Advanced Energy Industries Inc: Form 10-Q for the period ended Sep 30, 2024

This management discussion and analysis should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the Securities and Exchange Commission (the “SEC”) on February 20, 2024 (the “2023 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:

• volatility and business fluctuations in the industries in which we compete;
• our ability to achieve design wins with new and existing customers;
• our ability to accurately forecast and meet customer demand;
• risks related to global economic conditions, such as the impact of escalating global conflicts on macroeconomic conditions, economic uncertainty, market volatility, rising interest rates, inflation, or recession;
• risks inherent in our international operations, including the effect of trade and export controls, political and geographical risks, the impact of tariffs on our supply or products, and fluctuations in currency exchange rates;
• concentration of our customer base;
• risks associated with breach of our information security measures;
• our loss of or inability to attract and retain key personnel;
• disruptions to our manufacturing operations or those of our customers or suppliers;
• risks associated with our manufacturing footprint optimization and movement of manufacturing locations for certain products;
• our ability to successfully identify, close, integrate and realize anticipated benefits from our acquisitions;
• quality issues or unanticipated costs in fulfilling our warranty obligations (including our discontinued solar inverter product line), and adequacy of our warranty reserves;
• our ability to enforce, protect and maintain our proprietary technology and intellectual property rights;
• our ability to achieve cost savings, profitability, and gross margin goals;
• changes to tax laws and regulations or our tax rates;
• changes in federal, state, local and foreign regulations, including with respect to privacy and data protection, and environmental regulation;
• effect of our debt obligations and restrictive covenants on our ability to operate our business;
• customer price sensitivity;
• risks related to our unfunded pension obligations;
• restructuring and severance activities;
• legal matters, claims, investigations, and proceedings;
• our estimates of the fair value of intangible assets; and
• the potential impact of dilution related to our convertible debt, hedge, and warrant transactions.

Actual results could 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. Factors that could contribute to these differences or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include, but are not limited to, the risks and uncertainties listed above and described in Part I, Item 1A in the 2023 Form 10-K. We assume no obligation to update any forward-looking statement or provide the reasons why our actual results might differ.

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 support 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 into the Semiconductor Equipment, Industrial and Medical, Data Center Computing, and Telecom and Networking markets.

Recent Events

Airity Acquisition

On June 20, 2024, we acquired Airity Technologies, Inc. (“Airity”), which is based in Redwood City, California. This acquisition adds high voltage power conversion technologies and products, which broadens our range of targeted applications within our Semiconductor Equipment and Industrial and Medical markets. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

2024 Restructuring Plan

In July 2024, we approved further manufacturing consolidation initiatives, including the previously announced closure of our Zhongshan, China facility. In connection with the 2024 Plan, we recorded a $28.5 million charge primarily associated with expected employment-related charges and facility exit costs. We expect to incur $1.0 million to $2.0 million in additional charges related to our announced actions and continue to evaluate our operations and cost structure, which could result in incremental restructuring charges in future periods. For additional information, see Note 11. Restructuring, Asset Impairments, and Other Charges in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

Credit Agreement Amendment

On September 9, 2024, we used existing cash on hand to prepay the full $345.0 million outstanding principal balance under our Term Loan Facility. As of September 30, 2024, our only outstanding debt is the Convertible Notes due in 2028. On the same date, we entered into an additional amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million. See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for additional information.

Product and Services

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.

Our plasma power products offer solutions to 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, industrial production, medical and life science equipment, data center computing, networking, and telecommunications. We also supply related sensing, controls, and instrumentation products primarily for advanced measurement and calibration of power and temperature for multiple industrial markets.

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

The demand environment in each of our markets is impacted by macroeconomic conditions, various market trends, customer buying patterns, design wins, and other factors. Although we are currently experiencing a lower demand environment in certain markets, we continue to believe that the long-term market growth drivers support our long-term strategy, research and development efforts, and capital investments. However, in the short-term it is unclear how certain macroeconomic conditions, including the effect of higher interest rates impacting end customers’ capital investment, the timing of inventory digestion, and customer buying patterns, will affect customer demand and our revenue.

Semiconductor Equipment Market

The Semiconductor Equipment market is slowly recovering from a cyclical downturn, which began in the fourth quarter of 2022. Since the market bottomed in 2023, demand had modestly recovered in the first nine months of 2024, but a number of external factors continued to limit the market, including unfavorable macroeconomic conditions, prolonged weak demand for consumer electronics, low fab utilization, and U.S. export restrictions to China.

We continue to believe the long-term growth drivers will support cyclical growth for this market as more manufacturing capacity is needed to support increasing demand for semiconductor devices and related capital equipment.

Industrial and Medical Market

Beginning in the second half of 2023, the impact of weaker macroeconomic conditions started to impact demand for our products in the Industrial and Medical Market. In addition, in the first nine months of 2024, elevated inventory levels of our products following the supply chain crisis and extended lead times resulted in high levels of inventory rebalancing by our customers. We expect these factors will continue to limit our revenue levels in the near term, but we believe the long-term growth drivers will enable growth to return to this market after end markets recover and our customer inventories return to normal levels.

Data Center Computing Market

The Data Center Computing Market experienced weak demand starting in the first quarter of 2023 and continued until the first quarter of 2024, driven by reduced investments of our hyperscale customers, lower demand for Enterprise systems and the timing impact of large customer orders on our revenues. Starting in the second quarter of 2024, demand rebounded from both our hyperscale and enterprise customers, driven by accelerated investments in artificial intelligence and improved demand in the traditional server market, which we expect to continue for several quarters.

Telecom and Networking Market

Starting in 2023, leading companies in both the telecom and networking markets reported weakening demand. However, improved supply of critical components in 2023 drove higher customer orders and more than offset weakening market conditions, which continued in 2024. As end demand softens and customers rebalance their elevated inventory levels of our products, demand for our products declined meaningfully in the first nine months of 2024, which we expect to continue for several quarters.

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 (in thousands):

Revenue

The following tables summarize net sales and percentages of net sales, by markets (in thousands):

Total revenues in the three month period decreased from the same period in the prior year due to customer inventory rebalancing, resulting in lower demand in our Industrial and Medical and Telecom and Networking markets. This offset a modest revenue recovery in the Semiconductor Equipment market from the trough level a year ago and a demand recovery in the Data Center Computing market.

Total revenues in the nine month period decreased from the same periods in the prior year due primarily to customer inventory rebalancing, resulting in lower demand in our Industrial and Medical and Telecom and Networking markets. The Semiconductor Equipment market modestly recovered from the cyclical trough in 2023, and revenue in the Data Center Computing market was impacted by weak demand in the first quarter followed by a rebound beginning in the second and third quarter driven by investments in artificial intelligence.

Revenue by Market

(in thousands)

The increase in Semiconductor Equipment revenue for the three month period was primarily due to improved demand for our products compared to the same period in the prior year. The revenue for the nine month period modestly increased from the cyclical trough in 2023.

(in thousands)

The decrease in Industrial and Medical revenues for both the three and nine month periods was primarily due to lower demand and customers working down their elevated inventories compared to a record year in 2023 and shortened lead times following the supply chain crisis.

(in thousands)

The increase in Data Center Computing revenue for the three and nine month periods was due to increased hyperscale investments mostly driven by artificial intelligence adoption, and, to a lesser degree, a recovery in demand for traditional enterprise servers.

(in thousands)

The decrease in Telecom and Networking revenues for both the three and nine month periods was due to the prior year benefit of improved supply of critical components. This enabled fulfillment of outstanding orders in 2023, which did not continue in 2024. In addition, we experienced a slow demand environment and inventory rebalancing from our customers, which we expect to continue.

Gross Profit and Gross Margin

(in thousands)

For both the three and nine month periods, the decrease in gross profit was largely due to the decline in revenue and higher operating costs based on investments made in 2023. Gross margin declined in both periods due to the decline in volume, which drove manufacturing utilization lower. This was partially offset by more favorable product mix, savings realized from our restructuring programs, and lower premiums paid for scarce parts.

Operating Expenses

The following table summarizes our operating expenses (in thousands) and as a percentage of revenue:

Research and Development

(in thousands)

During the three and nine month periods we experienced an increase in R&D related to higher stock-based compensation expense as well as higher program and materials cost compared to the same periods in the prior year. This was partially offset by lower variable compensation cost.

Selling, General and Administrative

(in thousands)

Selling, general, and administrative expense remained constant due to actions taken to control costs, including headcount reduction and lower variable employee compensation, partially offset by higher stock-based compensation cost.

Amortization of Intangibles Assets

(in thousands)

Amortization expense remained constant. We acquired new intangible assets in the Airity acquisition, but this was offset by certain other intangible assets reaching the end of their estimated useful life.

Restructuring, Asset Impairments and Other Charges

(in thousands)

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

2024 Plan

In July 2024, we approved further manufacturing consolidation initiatives, including the previously announced closure of our Zhongshan, China facility. In connection with the 2024 Plan, we recorded a $28.5 million charge primarily associated with expected employment-related charges and facility exit costs. We expect to incur $1.0 million to $2.0 million in additional charges related to our announced actions and continue to evaluate our operations and cost structure, which could result in incremental restructuring charges in future periods.

For additional information about this and prior year restructuring plans, see Note 11. Restructuring, Asset Impairments, and Other Charges in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

Interest Income, Interest Expense, and Other Income (Expenses), net

(in thousands)

We experienced an increase in interest income on higher cash balances, due in part to proceeds from the issuance of the Convertible Notes in the third quarter of 2023, our ability to concentrate cash in investment accounts, and higher short term market interest rates.

Interest expense increased due to interest associated with the Convertible Notes and a higher interest rate on the portion of our Term Loan Facility subject to a variable interest rate. We prepaid in full the Term Loan Facility on September 9, 2024, and the interest rate swap contracts expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.

See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for information regarding our debt.

Other income (expense), net consists primarily of foreign exchange gains and losses and other miscellaneous items. We had unrealized foreign exchange losses during the three and nine months ended September 30, 2024 compared to unrealized gains in the same periods in the prior year. Additionally, during the three months ended September 30, 2024, we incurred costs associated with foreign currency translation adjustments related to liquidated foreign operations and debt discount and fees associated with our Term Loan Facility prepayment. There were no such costs during the same periods in the prior year.

Income Tax

The following table summarizes tax provision (benefit) (in thousands) and the effective tax rate for our income from continuing operations:

Our effective tax rates differ 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 previously announced Zhongshan, China factory closure impacted our effective tax rate in both the three and nine months ended September 30, 2024. For the nine months ended September 30, 2024, our effective tax rate was higher than the same period in the prior year due to smaller beneficial discrete items in the current period relative to the larger beneficial discrete items in the prior period.

As of January 1, 2024, the Pillar II minimum global effective tax rate of 15% enacted by the Organization for Economic Cooperation and Development (“OECD”) was effectuated. More than 140 countries agreed to enact the Pillar II global minimum tax. However, the timing of the implementation for each country varies. To date, we have determined that there was an immaterial global minimum tax liability as a result of Pillar II, as certain tax jurisdictions either will not have Pillar II enacted until after December 31, 2024 or satisfied the safe harbor test to prevent any minimum tax under Pillar II. We continue to monitor the jurisdictions for any changes and include any appropriate minimum tax throughout the year.

Non-GAAP Results

Management uses 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 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.

The non-GAAP results presented below exclude the impact of non-cash related charges, such as stock-based compensation, amortization of intangible assets, and long-term unrealized foreign exchange gains and losses. In addition, we exclude discontinued operations and other non-recurring items such as acquisition-related costs, facility expansion and 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.

(in thousands, except per share amounts)

Liquidity and Capital Resources

Liquidity

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 continue to be our available cash, cash generated from operations, and available borrowing capacity under the Revolving Facility (defined in Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements”).

As of September 30, 2024, our cash and cash equivalents totaled $657.3 million, while our available funding under our Revolving Facility was $600.0 million. Additionally, we generated $50.3 million of cash flow from continuing operations in the nine months ended September 30, 2024. We believe our sources of liquidity will be adequate to meet anticipated debt service, share repurchase programs, and dividends. During the ordinary course of business, we evaluate our cash requirements and, if necessary, adjust our expenditures to reflect the current market conditions and our projected revenue and demand. Our capital expenditures are primarily directed towards manufacturing and operations and can materially influence our available cash for other initiatives.

In addition, we may seek additional debt or equity financing from time to time; however, such additional financing may not be available on acceptable terms, if at all.

Debt

On September 9, 2024, we used existing cash on hand to prepay the full $345.0 million outstanding principal balance under our Term Loan Facility. On the same date, we entered into an additional amendment to the Credit Agreement to increase the capacity on the Revolving Facility from $200.0 million to $600.0 million.

As of September 30, 2024, our only outstanding debt is the $575.0 million Convertible Notes, which mature on September 15, 2028 and carry a 2.5% interest rate.

See Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements” for additional information.

The interest rate swap contracts previously entered into related to the Term Loan Facility expired on September 10, 2024. Should we have future borrowings under our Term Loan Facility or Revolving Facility, those borrowings would be subject to a variable rate.

As of September 30, 2024, no amounts were outstanding under the Revolving Facility, and we had $600.0 million in available funding.

In addition to the available capacity on the Revolving Facility, prior to the maturity date of our Credit Agreement, we may request an increase to the financing commitments in either the Term Loan Facility or Revolving Facility by an aggregate amount not to exceed $250.0 million. Any requested increase is subject to lender approval.

For more information see Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

Dividends

During the nine months ended September 30, 2024, we paid quarterly cash dividends of $0.10 per share, totaling $11.5 million. We currently anticipate that a cash dividend of $0.10 per share will continue to be paid on a quarterly basis, although the declaration of any future cash dividend is at the discretion of the Board of Directors and will depend on our financial condition, results of operations, capital requirements, business conditions, and other factors.

Cash Flows

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

Operating Activities

Net cash from operating activities from continuing operations for the nine months ended September 30, 2024 was $50.3 million, as compared to $128.2 million for the same period in the prior year. This $77.9 million decrease was primarily due to lower net income from continuing operations. Additionally, during the current year, we had a significant use of cash for inventories due to a strategic inventory buildup as well as lower cash flow from accounts receivable as a result of a decline in revenue. In addition, we had unfavorable changes in accounts payable, accrued expenses, and other liabilities.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2024 was $60.5 million, primarily driven by the following:

• $44.0 million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity;
• $13.8 million for the Airity acquisition; and
• $2.7 million in purchases of investments.

Net cash used in investing activities for the nine months ended September 30, 2023 was $50.2 million, primarily driven by the following:

• $46.8 million in purchases of property and equipment largely driven by investments in our manufacturing footprint and capacity; and
• $3.4 million in purchases of investments.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2024 was $374.4 million and included the following:

• $355.0 million for repayment of long-term debt;
• $11.5 million for dividend payments;
• $1.8 million for repurchase of common stock; and
• $6.0 million in net payments related to stock-based award activities.

Net cash from financing activities for the nine months ended September 30, 2023 was $454.2 million and included the following:

• $562.0 million net proceeds from issuance of long-term debt;
• $74.9 million proceeds from the sale of Warrants;
• $115.0 million for purchase of Note Hedges;
• $40.0 million for repurchase of common stock;
• $15.0 million for repayment of long-term debt;
• $11.4 million for dividend payments; and
• $1.3 million in net payments related to stock-based award activities.

Effect of Currency Translation on Cash

During the nine months ended September 30, 2024, foreign currency translation had a minimal impact on cash. See “Foreign Currency Exchange Rate Risk” in Part I, Item 3 for more information.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the consolidated financial statements and accompanying notes. Note 1. Summary of Operations and Significant Accounting Policies and Estimates to the consolidated financial statements in the 2023 Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Our critical accounting estimates, discussed in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2023 Form 10-K, include assessing excess and obsolete inventories, accounting for income taxes, and estimates for the valuation of assets and liabilities acquired in business combinations.

Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the consolidated financial statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.

Market Risk and Risk Management

In the normal course of business, we have exposure to interest rate risk from our investments and the Credit Agreement. We also have exposure to foreign exchange rate risk related to our foreign operations and foreign currency transactions.

See “Risk Factors” set forth in Part I, Item 1A of the 2023 Form 10-K and Part II of this report, for more information about the market risks to which we are exposed. There have been no material changes in our exposure to market risk from December 31, 2023.

Foreign Currency Exchange Rate Risk

We are impacted by changes in foreign currency exchange rates through revenue and purchasing transactions when we sell products and purchase materials in currencies different from the currency in which product and manufacturing costs were incurred. Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted by changes in foreign currency exchange rates. Assets and liabilities of substantially all our subsidiaries outside the U.S. are translated at period end rates of exchange for each reporting period. Operating results and cash flow statements are translated at average rates of exchange during each reporting period. Although these translation changes have no immediate cash impact, the translation changes may impact future borrowing capacity, and overall value of our net assets.

The functional currencies of our worldwide facilities primarily include the United States Dollar, Euro, South Korean Won, New Taiwan Dollar, Japanese Yen, Pound Sterling, and Chinese Yuan. We are subject to risks associated with revenue and purchasing activities and costs to operate that are denominated in currencies other than our functional currencies, such as the Singapore Dollar, Malaysian Ringgit, Mexican Peso, Philippine Peso, and Thai Baht. Historically, the impact of changes to these particular exchange rates has not been material to our operating results.

From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date, including foreign currency, which may be required for a potential foreign acquisition. Market risk arises from the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We may enter into foreign currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring parameters that limit the types and degree of our derivative contract instruments. We enter into derivative contract instruments for risk management purposes only. We do not enter into or issue derivatives for trading or speculative purposes.

Interest Rate Risk

At the present time, a change in interest rates does not have an impact upon our future earnings and cash flow because our only outstanding debt is the Convertible Notes, which carry a fixed 2.5% interest rate. However, increases in interest rates could impact the decision to borrow under our Credit Agreement, ability to refinance existing maturities, and acquire additional debt on favorable terms.

For more information see Note 16. Long-Term Debt in Part I, Item 1 “Unaudited Consolidated Financial Statements.”

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to management, including our Principal Executive Officer (Stephen D. Kelley, President and Chief Executive Officer) and Principal Financial Officer (Paul Oldham, Executive Vice President and Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2024. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit and Finance Committee. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We intend to continue to review and document our disclosure controls and procedures, including our internal controls over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

Changes in Internal Control over Financial Reporting

Our assessment of the effectiveness of internal control over financial reporting excludes Airity, which we acquired in a business combination on June 20, 2024. See Note 2. Acquisitions in Part I, Item 1 “Unaudited Consolidated Financial Statements.” Airity’s total assets and total revenue excluded from management’s assessment represent less than 1% of the related consolidated financial statement amounts as of September 30, 2024.

Aside from the above, there was no change in our internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Information concerning our risk factors is contained in Part I, Item 1A, “Risk Factors” in the 2023 Form 10-K. The risks described in the 2023 Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, or operating results. There have been no material changes to the risk factors previously disclosed in the 2023 Form 10-K.