ADVANCED ENERGY INDUSTRIES INC

Advanced Energy Industries, Inc. operates in the power electronics conversion products industry, serving the Semiconductor Equipment, Data Center Computing, Industrial and Medical, and Telecom and Networking markets. The company designs, manufactures, sells, and services precision power products that convert raw electrical power into highly controllable, usable power for complex equipment, enabling customers to reduce energy consumption through increased power conversion efficiency, power density, power coupling, and process control. The Semiconductor Equipment market is driven by megatrends such as artificial intelligence, energy efficiency, automobile electrification, and the Internet of Things, while the Data Center Computing market is fueled by rapid AI growth and related investments. The Industrial and Medical market benefits from investments in complex manufacturing, automation, clean energy, and medical devices, and the Telecom and Networking market is driven by 5G adoption and networking investments.

The markets Advanced Energy serves are highly competitive, characterized by rapid technological development and changing customer requirements, with no single company dominating any market. Competitors in the Semiconductor Equipment market include COMET Holding AG, Daihen Corp., MKS Instruments, Inc., and TRUMPF Hüttinger GmbH + Co. KG. In Data Center Computing, competitors include Delta Electronics, Inc., Flex Ltd., and Lite-On Technology Corp. Industrial and Medical competitors include Cosel Co., Ltd., Delta Electronics, Inc., MEAN WELL Enterprises, TDK-Lambda Corp., TRUMPF Hüttinger GmbH + Co. KG, and XP Power Ltd. Telecom and Networking competitors include Delta Electronics, Inc., Kexin Communication Technologies Co. Ltd., and Lite-On Technology Corp. Competitive factors include product performance, compatibility, price, quality, reliability, meeting customer demand, and customer service. The company's strategy in the Semiconductor Equipment market is to outgrow the wafer fabrication equipment market by developing plasma power products for advanced processing and gaining market share in both plasma power and adjacent applications. In Data Center Computing, the strategy targets high-end, high power, differentiated applications based on strengths in power density, efficiency, reliability, and speed. In Industrial and Medical, the strategy is to penetrate broader applications by expanding product offerings and leveraging common platforms. In Telecom and Networking, the strategy is to optimize products for differentiated applications and leverage investments across the power portfolio.

Advanced Energy generates revenue from the sale of a broad range of advanced and system power products and services to global original equipment manufacturers, distributors, and end customers. Revenue is recognized at a point in time, typically on shipment of goods, and the company also provides repair and maintenance services for its products. The company operates as a single segment of power electronics conversion products, with products sold in four end markets: Semiconductor Equipment, Data Center Computing, Industrial and Medical, and Telecom and Networking. The company's products are designed to enable process technologies, improve productivity, lower cost of ownership, and provide critical power capabilities. The company also supplies sensing, controls, and instrumentation products for advanced measurement and calibration of power and temperature for multiple industrial markets. A network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment.

In the Semiconductor Equipment market, Advanced Energy's portfolio includes plasma power, high-voltage power, system power, and adjacent sensing solutions used in applications such as dry etch and strip, deposition, ion implant, inspection and metrology, thermal, epitaxy, and back-end test and packaging. Revenue from this market was $839.9 million ¹ in 2025, compared to $792.5 million ² in 2024. In the Data Center Computing market, products are designed into data center server and storage systems and used by cloud service providers in custom designed server racks and power shelves. Revenue from this market was $587.3 million ³ in 2025, compared to $284.2 million ⁴ in 2024. In the Industrial and Medical market, the company supplies critical, precision power conversion products and sensing, control, and instrumentation products for applications including advanced material fabrication, medical devices, life science, test and measurement equipment, robotics, industrial production, defense, aerospace, and large-scale lighting. Revenue from this market was $282.3 million ⁵ in 2025, compared to $316.2 million ⁶ in 2024. In the Telecom and Networking market, the company provides application-specific power conversion products to OEMs of wireless infrastructure and computer networking equipment. Revenue from this market was $89.3 million ⁷ in 2025, compared to $89.1 million ⁸ in 2024.

Product revenue was $1,614.9 million ⁹ in 2025, compared to $1,315.7 million ¹⁰ in 2024. Services and other revenue was $183.9 million ¹¹ in 2025, compared to $166.3 million ¹² in 2024. The company's plasma power products enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. The broad portfolio of high and low voltage power products is used in semiconductor equipment, data center computing, industrial production, medical and life science equipment, aerospace and defense, networking, and telecommunications. The company also supplies related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets.

On May 8, 2025, the company terminated its prior credit agreement and entered into a new credit agreement consisting of a senior unsecured term loan facility and a senior unsecured revolving facility, both maturing on May 8, 2030. The company continued to execute its previously announced manufacturing consolidation plan, including the closure of its Zhongshan, China manufacturing facility, with manufacturing operations ceasing during the second quarter of 2025 and final site closure activities expected to conclude in 2026. In 2025, further actions were approved related to consolidating research and development, sales, and administrative functions in connection with manufacturing and footprint consolidation. The company expanded capacity in its Philippines and Mexicali factories and continued progress on a new factory in Thailand. During the year, the company repurchased $30.4 million ¹³ of shares, and at December 31, 2025, the remaining amount authorized for future share repurchases was $166.9 million ¹⁴ with no time limitation. The company paid quarterly cash dividends of $0.10 per share ¹⁵, totaling $15.6 million ¹⁶ for the full year.

For the year ended December 31, 2025, total revenue was $1,798.8 million ¹⁷, representing an increase of 21.4% ¹⁸ compared to $1,482.0 million ¹⁹ in 2024. Gross profit was $677.4 million ²⁰ in 2025, compared to $529.3 million ²¹ in 2024, with gross margin improving to 37.7% ²² from 35.7% ²³. Operating income from continuing operations was $168.0 million ²⁴ in 2025, compared to $36.6 million ²⁵ in 2024. Income from continuing operations was $149.3 million ²⁶ in 2025, compared to $56.3 million ²⁷ in 2024. Net income was $148.4 million ²⁸ in 2025, compared to $54.2 million ²⁹ in 2024. Diluted earnings per share from continuing operations was $3.87 ³⁰ in 2025, compared to $1.49 ³¹ in 2024. Net cash from operating activities from continuing operations was $234.7 million ³² in 2025, compared to $133.0 million ³³ in 2024.

The Data Center Computing market represents a major growth vector, driven by the rapid growth of AI and related investments. The accelerated power rating of next-generation AI processors and increased density of AI processors in each IT rack have significantly increased power requirements for AI-based servers and racks, increasing the importance of high power efficiency, density, and reliability for server rack power solutions. Due to increased investments in AI applications by leading hyperscale customers, along with adoption of next-generation high-power solutions, revenue in the Data Center Computing market more than doubled in 2025. The company expects continued investments and adoption of newer, higher power solutions for AI-related applications will continue to support robust demand in 2026. The company's strategy in this market is to target high-end, high power, differentiated applications based on competitive strengths in power density, efficiency, reliability, and speed in delivering next-generation, production-ready products.

The Semiconductor Equipment market represents another growth vector, with the company expecting improving conditions that began in the fourth quarter of 2025 to continue into 2026 and to accelerate demand for its products in the second half of the year. The market is driven by demand for leading-edge devices in logic and memory used in AI applications, partially offset by lower trailing-edge logic demand due to capacity underutilization, particularly in China, U.S. export restrictions to China, and the impact of tariffs. The company's strategy is to outgrow the wafer fabrication equipment market by developing plasma power products for advanced processing applications and through market share gains in both plasma power and adjacent semiconductor applications. The company believes the plasma power market will grow faster than WFE due to increasing number of plasma process steps and growing demand for more complex power content. The Industrial and Medical market began to recover starting in the second quarter of 2025 following a major industry downturn, with the positive trend continuing in the second half of 2025 as customer inventories approached normalized levels, and the company expects this trend to continue in 2026, paced by overall economic conditions. The Telecom and Networking market remained stable in 2025, and the company expects current market conditions to continue in 2026, with some potential for improvement driven by AI-related demand.

Gross margin improved in 2025 mainly due to the impact of higher volume and approximately 140 basis points ³⁴ resulting from manufacturing cost reduction programs. The increase in gross profit was largely due to increase in revenue and manufacturing cost improvements. Operating expenses increased to $509.4 million ³⁵ in 2025 from $492.7 million ³⁶ in 2024, primarily attributable to higher research and development program costs, higher compensation costs related to stock-based compensation and annual merit increases, partially offset by lower restructuring charges driven by the timing of restructuring plan decisions. Research and development expenses increased to $232.4 million ³⁷ in 2025 from $211.8 million ³⁸ in 2024, related to higher compensation costs and higher engineering program and materials costs. Selling, general, and administrative expenses increased to $242.4 million ³⁹ in 2025 from $224.6 million ⁴⁰ in 2024, mainly due to higher compensation costs. The company expects restructuring actions related to consolidating research and development, sales, and administrative functions to be substantially complete during 2027 and does not expect to incur significant additional charges.

The company manufactures products primarily in its large factories in the Philippines, Malaysia, and Mexico, with limited specialty manufacturing in the U.S., the United Kingdom, and Europe. During 2025, the company continued to execute its manufacturing consolidation plan, which included the shutdown of the Zhongshan, China manufacturing site, with manufacturing operations ceasing during the second quarter of 2025 and final site closure activities expected to conclude in 2026. The company expanded capacity in its Philippines and Mexicali factories and continued progress on a new factory in Thailand, which is expected to be operational in 2026. The company expects to continue to consolidate several of its smaller factory sites during 2026. The company is in the process of implementing a global enterprise resource planning system and other enterprise-wide applications expected to occur in phases over the next several years, and in 2025 shifted its deployment strategy to a more staggered approach, delaying widespread implementation to better align with business needs and risk tolerance.

Research and development expenses were $232.4 million ⁴¹ in 2025, $211.8 million ⁴² in 2024, and $202.4 million ⁴³ in 2023, ranging from 12.2% to 14.3% of total revenue. The company expects these investments to continue. Capital expenditures were $107.4 million ⁴⁴ in 2025, compared to $56.8 million ⁴⁵ in 2024, driven by continued investments in manufacturing footprint and capacity, the new ERP system, and other capabilities across multiple sites. At December 31, 2025, the remaining amount authorized by the Board for future share repurchases was $166.9 million ⁴⁶ with no time limitation. The company paid quarterly cash dividends of $0.10 per share ⁴⁷ in each of the four quarters in 2025, totaling $15.6 million ⁴⁸ for the full year, and currently anticipates that a quarterly cash dividend of $0.10 per share ⁴⁹ will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board.

The company faces headwinds from tariffs imposed by the U.S. government in 2025 under various rules including Section 301, Section 232, and the International Emergency Economic Powers Act, as well as anti-dumping and countervailing duty rates. Higher costs from tariffs partially offset benefits from cost optimization across operations in 2025, and the company expects this negative dynamic to continue. The company is also affected by U.S. government-imposed export regulations on U.S. semiconductor and supercomputing technology and related parts and services sold in China, which have been in place since October 2022, resulting in Chinese customers replacing the company at least in part with competitors operating outside the scope of U.S. export rules. The company's ability to maintain business in China may be dependent at least in part on obtaining export licenses, which may be difficult, costly, and time-consuming, with no assurance licenses will be issued in time to meet customer requirements or at all. The company also faces risks from the cyclical nature of the industries it serves, with the Semiconductor Equipment market experiencing lower trailing-edge logic demand due to capacity underutilization, particularly in China, and the impact of tariffs.

The company faces constraints from the concentration of its customer base, with three customers accounting for 23% ⁵⁰, 19% ⁵¹, and 12% ⁵² of total revenue in 2025, and two customers accounting for 26% ⁵³ and 11% ⁵⁴ of total revenue in 2024. The Data Center Computing market generally has lower margins than other markets, and as it grows to comprise a larger proportion of revenue, gross margin has been and could continue to be negatively impacted. The company also faces risks related to scaling manufacturing capacity and securing sufficient critical components to meet customer demand, as well as risks associated with the implementation of its new ERP system, which is expected to occur in phases over the next several years. The company's operations in the Asia Pacific region are subject to significant political and economic uncertainties, including trade tensions between the U.S. and China, and the company's supply chain in China may be subject to various U.S. or China government and regulatory actions.

The company faces significant customer concentration risk, with three customers accounting for 23% ⁵⁵, 19% ⁵⁶, and 12% ⁵⁷ of total revenue in 2025, and the loss of a large customer could have a material adverse effect on results of operations. The Data Center Computing market generally has lower margins than other markets, and as it grows to comprise a larger proportion of revenue, gross margin has been and could continue to be negatively impacted. The company is subject to risks from U.S. government-imposed export regulations on semiconductor and supercomputing technology sold in China, which have been in effect since October 2022, and higher costs from tariffs imposed in 2025 partially offset benefits from cost optimization, with the company expecting this negative dynamic to continue. The company's convertible notes with a principal amount of $575.0 million ⁵⁸ and a 2.5% ⁵⁹ interest rate are currently convertible at the option of holders due to the stock price exceeding 130% of the conversion price, which could adversely affect liquidity and result in dilution to stockholders. The company has unfunded pension obligations of $49.4 million ⁶⁰ as of December 31, 2025, and a material deterioration in the funded status could increase pension expenses and reduce profitability.

Management's message emphasizes the company's focus on executing its manufacturing consolidation plan and investing in growth areas. The company reported revenue of $1,798.8 million ⁶¹ for 2025, representing an increase of 21.4% ⁶² compared to 2024, primarily attributable to more than doubling of revenue from the Data Center Computing market. Management highlighted that gross margin improved mainly due to the impact of higher volume and approximately 140 basis points ⁶³ resulting from manufacturing cost reduction programs. The company continued to execute the 2024 Plan, with manufacturing operations in Zhongshan ceasing during the second quarter of 2025 and final site closure activities expected to conclude in 2026. During the second quarter of 2025, the company also approved actions related to consolidating research and development, sales, and administrative functions in connection with manufacturing and footprint consolidation, expected to be substantially complete during 2027 with no significant additional charges expected. The company also continued progress on a new factory in Thailand. Management noted that the Semiconductor Equipment market conditions started to improve in the fourth quarter of 2025, with expectations for these improving conditions to continue into 2026 and to accelerate demand for products in the second half of the year. In the Data Center Computing market, management expects continued investments and adoption of newer, higher power solutions for AI-related applications will continue to support robust demand in 2026. The Industrial and Medical market began to recover starting in the second quarter of 2025, with the positive trend continuing in the second half of 2025, and management expects this trend to continue in 2026. The Telecom and Networking market remained stable in 2025, with management expecting current market conditions to continue in 2026, with some potential for improvement driven by AI-related demand.