ARTESYN EMBEDDED TECHNOLOGIES, INC.  AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018 and 2017

and for the years ended December 31, 2018, 2017 and 2016

ARTESYN EMBEDDED TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018 and 2017

and for the years ended December 31, 2018, 2017 and 2016

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Management of
Artesyn Embedded Technologies, Inc. and subsidiaries

We have audited the accompanying consolidated financial statements of Artesyn Embedded Technologies, Inc. and subsidiaries, which comprise the consolidated balance sheets as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive loss, shareholder’s (deficit) equity and cash flows for each of the three years in the period ended December 31, 2018, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these financial statements in conformity with U.S. generally accepted accounting principles; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free of material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Artesyn Embedded Technologies, Inc. and subsidiaries at December 31, 2018 and 2017, and the consolidated results of their operations and their cash flows for the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted accounting principles.

/s/Ernst & Young

Phoenix, Arizona

March 27, 2019

except with respect to the effects of accounting standard updates adopted as discussed in Note 1 and the effects of the discontinued operations discussed in Note 2, as to which the date is

November 21, 2019

See accompanying Notes to the Consolidated Financial Statements.

See accompanying Notes to the Consolidated Financial Statements.

See accompanying Notes to the Consolidated Financial Statements.

See accompanying Notes to the Consolidated Financial Statements.

See accompanying Notes to the Consolidated Financial Statements.

1     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Description of Business

Artesyn Embedded Technologies, Inc. (‘Artesyn’) together with its subsidiaries (collectively, the ‘Company’) provides power conversion and embedded computing technologies and solutions for applications in a broad range of markets including communications, data center, industrial automation, medical, consumer and military/aerospace. The Company is headquartered in Tempe, Arizona and has engineering centers primarily in North America and Asia, and manufacturing locations in Asia (China and the Philippines).

The Company is comprised of three reporting units: Embedded Power Base, Consumer and Embedded Computing. Embedded Power Base designs and manufactures application-specific and customized power conversion products for use by computing, storage, telecommunications, industrial and medical customers. Consumer creates customized power conversion products for use in specific Consumer-based end markets. Embedded Computing designs and manufactures customized microprocessor-based boards and systems.  The Embedded Computing reporting unit was sold on July 8, 2019 and is being reported as discontinued operations.  See Note 2 for more details.

On May 14, 2019, Advanced Energy Industries, Inc., a Delaware corporation, entered into a Stock Purchase Agreement with Artesyn Embedded Technologies, Inc., to acquire Artesyn’s Embedded Power Base business. The transaction closed on September 10, 2019.

Pontus Holdings, LLC (‘Pontus’) is a holding company formed as a joint venture of affiliates of Platinum Equity, LLC (‘Platinum’) and Emerson Electric Co. (‘Emerson’) to own the operating company Artesyn. In 2013, Emerson entered into a purchase agreement with Pontus JV Holdings, LLC (‘Pontus JV’), an affiliate of certain private equity investment vehicles sponsored by Platinum, for the sale of a 51 percent controlling interest in Artesyn (the ‘Transaction’). As part of the Transaction, Emerson received cash and a 49 percent noncontrolling interest in Pontus. As a result, Artesyn is a wholly owned subsidiary of Pontus, and Pontus is owned 51 percent by Pontus JV and 49 percent by Emerson.

Basis of Presentation

The consolidated financial statements are presented in U.S. dollars, with all intercompany transactions eliminated in consolidation. The functional currency for the majority of the non-U.S. subsidiaries is the U.S. dollar. Adjustments resulting from translating non-U.S. local functional currency financial statements into U.S. dollars are reflected in Accumulated other comprehensive loss.

Discontinued Operations

The results of operations for the Company’s Embedded Computing business have been classified as discontinued operations for all periods presented in the Consolidated Statement of Operations. Assets and liabilities subject to the sale of Embedded Computing have been classified as assets and liabilities held for sale for all periods presented in the Consolidated Balance Sheets.  Refer to Note 2 for additional information.

Use of Estimates

The preparation of the consolidated financial statements in conformity with U.S. generally accepted accounting principles (‘U.S. GAAP’) requires management to make judgments, estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents consist of amounts on deposit and highly liquid investments with original maturities of three months or less.

Trade Receivables, net

Trade receivables consist of balances due from customers, net of estimated allowances. The allowances include estimates based on historical experience and specific reserves in the case of known collection issues.  Trade receivables as of December 31, 2018 and 2017 include a related party amount of $2,271 and $2,648, respectively, due from affiliates of Emerson and Pontus JV (see Note 12).

Inventories

Inventories are valued at the lower of cost or net realizable value using the first-in, first-out method. The Company writes down its inventory for estimated obsolescence or unmarketable inventory in an amount equal to the difference between the cost of inventory and the estimated net realizable value based upon assumptions about future demand and market conditions.

Revenue Recognition

The Company recognizes revenue for the sale of manufactured products when title and risk of loss passes to the customer (generally when products are shipped), persuasive evidence of an arrangement exists, the sales price is fixed or determinable, and collection is reasonably assured. Reserves, based on historical experience, are made for anticipated returns of products and sales discounts at the time products are sold.

The Company also records revenue for services including primarily repair services, engineering services, technical support, and extended warranties. Revenues for repair and engineering services are recognized when the goods and services are provided, while technical support and extended warranties are generally amortized over the life of the applicable contract. The total amount of service revenue was $31,457, $22,801 and $14,001 for the years ended December 31, 2018, 2017 and 2016, respectively.  In some of these instances, the service arrangement is part of a multiple element sales arrangement. In these instances, the revenue assigned to each element is based on vendor-specific objective evidence, third-party evidence or a management estimate of the relative selling price. Revenue is recognized individually for delivered elements only if they have value to the customer on a stand-alone basis and the performance of the undelivered item is probable and substantially in the Company’s control, or the undelivered elements are inconsequential or perfunctory and there are no unsatisfied contingencies related to payment.  Generally, these multiple deliverables include services to support the related product revenue, contract duration is short-term, and cancellation, termination or refund provisions apply only in the event of contract breach and historically have not been invoked.

The Company records amounts billed to customers for shipping and handling fees in a sales transaction as revenue. Shipping and handling costs are included in Cost of sales.

The Company had one customer that represented 36.5%, 35.9% and 31.9% of consolidated Net sales for the years ended December 31, 2018, 2017 and 2016, respectively.  There were no other customers with sales exceeding 10.0% of consolidated Net sales in the respective periods.

Fair Value Measurements

Accounting Standards Codification (‘ASC’) 820, ‘Fair Value Measurements’, established a formal hierarchy and framework for measuring certain financial statement items at fair value, and expanded disclosures about fair value measurements and the reliability of valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instruments use observable unadjusted market prices for the identical item in active markets and have the most reliable valuations. Level 2 instruments are valued based on quoted prices in markets that are not active, quoted prices for similar items in active markets, or market-observable inputs, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using valuation techniques that require inputs that are both significant to the fair value measurement and not observable, such as company-developed future cash flow estimates, and are considered the least reliable.

The carrying value as of December 31, 2018 and 2017 approximates fair value for Cash and cash equivalents, Trade receivables, Revolving credit facility, and Trade accounts payable because of their short-term nature and generally negligible credit losses.

See Note 1, Foreign Currency Derivative Contracts, for the fair value of derivatives and Note 6 for the fair value of long-term debt.

Property, Plant and Equipment, net

The Company records investments in land, buildings and improvements, and machinery and equipment at cost. Depreciation on assets is calculated primarily using the straight-line method over the estimated useful lives of the assets. The estimated useful life of buildings is 25 to 35 years, leasehold improvements are amortized over the lesser of the economic life or the related lease term, while the estimated useful lives of machinery and equipment range from 5 to 15 years (see Note 4).

The Company assesses the recoverability of the carrying amount of property, plant and equipment when changes in circumstances indicate that the carrying amount may not be recoverable. If the carrying amount of the asset or asset group does not exceed its expected undiscounted cash flows, an impairment loss equal to the excess of carrying value over the estimated fair value of the asset or asset group would be recorded.

Goodwill

Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. The excess of purchase price over identified tangible and intangible assets is recorded as goodwill (see Note 5). The goodwill represents intangible assets that do not qualify for separate recognition and other factors and substantially all goodwill is deductible for tax purposes. The Company conducts an annual impairment test of goodwill in the fourth quarter of the calendar year and between annual tests if events or circumstances indicate the fair value of a reporting unit may be less than its carrying value.

Intangible Assets

The Company’s identifiable intangible assets are subject to amortization (see Note 5). Identifiable intangible assets consist of intellectual property such as patented and unpatented technology, trademarks, and customer relationships, and are amortized on a straight-line basis over their estimated useful lives. Amortization of technology related intangible assets is included in Cost of sales, while trademark and customer relationship intangible amortization is included in Operating expenses. These intangible assets are also subject to an evaluation for potential impairment whenever events or circumstances indicate the carrying value may not be recoverable.

Product Warranties

Warranties vary by product line and generally extend for one to three years from the date of sale. Provisions for warranty are determined primarily based on historical warranty cost as a percentage of sales, adjusted for specific matters that may arise.

Interest Expense

Interest expense includes cash interest payments and debt related costs such as amortization of deferred financing costs. The Company amortizes deferred financing costs on a straight-line basis, which approximates the effective interest method.

Income Taxes

The Company files a consolidated U.S. federal income tax return and its income tax provision consists principally of federal, state and foreign income taxes. Current income tax liabilities and assets are recognized for the estimated taxes payable or refundable for the current income tax period. Deferred income tax assets and liabilities are recognized for the anticipated future tax consequences attributable to the temporary differences that exist between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The portion of any deferred income tax asset for which it is more likely than not that a tax benefit will not be realized is offset by recording a valuation allowance.  The future realization of the tax benefit of an existing temporary difference ultimately depends on the generation of future taxable income during the periods in which the temporary difference becomes deductible. 

In making its assessment regarding the realizability of its deferred tax assets and the need for a valuation allowance, management makes judgments and estimates of future taxable income that may be available under the tax law to realize the related tax benefits, including scheduled reversals of existing taxable temporary differences, projected taxable income exclusive of temporary differences and tax planning strategies.

The Company recognizes the impact of an income tax position if that position is more likely than not of being sustained on audit, based on the technical merits of the position.  Measurement of the tax position’s effect on the income tax provision is based on the largest amount of benefit that is greater than 50 percent likely of being realized upon the ultimate settlement.  Differences between the amount of benefits taken, or expected to be taken, in the Company’s income tax returns and the amount of benefits recognized based on this evaluation and measurement of the related tax positions represent the unrecognized income tax benefit, which is reflected as a liability.

The Company includes interest and penalties related to unrecognized tax benefits as part of the income tax provision in the consolidated statement of operations.

The Company is indemnified by Emerson for income taxes prior to the Transaction.  The Company recorded a receivable from Emerson for any unrecognized tax benefits which relate to periods prior to the Transaction.  See Note 11 for further details on Income Taxes.

Research and Development

The Company conducts ongoing research and development in support of existing and new product introductions. Research and development costs were $49,475,  $55,130 and $59,469 for the years ended December 31, 2018, 2017 and 2016, respectively. Research and development costs are included in Operating expenses.

Foreign Currency Derivative Contracts

The Company enters into foreign currency forward derivative contracts as part of a program designed to mitigate the currency exchange rate risk exposure on selected transactions of certain foreign subsidiaries. Although contracts pursuant to this program will serve as an economic hedge of the cash flow of currency exchange risk exposure, they are not formally designated as hedge contracts or qualify for hedge accounting treatment. Accordingly, any change in the fair value of these derivative instruments during a period will be included in the determination of earnings for that period.

As of December 31, 2018 and 2017 there were no outstanding foreign currency forward derivative contracts.

The Company recognized $533,  $29 and $590 of net loss on settled foreign currency forward derivatives for the year ended December 31, 2018, 2017 and 2016, respectively, reflected in Cost of sales and Operating expenses.

Comprehensive Income (Loss)

Comprehensive income (loss) is composed of net (loss) income plus changes in foreign currency translation relating to subsidiaries that do not use the U.S. dollar as their functional currency and changes in the funded status of defined benefit pension plans and post-employment plans. As of December 31, 2018 and 2017, the Accumulated other comprehensive loss related to the net actuarial gain (loss) for defined benefit pension and post-employment plans was $1,708 and  $(898), respectively. Accumulated other comprehensive income related to foreign currency translation December 31, 2018, 2017 and 2016 was $0 for all periods.

New Accounting Standards Adopted

As mentioned above, the Company was acquired by Advanced Energy Industries, Inc., a publicly traded business on September 10, 2019. Because of this transaction, the Company is now considered a public business entity (‘PBE’) for financial reporting purposes. In order for these consolidated financial statements to be presented in accordance with U.S. GAAP, the Company must apply the Accounting Standard Updates (‘ASU’) applicable to PBE’s. The two ASU’s discussed below were adopted based on the adoption dates applicable to PBE’s.

In March 2017, the Financial Accounting Standards Board (‘FASB’) issued ASU No. 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, that requires an employer to disaggregate the service cost component from the other components of net periodic cost (benefit) and report that component in the same line item as other compensation costs arising from services rendered by employees during the period. The other components of net periodic cost (benefit) are required to be presented in the statement of operations separately from the service cost component and outside of operating earnings. The amendment also allows for the service cost component of net periodic cost (benefit) to be eligible for capitalization when applicable. The amendments in this update are effective for public business entities for annual periods beginning after December 31, 2017, including interim periods within those annual periods. The guidance on the income statement presentation of the components of net periodic cost (benefit) must be applied retrospectively, while the guidance limiting the capitalization of net periodic cost (benefit) in assets to the service cost component must be applied prospectively. The Company adopted the standard as of January 1, 2018.

The Company elected to use, as a practical expedient, the amounts disclosed in its defined benefit plan footnote disclosure for the prior comparative period as the estimation basis for applying the retrospective presentation requirements. As a result of adopting ASU 2017-07, net periodic benefit income for the non-service cost components of $642, $553 and $899 was reclassified from Operating expense, to Other expense (income) for the years ended December 31, 2018, 2017 and 2016, respectively.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other, that simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in the current two-step impairment test under ASC 350. Under current guidance, if the fair value of a reporting unit is lower than its carrying amount (Step 1), an entity calculates any impairment charge by comparing the implied fair value of goodwill with its carrying amount (Step 2). The implied fair value of goodwill is calculated by deducting the current fair value of all assets and liabilities of the reporting unit from the reporting unit’s fair value as determined in Step 1. Under ASU No. 2017-04, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years beginning after December 15, 2019, and early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The guidance must be applied prospectively. The Company adopted the standard as of January 1, 2019. The effects of this standard did not have a material impact on the Company’s financial statements for the periods presented.

New Accounting Standards Not Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases, that intends to improve financial reporting for leasing transactions. The ASU requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. The guidance is effective for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020, and early adoption is permitted. The Company plans to adopt this ASU on January 1, 2020. The Company’s evaluation of this standard is currently ongoing and therefore, the effects of this standard on the Company’s financial position, results of operations and cash flows are not yet known.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and will supersede most current revenue recognition guidance. The standard is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company adopted the standard as of January 1, 2019 for annual reporting period and plans to adopt January 1, 2020 for interim reporting periods. The Company’s evaluation of this standard is currently ongoing and therefore, the effects of this standard on the Company’s financial position, results of operations and cash flows are not yet known.

2     DISCONTINUED OPERATIONS

On July 8, 2019, the Company entered into and completed a sale of the equity interests of the Embedded Computing reporting unit for approximately $80,000 to SMART Global Holdings, Inc. The agreement also contains a contingent earn-out payment

of up to $10,000. The business is considered to be discontinued operations as of June 30, 2019 and is reported as such for all periods presented.

A summary of the results for discontinued operations included in the Condensed Consolidated Statements of Operations follows:

A summary of the carrying amounts of the discontinued opearations’  major assets and liabilities, which were classified as current and long-term assets and liabilities held for sale in the Consolidated Balance Sheets follows: