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itureAndFixturesMember2020-06-300000927003us-gaap:ConstructionInProgressMember2020-06-300000927003aeis:ComputerAndCommunicationEquipmentMember2020-06-300000927003us-gaap:VehiclesMember2019-12-310000927003us-gaap:MachineryAndEquipmentMember2019-12-310000927003us-gaap:LeaseholdImprovementsMember2019-12-310000927003us-gaap:LandAndBuildingMember2019-12-310000927003us-gaap:FurnitureAndFixturesMember2019-12-310000927003us-gaap:ConstructionInProgressMember2019-12-310000927003aeis:ComputerAndCommunicationEquipmentMember2019-12-310000927003us-gaap:RetainedEarningsMember2020-04-012020-06-300000927003us-gaap:NoncontrollingInterestMember2020-04-012020-06-300000927003us-gaap:RetainedEarningsMember2020-01-012020-03-310000927003us-gaap:NoncontrollingInterestMember2020-01-012020-03-310000927003us-gaap:RetainedEarningsMember2019-04-012019-06-300000927003us-gaap:NoncontrollingInterestMember2019-04-012019-06-300000927003us-gaap:RetainedEarningsMember2019-01-012019-03-310000927003us-gaap:NoncontrollingInterestMember2019-01-012019-03-3100009270032020-03-3100009270032019-03-310000927003us-gaap:AccumulatedTranslationAdjustmentMember2020-04-012020-06-300000927003us-gaap:AccumulatedTranslationAdjustmentMember2020-01-012020-03-310000927003us-gaap:AccumulatedTranslationAdjustmentMember2019-04-012019-06-300000927003us-gaap:AccumulatedTranslationAdjustmentMember2019-01-012019-03-310000927003aeis:ArtesynsEmbeddedPowerBusinessMember2020-04-012020-06-300000927003us-gaap:RevolvingCreditFacilityMember2020-01-012020-06-300000927003us-gaap:RevolvingCreditFacilityMember2020-06-300000927003us-gaap:RevolvingCreditFacilityMember2019-09-300000927003aeis:UnsecuredRevolvingFacilityMember2019-09-300000927003aeis:TermLoanFacilityMember2019-09-300000927003us-gaap:RevolvingCreditFacilityMemberaeis:BankOfAmericaN.a.Member2020-06-300000927003us-gaap:FairValueInputsLevel3Memberaeis:ContingentConsiderationMemberus-gaap:FairValueMeasurementsRecurringMember2020-06-300000927003us-gaap:FairValueInputsLevel2Memberus-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2020-06-300000927003us-gaap:InterestRateSwapMemberus-gaap:FairValueMeasurementsRecurringMember2020-06-300000927003us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2020-06-300000927003aeis:ContingentConsiderationMemberus-gaap:FairValueMeasurementsRecurringMember2020-06-300000927003us-gaap:FairValueInputsLevel3Memberaeis:ContingentConsiderationMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310000927003us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsRecurringMember2019-12-310000927003aeis:ContingentConsiderationMemberus-gaap:FairValueMeasurementsRecurringMember2019-12-310000927003us-gaap:TechnologyEquipmentMember2020-06-300000927003us-gaap:CustomerRelationshipsMember2020-06-300000927003aeis:TrademarksAndOtherMember2020-06-300000927003us-gaap:TechnologyEquipmentMember2019-12-310000927003us-gaap:CustomerRelationshipsMember2019-12-310000927003aeis:TrademarksAndOtherMember2019-12-310000927003us-gaap:InterestRateSwapMember2020-06-300000927003us-gaap:InterestRateSwapMember2020-04-070000927003us-gaap:InterestRateSwapMemberus-gaap:CashFlowHedgingMemberus-gaap:DesignatedAsHedgingInstrumentMember2020-04-012020-06-300000927003us-gaap:InterestRateSwapMemberus-gaap:CashFlowHedgingMemberus-gaap:DesignatedAsHedgingInstrumentMember2020-06-300000927003srt:MinimumMemberus-gaap:InterestRateSwapMember2020-04-070000927003srt:MaximumMemberus-gaap:InterestRateSwapMember2020-04-070000927003us-gaap:RetainedEarningsMember2019-12-310000927003us-gaap:ServiceMember2020-04-012020-06-300000927003us-gaap:ProductMember2020-04-012020-06-300000927003us-gaap:ServiceMember2020-01-012020-06-300000927003us-gaap:ProductMember2020-01-012020-06-300000927003us-gaap:ServiceMember2019-04-012019-06-300000927003us-gaap:ProductMember2019-04-012019-06-300000927003us-gaap:ServiceMember2019-01-012019-06-300000927003us-gaap:ProductMember2019-01-012019-06-3000009270032019-05-012019-05-310000927003aeis:AppliedMaterialsIncMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2020-04-012020-06-300000927003aeis:AppliedMaterialsIncMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-06-300000927003aeis:AppliedMaterialsIncMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2020-01-012020-06-300000927003aeis:LamResearchMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2019-04-012019-06-300000927003aeis:AppliedMaterialsIncMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2019-04-012019-06-300000927003aeis:NidecMotorCorporationMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2019-01-012019-12-310000927003aeis:AppliedMaterialsIncMemberus-gaap:AccountsReceivableMemberus-gaap:CustomerConcentrationRiskMember2019-01-012019-12-310000927003aeis:LamResearchMemberus-gaap:SalesRevenueNetMemberus-gaap:CustomerConcentrationRiskMember2019-01-01201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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2020

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

A picture containing drawing

Description automatically generated

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, CO

80202

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (970407-6626

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" 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 August 3, 2020, there were 38,330,839 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

Page

PART I FINANCIAL INFORMATION

3

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

28

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

39

ITEM 4. CONTROLS AND PROCEDURES

40

PART II OTHER INFORMATION

41

ITEM 1. LEGAL PROCEEDINGS

41

ITEM 1A. RISK FACTORS

41

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

59

ITEM 6. EXHIBITS

60

SIGNATURES

61

2

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)

June 30, 

December 31, 

    

2020

    

2019

ASSETS

 

  

 

  

 

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

380,637

$

346,441

Marketable securities

 

2,729

 

2,614

Accounts and other receivable, net of expected credit losses of $7,477 and $7,745, respectively

 

235,613

 

246,564

Inventories

 

260,049

 

230,019

Income taxes receivable

 

4,862

 

4,245

Other current assets

45,792

36,855

Total current assets

 

929,682

 

866,738

Property and equipment, net

 

107,554

 

108,109

Operating lease right-of-use assets

107,774

105,404

Deposits and other assets

 

21,776

 

22,556

Goodwill

 

207,926

 

202,932

Intangible assets, net

 

173,644

 

184,011

Deferred income tax assets

45,894

42,656

TOTAL ASSETS

$

1,594,250

$

1,532,406

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Accounts payable

$

180,415

$

170,671

Income taxes payable

 

8,202

 

9,687

Accrued payroll and employee benefits

 

54,503

 

51,545

Other accrued expenses

 

49,501

 

41,691

Customer deposits and other

 

13,637

 

10,926

Current portion of long-term debt

17,500

17,500

Current portion of operating lease liabilities

19,112

18,312

Total current liabilities

 

342,870

 

320,332

Long-term debt

313,040

321,527

Operating lease liabilities

92,613

90,538

Pension benefits

67,451

68,169

Deferred income tax liabilities

 

11,989

 

9,952

Uncertain tax positions

 

16,478

 

16,055

Long-term deferred revenue

 

7,519

 

8,011

Other long-term liabilities

23,932

20,562

Total liabilities

 

875,892

 

855,146

Commitments and contingencies (Note 19)

 

 

Stockholders' equity:

 

 

Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding

 

 

Common stock, $0.001 par value, 70,000 shares authorized; 38,325 and 38,358 issued and outstanding at June 30, 2020 and December 31, 2019, respectively

 

38

 

38

Additional paid-in capital

 

102,094

 

104,849

Accumulated other comprehensive loss

 

(9,148)

 

(5,897)

Retained earnings

 

624,829

 

577,724

Advanced Energy stockholders' equity

 

717,813

 

676,714

Noncontrolling interest

 

545

 

546

Total stockholders’ equity

 

718,358

 

677,260

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$

1,594,250

$

1,532,406

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

3

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Operations

(In thousands, except per share amounts)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Sales, net:

 

  

 

  

 

  

 

  

 

Product

$

311,770

$

106,193

$

601,131

$

218,305

Services

 

28,110

 

28,617

 

54,205

 

57,248

Total sales, net

 

339,880

 

134,810

 

655,336

 

275,553

Cost of sales:

 

 

 

 

Product

 

195,535

 

56,113

 

386,601

 

116,914

Services

 

14,041

 

14,571

 

26,200

 

28,773

Total cost of sales

 

209,576

 

70,684

 

412,801

 

145,687

Gross profit

 

130,304

 

64,126

 

242,535

 

129,866

Operating expenses:

 

 

 

 

Research and development

 

35,855

 

21,840

 

70,625

 

43,129

Selling, general and administrative

 

48,174

 

27,612

 

94,165

 

56,626

Amortization of intangible assets

 

5,009

 

1,874

 

10,015

 

3,847

Restructuring expense

 

5,790

 

1,795

 

6,446

 

3,468

Total operating expenses

 

94,828

 

53,121

 

181,251

 

107,070

Operating income

 

35,476

 

11,005

 

61,284

 

22,796

Other income (expense), net

 

(1,587)

 

15,545

 

(5,097)

 

16,288

Income from continuing operations, before income taxes

 

33,889

 

26,550

 

56,187

 

39,084

Provision for income taxes

 

4,610

 

3,177

 

8,510

 

324

Income from continuing operations

 

29,279

 

23,373

 

47,677

 

38,760

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

 

(151)

 

8,324

 

(471)

 

8,315

Net income

$

29,128

$

31,697

$

47,206

$

47,075

Income (loss) from continuing operations attributable to noncontrolling interest

 

(16)

 

11

 

(1)

 

19

Net income attributable to Advanced Energy Industries, Inc.

$

29,144

$

31,686

$

47,207

$

47,056

Basic weighted-average common shares outstanding

 

38,294

 

38,274

 

38,326

 

38,236

Diluted weighted-average common shares outstanding

 

38,458

 

38,462

 

38,525

 

38,443

Earnings per share:

 

  

 

  

 

 

  

Continuing operations:

 

  

 

  

 

 

  

Basic earnings per share

$

0.77

$

0.61

$

1.24

$

1.01

Diluted earnings per share

$

0.76

$

0.61

$

1.24

$

1.01

Discontinued operations:

 

 

 

 

Basic earnings per share

$

$

0.22

$

(0.01)

$

0.22

Diluted earnings per share

$

$

0.22

$

(0.01)

$

0.22

Net income:

 

 

 

 

Basic earnings per share

$

0.76

$

0.83

$

1.23

$

1.23

Diluted earnings per share

$

0.76

$

0.82

$

1.23

$

1.22

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Comprehensive Income

(In thousands)

Three Months Ended June 30, 

Six Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Net income

$

29,128

$

31,697

$

47,206

$

47,075

Other comprehensive income (loss), net of income taxes

 

  

 

  

 

  

 

  

Foreign currency translation

 

2,500

 

543

 

(561)

 

(1,432)

Change in fair value of cash flow hedges

 

(2,844)

 

 

(2,844)

 

Minimum benefit retirement liability

 

 

63

 

154

 

10

Comprehensive income

$

28,784

$

32,303

$

43,955

$

45,653

Comprehensive income (loss) attributable to noncontrolling interest

 

(16)

 

11

 

(1)

 

19

Comprehensive income attributable to Advanced Energy Industries, Inc.

$

28,800

$

32,292

$

43,956

$

45,634

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Stockholders’ Equity

(In thousands, except 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

Earnings

Interest

Equity

Balances, December 31, 2018

    

38,164

    

$

38

    

$

97,418

    

$

(3,449)

    

$

512,783

    

$

512

    

$

607,302

Stock issued from equity plans

72

(1,707)

(1,707)

Stock-based compensation

3,199

3,199

Other comprehensive income (loss)

(2,028)

(2,028)

Net income

15,370

8

15,378

Balances, March 31, 2019

38,236

$

38

$

98,910

$

(5,477)

$

528,153

$

520

$

622,144

Stock issued from equity plans

69

 

 

665

 

 

 

 

665

Stock-based compensation

 

 

937

 

 

 

 

937

Other comprehensive income (loss)

 

 

 

606

 

 

 

606

Net income

 

 

 

 

31,686

 

11

 

31,697

Balances, June 30, 2019

38,305

$

38

$

100,512

$

(4,871)

$

559,839

$

531

$

656,049

Balances, December 31, 2019

38,358

$

38

$

104,849

$

(5,897)

$

577,724

$

546

$

677,260

Adoption of new accounting standards

(102)

(102)

Stock issued from equity plans

64

(2,171)

(2,171)

Stock-based compensation

3,048

3,048

Stock buyback

(170)

(7,248)

(7,248)

Other comprehensive income (loss)

(2,907)

(2,907)

Net income

18,063

15

18,078

Balances at March 31, 2020

38,252

$

38

$

98,478

$

(8,804)

$

595,685

$

561

$

685,958

Stock issued from equity plans

73

779

779

Stock-based compensation

2,837

2,837

Other comprehensive income (loss)

(344)

(344)

Net income

29,144

(16)

29,128

Balances at June 30, 2020

38,325

$

38

$

102,094

$

(9,148)

$

624,829

$

545

$

718,358

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Consolidated Statements of Cash Flows

(In thousands)

Six Months Ended June 30, 

    

2020

    

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

 

Net income

$

47,206

$

47,075

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

 

(471)

 

8,315

Income from continuing operations, net of income taxes

 

47,677

 

38,760

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

 

  

 

  

Depreciation and amortization

 

23,196

 

8,396

Stock-based compensation expense

 

5,885

 

4,136

Provision (benefit) for deferred income taxes

 

(1,439)

 

4,509

Gain on sale of central inverter service business

(14,804)

Discount on notes receivable

721

Net loss on disposal of assets

 

231

 

90

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

 

 

Accounts and other receivable, net

 

12,545

 

6,554

Inventories

 

(30,922)

 

1,030

Other assets

 

(7,528)

 

(6,852)

Accounts payable

 

6,468

 

(2,680)

Other liabilities and accrued expenses

 

12,853

 

(7,627)

Income taxes

 

(2,127)

 

(13,182)

Net cash provided by (used in) operating activities from continuing operations

 

67,560

 

18,330

Net cash provided by (used in) operating activities from discontinued operations

 

(586)

 

(1,914)

Net cash provided by (used in) operating activities

 

66,974

 

16,416

CASH FLOWS FROM INVESTING ACTIVITIES:

 

  

 

  

Purchases of marketable securities

 

(167)

 

Proceeds from sale of property and equipment

 

69

 

1,742

Issuance of notes receivable

(1,000)

(2,800)

Purchases of property and equipment

 

(13,391)

 

(8,866)

Net cash provided by (used in) investing activities from continuing operations

 

(14,489)

 

(9,924)

Net cash provided by (used in) investing activities from discontinued operations

 

 

Net cash provided by (used in) investing activities

 

(14,489)

 

(9,924)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

  

 

  

Payments on long-term borrowings

(8,750)

Purchase and retirement of common stock

(7,248)

Net payments related to stock-based award activities

 

(1,392)

 

(1,042)

Net cash provided by (used in) financing activities from continuing operations

 

(17,390)

 

(1,042)

Net cash provided by (used in) financing activities from discontinued operations

 

 

Net cash provided by (used in) financing activities

 

(17,390)

 

(1,042)

EFFECT OF CURRENCY TRANSLATION ON CASH

 

(899)

 

(932)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

 

34,196

 

4,518

CASH AND CASH EQUIVALENTS, beginning of period

 

346,441

 

354,552

CASH AND CASH EQUIVALENTS, end of period

 

380,637

 

359,070

Less cash and cash equivalents from discontinued operations

 

 

CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period

$

380,637

$

359,070

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

  

 

  

Cash paid for interest

$

3,510

$

298

Cash paid for income taxes

 

10,709

 

11,933

Cash received for refunds of income taxes

 

572

 

1,536

The accompanying notes are an integral part of these Unaudited Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

NOTE 1.     BASIS OF PRESENTATION

Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries ("we," "us," "our," "Advanced Energy," or the "Company") design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-controllable usable power that is predictable, repeatable and customizable. Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip, chemical and physical deposition, high and low voltage applications such as process control, analytical instrumentation and medical equipment, and in temperature-critical thermal applications such as material and chemical processing. We also supply related instrumentation products for advanced temperature measurement and control, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for several industrial markets. Our network of service support centers provide local repair and field service capability in key regions, provide upgrades and refurbishment services and sell used equipment to businesses that use our products. In September 2019, we acquired the Artesyn Embedded Power business, which added new power products and technologies used in networking and computing, data center, and industrial and medical applications. As of December 31, 2015, we discontinued our engineering, production, and sales of our Inverter product line. As such, all Inverter product revenues, costs, assets, and liabilities are reported in Discontinued Operations for all periods presented herein, and we currently report as a single unit. See Note 4. Disposed and Discontinued Operations for more information. Ongoing inverter repair and service operations are reported as part of our continuing operations.

In the opinion of management, the accompanying Unaudited Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of the Company as of June 30, 2020, and the results of our operations and cash flows for the three and six months ended June 30, 2020 and 2019.

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 fiscal year ended December 31, 2019 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, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for expected credit loss, excess and obsolete inventory, warranty reserves, right-of-use assets and related operating lease liabilities, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.

Critical Accounting Policies

Derivatives

The Company uses derivative financial instruments to manage risks associated with foreign currency and interest rate fluctuations. Unless we meet specific hedge accounting criteria, changes in the fair value of derivative financial instruments are recognized in the Consolidated Statements of Operations within Other income (expense), net.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

For derivatives designated as cash flow hedges, changes in fair value are recorded to Accumulated other comprehensive income (loss) on the Consolidated Balance Sheets and are reclassified to earnings when the underlying forecasted transaction affects earnings. We reassess the probability of the underlying forecasted transactions occurring on a quarterly basis.

Fair Value

We value our financial assets and liabilities using fair value measurements.

U.S. GAAP for fair value establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels of the hierarchy and the related inputs are as follows:

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date.
Level 2 — Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 — Unobservable inputs for the asset or liability.

The Company categorizes fair value measurements within the fair value hierarchy based upon the lowest level of the most significant inputs used to determine fair value. Our assessment of the significance of a particular input to the fair value measurement requires judgement and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

The carrying amounts of our cash and cash equivalents, accounts receivable, accounts payable and other current assets and liabilities approximate fair value as recorded due to the short-term nature of these instruments.

The Company’s non-financial assets, which primarily consist of property and equipment, goodwill, and other intangible assets, are not required to be carried at fair value on a recurring basis and are reported at carrying value. However, on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be fully recoverable (and at least annually for goodwill and indefinite-lived intangible assets), non-financial instruments are assessed for impairment and, if applicable, written down to and recorded at fair value. See Note 12, Goodwill, and Note 13, Intangible Assets, for further discussion and presentation of these amounts.

The fair value of borrowings approximates the recorded borrowing value based upon market interest rates for similar facilities. See Note 22, Credit Facility, for additional information. The fair value of contingent consideration and other acquired assets and liabilities associated with the acquisition of the Embedded Power business, are based on Level 3 inputs.

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, is not expected to have a material impact on the Consolidated Financial Statements upon adoption.

Recently issued accounting pronouncements not yet adopted

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)" ("ASU 2018-14"). ASU 2018-14 eliminates requirements for certain disclosures and

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

requires additional disclosures under defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and shall be applied to all periods presented on a retrospective basis. Early adoption is permitted. We are currently assessing and do not believe ASU 2018-14 will have a significant impact on our defined benefit plan disclosure requirements.

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”). ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria, that reference LIBOR or another rate that is expected to be discontinued. ASU 2020-04 will be in effect through December 31, 2022. We are currently assessing the potential impact of ASU 2020-04 on our Consolidated Financial Statements.

Recently adopted accounting pronouncements

In June 2016, the FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)" Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). ASU 2016-13 changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. We adopted ASU 2016-13 in the first quarter of fiscal year 2020 through a cumulative-effect adjustment to beginning retained earnings using the modified retrospective approach. The impact of the adoption of ASU 2016-13 was not material to our Consolidated Financial Statements.

The Company’s principal customers are original equipment manufacturers and end user customers, which operate globally through wholly owned subsidiaries that purchase the Company’s products under substantially the same credit terms, with similar historical credit risks. As a result, the Company assesses credit risks for its customers as a single group. The Company evaluates collection risk and establishes its expected credit loss primarily through a combination of the following: an assessment of customer credit risk ratings utilizing third party credit risk data, analysis of historical aging and credit loss experience, and customer specific information.

In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)" ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 was effective for fiscal years ending after December 15, 2019 and shall be applied to all periods presented on a retrospective basis. We adopted ASU 2018-13 in the first quarter of fiscal year 2020. The impact of the adoption of ASU 2018-13 was not material to our Consolidated Financial Statements.

In December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740)—Simplifying the Accounting for Income Taxes" ("ASU 2019-12"), which is meant to simplify and reduce the cost of accounting for income taxes. The FASB has stated that the ASU 2019-12 is being issued in connection with its Simplification Initiative, which is meant to reduce complexity in accounting standards by improving certain areas of generally accepted accounting principles without compromising information provided to users of financial statements. We early adopted ASU 2019-12 in the first quarter of fiscal year 2020. The impact of the adoption of ASU 2019-12 was not material to our Consolidated Financial Statements.

NOTE 2.     BUSINESS ACQUISITIONS

Artesyn’s Embedded Power Business

In September 2019, we completed the acquisition of Artesyn Embedded Technologies, Inc.’s (“Artesyn”) Embedded Power business pursuant to the Stock Purchase Agreement, dated May 14, 2019 as amended (the “Acquisition Agreement”). Pursuant to the Acquisition Agreement, we acquired all of Artesyn’s issued and outstanding shares for a purchase price of $364.3 million including the assumption of certain liabilities and subject to an adjustment for net working capital. In connection with the Acquisition Agreement, we entered into a credit agreement that provided

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

us with aggregate financing of $500.0 million which was used to partially fund the Artesyn acquisition. See Note 22. Credit Facility for additional details related to the credit agreement.

Artesyn’s Embedded Power business is one of the world’s largest providers of highly engineered, application-specific power supplies for demanding applications. This acquisition diversified our product portfolio and gave us access to additional growth markets, including hyperscale data centers, telecom infrastructure in next generation 5G networks, embedded industrial power applications and medical power for diagnostic and treatment applications.

The components of the fair value of the total consideration transferred for the acquisition is as follows:

    

Cash paid for acquisition

$

389,326

Non-cash consideration

 

2,000

Contingent consideration and working capital adjustments

(3,826)

Total fair value of consideration transferred

387,500

Less cash acquired

 

(23,225)

Total purchase price

$

364,275

The following table summarizes the estimated preliminary fair values of the assets acquired and liabilities assumed from the acquisition, along with the measurement period adjustments that occurred during the quarter:

    

Preliminary
Fair Value

    

Measurement
Period
Adjustments

    

Preliminary
Adjusted Fair
Value

Accounts and other receivable, net

$

132,466

$

$

132,466

Inventories

 

156,407

156,407

Property and equipment

 

63,321

63,321

Operating lease right-of-use assets

54,439

54,439

Goodwill

 

112,619

5,143

117,762

Intangible assets

 

124,000

124,000

Other assets

 

63,863

63,863

Total assets acquired

 

707,115

5,143

712,258

Accounts payable

 

152,635

152,635

Operating lease liability

54,477

38

54,515

Pension liability

48,315

48,315

Deferred income tax liabilities

 

5,870

5,870

Other liabilities

 

84,565

2,083

86,648

Total liabilities assumed

 

345,862

2,121

347,983

Total fair value of net assets acquired

$

361,253

$

3,022

$

364,275

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

    

    

Amortization

    

Method

Useful Life

Technology

$

28,000

 

Straight-line

 

5

Customer relationships

 

75,000

 

Straight-line

 

15

Tradename

 

21,000

 

Straight-line

 

10

Total

$

124,000

 

  

 

  

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill represents expected operating synergies from combining operations with the acquired company and the estimated value associated with the enhancements to our comprehensive

11

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

product lines and access to new markets. Advanced Energy is still evaluating the fair value for the assets acquired and liabilities assumed related to the Artesyn acquisition. Accordingly, the purchase price allocation presented above is preliminary.

Pro forma results for Advanced Energy Inc. giving effect to the Artesyn Embedded Power Business Transactions

The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and Artesyn as if the acquisition had been completed at the beginning of fiscal year 2019. The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place at the beginning of the year prior to the acquisition dates, nor are they indicative of future results.

The unaudited pro forma financial information for the three and six months ended June 30, 2019 combines Advanced Energy’s results with the pre-acquisition results of Artesyn for that period.

The following tables present our unaudited pro forma results for the acquisition of Artesyn:

Three Months Ended June 30,

Six Months Ended June 30,

2019

2019

    

As Reported

    

Pro Forma

    

As Reported

    

Pro Forma

Total sales

 

$

134,810

 

$

274,889

 

$

275,553

 

$

570,864

Net income attributable to Advanced Energy Industries, Inc.

 

$

31,686

 

$

25,336

 

$

47,056

 

$

46,880

Earnings per share:

 

  

 

  

 

 

Basic earnings per share

$

0.83

$

0.66

$

1.23

$

1.23

Diluted earnings per share

$

0.82

$

0.65

$

1.22

$

1.22

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