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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended December 31, 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 logo

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, Colorado

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

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes  No 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes  No 

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  No 

Indicate by check mark whether the registrant has submitted every 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  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. (Check one):

Large accelerated filer 

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $2,563,579,586 as of June 30, 2020, based upon the price at which such common stock was last sold on such date.

As of February 18, 2021, there were 38,300,076 shares of the registrant’s common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III of this Annual Report on Form 10-K incorporates information by reference from the registrant’s definitive proxy statement for its 2021 Annual Meeting of Stockholders (to be filed with the Commission under Regulation 14A no later than 120 days after the end of the registrant’s fiscal year ended December 31, 2020).

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

FORM 10-K

TABLE OF CONTENTS

PART I

4

ITEM 1.

BUSINESS

4

ITEM 1A.

RISK FACTORS

11

ITEM 1B.

UNRESOLVED STAFF COMMENTS

24

ITEM 2.

PROPERTIES

25

ITEM 3.

LEGAL PROCEEDINGS

26

ITEM 4.

MINE SAFETY DISCLOSURES

26

PART II

26

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

26

ITEM 6.

SELECTED FINANCIAL DATA

29

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

29

ITEM 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

44

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

46

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

86

ITEM 9A.

CONTROLS AND PROCEDURES

86

ITEM 9B.

OTHER INFORMATION

88

PART III

88

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

88

ITEM 11.

EXECUTIVE COMPENSATION

89

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

89

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

90

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

90

PART IV

90

ITEM 15.

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

90

ITEM 16.

FORM 10-K SUMMARY

94

SIGNATURES

95

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Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K includes or incorporates by reference "forward-looking statements" within the meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained or incorporated by reference in this Annual Report on Form 10-K, other than statements of historical fact, are "forward-looking statements." For example, statements relating to our beliefs, expectations, plans, projections, forecasts, goals, and estimates are forward-looking statements, as are statements that specified actions, conditions, or circumstances will continue or change. Forward-looking statements involve risks and uncertainties. In some cases, forward-looking statements can be identified by the inclusion of words such as "believe," "expect," "plan," "anticipate," "estimate," "may," "might," "could," "should," "will," "continue," "intend," "goal," and similar words.

Some of the forward-looking statements in this Annual Report on Form 10-K are, or reflect, our expectations or projections relating to:

our future sales, including backlog orders;
our ability to be successful in the design win process with our customers;
unanticipated costs in fulfilling our warranty obligations for solar inverters;
our future gross profit;
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;
sufficiency and availability of capital resources;
capital expenditures;
our production and factory strategy;
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;
our estimates of goodwill and related fair value of assets acquired;
restructuring activities and expenses;
the integration of our acquisitions;
general global political and economic conditions; and
industry trends.

Our actual results could differ materially from those projected or assumed in our forward-looking statements because forward-looking statements by their nature are subject to risks and uncertainties. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include the factors described in Item 1A "Risk Factors." Other factors might also contribute to the differences between our forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or the reasons why our actual results might differ.

Market and Industry Data

The market and industry data used in this Annual Report on Form 10-K are based on independent industry publications, customers, trade or business organizations, reports by market research firms and other published statistical information from third parties, as well as information based on management’s good faith estimates, which we derive from our review of internal information and independent sources. Although we believe these sources to be reliable, we have not independently verified the accuracy or completeness of the information.

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PART I

Unless the context otherwise requires, as used in this Form 10-K, references to "Advanced Energy," "the Company," "we," "us" or "our" refer to Advanced Energy Industries, Inc. and its consolidated subsidiaries.

ITEM 1.           BUSINESS

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 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, data center computing, networking, telecommunication, analytical instrumentation, medical equipment, industrial technology and 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 multiple industrial markets. Our network of global service support centers provides local repair and field service to our customers in key regions as well as upgrade and refurbishment services, and sales of used equipment to businesses that use our products. Our products are primarily sold into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets. Advanced Energy is organized on a global, functional basis and operates in a single segment structure for electrical power conversion and control products. We sell our products into four markets or applications and provide revenue data by market to enable tracking of market trends. Following the acquisition of Artesyn Embedded Technologies, Inc.’s embedded power business ("Artesyn") in September 2019, we have also provided information on an organic and inorganic basis, which in 2020 was limited to the Artesyn acquisition, to improve comparability during the periods.

During 2020, we saw the continued spread of COVID-19 which grew into a global pandemic. Our first priority was to provide a healthy and safe working environment for our employees which led to intermittent shutdowns of our manufacturing facilities to implement new health and safety protocols and make additional investments to comply with government guidelines. There were periods when some of our manufacturing facilities were not operating or were operating at reduced capacity due to government mandates to restrict travel, require social distancing and implement health and safety procedures. Many of our engineers and non-manufacturing personnel transitioned largely to a work from home environment. Additionally, the availability of materials, parts and subcomponents needed for production was also impacted during 2020. We expect the challenges associated with this environment to continue into 2021.

Although COVID-19 has impacted our revenues and manufacturing efficiency over the course of 2020, 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. While COVID-19 has not had a material adverse effect on our business during 2020, it is unknown if COVID-19 will have a material adverse impact on our future operations, our financial results (including, but not limited to, gross profit, and cash generation) or liquidity. Please see the information under the caption "Risk Factors" in Item 1A of this Annual Report on Form 10-K for additional discussion on the potential impacts of COVID-19 to the future operations of our business.

We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. Our executive offices are located at 1595 Wynkoop Street, Suite 800, Denver, Colorado 80202, and our telephone number is (970) 407-6555.

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Recent Acquisitions

In December 2020, we completed the acquisition of Versatile Power, Inc. This acquisition added radio frequency ("RF") and programmable power supplies for medical and industrial applications to our product portfolio and further expands our presence in the medical market by adding proven technologies, deep customer relationships, expertise in medical design, and a medical-certified manufacturing center.

In September 2019, we completed the acquisition of Artesyn. Artesyn’s embedded power business was one of the world’s largest providers of highly engineered, application-specific AC-DC and DC-DC power supplies for demanding applications. This acquisition diversified our product portfolio and gave us access to attractive growth markets, including data centers (including hyperscale), telecom infrastructure in next generation 5G networks, embedded industrial power applications and medical diagnostic and treatment applications.

For additional information, see Note 2. Business Acquisitions in Part II, Item 8 "Financial Statements and Supplementary Data."

Products and Services

PRODUCTS

Our precision power products and solutions are designed to enable new process technologies, improve productivity, lower the cost of ownership, and provide critical power capabilities for our customers. These products are designed to meet our customers’ demanding requirements in efficiency, flexibility, performance, and reliability. We also provide repair and maintenance services for our products.

We principally serve global original equipment manufacturers ("OEM") and end customers in a wide range of semiconductor and industrial technology applications with a broad range of advanced and embedded power products. Our advanced power products are solutions that are designed to deliver precise power, control and measurement of processes used in a diverse set of applications in semiconductor device manufacturing, thin film deposition of advanced materials, thermal power control, instrumentation and gas detection and monitoring. Our embedded power products are solutions designed to provide stable and efficient power in mission critical applications across a variety of industrial technology applications such as telecommunication and networking equipment, data center servers and storage systems, medical equipment, robotics, motion control and test and measurement equipment.

Our process power solutions include direct current ("DC"), pulsed DC, low frequency alternating current ("AC"), high voltage, and RF power supplies, RF matching networks, remote plasma sources for reactive gas applications and RF instrumentation. These solutions are used in a wide range of thin film processes across multiple semiconductor applications and for deposition of advanced materials in adjacent industries such as flat panel display, solar cell manufacturing, thin film coating, and hard coatings.

Our power control modules and thermal instrumentation products are used in the semiconductor and adjacent industries, in which time-temperature cycles affect material properties, productivity, and yield. These products are used in processes such as rapid thermal processing, chemical vapor deposition and crystal growing, which require non-contact temperature measurement. They are also used in many industrial production applications for chemical processing, metal and glass manufacturing, and numerous other industrial power applications.

Our gas detection and monitoring products utilize proven infrared technologies to detect and analyze gases in a wide range of industrial applications, including automotive, energy, environmental controls, aerospace, medical and research. Our products offer cost-effective online monitoring, allowing our customers to automate manual monitoring or sampling processes that will improve process efficiency, reduce waste, and lower maintenance costs.

Our embedded power products are designed to maximize energy conversion efficiency, minimize physical sizes, and to meet a variety of standards, such as IEC 60601-1 for medical equipment or IEC 60950-1 for information technology equipment. Our low-voltage AC-DC and DC-DC power supplies are used in a wide variety of end markets such as data

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center computing, telecom, networking, medical equipment, and broad industrial electronics. These products feature industry-leading efficiency and density, to maximize performance, lower energy costs, and minimize the form factor. These products target applications where energy usage is high, such as data centers, but also applications that require a highly reliable and rugged design for use in demanding climate conditions, such as a wireless cellular tower.

Our high and lower voltage DC-DC products are designed to meet the demanding requirements of OEMs worldwide. Our DC-DC solutions and custom-built power conversion products offer high and low voltage topology, providing wide input and output operating ranges while retaining excellent stability and efficiencies ranging from benchtop and rackmount systems to micro-size printed circuit board mount modules. The high voltage DC-DC products target applications including semiconductor wafer processing and metrology, electrostatic clamping of substrates, scientific instrumentation, mass spectrometry, and x-ray systems for industrial and analytical applications. The low voltage DC-DC board mounted solutions are designed for a wide range of industrial applications such as healthcare, telecommunications, test and measurement, instrumentation, industrial equipment and distributed power in server and storage systems.

PowerInsight, our big data analytics solution transforms the data acquired from our power delivery systems into useable insights, through a combination of enhanced data sets and advanced analytics. These capabilities allow our customers to maximize performance, reduce costs and improve yield in their manufacturing processes.

GLOBAL SUPPORT

Our global support services group offers in-warranty and out-of-warranty repair services in the regions in which we operate, providing us with revenue opportunities from repair, upgrades and retrofit offerings to our installed base. Our customers wish to lower the cost of ownership of their capital equipment and are increasingly sensitive to the significant costs of system downtime. They expect suppliers to offer comprehensive local repair service and customer support. In addition to product repairs our customers look for upgrade and retrofit offerings to extend the useable life of their capital equipment for additional technology generations. To meet these market requirements, we maintain a worldwide support organization in ten countries, including the United States ("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 of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product line representing a strategic shift in our business. As such, all inverter revenues, costs, assets, and liabilities are reported in Discontinued Operations for all periods presented herein and we currently report as a single unit. However, extended warranties historically sold and reflected as deferred revenue on our Consolidated Balance Sheets, represent future revenue and service costs to be incurred by our global services group and are reflected as continuing operations for historical periods and future periods. In May 2019, we divested the U.S. central inverter repair and support business to Bold Renewables. See Note 4. Disposed and Discontinued Operations in Part II, Item 8 "Financial Statements and Supplementary Data."

Markets

Our products compete in markets for high tech applications using capital equipment. The majority of our markets are not generally subject to significant seasonality; however, these markets are cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital. Other factors, such as global economic and market conditions and technological advances in the applications we serve can also have an impact on our financial results, both positively and negatively. For more information related to the markets in which we compete and the current environment in those markets, see Business Environment and Trends in Part II, Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations."

SEMICONDUCTOR EQUIPMENT MARKET

Customers in the semiconductor capital equipment market incorporate our products into equipment that make integrated circuits. Our process power conversion products and systems provide the energy to enable thin film plasma-

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based processes, such as dry etch, strip, chemical and physical deposition. Precise control over the energy delivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance. Our high voltage products are used in applications such as ion implant, wafer inspection and metrology, electrostatic measurement, and electrostatic clamping of the wafers. Our thermal instrumentation products measure the temperature of the processed substrate or the process chamber. Our power control modules are used in thermal processing applications and for epitaxial growth of photonics or microelectronic devices. Our remote plasma sources deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement. Our low voltage power products deliver stable, clean, and reliable power and are used in semiconductor Automatic Test Equipment ("ATE"), wafer processing equipment, back-end assembly equipment, and auxiliary equipment such as wafer handling. Our strategy in the Semiconductor Equipment market is to expand our content of power related products and grow share.

INDUSTRIAL AND MEDICAL MARKET

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, motor drives and connected light-emitting diodes.

OEM customers design equipment utilizing our process power technologies in a variety of industrial thin film applications including glass coating, glass manufacturing, flat panel displays, photovoltaics solar cell manufacturing, 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.

We serve 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. Examples of products sold into the Industrial and Medical market include high voltage products for analytical instrumentation, and medical equipment, low voltage power supplies used in applications for medical devices, test and measurement, medical lasers, scientific instrumentation and industrial equipment, and power control modules and thermal instrumentation products for material fabrication, processing, and treatment. Our gas monitoring products serve multiple applications in the energy market, air quality monitoring and automobile emission monitoring and testing. Our strategy in the Industrial and Medical market is to expand our addressable market both organically through our global distribution channels and through acquisitions of products and technologies that are complimentary and adjacent to our core power conversion applications.

DATA CENTER COMPUTING MARKET

Following the acquisition of Artesyn in September 2019, Advanced Energy entered the Data Center Computing market with industry-leading products and low-voltage power conversion technologies. We sell to many data center and hyperscale server and storage manufacturers, 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 enterprise on-premise computing to data centers. Our power systems, power shelves, AC-DC and DC-DC power conversion products feature industry-leading performance and are used in a variety of computing applications such as server rack power, back-up power and CPRS server power supply, including a wide range of standard and custom power solutions used in data center racks, server, and storage systems. We offer our customers industry-leading technology with a strong reputation and deep customer relationships. With a growing presence at both cloud service providers and industry-leading data center server and storage vendors, we believe we are well positioned to continue to capitalize on the ongoing shift towards cloud computing. Starting in late 2019 and through the end of 2020, demand for our embedded power products in the Data Center Computing market increased significantly driven by share gain and ramp at hyperscale customers. In addition, we believe COVID-19 is having a positive impact on hyperscale demand given the increased need for cloud and network applications. Demand for hyperscale products declined sequentially during the third and fourth quarter of 2020 based on customer digestion following large investments in the first half of the year but was offset by higher demand from enterprise computing customers, which had been cyclically down in the first half of 2020. We expect this digestion period to continue into the first half of 2021.

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TELECOM AND NETWORKING MARKET

The acquisition of Artesyn in September 2019 provided Advanced Energy with a portfolio of products and technologies that are used across the Telecom and Networking market. Our customers include many leading vendors and original design manufacturers of wireless and wireline infrastructure equipment, telecommunication equipment and computer networking. Our products serving telecom and networking applications are differentiated by their rugged design and high reliability, even in harsh outdoor environments. Our wide range of AC-DC power supplies/rectifiers and DC-DC conversion modules are used by leading developers of telecom systems across fixed, mobile, and converged network applications. Our products are designed into many wireless infrastructure applications such as remote radio heads, RF power amplifiers in base stations and multi-access edge computing equipment. In networking, our products are designed into many core and edge networking systems, including gateways, application servers, switches, routers, and wireless 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 in 5G, and this trend is expected to drive demand for our products in the Telecom and Networking market over time. In datacom, demand is driven by networking investments by telecom service providers and enterprise upgrading of their network, as well as cloud data center networking investments for increased bandwidth. Demand in late 2019 and the first half of 2020 was lower as geopolitical issues and consolidation of wireless telecom providers drove slower global investment in cellular and network infrastructure; however, we saw modest market growth off these reduced levels in the third and fourth quarter of 2020.

Customers

Our products are sold worldwide to OEMs, integrators, distributors and directly to end users. The following table summarizes the percentage of our total sales derived from our ten largest customers:

Years Ended December 31, 

2020

    

2019

    

2018

Ten largest customers

58.0

%  

57.3

%  

62.5

%  

The following table summarizes sales to and percentage of total sales from Applied Materials, Inc. and Lam Research Corp., our two largest customers (in thousands):

Years Ended December 31, 

    

2020

    

2019

    

2018

Applied Materials, Inc.

$

248,350

    

17.5

%  

$

164,724

    

20.9

%  

$

258,027

    

35.9

%  

Lam Research

 

141,778

 

10.0

%  

 

88,251

 

11.2

%  

 

109,005

 

15.2

%  

We expect that the sale of products to our largest customers will continue to account for a significant percentage of our sales for the foreseeable future. The loss of a large customer could have a material adverse effect on our results of operations.

Backlog

Our backlog was approximately $290.7 million on December 31, 2020, a 12.3% increase from $258.9 million on December 31, 2019. For more information related to our expectations for the markets we serve, see Business Environment and Trends in Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations." Backlog orders are firm orders scheduled to be filled and shipped in the next 12 months.

Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and the significance of customer production demand pull systems to our business, which are not reflected in orders or backlog. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedules and/or customer changes to backlog orders during any particular period could cause a decrease in sales and have a material adverse effect on our business and results of operations.

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Marketing, Sales and Distribution

We sell our products through direct and indirect sales channels in North America, Europe, and Asia. Our sales operations are primarily located in the U.S., the PRC, the United Kingdom, Germany, Israel, Japan, South Korea, India, Singapore, Philippines, Hong Kong, Ireland, and Taiwan. In addition to a direct sales force, we have independent sales representatives, channel partners and distributors that support our selling efforts. We maintain customer service offices at many of the locations listed above, as well as other sites near our customers’ locations. We believe that customer service and technical support are important competitive factors and are essential to building and maintaining close, long-term relationships with our customers.

The following table presents our sales by geographic region. Sales are attributed to individual countries based on customer location (in thousands).

Years Ended December 31, 

 

    

2020

    

2019

    

2018

 

North America

$

687,814

 

48.6

%  

$

373,634

 

47.4

%  

$

372,834

 

51.8

%  

Asia

 

606,893

 

42.9

 

295,155

 

37.4

 

250,574

 

34.9

Europe

 

117,990

 

8.3

 

119,427

 

15.1

 

94,793

 

13.2

Other

 

3,129

 

0.2

 

732

 

0.1

 

691

 

0.1

Total

$

1,415,826

    

100.0

%  

$

788,948

    

100.0

%  

$

718,892

    

100.0

%

Total sales to all countries outside of the U.S. totaled $972.2 million, $467.1 million, and $348.1 million in the years ended December 31, 2020, 2019, and 2018, respectively.

See Item 1A "Risk Factors" for a discussion of certain risks related to our foreign operations.

Manufacturing

The manufacturing of our products is primarily performed in major sites in the PRC and the Philippines and in 2020 we began to increase production at an additional major manufacturing site in Penang, Malaysia. In addition, we perform limited specialty manufacturing for some of our products in the U.S., United Kingdom, Germany, and Denmark. Manufacturing in these locations, primarily in the PRC, exposes us to risks, such as exchange controls and currency restrictions, changes in local economic conditions, changes in laws and regulations, government actions, political conditions, and other regional risks including natural disasters and health risks, and an inability to meet customer demands if one of our facilities becomes impaired. See Item 1A, "Risk Factors" for a discussion of certain risks related to our manufacturing operations.

Manufacturing requires raw materials, including a wide variety of mechanical and electrical components, to be manufactured to our specifications. We use numerous companies, including contract manufacturers, to supply parts for the manufacture and support of our products. Although we make reasonable efforts to assure that parts are available from multiple qualified suppliers, some key parts may be obtained from a sole supplier or a limited group of suppliers. During 2020, COVID-19 impacted the availability of materials, parts, and subcomponents needed for production, and we expect the related supply chain challenges will continue into 2021. We seek to reduce costs and to lower the risks of production and service interruptions, as well as shortages of key parts by:

selecting and qualifying alternate suppliers for key parts using rigorous technical and commercial evaluation of suppliers’ products and business processes including testing their components’ performance, quality, and reliability on our power conversion product at our customers’ and their customers’ processes. The qualification process for our process power products, particularly as it pertains to semiconductor customers, follows semiconductor industry standard practices, such as "copy exact";
monitoring the financial condition and overall performance of key suppliers;

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maintaining appropriate inventories of key parts, including making last time purchases of key parts when notified by suppliers that they are ending the supply of those parts;
qualifying new parts on a timely basis and in geographies that reduce costs without degradation in quality;
locating certain manufacturing operations in areas that are closer to suppliers and customers; and
competitively sourcing parts through electronic bidding tools to ensure the lowest total cost is achieved for the parts needed in our products.

Intellectual Property

We seek patent protection for inventions governing new products or technologies as part of our ongoing research and development. We currently hold 285 U.S. issued patents and 340 foreign issued patents, and we have 337 patent applications pending in the U.S., Europe, and Asia. Most patents are active for 20 years, and our patents expire on various dates through 2039. A substantial majority of our patents are related to our process power products and solutions business. Generally, our efforts to obtain international patents have been concentrated in the industrialized countries within Europe and Asia because there are other manufacturers and developers of power conversion and control systems in those countries, as well as customers for those systems for which our intellectual property applies.

Litigation may, from time to time, be necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us, to defend us against claimed infringement of the rights of others, or to determine the scope and validity of the proprietary rights of others. See "We are highly dependent on our intellectual property" in Item 1A "Risk Factors."

Competition

The markets we serve are highly competitive and characterized by rapid technological development and changing customer requirements. We face a wide variety of competitors and no single company dominates any of our markets. Significant competitive factors in our markets include product performance, compatibility with adjacent products, price, quality, reliability, and level of customer service and support.

We encounter substantial competition from foreign and domestic companies for each of our product lines. Our list of competitors has increased over the past year due to the acquisition of Artesyn, which competes in different markets and against different competitors. Some of our competitors have greater financial and other resources than we do. In some cases, competitors are smaller than we are, but are well established in specific product niches. Adtec Plasma Tech. Co., Ltd., COMET Holding AG., Daihen Corp., Kyosan Electric Mfg. Co., Ltd., MKS Instruments, Inc., New Power Plasma Co., Ltd. and TRUMPF Hüttinger GmbH + Co. KG. are primary competitors to our power conversion products for semiconductor and thin film processing. Competitors to our low voltage AC-DC and DC-DC embedded power conversion offerings include, but are not limited to ABB Ltd., Acbel Polytech Inc., Cosel Co., Ltd., Delta Electronics, Inc., Flex Ltd., Lite-On Technology Corp., Murata Manufacturing, MEAN WELL Enterprises, TDK-Lambda Americas Inc., and XP Power Ltd. In high voltage DC-DC, our competitors include, but are not limited to Crane Co., Matsusada Precision, Inc., and Spellman High Voltage Electronics Corp. CD Automation, Control Concepts Inc., Eurotherm and Spang Power Electronics offer products that compete with our power control modules. BASF SE., Fluke Corp., LayTec AG. and Photon Control Inc. offer products that compete with our thermal measurement and instrumentation products. Honeywell International, Inc., Morgan Schaffer Ltd., Qualitrol Corp., and Williamson Corp. offer products that compete with our gas detection and monitoring products.

In addition, a focus on local content is causing new competitors to emerge around the world, with strong support from local governments, industry leaders, and investors. Our ability to compete successfully in these markets depends on our ability to make timely introduction of new products and enhancements to existing products, to localize these development and production activities in key world regions close to our customers, and to produce high quality products. We expect our competitors will continue to improve the design and performance of their products and introduce new products with competitive performance characteristics. We believe that we compete effectively with respect to these factors, although we cannot assure that we will be able to compete effectively in the future.

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Research and Development

The market for our products is characterized by ongoing technological changes and evolving customer requirements. We believe that continued and timely development of new highly-differentiated products and enhancements to existing products to support end user and OEM requirements is necessary for us to maintain a competitive position in the markets we serve. Accordingly, we continue to devote a significant portion of our personnel and financial resources to research and development projects and seek to maintain close relationships with our key customers and other industry leaders in order to remain responsive to their product requirements now and in the future.

Research and development expenses were $144.0 million in 2020, $101.5 million in 2019, and $76.0 million in 2018, representing 10.2% of our sales in 2020, 12.9% of our sales in 2019, and 10.6% of our sales in 2018.

Employees

As of December 31, 2020, we had approximately 10,000 employees. Our employees are not represented by unions, except for statutory organization rights applicable to our employees in the PRC and Germany. We believe that our continued success depends, in part, on our ability to attract and retain qualified personnel. We consider our relations with our employees to be good. We recognize that our employees are our most important asset, and we know that each person’s diverse background and unique skill set are fundamental to our success. See Item 7 "Management’s Discussion and Analysis of Financial Condition and Results of Operations" for a discussion of human capital resources.

Environmental Matters

We are subject to federal, state, and local environmental laws and regulations, as well as the environmental laws and regulations of the foreign federal and local jurisdictions in which we have manufacturing and service facilities. We believe we are in material compliance with all such laws and regulations.

Compliance with federal, state, and local laws and regulations has not had, and is not expected to have, an adverse effect on our capital expenditures, competitive position, financial condition, or results of operations.

Available Information

Our website address is www.advancedenergy.com. We make available, free of charge on our website, our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as soon as reasonably practicable after filing such reports with, or furnishing them to, the Securities and Exchange Commission ("SEC"). Such reports are also available at www.sec.gov. Information contained on our website is not incorporated by reference in, or otherwise part of, this Annual Report on Form 10-K nor any of our other filings with the SEC.

ITEM 1A.     RISK FACTORS

Our business, financial condition, operating results, and cash flows can be impacted by a number of factors, including, but not limited to, those set forth below, any of which could cause our results to be adversely impacted and could result in a decline in the value or loss of an investment in our common stock. Other factors may also exist that we cannot anticipate or that we currently do not consider to be material based on information that is currently available. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows and future results. Such risks and uncertainties may also impact the accuracy of forward-looking statements included in this Form 10-K and other reports we file with the Securities and Exchange Commission.

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COVID-19, natural disasters, and related risks

COVID-19 could further materially adversely affect our business, workforce, supply chain, results of operations, financial condition and/or cash flows. 

The continuing spread in 2020 of COVID-19 and related foreign and domestic government actions restricting travel, commerce and gathering has adversely affected our manufacturing locations. COVID-19 has also resulted in economic recessions and high unemployment in many countries which could negatively impact future customer purchases of our products. If COVID-19 continues to spread and restrictions remain in place or are reinstituted, we may continue to see adverse impact on our ability (a) to manufacture, test, service and ship our products, (b) to get required materials and sub-assemblies to build and service our products and (c) to staff labor and management for manufacturing, research and development, supply chain, service, and administrative operations. Further, we may experience adverse impact with our global supply chain partners and transportation service providers which may result in increased costs and material shortages. In addition, much of our workforce is now working remotely. While we have been successful in transitioning to this remote environment, the long-term impact on productivity and innovation is not yet clear. As a result, COVID-19 could adversely impact our near-term and long-term revenues, earnings and cash flow and could require further expenditures. This situation continues to evolve, and other impacts may arise that we are not aware of currently. We have an active rapid response team to mitigate risks we are aware of currently and as they arise.

Our results of operations could be affected by natural disasters and other events in the locations in which we or our customers or suppliers operate.

We have manufacturing and other operations in locations subject to natural occurrences such as severe weather and geological events including earthquakes or tsunamis that could disrupt operations. In addition, our suppliers and customers also have operations in such locations. A natural disaster, fire, explosion, or other event that results in a prolonged disruption to our operations, or the operations of our customers or suppliers, may materially adversely affect our business, results of operations, or financial condition.

Industry-related risks 

The industries in which we compete are subject to volatile and unpredictable cycles.

As a supplier to the global semiconductor equipment, telecom, networking, data center computing, industrial, and medical industries, we are subject to business cycles, the timing, length, and volatility of which can be difficult to predict. Certain of these industries historically have been cyclical due to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products, inventory levels relative to demand, and access to affordable capital. These changes have affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect our orders, net sales, operating expenses, and net income. We may not be able to respond adequately or quickly to the declines in demand by reducing our costs. We may be required to record significant reserves for excess and obsolete inventory as demand for our products changes.

To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key employees. During periods of increasing demand, we must have enough manufacturing capacity and inventory to fulfill customer orders, effectively manage our supply chain, and attract, retain, and motivate enough qualified individuals. If we are not able to timely and appropriately adapt to changes in our business environment or to accurately assess where we are positioned within a business cycle, our business, financial condition, or results of operations may be materially and adversely affected. For example, following record levels of demand in the first half of 2018, the Semiconductor Equipment market experienced a decline, and, as a result, Advanced Energy’s revenue from the Semiconductor Equipment market declined 24.5% during 2019, as compared to 2018. Although the Semiconductor Equipment market improved during the fourth quarter of 2019 and throughout 2020, it is unclear how long this recovery will last. In addition, the market may be characterized in the future with more "mini-ramps" rather than sustained growth periods as experienced during 2015-2017 given market dynamics, inventory levels, and geopolitical changes. In addition, our Data Center Computing and Telecom

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and Networking markets are characterized by large program investments, which can cause variations in quarterly or annual revenues. For example, during 2020 our growth in data center computing and telecom networking has been driven by share gains at specific customer accounts. Towards the end of 2020, we began to experience a period of digestion by our major customers resulting in lower demand. We expect this digestion to continue into the first half of 2021 and overall business levels may not continue to be realized at these levels each quarter.

We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved do not necessarily result in substantial sales.

Driven by continuing technology migration and changing customers demand, the markets we serve are constantly changing in terms of advancement in applications, core technology and competitive pressures. New products we design for capital equipment manufacturers typically have a lifespan of five to ten years. Increasingly, we are required to accelerate our investment in research and development to meet time-to-market, performance and technology adoption cycle needs of our customers simply to compete for design wins. Given such up-front investments we make to develop, evaluate, and qualify products in the design win process, our success and future growth depend on our products being designed into our customers new generations of equipment as they develop new technologies and applications. We must work with these manufacturers early in their design cycles to modify, enhance and upgrade our products or design new products that meet the requirements of their new systems. The design win process is highly competitive, and we may win or lose new design wins for our existing customers or new customers next generations of equipment. If existing or new customers do not choose us during the design win process, our market share will be reduced, the potential revenues related to the lifespan of our customers’ products, which can be five to ten years, will not be realized, and our business, financial condition and results of operations would be materially and adversely impacted.

Business model, acquisitions, and capital structure related risks

Despite the continued evolution of our manufacturing footprint our product lines are manufactured at only a few sites and our sites are not generally interchangeable.

Our power products for the semiconductor industry are manufactured in Shenzhen, PRC and Penang, Malaysia. Our high voltage products are manufactured in Ronkonkoma and Lockport, New York, Littlehampton, United Kingdom and Shenzhen, PRC. Our thermal instrumentation products are manufactured in Vancouver, Washington, Littlehampton, United Kingdom and Frankfurt, Germany. Our pyrometry solutions are manufactured in Ballerup, Denmark, Frankfurt, Germany, Magdeburg, Germany and Vancouver, Washington. Our telecom, networking, data center computing, and medical products are manufactured in Zhongshan, PRC, Rosario, Philippines and Santa Rosa, Philippines. Most facilities are under operating lease and interruptions in operations could be caused by early termination of existing leases by landlords or failure by landlords to renew existing leases upon expiration, including the possibility that suitable operating locations may not be available in proximity to existing facilities which could result in labor or supply chain risks. Each facility manufactures different products, and therefore, is not interchangeable. Natural, uncontrollable occurrences or other operational issues at any of our manufacturing facilities could significantly reduce or disrupt our productivity at such site and could prevent us from meeting our customers’ requirements in a timely manner, or at all.

Additionally, we have a plan to relocate our Shenzhen, PRC manufacturing facility by December 2021. As a result, we are investing in a dual manufacturing facility in Penang, Malaysia capable of manufacturing our semiconductor and other products. We believe this investment will help to mitigate our exposure to regional risks, improve our business continuity profile and lower costs over time. We opened this facility in 2020; however, it may take additional time to realize the facility’s full production capacity given the impact of COVID-19.

Our long-term success and results of operations depend on our ability to successfully integrate Artesyn’s business and operations and realize the anticipated benefits from the acquisition.

In September 2019, we acquired Artesyn, and we are continuing to combine Artesyn’s business with our business. The acquisition of Artesyn has significantly increased our embedded power product offerings, increased our exposure to the Industrial and Medical, Data Center Computing, and Telecom and Networking markets, and significantly increased the number of employees and facilities.

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To realize the anticipated benefits of the acquisition, we must continue to combine our businesses in an efficient and effective manner and realize our synergy and cost-savings targets. Integrating Artesyn’s business and operations with ours requires significant management attention, effort, and expenditures, and we may not be able to achieve the longer-term integration goals in an effective, complete, timely or cost-efficient manner.

Potential risks related to the successful integration of Artesyn’s business include our ability to:

maintain and improve Artesyn’s financial and operating results while integrating and optimizing our combined sales, marketing, manufacturing, and corporate administrative organizations;
optimize our combined worldwide manufacturing footprint while utilizing Artesyn’s vertically integrated manufacturing model for a broader set of company products;
successfully eliminate fixed costs previously absorbed by other businesses prior to the transaction;
recognize and capitalize on anticipated product sales and technology enhancement opportunities presented by our combined businesses;
integrate our information technology systems to mitigate cyber-security risks and enable the management and operation of the combined business.

If we are unable to successfully or timely integrate the operations of Artesyn’s business into our business over the long-term, we may be unable to realize the long-term revenue growth, synergies, cost-savings, and other anticipated benefits resulting from the acquisition and our business could be adversely affected. Additionally, we have and may continue to incur transaction-related costs, including legal, regulatory, and other costs associated with implementing integration plans, including facilities and systems consolidation costs and employment-related costs. Artesyn’s business and operations may not achieve the anticipated revenues and operating results. Any of the foregoing risks could materially harm our business, financial condition, and results of operations.

Our debt obligations and the restrictive covenants in the agreements governing our debt could limit our ability to operate our business or pursue our business strategies, could adversely affect our business, financial condition, results of operations, and cash flows, and could significantly reduce stockholder benefits from a change of control event.

Our debt obligations could make us more vulnerable to general adverse economic and industry conditions and could limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate, thereby placing us at a disadvantage to our competitors that have less indebtedness.

Our debt obligations impose financial covenants on us and our subsidiaries that require us to maintain a certain leverage ratio. The financial covenants place certain restrictions on our business that may affect our ability to execute our business strategy successfully or take other actions that we believe would be in the best interests of our Company. These include limitations or restrictions, among other things, on our ability and the ability of our subsidiaries to:

incur additional indebtedness; 
pay dividends or make distributions on our capital stock or certain other restricted payments or investments;
make domestic and foreign investments and extend credit;
engage in transactions with affiliates;
transfer and sell assets;
effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets; and
create liens on our assets to secure debt.

Our debt obligations contain certain customary events of default. Any breach of the covenants or other event of default could cause a default on our debt obligations, which could restrict our ability to borrow under our revolving credit facility. If there were an event of default under certain provisions of our debt arrangements that was not cured or waived, the holders of the defaulted debt may be able to cause all amounts outstanding with respect to the debt instrument, plus any required settlement costs, to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay

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borrowings under our outstanding debt instruments if accelerated upon an event of default. If we are unable to repay, refinance, or restructure our indebtedness as required, or amend the covenants contained in these agreements, the lenders can exercise all rights and remedies available under our Credit Agreement or applicable laws or equity. 

Our orders of raw materials, parts, components, and subassemblies are based on demand forecasts.

We place orders with many of our suppliers based on our customers’ quarterly forecasts and our annual forecasts. These forecasts are based on our customers’ and our expectations as to demand for our products. As the quarter and the year progress, such demand can change rapidly or we may realize that our customers’ expectations were overly optimistic or pessimistic, especially when industry or general economic conditions change. Orders with our suppliers cannot always be amended in response. In addition, to assure availability of certain components or to obtain priority pricing, we have entered into contracts with some of our suppliers that require us to purchase a specified number of components and subassemblies each quarter, even if we are not able to use such components or subassemblies. Moreover, we have obligations to some of our customers to hold a minimum amount of finished goods in inventory, to fulfill just in time orders, regardless of whether the customers expect to place such orders. We currently have firm purchase commitments and agreements with various suppliers to ensure the availability of components. If demand for our products does not continue at current levels, we might not be able to use all the components that we are required to purchase under these commitments and agreements, and our reserves for excess and obsolete inventory may increase, which could have a material adverse effect on our results of operations. If demand for our products exceeds our customers’ and our forecasts, we may not be able to timely obtain enough raw materials, parts, components, or subassemblies, on favorable terms or at all, to fulfill the excess demand. For example, entering 2021 there is global shortage of certain electronics and semiconductor parts given higher global demand and the impact of COVID-19 on the global supply chain. If we are not able to obtain parts in a reasonable timeframe our business may be adversely impacted.

Activities necessary to integrate acquisitions may result in costs more than current expectations or be less successful than anticipated.

We have completed acquisitions in the past and we may acquire other businesses in the future. The success of such transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions and to apply our internal controls process to these acquired businesses. The integration of acquisitions may require significant attention from our management, and the diversion of management’s attention and resources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first entered the acquisition transaction. If actual integration costs are higher than amounts originally anticipated, if we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from anticipated synergies, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

We transitioned a significant amount of our supply base to Asian suppliers.

We transitioned the purchasing of a substantial portion of components for our products to Asian suppliers to lower our materials costs and shipping expenses. These components might require us to incur higher than anticipated testing or repair costs, which would have an adverse effect on our operating results. Customers who have strict and extensive qualification requirements might not accept our products if these lower-cost components do not meet their requirements. A delay or refusal by our customers to accept such products, as well as an inability of our suppliers to meet our purchasing requirements, might require us to purchase higher-priced components from our existing suppliers or might cause us to lose sales to these customers, either of which could lead to decreased revenue and gross margins and have an adverse effect on our results of operations.

We generally have no long-term contracts with our customers requiring them to purchase any specified quantities from us.

Our sales are primarily made on a purchase order basis, and we generally have no long-term purchase commitments from our customers, which is typical in the industries we serve. As a result, we are limited in our ability to predict the level of future sales or commitments from our current customers, which may diminish our ability to allocate

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labor, materials, and equipment in the manufacturing process effectively. In addition, we may purchase inventory in anticipation of sales that do not materialize, resulting in excess and obsolete inventory write-offs.

If we are unable to adjust our business strategy successfully for some of our product lines to reflect the increasing price sensitivity on the part of our customers, our business and financial condition could be harmed.

Our business strategy for many of our product lines has been focused on product performance and technology innovation to provide enhanced efficiencies and productivity. Our customers continually exert pressure on us to reduce our prices and extend payment terms and we may be required to enter into long term reduced pricing agreements with our largest customers to remain competitive. In addition, we compete in markets in which customers may include dual or multi-sourcing of power. We believe some of our Asian competitors benefit from local governmental funding incentives and purchasing preferences from end-user customers in their respective countries. If competition against any of our product lines should come to focus solely on price rather than on product performance and technology innovation, we will need to adjust our business strategy, product offerings and product costs accordingly, and if we are unable to do so, our business, financial condition, and results of operations could be materially and adversely affected.

A significant portion of our sales and accounts receivable are concentrated among a few customers.

The following table summarizes the percentage of total sales derived from our ten largest customers:

Years Ended December 31, 

2020

    

2019

    

2018

Ten largest customers

58.0

%  

57.3

%  

62.5

%  

The following table summarizes sales to and percentage of total sales from Applied Materials, Inc. and Lam Research Corp., our two largest customers (in thousands):

Years Ended December 31, 

    

2020

    

2019

    

2018

Applied Materials, Inc.

$

248,350

    

17.5

%  

$

164,724

    

20.9

%  

$

258,027

    

35.9

%  

Lam Research

 

141,778

 

10.0

%  

 

88,251

 

11.2

%  

 

109,005

 

15.2

%  

We have an accounts receivable balance from Applied Materials, Inc. of $33.4 million and $36.8 million as of December 31, 2020 and 2019, respectively. A significant decline in sales from this or other large customers, or the Company’s inability to collect on these sales, could materially and adversely impact our business, results of operations and financial condition.

The loss of any of our key personnel could significantly harm our results of operations and competitive position.

Our success depends to a significant degree upon the continuing contributions of our key management, technical, marketing, and sales employees. We may not be successful in retaining our key employees or attracting or retaining additional skilled personnel as required. Failure to retain or attract key personnel could significantly harm our results of operations and competitive position. Our success in hiring and retaining employees depends on a variety of factors, including the attractiveness of our compensation and benefit programs, global economic or political and industry conditions, our organizational structure, our reputation, culture and working environment, competition for talent and the availability of qualified employees, the availability of career development opportunities, and our ability to offer a challenging and rewarding work environment. We must develop our personnel to provide succession plans capable of maintaining continuity during the inevitable unpredictability of personnel retention. While we have plans for key management succession and long-term compensation plans designed to retain our senior employees, if our succession plans do not operate effectively, our business could be adversely affected.

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The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which we have no control.

The stock market has from time to time experienced, and is likely to continue to experience, extreme price and volume fluctuations. Prices of securities of technology companies have been especially volatile and have often fluctuated for reasons that are unrelated to their operating performance. In the past, companies that have experienced volatility in the market price of their stock have been the subject of securities class action litigation. If we were the subject of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.

Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decrease significantly.

Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control. Because our operating expenses are based on anticipated revenue levels, our sales cycle for development work is relatively long, and a high percentage of our expenses are fixed for the short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from period to period. If our earnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.

Commercial and financial related risks

We are highly dependent on our intellectual property.

Our success depends significantly on our proprietary technology. We attempt to protect our intellectual property rights through patents and non-disclosure agreements; however, we might not be able to protect our technology, and customers or competitors might be able to develop similar technology independently. In addition, the laws of some foreign countries might not afford our intellectual property the same protections as do the laws of the United States. Our intellectual property is not protected by patents in several countries in which we do business, and we have limited patent protection in other countries, including the PRC Generally, our efforts to obtain international patents have been concentrated in the European Union and certain industrialized countries in Asia, including Korea, Japan, and Taiwan. If we are unable to protect our intellectual property successfully, our business, financial condition, and results of operations could be materially and adversely affected.

The PRC commercial law is relatively undeveloped compared to the commercial law in the United States. Limited protection of intellectual property is available under PRC law. Consequently, manufacturing our products in the PRC may subject us to an increased risk that unauthorized parties may attempt to copy our products or otherwise obtain or use our intellectual property.

Our operations in the People’s Republic of China (PRC) and the Asia Pacific region are subject to significant political and economic uncertainties over which we have little or no control and we may be unable to alter our business practice in time to avoid reductions in revenues.

A significant portion of our operations outside the United States are located in the PRC, which exposes us to risks, such as exchange controls and currency restrictions, changes in local economic conditions, changes in customs regulations and tariffs, changes in tax policies, changes in PRC laws and regulations, possible expropriation or other PRC government actions, and unsettled political conditions including potential changes in U.S. policy regarding overseas manufacturing. At various times during recent years, the U.S. and PRC have had significant disagreements over geopolitical, trade and economic issues. Controversies may arise in the future between these two countries. Any escalating political controversies between the U.S. and PRC, whether or not directly related to our business, could have a material adverse effect on our operations, business, results of operations, and financial condition. See "We are exposed to risks associated with worldwide financial markets and the global economy" risk factor below.

Additionally, there is inherent risk, based on the complex relationships among PRC, Hong Kong, Taiwan, and the United States, that political, diplomatic, and national security influences might lead to trade, technology, or capital disputes,

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and/or disruptions, in particular those affecting the semiconductor industry. This would adversely affect our business with PRC, Hong Kong, and/or Taiwan and perhaps the entire Asia Pacific region or global economy.

Actions by the Chinese government extending its territorial claims, such as the recent passage of the national security law in Hong Kong and the planned establishment of an Air Defense Identification Zone over the South China Sea, raises the fear of conflict that could result in international reprisal. Actions by the U.S. government on trade policy against the PRC and companies like Huawei Technologies Co., Ltd. have also escalated tensions. Lastly, the recent U.S. and PRC consulate closures and the continuing Hong Kong political unrest is creating more uncertainty. Should the PRC take any actions against Taiwan, we could see additional risks to diplomatic and trade relations in the region. Given our expanded presence in the PRC and Hong Kong, the company’s business results, operations and financial condition could be adversely affected by these developments and other changes to political, diplomatic, and social conditions. Moreover, PRC’s policies towards, and treatment of, U.S. companies operating in PRC and Hong Kong could change quickly resulting in an adverse impact on the Company.

We are subject to risks inherent in international operations.

Given the global nature of our business, we have both domestic and international concentrations of cash and investments. The value of our cash, cash equivalents, and marketable securities can be negatively affected by liquidity, credit deterioration, financial results, economic risk, political risk, sovereign risk, or other factors.

Sales to our customers outside the United States were approximately 68.7% and 59.2% of our total sales for the year ended December 31, 2020 and 2019, respectively. Our acquisitions have increased our presence in international locations. Our success producing goods internationally and competing in international markets is subject to our ability to manage various risks and difficulties, including, but not limited to:

our ability to effectively manage our employees at remote locations who are operating in different business environments from the United States;
our ability to develop and maintain relationships with suppliers and other local businesses;
compliance with product safety requirements and standards that are different from those of the United States;
variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of intellectual property and contract rights;
trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions;
customs regulations and the import and export of goods (including customs audits in various countries that occur from time to time);
the ability to provide enough levels of technical support in different locations;
our ability to obtain business licenses that may be needed in international locations to support expanded operations;
timely collecting accounts receivable from foreign customers including significant balances in accounts receivable from foreign customers as of December 31, 2020;
changes in tariffs, taxes, and foreign currency exchange rates; and

Our profitability and ability to implement our business strategies, maintain market share and compete successfully in international markets will be compromised if we are unable to manage these and other international risks successfully.

We are exposed to risks associated with worldwide financial markets and the global economy.

Our business depends on the expansion of manufacturing capacity in our end markets and the installation base for the products we sell. In the past, severe tightening of credit markets, turmoil in the financial markets, and a weakening global economy have contributed to slowdowns in the industries in which we operate and has negatively impacted the global demand for our products. Some of our key markets depend largely on consumer spending. Economic uncertainty exacerbates negative trends in consumer spending and may cause our customers to push out, cancel, or refrain from placing orders.

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Difficulties or increased costs in obtaining capital and uncertain market conditions may also lead to a reduction of our sales and greater instances of nonpayment. These conditions may similarly affect our key suppliers, which could affect their ability to deliver parts and result in delays for our products. Further, these conditions and uncertainty about future economic conditions including inflation, interest rates, availability of capital markets, consumer spending rates, energy availability and costs and the effects of government initiatives to manage economic conditions could make it challenging for us to forecast our operating results and evaluate the risks that may affect our business, financial condition, and results of operations.

Globalization of sales increases risk of compliance with policy.

We operate in an increasingly complex sales environment around the world which places greater importance on our global control environment and imposes additional oversight risk. Such increased complexity could adversely affect our operating results by increasing compliance costs in the near-term and by increasing the impact of control failures in the event of non-compliance.

Our legacy inverter products may suffer higher than anticipated litigation, damage, or warranty claims.

Our legacy inverter products (of which we discontinued the manufacture, engineering, and sale in December 2015 and which are reflected as Discontinued Operations in this filing) contain components that may contain errors or defects and were sold with original product warranties ranging from one to ten years with an option to purchase additional warranty coverage for up to 20 years. If any of our products are defective or fail because of their design, we might be required to repair, redesign, or recall those products or to pay damages (including liquidated damages) or warranty claims, and we could suffer significant harm to our reputation. We are experiencing increasing claims from customers and suppliers and increasing litigation related to the legacy inverter product line. We review such claims and vigorously defend against such lawsuits in the ordinary course of our business. We cannot assure that any such claims or litigation brought against us will not have a material adverse effect on our business or financial statements. Our involvement in such litigation could result in significant expense to us and divert the efforts of our technical and management personnel. We also accrue a warranty reserve for estimated costs to provide warranty services including the cost of technical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in additional expenses in the line "Income (loss) from discontinued operations, net of income taxes" on our Consolidated Statement of Operations in future periods. We plan to continue supporting inverter customers with service maintenance and repair operations. This includes performing service to fulfill obligations under existing service maintenance contracts. There is no certainty that these can be performed profitably and could be adversely affected by higher than anticipated product failure rates, loss of critical service technician skills, an inability to obtain service parts, customer demands and disputes and cost of repair parts, among other factors. See Note 4. Disposed and Discontinued Operations in Part II, Item 8 "Financial Statements and Supplementary Data" contained herein.

Our products may suffer from defects or errors leading to damage or warranty claims.

Our products use complex system designs and components that may contain errors or defects, particularly when we incorporate new technology into our products or release new versions. If any of our products are defective or fail because of their design, we might be required to repair, redesign, or recall those products, pay damages (including liquidated damages) or warranty claims, and we could suffer significant harm to our reputation. We accrue a warranty reserve for estimated costs to provide warranty services including the cost of technical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in decreased gross profit. In recent years, we have experienced increased warranty costs for our legacy inverter product lines, which is reflected in "Income (loss) from discontinued operations, net of income taxes." See Note 4. Disposed and Discontinued Operations in Part II, Item 8 "Financial Statements and Supplementary Data" contained herein.

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Unfavorable currency exchange rate fluctuations may lead to lower operating margins, or may cause us to raise prices, which could result in reduced sales.

Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations, and we could experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be materially and adversely affected. In addition, we have large, long term liabilities such as local lease and pension liabilities in Europe and Asia creating more significant exposure to fluctuations in the value of the Euro, Philippine Peso, and Chinese Yuan. The company does not attempt to hedge these exposures given the long-term nature of the underlying liabilities and the non-cash nature of the foreign exchange gain or loss.

The PRC government is continually pressured by its trading partners to allow its currency to float in a manner like other major currencies. Any change in the value of the Chinese yuan could significantly increase the labor and other costs incurred in the operation of our Shenzhen and Zhongshan facilities and the cost of raw materials, parts, components, and subassemblies that we source in the PRC, which could materially and adversely affect our results of operations.

The United Kingdom’s exit from the European Union and related actions could adversely affect us.

On June 23, 2016, the United Kingdom ("UK") held a referendum in which voters approved an exit from the European Union ("EU"). On January 23, 2020, the UK left the EU, which is commonly referred to as "Brexit," and was in a transitionary period through December 31, 2020. As of January 1, 2021, EU Trade Agreements no longer apply to the UK. The UK has taken steps to reproduce the effects of trading agreements that previously applied through the provisional application of new trade agreements not yet ratified and has introduced the UK Global Tariff. These changes result in increased regulatory complexities on imports and exports between the UK and EU countries and may adversely affect our sales, operations, and financial results. Our operations in the UK may be adversely affected by significant fluctuations in the UK exchange rates and increased administrative costs and tariffs on the importation of parts for manufacturing and repair services. Moreover, the imposition of any import restrictions and duties levied on our UK products as imported for EU customers may make our products more expensive for such customers and less competitive from a pricing perspective.

Difficulties with our enterprise resource planning ("ERP") system and other parts of our global information technology system could harm our business and results of operation.

Like many multinational corporations, we maintain a global information technology system, including software products licensed from third parties. The acquisition of Artesyn added additional information systems that are initially different from current systems. Any system, network or Internet failures, misuse by system users, the hacking into or disruption caused by unauthorized access or loss of license rights could disrupt our ability to timely and accurately manufacture and ship products or to report our financial information in compliance with the timelines mandated by the SEC. Any such failure, misuse, hacking, disruptions, or loss would likely cause a diversion of management’s attention from the underlying business and could harm our operations. In addition, a significant failure of our global information technology system could adversely affect our ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002.

If our network security measures are breached and unauthorized access is obtained to a customer’s data or our data or our information technology systems, we may incur significant legal and financial exposure and liabilities.

As part of our day-to-day business, we store our data and certain data about our customers in our global information technology system. Unauthorized access to our data, including any regarding our customers, could expose us to a risk of loss of this information, loss of business, litigation, and possible liability. These security measures may be breached by intentional misconduct by computer hackers, because of third-party action, employee error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into disclosing sensitive information such as usernames, passwords, or other information in order to gain access to our customers’ data or our data, including our intellectual property and other confidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally are not

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recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any security breach could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead to legal liability, and negatively impact our future sales.

We have been, and in the future may again be, involved in litigation. Litigation is costly and could result in further restrictions on our ability to conduct business or make use of market relationships we have developed, or an inability to prevent others from using our technology.

Litigation may be necessary to enforce our commercial or property rights, to defend ourselves against claimed violations of such rights of others, or to protect our interests in regulatory, tax, customs, commercial, and other disputes, or similar matters. We have been experiencing increased litigation related to our legacy inverter product line. Litigation often requires a substantial amount of our management’s time and attention, as well as financial and other resources, including:

substantial costs in the form of legal fees, fines, and royalty payments;
restrictions on our ability to sell certain products or in certain markets;
an inability to prevent others from using technology we have developed; and
a need to redesign products or seek alternative marketing strategies.

Any of these events could have a significant adverse effect on our business, financial condition, and results of operations.

Return on investments or interest rate declines on plan investments could result in additional unfunded pension obligations for our pension plan.

We currently have unfunded obligations to our pension plans. The extent of future contributions to the pension plan depends heavily on market factors such as the discount rate used to calculate our future obligations and the actual return on plan assets which enable future payments. We estimate future contributions to the plan using assumptions with respect to these and other items. Changes to those assumptions could have a significant effect on future contributions. Additionally, a material deterioration in the funded status of the plan could increase pension expenses and reduce our profitability. See Note 17. Employee Retirement Plans and Postretirement Benefits in Part II, Item 8 "Financial Statements and Supplementary Data" contained herein.

Our intangible assets may become impaired.

As of December 31, 2020, we have $210.0 million of goodwill and $168.9 million in intangible assets. We periodically review the estimated useful lives of our identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fair value, or for intangible assets, a revised useful life. The events and circumstances include significant changes in the business climate, legal factors, operating performance indicators, and competition. Any impairment or revised useful life could have a material and adverse effect on our financial position and results of operations and could harm the trading price of our common stock.

International trade, tax, and regulatory related risks

Significant developments stemming from recent U.S. government actions and proposals concerning tariffs and other economic proposals could have a material adverse effect on us.

U.S. government actions are imposing greater restrictions and economic disincentives on international trade. It has initiated the imposition of additional tariffs on certain foreign goods, including steel and aluminum, semiconductor manufacturing equipment and spare parts thereof and has also announced the imposition of import license requirements on aluminum articles. The government has amended and expanded export regulations regarding sales to companies on the U.S. Entity List. These changes prevent sales of foreign produced direct product of the U.S. that is manufactured using controlled U.S.-origin equipment, technology, and software located outside the United States to companies on the U.S. Entity List. Additionally, the U.S. Department of Defense continues to issue lists of companies it has determined to be owned or controlled by China’s People’s Liberation Army on which sanctions could be levied by executive order, and the

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Department of Commerce has published their "first tranche" of designated military end users from China and Russia for whom export licenses are now required.

Furthermore, the government has determined that the Special Administrative Region of Hong Kong is no longer sufficiently autonomous to justify being treated as separate from China and has eliminated certain license exceptions for the export of controlled goods to Hong Kong and has removed Hong Kong as a separate shipping destination under the Export Administration Regulations ("EAR").

In response to U.S. Government actions, China passed the Export Control Law of the People’s Republic of China, effective December 1, 2020. The Export Control Law provides the Chinese government with the framework to ban exports of strategic materials and advanced technologies to specific foreign entities on its Control List and also provides a counterweight to the U.S. government’s restrictions through provisions for retaliatory action and extraterritorial jurisdiction.

Changes in U.S. trade policy could result in one or more U.S. trading partners adopting responsive trade policy making it more difficult or costly for us to export our products to those countries. As indicated above, these measures could also result in increased costs for goods imported into the U.S. This in turn could require us to increase prices to our customers which may reduce demand, or, if we are unable to increase prices, result in lowering our margin on goods and services sold. To the extent that trade tariffs and other restrictions imposed by the U.S. increase the price of semiconductor equipment and related parts imported into the U.S., the cost of our materials may be adversely affected and the demand from customers for products and services may be diminished, which could adversely affect our revenues and profitability.

The adoption and expansion of trade restrictions, the occurrence of a trade war, or other governmental action related to tariffs or trade agreements or policies has the potential to adversely impact demand for our products, our costs, our customers, our suppliers, and the U.S. economy, which in turn could adversely impact our business, financial condition, and results of operations.

Changes in U.S. social, political, regulatory, and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as a result of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and among non-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.

Increased governmental action on income tax regulations could negatively impact our business.

International governments have heightened their review and scrutiny of multinational businesses like ours which could increase our compliance costs and future tax liability to those governments. As governments continue to look for ways to increase their revenue streams, they could increase audits of companies to accelerate the recovery of monies perceived as owed to them under current or past regulations. Such an increase in audit activity could have a negative impact on companies which operate internationally, as we do.

Changes in tax laws, tax rates, or mix of earnings in tax jurisdictions in which we do business, could impact our future tax liabilities and related corporate profitability.

We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practices in various jurisdictions by their nature are complex and may be subject to significant change due to economic, political, and other conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower statutory rates and earnings higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes to our existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations, administrative

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practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate multinationals. The U.S., many countries in the European Union, and several other countries are actively considering changes in this regard.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our income tax returns could adversely affect our results.

Our provision for income taxes is subject to volatility and could be adversely affected by earnings being lower than anticipated in countries that have lower tax rates and higher than anticipated in countries that have higher tax rates; by changes in the valuation of our deferred tax assets and liabilities; by changes, regulations, and interpretations of foreign-derived intangible income ("FDII"), global intangible low-tax income ("GILTI") and base erosion and anti-abuse tax laws ("BEAT"); by expiration of or lapses in tax incentives; by transfer pricing adjustments, including the effect of acquisitions on our legal structure; by tax effects of nondeductible compensation; by tax costs related to intercompany realignments; by changes in accounting principles; or by changes in tax laws and regulations, treaties, or interpretations thereof, including changes to the taxation of earnings of our foreign subsidiaries, the deductibility of expenses attributable to foreign income, and the foreign tax credit rules. Significant judgment is required to determine the recognition and measurement attribute prescribed in the accounting guidance for uncertainty in income taxes. The Organization for Economic Co-operation and Development ("OECD"), an international association comprised of 36 countries, including the United States, has made changes to numerous long-standing tax principles. There can be no assurance that these changes, once adopted by countries, will not have an adverse impact on our provision for income taxes. Further, because of certain of our ongoing employment and capital investment actions and commitments, our income in certain countries is subject to reduced tax rates. Our failure to meet these commitments could adversely impact our provision for income taxes. In addition, we are subject of regular examination of our income tax returns by tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. There can be no assurance that the outcomes from these continuous examinations will not have an adverse effect on our operating results and financial condition.

Our business is subject to complex and evolving U.S. and international laws and regulations regarding privacy and data protection. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, changes to our business practices, penalties, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

Regulatory authorities around the world have implemented or are considering several legislative and regulatory proposals concerning data protection, including measures to ensure that encryption of users’ data does not hinder law enforcement agencies’ access to that data. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. These legislative and regulatory proposals, if adopted, and such interpretations could, in addition to the possibility of fines, result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.

We are subject to numerous governmental regulations.

We are subject to federal, state, local and foreign regulations, including environmental regulations and regulations relating to the design and operation of our products and control systems and regulations governing the import, export and customs duties related to our products. We might incur significant costs as we seek to ensure that our products meet safety and emissions standards, many of which vary across the states and countries in which our products are used. In the past, we have invested significant resources to redesign our products to comply with these directives. In addition, with our acquisition of Versatile Power, Inc., we expanded our presence in the medical market to include more highly regulated applications and added its medical-certified manufacturing center to our operating footprint. We may encounter increased costs to maintain compliance with the quality systems and other regulations and requirements that apply to the acquired business. Compliance with future regulations, directives, and standards could require us to modify or redesign some products, make capital expenditures, or incur substantial costs. Also, we may incur significant costs in complying with the

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numerous imports, exports, and customs regulations as we seek to sell our products internationally. If we do not comply with current or future regulations, directives, and standards:

we could be subject to fines and penalties;
our production or shipments could be suspended; and
we could be prohibited from offering particular products in specified markets.

If we were unable to comply with current or future regulations, directives and standards, our business, financial condition, and results of operations could be materially and adversely affected.

Financial reform legislation will result in new laws and regulations that may increase our costs of operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal agencies to adopt a broad range of implementing rules and regulations, and to prepare numerous studies and reports for Congress. On August 22, 2012, under the Dodd-Frank Act, the SEC adopted requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether such minerals originate from the Democratic Republic of Congo and adjoining countries. We must perform sufficient due diligence to determine whether such minerals are used in the manufacture of our products. Regarding our acquisition of Artesyn, we will need to complete due diligence on the minerals used in the manufacture of those products and include our due diligence results in our next conflict minerals report. In addition, we incur costs to comply with the disclosure requirements, including costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in satisfying customers who require that all the components of our products are certified as conflict mineral free.

General Risk Factors

Our failure to maintain appropriate environmental, social, and governance ("ESG") practices and disclosures could result in reputational harm, a loss of customer and investor confidence, and adverse business and financial results.

Governments, investors, customers, and employees are enhancing their focus on ESG practices and disclosures, and expectations in this area are rapidly evolving and increasing. While we monitor the various and evolving standards and associated reporting requirements, failure to adequately maintain appropriate ESG practices that meet diverse stakeholder expectations may result in the loss of business, diluted market valuation, an inability to attract customers, and an inability to attract and retain top talent.

ITEM 1B.        UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.           PROPERTIES

Information concerning our principal properties is set forth below:

Location

    

Principal Activity

    

Ownership

 

Denver, Colorado

Corporate headquarters, general and administrative

Leased

Fort Collins, Colorado

Research and development, distribution, sales, and service

Leased

Lockport, New York

Manufacturing, distribution, service, and research and development

Leased

Campbell, California

Manufacturing, distribution, service, and research and development

Leased

Milpitas, California

Research and development, sales, and service

Leased

Ronkonkoma, New York

Manufacturing, distribution, service, and research and development

Leased

Vancouver, Washington

Research and development, manufacturing, distribution, sales, and service

Leased

Georgetown, Massachusetts

Sales

Leased

Eden Prairie, Minnesota

Engineering, and research and development

Leased

Tempe, Arizona

Sales and administration

Leased

Beijing, China

Sales

Leased

Shanghai, China

Sales and distribution

Leased

Shenzhen, China

Manufacturing, distribution, service, and research and development

Leased

Xian, China

Service

Leased

Zhongshan, China

Manufacturing

Leased

Pune, India

Sales

Leased

Tokyo, Japan

Sales and service

Leased

Seoul, South Korea

Sales and service

Leased

Bukit Minak, Malaysia

Manufacturing and distribution

Leased

Quezon, Philippines

Engineering, research and development, administration, and support

Leased

Rosario, Philippines

Manufacturing

Owned

Santa Rosa, Philippines

Manufacturing

Leased

Singapore, Singapore

Global operations headquarters (sales, service, and research and development)

Leased

Taipei, Taiwan

Sales, distribution, and service

Leased

Hong Kong, Hong Kong

Distribution and general and administrative

Leased

Ballerup, Denmark

Manufacturing, distribution, sales, service, and research and development

Leased

Metzingen, Germany

Distribution, sales, and service

Leased

Warstein-Belecke, Germany

Research and development, distribution, sales, and service

Leased

Frankfurt, Germany

Manufacturing, distribution, sales, service, and research and development

Leased

Magdeburg, Germany

Manufacturing and distribution

Leased

Cork, Ireland

Sales, service, and research and development

Leased

Caesarea, Israel

Research and development and service

Leased

Littlehampton, United Kingdom

Manufacturing, distribution, sales, service, and research and development

Leased

We consider the properties that we own or lease as adequate to meet our current and future requirements. We regularly assess the size, capability, and location of our global infrastructure and periodically make adjustments based on these assessments.

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ITEM 3.           LEGAL PROCEEDINGS

We are presently 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 litigation 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 rights. An unfavorable decision in a collection action against a customer we sold products to, or a claim or counterclaim from a customer related to alleged product failures, could also have a material adverse effect on our financial position or reported results of operations. We are engaged presently in such disputes and legal actions with customers and supplier for the inverter product line. 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. For further information see Note 19. Commitments and Contingencies in Part II, Item 8 "Financial Statements and Supplementary Data."

ITEM 4.           MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5.       MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Principal Market

Our common stock is listed on the NASDAQ Global Select Market under the symbol "AEIS." On January 31, 2021, the number of common stockholders of record was approximately 300.

Dividend Policy

We have not declared or paid any cash dividends on our capital stock in our history as a public company. However, on December 15, 2020, our Board of Directors ("the Board") approved the initiation of a cash dividend program under which we intend to pay a regular quarterly dividend of $0.10 per share, starting in the first quarter of 2021. On February 1, 2021, the Board declared a quarterly dividend of $0.10 per share payable to shareholders of record as of February 22, 2021. Future dividend payments are subject to approval by the Board.

Purchases of Equity Securities by the Issuer

In September 2015, the Board authorized a program to repurchase up to $150.0 million of our stock over a thirty-month period. In November 2017, the Board approved an extension of the share repurchase program to December 2019 from its original maturity of March 2018. In May 2018, the Board approved a $50 million increase in the repurchase authorization. 

On December 18, 2019, the Board authorized to remove the expiration date from the repurchase program and increased the balance available for stock repurchase by $25.1 million. As of December 31, 2020, the Company was authorized to repurchase shares of the Company’s common stock of up to a total of $38.4 million.

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The following table summarizes the stock repurchase activity for the three months ended December 31, 2020 (in thousands, except per share amount):

 

    

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 per share amount)

October 1, 2020 - October 31, 2020

1

$

61.91

1

$

38,369

November 1, 2020 - November 30, 2020

December 1, 2020 - December 31, 2020

Total

1

$

61.91

1

$

38,369

In order to execute the repurchase of shares of our common stock, the Company periodically enters into stock repurchase agreements. All shares repurchased were executed in the open market, and no shares were repurchased from related parties. Repurchased shares are retired and assumed the status of authorized and unissued shares. Accordingly, the associated cost of the repurchased shares was recognized as a reduction to additional paid-in capital.

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Performance Graph

The performance graph below shows the five-year cumulative total stockholder return on our common stock in comparison with various other indices during the period from December 31, 2015 through December 31, 2020. The comparison assumes $100 was invested on December 31, 2015 in Advanced Energy common stock and in each of the indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph represents past performance and should not be considered an indication of future performance.

Chart, diagram, line chart

Description automatically generated

*

$100 invested on December 31, 2015 in our stock or index, including reinvestment of dividends. Indices and our stock performance are calculated on a calendar year-end basis.

December 31,

2015

    

2016

    

2017

    

2018

    

2019

 

2020

Advanced Energy Industries, Inc.

$

100.00

$

193.94

$

239.04

$

152.07

$

252.21

$

343.50

NASDAQ Composite

 

100.00

 

108.87

 

141.13

 

137.12

 

187.44

 

271.64

RDG Semiconductor Composite

 

100.00

 

131.64

 

177.48

 

164.63

 

242.61

 

351.91

S&P 1000

100.00

122.49

141.26

126.71

158.57

179.15

Information relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" of this Annual Report on Form 10-K.

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ITEM 6.           SELECTED FINANCIAL DATA

Not applicable.

ITEM 7.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain statements set forth below under this caption constitute forward-looking statements. See "Special Note Regarding Forward-Looking Statements" in this Annual Report on Form 10-K for additional factors relating to such statements and see "Risk Factors" in Item 1A for a discussion of certain risks applicable to our business, financial condition, and results of operations.

This section of this Form 10-K discusses and compares the results of operations for 2020 and 2019. The discussion and analysis comparing the results of operations for 2018 to 2019 are not included in this Form 10-K and can be found within Part II, Item 7 "Management’s Discussion and Analysis for Financial Condition and Results of Operations" in our 2019 Form 10-K for the year ended December 31, 2019.

Overview

We design, manufacture, sell and support precision power products that transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-controllable, usable power that is predictable, repeatable, and customizable. 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, data center computing, networking, telecommunication, analytical instrumentation, medical equipment, industrial technology, and temperature-critical thermal applications such as material and chemical processing. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and refurbishments and used equipment to companies using our products.

Driven by continuing technology evolution and changing customer demands, the markets we serve are constantly changing in terms of advancement in applications, core technology and competitive pressures. New products we design for capital equipment manufacturers could have a lifespan of five to ten years. Our success and future growth depend on our products being designed into our customers’ new generations of equipment as they develop new technologies and applications. We work with these original equipment manufacturers early in their design cycles to modify, enhance and upgrade our products or design new products that meet the requirements of their new and future systems. The design win process is highly competitive, and we may win or lose new designs for our existing customers’ or new customers’ next generations of equipment. If existing or new customers do not choose our products as a result of the development, evaluation and qualification efforts related to the design win process, our market share may be reduced, our potential revenues related to the lifespan of our customers’ products, which can be 5-10 years, may not be realized, and our business, financial condition and results of operations may be materially and adversely impacted.

Critical Accounting Estimates

The preparation of consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America ("U.S. GAAP") requires us to make judgments, assumptions, and estimates that affect the amounts reported. Note 1. Operations and Summary of Significant Accounting Policies and Estimates in Part II, Item 8 "Financial Statements and Supplementary Data" describes the significant accounting policies used in the preparation of our consolidated financial statements. The accounting positions described below are significantly affected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of the consolidated financial statements, actual results could differ materially from the amounts reported based on variability in factors affecting these statements.

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Revenue Recognition

We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or completion of services have been transferred to our customers. The transaction price is based upon the standalone selling price. In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling fees, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our standard warranty do not generate revenue.

We maintain a credit approval process and we make significant judgments in connection with assessing our customers’ ability to pay. Despite this assessment, from time to time, our customers are unable to meet their payment obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, a significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results. Additionally, if our credit loss rates prove to be greater than we currently estimate, we record additional reserves for credit losses.

Business Combinations

We record the assets acquired and liabilities assumed in a business combination at their acquisition date fair values. Fair values of assets acquired, and liabilities assumed are based upon available information and may involve engaging an independent third party to perform an appraisal. Estimating fair values can be complex and subject to significant business judgment. We must also identify and include in the allocation all acquired tangible and intangible assets that meet certain criteria, including assets that were not previously recorded by the acquired entity. The estimates most commonly involve property, plant and equipment and intangible assets, including those with indefinite lives. The estimates also include the fair value of contracts including commodity purchase and sale agreements, storage contracts, and transportation contracts. The excess of the purchase price over the net fair value of acquired assets and assumed liabilities is recorded as goodwill, which is not amortized but instead is evaluated for impairment at least annually. Pursuant to GAAP, an entity is allowed a reasonable period of time (not to exceed one year) to obtain the information necessary to identify and measure the fair value of the assets acquired and liabilities assumed in a business combination.

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Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. We calculate tax expense consistent with intraperiod tax allocation methodology resulting in an allocation of current year tax expense/benefit between continuing operations and discontinued operations. We record a valuation allowance to reduce our deferred tax assets to the net amount that we believe is more likely than not to be realized.

We recognize tax benefits from uncertain tax positions only if we believe that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance that the final tax outcome of these matters will not be materially different. We adjust these reserves when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period in which such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest and penalties. For more details see Note 5. Income Taxes in Part II, Item 8 "Financial Statements and Supplementary Data."

Inventory

We value our inventory at the lower of cost (first-in, first-out method) or net realizable value. We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on our estimated forecast of product demand. Our industry is subject to technological change, new product developments, and changes in end-user demand for our products which can fluctuate significantly. Any significant changes in end-user demand, technology or new product developments could have a significant impact on the value of our inventory and our reported operating results.

Warranty Costs

We offer warranty coverage for a majority of our products for periods typically ranging from 12 to 24 months after shipment. We provided warranties on our inverter products for five to ten years and also provided the option to purchase additional warranty coverage up to 20 years. Our standard inverter product warranty expense is reported within discontinued operations. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the repairs. The assumptions we use to estimate warranty accruals are reevaluated periodically, considering actual experience, and when appropriate, the accruals are adjusted. Should product failure rates differ from our estimates, actual costs could vary significantly from our expectations. See Note 4. Disposed and Discontinued Operations in Part II, Item 8 "Financial Statements and Supplementary Data" for more information on our discontinued operations and Note 15. Warranties in Part II, Item 8 "Financial Statements and Supplementary Data" for more information.

Goodwill, Intangible and Other Long-Lived Assets

We evaluate the carrying value of our goodwill for impairment at least annually or when an interim triggering event occurs that would indicate that impairment may have taken place. Our annual impairment test was performed as of December 31st with no indication of impairment. We evaluate our other definite-lived intangible assets for impairment when evidence exists that certain events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Significant judgments and assumptions are required in such impairment evaluations.

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The annual impairment test of goodwill may be performed using an assessment of qualitative factors if it is considered more likely than not that goodwill is not impaired. If this qualitative assessment indicates that it is more likely than not that goodwill is impaired, then the next step of impairment testing compares the fair value of a reporting unit to its carrying value. If fair value exceeds carrying value, then we conclude no goodwill impairment has occurred. Conversely, if carrying value exceeds fair value, we recognize an impairment loss.

We evaluate definite-lived intangible assets and other long-lived assets whenever there is an indicator of impairment. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows. If our expectations of future results and cash flows are significantly diminished, intangible assets, long-lived assets, and goodwill may be impaired and the resulting charge to operations may be material. Changes in these estimates could result in significant revisions to the carrying value of these assets and may result in material charges to our results of operations.

Defined Benefit Pension Plans

Accounting for pension plans requires that we make assumptions that involve considerable judgment which are significant inputs in the actuarial models that measure our net pension obligations and ultimately impact our earnings. These include the discount rate, long-term expected rate of return on assets, compensation trends, inflation considerations, health care cost trends and other assumptions, as well as determining the fair value of assets in our funded plans. Specifically, the discount rates, as well as the expected rates of return on assets and plan asset fair value determination, are important assumptions used in determining the plans' funded status and annual net periodic pension and benefit costs. We evaluate these critical assumptions at least annually on a plan and country-specific basis. We also, with the help of actuaries, periodically evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. The Company believes the accounting estimates related to our pension plans are critical accounting estimates because they are highly susceptible to change from period to period based on the performance of plan assets, actuarial valuations, market conditions and contracted benefit changes. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions may materially affect our net pension and postretirement benefit obligations and related expense.

Human Capital Resources

Our corporate citizenship, social responsibility and commitment to our employees extends beyond the products we make. We recognize that our employees are our most important asset, and with approximately 10,000 employees located across the globe, we know that each person’s diverse background and unique skill set are fundamental to our success. We regularly conduct anonymous surveys to seek feedback from our employees on important topics related to confidence in company leadership, career growth opportunities, and improvements on how we can make our company a great place to work. In addition, the results of the survey are shared with our Board. To further increase our commitment to diversity and equity, in 2020, we announced the launch of our inaugural Advanced Energy STEM Diversity Scholarship, which is aimed at developing emerging talent and promoting greater ethnic, racial and gender diversity in STEM. The annual program will begin in the 2021 academic year and will accept applications from undergraduate and post-graduate students attending five leading institutions in the field of power technologies.

Total Rewards

As part of our total rewards philosophy, we believe in offering and maintaining competitive compensation and benefits programs for our employees in order to attract and retain a talented, highly engaged workforce.  Our compensation programs are focused on equitable, fair pay practices including market-based base pay, an annual pay-for-performance incentive plan, and discounted Employee Stock Purchase Plan. In addition to our competitive compensation practices, we offer a strong benefits package in each of the countries in which we operate. In the majority of our non-U.S. operations, we offer additional benefits that supplement governmental statutory benefits. In the U.S., we offer a competitive benefits package that includes four different health care plan options with employee premiums lower than the market average,

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dental, vision, disability and life insurance, health savings and flexible spending accounts, paid-time off, 8-weeks of paid parental leave for both parents, company matched 401(k), flexible work schedules, expanded mental health coverage and employee assistance programs. With the challenging times created by COVID-19, we made the commitment to ensure our employees maintained financial security and provided employees the ability to work from home and paid leave time for our hourly employees who may have been impacted by temporary site closures.

Learning and Development

To support our employees in reaching their full potential and to build internal capabilities, we offer a wide range of internal and external learning and development opportunities. We have a program for education assistance reimbursement that provides financial support to employees who seek to expand their skills and abilities. We support a women’s leadership forum conducted by our employees that discusses, among other things, career development, leadership topics, and the opportunities for mentorship. We also have an internship program designed to help support a pipeline of talent for the Company. We have a robust succession planning process to develop internal leadership capabilities and technical bench strength, ensuring we have a strong workforce for the future.

Health and Safety

We are committed to providing a safe work environment for our employees. We provide regular health and safety training both on-site as needed and through our virtual training tool that assigns training requirements based on job profiles and site-specific requirements. Our Environmental, Health and Safety organization is a global team responsible for health and safety related to on-site operations including hazard and risk identification. Workplace safety is also addressed in operations meetings and monthly business reviews. We are also committed to the standards of the Responsible Business Alliance Code of Conduct which promotes labor, health and safety, environmental and ethics best practices.

Community Involvement

Our charitable contributions committee, founded in 2010, is supported and led by our employees. The committee provides financial support for 501(c)(3) corporations, non-profit institutions, and organizations that improve education, the environment, health and social services across the communities in which we operate and where our employees live. We provide financial support to workforce initiatives led by the local chamber of commerce in Northern Colorado and have partnered with a community college to provide equipment and funding to train technicians and develop skilled labor that may lead to employment opportunities with us or other local companies. We offer each employee eight hours of paid-time off to volunteer with a 501(c)(3) organization of the employee’s choosing. Our Educational Scholarship Program, available to children of AE employees, celebrates education accomplishments and facilitates career and learning goals. In 2020, we received a record number of submissions and recognized ten employees’ students across multiple countries.

Business Environment and Trends

Advanced Energy operates in a single segment structure for power electronics conversion products. The acquisition of Artesyn added additional products and market verticals to our business. Following the acquisition, we have continued to be organized on a global, functional basis to achieve the anticipated synergies associated with the acquisition. We operate in four vertical markets or applications and provide revenue information to enable tracking of market trends. Following the acquisition of Artesyn in September of 2019, we also provide information on an organic and inorganic basis to improve comparability during the periods.

The demand environment in each of our markets is impacted by various market trends, customer buying patterns, design wins, macroeconomic and other factors. During 2020 we saw strengthening demand in Semiconductor Equipment and Data Center Computing Markets and weakening demand in our general industrial markets.

In the beginning of the first quarter of 2020, we began to see an impact of COVID-19 on our operations particularly in China, which has affected both our own workforce and supply chain. This situation remains dynamic and may continue to affect our operations. See Item 1A "Risk Factors" for a discussion of certain risks related to COVID-19.

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SEMICONDUCTOR EQUIPMENT MARKET

Growth in the Semiconductor Equipment market is driven by growing integrated circuits content across many industries, increased demand for processing and storage in advanced applications such as artificial intelligence or autonomous vehicles, the rapid adoption of advanced mobile connectivity solutions such as 5G and enhancing existing and enabling new wireless applications. To address the long-term growing demand for semiconductor devices, the industry continues to invest in production capacities for advanced logic devices at the 7nm technology node and beyond, 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 memory devices is requiring an increased number of 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 radio frequency ("RF") and direct current ("DC") technologies are needed. We are meeting 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 fab, including inspection, metrology, thermal, ion implantation, and semiconductor test, 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. The acquisition of Artesyn in September 2019 expanded Advanced Energy’s reach within the Semiconductor Equipment market by adding a broad range of low voltage applications as well as back-end test and assembly equipment makers.

In the first half of 2019, the semiconductor industry went through a period of weakening equipment investment as a result of slowing growth in end market demand for semiconductor devices, ongoing digestion of equipment capacity, and consumption of existing inventory. Demand for semiconductor equipment has continued to grow through the fourth quarter of 2020 driven by foundry logic and certain memory investments and has returned to prior peak levels. In addition, the demand for semiconductor devices for a wide range of applications is expected to drive investment into 2021. However, due to limited visibility and uncertainty arising from COVID-19 and its impact on the global economy and supply chain, geopolitical uncertainty, overall levels of current investment by our customers, and the cyclical nature of the market it is difficult to determine the extent or duration to which the increased demand for semiconductor equipment will continue.

INDUSTRIAL AND MEDICAL MARKET

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, motor drives and connected light-emitting diodes.

OEM customers design equipment utilizing our process power technologies in a variety of industrial 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.

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. Examples of products sold into the Industrial and Medical market includes high voltage products for analytical instrumentation, medical equipment, low voltage power supplies used in applications for medical devices, test and measurement, medical lasers, scientific instrumentation and industrial equipment, and power control modules and thermal instrumentation products for material fabrication, processing, and treatment. Our gas monitoring products serve multiple applications in the energy market, air quality monitoring and automobile emission monitoring and testing. Our strategy in the Industrial and Medical market is to grow and expand our addressable market both organically through our global distribution channels and through acquisitions of products and technologies that are complimentary and adjacent to our core power conversion applications.

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Revenue for Industrial and Medical products improved in the second half of 2020 after lower revenues in the first half of 2020 primarily due to recessionary macroeconomic conditions, and production and supply chain delays related to COVID-19 that pushed shipments into the third and fourth quarter of 2020. Additionally, we saw modest improvement in industrial markets as global economic growth resumed and our customers were able to increase capacity after governmental restrictions were relaxed during the second half of 2020.

DATA CENTER COMPUTING MARKET

Following the acquisition of Artesyn in September 2019, Advanced Energy entered the Data Center Computing market with industry-leading products and low-voltage power conversion technologies. We sell to many data center server and storage manufacturers, 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 enterprise on-premise computing to the data center. Nevertheless, 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. In late 2019 and through 2020, demand for our embedded power products in the data center computing market increased significantly driven by share gains and a capacity ramp at hyperscale customers. In addition, we believe as a consequence of COVID-19, hyperscale demand has risen in the near term given the increased need for cloud and network applications in the current environment. Demand for hyperscale products declined sequentially during the latter half of 2020, as a result of market digestion following a ramp of investment earlier in the year. This digestion period is expected to continue into the first part of 2021.

TELECOM AND NETWORKING MARKET

The acquisition of Artesyn in September 2019 provided Advanced Energy with a portfolio of products and technologies that are used across the Telecom and Networking market. Our customers 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 in 5G, 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 of their network, as well as cloud data center networking investments for increased bandwidth. Demand in late 2019 and the first half of 2020 was lower as geopolitical issues and consolidation of wireless telecom providers drove slower global investment in cellular and network infrastructure. Revenue increased sequentially in the third and fourth quarters primarily as a result of modest improvement in market conditions and improved manufacturing capacity amid COVID-19.

Results of Continuing Operations

The analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance and relevant trends going forward, and should be read in conjunction with our consolidated financial statements, including the notes thereto, in Item 8 "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

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

Year Ended December 31, 

2020

2019

  

Sales

$

1,415,826

    

$

788,948

Gross profit

 

541,869

 

315,652

Operating expenses

 

365,846

 

261,264

Operating income from continuing operations

 

176,023

 

54,388

Other income (expense), net

 

(17,876)

 

12,806

Income from continuing operations before income taxes

 

158,147

 

67,194

Provision for income taxes

 

22,996

 

10,699

Income from continuing operations, net of income taxes

$

135,151

$

56,495

The following table sets forth the percentage of sales represented by certain items reflected in our Consolidated Statements of Operations:

Year Ended December 31, 

2020

    

2019

Sales

100.0

%  

100.0

%

Gross profit

 

38.3

 

 

40.0

 

Operating expenses

 

25.8

 

 

33.1

 

Operating income from continuing operations

 

12.4

 

 

6.9

 

Other income (expense), net

 

(1.3)

 

 

1.6

 

Income from continuing operations before income taxes

 

11.2

 

 

8.5

 

Provision for income taxes

 

1.6

 

 

1.4

 

Income from continuing operations, net of income taxes

9.5

%  

7.2

%

SALES, NET

The following tables summarize annual sales and percentages of sales, by product line (in thousands):

Year Ended December 31, 

Change 2020 v. 2019

    

2020

    

2019

    

Dollar

    

Percent

Semiconductor Equipment

$

611,864

$

403,018

$

208,846

 

51.8

%

Industrial and Medical

 

313,646

 

245,992

 

67,654

 

27.5

Data Center Computing

322,539

91,438

231,101

252.7

Telecom and Networking

167,777

48,500

 

119,277

 

245.9

Total

$

1,415,826

$

788,948

$

626,878

 

79.5

%

Years Ended December 31, 

2020

    

2019

Semiconductor Equipment

43.2

%

51.1

%

Industrial and Medical

 

22.1

31.2

Data Center Computing

22.8

11.6

Telecom and Networking

11.9

6.1

Total

100.0

%

100.0

%

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OPERATING EXPENSE

The following table summarizes our operating expense as a percentage of sales (in thousands):

Years Ended December 31, 

    

2020

    

2019

    

Research and development

$

143,961

 

10.2

%  

$

101,503

 

12.9

%  

Selling, general, and administrative

 

188,590

 

13.3

 

142,555

 

18.1

Amortization of intangible assets

20,129

 

1.4

 

12,168

 

1.5

Restructuring charges

 

13,166

 

0.9

 

5,038

 

0.6

Total operating expenses

$

365,846

 

25.8

%  

$

261,264

 

33.1

%  

2020 Results Compared To 2019

SALES

Total sales for the year ended December 31, 2020 increased $626.9 million, or 79.5% to $1,415.8 million from $788.9 million for the year ended December 31, 2019. Revenue in 2020 benefited from $670.8 million in inorganic sales from the acquisition of Artesyn. Organic sales in 2020 increased $176.4 million primarily due to increased demand in the Semiconductor Equipment market offset by lower sales of our industrial thin film products due to a weaker overall macroeconomic environment and the impact of COVID-19. Sales in 2019 include $220.3 million in sales from our acquisition of Artesyn.

In 2020, sales to the Semiconductor Equipment market increased $208.8 million, or 51.8% to $611.9 million from $403.0 million in 2019. The increase in sales during 2020 is primarily due to an overall increase in demand for semiconductor equipment used in deposition and etch applications, increasing power content in semiconductor manufacturing tools, and market share gains in RF match and remote plasma sources.

Sales to the Industrial and Medical market increased $67.7 million, or 27.5% to $313.6 million in 2020 from $246.0 million in 2019. Our customers in this market are primarily global and regional original equipment and device manufacturers. Inorganic growth contributed $97.9 million in 2020, while organic sales in the Industrial and Medical market decreased $30.3 million, or 17.9%. The increase in inorganic sales is primarily due to inclusion of full year results for Artesyn in 2020 compared to a partial year during 2019. The decrease in organic sales was primarily due to slowing macroeconomic conditions, the impact of COVID-19 on global manufacturing, and lower demand in the consumer hard coating and flat panel display markets impacting our thin film deposition markets, partially offset by growth in medical and other embedded power products.

Sales in the Data Center Computing market were $322.5 million in 2020 and $91.4 million in 2019. The increase in Data Center Computing market sales is primarily due to inclusion of full year results for Artesyn in 2020 compared to a partial year during 2019 and revenue increases driven by growth in hyperscale customers and market share gains.

Sales in the Telecom and Networking market were $167.8 million in 2020 and $48.5 million in 2019. The increase in telecom and networking sales is due to the addition of new product verticals through inorganic growth. Since early 2019, demand for telecom and networking equipment has been impacted by reduced investment in current generation networks given geopolitical issues, consolidation of network providers, and slowing global growth. Demand in the Telecom and Networking market started to recover in the second half of 2020, and over time 5G infrastructure investments and upgrades to enterprise networks are expected to drive growth in this market.

Sales to Applied Materials, Inc. and Lam Research Corp., our two largest customers, increased $137.1 million to $390.1 million, and 27.5% of sales, in 2020 from $253.0 million, and 32.1% of sales in 2019. Our sales to Applied Materials, Inc. and Lam Research Corp. included sales in the Semiconductor Equipment market, as well as sales in the Industrial and Medical market for equipment used in flat panel displays.

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Backlog

Our backlog was $290.7 million on December 31, 2020 as compared to $258.9 million on December 31, 2019.

GROSS PROFIT

Gross profit increased $226.2 million to $541.9 million, or 38.3%, in 2020 as compared to $315.7 million, or 40.0%, in 2019. The decrease in gross profit as a percent of revenue is largely related to the mix of embedded power products acquired from Artesyn, which carry a lower gross margin, offset partially by the impact of increased volume from our organic product mix, improvements in material cost, and synergies from the combined company. Gross profit in 2020 includes $160.8 million from our acquisitions of Artesyn. Gross profit in 2019 includes $44.8 million associated with our acquisition of Artesyn.

OPERATING EXPENSE

Research and Development

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

R&D expenses in 2020 increased $42.5 million to $144.0 million, from $101.5 million in 2019, and decreased as a percentage of total revenue to 10.2% in 2020 from 12.9% in 2019. R&D expenses in 2020 include $47.2 million from our acquisition of Artesyn. R&D expenses in 2019 include $14.2 million from our acquisition of Artesyn. R&D excluding the acquisition of Artesyn increased $9.7 million primarily due to increased payroll, consulting and material and supplies costs as we invested 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 in 2020 increased $46.0 million to $188.6 million from $142.6 million in 2019 and decreased as a percentage of total revenue to 13.3% in 2020 from 18.1% in 2019. SG&A expenses include $57.0 million from our acquisition of Artesyn. SG&A expenses in 2019 include $19.3 million from our acquisition of Artesyn. Organic SG&A expenses increased by $8.3 million primarily due to increased incentive and stock-based compensation, offset partially by decrease in reserve for credit losses related to prior year credit exposure in the PRC as a result of deferred programs due in part to COVID-19, and lower headcount, professional services, and synergies related to the Artesyn integration.

Amortization of Intangibles

Amortization expense in 2020 increased $8.0 million to $20.1 million from $12.2 million in 2019. The increase in 2020 is primarily driven by incremental amortization of intangible assets for a full year related to our acquisition of Artesyn.

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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 the year ended December 31, 2020, we incurred $13.2 million in restructuring charges which relate to severance costs for the transition and exit of our facility in Shenzhen, PRC and actions associated with Artesyn synergies. Refer to Note 14. Restructuring Costs in Item 8. Financial Statements and Supplementary Data.

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. Other income (expense), net was ($17.9) million in 2020, as compared to $12.8 million in 2019. In May 2019 we sold our central solar inverter repair and service operation and recorded a one-time gain of $14.8 million. Other income (expense) excluding the effect of the sale of the central inverter service and repair business was ($2.0) million in 2019. The increase in other income (expense) is primarily due to foreign exchange losses as our exposure to foreign currencies increased with the Artesyn acquisition and higher interest expense related to a full year of interest in 2020 compared to approximately four months interest in the second half of 2019 related to the debt issued in connection with the acquisition of Artesyn.

Provision for Income Taxes

In 2020, we recorded income tax expense for our continuing operations of $23.0 million or an effective tax rate of 14.5%. Income tax expense in 2019 was $10.7 million or an effective tax rate of 15.9%. The 2020 effective tax rate differs from the federal statutory rate of 21% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, offset by net U.S. tax on foreign operations and withholding taxes.

Discontinued Operations

In December 2015, we completed the wind down of engineering, manufacturing, and sales of our solar inverter product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as "Income (loss) from discontinued operations, net of income taxes" on our Consolidated Statements of Operations for all periods presented herein.

The effect of our sales of the remaining extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statements of Operations, as the deferred revenue is earned, and the associated services are rendered. Extended warranties related to the inverter product line are no longer offered.

In May 2019, we divested our grid-tied central solar inverter repair and service operation. In conjunction with the divesture, the initial product warranty for the previously sold grid-tied central solar inverters was transferred to the buyer. Accordingly, a gain of $8.6 million net of tax expense of $2.4 million was recognized in Other income (expense), net and Provision (benefit) for income taxes, respectively, in our discontinued operations for the year December 31, 2019. Operating income from discontinued operations for the year ended December 31, 2020 and 2019, also includes the impacts of changes in our estimated product warranty liability, the recovery of accounts receivable and foreign exchange gain or (losses).

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

Years Ended December 31, 

    

2020

    

2019

Sales

$

$

Cost of sales

 

 

(901)

Total operating expense

 

620

 

1,022

Operating income (loss) from discontinued operations

 

(620)

 

(121)

Other income (expense)

 

65

 

10,895

Income (loss) from discontinued operations before income taxes

 

(555)

 

10,774

Provision (benefit) for income taxes

 

(134)

 

2,294

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

$

(421)

$

8,480

Non-GAAP Results

Management uses non-GAAP operating income and non-GAAP 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.

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

Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing operations, excluding certain items (in thousands)

Years Ended December 31, 

    

2020

    

2019

Gross profit from continuing operations, as reported

$

541,869

$

315,652

Adjustments to gross profit:

 

 

  

Stock-based compensation

 

567

 

525

Facility expansion, relocation costs and other

 

4,349

 

3,891

Acquisition-related costs

5,381

8,290

Non-GAAP gross profit

 

552,166

 

328,358

Non-GAAP gross margin

39.0%

41.6%

Operating expenses from continuing operations, as reported

365,846

261,264

Adjustments:

 

 

Amortization of intangible assets

 

(20,129)

 

(12,168)

Stock-based compensation

 

(11,705)

 

(6,803)

Acquisition-related costs

 

(10,209)

 

(12,002)

Facility expansion, relocation costs and other

 

(2,213)

 

(948)

Restructuring charges

 

(13,166)

 

(5,038)

Non-GAAP operating expenses

308,424

224,305

Non-GAAP operating income

$

243,742

$

104,053

Non-GAAP operating margin

17.2%

13.2%

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Reconciliation of Non-GAAP measure – income from continuing operations, excluding certain items (in thousands)

Years Ended December 31, 

    

2020

    

2019

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

$

135,096

$

56,461

Adjustments:

 

  

 

  

Amortization of intangible assets

 

20,129

 

12,168

Acquisition-related costs

 

15,590

 

20,292

Facility expansion, relocation costs and other

 

6,562

 

4,838

Restructuring charges

 

13,166

 

5,038

Unrealized foreign currency (gain) loss

8,384

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

716

(29)

Central inverter services business sale

(13,737)

Tax effect of non-GAAP adjustments

 

(7,611)

 

3,206

Non-GAAP income, net of income taxes, excluding stock-based compensation

192,032

88,237

Stock-based compensation, net of taxes

9,418

5,627

Non-GAAP income, net of income taxes

$

201,450

$

93,864

Non-GAAP diluted earnings per share

$

5.23

$

2.44

Impact of Inflation

In recent years, inflation has not had a significant impact on our operations. However, we continuously monitor operating price increases, particularly in connection 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. Sales price increases, however, were not significant in any of the years presented herein.

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, and cash generated from current operations.

On December 31, 2020, we had $483.0 million in cash, cash equivalents, and marketable securities. We believe that our current cash levels and our cash flows from future operations will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, and contractual obligations for the next twelve months.

On December 31, 2020, we had $179.6 million in cash, cash equivalents, and marketable securities held by foreign subsidiaries. As a result of the recent Tax Act, we have provided for U.S. tax on certain foreign unremitted earnings. Accordingly, cash related to these unremitted earnings could be repatriated to the U.S. with minimal additional taxes. Additional taxes would include foreign withholding taxes and U.S. state income taxes. During 2018 and 2019, the Company changed its policy regarding indefinite investment of unremitted earnings and recognized the tax expense associated with this change in election. Consistent with the Company’s capital deployment initiatives, the Company intends to utilize foreign cash to expand our operations through internal growth and strategic acquisitions, provide for service of existing debt, and opportunistically return cash to stockholders.

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Credit Facility

In connection with the acquisition of Artesyn in 2019, the Company entered into a credit agreement (“Credit Agreement") that provided aggregate financing of $500.0 million, consisting of a $350.0 million senior unsecured term loan facility (the "Term Loan Facility") and a $150.0 million senior unsecured revolving facility ("Revolving Facility"). Both the Term Loan Facility and Revolving Facility mature on September 10, 2024. On December 31, 2020, we had $150.0 million in available funding under the Revolving Facility. See Note 21. Credit Facility in Part II, Item 8 "Financial Statements and Supplemental Data" for additional information.

Dividends

We have not declared or paid any cash dividends on our capital stock in our history as a public company. However, on December 15, 2020, our Board approved the initiation of a cash dividend program under which we intend to pay a regular quarterly dividend of $0.10 per share, starting in the first quarter of 2021. On February 1, 2021, the Board declared a quarterly dividend of $0.10 per share payable to shareholders of record as of February 22, 2021. Future dividend payments are subject to approval by the Board.

Share Repurchase

On December 18, 2019, the Board authorized to remove the expiration date to the Company’s common stock share repurchase program and increase the authorized amount by $25.1 million, which increased the. authorization to repurchase shares up to a total of $50.0 million. As of December 31, 2020, a total of $38.4 million remained available for future share repurchases. During the year ended December 31, 2020, we repurchased 244 thousand shares for $11.6 million at an average price of $47.75 per share. There were no share repurchases during the year ended December 31, 2019.

Cash Flows

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

Years Ended December 31, 

    

2020

    

2019

Net cash from operating activities from continuing operations

$

202,159

$

47,899

Net cash from operating activities from discontinued operations

 

(923)

 

493

Net cash from operating activities

 

201,236

 

48,392

Net cash from investing activities from continuing operations

 

(42,840)

 

(393,847)

Net cash from financing activities from continuing operations

 

(29,612)

 

338,840

Effect of currency translation on cash

 

5,143

 

(1,496)

Increase (decrease) in cash and cash equivalents

 

133,927

 

(8,111)

Cash and cash equivalents, beginning of period

 

346,441

 

354,552

Cash and cash equivalents, end of period

$

480,368

$

346,441

Net cash from operating activities

Net cash from operating activities in 2020 was $201.2 million, an increase of $152.8 million, or 315.7% compared to $48.4 million in 2019. The increase in net cash from operating activities was primarily due to overall increases in sales and net income.

Net cash from operating activities in the fourth quarter and full year of 2019 was impacted by net payments for acquisition related activities and assumed liabilities of approximately ($27.0) million, partially offset by receipt of approximately $10.0 million in cash related to the transfer of inventory and other current assets to Smart Global Holdings, Inc. in connection with the completion of the pre-acquisition carve-out of Artesyn’s embedded computing business.

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Net cash from investing activities

Net cash from investing activities in 2020 was ($42.8) million, compared to ($393.8) million in 2019. Net cash from investing activities in 2020 includes ($36.5) million in purchases of property and equipment as we invested in our manufacturing footprint and capacity, and ($5.5) million related to business acquisitions. Net cash from investing activities in 2019 includes ($366.1) million associated with the acquisition of Artesyn.

Net cash from financing activities

Net cash from financing activities in 2020 was ($29.6) million, which consists primarily of ($17.5) million in principal repayments on our Term Loan Facility and ($11.6) million in stock repurchases. The net cash from financing activities in 2019 was $338.8 million which included the effect of cash proceeds of $350.0 million, net of financing costs of ($2.5) million, from our Term Loan Facility, partially offset by ($8.8) million in principal repayments.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K.

Contractual Obligations

The following table sets forth our future payments due under contractual obligations as of December 31, 2020 (in thousands):

    

    

    

    

    

More

Less than

than 5

    

Total

1 year

1-3 years

3-5 years

years

Debt obligations(1)

$

323,750

$

17,500

$

35,000

$

271,250

$

Interest payments associated with debt obligations(1)

13,956

4,038

7,478

2,440

Operating lease obligations(2)

148,471

21,916

30,397

22,936

73,222

Purchase obligations(3)

 

191,765

 

191,205

 

560

 

 

Income tax obligations(4)

 

10,608

1,117

3,211

6,280

Pension funding commitment(5)

 

60,701

2,255

4,156

5,192

49,098

Total

$

749,251

$

238,031

$

80,802

$

308,098

$

122,320

(1)Our debt obligations consist of principal and interest repayments due on our Credit Facility based on current interest rates.
(2)Amounts represent the minimum contractual cash commitments, including the effects of fixed rental escalation clauses and deferred rent, exclusive of certain contingent rents that are not determinable for future periods.
(3)Our purchase obligations consist of purchase commitments with various manufacturing suppliers to ensure the availability of components.
(4)Income tax obligations are a result of the Tax Act and include a transition tax on unremitted foreign earnings and profits, of which we have elected to pay the estimated amount over an eight-year period.
(5)Our pension funding commitments represent the amounts that we are required to pay to fund our pension plan obligations.

Recent Accounting Pronouncements

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 our consolidated financial statements upon adoption.

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To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information provided in Note 1. Operations and Summary of Significant Accounting Policies and Estimates in Part II, Item 8 "Financial Statements and Supplementary Data."

ITEM 7A.           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, credit facility, and foreign exchange rate risk related to our foreign operations and foreign currency transactions.

Interest Rate Risk

Our market risk exposure relates to changes in interest rates in our investment portfolio and credit facility. We generally place our investments with high-credit quality issuers and by policy are averse to principal loss and seek to protect and preserve our invested funds by limiting default risk, market risk, and reinvestment risk.

As of December 31, 2020, our investments consisted primarily of certificates of deposit with maturity of less than one year. As a measurement of the sensitivity of our portfolio and if our investment portfolio balances remain constant, a hypothetical decrease of 100 basis points (1%) in interest rates would decrease annual pre-tax earnings by a nominal amount.

As of December 31, 2020, we had $323.8 million of borrowings under our Credit Facility at a rate based on a reserve adjusted Eurodollar Rate or a Base Rate plus an applicable margin. Our quarterly commitments of interest payments are impacted by an increase or decrease of interest rate fluctuations.

In April 2020, the Company executed interest rate swap contracts with independent financial institutions to partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan F