Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

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10-Q

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, 2015
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 þ	Accelerated filer o	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, 2015 there were 41,041,983 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 (Loss) 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	24

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	47

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	47

ITEM 4. MINE SAFETY DISCLOSURES	47

ITEM 5. OTHER INFORMATION	47

ITEM 6. EXHIBITS	48

SIGNATURES	49
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,
	2015			2014
ASSETS	UNAUDITED
CURRENT ASSETS:
Cash and cash equivalents	$	184,296		$	125,285
Marketable securities	14,708			3,083
Accounts receivable, net of allowances of $24,416 and $3,035, respectively	90,755			124,150
Inventories, net of reserves of $40,855 and $41,080, respectively	71,712			95,082
Deferred income tax assets	13,767			14,011
Income taxes receivable	5,955			5,555
Other current assets	12,224			9,588
Total current assets	393,417			376,754
Property and equipment, net	12,519			28,976
OTHER ASSETS:
Deposits and other	1,540			2,052
Goodwill	43,479			203,329
Other intangible assets, net	36,599			47,074
Deferred income tax assets	26,107			26,384
Total assets	$	513,661		$	684,569
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	50,117		$	53,040
Income taxes payable	1,144			1,495
Accrued payroll and employee benefits	11,375			13,479
Accrued warranty expense	10,749			17,769
Other accrued expenses	27,747			19,970
Customer deposits	2,742			6,817
Deferred income tax liabilities	38,865			—
Total current liabilities	142,739			112,570
LONG-TERM LIABILITIES:
Deferred income tax liabilities	2,322			1,439
Uncertain tax positions	8,874			6,484
Accrued warranty expense	18,588			18,352
Long term deferred revenue	45,471			47,246
Other long-term liabilities	20,298			23,513
Total liabilities	238,292			209,604

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; 41,035 and 40,613
issued and outstanding, respectively	41			41
Additional paid-in capital	243,731			237,752
Retained earnings	31,645			226,396
Accumulated other comprehensive income	(48		)	10,776
Total stockholders’ equity	275,369			474,965
Total liabilities and stockholders’ equity	$	513,661		$	684,569

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

(In thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	UNAUDITED						UNAUDITED
SALES	$	130,800		$	143,147		$	408,709		$	430,380
COST OF SALES	77,763			95,204			255,650			277,230
GROSS PROFIT	53,037			47,943			153,059			153,150
OPERATING EXPENSES:
Research and development	11,696			15,074			39,985			44,952
Selling, general and administrative	16,484			20,223			78,784			62,782
Amortization of intangible assets	1,267			2,238			5,052			6,339
Restructuring charges and asset impairment*	13,930			1,183			182,323			1,427
Total operating expenses	43,377			38,718			306,144			115,500
OPERATING INCOME (LOSS)	9,660			9,225			(153,085		)	37,650
OTHER (EXPENSE) INCOME, NET	(867		)	(618		)	354			(689		)
Income (loss) before income taxes	8,793			8,607			(152,731		)	36,961
(Benefit) provision for income taxes	(7,639		)	(3,695		)	42,020			(702		)
NET INCOME (LOSS)	$	16,432		$	12,302		$	(194,751	)	$	37,663

Basic weighted-average common shares outstanding	41,027			39,998			40,905			40,450
Diluted weighted-average common shares outstanding	41,319			40,470			40,905			41,102

EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE	$	0.40		$	0.31		$	(4.76	)	$	0.93
DILUTED EARNINGS PER SHARE	$	0.40		$	0.30		$	(4.76	)	$	0.92

*See Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q.

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 (Loss) Income

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	UNAUDITED						UNAUDITED
Net income (loss)	$	16,432		$	12,302		$	(194,751	)	$	37,663
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	(2,498		)	(14,373		)	(10,211		)	(16,034		)
Unrealized (losses) gains on marketable securities	11			5			(613		)	6
Comprehensive income (loss)	$	13,945		$	(2,066	)	$	(205,575	)	$	21,635

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

(In thousands)



	Nine Months Ended September 30,
	2015			2014
	UNAUDITED
Cash Flows from Operating Activities:
Net (loss) income	$	(194,751	)	$	37,663
Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
Depreciation and amortization	11,911			15,713
Stock-based compensation expense	2,245			4,747
Provision for deferred income taxes	38,631			(521		)
Restructuring charges and asset impairment	168,285			—
Non-cash reserve for potential bad debts	15,473			—
Inventory impairment	18,369			—
Net gain on sale or disposal of assets	365			1,107
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable	13,029			16,538
Inventories	2,959			(3,112		)
Other current assets	(937		)	6,015
Accounts payable	(1,114		)	(128		)
Other current liabilities and accrued expenses	(1,672		)	(17,444		)
Income taxes	(738		)	(3,258		)
Net cash provided by operating activities	72,055			57,320
Cash Flows from Investing Activities:
Purchases of marketable securities	(27,546		)	(5,591		)
Proceeds from sale of marketable securities	15,891			14,398
Purchases of property and equipment	(3,191		)	(4,817		)
Acquisitions, net of cash acquired	(128		)	(57,138		)
Net cash used in investing activities	(14,974		)	(53,148		)
Cash Flows from Financing Activities
Borrowings from lines of credit, net of repayments	—			(13,691		)
Cash settlement of performance stock units	—			(11,198		)
Purchase and retirement of common stock	—			(25,000		)
Proceeds from exercise of stock options	3,503			10,273
Excess tax from stock-based compensation deduction	586			1,143
Other financing activities	(17		)	35
Net cash provided by (used in) financing activities	4,072			(38,438		)
Effect of Currency Translation on Cash	(2,142		)	(818		)
Increase (Decrease) in Cash and Cash Equivalents	59,011			(35,084		)
Cash and Cash Equivalents, beginning of period	125,285			138,125
Cash and Cash Equivalents, end of period	$	184,296		$	103,041

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	217		$	170
Cash paid for income taxes	5,985			5,763
Cash received for refunds of income taxes	5,365			5,136
Cash held in banks outside the United States of America	99,272			56,115

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 and control products that transform power into various usable forms. Our direct current (“DC”), pulsed DC mid-frequency, radio frequency (“RF”) power supplies, matching networks and RF instrumentation products enable manufacturing processes that use thin film for various products, such as semiconductor devices, flat panel displays, thin film renewables, architectural glass, optical coating and consumer products decorative and functional coating. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these same markets. Our power control modules provide power control solutions for industrial applications where heat treatment and processing are used such as glass manufacturing, metal fabrication and treatment, and material and chemical processing. Our high voltage power supplies and modules are used in applications such as semiconductor ion implantation, scanning electron microscopy ("SEM"), chemical analysis such as mass spectrometry and various applications using X-ray technology and electron guns for both analytical and processing applications. Our solar inverter products support renewable power generation solutions primarily for 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 and used equipment to companies using our products. We also offer a wide variety of operations and maintenance service plans that can be tailored for photovoltaic ("PV") sites of all sizes.

We are organized into two business segments based on the products and services provided.


•	Precision Power Products segment ("Precision Power") offers products for direct current, pulsed DC mid-frequency, high voltage, and radio frequency power supplies, matching networks and RF instrumentation as well as thermal instrumentation and digital power controller products.


•	Inverters segment ("Inverters") 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 June 2015 the Company completed its six-month long process of seeking strategic alternatives for its inverter business and no satisfactory offers were received for all or a part of the inverter business. On June 29, 2015, we announced our decision to wind down our solar Inverter business to focus solely on our Precision Power business. This decision resulted in the cancellation of customer orders, reduction in future customer orders, decline in backlog, worsening product margin, lower average selling prices, and a decline in Inverter customer confidence of our ability and intent to continue to service their needs. These events were evaluated by management and it was determined that a triggering event had occurred, requiring the assessment of asset recoverability. For indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions, which are considered level 3 inputs. We evaluated the likelihood of collectability of receivables, evaluated the recoverability of inventory and analyzed projections of estimated future cash flows - from both the wind down operations and the ultimate disposal of assets and settlement of liabilities during the wind down which indicated that future cash flows would be negative. This assessment utilized the income approach, based on discounted cash flows, which are derived from internal forecasts and economic expectations. The result of this assessment was the recording of asset impairments during the three and nine months ended September 30, 2015 as follows:



Asset Category	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015		Reflected in this line of the Statement of Operations
Accounts receivable	$	(4,068	)	$	13,593	Selling, general and administrative
Inventory Excess and Obsolete reserve	3,375			18,369		Cost of sales
Property, plant and equipment	—			12,281		Restructuring charges and asset impairment*
Intangible assets	—			3,893		Restructuring charges and asset impairment*
Goodwill	—			149,916		Restructuring charges and asset impairment*
Total asset impairments	$	(693	)	$	198,052
*Note: See Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2015, and the results of our operations and cash flows for the three and nine months ended September 30, 2015 and 2014.

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, 2014 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.

CRITICAL ACCOUNTING POLICIES

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, 2014.

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, 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.

In April 2014, the FASB issued guidance redefining discontinued operations and requiring only those disposals of components of an entity, including classifications as held for sale, that represent a strategic shift that has, or will have, a major effect on an entity’s operations and financial results to be reported as discontinued operations. In addition, the new standard expands the disclosure requirements of discontinued operations. This pronouncement does not have an impact on our consolidated financial statements and related disclosures for the quarter ended September 30, 2015. However, it is our expectation that the wind down of Inverters will qualify as Discontinued Operations in a future period.

In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance is proposed to be effective at the beginning of fiscal year 2018, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing reporting.


NOTE 2.	BUSINESS ACQUISITIONS

Acquisitions

Power Control Module

On January 27, 2014, we acquired the intellectual property related to AEG Power Solutions' Power Control Modules ("PCM"). PCM is comprised of the Thyro-Family of products and accessories and serves numerous power control applications in

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

different industries ranging from materials thermal processing through chemical processing, glass manufacturing and numerous other general industrial power applications. This acquisition is expected to broaden our product offerings and is included in our Precision Power portfolio. We paid total consideration of $31.5 million including contingent consideration, of which $15.0 million is included in Intangibles, $16.4 million in Goodwill, and $0.1 million in Property, plant, and equipment. The acquisition included $1.4 million of contingent consideration that was paid in the first quarter of 2015. 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 our product offerings into new markets.

HiTek Power Group

On April 12, 2014, Advanced Energy acquired all outstanding common stock of HiTek Power Group ("HiTek"), a privately-held provider of high voltage power solutions. Based in the United Kingdom, HiTek offers a comprehensive portfolio of high voltage and custom built power conversion products, ranging from 100V to 500kV, designed to meet the demanding requirements of OEMs worldwide. These products target applications including semiconductor wafer processing and metrology, scientific instrumentation, mass spectrometry, industrial printing, and analytical x-ray systems for industrial and analytical applications. HiTek's unique product architecture, encapsulation technology and control algorithms, combined with deep knowledge of its customer-specific applications, have made it a leading provider of critical, high-end, high voltage power solutions. We acquired HiTek to expand our product offerings in our Precision Power portfolio.

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



Cash paid to owners	$	3,525
Cash acquired	(6,889		)
Total fair value of consideration received	$	(3,364	)

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of April 12, 2014 (in thousands):



Accounts receivable	$	2,867
Inventories	4,980
Other current assets	415
Property and equipment	1,291
Current liabilities	(3,836		)
Deferred taxes on intangible values	2,020
Long-term liabilities	(22,725		)
Total tangible assets, net	(14,988		)

Amortizable intangible assets:
Tradename	336
Technology	4,029
Customer relationships	8,225
Total amortizable intangible assets	12,590
Total identifiable net assets	(2,398		)
Gain on bargain purchase	(966		)
Total fair value of consideration received	$	(3,364	)

A bargain purchase gain is recorded when the fair value of assets acquired exceeds the fair value of the liabilities assumed and consideration paid. This gain is recorded in Other income on our Consolidated Statements of Operations.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the intangible assets acquired, amortization method and estimated useful lives as of April 12, 2014 follows (in thousands, except useful life):



	Amount		Amortization Method	Useful Life
Technology	$	4,029	Straight-line	10
Tradename	336		Straight-line	2.5
Customer relationships	8,225		Straight-line	15
	$	12,590

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

UltraVolt, Inc.

On August 4, 2014, Advanced Energy acquired all outstanding common stock of UltraVolt, Inc. ("UltraVolt"), a privately-held provider of high voltage power solutions. Based in Ronkonkoma, New York, UltraVolt offers a comprehensive portfolio of high voltage power supplies and modules ranging from benchtop and rack mount systems to microsize printed circuit board mount modules. Its standard DC-to-DC product line consists of over 1,500 models, which can be combined with accessories and options to create thousands of product configurations. Serving over 100 markets, UltraVolt's fixed-frequency, high-voltage topology provides wide input and output operating ranges while retaining excellent stability and efficiencies. We acquired UltraVolt to expand our high voltage product offerings in our Precision Power portfolio.

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



Cash paid to owners	$	30,200
Net working capital adjustment	1,073
Total fair value of consideration transferred	$	31,273

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of August 4, 2014 (in thousands):



Cash	$	758
Accounts receivable	1,694
Inventories	2,599
Other current assets	264
Property and equipment	424
Long-term assets	711
Deferred taxes on intangible values	(2,087		)
Current liabilities	(1,053		)
Total tangible assets, net	3,310

Amortizable intangible assets:
Technology	2,100
Tradename	200
Customer relationships	8,600
Total amortizable intangible assets	10,900
Total identifiable net assets	14,210
Goodwill	17,063
Total fair value of consideration transferred	$	31,273

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

A summary of the intangible assets acquired, amortization method and estimated useful lives as of August 4, 2014 follows (in thousands, except useful life):



	Amount		Amortization Method	Useful Life
Technology	$	2,100	Straight-line	10
Tradename	200		Straight-line	2.5
Customer relationships	8,600		Straight-line	12
	$	10,900

The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into additional markets that we already serve.


NOTE 3.	INCOME TAXES

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Income (loss) before income taxes	$	8,793		$	8,607		$	(152,731	)	$	36,961
(Benefit) provision for income taxes	(7,639		)	(3,695		)	42,020			(702		)
Effective tax rate	(86.9		)%	(42.9		)%	(27.5		)%	(1.9		)%

The tax expense and effective tax rates for the three and nine months ended September 30, 2015 are significantly impacted by the current period charges related to the inverter business restructuring. These charges include restructuring expenses not deductible for tax purposes, the exclusion of losses recorded in tax jurisdictions for which tax benefits are not being recognized, and the recognition of discrete tax expense in the quarter related to a change in the determination of the realizability of certain deferred tax assets. The income tax provision for the three and nine months ended September 30, 2015 was calculated under the annual effective tax rate method, which resulted in a significant tax expense in the second quarter, and a tax benefit in the third quarter. The Company anticipates that the annual effective tax rate method will result in the recording of a significant tax benefit in the fourth quarter of 2015. At September 30, 2015, the Company has recorded the current income tax payable amount as a deferred income tax liability as the Company expects this tax liability to completely reverse in the fourth quarter.

The effective tax rates for the three and nine months ended September 30, 2015 and 2014 are favorably impacted by the benefit of earnings in foreign jurisdictions which are subject to lower tax rates.

Our policy is to classify accrued interest and penalties related to unrecognized tax benefits in our income tax provision. For the three months ended September 30, 2015 and 2014, the amount of interest and penalties accrued related to our unrecognized tax benefits was not significant.


NOTE 4.	EARNINGS PER SHARE

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,
	2015		2014		2015			2014
Net Income (loss)	$	16,432	$	12,302	$	(194,751	)	$	37,663

Basic weighted-average common shares outstanding	41,027		39,998		40,905			40,450
Assumed exercise of dilutive stock options and restricted stock units	292		472		—			652
Diluted weighted-average common shares outstanding	41,319		40,470		40,905			41,102

Basic earnings per share	$	0.40	$	0.31	$	(4.76	)	$	0.93
Diluted earnings per share	$	0.40	$	0.30	$	(4.76	)	$	0.92

The following stock options and restricted stock units were excluded in the computation of diluted earnings per share because they were anti-dilutive (in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015	2014	2015	2014
Stock options	172	91	151	77
Restricted stock units	4	—	2	—

Of the shares listed above, incremental shares of 328,766 attributable to the assumed exercise of outstanding options and restricted stock units with exercise prices that were lower than the average price of our stock were not included in the calculation of diluted loss per share for the nine months ended September 30, 2015 as their effect would have been anti-dilutive due to the loss in the period.

Stock Buyback

In May 2014, 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 six months ended June 30, 2014, we repurchased and retired 1.4 million shares of our common stock for a total of $25.0 million. We completed the share repurchase program as of June 30, 2014. All shares repurchased were executed in the open market and no shares were repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares.

In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over a thirty-month period. Under this program, during the three and nine months ended September 30, 2015, we did not repurchase 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.

Our marketable securities consist of commercial paper and certificates of deposit as follows (in thousands):



	September 30,				December 31,
	2015				2014
	Cost		Fair Value		Cost		Fair Value
Commercial paper	$	6,239	$	6,246	$	—	$	—
Certificates of deposit	8,462		8,462		3,083		3,083
Total marketable securities	$	14,701	$	14,708	$	3,083	$	3,083

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The maturities of our marketable securities available for sale as of September 30, 2015 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.

As of September 30, 2015, we do not believe any of the underlying issuers of our marketable securities are at risk of default.


NOTE 6.	DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates. We attempt to mitigate these risks through the use of derivative financial instruments, primarily forward contracts. During the three and nine months ended September 30, 2015 and 2014, we entered into foreign currency exchange forward contracts to attempt to mitigate the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they tend to offset the fluctuations of our intercompany debt due to foreign exchange rate changes. These forward contracts are typically for one month periods. We did not have foreign currency exchange contracts outstanding as of September 30, 2015. At December 31, 2014 we had outstanding Euro forward contracts.

As of September 30, 2015, we did not have any foreign currency exchange contracts. The notional amount of foreign currency exchange contracts at September 30, 2014 was $10.7 million, and the difference between the fair value and the notional value of these contracts was not significant. During the three months ended September 30, 2014, we recognized an insignificant gain. For the nine months ended September 30, 2015 and 2014, we recognized a gain of $1.9 million and a loss of $0.5 million, respectively, on our foreign currency exchange contracts. These gains and losses were offset by corresponding losses and gains, respectively, on the related underlying 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, 2015, and December 31, 2014. 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, 2015, and December 31, 2014.



September 30, 2015	Level 1		Level 2		Level 3		Total
	(In thousands)
Commercial paper	$	—	$	6,246	$	—	$	6,246
Certificates of deposit	—		8,462		—		8,462
Total marketable securities	$	—	$	14,708	$	—	$	14,708

December 31, 2014	Level 1		Level 2		Level 3		Total
	(In thousands)
Certificates of deposit	$	—	$	3,083	$	—	$	3,083
Total marketable securities	$	—	$	3,083	$	—	$	3,083

There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three and nine months ended September 30, 2015.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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, net of reserves, are as follows (in thousands):



	September 30,		December 31,
	2015		2014
Parts and raw materials	$	45,354	$	64,096
Work in process	8,040		6,623
Finished goods	18,318		24,363
Inventories, net of reserves	$	71,712	$	95,082

The Company recorded impairment charges on its inventory of $3.4 million and $18.4 million for the three and nine months ended September 30, 2015 related to the wind down of the Inverter business (see Note 1. Basis of Presentation in Part I Item 1 of this Form 10-Q).


NOTE 9.	PROPERTY AND EQUIPMENT

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



	September 30,			December 31,
	2015			2014
Buildings and land	$	1,610		$	1,745
Machinery and equipment	43,304			49,034
Computer and communication equipment	25,073			24,063
Furniture and fixtures	1,527			4,251
Vehicles	323			246
Leasehold improvements	27,917			28,030
Construction in process	—			815
	99,754			108,184
Less: Accumulated depreciation	(87,235		)	(79,208		)
Property and equipment, net	$	12,519		$	28,976

Depreciation expense, recorded in general and administrative expenses and cost of goods sold, is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Depreciation expense	$	1,050	$	3,149	$	6,859	$	9,374

The Company recorded impairment charges on its Inverter property and equipment of $12.3 million for the nine months ended September 30, 2015 related to the wind down of the Inverter business (see Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q).

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 10.	GOODWILL

The following summarizes the changes in goodwill during the nine months ended September 30, 2015 (in thousands):



	December 31, 2014		Additions		Impairment*			Effect of Currency Translation			September 30, 2015
Precision Power	$	43,873	$	453	$	—		$	(847	)	$	43,479
Inverters	159,456		—		(149,916		)	(9,540		)	—
Consolidated	$	203,329	$	453	$	(149,916	)	$	(10,387	)	$	43,479
*See Note 1. Basis of Presentation and Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q.


NOTE 11.	INTANGIBLE ASSETS

Other intangible assets subject to amortization consisted of the following as of September 30, 2015 (in thousands, except weighted-average useful life):



	Gross Carrying Amount as of September 30, 2015		Effect of Changes in Exchange Rates			Impairment*			Accumulated Amortization			Net Carrying Amount as of September 30, 2015		Weighted-Average Useful Life in Years
Technology-based	$	35,608	$	(1,786	)	$	(2,171	)	$	(20,656	)	$	10,995	8
Customer relationships	35,472		(2,669		)	(1,669		)	(7,114		)	24,020		12
Trademarks and other	6,001		(166		)	(53		)	(4,198		)	1,584		10
Total amortizable intangibles	$	77,081	$	(4,621	)	$	(3,893	)	$	(31,968	)	$	36,599
*See Note 1. Basis of Presentation and Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q.

Other intangible assets subject to amortization consisted of the following as of December 31, 2014 (in thousands, except weighted-average useful life):



	Gross Carrying Amount as of December 31, 2014		Effect of Changes in Exchange Rates			Accumulated Amortization			Net Carrying Amount as of December 31, 2014		Weighted-Average Useful Life in Years
Technology-based	$	35,608	$	(1,148	)	$	(18,358	)	$	16,102	7
Customer relationships	35,472		(1,838		)	(4,767		)	28,867		11
Trademarks and other	6,001		(105		)	(3,791		)	2,105		9
Total amortizable intangibles	$	77,081	$	(3,091	)	$	(26,916	)	$	47,074

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Amortization expense	$	1,267	$	2,238	$	5,052	$	6,339

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Amortization expense related to intangibles for each of the five years 2015 (remaining) through 2019 and thereafter is as follows (in thousands):



Year Ending December 31,
2015 (remaining)	$	1,256
2016	4,814
2017	4,077
2018	4,064
2019	4,047
Thereafter	18,341
	$	36,599

NOTE 12.OTHER ACCRUED EXPENSES

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



	September 30,		December 31,
	2015		2014
Accrued restructuring costs (See Note 13)	$	4,641	$	1,386
Current contingent consideration	—		1,210
Accrued sales and use tax	2,522		2,252
Accrued VAT	2,794		3,980
Other*	17,790		11,142
Total Other accrued expenses	$	27,747	$	19,970

*Other consists of items that are individually less than 5% of total current liabilities.

NOTE 13.RESTRUCTURING COSTS

In June 2015, we committed to a restructuring plan in relation to the wind down of our Inverter business. We expect to record changes within the original estimated pre-tax range of approximately $260 million to $290 million, the majority of which was recorded in the second and third quarters of 2015. We expect to incur an additional $15 million to $20 million over the next three months as we wind down the Inverter activities. Of this amount, approximately $10 million to $15 million relate to the write down of inventory and other assets, $1 million to employee termination costs, and the remaining $3 million for other costs to exit the business, primarily the costs to exit facilities.

The following table summarizes the components of our restructuring costs incurred under the 2015 plan (in thousands):



	Three Months Ended September 30,		Nine Months Ended September 30,
	2015		2015
Severance and related costs	$	5,581	$	5,689
Asset impairments	—		168,285
Contract settlement costs	8,025		8,025
Facility closure costs	324		324
Total restructuring charges	$	13,930	$	182,323

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes our liabilities under the 2015 plan (in thousands):



	Balances at December 31, 2014		Costs incurred and charged to expense		Cost paid or otherwise settled			Effect of change in exchange rates			Balances at September 30, 2015
Severance and related costs	$	—	$	5,689	$	(2,615	)	$	35		$	3,109
Asset impairments*	—		168,285		(166,853		)	(14		)	1,418
Contract Settlement	—		8,025		(8,025		)	—			—
Facility closure costs	—		324		(324		)	—			—
Total restructuring liabilities	$	—	$	182,323	$	(177,817	)	$	21		$	4,527

*Asset impairments primarily include property and equipment of $12.3 million (see Note 9. Property and Equipment in Part I Item 1 of this Form 10-Q), goodwill of $149.9 million (see Note 10. Goodwill in Part I Item 1 of this Form 10-Q), and intangibles of $3.9 million (see Note 11. Intangibles in Part I Item 1 of this Form 10-Q).

In April 2014, we committed to a restructuring plan to take advantage of additional cost savings opportunities in connection with our acquisitions and realignment to a single organizational structure based on product line. The plan called for consolidating certain facilities and rebranding of products to allow us to use our resources more efficiently. All activities under this restructuring plan were completed prior to December 31, 2014. Accrued restructuring costs are included in Other accrued expenses on our Condensed Consolidated Balance Sheet.

The following table summarizes our restructuring liabilities under the 2014 plan (in thousands):



	Balances at December 31, 2014		Cost paid or otherwise settled			Effect of change in exchange rates			Balances at September 30, 2015
Severance and related costs	$	992	$	(990	)	$	(2	)	$	—
Facility closure costs	51		(49		)	(2		)	—
Total restructuring liabilities	$	1,043	$	(1,039	)	$	(4	)	$	—

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. All activities under this restructuring plan were completed prior to December 31, 2013.

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



	Balances at December 31, 2014		Cost paid or otherwise settled			Effect of change in exchange rates			Balances at September 30, 2015
Severance and related costs	$	38	$	(38	)	$	—		$	—
Facility closure costs	141		(54		)	(12		)	75
Total restructuring liabilities	$	179	$	(92	)	$	(12	)	$	75

In September 2011, we approved and committed to several initiatives over the following 16 months 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.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes our restructuring liabilities under the 2011 plan (in thousands):



	Balances at December 31, 2014		Cost paid or otherwise settled			Effect of change in exchange rates		Balances at September 30, 2015
Facility closure costs	$	164	$	(125	)	$	—	$	39
Total restructuring liabilities	$	164	$	(125	)	$	—	$	39


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 Precision Power products and 3 years to 10 years following installation for Inverter 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,
	2015			2014			2015			2014
Balances at beginning of period	$	31,247		$	37,590		$	36,121		$	22,067
Warranty liabilities acquired	—			26			—			19,710
Increases to accruals related to sales during the period	1,186			4,184			4,986			7,609
Warranty expenditures	(3,048		)	(5,077		)	(9,751		)	(12,683		)
Effect of changes in exchange rates	(48		)	(2,474		)	(2,019		)	(2,454		)
Balances at end of period	$	29,337		$	34,249		$	29,337		$	34,249

As of September 30, 2015 $10.7 million is recorded in Current liabilities and $18.6 million is recorded in Long-term liabilities in our Condensed Consolidated Balance Sheet.


NOTE 15.	PENSION LIABILITY

In connection with the HiTek acquisition discussed in Note 2. Business Acquisitions, we acquired the HiTek Power Limited Pension Scheme ("HPLPS"). The HPLPS has been closed to new participants and additional accruals since 2006. In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as current facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. The net amount of the pension liability on our balance sheets as of September 30, 2015 and December 31, 2014 was $19.1 million and $20.1 million, respectively, recorded in Other long-term liabilities.

The components of the net periodic pension expense for the three and nine months ended September 30, 2015 and 2014 were as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Expected return on plan assets	$	(166	)	$	(181	)	$	(494	)	$	(362	)
Interest cost	332			361			986			722
Net periodic expense	$	166		$	180		$	492		$	360

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 16.	STOCK-BASED COMPENSATION

We recognize stock-based compensation expense in Cost of sales, Research and development, and Selling, general & administrative expenses based on the fair value of the awards issued and the functional area of the employee receiving the award. Stock-based compensation for the three and nine months ended September 30, 2015 and 2014 is as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock-based compensation expense	$	803	$	1,488	$	2,245	$	4,747

Stock Options

Stock option awards, other than awards under our 2012-2014 Long Term Incentive Plan ("2012-2014 LTI Plan") and our 2015 Long Term Incentive Plan ("2015 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 our 2012-2014 LTI Plan, we made grants of performance based options during the first quarter of 2014, which vested in the first quarter of 2015 based on the Company's achievement of return on net assets targets established by our Board of Directors at the beginning of 2014. 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 53.3%, a risk-free rate of 1.7%, a dividend yield of zero, and an expected term of 5.4 years. The weighted-average grant date fair value of the options is $13.09 per share.

Under our 2015 LTI Plan, we made grants of time-based options during the first quarter of 2015, which will vest annually over a three-year period. 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 43.4%, a risk-free rate of 1.1%, a dividend yield of zero, and an expected term of 4.3 years. The weighted-average grant date fair value of the options is $9.53 per share

A summary of our time based stock option activity for the nine months ended September 30, 2015 is as follows (in thousands):



	Shares
Options outstanding at beginning of period	642
Options granted	171
Options exercised	(194	)
Options forfeited	(38	)
Options expired	(1	)
Options outstanding at end of period	580

Changes in outstanding performance based stock options during the nine months ended September 30, 2015 were as follows (in thousands):



	Shares
Options outstanding at beginning of period	380
Options exercised	(94	)
Options forfeited	(143	)
Options outstanding at end of period	143

Restricted Stock Units

Restricted Stock Units ("RSU"), except for those under our 2012-2014 LTI Plan and our 2015 LTI Plan, are generally granted with a three- or four-year vesting schedule.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Under our 2012-2014 LTI Plan, we made grants of performance based awards during the first quarter of 2014, which vested in the first quarter of 2015 based on the Company's achievement of return on net assets targets established by our Board of Directors at the beginning of 2014. No further awards are outstanding under this plan.

Under our 2015 LTI Plan, we made grants of performance based and time-based awards during the first quarter of 2015. The time-based awards will vest annually over a three-year period and the performance based awards will vest in the next year based on the Company's achievement of return on net assets targets established by our Board of Directors at the beginning of 2015. The awards were granted with an exercise price equal to the market price of our common stock at the date of grant.

A summary of our time-based unvested RSU activity for the nine months ended September 30, 2015 is as follows (in thousands):



	Shares
Balance at beginning of period	115
RSUs granted	151
RSUs vested	(74	)
RSUs forfeited	(12	)
Balance at end of period	180

Changes in the unvested performance based RSUs during the nine months ended September 30, 2015 were as follows (in thousands):



	Shares
Balance at beginning of period	242
RSUs granted	62
RSUs vested	(75	)
RSUs forfeited	(169	)
Balance at end of period	60


NOTE 17.	ACCUMULATED OTHER COMPREHENSIVE INCOME

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



	Foreign Currency Adjustments			Unrealized Gains (Losses) on Marketable Securities			Total Accumulated Other Comprehensive Income
Balances at December 31, 2014	$	10,249		$	527		$	10,776
Current period other comprehensive (loss) income	(10,211		)	(613		)	(10,824		)
Balances at September 30, 2015	$	38		$	(86	)	$	(48	)


NOTE 18.	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, 2015 is approximately $55.3 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. Additionally, we have a commitment to fund our defined benefit obligation in the amount of $0.8 million per year through 2024. For more information on the defined benefit obligation, please see Note 15. Pension Liability in Part I Item 1 of this Form 10-Q.

We are undergoing a customs audit related to the years 2008 - 2013. The settlement is not expected to have a material impact on our condensed consolidated financial statements. 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, 2015.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 19.	RELATED PARTY TRANSACTIONS

During the three and nine months ended September 30, 2015 and 2014, 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,
	2015		2014		2015		2014
Sales to related parties	$	56	$	26	$	367	$	253
Rent expense paid to related party lessor	—		472		—		1,378

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 months ended September 30, 2015 and September 30, 2014, we had sales to one such customer as noted above. During the nine months ended September 30, 2015 and September 30, 2014, we had sales to two and one such customers, respectively, as noted above. As of September 30, 2015, we had aggregate accounts receivable from one such customer of $0.2 million. As of December 31, 2014, we had aggregate accounts receivable of $0.1 million from three such customers.


NOTE 20.	SEGMENT INFORMATION

Our Precision Power segment offers power conversion products for direct current, pulsed DC mid-frequency, high voltage, and radio frequency power supplies, matching networks, RF instrumentation, and PCM 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. Precision Power principally serves original equipment manufacturers ("OEMs") and end customers in the semiconductor, flat panel display, solar panel, and other capital equipment and industrial markets.

Our Inverters segment 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 Inverters segment focuses on commercial and utility-scale solar projects and installations, selling primarily to distributors, engineering, procurement, and construction contractors, developers, and utility companies. On June 29, 2015, we announced our intention to wind down operations of our Solar Inverter business. For more information on this wind down, please refer to Note 13. Restructuring Costs in Part I Item 1 of this Form 10-Q.

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.

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Precision Power	$	107,851	$	91,192	$	318,300	$	255,896
Inverters	22,949		51,955		90,409		174,484
Total	$	130,800	$	143,147	$	408,709	$	430,380

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Income (loss) before income taxes by operating segment is as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Precision Power	$	30,600		$	22,882		$	90,335		$	64,455
Inverters	(7,010		)	(12,474		)	(61,097		)	(25,378		)
Total segment operating income	23,590			10,408			29,238			39,077
Restructuring charges	(13,930		)	(1,183		)	(182,323		)	(1,427		)
Other (expense) income, net	(867		)	(618		)	354			(689		)
Income (loss) before income taxes	$	8,793		$	8,607		$	(152,731	)	$	36,961

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



	September 30, 2015		December 31, 2014
Precision Power	$	51,716	$	51,414
Inverters	32,515		69,612
Total segment assets	84,231		121,026
Unallocated corporate property and equipment	—		2,617
Unallocated corporate assets	429,430		560,926
Consolidated total assets	$	513,661	$	684,569

"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, 2015, we had two customers which individually accounted for 10% or more of our sales. Sales to Applied Materials, Inc. and LAM Research were $33.8 million and $22.8 million or 25.8% and 17.4%, respectively, of total sales for the three month period and $98.0 million and $70.0 million or 24.0% and 17.1% for the nine month period. During the three months ended September 30, 2014, we had two customers individually accounting for 10% or more of our sales. Sales to Applied Materials, Inc. and LAM Research were $28.2 million and $20.9 million or 19.7% and 14.6%, respectively, of total sales during the three months ended September 30, 2014. During the nine months ended September 30, 2014, we had sales to two customers which individually accounted for over 10% of our sales. Sales to Applied Materials, Inc. and LAM Research were $76.4 million and $53.7 million or 17.5% and 12.5%, respectively. Our sales to Applied Materials, Inc. and LAM Research include precision power 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 21.	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 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 which reduce availability under the Credit Agreement. The maturity date of the Credit Facility is October 12, 2017. As of September 30, 2015, we had $21.1 million of availability on our Wells Fargo Credit Facility.

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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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, 2015, the rate in effect was 3.75%.

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, 2015 and 2014, we expensed $0.3 million and $0.3 million, respectively, 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 during the nine months ended September 30, 2015. During the quarter ended September 30, 2015, the lender issued a letter of credit in the amount of $2.0 million related to a customer contract.

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.

In 2013 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 had an outstanding loan agreement with Commerzbank Aktiengesellschaft ("Commerzbank") for up to 8.0 million Euros ("Commerzbank Loan Agreement"). The agreement allowed 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 was no maturity date. Borrowings under the revolving credit facility bore interest at 5.32%. Surety and guarantee loans bore interest at 1.5%. The Commerzbank Loan Agreement required the payment of a credit commission of 0.5% of the total loan amount. The agreement contained various covenants including a financial covenant requiring a specified level of equity. This line of credit was repaid and cancelled in the second quarter of 2014.

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 as 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 Bayern under which it had the ability to borrow up to 4.0 million Euros (equal to $5.5 million on September 30, 2015) as either bank overdrafts, term loans, guarantees, or letters of credit. The overdraft facility bore interest at 3.9%, guarantees bore a rate of 1.64% and interest on term loans was a fixed rate set for each term loan period based on money market rates. Loan commitment fees were 0.25%. This line of credit was repaid and cancelled in the third quarter of 2014.

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

Special Note on Forward-Looking Statements

This Form 10-Q and the information we are incorporating by reference 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," "might," "continue," "enables," "plan," "intend," "should," "could," "would," 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, 2014. 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 and control 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, industrial electro-thermal applications for material and chemical processes, and precision power for analytical instrumentation. We also supply thermal instrumentation products for advanced temperature control in these markets. Our network of global service support centers provides local repair and field service capability in key regions. We refer to this as our "core business" ("AE without Inverters").

•

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 in processing equipment that is 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 power control modules, through the acquisition of this product line from AEG Power Solutions, provide power control solutions for industrial applications where heat treatment and processing are used, such as glass manufacturing, metal fabrication and treatment, and material and chemical processing.

•

Our high voltage products, through the acquisition of HiTek Power and UltraVolt provide high voltage power supplies that are used in diverse applications including semiconductor ion implantation and scanning electron microscopy, medical equipment, and instrumentation applications such as x-ray and mass spectroscopy, as well as general electron gun sources for scientific and industrial applications.


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

On June 29, 2015, we announced our decision to wind down our solar Inverter business to focus solely on our Precision Power business. For more information on this wind down, please refer to Note 1. Basis of Presentation in Part I Item 1 of this Form 10-Q.

As also noted in Note 2. Business Acquisitions in Part I Item 1 of this Form 10-Q, we acquired the assets of Power Control Modules ("PCM") on January 27, 2014. The financial results discussed below include the financial results of PCM for the period January 27, 2014 to December 31, 2014 and the three and nine months ended September 30, 2015.

Additionally, on April 12, 2014, we acquired HiTek Power Group ("HiTek"), a privately held provider of high voltage power solutions, based in the United Kingdom. The financial results discussed below include the financial results of HiTek for the

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period April 12, 2014 to December 31, 2014 and the three and nine months ended September 30, 2015. Note 2. Business Acquisitions in Part I Item 1 of this Form 10-Q describes the acquisition of HiTek.

Furthermore, on August 4, 2014, we acquired UltraVolt, Inc., a privately held provider of high voltage power solutions, based in Ronkonkoma, New York. The financial results discussed below include the financial results of UltraVolt for the period August 4, 2014 to December 31, 2014 and the three and nine months ended September 30, 2015. Note 2. Business Acquisitions in Part I Item 1 of this Form 10-Q describes the acquisition of UltraVolt.

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 provided below.

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,
	2015			2014			2015			2014
Sales	$	130,800		$	143,147		$	408,709		$	430,380
Gross profit	53,037			47,943			153,059			153,150
Operating expenses	43,377			38,718			306,144			115,500
Operating income (loss)	9,660			9,225			(153,085		)	37,650
Other (expense) income, net	(867		)	(618		)	354			(689		)
Income (loss) before income taxes	8,793			8,607			(152,731		)	36,961
(Benefit) provision for income taxes	(7,639		)	(3,695		)	42,020			(702		)
Income (loss) net of income taxes	$	16,432		$	12,302		$	(194,751	)	$	37,663

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,
	2015		2014		2015		2014
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	40.5		33.5		37.4		35.6
Operating expenses	33.2		27.0		74.9		26.8
Operating income (loss)	7.3		6.5		(37.5	)	8.8
Other (expense) income, net	(0.7	)	(0.4	)	0.1		(0.2	)
Income (loss) before income taxes	6.7		6.0		(37.4	)	8.6
(Benefit) provision for income taxes	(5.8	)	(2.6	)	10.3		(0.2	)
Income (loss) net of income taxes	12.5	%	8.6	%	(47.7	)%	8.8	%

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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, 2015 and 2014 (in thousands):



	Three Months Ended September 30,
	2015		% of Total Sales		2014		% of Total Sales		Increase/ (Decrease)			Percent Change
Core Business:
Semiconductor capital equipment	$	72,859	55.7	%	$	57,934	40.5	%	$	14,925		25.8	%
Non-semiconductor capital equipment	21,378		16.4		20,490		14.3		888			4.3
Global support	13,614		10.3		12,768		8.9		846			6.6
Total Core Business	107,851		82.5		91,192		63.7		16,659			18.3
Inverters	22,949		17.5		51,955		36.3		(29,006		)	(55.8	)
Total sales	$	130,800	100.0	%	$	143,147	100.0	%	$	(12,347	)	(8.6	)%

Nine Months Ended September 30,

2015

% of Total Sales

2014

% of Total Sales

Increase/ (Decrease)