Advanced Energy Industries, Inc.

ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This management discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2025, which was filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2026 (the “2025 Form 10-K”).

Special Note on Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “report”) contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations, and plans are forward-looking statements, as are statements that certain actions, conditions, events, or circumstances will continue. The inclusion of words such as “anticipate,” “expect,” “estimate,” “can,” “may,” “might,” “continue,” “enable,” “plan,” “intend,” “should,” “could,” “would,” “will,” “likely,” “potential,” “believe,” and similar expressions and the negative versions thereof indicate forward-looking statements; however, not all forward-looking statements may contain such words or expressions.

These forward-looking statements are based upon information available as of the date of this report and management’s current estimates, forecasts, and assumptions. Although we believe that our expectations reflected in or suggested by these forward-looking statements are reasonable, we may not achieve the results, performance, plans, or objectives expressed or implied by such forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control.

Risks and uncertainties to which our forward-looking statements are subject include:

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These risks and uncertainties could cause actual results to differ materially and adversely from those expressed in any forward-looking statements, and readers are cautioned not to place undue reliance on forward-looking statements. We assume no obligation to update any forward-looking statements or provide reasons why our actual results may differ.

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BUSINESS AND MARKET OVERVIEW

Company Overview

Advanced Energy provides highly engineered, critical, precision power conversion, measurement, and control solutions to our global customers. We design, manufacture, sell, and service precision power products that transform, refine, and modify the raw electrical power coming from either the utility or the building facility and convert it into various types of highly controllable, usable power that is predictable, repeatable, and customizable to meet the necessary requirements for powering a wide range of complex equipment. Many of our products enable customers to reduce or optimize their energy consumption through increased power conversion efficiency, power density, power coupling, and process control across a wide range of applications.

We are organized on a global, functional basis and operate as a single segment of power electronics conversion products. Within this segment, our products are sold in the Semiconductor Equipment, Data Center Computing, Industrial and Medical, and Telecom and Networking markets.

Product and Services

Our precision power products and solutions are designed to enable process technologies, improve productivity, lower the cost of ownership, and/or provide critical power capabilities for our customers.

Our plasma power products enable innovation in complex semiconductor and thin film plasma processes such as dry etch and deposition. Our broad portfolio of high and low voltage power products is used in a wide range of applications, such as semiconductor equipment, data center computing, industrial production, medical and life science equipment, aerospace and defense, networking, and telecommunications.

Our network of global service support centers provides repair services, calibration, conversions, upgrades, refurbishments, and used equipment to companies that use our products.

End Markets Summary and Trends

We continue to monitor developments related to tariffs and trade policy, including recent court rulings affecting certain U.S. tariffs. While the tariff impact was not material to our results, we remain focused on potential governmental responses and development of potential future recoveries to adjust our mitigation strategies with our customers. In addition, heightened geopolitical instability, including the conflicts in the Middle East, has contributed to volatility in energy markets, disruptions to global shipping, and broader macroeconomic uncertainty. Increased demand relative to supply for AI-related equipment and semiconductors is extending lead times and increasing prices of certain components, impacting both timing of some customer demand and many of our suppliers. We continue to take actions to procure strategic supply of materials and recover increased costs through pricing actions. While these factors were not material to our results in the current quarter, they could become material in future periods and adversely affect our costs such as higher energy and supply chain costs, as well as negatively impact our ability to sell our products and provide services.

Advanced Energy generates revenue from the sale of a broad range of advanced and system power products and services to global original equipment manufacturers (“OEMs”), distributors, and end customers. Our customers select our products based on various performance metrics such as high power conversion efficiency, high power density, low noise emission, and lower power consumption as well as our ability to tailor our solutions to meet the unique requirements of their critical applications. The future growth and demand for our products is driven by a combination of factors within each of the end markets we serve, as follows:

Semiconductor Equipment Market

The Semiconductor Equipment market supports and enables the long-term need for production capacity and new process technologies to meet demand for semiconductor devices across many applications driven by megatrends such as artificial intelligence (“AI”), energy efficiency, automobile electrification, and Internet of things.

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Our portfolio of power conversion and related products sold into this market includes plasma power, high-voltage power, system power, and adjacent sensing solutions. Our plasma power solutions are used to create plasma-based etch and deposition processes. Our semiconductor market products are incorporated into a wide range of applications, including dry etch and strip, deposition, ion implant, inspection and metrology, thermal, epitaxy, and back-end test and packaging.

The Semiconductor Equipment market continues to be driven by demand for leading-edge devices in logic and memory used in AI applications, partially offset by lower trailing-edge demand due to capacity underutilization, particularly in China, U.S. export restrictions to China, and the impact of tariffs. However, end market conditions started to improve in the fourth quarter of 2025. We expect these improving conditions to continue in 2026 and to accelerate demand for our products in the remainder of the year.

Data Center Computing Market

The Data Center Computing market is being 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 IT racks have significantly increased the power requirements for AI-based servers and racks which, in turn, increased the importance of high power efficiency, density, and reliability for server rack power solutions.

Our products are designed into data center server and storage systems and are also used by cloud service providers and their partners in their custom designed server racks and power shelves.

Due to increased investments in AI applications by leading hyperscale customers, along with adoption of our next-generation high-power solutions, revenue in the Data Center Computing market more than doubled in the first quarter of 2026 compared to the same quarter in the previous year.

We expect these trends to continue supporting healthy demand in the remainder of the year.

Industrial and Medical Market

The Industrial and Medical market is fueled by continued investment in complex manufacturing processes, increased adoption of new industrial technologies such as automation and clean energy, and increased breadth and precision requirements of medical devices and life science equipment.

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We supply this market with critical, precision power conversion products that deliver precise and highly reliable, low noise and/or differentiated power. In addition, our sensing, control, and instrumentation products complement our power solutions. Our products are used in a wide variety of applications, such as advanced material fabrication, medical devices, life science, test and measurement equipment, robotics, industrial production, defense, aerospace, and large-scale lighting applications.

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We believe that the Industrial and Medical market began to recover starting in the second quarter of 2025 following a major industry downturn as a result of macroeconomic conditions and supply chain disruptions from prior years. The recovery continued in the first quarter of 2026 compared to the same quarter in the previous year. In addition, we expect demand to continue to improve in the remainder of 2026, paced by overall economic conditions.

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Telecom and Networking Market

Demand in the Telecommunication and Networking market is driven by adoption of more advanced mobile standards, such as 5G technologies, networking investments by telecommunication service providers, enterprises upgrading their communication networks, and data centers investing in their networks for AI-driven increased bandwidth.

We serve this market by providing application-specific power conversion products to many leading OEMs of wireless infrastructure equipment and computer networking equipment.

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End demand in the Telecom and Networking market remained stable in 2025. Revenue in the first quarter of 2026 increased primarily due to growth in AI-related applications. We expect this trend to continue for the remainder of the year.

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Results of Continuing Operations

The analysis presented below is organized to provide the information we believe will be helpful for an understanding of our historical performance and relevant trends going forward and should be read in conjunction with our “Unaudited Consolidated Financial Statements” in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.

The following table sets forth certain data derived from our Consolidated Statements of Operations:

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Revenue

The following tables summarize net sales and percentages of net sales by markets:

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Revenue by Market

Semiconductor Equipment revenue for the three months ended March 31, 2026 was relatively flat as compared to the same period in the prior year, but increased sequentially from the fourth quarter on strengthening demand.

The increase in Data Center Computing revenue was due to increased AI investments by leading hyperscale customers and growth associated with design wins secured previously.

The increase in Industrial and Medical revenue was primarily due to recovery in the end markets as a result of ongoing customer inventory rebalancing and an improved demand environment.

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The increase in Telecom and Networking revenue was primarily driven by growth in AI-related applications.

Gross Profit and Gross Margin

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The increase in gross profit was largely due to an increase in revenue and manufacturing cost improvements. Gross margin improved mainly due to the impact of higher volume, and approximately 60 basis points resulting from manufacturing cost reduction programs, partially offset by the impact of tariffs during the three months ended March 31, 2026.

Operating Expenses

The following table summarizes our operating expenses and as a percentage of revenue:

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Research and Development

The increase in research and development expense was driven by higher compensation costs related to stock-based compensation and annual merit increases, and higher engineering program and materials costs compared to the same period in the prior year.

Selling, General and Administrative

The increase in selling, general, and administrative expense was mainly due to higher compensation costs including stock-based compensation and annual merit increases.

Amortization of Intangibles Assets

Amortization expense declined primarily due to certain intangible assets reaching the end of their estimated useful life.

Restructuring, Asset Impairments and Other Charges

The increase in restructuring, asset impairments, and other charges is primarily driven by the timing of our restructuring plan decisions.

For additional information about this and prior restructuring plans, see Note 10. Restructuring, Asset Impairments, and Other Charges in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

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Interest Income, Interest Expense, and Other Expense, Net

We experienced a decrease in interest income caused by lower cash balances.

Other expense, net consists primarily of foreign exchange gains and losses and other miscellaneous items. For the three months ended March 31, 2026, we had a $3.4 million improvement in other expense, net compared to the same period in the prior year primarily as a result of foreign exchange gains.

Interest expense remained relatively flat compared to the same period in prior year. See Note 6. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for information regarding our debt.

Income Tax Provision

The following table summarizes tax provision and the effective tax rate for our income from continuing operations:

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Our effective tax rate differs from the U.S. federal statutory rate of 21% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, as well as tax credits, partially offset by net U.S. tax on foreign operations. The effective tax rate as of March 31, 2026 is lower than the same period in 2025 primarily due to excess tax benefits recognized from stock-based compensation.

As of March 31, 2026, certain countries in which the Company operates have implemented or are in the process of implementing the Pillar II minimum global effective tax rate regime as put forth by the Organization for Economic Cooperation and Development (“OECD”). Specifically, the OECD released prospective “Side-by-Side” guidance in early 2026 which is generally beneficial to U.S. parented organizations, but will require adoption by member countries to implement. As countries continue to make revisions to legislation and release additional guidance with respect to the global minimum tax, we continue to monitor and evaluate potential cash tax expense and associated impacts to the effective tax rate in the jurisdictions in which the Company operates.

On July 4, 2025, the One Big Beautiful Bill (“OBBB”) Act, which includes a broad range of elective tax law items available in 2025 and prescribed tax law changes in 2026, was signed into law in the United States. The Company has reflected the impact of the OBBB’s elective tax law items in its financial statements for the period ending March 31, 2026. The OBBB is expected to have an overall positive effect on the GAAP and non-GAAP effective tax rate of the Company, benefiting from revisions to foreign-derived intangible income (FDII) and the foreign tax credit rules.

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Non-GAAP Results

Management uses non-GAAP net income, non-GAAP operating income, and non-GAAP earnings per share (“EPS”) to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, and make business decisions, including developing budgets and forecasting future periods. In addition, management’s incentive plans include certain of these non-GAAP measures as criteria for achievements. These non-GAAP measures are not prepared 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.