Stock-based compensation, net of taxes

4,697

2,811

11,668

9,809
Non-GAAP income, net of income taxes

$
79,610

$
34,006

$
180,606

$
131,758
Non-GAAP diluted earnings per share

$
2.12

$
0.89

$
4.79

$
3.42

Impact of Inflation
In previous years, inflation has not had a significant impact on our operations. However, more recently we are experiencing 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. ~~We continuously monitor operating price increases, particularly in connection~~In this environment, we are actively working with ~~the supply of component parts used in our manufacturing process. To the extent permitted by competition, we pass increased costs on to~~ our customers ~~by increasing sales prices over time. From time~~ to ~~time, we may also reduce prices to customers based~~adjust pricing that helps offset the inflationary pressure on ~~reductions in~~ the cost ~~structure~~ of our ~~products from cost improvement initiatives and decreases in component part prices~~.components.
Liquidity and Capital Resources
Liquidity
We believe that 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 ~~below)~~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, 2022

September 30, 2022
Cash and cash equivalents

$
521,236

$
409,053
Marketable securities

2,282

2,120
Total cash, cash equivalents, and marketable securities

$
523,518

$
411,173

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 twelve 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.

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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, 2022				September 30, 2022
	Balance		Interest Rate	Unused Line Fee	Balance		Interest Rate	Unused Line Fee
Term Loan Facility subject to a fixed interest rate	$	251,344	1.271%	—	$	242,594	1.271%	—
Term Loan Facility subject to a variable interest rate		138,656	1.207%	—		137,406	3.865%	—
Revolving Facility subject to a variable interest rate		—	1.207%	0.10%		—	3.865%	0.10%
Total borrowings under the Credit Agreement	$	390,000			$	380,000

As of ~~March 31,~~September 30, 2022, 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.

~~Table~~In addition to the available capacity on the Revolving Facility, prior to the maturity date of ~~Contents~~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 Facility.

Dividends

In March 2021, the Board of Directors (the "Board") declared the first quarterly cash dividend since our inception as a public company. During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, we paid a quarterly cash ~~dividend~~dividends of $0.10 per share totaling ~~$3.8~~$11.4 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 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,				Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2022		2021		2022		2021		2022		2021
Amount paid to repurchase shares	$	6,594	$	—
Amount paid or accrued to repurchase shares					$	2,342	$	52,555	$	25,955	$	59,058
Number of shares repurchased		82		—		34		605		346		677
Average repurchase price per share	$	80.02	$	—	$	69.39	$	86.93	$	75.07	$	87.30
Remaining authorized by Board of Directors for future repurchases as of period end	$	121,783	$	38,369

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Cash Flows

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


	Three Months Ended March 31,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net cash from operating activities from continuing operations	$	9,913	$	54,264	$	112,982	$	106,410
Net cash from operating activities from discontinued operations		(92)		(185)		(81)		(523)
Net cash from operating activities		9,821		54,079		112,901		105,887
Net cash from investing activities from continuing operations		(13,675)		(12,415)		(185,286)		(39,121)
Net cash from financing activities from continuing operations		(17,813)		(12,443)		(53,773)		3,554
Effect of currency translation on cash and cash equivalents		(1,469)		321		(9,161)		(2,765)
Net change in cash and cash equivalents		(23,136)		29,542		(135,319)		67,555
Cash and cash equivalents, beginning of period		544,372		480,368		544,372		480,368
Cash and cash equivalents, end of period	$	521,236	$	509,910	$	409,053	$	547,923

Net Cash From Operating Activities

Net cash from operating activities from continuing operations for the ~~three~~nine months ended ~~March 31,~~September 30, 2022, was ~~$9.9~~$113.0 million, as compared to ~~$54.3~~$106.4 million for the same period in the prior year. The ~~decrease~~increase of ~~$44.4~~$6.6 million in net cash flows from operating activities as compared to the same period in the prior year is primarily due to an increase in net income. This was partially offset by an unfavorable increase in net operating assets driven primarily by an increase in accounts receivable due to our ~~increased investment in inventory as we attempted to mitigate supply chain constraints.~~strong revenue growth.

Net Cash From Investing Activities

Net cash from investing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 was ($~~13.7)~~185.3) million, driven by the following:

●

($~~13.1)~~145.8) million for business combinations; and

●

($39.5) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity.

Net cash from investing for the nine months ended September 30, 2021 was ($39.1) million, driven partially by the following:

●

($21.2) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and

●

($~~0.6)~~18.7) million for business combinations.

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~~Net cash from investing for the three months ended March 31, 2021 was ($12.4) million, driven by the following:~~

●

~~($8.8) million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and~~

●

~~($3.6) million for business combinations~~

Net Cash From Financing Activities

Net cash from financing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2022 was ($~~17.8)~~53.8) million and included the following:

●

($~~6.6)~~26.0) million related to repurchases of our common stock;

●

($~~5.0)~~15.0) million for repayment of long-term debt;

●

($~~3.8)~~11.4) million for dividend payments; and

●

($~~2.4)~~1.4) million in net payments related to stock-based award activities.

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Net cash from financing activities for the ~~three~~nine months ended ~~March 31,~~September 30, 2021 was ~~($12.4)~~$3.6 million and included the following:

●

$83.7 million proceeds from long-term debt;

●

($~~4.4)~~56.6) million related to repurchases of our common stock;

●

($8.8) million for repayment of long-term debt;

●

($~~4.2)~~3.1) million in net payments related to stock-based award activities; and

●

($~~3.9)~~11.6) million offor dividend payments.

Effect of Currency Translation on Cash

During the ~~three~~nine months ended ~~March 31,~~September 30, 2022, currency translation had an unfavorable impact primarily due to a stronger U.S. dollar. See "Foreign Currency Exchange Rate Risk" in Part I, Item 3 of this Form 10-Q for more information.

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. Operation and Summary of Significant Accounting Policies and Estimates to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021, 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, 2021, include:
● estimates for the valuation of assets and liabilities acquired in business combinations;
● accounting for income taxes;
● inputs to actuarial models that measure our pension obligations; and
● assessing excess and obsolete inventories.

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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 exposures to interest rate risk from our investments and credit ~~facility, and~~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, Item 1A of this Form 10-Q 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, 2021.

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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.

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.

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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, 2022				September 30, 2022
	Balance		Interest Rate	Unused Line Fee	Balance		Interest Rate	Unused Line Fee
Term Loan Facility subject to a fixed interest rate	$	251,344	1.271%	—	$	242,594	1.271%	—
Term Loan Facility subject to a variable interest rate		138,656	1.207%	—		137,406	3.865%	—
Revolving Facility subject to a variable interest rate		—	1.207%	0.10%		—	3.865%	0.10%
Total borrowings under the Credit Agreement	$	390,000			$	380,000

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

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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 a reserve adjusted "Eurodollar Rate" or "Base Rate," 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 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.

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, 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, ~~the~~our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of ~~March 31,~~September 30, 2022. 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.

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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in disputes and legal actions arising in the normal course of our business. ~~Since December 31, 2021, there~~Although it is not possible to predict the outcome of these matters, we believe that the results of these proceedings will not have ~~been no~~a material ~~developments in legal proceedings in which we are involved. For a description~~adverse effect on our financial condition, results of ~~previously reported legal proceedings refer to Part I, Item 3, "Legal Proceedings" of our Annual Report on Form 10-K for the year ended December 31, 2021.~~operations, or liquidity.
ITEM 1A. RISK FACTORS
~~This Quarterly Report on Form 10-Q should be read in conjunction with the~~Information concerning our risk factors ~~discussed~~is contained in Part I, Item 1A, ~~"Risk Factors"~~"Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, ~~2021, which details risks that could materially affect our business, financial condition, or future results.~~2021. 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

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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.

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. The following table summarizes these repurchases:

Month

Total
Number of
Shares
Purchased

Average
Price Paid
Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum
Dollar
Value of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs

Total
Number of
Shares
Purchased

Average
Price Paid
Per Share

Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs

Maximum
Dollar
Value of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs

(in thousands, except price per share data)

(in thousands, except price per share data)
January

82

$
80.02

82

$
121,783

82

$
80.02

82

$
121,783
February

—

$
—

—

$
121,783

—

$
—

—

$
121,783
March

—

$
—

—

$
121,783

—

$
—

—

$
121,783
First quarter

82

$
80.02

82

82

$
80.02

82

April

—

$
—

—

$
121,783
May

103

$
76.23

103

$
113,969
June

127

$
72.42

127

$
104,765
Second quarter

230

$
74.12

230

July

34

$
69.39

34

$
200,000
August

—

$
—

—

$
200,000
September

—

$
—

—

$
200,000
Third quarter

34

$
69.39

34

Total

346

$
75.07

346

$
200,000

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 ~~Company~~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

3942

Table of Contents

ITEM 4. MINE SAFETY DISCLOSURES
None
ITEM 5. OTHER INFORMATION
None

~~Table of Contents~~

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 and Restated Deferred Compensation Plan

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~~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~~101.

Filed herewith

4143

Table of Contents

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.

ADVANCED ENERGY INDUSTRIES, INC.

Dated:
~~May 4,~~November 1, 2022
/s/ Paul Oldham

Paul Oldham

Chief Financial Officer and Executive Vice President

4244


Cash paid for acquisition	$	15,430
Holdback		1,800
Total fair value of consideration transferred		17,230
Less cash acquired		(177)
Total purchase price	$	17,053


December 31, 2021	$	5,784	$	5,784
Additions		161		441
Deductions - write-offs, net of recoveries				(4,170)
Foreign currency translation		2		(30)
March 31, 2022	$	5,947
September 30, 2022			$	2,025


	Estimated Useful	March 31,		December 31,		Estimated Useful	September 30,		December 31,
	Life (in years)	2022		2021		Life (in years)	2022		2021
Buildings	25	$	1,591	$	1,625
Machinery and equipment	5 to 8		136,610		133,010
Buildings, machinery, and equipment						5 to 25	$	149,877	$	134,635
Computer equipment, furniture, fixtures, and vehicles	3 to 5		33,806		33,490	3 to 5		34,557		33,490
Leasehold improvements	2 to 10		49,838		48,370	2 to 10		61,804		48,370
Construction in process			10,788		5,914			16,787		5,914
			232,633		222,409			263,025		222,409
Less: Accumulated depreciation			(115,346)		(107,579)			(126,523)		(107,579)
Property and equipment, net		$	117,287	$	114,830		$	136,502	$	114,830


	March 31, 2022						September 30, 2022
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount
Technology	$	91,088	$	(38,391)	$	52,697	$	96,027	$	(43,146)	$	52,881
Customer relationships		118,181		(35,879)		82,302		166,018		(40,325)		125,693
Trademarks and other		27,178		(8,569)		18,609		26,864		(9,631)		17,233
Total	$	236,447	$	(82,839)	$	153,608	$	288,909	$	(93,102)	$	195,807


Year Ending December 31,
2022 (remaining)		16,461	$	7,014
2023		21,936		28,058
2024		19,105		25,072
2025		14,618		20,905
2026		12,902		19,189
Thereafter		68,586		95,569
Total	$	153,608	$	195,807


	Cumulative Cost		Cumulative Cost
	Through		Through
	March 31,		September 30,
	2022		2022
Severance and related charges	$	21,253	$	21,213
Facility relocation and closure charges		7,160		7,160
Total restructuring charges	$	28,413	$	28,373


December 31, 2021	$	9,263	$	9,263
Costs incurred and charged to expense		1,218		1,178
Costs paid or otherwise settled		(2,438)		(8,623)
Effects of changes in exchange rate		(3)		(24)
March 31, 2022	$	8,040
September 30, 2022			$	1,794


	Three Months Ended
	March 31, 2022
December 31, 2021	$	3,350	$	3,350
Additions from acquisitions				181
Increases to accruals		880		4,820
Warranty expenditures		(693)		(2,431)
Effect of changes in exchange rates		(7)		(98)
March 31, 2022	$	3,530
September 30, 2022			$	5,822


Year Ending December 31,
2022 (remaining)	$	15,589	$	5,421
2023		18,733		20,029
2024		16,247		17,518
2025		13,280		14,515
2026		11,903		13,190
Thereafter		66,528		68,353
Total lease payments		142,280		139,026
Less: Interest		(31,439)		(28,152)
Present value of lease liabilities	$	110,841	$	110,874



		~~March 31,~~September 30, 2022
Shares available for future issuance under the 2017 Omnibus Incentive Plan		~~1,629~~1,536
Shares available for future issuance under the Employee Stock Purchase Plan		~~665~~642


	Three Months Ended March 31, 2022			Nine Months Ended September 30, 2022
		Weighted-			Weighted-
		Average			Average
	Number of	Grant Date		Number of	Grant Date
	RSUs	Fair Value		RSUs	Fair Value
RSUs outstanding at beginning of period	627	$	76.37	627	$	76.37
RSUs granted	361	$	73.79	525	$	73.38
RSUs vested	(82)	$	76.55	(145)	$	84.99
RSUs forfeited	(176)	$	54.71	(248)	$	60.74
RSUs outstanding at end of period	730	$	80.31	759	$	77.77


Year Ending December 31,
2022 (remaining)	$	15,000	$	5,000
2023		20,000		20,000
2024		20,000		20,000
2025		20,000		20,000
2026		315,000		315,000
Total	$	390,000	$	380,000


	March 31,		December 31,		Change				September 30,		December 31,		September 30,		Change from Year End				Change from Same Period One Year Ago
	2022		2021		Dollar		Percent		2022		2021		2021		Dollar		Percent		Dollar		Percent
Backlog	$	1,012,432	$	927,810	$	84,622	9.1	%	$	1,093,026	$	927,810	$	771,433	$	165,216	17.8	%	$	321,593	41.7	%


Reconciliation of non-GAAP measure - operating expenses and operating income from	Three Months Ended March 31,
continuing operations, excluding certain items (in thousands)	2022		2021
Gross profit from continuing operations, as reported	$	144,316	$	137,503
Adjustments to gross profit:
Stock-based compensation		231		350
Facility expansion, relocation costs and other		1,284		1,838
Acquisition-related costs		(502)		8
Non-GAAP gross profit		145,329		139,699
Non-GAAP gross margin		36.6%		39.7%

Operating expenses from continuing operations, as reported		99,659		93,321
Adjustments:
Amortization of intangible assets		(5,509)		(5,384)
Stock-based compensation		(3,697)		(5,351)
Acquisition-related costs		(1,668)		(2,028)
Facility expansion, relocation costs and other		—		(51)
Restructuring charges		(1,218)		(1,038)
Non-GAAP operating expenses		87,567		79,469
Non-GAAP operating income	$	57,762	$	60,230
Non-GAAP operating margin		14.5%		17.1%


Reconciliation of non-GAAP measure - income from continuing operations,	Three Months Ended March 31,
excluding certain items (in thousands, except per share amounts)	2022		2021
Income from continuing operations, less non-controlling interest, net of income taxes	$	36,876	$	38,358
Adjustments:
Amortization of intangible assets		5,509		5,384
Acquisition-related costs		1,166		2,036
Facility expansion, relocation costs, and other		1,284		1,889
Restructuring charges		1,218		1,038
Unrealized foreign currency (gain) loss		(1,285)		(2,202)
Acquisition-related costs and other included in other income (expense), net		—		87
Tax effect of non-GAAP adjustments		(1,069)		(1,284)
Non-GAAP income, net of income taxes, excluding stock-based compensation		43,699		45,306
Stock-based compensation, net of taxes		3,025		4,362
Non-GAAP income, net of income taxes	$	46,724	$	49,668
Non-GAAP diluted earnings per share	$	1.24	$	1.29


Reconciliation of non-GAAP measure
Operating expenses and operating income from continuing	Three Months Ended September 30,				Nine Months Ended September 30,
operations, excluding certain items (in thousands)	2022		2021		2022		2021
Gross profit from continuing operations, as reported	$	191,218	$	120,039	$	497,692	$	392,575
Adjustments to gross profit:
Stock-based compensation		454		218		1,087		783
Facility expansion, relocation costs and other		1,662		1,357		4,133		5,192
Acquisition-related costs		66		3,259		(372)		3,351
Non-GAAP gross profit		193,400		124,873		502,540		401,901
Non-GAAP gross margin		37.5%		36.1%		37.1%		38.0%

Operating expenses from continuing operations, as reported		113,646		95,830		322,698		283,104
Adjustments:
Amortization of intangible assets		(7,049)		(5,607)		(19,081)		(16,504)
Stock-based compensation		(5,568)		(3,456)		(13,921)		(12,036)
Acquisition-related costs		(1,150)		(1,768)		(6,977)		(6,124)
Facility expansion, relocation costs and other		—		(98)		—		(212)
Restructuring charges		(121)		(1,272)		(1,178)		(2,521)
Non-GAAP operating expenses		99,758		83,629		281,541		245,707
Non-GAAP operating income	$	93,642	$	41,244	$	220,999	$	156,194
Non-GAAP operating margin		18.1%		11.9%		16.3%		14.7%


Reconciliation of non-GAAP measure
Income from continuing operations, excluding certain items	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands, except per share amounts)	2022		2021		2022		2021
Income from continuing operations, less non-controlling interest, net of income taxes	$	74,864	$	21,041	$	156,530	$	94,910
Adjustments:
Amortization of intangible assets		7,049		5,607		19,081		16,504
Acquisition-related costs		1,216		5,027		6,605		9,475
Facility expansion, relocation costs, and other		1,662		1,455		4,133		5,404
Restructuring charges		121		1,272		1,178		2,521
Unrealized foreign currency (gain) loss		(6,169)		(2,092)		(13,023)		(3,409)
Acquisition-related costs and other included in other income (expense), net		(4,685)		(79)		(4,600)		907
Tax effect of non-GAAP adjustments		855		(1,036)		(966)		(4,363)
Non-GAAP income, net of income taxes, excluding stock-based compensation		74,913		31,195		168,938		121,949
Stock-based compensation, net of taxes		4,697		2,811		11,668		9,809
Non-GAAP income, net of income taxes	$	79,610	$	34,006	$	180,606	$	131,758
Non-GAAP diluted earnings per share	$	2.12	$	0.89	$	4.79	$	3.42


Month	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs		Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs

	(in thousands, except price per share data)								(in thousands, except price per share data)
January		82	$	80.02		82	$	121,783		82	$	80.02		82	$	121,783
February		—	$	—		—	$	121,783		—	$	—		—	$	121,783
March		—	$	—		—	$	121,783		—	$	—		—	$	121,783
First quarter		82	$	80.02		82				82	$	80.02		82

April										—	$	—		—	$	121,783
May										103	$	76.23		103	$	113,969
June										127	$	72.42		127	$	104,765
Second quarter										230	$	74.12		230

July										34	$	69.39		34	$	200,000
August										—	$	—		—	$	200,000
September										—	$	—		—	$	200,000
Third quarter										34	$	69.39		34

Total										346	$	75.07		346	$	200,000


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 ~~Company~~repurchase program from its remaining authorization of $102.4 million, to repurchase up to $200.0 million with no time limitation

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

10.1	Amended and Restated Deferred Compensation Plan				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~~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~~101.				Filed herewith


		ADVANCED ENERGY INDUSTRIES, INC.

Dated:	~~May 4,~~November 1, 2022	/s/ Paul Oldham
		Paul Oldham
		Chief Financial Officer and Executive Vice President