Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

Certificates of deposit

AEIS 10Q Q3 2013 Master

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended September 30, 2013
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the transition period from to .

Commission file number: 000-26966

ADVANCED ENERGY INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



Delaware		84-0846841
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1625 Sharp Point Drive, Fort Collins, CO		80525
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (970) 221-4670

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

As of October 31, 2013 there were 39,984,269 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.

ADVANCED ENERGY INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I FINANCIAL STATEMENTS	3

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Operations	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	25

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	34

ITEM 4. CONTROLS AND PROCEDURES	34

PART II OTHER INFORMATION	36

ITEM 1. LEGAL PROCEEDINGS	36

ITEM 1A. RISK FACTORS	36

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	37

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	38

ITEM 4. MINE SAFETY DISCLOSURES	38

ITEM 5. OTHER INFORMATION	38

ITEM 6. EXHIBITS	39

SIGNATURES	40
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Table Of Contents

PART I FINANCIAL STATEMENTS


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Balance Sheets *

(In thousands, except per share amounts)



	September 30,		December 31,
	2013		2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	92,449	$	146,564
Marketable securities	12,277		25,683
Accounts receivable, net of allowances of $4,372 and $4,589, respectively	130,311		83,914
Inventories, net of reserves of $16,341 and $14,629, respectively	123,152		81,482
Deferred income tax assets	19,465		19,477
Income taxes receivable	9,249		4,315
Other current assets	13,908		9,075
Total current assets	400,811		370,510
Property and equipment, net	36,348		39,523
OTHER ASSETS:
Deposits and other	7,641		7,529
Goodwill	148,432		60,391
Other intangible assets, net	20,494		46,209
Deferred income tax assets	13,953		13,998
Total assets	$	627,679	$	538,160
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	67,563	$	41,044
Income taxes payable	2,017		11,029
Accrued payroll and employee benefits	11,713		11,675
Accrued warranty expense	11,710		7,419
Other accrued expenses	21,946		15,399
Customer deposits	3,849		2,080
Notes payable to banks	11,436		—
Total current liabilities	130,234		88,646
LONG-TERM LIABILITIES:
Deferred income tax liabilities	18,095		16,832
Uncertain tax positions	13,669		13,669
Accrued warranty expense	6,426		7,378
Other long-term liabilities	44,414		24,004
Total liabilities	212,838		150,529

STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding	—		—
Common stock, $0.001 par value, 70,000 shares authorized; 39,959 and 37,991
issued and outstanding, respectively	40		38
Additional paid-in capital	240,157		212,520
Retained earnings	143,079		145,348
Accumulated other comprehensive income	31,565		29,725
Total stockholders’ equity	414,841		387,631
Total liabilities and stockholders’ equity	$	627,679	$	538,160

* Amounts as of September 30, 2013 are unaudited. Amounts as of December 31, 2012 are derived from the December 31, 2012 audited Consolidated Financial Statements.

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
SALES	$	142,899		$	117,515	$	394,424		$	338,960
COST OF SALES	86,688			71,788		243,115			209,760
GROSS PROFIT	56,211			45,727		151,309			129,200
OPERATING EXPENSES:
Research and development	15,105			14,564		45,098			44,181
Selling, general and administrative	22,138			16,806		62,702			53,571
Amortization of intangible assets	626			1,416		4,814			4,139
Restructuring charges and asset impairment	19,884			3,003		44,090			5,434
Total operating expenses	57,753			35,789		156,704			107,325
OPERATING INCOME (LOSS)	(1,542		)	9,938		(5,395		)	21,875
OTHER INCOME (EXPENSE), NET	164			65		(369		)	2,251
Income (loss) from continuing operations before income taxes	(1,378		)	10,003		(5,764		)	24,126
Provision (benefit) for income taxes	(2,065		)	4,268		(3,495		)	8,824
INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF INCOME TAXES	687			5,735		(2,269		)	15,302
Income from discontinued operations, net of income taxes	—			—		—			430
NET INCOME (LOSS)	$	687		$	5,735	$	(2,269	)	$	15,732

Basic weighted-average common shares outstanding	39,878			37,807		39,365			39,148
Diluted weighted-average common shares outstanding	40,577			38,330		40,150			39,720

EARNINGS PER SHARE:
CONTINUING OPERATIONS:
BASIC EARNINGS (LOSS) PER SHARE	$	0.02		$	0.15	$	(0.06	)	$	0.39
DILUTED EARNINGS (LOSS) PER SHARE	$	0.02		$	0.15	$	(0.06	)	$	0.39
DISCONTINUED OPERATIONS
BASIC EARNINGS PER SHARE	$	0.00		$	0.00	$	0.00		$	0.01
DILUTED EARNINGS PER SHARE	$	0.00		$	0.00	$	0.00		$	0.01
NET INCOME:
BASIC EARNINGS (LOSS) PER SHARE	$	0.02		$	0.15	$	(0.06	)	$	0.40
DILUTED EARNINGS (LOSS) PER SHARE	$	0.02		$	0.15	$	(0.06	)	$	0.40

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Net income (loss)	$	687		$	5,735	$	(2,269	)	$	15,732
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	5,376			1,095		1,851			226
Unrealized gains (losses) on marketable securities	(5		)	2		(12		)	16
Comprehensive income (loss)	$	6,058		$	6,832	$	(430	)	$	15,974

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(2,269	)	$	15,732
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization	14,487			13,109
Stock-based compensation expense	9,310			10,072
Benefit for deferred income taxes	(13		)	(54		)
Restructuring charges and asset impairment	44,090			5,434
Net gain (loss) on sale or disposal of assets	421			(557		)
Changes in operating assets and liabilities:
Accounts receivable	(35,711		)	31,130
Inventories	(23,453		)	(6,995		)
Other current assets	(727		)	4,086
Accounts payable	8,356			7,673
Other current liabilities and accrued expenses	(5,665		)	4,344
Income taxes	(13,472		)	8,276
Net cash provided by (used in) operating activities	(4,646		)	92,250
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(16,137		)	(20,522		)
Proceeds from sale of marketable securities	29,493			23,476
Proceeds from the sale of assets	—			2,200
Purchases of property and equipment	(6,589		)	(6,676		)
Acquisitions, net of cash acquired	(75,374		)	—
Net cash used in investing activities	(68,607		)	(1,522		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from lines of credit	(916		)	—
Purchase and retirement of common stock	—			(57,117		)
Proceeds from exercise of stock options	20,026			2,669
Excess tax from stock-based compensation deduction	(604		)	(634		)
Other financing activities	(69		)	(71		)
Net cash provided by (used in) financing activities	18,437			(55,153		)
EFFECT OF CURRENCY TRANSLATION ON CASH	701			(2,180		)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(54,115		)	33,395
CASH AND CASH EQUIVALENTS, beginning of period	146,564			117,639
CASH AND CASH EQUIVALENTS, end of period	$	92,449		$	151,034
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	70		$	14
Cash paid for income taxes	14,888			3,343
Cash received for refunds of income taxes	2,945			7,345
Cash held in banks outside the United States of America	29,068			37,543

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1.	BASIS OF PRESENTATION

Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries ("we," "us," "our," "Advanced Energy," or the "Company") design, manufacture, sell, and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin film deposition for various products, such as semiconductor devices, flat panel displays, thin film renewables, and architectural glass. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these same markets. Our solar inverter products support renewable power generation solutions for primarily commercial, and utility-scale solar projects and installations. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and refurbishments to companies using our products. We also offer a wide variety of operations and maintenance service plans that can be tailored for individual photovoltaic ("PV") sites of all sizes.

We are organized into two strategic business units ("SBU") based on the products and services provided.

Thin Films Processing Power Conversion and Thermal Instrumentation ("Thin Films") SBU offers products for direct current ("DC"), pulsed DC mid frequency, and radio frequency ("RF") power supplies, matching networks and RF instrumentation as well as thermal instrumentation products.

Solar Energy SBU offers both a transformer-based or transformerless advanced grid-tied PV inverter solution for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2013, and the results of our operations and cash flows for the three and nine months ended September 30, 2013 and 2012.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and other financial information filed with the SEC.

ESTIMATES AND ASSUMPTIONS

The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory, warranty reserves, acquisitions, asset valuations, goodwill, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.

REVENUE RECOGNITION

Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.

NEW ACCOUNTING STANDARDS

From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance,

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

whether adopted or to be adopted in the future, is not expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.


NOTE 2.	BUSINESS ACQUISITION & DISPOSITION

Acquisition

Solvix SA

On November 8, 2012, we acquired Solvix SA ("Solvix"), a privately-held Switzerland based company, pursuant to a stock purchase agreement dated November 8, 2012 between AEI International Holdings, CV ("AEI CV"), a wholly-owned subsidiary of Advanced Energy incorporated in the Netherlands, and CPA Group SA ("CPA Group"), a privately held Switzerland company. Pursuant to the stock purchase agreement, AEI CV purchased 100% of the outstanding stock of Solvix.

We acquired all of the outstanding Solvix common stock for total consideration with a fair value of approximately $21.2 million consisting of cash payments totaling $16.0 million, net of cash acquired, and contingent consideration payable to the former shareholders of Solvix. The additional cash consideration of up to $7.9 million is payable to CPA Group if certain milestone targets are met during the year ending December 31, 2013 and certain financial targets are met in the three years ended December 31, 2015. The estimated fair value of this contingent consideration is approximately $5.3 million as of November 8, 2012, of which the remaining balance of $0.9 million is included in Other accrued expenses and $2.3 million is included in Other long-term liabilities on the Condensed Consolidated Balance Sheet.

Solvix is a manufacturer of power supplies for the surface treatment and thin films industry. Solvix manufactures products that bring plasma-based sputtering and cathodic arc deposition applications to Advanced Energy's existing product portfolio and is included in our Thin Film business unit. Solvix has approximately 10 employees and had revenues of $5.2 million in its fiscal year ended September 30, 2012.

During 2013, we initiated the move of the Solvix product line from a contract manufacturer in Switzerland to our Shenzhen facility. The move will be completed by the end of the fourth quarter of 2013.

The components of the fair value of the total consideration transferred for the Solvix acquisition are as follows (in thousands):



Cash paid to owners	$	16,673
Contingent consideration	5,253
Cash acquired	(680		)
Total fair value of consideration transferred	$	21,246

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of November 8, 2012 (in thousands):



Cash	$	680
Accounts receivable	1,074
Inventories	57
Other receivables	32
Other current assets	46
Property and equipment	43
Accounts payable	(390		)
Accrued payroll and employee benefits	(186		)
Other accrued expenses	(159		)
Customer deposits	(38		)
Deferred tax liabilities	(1,628		)
	(469		)
Amortizable intangible assets:
Trademarks	106
Technology	2,723
Customer relationships	5,398
Total amortizable intangible assets	8,227
Total identifiable net assets	7,758
Goodwill	13,488
Total fair value of consideration transferred	$	21,246

A summary of the intangible assets acquired, amortization method and estimated useful lives as of November 8, 2012 follows (in thousands, except useful life):



	Amount		Amortization Method	Useful Life
Trademarks	$	106	Straight-line	3
Technology	2,723		Straight-line	9
Customer relationships - other	755		Straight-line	7
Customer relationships - design	4,643		Straight-line	12
	$	8,227

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date.

The cost of the acquisition may increase or decrease based on the final amount payable to the former owner of Solvix related to the financial targets to be met during the three years ending December 31, 2015. Advanced Energy is in the process of finalizing valuations of other intangibles, estimates of the fair value of liabilities associated with the acquisition and deferred taxes and expects to complete the acquisition accounting and required disclosures prior to December 31, 2013.

Refusol Holding

On April 8, 2013, we acquired all the outstanding shares of Refusol Holding GmbH pursuant to a Sale and Purchase Agreement (the "Agreement ") between AEI Holdings, GmbH (formerly Blitz S13-103, GmbH) ("AEI Holdings"), an indirect wholly-owned subsidiary of Advanced Energy Industries, Inc. and Jolaos Verwaltungs GmbH ("Jolaos") and Prettl Beteilgungs Holding GmbH. Refusol Holding GmbH ("Refusol Holding") owns all of the shares of Refusol GmbH and its subsidiaries (collectively and together with Refusol Holding, "Refusol"). Refusol develops, manufactures, distributes and services photovoltaic inverters.

All of the outstanding shares of Refusol Holding were acquired for total consideration of approximately $87.2 million, consisting of a cash payment of $75.4 million, net of cash acquired and a working capital reduction and assumption of debt totaling $11.9 million. The agreement calls for additional cash consideration if certain stretch financial targets are met by our Solar Energy

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

business unit and Refusol, on a combined basis, at the end of the twelve (12) calendar months following April 1, 2013. The contingent consideration has no estimated fair value as of April 8, 2013 based on management's estimates of operating income for the Solar Energy business unit for the specified period. The preliminary base price is subject to a post-closing adjustment based on confirmation of the financial statements of Refusol effective as of the closing date.

Refusol develops three-phase string inverters for commercial customers across Europe and Asia. Its three-phase string inverter offerings range in size from 8kW to 24kW broadening the range of solar inverter products offered by Advanced Energy. Refusol is included in our Solar Energy business unit. Refusol had revenues of $170.5 million in its fiscal year ended December 31, 2012.

The components of the fair value of the total consideration transferred for the Refusol acquisition are as follows (in thousands):



Cash paid to owners	$	79,550
Debt assumed	11,873
Working capital adjustment	(2,340		)
Cash acquired	(1,836		)
Total fair value of consideration transferred	$	87,247

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of April 8, 2013 (in thousands):



Accounts receivable	10,705
Inventories	17,477
Other current assets	7,028
Property and equipment	5,165
Other long-term assets	130
Current liabilities	(21,257		)
Long-term liabilities	(23,664		)
Deferred tax liabilities	(2,985		)
	(7,401		)
Amortizable intangible assets:
Trademarks	1,300
Technology	5,700
Customer relationships	3,500
Total amortizable intangible assets	10,500
Total identifiable net assets	3,099
Goodwill	84,148
Total fair value of consideration transferred	$	87,247

A summary of the intangible assets acquired, amortization method and estimated useful lives as of April 8, 2013 follows (in thousands, except useful life):



	Amount		Amortization Method	Useful Life
Trademarks	$	1,300	Straight-line	1.5
Technology	5,700		Straight-line	5
Customer relationships	3,500		Straight-line	5
	$	10,500

Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into additional markets that we already serve.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The cost of the acquisition may increase or decrease based on the final amount payable to the former owner of Refusol related to the financial targets to be met during the twelve month period subsequent to April 1, 2013 and a post-closing working capital adjustment based on confirmation of the financial statements of Refusol effective as of the closing date. Advanced Energy is in the process of finalizing valuations of accounts receivable, inventory, other intangibles, property, plant and equipment, estimates of the fair value of liabilities associated with the acquisition and deferred taxes.

The results of Refusol operations are included in our Condensed Consolidated Statements of Operations beginning April 8, 2013. For the period ended September 30, 2013, net sales of approximately $43.8 million and operating loss of $3.1 million attributable to Refusol were included in the Condensed Consolidated Statements of Operations. Refusol's results of operations included restructuring charges of $3.7 million and amortization of purchased intangible assets of $1.4 million.

Pro Forma Results for Refusol Acquisition

The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and Refusol as if the acquisition had occurred as of January 1, 2012. The pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at January 1, 2012. The unaudited pro forma financial information for the three and nine months ended September 30, 2012 includes the historical results of Advanced Energy for the three and nine months ended September 30, 2012 and the historical results of Refusol for the same periods.

The unaudited pro forma results for all periods presented include amortization charges for acquired intangible assets and related tax effects. These pro forma results consider the sale of the gas flow control business and related product lines as discontinued operations. The unaudited pro forma results follow (in thousands, except per share data):



	(Unaudited)
	Three Months Ended September 30,		Three Months Ended September 30,		Nine Months Ended September 30,			Nine Months Ended September 30,
	2013		2012		2013			2012
Sales	$	142,899	$	175,874	$	414,507		$	295,015
Net income (loss)	687		5,679		(6,975		)	9,433
Earnings (loss) per share:
Basic	$0.02		$	0.15	$	(0.18	)	$	0.24
Diluted	$0.02		$	0.14	$	(0.17	)	$	0.24

Disposition

On October 15, 2010, we completed the sale of our gas flow control business, which included the Aera^® mass flow control and related product lines to Hitachi Metals, Ltd. ("Hitachi"), for approximately $43.3 million. Assets and liabilities sold included, without limitation, inventories, real property in Hachioji, Japan, equipment, certain contracts, intellectual property rights related to the gas flow control business and certain warranty liability obligations.

In connection with the closing of this asset disposition, we entered into a Master Services Agreement and a Supplemental Transition Services Agreement pursuant to which we provided certain transition services until October 2011 and we became an authorized service provider for Hitachi in all countries other than Japan. In March 2012, we entered into an agreement to sell certain fixed assets to Hitachi and cease providing contract manufacturing services. As of May 31, 2012, we ceased providing contract manufacturing services to Hitachi and completed the sale of certain fixed assets related to that manufacturing. The sale of these assets resulted in a $1.9 million gain, which is recorded in Other income (expense), net in our Condensed Consolidated Statements of Operations. As of June 30, 2012, all manufacturing activities and relationships with Hitachi related to the previously owned gas flow control business have ended. We do not anticipate any additional activity with Hitachi in respect of these assets that would materially impact our financial statements in the future.

In accordance with authoritative accounting guidance for reporting discontinued operations, for the periods reported in this Form 10-Q, the results of continuing operations were reduced by the revenue and costs associated with the gas flow control business, which are included in the Income from discontinued operations, net of income taxes, in our Condensed Consolidated Statements of Operations.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating results of discontinued operations are as follows (in thousands):



	Nine Months Ended September 30,
	2012
Sales	$	8,959
Cost of sales	9,189
Gross profit (loss)	(230		)
Operating expenses:
Research and development	—
Selling, general, and administrative	88
Total operating expenses	88
Operating income (loss) from discontinued operations	(318		)
Other income	881
Income from discontinued operations before income taxes	563
Provision for income taxes	133
Income from discontinued operations, net of income taxes	$	430


NOTE 3.	INCOME TAXES

The following table sets out the tax expense and the effective tax rate for our income from continuing operations (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Income (loss) from continuing operations before income taxes	$	(1,378	)	$	10,003		$	(5,764	)	$	24,126
Provision (benefit) for income taxes	(2,065		)	4,268			(3,495		)	8,824
Effective tax rate	149.9		%	42.7		%	60.6		%	36.6		%

The effective tax rates for the three and nine months ended September 30, 2013 differ from the federal statutory rate of 35% primarily due to the effect of changes in foreign earnings coupled with the impact of the restructuring charges in the period. The effective tax rate is also impacted by discrete items recorded in the period.

For the three months ended September 30, 2013, the company recognized $4.9 million in net discrete tax benefits related to unrecognized tax benefits including the expiration of the statutes of limitations for multiple tax years. As of September 30, 2013, the total amount of gross unrecognized tax benefits was $4.7 million, all of which, if recognized, would impact the effective tax rate.

Our policy is to classify accrued interest and penalties related to unrecognized tax benefits in our income tax provision. For the three and nine months ended September 30, 2013 and 2012, the amount of interest and penalties accrued related to our unrecognized tax benefits was not significant.


NOTE 4.	EARNINGS PER SHARE FOR CONTINUING OPERATIONS

Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator is increased to exclude charges that would not have been incurred, and the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if securities containing potentially dilutive common shares (e.g., stock options and restricted stock units) had been converted to common shares, and if such assumed conversion is dilutive.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted EPS (in thousands, except per share data):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013			2012
Income (loss) from continuing operations, net of income taxes	$	687	$	5,735	$	(2,269	)	$	15,302

Basic weighted-average common shares outstanding	39,878		37,807		39,365			39,148
Assumed exercise of dilutive stock options and restricted stock units	699		523		785			572
Diluted weighted-average common shares outstanding	40,577		38,330		40,150			39,720
Income from continuing operations:
Basic earnings (loss) per share	$	0.02	$	0.15	$	(0.06	)	$	0.39
Diluted earnings (loss) per share	$	0.02	$	0.15	$	(0.06	)	$	0.39

The following stock options were excluded in the computation of diluted earnings per share because they were anti-dilutive:



	Three Months Ended September 30,		Nine Months Ended September 30,
	2013	2012	2013	2012
Stock options	382	4,042	609	5,118

Share Repurchases

In October 2012, our Board of Directors authorized a program to repurchase up to $25.0 million of our stock over a twelve-month period. Under this program, during the three and nine months ended September 30, 2013, we have not yet repurchased any shares.


NOTE 5.	MARKETABLE SECURITIES

Our investments with original maturities of more than three months at time of purchase are considered marketable securities available for sale.

The composition of our marketable securities is as follows (in thousands):



	September 30,				December 31,
	2013				2012
	Cost		Fair Value		Cost		Fair Value
Commercial paper	$	—	$	—	$	749	$	749
Certificates of deposit	12,277		12,277		12,498		12,498
Corporate bonds/notes	—		—		11,274		11,253
Municipal bonds/notes	—		—		285		285
Agency bonds/notes	—		—		900		898
Total marketable securities	$	12,277	$	12,277	$	25,706	$	25,683

The maturities of our marketable securities available for sale as of September 30, 2013 are as follows:

The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. Our current investments in marketable securities are expected to be liquidated during the next twelve months.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2013, we do not believe any of the underlying issuers of our marketable securities are presently at risk of default.


NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates. We manage these risks through the use of derivative financial instruments, primarily forward contracts. During the three and nine months ended September 30, 2013 and 2012, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they do offset the fluctuations of our intercompany debt due to foreign exchange rate changes. These forward contracts are typically for one month periods. At September 30, 2013 and December 31, 2012 we had outstanding Euro, Swiss Franc, and Canadian Dollar forward contracts. At September 30, 2013, we also had outstanding Japanese Yen forward contracts.

The notional amount of foreign currency exchange contracts at September 30, 2013 and 2012 was $36.0 million and $31.2 million, respectively, and the fair value of these contracts was not significant at September 30, 2013 and 2012. During the three months ended September 30, 2013 and 2012, we recognized losses of $1.3 million and $0.9 million, respectively, on our foreign currency exchange contracts. During the nine months ended September 30, 2013 and 2012, we recognized losses of $0.6 million and $0.3 million, respectively. These losses were offset by corresponding gains on the related intercompany debt and both are included as a component of Other income (expense), net, in our Condensed Consolidated Statements of Operations.


NOTE 7.	ASSETS MEASURED AT FAIR VALUE

The following tables present information about our financial assets measured at fair value, on a recurring basis, as of September 30, 2013, and December 31, 2012. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of September 30, 2013, and December 31, 2012.



September 30, 2013	Level 1		Level 2		Level 3		Total
	(In thousands)
Certificates of deposit	$	—	$	12,277	$	—	$	12,277
Total marketable securities	$	—	$	12,277	$	—	$	12,277

December 31, 2012	Level 1		Level 2		Level 3		Total
	(In thousands)
Commercial paper	$	—	$	749	$	—	$	749
Certificates of deposit	—		12,498		—		12,498
Corporate bonds/notes	—		11,253		—		11,253
Municipal bonds/notes	—		285		—		285
Agency bonds/notes	898		—		—		898
Total marketable securities	$	898	$	24,785	$	—	$	25,683

There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three or nine months ended September 30, 2013.


NOTE 8.	INVENTORIES

Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories are as follows (in thousands):



	September 30,		December 31,
	2013		2012
Parts and raw materials	$	85,789	$	59,484
Work in process	6,017		3,728
Finished goods	31,346		18,270
Inventories, net of reserves	$	123,152	$	81,482

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 9.	PROPERTY AND EQUIPMENT

Details of property and equipment are as follows (in thousands):



	September 30,			December 31,
	2013			2012
Buildings and land	$	1,776		$	1,794
Machinery and equipment	42,681			40,993
Computer and communication equipment	24,169			22,895
Furniture and fixtures	4,370			1,845
Vehicles	370			359
Leasehold improvements	23,472			27,976
Construction in process	4,719			3,362
	101,557			99,224
Less: Accumulated depreciation	(65,209		)	(59,701		)
Property and equipment, net	$	36,348		$	39,523

Depreciation expense recorded in continuing operations is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Depreciation expense	$	3,269	$	3,075	$	9,673	$	8,970


NOTE 10.	GOODWILL

The following summarizes the changes in goodwill during the nine months ended September 30, 2013 (in thousands):



Gross carrying amount, beginning of period	$	60,391
Additions	84,148
Translation adjustments	3,893
Gross carrying amount, end of period	$	148,432


NOTE 11.	INTANGIBLE ASSETS

Other intangible assets consisted of the following as of September 30, 2013 (in thousands, except weighted-average useful life):



	Gross Carrying Amount		Effect of Changes in Exchange Rates		Impairment			Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life in Years
Amortizable intangibles:
Technology-based	$	50,368	$	323	$	(26,167	)	$	(14,006	)	$	10,518	4
Trademarks and other	18,515		386		(5,705		)	(3,220		)	9,976		7
Total amortizable intangibles	$	68,883	$	709	$	(31,872	)	$	(17,226	)	$	20,494

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other intangible assets consisted of the following as of December 31, 2012 (in thousands, except weighted-average useful life):



	Gross Carrying Amount		Effect of Changes in Exchange Rates		Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life in Years
Amortizable intangibles:
Technology-based	$	44,668	$	83	$	(10,775	)	$	33,976	7
Trademarks and other	13,703		167		(1,637		)	12,233		9
Total amortizable intangibles	$	58,371	$	250	$	(12,412	)	$	46,209

Amortization expense relating to other intangible assets included in our income (loss) from continuing operations is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Amortization expense	$	626	$	1,416	$	4,814	$	4,139

Amortization expense related to intangibles for each of the five years 2013 through 2017 and thereafter is as follows (in thousands):



Year Ending December 31,
2013 (remaining)	$	1,322
2014	5,062
2015	3,979
2016	2,744
2017	2,744
Thereafter	4,643
	$	20,494


NOTE 12.	OTHER ACCRUED EXPENSES

Other accrued expenses consisted of the following (in thousands):



	September 30,		December 31,
	2013		2012
Other accrued expenses:
Current deferred tax liability	$	4,139	$	4,137
Accrued restructuring costs	3,445		1,853
Current contingent consideration	851		2,773
Accrued sales and use tax	3,597		1,010
Other*	9,914		5,626
Total Other accrued expenses	$	21,946	$	15,399

*Other accrued expenses consisted of items that are individually less than 5% of total current liabilities.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 13.	RESTRUCTURING COSTS

In April 2013, we committed to a restructuring plan to take advantage of additional cost saving opportunities in connection with our acquisition of Refusol. The plan called for consolidating certain facilities, further centralizing our manufacturing and rationalizing certain products to most effectively meet customer needs. Collectively, these steps will enable us to more efficiently use our resources to achieve strategic goals.

As a part of the product rationalization initiated under the restructuring plan, we determined that the intangible assets associated with certain technology should be tested for recoverability. To test the intangible assets for recoverability, we compared the carrying value of the assets with their fair value which resulted in an impairment of $36.2 million which is recorded in restructuring charges and asset impairment in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2013.

Over the next three months, we will continue to consolidate facilities; transfer the remaining supply chain activities of our Thin Films business unit to the Shenzhen, China manufacturing facility; and rationalize the inverter product line to most effectively meet the needs of its customers. As a result, we anticipate additional charges of approximately $0.5 million, all of which are expected to be cash expenditures. Estimated total expenses to be incurred under the plan are approximately $44.6 million to $44.9 million. Of this total, approximately $6.5 million to $6.8 million relates to severance costs, $6.2 million to $6.5 million for space consolidation, and $31.9 million for product rationalization and impairments of the intangible assets associated with the technology around those products.

The following table summarizes the components of our restructuring costs incurred under the 2013 plan (in thousands):



	Three Months Ended			Nine Months Ended		Cumulative costs through
	September 30, 2013			September 30, 2013		September 30, 2013
Severance and related costs	$	1,590		$	6,010	$	6,010
Property and equipment and intangible asset impairments	18,475			36,219		36,219
Facility closure costs	(181		)	1,861		1,861
Total restructuring charges	$	19,884		$	44,090	$	44,090

The following table summarizes our restructuring liabilities under the 2013 plan (in thousands):



	Balances at December 31, 2012		Costs incurred and charged to expense		Cost paid or otherwise settled			Effect of change in exchange rates			Balances at September 30, 2013
Severance and related costs	$	—	$	6,011	$	(3,417	)	$	(100	)	$	2,494
Property and equipment and intangible asset impairments	—		36,219		(36,219		)	—			—
Facility closure costs	—		1,860		(1,518		)	19			361
Total restructuring liabilities	$	—	$	44,090	$	(41,154	)	$	(81	)	$	2,855

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In September 2011, we approved and committed to several initiatives to realign our manufacturing and research and development activities in order to foster growth and enhance profitability. These initiatives are designed to align research and development activities with the location of our customers and reduce production costs. Under this plan, we reduced our global headcount, consolidated our facilities by terminating or exiting several leases, and recorded impairments for assets no longer in use due to the restructuring of our business. All activities under this restructuring plan were completed prior to December 31, 2012. The following table summarizes our restructuring liabilities under this plan (in thousands):



	Balances at December 31, 2012		Costs incurred and charged to expense		Cost paid or otherwise settled			Effect of change in exchange rates		Balances at September 30, 2013
Severance and related costs	$	1,345	$	—	$	(1,137	)	$	—	$	208
Facility closure costs	508		—		(126		)	—		382
Total restructuring liabilities	$	1,853	$	—	$	(1,263	)	$	—	$	590

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 14.	WARRANTIES

Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 18 months to 24 months following installation for Thin Films products and 5 years to 10 years following installation for Solar Energy products. Our provision for the estimated cost of warranties is recorded when revenue is recognized. The warranty provision is based on historical experience by product, configuration and geographic region.

We establish accruals for warranty issues that are probable to result in future costs. Changes in product warranty accruals are as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Balances at beginning of period	$	20,419		$	14,057		$	14,797		$	14,719
Warranty liabilities acquired	—			—			10,678			—
Increases to accruals related to sales during the period	2,404			2,650			8,108			6,350
Warranty expenditures	(4,687		)	(1,832		)	(15,447		)	(6,194		)
Balances at end of period	$	18,136		$	14,875		$	18,136		$	14,875

We also offer our Solar Energy customers the option to purchase additional warranty coverage up to 20 years after the base warranty period expires. Deferred revenue related to such extended warranty contracts was $24.9 million as of September 30, 2013 and is all classified in Other long-term liabilities in the Condensed Consolidated Balance Sheet. As of December 31, 2012, deferred revenue related to extended warranty contracts was $20.5 million, of which $0.4 million is classified in Customer deposits and $20.1 million is classified in Other long-term liabilities.


NOTE 15.	STOCK-BASED COMPENSATION

We recognize stock-based compensation expense based on the fair value of the awards issued. Stock-based compensation for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Stock-based compensation expense	$	4,106	$	2,835	$	9,310	$	10,072

Stock Options

Stock option awards, other than awards under our 2012-2014 Long Term Incentive Plan ("LTI Plan"), are generally granted with an exercise price equal to the market price of our common stock at the date of grant, a four-year vesting schedule, and a term of 10 years.

Under the LTI Plan, we made grants of performance based options and awards during the first quarter of 2012, which will vest annually over a three-year period based on the Company's achievement of return on net assets targets established by our Board of Directors at the beginning of each year. These awards are granted with an exercise price equal to the market price of our common stock at the date of grant and have a term of 10 years. The fair value of each grant was estimated on the date of grant using the Black-Scholes-Merton option pricing model utilizing an expected volatility of 61.5%, a risk-free rate of 1.2%, a dividend yield of zero, and an expected term of 5.6 years. The weighted-average grant date fair value of the options is $6.19 per share. The weighted average grant date fair value of the awards is $11.03 per share.

In the second quarter of 2013, we granted additional options and awards under the LTI plan to our chief executive officer who was not previously a participant in the plan. The fair value of these shares was estimated using the Black-Scholes-Merton option pricing model utilizing an expected volatility of 68.9%, a risk free rate of 0.74%, a dividend yield of zero, and an expected term of 5.6 years. The weighted-average grant date fair value of the options is $10.55 and the weighted-average grant date fair value of the awards is $17.92.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Also in the second quarter of 2013, we awarded restricted stock units to our chief executive officer which vest one-third on the grant date and one-third each on September 30, 2013 and December 31, 2013. The grant-date fair value of the awards is $17.92.

A summary of our stock option activity for the nine months ended September 30, 2013 is as follows (in thousands):



	Shares
Options outstanding at December 31, 2012	5,659
Options granted	43
Options exercised	(1,624	)
Options forfeited	(728	)
Options expired	(122	)
Options outstanding at September 30, 2013	3,228

Restricted Stock Units

Restricted Stock Units ("RSU") are generally granted with a four-year vesting schedule.

A summary of our non-vested RSU activity for the nine months ended September 30, 2013 is as follows (in thousands):



	Shares
Balance at December 31, 2012	2,073
RSUs granted	379
RSUs vested	(434	)
RSUs forfeited	(290	)
Balance at September 30, 2013	1,728


NOTE 16.	ACCUMULATED OTHER COMPREHENSIVE INCOME

Accumulated other comprehensive income consisted of the following (in thousands):



	Foreign Currency Adjustments		Unrealized Losses on Marketable Securities			Total Accumulated Other Comprehensive Income
Balances at December 31, 2012	$	29,730	$	(5	)	$	29,725
Current period other comprehensive income (loss)	1,852		(12		)	1,840
Balances at September 30, 2013	$	31,582	$	(17	)	$	31,565


NOTE 17.	COMMITMENTS AND CONTINGENCIES

We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of September 30, 2013 is approximately $59.4 million. Our policy with respect to all purchase commitments, is to record losses, if any, when they are probable and reasonably estimable. We continuously monitor these commitments for exposure to potential losses and will record a provision for losses when it is deemed necessary.

We are involved in disputes and legal actions arising in the normal course of our business. There have been no material developments in legal proceedings in which we are involved during the three and nine months ended September 30, 2013.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 18.	RELATED PARTY TRANSACTIONS

During the three and nine months ended September 30, 2013 and 2012, we engaged in the following transactions with companies related to members of our Board of Directors, as described below (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Sales - related parties	$	20	$	102	$	635	$	579
Rent expense - related parties	465		466		1,407		1,403

Sales - Related Parties

Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the three and nine months ended September 30, 2013, we had sales to two such customers as noted above and accounts receivable from one such customers totaled $3,800 at September 30, 2013. During the three and nine months ended September 30, 2012, we had sales to two such customers as noted above and no aggregate accounts receivable from these customers at December 31, 2012.

Rent Expense - Related Parties

We lease our executive offices, research and development, and manufacturing facilities in Fort Collins, Colorado from a limited liability partnership in which Douglas Schatz, our Chairman of the Board and former Chief Executive Officer, holds an interest. The leases relating to these spaces expire during 2021 and obligate us to total annual payments of approximately $2.0 million, which includes facilities rent and common area maintenance costs.


NOTE 19.	SEGMENT INFORMATION

Our Thin Films SBU offers power conversion products for direct current, pulsed DC mid frequency, and radio frequency power supplies, matching networks, and RF instrumentation, as well as thermal instrumentation products. Our power conversion systems refine, modify, and control the raw electrical power from a utility and convert it into power that may be customized and is predictable and repeatable. Our thermal instrumentation products provide temperature measurement solutions for applications in which time-temperature cycles affect material properties, productivity, and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement. Our network of global service support centers offer repair services, conversions, upgrades, and refurbishments to companies using our products. Our Thin Films SBU principally serves original equipment manufacturers ("OEMs") and end customers in the semiconductor, flat panel display, solar panel, and other capital equipment markets.

Our Solar Energy SBU offers both a transformer-based and a transformerless advanced grid-tied PV inverter solution primarily for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. Our Solar Energy SBU focuses on commercial and utility-scale solar projects and installations, selling primarily to distributors, engineering, procurement, and construction contractors, developers, and utility companies. Our Solar Energy revenue has seasonal variations. Installations of inverters are normally lowest during the first quarter as a result of typically poor weather and installation scheduling by our customers.

Our chief operating decision maker, who is our Chief Executive Officer, and other management personnel regularly review our performance and make resource allocation decisions by reviewing the results of our two business segments separately. Revenue and operating profit is reviewed by our chief operating decision maker. We have also divided inventory and property and equipment based on business segment.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sales with respect to our operating segments is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Thin Films	$	75,409	$	56,780	$	208,888	$	182,013
Solar Energy	67,490		60,735		185,536		156,947
Total	$	142,899	$	117,515	$	394,424	$	338,960

Income from continuing operations before income taxes by operating segment is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
Thin Films	$	18,150		$	6,065		$	40,067		$	18,113
Solar Energy	192			7,410			(1,372		)	10,643
Total segment operating income	18,342			13,475			38,695			28,756
Corporate expenses	—			(534		)	—			(1,447		)
Restructuring charges	(19,884		)	(3,003		)	(44,090		)	(5,434		)
Other income (expense), net	164			65			(369		)	2,251
Income (loss) from continuing operations before income taxes	$	(1,378	)	$	10,003		$	(5,764	)	$	24,126

Corporate expenses in 2012 consist of intangible amortization that is now being allocated to the business units.

Segment assets consist of inventories, net and property and equipment, net. A summary of consolidated total assets by segment follows (in thousands):



	September 30, 2013		December 31, 2012
Thin Films	$	42,513	$	40,965
Solar Energy	115,383		76,393
Total segment assets	157,896		117,358
Unallocated corporate property and equipment	1,603		3,647
Unallocated corporate assets	468,180		417,155
Consolidated total assets	$	627,679	$	538,160

"Corporate" is a non-operating business segment with the main purpose of supporting operations. Unallocated corporate assets include accounts receivable, deferred income taxes, other current assets and intangible assets.

During the three and nine months ended September 30, 2013, we had one customer accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $23.5 million or 16.9% of total sales for the three month period and $65.0 million or 16.5% of total sales for the nine month period. During the three and nine months ended September 30, 2012, we had one customer accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $14.1 million or 12.0% of total sales during the three month period and $49.8 million or 14.7% of total sales during the nine month period. Our sales to Applied Materials, Inc. include thin film products used in semiconductor processing and solar, flat panel display, and architectural glass applications. No other customer accounted for 10% or more of our sales during these periods.


NOTE 20.	CREDIT FACILITIES

In October 2012, we, along with two of our wholly-owned subsidiaries, AE Solar Energy, Inc. and Sekidenko, Inc., entered into a Credit Agreement, subsequently amended in November 2012 and August 2013, (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as agent for and on behalf of certain lenders (each a "Lender"), which provides for a

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new secured revolving credit facility of up to $50.0 million (the "Credit Facility"). The Credit Facility provides us with the ability to borrow up to $50.0 million, although the amount of the Credit Facility may be increased by an additional $25.0 million up to a total of $75.0 million subject to receipt of lender commitments and other conditions. Borrowings under the Credit Facility are subject to a borrowing base based upon our domestic accounts receivable and inventory and are available for various corporate purposes, including general working capital, capital expenditures, and certain permitted acquisitions. The Credit Agreement also permits us to issue letters of credit. The maturity date of the Credit Facility is October 12, 2017.

At our election, the loans comprising each borrowing will bear interest at a rate per annum equal to either: (a) a "base rate" plus between one-half (0.5%) and one (1.0%) full percentage point depending on the amount available for additional draws under the Credit Facility ("Base Rate Loan"); or (b) the LIBOR rate then in effect plus between one and one-half (1.5%) and two (2%) percentage points depending on the amount available for additional draws under the Credit Facility. The "base rate" for any Base Rate Loan will be the greatest of the federal funds rate plus one-half (0.5%) percentage point; the one-month LIBOR rate plus one (1.0%) percentage point; and Wells Fargo's "prime rate" then in effect. As of September 30, 2013, the rate in effect was 4.25%.

The Credit Agreement requires us to pay certain fees to the Lenders and contains affirmative and negative covenants, which, among other things, require us to deliver to the Lenders specified quarterly and annual financial information, and limit us and our Guarantors (as defined below), subject to various exceptions and thresholds, from, among other things: (i) creating liens on our assets; (ii) merging with other companies or engaging in other extraordinary corporate transactions; (iii) selling certain assets or properties; (iv) entering into transactions with affiliates; (v) making certain types of investments; (vi) changing the nature of our business; and (vii) paying certain distributions or certain other payments to affiliates. Additionally, there are the following financial covenants: (i) during any period in which $12.5 million or less is available to us under the Credit Facility and for sixty (60) days thereafter, the Credit Agreement requires the maintenance of a defined consolidated fixed charge coverage ratio; and (ii) if there is any indebtedness under any issued and outstanding convertible notes, we are required to maintain a specified level of liquidity.

The Credit Agreement requires us to pay certain fees to the Lenders, including a $2,500 collateral management fee for each month that the Credit Facility is in place, and a fee based on the unused amount of the Credit Facility. During the nine months ended September 30, 2013, we expensed $0.2 million in interest and fees related to unused line of credit fees and amortization of debt issuance costs. We did not borrow against the Credit Facility in the three and nine month periods of 2013.

Pursuant to a Guaranty and Security Agreement (the "GS Agreement"), borrowings under the Credit Facility are guaranteed by our wholly-owned subsidiaries Aera Corporation and AEI US Subsidiary, Inc., (collectively the " Guarantors"). Under the GS Agreement, we and the Guarantors granted the Lenders a security interest in certain, but not all, of our and the Guarantors' assets.

As part of the acquisition of Refusol described in Note 2. Business Acquisitions and Disposition, we assumed the outstanding debt of Refusol as of the acquisition date. There were three outstanding loans with banks related to this debt, of which one was repaid and cancelled during the third quarter of 2013.

Refusol, GmbH has an outstanding loan agreement with Commerzbank Aktiengesellschaft ("Commerzbank") for up to 8.0 million Euros ("Commerzbank Loan Agreement"). The agreement allows Refusol to borrow up to 8.0 million Euros through various types of instruments including an overdraft (revolving) facilities, money market (term) loans, surety loans, or guarantees. There is no maturity date. Borrowings under the revolving credit facility bear interest at 5.32%. Surety and guarantee loans bear interest at 1.5%. Money market loans are granted by separate agreement when requested and must meet certain Euro thresholds related to the value depending on the maturity date chosen. The Commerzbank Loan Agreement requires the payment of a credit commission of 0.5% of the total loan amount. The agreement contains a various covenants including a financial covenant requiring a specified level of equity.

Refusol, GmbH also had an outstanding loan agreement with Bayerische Landesbank ("Bayern") which allowed it to borrow up to 4.0 million Euros either as overdraft facilities, term loans, or guarantees with repayment occurring one lump sum at the maturity date of the individual transaction with respect to term loans, or maturity of the loan agreement which was July 31, 2013 (the "Bayern Loan Agreement"). The overdraft facility bore interest at 4.5%. Term loans bore interest at the money market rate established by Bayern at the time of the loan plus a margin of 1.9%. Guarantees bore interest at 1.25% and had an issuing fee per guarantee. Loan commitment fees were 0.25% on the unused portion of the total loan amount. The Bayern Loan Agreement contained certain reporting requirements and a financial covenant requiring a specified level of equity.

Upon expiration of this agreement, Refusol, GmbH entered into a new loan agreement with Bayerische Landesbank ("Bayern") under which it has the ability to borrow up to 4.0 million Euros as either bank overdrafts, term loans, guarantees, or letters of credit. The overdraft facility bears interest at 3.9%, guarantees bears a rate of 1.64% and interest on term loans is a fixed rate set for each term loan period based on money market rates. Loan commitment fees are 0.25%. The loan matures on July 31,

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2014.

Refusol, Inc., a wholly-owned subsidiary of Refusol, GmbH located in the United States, has a revolving line of credit with Wells Fargo with an aggregate principal amount of $1.5 million and a maturity date of July 1, 2013. Borrowings under the line of credit are secured by all of Refusol, Inc.'s accounts receivable, inventory, and property, plant, and equipment and a letter of credit issued under the Commerzbank Loan Agreement. The line of credit bears interest at either (a) a fluctuating rate per annum one quarter of one percent (0.25%) above the Prime Rate or (b) the LIBOR rate then in effect plus two percent (2.0%). Refusol, Inc. has the option to select the method of interest each month. A commitment fee of 0.125% is payable by Refusol, Inc. on the unused portion of the line of credit. The line of credit contains certain affirmative and negative covenants limiting Refusol, Inc.'s ability to borrow additional funds or guarantee the debt of others. This line of credit was paid down and cancelled on its maturity date of July 1, 2013.

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

Special Note on Forward-Looking Statements

The following discussion 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. 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 or circumstances will continue. The inclusion of words such as "anticipate," "expect," "estimate," "can," "may," "continue," "enables," "plan," "intend," or "believe," as well as statements that events or circumstances "will" occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control. Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements.

For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption "Risk Factors" in Part II Item 1A of this Quarterly Report on Form 10-Q and, in our Annual Report on Form 10-K for the year ended December 31, 2012. We undertake no obligation to revise or update any forward-looking statements for any reason.

BUSINESS OVERVIEW

We design, manufacture, sell and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin film and plasma enhanced chemical and physical processing for various products as well as grid-tied power conversion. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these markets. Our network of global service support centers provides local repair and field service capability in key regions.


•	Our power conversion products refine, modify and control the raw electrical power from a utility and convert it into power that is predictable, repeatable and customizable. Our power conversion products are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage, hard and optical coating, and architectural glass manufacturers.


•	Our thermal instrumentation products, used primarily in the semiconductor industry, provide temperature measurement and control solutions for applications in which time-temperature cycles affect productivity and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement.

•

Our grid-tied power conversion products offer advanced transformer-based or transformerless grid-tied PV solutions for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. These products are used for commercial and utility-scale solar projects and installations, and are sold primarily to distributors; engineering, procurement, and construction contractors; developers; and utility companies. These product revenues have seasonal variations. Installations of inverters are normally lowest during the first quarter of the year due to less favorable weather conditions and installation scheduling by our customers.


•	Our network of global service support centers offer repair services, upgrades and refurbishments to businesses that use our products.

On October 15, 2010, we sold our gas flow control business, which includes the Aera® mass flow control and related product lines, to Hitachi Metals, Ltd. Consequently, the results of operations from our gas flow control business have been excluded from our discussions relating to continuing operations.

On November 8, 2012, we acquired Solvix SA ("Solvix"), a privately held company based in Villaz-Saint-Pierre, Switzerland. The financial results discussed below include the financial results of Solvix for the three and nine months ended September 30, 2013. Note 2. Business Acquisition & Disposition in Part I Item 1 of this Form 10-Q describes the acquisition of Solvix.

As also noted in Note 2. Business Acquisitions and Disposition in Part I Item 1 of this Form 10-Q, we acquired Refusol Holdings GmbH ("Refusol") on April 8, 2013. The financial results discussed below include the financial results of Refusol for the period April 8, 2013 through September 30, 2013.

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Our analysis presented below is organized to provide the information we believe will be helpful for understanding our historical performance and relevant trends going forward. This discussion should be read in conjunction with our Condensed 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 in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is also provided.

Results of Operations

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
Sales	$	142,899		$	117,515	$	394,424		$	338,960
Gross profit	56,211			45,727		151,309			129,200
Operating expenses	57,753			35,789		156,704			107,325
Operating income (loss)	(1,542		)	9,938		(5,395		)	21,875
Other income (expenses), net	164			65		(369		)	2,251
Income (loss) from continuing operations before income taxes	(1,378		)	10,003		(5,764		)	24,126
Provision (benefit) for income taxes	(2,065		)	4,268		(3,495		)	8,824
Income (loss) from continuing operations, net of income taxes	$	687		$	5,735	$	(2,269	)	$	15,302

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	39.3	%	38.9	%	38.4	%	38.1	%
Operating expenses	40.4	%	30.5	%	39.7	%	31.6	%
Operating income (loss)	(1.1	)%	8.4	%	(1.3	)%	6.5	%
Other income (expenses), net	0.1	%	0.1	%	(0.1	)%	0.7	%
Income (loss) from continuing operations before income taxes	(1.0	)%	8.5	%	(1.4	)%	7.2	%
Provision (benefit) for income taxes	(1.4	)%	3.6	%	(0.9	)%	2.6	%
Income (loss) from continuing operations, net of income taxes	0.4	%	4.9	%	(0.5	)%	4.6	%

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SALES

The following tables summarize sales, and percentages of sales, by segment for the three and nine months ended September 30, 2013 and 2012 (in thousands):



	Three Months Ended September 30,
	2013		% of Total Sales		2012		% of Total Sales		Increase/ (Decrease)			Percent Change
Thin Films:
Semiconductor capital equipment	$	43,100	30.2	%	$	29,716	25.3	%	$	13,384		45.0	%
Non-semiconductor capital equipment	19,495		13.6	%	13,510		11.5	%	5,985			44.3	%
Global support	12,814		9.0	%	13,554		11.5	%	(740		)	(5.5	)%
Total Thin Films	75,409		52.8	%	56,780		48.3	%	18,629			32.8	%
Solar Energy	67,490		47.2	%	60,735		51.7	%	6,755			11.1	%
Total sales	$	142,899	100.0	%	$	117,515	100.0	%	$	25,384		21.6	%



	Nine Months Ended September 30,
	2013		% of Total Sales		2012		% of Total Sales		Increase/ (Decrease)		Percent Change
Thin Films:
Semiconductor capital equipment	$	116,867	29.6	%	$	104,705	30.9	%	$	12,162	11.6	%
Non-semiconductor capital equipment	54,599		13.8	%	38,870		11.5	%	15,729		40.5	%
Global