Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

Certificates of deposit

Document

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, 2016
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 28, 2016 there were 39,688,752 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	17

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	25

ITEM 4. CONTROLS AND PROCEDURES	26

PART II OTHER INFORMATION	27

ITEM 1. LEGAL PROCEEDINGS	27

ITEM 1A. RISK FACTORS	27

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	38

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-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.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)



	September 30,		December 31,
	2016		2015
ASSETS
Current assets:
Cash and cash equivalents	$	244,292	$	158,443
Marketable securities	5,538		11,986
Accounts receivable, net of allowances of $1,993 and $8,739, respectively	69,410		54,959
Inventories	56,025		52,573
Deferred income tax assets	6,044		6,004
Income taxes receivable	7,902		9,040
Other current assets	8,166		7,868
Current assets of discontinued operations	23,491		41,902
Total current assets	420,868		342,775
Deposits and other assets	1,673		1,729
Property and equipment, net	11,988		9,645
Goodwill	43,596		42,729
Intangible assets, net	30,200		34,141
Deferred income tax assets	30,184		30,398
Non-current assets of discontinued operations	163		1,271
TOTAL ASSETS	$	538,672	$	462,688
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	37,180	$	27,246
Income taxes payable	10,312		13,972
Accrued payroll and employee benefits	10,719		9,175
Customer deposits	6,890		3,319
Other accrued expenses	13,149		13,891
Current liabilities of discontinued operations	17,232		36,481
Total current liabilities	95,482		104,084
Deferred income tax liabilities	1,225		1,181
Uncertain tax positions	4,191		2,086
Long term deferred revenue	40,393		45,584
Other long-term liabilities	17,232		18,871
Non-current liabilities of discontinued operations	25,362		27,302
Total liabilities	183,885		199,108
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; 39,689 and 39,756
issued and outstanding, respectively	40		40
Additional paid-in capital	201,772		195,096
Retained earnings	151,083		67,910
Accumulated other comprehensive income	1,892		534
Total stockholders’ equity	354,787		263,580
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	538,672	$	462,688

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

Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016		2015

Sales:
Product	$	107,650		$	94,238		$	294,695	$	279,270
Services	18,902			15,518			53,666		48,650
Total sales	126,552			109,756			348,361		327,920
Cost of sales:
Product	49,835			43,770			137,984		129,840
Services	10,594			7,448			28,748		23,894
Total cost of sales	60,429			51,218			166,732		153,734
Gross profit	66,123			58,538			181,629		174,186
Operating expenses:
Research and development	11,293			10,370			33,324		30,114
Selling, general and administrative	19,421			16,585			56,814		49,976
Amortization of intangible assets	1,048			1,098			3,180		3,298
Restructuring benefit	—			317			—		315
Total operating expenses	31,762			28,370			93,318		83,703
Operating income	34,361			30,168			88,311		90,483
Other income (expense), net	(55		)	(722		)	1,138		447
Income from continuing operations before income taxes	34,306			29,446			89,449		90,930
Provision for income taxes	5,268			6,133			12,937		18,938
Income from continuing operations	29,038			23,313			76,512		71,992
Income (loss) from discontinued operations, net of income taxes	1,323			(6,881		)	6,661		(266,743		)
Net income (loss)	$	30,361		$	16,432		$	83,173	$	(194,751	)

Basic weighted-average common shares outstanding	39,681			41,027			39,723		40,905
Diluted weighted-average common shares outstanding	39,967			41,319			40,015		40,905

Earnings (loss) per share:
Continuing operations:
Basic earnings per share	$	0.73		$	0.57		$	1.93	$	1.76
Diluted earnings per share	$	0.73		$	0.56		$	1.91	$	1.76
Discontinued operations:
Basic earnings (loss) per share	$	0.03		$	(0.17	)	$	0.17	$	(6.52	)
Diluted earnings (loss) per share	$	0.03		$	(0.17	)	$	0.17	$	(6.52	)
Net income:
Basic earnings (loss) per share	$	0.77		$	0.40		$	2.09	$	(4.76	)
Diluted earnings (loss) per share	$	0.76		$	0.40		$	2.08	$	(4.76	)

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

Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

(In thousands)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net income (loss)	$	30,361		$	16,432		$	83,173		$	(194,751	)
Other comprehensive income, net of tax:
Foreign currency translation adjustment	1,125			(2,498		)	1,389			(10,211		)
Unrealized gain (loss) on marketable securities	(17		)	11			(31		)	(613		)
Comprehensive income (loss)	$	31,469		$	13,945		$	84,531		$	(205,575	)

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

Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)



	Nine Months Ended September 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	83,173		$	(194,751	)
Income (loss) from discontinued operations, net of income taxes	6,661			(266,743		)
Income from continuing operations, net of income taxes	76,512			71,992

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	5,938			6,779
Stock-based compensation expense	4,299			1,913
Net (gain) loss on sale or disposal of assets	259			(17		)
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable	(13,679		)	11,007
Inventories	(5,261		)	4,636
Other current assets	(696		)	(1,931		)
Accounts payable	10,619			6,933
Other current liabilities and accrued expenses	1,489			(840		)
Income taxes	2,562			9,045
Net cash provided by operating activities from continuing operations	82,042			109,517
Net cash used in operating activities from discontinued operations	(4,538		)	(37,462		)
Net cash provided by operating activities	77,504			72,055
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(745		)	(27,546		)
Proceeds from sale of marketable securities	7,161			15,891
Acquisitions, net of cash acquired	—			(128		)
Purchases of property and equipment	(4,524		)	(3,145		)
Net cash provided by (used in) investing activities from continuing operations	1,892			(14,928		)
Net cash used in investing activities from discontinued operations	—			(46		)
Net cash provided by (used in) investing activities	1,892			(14,974		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	1,753			3,503
Excess tax from stock-based compensation deduction	623			586
Other financing activities	(3		)	(3		)
Net cash provided by financing activities from continuing operations	2,373			4,086
Net cash used in financing activities from discontinued operations	(24		)	(14		)
Net cash provided by financing activities	2,349			4,072
Effect of currency translation on cash	(550		)	(2,142		)
Increase in cash and cash equivalents	81,195			59,011
CASH AND CASH EQUIVALENTS, beginning of period	169,720			125,285
CASH AND CASH EQUIVALENTS, end of period	250,915			184,296
Less cash and cash equivalents from discontinued operations	6,623			6,135
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period	$	244,292		$	178,161
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	173		$	217
Cash paid for income taxes	$	4,930		$	5,861
Cash received for refunds of income taxes	$	444		$	4,919
Cash held in banks outside the United States of America	$	176,815		$	94,773

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

Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)


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 electrical power into various usable forms. Our products enable manufacturing processes that use thin films for various products, such as semiconductor devices, flat panel displays, solar cells, architectural glass, optical coating and decorative and functional coating for consumer products. 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, chemical analysis such as mass spectrometry and various applications using X-ray technology and electron guns for both analytical and processing applications. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and refurbishments and sales of used equipment to companies using our products. As of December 31, 2015, we discontinued the production, engineering, and sales of our solar inverter product line. As such, all solar inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein. See Note 2. Discontinued Operations.

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 as of September 30, 2016, and the results of our operations and cash flows for the three and nine months ended September 30, 2016 and 2015.

The Unaudited 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, 2015 and other financial information filed with the SEC.

ESTIMATES AND ASSUMPTIONS

The preparation of our Unaudited 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.

CRITICAL ACCOUNTING POLICIES

Our accounting policies are described in our audited Consolidated Financial Statements and Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2015.

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 Consolidated Financial Statements upon adoption.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step process for 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 will be effective for us in the first quarter of 2018. 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.

In November 2015, the FASB issued guidance requiring entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet instead of separating into current and noncurrent amounts. This guidance is effective for the first quarter of 2017. Early adoption is permitted for all companies in any interim or annual period. We are not planning on early adoption. Based on our current assessment, we have determined that as of September 30, 2016 and December 31, 2015, the result of adoption would be the reclassification of approximately $20.3 million and $20.3 million, respectively, from current assets to non-current assets. Of these amounts, $14.3 million and $14.3 million, respectively, would have been reflected in discontinued operations.

In February 2016, the FASB issued guidance which requires organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. The new guidance also requires additional disclosures related to leasing transactions. The standard is effective for the first quarter of 2019. We are currently evaluating the impact that the adoption will have on our Consolidated Financial Statements and related disclosures.

In March 2016, the FASB issued guidance requiring a change in the accounting of share-based payments, including the income tax consequences, forfeitures, classifications of awards and classification on the statement of cash flows. This guidance will be effective for us in the first quarter of 2017. Early adoption is permitted for all companies in any interim or annual period. We are currently evaluating the impact that the adoption will have on our Consolidated Financial Statements and related disclosures.


NOTE 2.	DISCONTINUED OPERATIONS

In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business"). Accordingly, the results of our inverter business has been reflected as “Income (loss) from discontinued operations, net of income taxes” on our Unaudited Condensed Consolidated Statements of Operations for all periods presented herein.

The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Unaudited Condensed Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue is earned and the associated services are rendered. Extended warranties related to the inverter product line are no longer offered.

The items included in "Income (loss) from discontinued operations, net of income taxes" are as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Sales	$	—		$	21,044		$	—		$	80,789
Cost of sales	3,095			26,545			672			101,915
Total operating (income) expenses (including restructuring)	(1,473		)	15,007			(3,759		)	222,439
Operating income (loss) from discontinued operations	(1,622		)	(20,508		)	3,087			(243,565		)
Other (loss) income	(14		)	(145		)	325			(96		)
Income (loss) from discontinued operations before income taxes	(1,636		)	(20,653		)	3,412			(243,661		)
(Benefit) provision for income taxes	(2,959		)	(13,772		)	(3,249		)	23,082
Income (loss) from discontinued operations, net of income taxes	$	1,323		$	(6,881	)	$	6,661		$	(266,743	)

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

Assets and Liabilities of discontinued operations within the Condensed Consolidated Balance Sheets are comprised of the following:



	September 30,		December 31,
	2016		2015
Cash and cash equivalents	$	6,623	$	11,277
Accounts and other receivables, net	2,328		16,331
Inventories	246		—
Deferred income tax assets	14,294		14,294
Current assets of discontinued operations	$	23,491	$	41,902

Intangibles and other assets, net	$	163	$	1,271
Non-current assets of discontinued operations	$	163	$	1,271

Accounts payable and other accrued expenses	$	8,259	$	19,261
Accrued warranty	8,241		11,852
Accrued restructuring	732		5,368
Current liabilities of discontinued operations	$	17,232	$	36,481

Accrued warranty	$	25,179	$	27,124
Other liabilities	183		178
Non-current liabilities of discontinued operations	$	25,362	$	27,302

During the quarter ended September 30, 2016, we reclassified $5 million of income tax receivable from Accounts and other receivables, net reflected in discontinued operations to Income tax receivable reflected in continuing operations.


NOTE 3.	INCOME TAXES

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



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Income from continuing operations before income taxes	$	34,306		$	29,446		$	89,449		$	90,930
Provision for income taxes	5,268			6,133			12,937			18,938
Effective tax rate	15.4		%	20.8		%	14.5		%	20.8		%

The effective tax rates for the nine months ended September 30, 2016 and 2015 are lower than the federal statutory rate primarily due to the benefit of the 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 and nine months ended September 30, 2016 and 2015, 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 our diluted EPS is similar to the computation of our basic EPS except that the denominator is increased to include the number of additional common shares that would have

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted EPS:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Income from continuing operations, net of income taxes	$	29,038	$	23,313	$	76,512	$	71,992

Basic weighted-average common shares outstanding	39,681		41,027		39,723		40,905
Assumed exercise of dilutive stock options and restricted stock units	286		292		292		—
Diluted weighted-average common shares outstanding	39,967		41,319		40,015		40,905
Continuing operations:
Basic earnings per share	$	0.73	$	0.57	$	1.93	$	1.76
Diluted earnings per share	$	0.73	$	0.56	$	1.91	$	1.76

The following stock options and restricted stock units 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,
	2016	2015	2016	2015
Stock options	—	172	—	151
Restricted stock units	1	4	1	2

Stock Buyback

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. As of October 28, 2016, we have $100 million remaining available for the repurchase of shares. In November 2015 we entered into an accelerated stock repurchase arrangement with Morgan Stanley & Co. LLC (the “Counterparty”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (the “ASR Agreement”) to purchase $50.0 million of shares of our common stock in the open market. In accordance with the ASR Agreement, we paid $50.0 million at the beginning of the contract and received an initial delivery of 1.4 million shares of our common stock. In April 2016, we received a final delivery of 0.3 million shares of our common stock. A total of 1.7 million shares of our common stock was repurchased under the ASR Agreement at an average price of $28.99 per share. We retired the shares repurchased under the ASR Agreement and have therefore recognized the $50.0 million share repurchase as a reduction to Stockholders Equity.


NOTE 5.	MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUE

Our investments with original maturities of more than three months at time of purchase and that are intended to be held for no more than 12 months, are considered marketable securities available for sale.

Our marketable securities consist of commercial paper and certificates of deposit as follows:



	September 30,				December 31,
	2016				2015
	Cost		Fair Value		Cost		Fair Value
Commercial paper	$	—	$	—	$	4,989	$	4,995
Certificates of deposit	5,532		5,538		7,008		6,991
Total marketable securities	$	5,532	$	5,538	$	11,997	$	11,986

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

The maturities of our marketable securities available for sale as of September 30, 2016 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. As of September 30, 2016, we do not believe any of the underlying issuers of our marketable securities are at risk of default.

The following tables present information about our marketable securities measured at fair value, on a recurring basis, as of September 30, 2016 and December 31, 2015. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of September 30, 2016 and December 31, 2015.



September 30, 2016	Level 1		Level 2		Level 3		Total
Certificates of deposit	$	—	$	5,538	$	—	$	5,538
Total marketable securities	$	—	$	5,538	$	—	$	5,538

December 31, 2015	Level 1		Level 2		Level 3		Total
Commercial paper	$	—	$	4,995	$	—	$	4,995
Certificates of deposit	—		6,991		—		6,991
Total marketable securities	$	—	$	11,986	$	—	$	11,986

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, 2016.


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 currency exchange rate contracts. During the nine months ended September 30, 2016 and 2015, we entered into currency exchange rate forward contracts to attempt to mitigate the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. We did not enter into any currency exchange rate forward contracts during the three months ended September 30, 2016 and 2015. These derivative instruments are not designated as hedges for accounting purposes; however, they tend to offset the fluctuations of our intercompany debt due to foreign currency exchange rate changes. These forward contracts are typically for one month periods. We did not have any currency exchange rate contracts outstanding as of September 30, 2016. At December 31, 2015 we had outstanding Euro forward contracts.

During the three and nine months ended September 30, 2016 and 2015 the gains and losses recorded related to the foreign currency exchange contracts are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
Foreign currency gain (loss) from foreign currency exchange contracts	$	—	$	—	$	(569	)	$	1,887

These gains and losses were offset by corresponding gains and losses on the revaluation of the underlying intercompany debt and both are included as a component of Other income, net, in our Unaudited Condensed Consolidated Statements of Operations.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


NOTE 7.	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:



	September 30,		December 31,
	2016		2015
Parts and raw materials	$	40,076	$	40,578
Work in process	5,964		5,643
Finished goods	9,985		6,352
Inventories	$	56,025	$	52,573


NOTE 8.	PROPERTY AND EQUIPMENT

Property and equipment are as follows:



	September 30,			December 31,
	2016			2015
Buildings and land	$	1,732		$	1,623
Machinery and equipment	32,578			30,479
Computer and communication equipment	24,086			19,744
Furniture and fixtures	1,367			1,319
Vehicles	342			215
Leasehold improvements	15,545			15,173
Construction in process	265			15
	75,915			68,568
Less: Accumulated depreciation	(63,927		)	(58,923		)
Property and equipment, net	$	11,988		$	9,645

Depreciation expense, recorded in continuing operations and included in selling, general and administrative expense, is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Depreciation expense	$	845	$	1,050	$	2,758	$	3,481


NOTE 9.	GOODWILL

The following summarizes the changes in goodwill during the nine months ended September 30, 2016:



	September 30, 2016		Effect of Changes in Exchange Rates		December 31, 2015
Goodwill	$	43,596	$	867	$	42,729

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

NOTE 10.INTANGIBLE ASSETS

Other intangible assets subject to amortization consisted of the following as of September 30, 2016 and December 31, 2015:



	September 30, 2016
	Gross Carrying Amount		Effect of Changes in Exchange Rates			Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life in Years
Technology-based	$	14,130	$	(1,702	)	$	(3,778	)	$	8,650	10
Customer relationships	31,276		(3,250		)	(7,526		)	20,500		12
Trademarks and other	2,892		(389		)	(1,453		)	1,050		10
Total amortizable intangibles	$	48,298	$	(5,341	)	$	(12,757	)	$	30,200



	December 31, 2015
	Gross Carrying Amount		Effect of Changes in Exchange Rates			Accumulated Amortization			Net Carrying Amount		Weighted-Average Useful Life in Years
Technology-based	$	14,130	$	(1,535	)	$	(2,828	)	$	9,767	10
Customer relationships	31,276		(2,805		)	(5,550		)	22,921		12
Trademarks and other	2,892		(247		)	(1,192		)	1,453		10
Total amortizable intangibles	$	48,298	$	(4,587	)	$	(9,570	)	$	34,141

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Amortization expense	$	1,048	$	1,098	$	3,180	$	3,298

Amortization expense related to intangibles for each of the five years 2016 (remaining) through 2020 and thereafter is as follows:



Year Ending December 31,
2016 (remaining)	$	1,022
2017	3,950
2018	3,938
2019	3,920
2020	3,271
Thereafter	14,099
	$	30,200


NOTE 11.	WARRANTIES

Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months following installation. The estimated cost of warranties is recorded when revenue is recognized and is based upon historical experience by product, configuration and geographic region.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

We establish accruals for our warranty obligations that are probable to result in future costs. The warranty accrual is included in our Other accrued expenses in our balance sheet. Changes in our product warranty accrual are as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Balances at beginning of period	$	1,933		$	1,476		$	1,633		$	1,612
Increases to accruals related to sales during the period	789			235			1,726			674
Warranty expenditures	(197		)	(240		)	(811		)	(816		)
Effect of changes in currency exchange rates	(8		)	(7		)	(31		)	(6		)
Balances at end of period	$	2,517		$	1,464		$	2,517		$	1,464


NOTE 12.	PENSION LIABILITY

In connection with the HiTek acquisition on April 12, 2014, 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. We have committed to fund our defined benefit obligation of HPLPS in the amount of approximately $1.0 million per year through 2024.

The net pension liability is included in Other long-term liabilities in our balance sheet as follows:



	September 30,		December 31,
	2016		2015
Pension liability	$	17,219	$	17,789

The components of the net periodic pension expense for the three and nine months ended September 30, 2016 and 2015 were as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Net periodic (benefit) expense:
Expected return on plan assets	$	(121	)	$	(166	)	$	(385	)	$	(494	)
Interest cost	235			332			747			986
Amortization of actuarial gains and losses	80			—			255			—
Net periodic expense	$	194		$	166		$	617		$	492


NOTE 13.	STOCK-BASED COMPENSATION

We have reserved a total of 3.0 million shares of Advanced Energy’s common stock for issuance under the 2008 Omnibus Incentive Plan. The Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights. Any of the awards issued under this Plan may be issued as performance based awards to align compensation awards to the attainment of annual or long-term performance goals. As of September 30, 2016, there were 1.9 million shares available for grant under the 2008 Omnibus Incentive Plan.

Stock option awards are granted with an exercise price equal to the market price of our stock at the date of grant and have either a time based vesting schedule of three or four-years, or a performance based vesting schedule based upon achievement

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

of organizational performance goals over a three year period, and a term of 10 years. The fair value of each award was estimated on the date of grant using the Black-Scholes-Merton option pricing model.

Restricted stock units (“RSU’s”) are granted with either a time based vesting schedule of three or four-years, or a performance based vesting schedule based upon achievement of organizational performance goals over a three year period. The fair value of each RSU is determined based upon the closing fair market value of our common stock on the grant date.

We recognize stock-based compensation expense 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, 2016 and 2015 is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Stock-based compensation expense	$	1,301	$	733	$	4,299	$	1,913

A summary of activity for stock option awards during the three and nine months ended September 30, 2016 is as follows:



	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Number of Options		Weighted-Average Exercise Price per Share		Number of Options		Weighted-Average Exercise Price per Share
Options outstanding at beginning of period	495		$	17.30	642		$	17.10
Options granted	—		—		—		—
Options exercised	(12	)	13.93		(147	)	15.42
Options forfeited	—		—		(12	)	26.32
Options outstanding at end of period	483		$	17.38	483		$	17.38

The assumptions in the following table were used to determine fair value of options granted using the Black-Scholes-Merton option valuation model.



	Three Months Ended September 30,		Nine Months Ended September 30,
	2016	2015	2016	2015
Expected term (years)	n/a	n/a	n/a	4.3 years
Estimated volatility	n/a	n/a	n/a	43.0%
Estimated dividend yield	n/a	n/a	n/a	—%
Risk-free interest rate	n/a	n/a	n/a	1.1% - 1.4%

The expected term represents the period of time the stock options awarded are expected to be outstanding, based upon the historical experience of the plan participants. Expected volatility is based on the historical volatility using daily stock price observations. The estimated dividend yield is based on historical dividend practice and the market value of our common stock. The risk-free rate is based on the U.S. treasury yield curve, for periods within the contractual life of the stock option at the time of award.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

A summary of activity for RSU awards for the three and nine months ended September 30, 2016 is as follows:



	Three Months Ended September 30, 2016				Nine Months Ended September 30, 2016
	Number of Options		Average Weighted Grant Date Fair Value		Number of Options		Average Weighted Grant Date Fair Value
Balance at beginning of period	353		$	28.97	233		$	26.10
RSUs granted	5		44.26		292		30.00
RSUs vested	(1	)	22.46		(151	)	26.03
RSUs forfeited	(1	)	24.98		(18	)	28.09
Balance at end of period	356		$	29.23	356		$	29.23


NOTE 14.	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, 2016 is approximately $54.4 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, 2016.


NOTE 15.	RELATED PARTY TRANSACTIONS

Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. Sales to our related party customers for the three and nine months ended September 30, 2016 and 2015 are as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
Sales to related parties	$	673	$	56	$	896	$	367
Number of related party customers	2		1		3		2

Our accounts receivable balance from related party customers with outstanding balances as of September 30, 2016 and December 31, 2015 is as follows:



	September 30,		December 31,
	2016		2015
Accounts receivable from related parties	$	282	$	83
Number of related party customers	2		1

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


NOTE 16.	SIGNIFICANT CUSTOMER INFORMATION

The following tables summarize sales, and percentages of sales, by customers which individually accounted for 10% or more of sales for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,
	2016		% of Total Sales		2015		% of Total Sales
Applied Materials, Inc.	$	45,806	36.2	%	$	33,566	30.6	%
LAM Research	24,305		19.2	%	21,640		19.7	%

	Nine Months Ended September 30,
	2016		% of Total Sales		2015		% of Total Sales
Applied Materials, Inc.	$	118,364	34.0	%	$	97,551	29.7	%
LAM Research	73,319		21.0	%	66,557		20.3	%

The following table summarize the accounts receivable balances, and percentages of the total accounts receivables, for customers which individually accounted for 10% or more of accounts receivables as of September 30, 2016 and December 31, 2015:



	September 30,				December 31,
	2016				2015
Applied Materials, Inc.	$	29,377	42.3	%	$	17,147	31.2	%
LAM Research	10,026		14.4	%	7,321		13.3	%

Our sales to Applied Materials, Inc. and LAM Research include precision power products used in semiconductor processing and solar and flat panel display. No other customer accounted for 10% or more of our sales or accounts receivable balances during these periods.


NOTE 17.	CREDIT FACILITIES

On September 9, 2016, Advanced Energy Industries, Inc., along with three of its wholly-owned subsidiaries, AE Solar Energy, Inc., Sekidenko, Inc., and UltraVolt, Inc. terminated its Credit Agreement with Wells Fargo Bank, National Association ("Wells Fargo") which provided for a secured revolving credit facility of up to $50.0 million (the "Credit Facility"), subject to a borrowing base calculation as discussed in our Annual Report on Form 10-K for the year ended December 31, 2015. Management determined that the Credit Facility was no longer needed and therefore is not cost beneficial to the Company. We expensed $0.3 million in interest, unused line of credit fees and amortization of debt issuance costs during each of the nine months ended September 30, 2016 and 2015. We did not borrow against the Credit Facility during the nine months ended September 30, 2016.

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," "might," "continue," "enables," "plan," "intend," "should," "could," "would," "likely," "potential," 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. Neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements and readers are cautioned not to place undue reliance on forward-looking statements.

Table Of Contents

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, 2015. We undertake no obligation to revise or update any forward-looking statements for any reason.

BUSINESS OVERVIEW

We design, manufacture, sell and support precision power products that transform electrical power into various usable forms. 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 products enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for various semiconductor and industrial products, industrial thermal applications for material and chemical processes, and specialty power for critical industrial applications. 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 as well as provides upgrades and refurbishment services, and sales of used equipment to businesses that use our products. The markets we serve include:


•	Semiconductor capital equipment market - Customers in the semiconductor capital equipment market incorporate our products into equipment that make integrated circuits. Our power conversion systems provide the energy to enable thin film processes, such as deposition and etch, and high voltage applications such as ion implant, wafer inspection and metrology.

•

Our thermal instrumentation products measure the temperature of the processed substrate or the process chamber. Our remote plasma sources deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement. Precise control over the energy delivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance.


•	Industrial power capital market - Our industrial power capital market is comprised of products for Thin Films Industrial Power and Specialty Power applications.


◦	Thin Films Industrial Power applications include glass coating, glass manufacturing, flat panel displays, solar cell manufacturing, and similar thin film manufacturing, including data storage, hard and optical coating.


◦	Specialty Power applications include power control modules for metal fabrication and treatment, and material and chemical processing. Our high voltage industrial applications include 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.

The 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 Unaudited 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.

Table Of Contents

Results of Continuing Operations

The following table sets forth certain data, and the percentage of sales each item reflects, derived from our Unaudited Condensed Consolidated Statements of Operations for the periods indicated:



	Three Months Ended September 30,										Nine Months Ended September 30,
	2016					2015					2016				2015
Sales	$	126,552		100.0	%	$	109,756		100.0	%	$	348,361	100.0	%	$	327,920	100.0	%
Gross profit	66,123			52.2		58,538			53.3		181,629		52.1		174,186		53.1
Operating expenses	31,762			25.1		28,370			25.8		93,318		26.8		83,703		25.5
Operating income from continuing operations	34,361			27.1		30,168			27.5		88,311		25.3		90,483		27.6
Other income (expense), net	(55		)	—		(722		)	(0.7	)	1,138		0.3		447		0.1
Income from continuing operations before income taxes	34,306			27.1		29,446			26.8		89,449		25.6		90,930		27.7
Provision for income taxes	5,268			4.2		6,133			5.6		12,937		3.7		18,938		5.8
Income from continuing operations, net of income taxes	$	29,038		22.9	%	$	23,313		21.2	%	$	76,512	21.9	%	$	71,992	21.9	%

SALES

The following tables set forth sales, and percentage of sales, by product group for the three and nine months ended September 30, 2016 and 2015:



	Three Months Ended September 30,
	2016		% of Total Sales		2015		% of Total Sales		Increase/ (Decrease)		Percent Change

Semiconductor capital equipment market	$	81,157	64.1	%	$	72,859	66.4	%	$	8,298	11.4	%
Industrial power capital markets	26,493		20.9		21,378		19.5		5,115		23.9
Global service	18,902		15.0		15,519		14.1		3,383		21.8
Total sales	$	126,552	100.0	%	$	109,756	100.0	%	$	16,796	15.3	%



	Nine Months Ended September 30,
	2016		% of Total Sales		2015		% of Total Sales		Increase/ (Decrease)		Percent Change

Semiconductor capital equipment market	$	229,486	65.9	%	$	216,247	65.9	%	$	13,239	6.1	%
Industrial power capital markets	65,209		18.7		63,022		19.2		2,187		3.5
Global service	53,666		15.4		48,651		14.9		5,015		10.3
Total sales	$	348,361	100.0	%	$	327,920	100.0	%	$	20,441	6.2	%

Total Sales

Sales increased $16.8 million, or 15.3%, to $126.6 million for the three months ended September 30, 2016 from $109.8 million for the three months ended September 30, 2015. Sales for the nine months ended September 30, 2016 increased $20.4 million, or 6.2%, to $348.4 million from $327.9 million for the nine months ended September 30, 2015.

Sales in the semiconductor market increased $8.3 million, or 11.4% for the three months ending September 30, 2016 as compared to the same period in 2015. Semiconductor market sales for the nine months ended September 30, 2015 increased $13.2 million or 6.1% as compared to the same period in 2015. Our growth in the semiconductor market has been fueled by our leadership

Table Of Contents

in etch applications, specifically related to advanced memory and transition to 3DNAND, along with advances in logic technology. Sales growth in each of the periods is driven primarily by recent program wins which have moved into production and delivery.

Sales in the industrial power capital equipment markets increased $5.1 million, or 23.9% for the three months ended September 30, 2016 as compared to the same period in 2015 primarily from flat panel display applications. For the nine months ended September 30, 2016 sales increased $2.2 million or 3.5% as compared to the same period in 2015. The industrial markets we serve include solar panel, flat panel display, power control modules, data storage, architectural glass, high voltage and other industrial manufacturing markets. Our customers in these markets are primarily global and regional original equipment manufacturers.

Global service sales increased $3.4 million, or 21.8%, for the three months ended September 30, 2016 as compared to the same period in 2015. Global service sales for the nine months ending September 30, 2016 increased $5.0 million, or 10.3% as compared to the same period in 2015. Increased global service sales in both periods was due to share gains and growth in the installed base.

Backlog

Our backlog was $56.4 million at September 30, 2016 as compared to $43.7 million at December 31, 2015. Backlog remains strong primarily due to increased demand in the semiconductor market.

GROSS PROFIT

For the three months ended September 30, 2016, gross profit was $66.1 million, or 52.2% of sales as compared to gross profit of $58.5 million, or 53.3% of sales, for the same period in 2015. Gross profit for the nine months ended September 30, 2016 was $181.6 million, or 52.1% of sales, as compared to gross profit of $174.2 million, or 53.1% of sales, for the same period in 2015. The increase in gross profit for both periods is attributable to increased volume as the semiconductor capital equipment market remains strong. The decrease in gross profit as a percentage of sales for both periods is attributable to product mix.

OPERATING EXPENSE

Operating expenses increased $3.4 million to $31.8 million, or 25.1% of sales, for the three months ending September 30, 2016 from $28.4 million, or 25.8% of sales for the same period in 2015. Operating expenses increased $9.6 million to $93.3 million, or 26.8% of sales, for the nine months ended September 30, 2016 from $83.7 million or 25.5% of sales for the same period in 2015.

The following table summarizes our operating expenses as a percentage of sales for the periods indicated:



	Three Months Ended September 30,								Nine Months Ended September 30,
	2016				2015				2016				2015
Research and development	$	11,293	8.9	%	$	10,370	9.4	%	$	33,324	9.6	%	$	30,114	9.2	%
Selling, general, and administrative	19,421		15.4		16,585		15.1		56,814		16.3		49,976		15.2
Amortization of intangible assets	1,048		0.8		1,098		1.0		3,180		0.9		3,298		1.0
Restructuring charges	—		—		317		0.3		—		—		315		0.1
Total operating expenses	$	31,762	25.1	%	$	28,370	25.8	%	$	93,318	26.8	%	$	83,703	25.5	%

Research and Development

We perform research and development of products for new or emerging applications, technological changes to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, as well as enhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.

Research and development expenses increased $0.9 million to $11.3 million, or 8.9% of sales, for the three months ended September 30, 2016 from $10.4 million, or 9.4% of sales, for the same period in 2015. Research and development expenses increased $3.2 million to $33.3 million, or 9.6% of sales, for the nine months ended September 30, 2016 from $30.1 million, or

Table Of Contents

9.2% of sales, for the same period in 2015. The increase in research and development expense is due to our investment in new programs to maintain and increase our technological leadership.

Selling, General and Administrative

Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, and human resource functions in addition to our general management, including acquisition-related activities.

Selling, general and administrative expenses increased $2.8 million to $19.4 million, or 15.4% of sales for the three months ended September 30, 2016 from $16.6 million, or 15.1% of sales, in the same period in 2015. Selling, general and administrative expenses increased $6.8 million to $56.8 million, or 16.3% of sales, for the nine months ended September 30, 2016 from $50.0 million, or 15.2% of sales in the same period in 2015. The increase in both periods is primarily driven by higher sales expense as we expand our sales management and marketing team to support our growth diversification and geographical expansion plans, as well as, higher stock-based compensation expense, professional fees and costs associated with acquisition opportunities.

Other Income (Expense), net

Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items. Other income (expense), net was a loss of $0.1 million for the three months ended September 30, 2016, as compared to a loss of $0.7 million for the same period in 2015. Other income (expense), net was a gain of $1.1 and $0.4 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in gain for the three months ended September 30, 2016 as compared to the same period in 2015 is primarily due to the fluctuation in foreign exchange rates and our assets in different countries.

Provision for Income Taxes

We recorded an income tax provision for the three and nine months ended September 30, 2016 of $5.3 million and $12.9 million, respectively, compared to $6.1 million and $18.9 million for the three and nine months ended September 30, 2015, respectively. Effective tax rates are 15.4% and 14.5% for the three and nine months ended September 30, 2016, respectively, and 20.8% and 20.8% for the three and nine months ended September 30, 2015, respectively.

The effective tax rates for the three and nine months ended September 30, 2016 and 2015 are lower than the federal statutory rate primarily due to the benefit of the earnings in foreign jurisdictions which are subject to lower tax rates. Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.

Results of Discontinued Operations

We completed the wind down of our inverter engineering, manufacturing and sales product line in December 2015. Accordingly, the inverter product line is presented as a discontinued operation for all periods presented herein. Extended warranties previously sold for the inverter product line are reflected in deferred revenue from continuing operations on our Unaudited Condensed Consolidated Balance Sheets and will be reflected in continuing operations in future periods as the deferred revenue is earned and the associated services are rendered.

Table Of Contents

Income (loss) from discontinued operations, net of income taxes are as follows:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Sales	$	—		$	21,044		$	—		$	80,789
Cost of sales	3,095			26,545			672			101,915
Total operating (income) expenses (including restructuring)	(1,473		)	15,007			(3,759		)	222,439
Operating income (loss) from discontinued operations	(1,622		)	(20,508		)	3,087			(243,565		)
Other (loss) income	(14		)	(145		)	325			(96		)
Income (loss) from discontinued operations before income taxes	(1,636		)	(20,653		)	3,412			(243,661		)
(Benefit) provision for income taxes	(2,959		)	(13,772		)	(3,249		)	23,082
Income (loss) from discontinued operations, net of income taxes	$	1,323		$	(6,881	)	$	6,661		$	(266,743	)

Operating income (loss) from discontinued operations for the three and nine months ending September 30, 2016 reflects the recovery of accounts receivable previously reserved for product warranties.

Non-GAAP Results

Management uses non-GAAP operating income and non-GAAP EPS to evaluate business performance without the impacts of certain non-cash charges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives, make business decisions, including developing budgets and forecasting future periods. In addition, management's incentive plans include these non-GAAP measures as criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers to evaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.

The non-GAAP results presented below exclude the impact of non-cash related charges, such as the amortization of intangible assets, stock-based compensation, and restructuring charges, as well as acquisition-related costs and other nonrecurring costs, as they are not indicative of future performance. The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of their respective book and tax treatments.



Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing operations, excluding certain items	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2016			2015			2016			2015
Gross Profit from continuing operations, as reported	$	66,123		$	58,538		$	181,629		$	174,186
Operating expenses from continuing operations, as reported	31,762			28,370			93,318			83,703
Adjustments:
Restructuring charges	—			(317		)	—			(314		)
Stock-based compensation	(1,301		)	(733		)	(4,299		)	(1,913		)
Amortization of intangible assets	(1,048		)	(1,098		)	(3,180		)	(3,298		)
Non-GAAP operating expenses from continuing operations	29,413			26,222			85,839			78,178
Non-GAAP operating income from continuing operations	$	36,710		$	32,316		$	95,790		$	96,008
	29.0		%	29.4		%	27.5		%	29.3		%

Table Of Contents



Reconciliation of Non-GAAP measure - income from continuing operations, excluding certain items	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2016		2015		2016		2015
Income from continuing operations, net of income taxes, as reported	$	29,038	$	23,313	$	76,512	$	71,992
Adjustments
Restructuring charges	—		317		—		314
Stock-based compensation	1,301		733		4,299