Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

Three Months Ended March 31,

Restricted stock units

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 March 31, 2018
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	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 26, 2018 there were 39,329,426 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.

ADVANCED ENERGY INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I FINANCIAL STATEMENTS	3

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Operations	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

ITEM 4. CONTROLS AND PROCEDURES	29

PART II OTHER INFORMATION	29

ITEM 1. LEGAL PROCEEDINGS	29

ITEM 1A. RISK FACTORS	30

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	41

ITEM 6. EXHIBITS	42

SIGNATURES	43
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2

Table Of Contents

PART I FINANCIAL STATEMENTS


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except per share amounts)



	March 31,		December 31,
	2018		2017
ASSETS
Current assets:
Cash and cash equivalents	$	413,874	$	407,283
Marketable securities	3,197		3,104
Accounts and other receivable, net of allowances of $1,824 and $1,748 respectively	116,900		87,429
Inventories	96,842		78,450
Income taxes receivable	2,226		1,295
Other current assets	7,895		8,129
Current assets from discontinued operations	9,638		9,535
Total current assets	650,572		595,225
Property and equipment, net	20,706		17,795
Deposits and other assets	4,207		3,051
Goodwill	54,906		53,812
Intangible assets, net	33,445		33,499
Deferred income tax assets	38,741		18,841
Non-current assets from discontinued operations	11,084		11,085
TOTAL ASSETS	$	813,661	$	733,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	61,328	$	48,177
Income taxes payable	13,011		5,365
Accrued payroll and employee benefits	13,890		18,412
Other accrued expenses	21,395		19,913
Customer deposits	9,738		6,402
Current liabilities from discontinued operations	7,272		7,850
Total current liabilities	126,634		106,119
Deferred income tax liabilities	6,592		4,556
Uncertain tax positions	17,701		17,031
Long term deferred revenue	32,443		33,402
Other long-term liabilities	38,803		36,282
Non-current liabilities from discontinued operations	14,279		15,277
Total liabilities	236,452		212,667
Commitments and contingencies (Note 17)
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; 39,536 and 39,604 issued and outstanding, respectively	40		40
Additional paid-in capital	172,460		184,843
Accumulated other comprehensive income	4,837		2,533
Retained earnings	399,410		333,225
Advanced Energy stockholders’ equity	576,747		520,641
Noncontrolling interest	462		—
Total stockholders’ equity	577,209		520,641
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	813,661	$	733,308

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

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)



	Three Months Ended March 31,
	2018		2017

Sales:
Product	$	171,209	$	128,827
Services	24,408		20,524
Total sales	195,617		149,351
Cost of sales:
Product	79,806		60,117
Services	12,166		10,403
Total cost of sales	91,972		70,520
Gross profit	103,645		78,831
Operating expenses:
Research and development	17,637		12,503
Selling, general and administrative	28,648		22,098
Amortization of intangible assets	1,257		962
Total operating expenses	47,542		35,563
Operating income	56,103		43,268
Other income (expense), net	26		(3,208		)
Income from continuing operations, before income taxes	56,129		40,060
Provision for income taxes	9,759		4,619
Income from continuing operations	46,370		35,441
Income from discontinued operations, net of income taxes	140		2,094
Net income	$	46,510	$	37,535
Income from continuing operations attributable to noncontrolling interest	31		—
Net income attributable to Advanced Energy Industries, Inc.	$	46,479	$	37,535

Basic weighted-average common shares outstanding	39,619		39,738
Diluted weighted-average common shares outstanding	39,995		40,179

Earnings per share:
Continuing operations:
Basic earnings per share	$	1.17	$	0.89
Diluted earnings per share	$	1.16	$	0.88
Discontinued operations:
Basic earnings per share	$	—	$	0.05
Diluted earnings per share	$	—	$	0.05
Net income:
Basic earnings per share	$	1.17	$	0.94
Diluted earnings per share	$	1.16	$	0.93

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

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Comprehensive Income

(In thousands)



	Three Months Ended March 31,
	2018			2017
Net income	$	46,510		$	37,535
Other comprehensive income:
Foreign currency translation	2,472			3,028
Minimum benefit retirement liability	(168		)	(16		)
Comprehensive income	48,814			40,547
Comprehensive income attributable to noncontrolling interest	31			—
Comprehensive income attributable to Advanced Energy Industries, Inc.	$	48,783		$	40,547

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

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ADVANCED ENERGY INDUSTRIES, INC.

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)



	Three Months Ended March 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	46,510		$	37,535
Income from discontinued operations, net of income taxes	140			2,094
Income from continuing operations, net of income taxes	46,370			35,441
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	2,861			1,987
Stock-based compensation expense	4,494			3,398
Loss on foreign exchange hedge	—			3,489
Net loss on disposal of assets	138			65
Changes in operating assets and liabilities, net of assets acquired:
Accounts and other receivable, net	(17,457		)	(431		)
Inventories	(17,113		)	(8,047		)
Other current assets	364			(1,109		)
Accounts payable	11,932			5,194
Other liabilities and accrued expenses	(2,346		)	(614		)
Income taxes	5,642			3,286
Net cash provided by operating activities from continuing operations	34,885			42,659
Net cash used in operating activities from discontinued operations	(1,784		)	(2,453		)
Net cash provided by operating activities	33,101			40,206
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition, net of cash acquired	(6,072		)	—
Purchase of foreign exchange hedge	—			(3,489		)
Purchases of property and equipment	(3,923		)	(1,391		)
Net cash used in investing activities from continuing operations	(9,995		)	(4,880		)
Net cash used in investing activities from discontinued operations	—			—
Net cash used in investing activities	(9,995		)	(4,880		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase and retirement of common stock	(12,750		)	—
Net payments related to stock-based award activities	(4,032		)	(1,688		)
Net cash used in financing activities from continuing operations	(16,782		)	(1,688		)
Net cash used in financing activities from discontinued operations	—			—
Net cash used in financing activities	(16,782		)	(1,688		)
EFFECT OF CURRENCY TRANSLATION ON CASH	167			1,133
INCREASE IN CASH AND CASH EQUIVALENTS	6,491			34,771
CASH AND CASH EQUIVALENTS, beginning of period	415,037			289,517
CASH AND CASH EQUIVALENTS, end of period	421,528			324,288
Less cash and cash equivalents from discontinued operations	7,654			6,339
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period	$	413,874		$	317,949
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	56		$	—
Cash paid for income taxes	3,404			918
Cash received for refunds of income taxes	95			396
Cash held in banks outside the United States	320,753			239,553

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

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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 4. 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 March 31, 2018, and the results of our operations and cash flows for the three months ended March 31, 2018 and 2017.

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, 2017 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, 2017. See Note 3. Revenue for the updated revenue recognition policy in accordance with ASU 2014-09, "Revenue from Contracts with Customers".

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.

Recently issued accounting pronouncements not yet adopted

In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

within the year of adoption. Early adoption is permitted. Advanced Energy is currently assessing and has not yet determined the impact ASU 2016-02 may have on its Consolidated Financial Statements.

In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income" to give companies the option to reclassify the income tax effects on items within accumulated other comprehensive income resulting from U.S. tax reform to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted. Advanced Energy is currently assessing and has not yet determined the impact ASU 2018-02 may have on its Consolidated Financial Statements.

Recently adopted accounting pronouncements

In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" and has subsequently issued several supplemental and/or clarifying ASUs (collectively known as "ASC 606"). ASC 606 implements a five step model 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. ASC 606 is effective for fiscal periods beginning after December 15, 2017 and for the interim periods within that year. We adopted ASC 606 during the first quarter of fiscal year 2018 using the modified retrospective approach and recorded an adjustment to reflect the cumulative-effect of its adoption on all contracts with customers. See Note 3. Revenue for further details.

In October 2016, the FASB issued ASU 2016-16, "Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory." ASU 2016-16 changes the timing of income tax recognition for an intercompany sale of assets. ASU 2016-16 requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 including interim periods within the year of adoption. We adopted ASU 2016-16 during the first quarter of fiscal year 2018 using the modified retrospective approach and recorded a adjustment to reflect the cumulative-effect of its adoption.

Cumulative-effect of recently adopted accounting pronouncements

The following table reflects the cumulative-effect of the adoption of ASC 606 and ASU 2016-16 using the modified retrospective approach for:



	December 31, 2017		Impact of			Impact of		January 1, 2018
	as reported		ASC 606			ASU 2016-16		as adjusted
Accounts and other receivable, net	$	87,429	$	8,251		$	—	$	95,680
Inventories	78,450		(3,561		)	—		74,889
Total current assets	595,225		4,690			—		599,915
Deferred income tax assets	18,841		—			17,080		35,921
Total assets	733,308		4,690			17,080		755,078

Income taxes payable	5,365		—			921		6,286
Deferred income tax liabilities	4,556		1,143			—		5,699
Total liabilities	212,667		1,143			921		214,731
Retained earnings	333,225		3,547			16,159		352,931
Total stockholders’ equity	520,641		3,547			16,159		540,347
Total liabilities and stockholders' equity	733,308		4,690			17,080		755,078


NOTE 2.	BUSINESS ACQUISITION

On February 1, 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan and Lockport, New York. Trek has a 95% ownership interest in its U.S. subsidiary which is also its primary operation.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

The components of the fair value of the total consideration transferred for the Trek acquisition are as follows:



Cash paid to owners	$	11,723
Cash acquired	(5,651		)
Total fair value of consideration transferred	$	6,072

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of February 1, 2018:



Accounts and other receivable, net	$	2,818
Inventories	4,037
Other current assets	275
Property and equipment	594
Other non-current assets	579
Deferred income tax assets	702
Accounts payable	(747		)
Other accrued expenses	(2,696		)
	5,562
Amortizable intangible assets:
Technology	200
Customer relationships	200
Total amortizable intangible assets	400
Total identifiable net assets	5,962
Goodwill	110
Total fair value of consideration received	$	6,072

A summary of the intangible assets acquired, amortization method and estimated useful lives as of February 1, 2018 follows:



	Amount		Amortization Method	Useful Life
Technology	$	200	Straight-line	10
Customer relationships	200		Straight-line	10
Total	$	400

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. Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed.


NOTE 3.	REVENUE

Adoption of ASC 606, "Revenue from Contract with Customers"

Advanced Energy adopted ASC 606 using the modified retrospective method by recognizing the cumulative effect of the adoption of ASC 606, for all contracts with customers, to the opening balance of equity at January 1, 2018. Therefore, our comparative financial information as of December 31, 2017 has not been adjusted and continues to be reported under ASC Topic 605. The cumulative effect adjustment was based on the timing difference of revenue recognition between ASC Topic 605 and ASC 606 related to our inventory stocking agreements. Under ASC 606, revenue related to our inventory stocking agreements are recognized when inventory is shipped to our customers. Under ASC Topic 605, revenue was recognized when the inventory was consumed by our customers. The tables below show the quantitative impact of ASC 606 on our consolidated financial statements.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)



	March 31, 2018
						Balances without
						adoption of
	As Reported		Adjustments			ASC 606
Accounts and other receivable, net	$	116,900	$	(9,710	)	$	107,190
Inventories	96,842		4,086			100,928
Total current assets	650,572		(5,624		)	644,948
TOTAL ASSETS	813,661		(5,624		)	808,037

Income taxes payable	13,011		(230		)	12,781
Total current liabilities	126,634		(230		)	126,404
Deferred income tax liabilities	6,592		(1,143		)	5,449
Total liabilities	236,452		(1,373		)	235,079

Retained earnings	399,410		(4,251		)	395,159
Advanced Energy stockholders’ equity	576,747		(4,251		)	572,496
Total stockholders’ equity	577,209		(4,251		)	572,958
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	813,661	$	(5,624	)	$	808,037



	Three Months Ended March 31, 2018
						Balances without
						adoption of
	As Reported		Adjustments			ASC 606
Product sales	$	171,209	$	(1,460	)	$	169,749
Total sales	195,617		(1,460		)	194,157
Product cost of sales	79,806		(526		)	79,280
Total cost of sales	91,972		(526		)	91,446
Gross profit	103,645		(934		)	102,711
Operating income	56,103		(934		)	55,169
Income from continuing operations, before income taxes	56,129		(934		)	55,195
Provision for income taxes	9,759		(230		)	9,529
Income from continuing operations	46,370		(704		)	45,666
Net income	46,510		(704		)	45,806
Net income attributable to Advanced Energy Industries, Inc.	$	46,479	$	(704	)	$	45,775



	Three Months Ended March 31, 2018
							Balances without
							adoption of
	As Reported			Adjustments			ASC 606
Net income	$	46,510		$	(704	)	$	45,806
Changes in operating assets and liabilities, net of assets acquired:
Accounts and other receivable, net	(17,457		)	1,460			(15,997		)
Inventories	(17,113		)	(526		)	(17,639		)
Income taxes	5,642			(230		)	5,412
Net cash provided by operating activities from continuing operations	$	34,885		$	—		$	34,885

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

Revenue Recognition

We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or services have been transfered to our customers. The transaction price is based upon the standalone selling price. In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our standard warranty do not generate revenue.

Practical Expedients

We expense incremental costs of obtaining contracts when the amortization period of the costs are less then 1 year. These costs are included in selling, general, and administrative expenses.

Nature of goods and services

Products

Advanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and control solutions to our global customers. 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 measurement and control in these markets.

Our products are designed to enable new process technologies, improve productivity, and lower the cost of ownership for our customers. We also provide repair and maintenance services for all of our products. We principally serve original equipment manufacturers ("OEM") and end customers in the semiconductor, flat panel display, high voltage, solar panel, and other industrial capital equipment markets. Our products are used in diverse markets, applications, and processes including the manufacture of capital equipment for semiconductor device manufacturing, thin film applications for thin film renewables and architectural glass, and for other thin film applications including flat panel displays, and industrial coatings.

Services

Our global support services group offers in-warranty and out-of-warranty repair services in the regions in which we operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the significant costs of system downtime. They expect that suppliers offer comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide support organization comprising of both direct and indirect activities through partnership with local distributors primarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Germany, and United Kingdom.

As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties which had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenance plans are deferred. Revenue under these arrangements are recognized ratably over the underlying terms as we do not have historical information which would allow us to project the estimated service usage pattern. We have deferred revenue related to our extended warranties and service contracts totaling $36.3 million as of March 31, 2018 and $37.5 million as of December 31, 2017.

Disaggregation of Revenue

The following table presents our net sales by product line:



	Three Months Ended March 31,
	2018		2017
Semiconductor capital market	$	136,010	$	104,648
Industrial power capital market	35,199		24,179
Global support	24,408		20,524
Total	$	195,617	$	149,351

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

The following table presents our net sales by geographic region:



	Three Months Ended March 31,
	2018				2017
Sales to external customers:
United States	$	130,369	66.5	%	$	104,715	70.1	%
Canada	111		0.1	%	16		0.1	%
North America	130,480		66.6	%	104,731		70.2	%

People's Republic of China	9,551		4.9	%	8,133		5.4	%
Other Asian countries	30,307		15.5	%	21,436		14.4	%
Asia	39,858		20.4	%	29,569		19.8	%

Germany	19,286		9.9	%	11,854		7.9	%
United Kingdom	1,948		1.0	%	3,197		2.1	%
Other European countries	4,045		2.1	%	—		—	%
Europe	25,279		13.0	%	15,051		10.0	%
Total	$	195,617	100.0	%	$	149,351	100.0	%

The following table presents our net sales by extended warranty and service contracts recognized over time and our product and service revenue recognized at a point in time:



	Three Months Ended March 31,
	2018		2017
Product and service revenue recognized at point in time	$	194,683	$	148,530
Extended warranty and service contracts recognized over time	934		821
Total	$	195,617	$	149,351


NOTE 4.	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 have been reflected as "Income from discontinued operations, net of income taxes" on our 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 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 significant items included in "Income from discontinued operations, net of income taxes" are as follows:



	Three Months Ended March 31,
	2018			2017
Sales	$	—		$	—
Cost of sales	112			(828		)
Total operating income (including restructuring)	(61		)	(1,120		)
Operating (loss) income from discontinued operations	(51		)	1,948
Other income	124			163
Income from discontinued operations before income taxes	73			2,111
(Benefit) provision for income taxes	(67		)	17
Income from discontinued operations, net of income taxes	$	140		$	2,094

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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:



	March 31,		December 31,
	2018		2017
Cash and cash equivalents	$	7,654	$	7,754
Accounts and other receivables, net	1,379		1,363
Inventories	605		418
Current assets of discontinued operations	$	9,638	$	9,535

Other assets	$	71	$	72
Deferred income tax assets	11,013		11,013
Non-current assets of discontinued operations	$	11,084	$	11,085

Accounts payable and other accrued expenses	$	517	$	545
Accrued warranty	6,755		7,305
Current liabilities of discontinued operations	$	7,272	$	7,850

Accrued warranty	$	14,109	$	15,112
Other liabilities	170		165
Non-current liabilities of discontinued operations	$	14,279	$	15,277


NOTE 5.	INCOME TAXES

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



	Three Months Ended March 31,
	2018			2017
Income from continuing operations, before income taxes	$	56,129		$	40,060
Provision for income taxes	9,759			4,619
Effective tax rate	17.4		%	11.5		%

On December 22, 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act (“Tax Act”), which contains several key tax provisions that affected our financial results for 2017, including a one-time mandatory transition tax on our accumulated foreign earnings and the reduction of the corporate income tax rate from 35% to21%, effective January 1, 2018, which required a revaluation of our U.S. deferred tax assets. The Tax Act also contains several key tax provisions that will affect our financial results for 2018, including reduction of the corporate income tax rate from 35% to 21% and application of the global intangible low-taxed income of foreign subsidiaries (“GILTI tax”), among others.

In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, we consider the accounting for the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.

Our effective tax rates differ from the U.S. federal statutory rate of 21% and35% for the three months ended March 31, 2018 and 2017, respectively, primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates. Our effective tax rate for the three months ended March 31, 2018 was also impacted by the effect of the recently enacted Tax Act, with the benefit from the corporate income tax rate reduction to 21% offset by additional GILTI tax, and entry into additional foreign taxable jurisdictions. Additionally, the March 2018 rate includes $1.9 million in tax expense related to our change in estimated U.S. transition tax.

Our policy is to classify accrued interest and penalties related to unrecognized tax benefits in our income tax provision. The amount of interest and penalties accrued related to our unrecognized tax benefits for the three months ended March 31, 2018 and 2017 was not significant.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


NOTE 6.	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 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 for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018		2017
Income from continuing operations	$	46,370	$	35,441
Income attributable to noncontrolling interest	31		—
Income from continuing operations attributable to Advanced Energy Industries, Inc.	$	46,339	$	35,441

Basic weighted-average common shares outstanding	39,619		39,738
Assumed exercise of dilutive stock options and restricted stock units	376		441
Diluted weighted-average common shares outstanding	39,995		40,179
Continuing operations:
Basic earnings per share	$	1.17	$	0.89
Diluted earnings per share	$	1.16	$	0.88

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

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. In November 2017, our Board of Directors approved an extension to the share repurchase program to December 2019 from its original maturity of March 2018. As of March 31, 2018, we had $57.3 million remaining for the authorized repurchase of shares.

In March 2018, we entered into Stock Repurchase Plan and Agreement to repurchase up to $50.0 million of our common stock through December 31, 2018 subject to certain pricing conditions. In March 2018 we repurchased $12.8 million of shares of our common stock in the open market under the Stock Repurchase Plan and Agreement. A total of 180,942 shares of our common stock was repurchased at an average price of $70.47 per share. There were no shares repurchased from related parties. The $12.8 million share repurchase was recognized as a reduction to Additional paid-in capital. Repurchased shares were retired and assumed the status of authorized and unissued shares. As of March 31, 2018, we had $37.2 million remaining for the authorized repurchase of shares under the Stock Repurchase Plan and Agreement. Subsequent to March 31, 2018 we repurchased $15.7 million of shares of our common stock in the open market under the Stock Repurchase Plan and Agreement. A total of 254,015 shares of our common stock was repurchased at an average price of $62.01 per share.


NOTE 7.	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.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

Our marketable securities consist of certificates of deposit as follows:



	March 31, 2018				December 31, 2017
	Cost		Fair Value		Cost		Fair Value
Total marketable securities	$	3,196	$	3,197	$	3,103	$	3,104

The maturities of our marketable securities available for sale as of March 31, 2018 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 March 31, 2018, 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 March 31, 2018 and December 31, 2017. 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 March 31, 2018 and December 31, 2017.



March 31, 2018	Level 1		Level 2		Level 3		Total
Total marketable securities	$	—	$	3,197	$	—	$	3,197

December 31, 2017	Level 1		Level 2		Level 3		Total
Total marketable securities	$	—	$	3,104	$	—	$	3,104

There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three months ended March 31, 2018.


NOTE 8.	DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates. We manage these risks through the use of derivative financial instruments, primarily forward contracts with banks. We did not enter into any new foreign currency exchange forward contracts during the three months ended March 31, 2018. During the three months ended March 31, 2017, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they do offset the fluctuations of our intercompany debt due to foreign exchange rate changes. These forward contracts are typically for one month periods. We did not have any currency exchange rate contracts outstanding as of March 31, 2018. At December 31, 2017 we had outstanding Euro and Pound Sterling forward contracts.

The notional amount of foreign currency exchange contracts outstanding at December 31, 2017 was $16.3 million and the fair value of these contracts was not significant at December 31, 2017.

During the three months ended March 31, 2018 and 2017 the gains and losses recorded related to the foreign currency exchange contracts are as follows:



	Three Months Ended March 31,
	2018			2017
Foreign currency (loss) gain from foreign currency exchange contracts	$	(750	)	$	39

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 (expense), net, in our Unaudited Condensed Consolidated Statements of Operations.

During the first quarter of 2017 we entered into a foreign currency exchange rate forward contract at a cost of $3.5 million, to mitigate the exchange rate risk associated with a planned offshore acquisition which was not consummated. This derivative instrument was designated as a hedge for accounting purposes. The hedge expired upon maturity in the first quarter of 2017. The

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

cost of the forward contract is recorded as a component of Other income (expense), net in our Condensed Consolidated Statement of Operations.


NOTE 9.	ACCOUNTS AND OTHER RECEIVABLE

Accounts and other receivable are recorded at net realizable value. Components of accounts and other receivable, net of reserves, are as follows:



	March 31,		December 31,
	2018		2017
Amounts billed, net	$	107,190	$	87,429
Unbilled receivables	9,710		—
Total receivables, net	$	116,900	$	87,429

Amounts billed, net consist of amounts that have been invoiced to our customers in accordance with our terms and conditions and are shown net of an allowance for doubtful accounts.

Unbilled receivables consist of amounts where we have satisfied our contractual obligations related to inventory stocking contracts with customers. Such amounts typically become billable to the customer upon their consumption of the inventory managed under the stocking contracts. We anticipate that substantially all unbilled receivables will be invoiced and collected over the next twelve months.


NOTE 10.	INVENTORIES

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



	March 31,		December 31,
	2018		2017
Parts and raw materials	$	71,284	$	58,567
Work in process	13,054		7,986
Finished goods	12,504		11,897
Total	$	96,842	$	78,450


NOTE 11.	PROPERTY AND EQUIPMENT

Property and equipment, net is comprised of the following:



	March 31,			December 31,
	2018			2017
Buildings and land	$	1,846		$	1,788
Machinery and equipment	37,886			36,579
Computer and communication equipment	25,391			26,819
Furniture and fixtures	1,479			1,568
Vehicles	273			341
Leasehold improvements	14,156			17,286
Construction in process	725			802
	81,756			85,183
Less: Accumulated depreciation	(61,050		)	(67,388		)
Property and equipment, net	$	20,706		$	17,795

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

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



	Three Months Ended March 31,
	2018		2017
Depreciation expense	$	1,604	$	1,025


NOTE 12.	GOODWILL

The following summarizes the changes in goodwill during the three months ended March 31, 2018:



	Beginning Balance		Additions		Effect of Changes in Exchange Rates		Ending Balance
March 31, 2018	$	53,812	$	110	$	984	$	54,906

NOTE 13.INTANGIBLE ASSETS

Intangible assets consisted of the following as of March 31, 2018 and December 31, 2017:



March 31, 2018	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	30,885	$	(11,763	)	$	19,122
Technology	19,397		(6,192		)	13,205
Trademarks and other	2,707		(1,589		)	1,118
Total	$	52,989	$	(19,544	)	$	33,445



December 31, 2017	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	30,034	$	(10,787	)	$	19,247
Technology	18,702		(5,559		)	13,143
Trademarks and other	2,623		(1,514		)	1,109
Total	$	51,359	$	(17,860	)	$	33,499

Amortization expense related to intangible assets is as follows:



	Three Months Ended March 31,
	2018		2017
Amortization expense	$	1,257	$	962

Estimated amortization expense related to intangibles is as follows:



Year Ending December 31,
2018 (remaining)	$	3,778
2019	5,019
2020	4,313
2021	4,207
2022	3,938
Thereafter	12,190
Total	$	33,445

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


NOTE 14.	WARRANTIES

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

Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets. Changes in our product warranty obligation are as follows:



	Three Months Ended March 31,
	2018			2017
Balances at beginning of period	$	2,312		$	2,329
Warranty liabilities acquired	92			—
Increases to accruals	178			2,181
Warranty expenditures	(506		)	(389		)
Effect of changes in exchange rates	8			5
Balances at end of period	$	2,084		$	4,126


NOTE 15.	PENSION LIABILITY

In connection with the acquisition of HiTek Power Group, a privately-held provider of high voltage power solutions, in 2014, we acquired the HiTek Power Limited Pension Scheme (the "HiTek Plan"). The HiTek Plan has been closed to new participants since April 1, 2002 and to additional accruals since April 5, 2005. 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 facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. We are committed to make annual fixed payments of $0.9 million into the HiTek Plan through April 30, 2024, and then $1.9 million from May 1, 2024 through November 30, 2033.

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



	March 31,		December 31,
	2018		2017
Pension liability	$	20,490	$	19,797

The following table sets forth the components of net periodic pension cost for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018			2017
Interest cost	$	218		$	264
Expected return on plan assets	(161		)	(140		)
Amortization of actuarial gains and losses	136			70
Net periodic pension cost	$	193		$	194


NOTE 16.	STOCK-BASED COMPENSATION

On May 4, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan ("the 2017 Plan") and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan are now available for issuance under the 2017 Plan. The 2017 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 the 2017 Plan may be issued as performance-based awards to align compensation awards to the attainment of annual or long-term performance goals. As of March 31, 2018, there were 2.7 million shares available for grant and 3.3 million shares reserved under the 2017 Plan.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

Restricted stock units ("RSU’s") are generally granted with a grant date fair value equal to the market price of our stock at the date of grant and with either a three or four year vesting schedule or performance-based vesting as determined at the time of grant.

Stock option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant and with either a three or four year vesting schedule or performance-based vesting as determined at the time of grant. Stock option awards generally have a term of 10 years.

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 months ended March 31, 2018 and 2017 was as follows:



	Three Months Ended March 31,
	2018		2017
Stock-based compensation expense	$	4,494	$	3,398

Changes in the outstanding RSU awards during the three months ended March 31, 2018 were as follows:



	Number of RSUs		Weighted-Average Grant Date Fair Value
RSUs outstanding at beginning of period	386		$	51.06
RSUs granted	160		$	69.32
RSUs vested	(155	)	$	52.59
RSUs forfeited	(55	)	$	47.51
RSUs outstanding at end of period	336		$	59.64

Changes in the outstanding stock option awards during the three months ended March 31, 2018 were as follows:



	Number of Options		Weighted-Average Exercise Price per Share
Options outstanding at beginning of period	317		$	18.97
Options exercised	(17	)	$	18.36
Options expired	(1	)	$	12.19
Options outstanding at end of period	299		$	19.02


NOTE 17.	COMMITMENTS AND CONTINGENCIES

We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of March 31, 2018 is approximately $177.4 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 months ended March 31, 2018.


NOTE 18.	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. During the three months ended March 31, 2018, we engaged in the following

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

transactions with companies related to members of our Board of Directors, as described below:



	Three Months Ended March 31,
	2018		2017
Sales to related parties	$	73	$	577
Number of related party customers	1		1

Our accounts receivable balance from related party customers with outstanding balances as of March 31, 2018 and December 31, 2017 is as follows:



	March 31,		December 31,
	2018		2017
Accounts receivable from related parties	$	7	$	27
Number of related party customers	1		1


NOTE 19.	SIGNIFICANT CUSTOMER INFORMATION

The following table summarizes sales, and percentages of sales, by customers that individually accounted for 10% or more of our sales for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,
	2018		% of Total Sales		2017		% of Total Sales
Applied Materials, Inc.	$	69,872	35.7	%	$	54,518	36.5	%
LAM Research	39,726		20.3	%	32,016		21.4	%

The following table summarizes the accounts receivable balances, and percentages of the total accounts receivable, for customers that individually accounted for 10% or more of accounts receivable as of March 31, 2018 and December 31, 2017:



	March 31,				December 31,
	2018				2017
Applied Materials, Inc.	$	46,131	39.5	%	$	36,755	42.0	%
LAM Research	15,957		13.7	%	5,421		6.2	%

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 20.	CREDIT FACILITY

The Company is party to a Loan Agreement, as amended (the "Loan Agreement") with Bank of America N.A. ("BA") which provides a revolving line of credit of up to $150.0 million subject to certain funding conditions. The Loan Agreement expires in July 28, 2022. Interest on amounts drawn shall be paid quarterly based upon the LIBOR Daily Floating Rate then in effect, plus between one and one-quarter (1.25%) and one and three-quarters (1.75%) percentage points depending on the Funded Debt to EBITDA ratio. As of March 31, 2018, the interest rate was 3.13%. The Loan Agreement also requires the Company to pay the lender on a quarterly basis an unused commitment fee based on credit availability. The obligations under the Loan Agreement are unsecured until the Funded Debt to EBITDA ratio exceeds 2.0 to 1.0, at which time the Company and certain affiliates’ tangible and intangible personal property will be subject to a first priority, perfected lien and security interest in favor of BA pursuant to a Security Agreement. As of March 31, 2018, the Company is in compliance with all covenants required under the Loan Agreement. At March 31, 2018 our credit availability under the Loan Agreement was $150.0 million. During the three months ended March 31, 2018, we had less than $0.1 million of expenses related to interest and unused line of credit fees.

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

Special Note on Forward-Looking Statements

The following discussion contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions or circumstances will continue. The inclusion of words such as "anticipate," "expect," "estimate," "can," "may," "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.

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, 2017. 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.


•	Industrial power capital equipment 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.

◦

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.

We acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan and Lockport, New York on February 1, 2018. Trek has a 95% ownership interest in its U.S. subsidiary which is also its primary operation. Trek designs, manufactures and sells high-voltage amplifiers, power supplies and generators, high-performance electrostatic measurement instruments and electrostatic discharge (ESD) sensors and monitors to the global marketplace. Trek's standard and custom-OEM products are used in industry and research in aerospace, automotive, electronics, electrostatics, materials, medical, military, nanotechnology, photovoltaic/solar, physics, plasma, semiconductor and test and measurement applications. Trek’s comprehensive portfolio of power supply products strengthen and accelerate Advanced Energy’s growth in high voltage applications.

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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.

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 March 31,
	2018				2017
Sales	$	195,617	100.0	%	$	149,351		100.0	%
Gross profit	103,645		53.0		78,831			52.8
Operating expenses	47,542		24.3		35,563			23.8
Operating income from continuing operations	56,103		28.7		43,268			29.0
Other income (expense), net	26		—		(3,208		)	(2.2	)
Income from continuing operations before income taxes	56,129		28.7		40,060			26.8
Provision for income taxes	9,759		5.0		4,619			3.1
Income from continuing operations, net of income taxes	$	46,370	23.7	%	$	35,441		23.7	%

SALES

The following tables summarize net sales and percentages of net sales, by product line, for the three months ended March 31, 2018 and 2017:



	Three Months Ended March 31,				Change 2018 v. 2017
	2018		2017		Dollar		Percent
Semiconductor capital market	$	136,010	$	104,648	$	31,362	30.0	%
Industrial power capital market	35,199		24,179		11,020		45.6	%
Global support	24,408		20,524		3,884		18.9	%
Total	$	195,617	$	149,351	$	46,266	31.0	%



	Three Months Ended March 31,
	2018		2017
Semiconductor capital market	69.5	%	70.1	%
Industrial power capital market	18.0	%	16.2	%
Global support	12.5	%	13.7	%
Total	100.0	%	100.0	%

Total Sales

Sales increased $46.3 million, or 31.0%, to $195.6 million for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 and increased $16.4 million, or 9.2%, as compared to the three months ended December 31, 2017. The increase in sales was primarily due to demand in the semiconductor market driven by our strength in, and demand for our etch applications, as well as increased sales in the industrial markets we serve. Sales for the three months ended March 31, 2018 includes $7.9 million associated with our recently acquired Trek and Excelsys businesses.

Sales in the semiconductor market increased $31.4 million, or 30.0%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 and increased $12.4 million, or 10.1%, as compared to the three months ended December 31, 2017. Our growth in the semiconductor market has been fueled by our leadership in etch applications,

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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 markets increased $11.0 million, or 45.6%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 and increased $4.6 million, or 15.0%, as compared to the three months ended December 31, 2017. The industrial markets we serve include solar panel, flat panel display, power control modules, data storage, architectural glass, consumer electronics, high voltage and other industrial manufacturing markets. Our customers in these markets are primarily global and regional original equipment manufacturers.

Global service sales increased $3.9 million, or 18.9%, for the three months ended March 31, 2018 as compared to the three months ended March 31, 2017 due to share gains and growth in the installed base. Global service sales decreased $0.6 million, or 2.5%, for the three months ended March 31, 2018 compared to the three months ended December 31, 2017 due to timing and mix of projects during the period.

Backlog

Our backlog was $145.7 million at March 31, 2018 as compared to $131.3 million at December 31, 2017. Backlog remains strong primarily due to demand in the semiconductor and industrial thin film markets.

GROSS PROFIT

For the three months ended March 31, 2018, gross profit increased $24.8 million to $103.6 million as compared to gross profit of $78.8 million for the same period in 2017. Gross profit as a percent of sales remained flat at 53.0% for the three months ended March 31, 2018, from 52.8% for the same period in 2017. Gross profit for the three months ended March 31, 2018 includes $3.7 million from our recently acquired Trek and Excelsys businesses.

OPERATING EXPENSE

Operating expenses increased $12.0 million to $47.5 million, or 24.3% of sales, for the three months ended March 31, 2018 from $35.6 million, or 23.8% of sales, for the same period in 2017.

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



	Three Months Ended March 31,
	2018				2017
Research and development	$	17,637	9.0	%	$	12,503	8.4	%
Selling, general, and administrative	28,648		14.7	%	22,098		14.8	%
Amortization of intangible assets	1,257		0.6	%	962		0.6	%
Total operating expenses	$	47,542	24.3	%	$	35,563	23.8	%

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 $5.1 million to $17.6 million, or 9.0% of sales, for the three months ended March 31, 2018 from $12.5 million, or 8.4% of sales, for the same period in 2017. The increase in research and development expense is due to our investment in new programs to maintain and increase our technological leadership and provide solutions to our customers' evolving needs. Research and development for the three months ended March 31, 2018 includes $0.6 million from our recently acquired Trek and Excelsys businesses.

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 $6.6 million to $28.6 million, or 14.7%, of sales for the three months ended March 31, 2018 from $22.1 million, or 14.8% of sales, for the same period in 2017. The increase in selling, general

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and administrative expense is primarily driven by increased headcount and payroll, and costs associated with business development. Selling, general and administrative expenses for the three months ended March 31, 2018 includes $1.2 million from our recently acquired Trek and Excelsys businesses.

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 less than $0.1 million for the three months ended March 31, 2018, as compared to a loss of $3.2 million for the same period in 2017. The loss in 2017 was primarily the cost of a foreign currency exchange rate forward contract that we entered into for a potential offshore acquisition that we decided not to consummate. See Note 8. Derivative Financial Instruments in Part I, Item 1 "Unaudited Condensed Consolidated Financial Statements" contained herein.

Provision for Income Taxes

We recorded an income tax provision for the three months ended March 31, 2018 of $9.8 million compared to $4.6 million for the three months ended March 31, 2017. The effective tax rate for the three months ended March 31, 2018 is 17.4% compared to 11.5% for the three months ended March 31, 2017.

The effective tax rates differ from the U.S. federal statutory rate of 21% and 35% for the 2018 and 2017 periods, respectively, primarily due to the benefit of the earnings in foreign jurisdictions which are subject to lower tax rates. Our effective tax rate for the three month ended March 31, 2018 was also impacted by the effect of the recently enacted 2017 Tax Cuts and Jobs Act (“Tax Act”), with the benefit from the corporate income tax rate reduction to 21% offset by additional global intangible low-taxed income of foreign subsidiaries tax (“GILTI tax”), and entry into additional foreign taxable jurisdictions, among others.

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.

The Tax Act contains several key tax provisions that affected our financial results for 2017, including a one-time mandatory transition tax on our accumulated foreign earnings and the reduction of the corporate income tax rate from 35% to 21%, effective January 1, 2018, which required a revaluation of our U.S. deferred tax assets. The Tax Act also contains several key tax provisions that affect our financial results for 2018, including reduction of the corporate income tax rate from 35% to 21% and application of the GILTI tax. Additionally, the March 2018 rate includes $1.9 million in tax expense related to our change in estimated U.S. transition tax.

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.

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



	Three Months Ended March 31,
	2018			2017
Sales	$	—		$	—
Cost of sales	112			(828		)
Total operating (income) expense	(61		)	(1,120		)
Operating income from discontinued operations	(51		)	1,948
Other income	124			163
Income from discontinued operations before income taxes	73			2,111
Provision for income taxes	(67		)	17
Income from discontinued operations, net of income taxes	$	140		$	2,094

Operating income from discontinued operations for the three months ended March 31, 2018 and 2017 reflects the recovery of accounts receivable and the effect of changes in our estimated product warranty liability.

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 March 31,
	2018			2017
Gross profit from continuing operations, as reported	$	103,645		$	78,831
Operating expenses from continuing operations, as reported	47,542			35,563
Adjustments:
Stock-based compensation	(4,494		)	(3,398		)
Amortization of intangible assets	(1,257		)	(962		)
Acquisition-related costs	(350		)	—
Facility expansion and relocation costs	(476		)	—
Non-GAAP operating expenses from continuing operations	40,965			31,203
Non-GAAP operating income from continuing operations	$	62,680		$	47,628

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Reconciliation of Non-GAAP measure - operating expenses and operating income from continuing operations, excluding certain items	Three Months Ended March 31,
	2018		2017
Gross profit from continuing operations, as reported	53.0	%	52.8	%
Operating expenses from continuing operations, as reported	24.3		23.8
Adjustments:
Stock-based compensation	(2.3	)	(2.3	)
Amortization of intangible assets	(0.6	)	(0.6	)
Acquisition-related costs	(0.2	)	—
Facility expansion and relocation costs	(0.2	)	—
Non-GAAP operating expenses from continuing operations	21.0		20.9
Non-GAAP operating income from continuing operations	32.0	%	31.9	%



Reconciliation of Non-GAAP measure - income from continuing operations, excluding certain items	Three Months Ended March 31,
	2018			2017
Income from continuing operations, less noncontrolling interest, net of income taxes	$	46,339		$	35,441
Adjustments:
Stock-based compensation	4,494			3,398
Amortization of intangible assets	1,257			962
Loss on foreign exchange hedge	—			3,489
Acquisition-related costs	350			—
Facility expansion and relocation costs	476			—
Tax Cuts and Jobs Act Impact	1,853			—
Tax effect of non-GAAP adjustments	(1,343		)	(1,396		)
Non-GAAP income from continuing operations, net of income taxes	$	53,426		$	41,894
Non-GAAP diluted earnings per share	$1.34			$1.04

Impact of Inflation

In recent years, inflation has not had a significant impact on our operations. However, we continuously monitor operating price increases, particularly in connection with the supply of component parts used in our manufacturing process. To the extent permitted by competition, we pass increased costs on to our customers by increasing sales prices over time. From time to time, we may also reduce prices to customers to decrease sales prices due to reductions in the cost structure of our products from cost improvement initiatives and decreases in component part prices.

Liquidity and Capital Resources

LIQUIDITY

We believe that adequate liquidity and cash generation are important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity are our available cash, investments, cash generated from current operations as well as our credit facility noted below.

At March 31, 2018, we had $417.1 million in cash, cash equivalents, and marketable securities. We believe that our current and available cash levels, available credit facility, as well as our cash flows from future operations, will be adequate to meet anticipated working capital needs, levels of capital expenditures, acquisitions and contractual obligations for the next twelve months. We may, however, seek additional financing from time to time.

In addition to available cash, cash equivalents, and marketable securities, we have an outstanding Loan Agreement (the “Loan Agreement”) with a bank which provides a revolving line of credit of up to $150.0 million subject to certain funding conditions expiring in July 2022. The Loan Agreement provides us with further future flexibility for execution of our strategic

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plans. At March 31, 2018, we had $150.0 million in available funding under the Loan Agreement. For more information on the Loan Agreement, see "Note 20. Credit Facility" as set forth in Part I Item 1 of this Form 10-Q.

In March 2018, we entered into a Stock Repurchase Plan and Agreement to repurchase up to $50.0 million of our common stock through December 31, 2018 subject to certain pricing conditions. In March 2018 we repurchased $12.8 million of shares of our common stock in the open market under the Stock Repurchase Plan and Agreement. A total of 180,942 shares of our common stock was repurchased at an average price of $70.47 per share. Subsequent to March 31, 2018 we repurchased $15.7 million of shares of our common stock in the open market under the Stock Repurchase Plan and Agreement. A total of 254,015 shares of our common stock was repurchased at an average price of $62.01 per share. There were no shares repurchased from related parties. We had $37.2 million and $21.5 million remaining for the authorized repurchase of shares under the Stock Repurchase Plan and Agreement as of March 31, 2018 and April 26th, 2018, respectively.

CASH FLOWS

A summary of our cash provided by and (used in) operating, investing and financing activities is as follows:



	Three Months Ended March 31,
	2018			2017
Net cash provided by operating activities from continuing operations	$	34,885		$	42,659
Net cash used in operating activities from discontinued operations	(1,784		)	(2,453		)
Net cash provided by operating activities	33,101			40,206

Net cash used in investing activities from continuing operations	(9,995		)	(4,880		)
Net cash used in investing activities from discontinued operations	—			—
Net cash used in investing activities	(9,995		)	(4,880		)

Net cash used in financing activities from continuing operations	(16,782		)	(1,688		)
Net cash used in financing activities from discontinued operations	—			—
Net cash used in financing activities	(16,782		)	(1,688		)

EFFECT OF CURRENCY TRANSLATION ON CASH	167			1,133
INCREASE IN CASH AND CASH EQUIVALENTS	6,491			34,771
CASH AND CASH EQUIVALENTS, beginning of period	415,037			289,517
CASH AND CASH EQUIVALENTS, end of period	421,528			324,288
Less cash and cash equivalents from discontinued operations	7,654			6,339
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period	$	413,874		$	317,949

2018 CASH FLOWS COMPARED TO 2017

Net cash provided by operating activities

Net cash provided by operating activities for the three months ended March 31, 2018 was $33.1 million, as compared to $40.2 million for the same period in 2017. The decrease of $7.1 million in net cash flows from operating activities, as compared to the same period in 2017, is due to additional investment in working capital with increases to accounts receivable, inventory, and accounts payable, offset partially by improved earning from operations.

Net cash used in investing activities

Net cash used in investing activities for the three months ended March 31, 2018 was $10.0 million, as compared to $4.9 million for the three months ended March 31, 2017. Included in cash used in investing activities for the three months ended March 31, 2018 was $6.1 million used in the acquisition of Trek.

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Net cash used in financing activities

Net cash used in financing activities for the three months ended March 31, 2018 was $16.8 million, as compared to $1.7 million for the three months ended March 31, 2017. Included in cash used in financing activities for the three months ended March 31, 2018 was $12.8 million for the repurchase of company stock.

Effect of currency translation on cash

During the three months ended March 31, 2018, currency translation had a $0.2 million favorable impact as compared to a $1.1 million favorable impact during the three months ended March 31, 2017. Our foreign operations primarily sell product and incur expenses in the related local currency. Exchange rate fluctuations could require us to increase prices to foreign customers, which could result in lower net sales by us to such customers. Alternatively, if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could be adversely impacted. The functional currencies of our worldwide operations include U.S. dollar ("USD"), Canadian Dollar ("CAD"), Swiss Franc ("CHF"), Chinese Yuan ("CNY"), Euro ("EUR"), Pound Sterling ("GBP"), Indian Rupee ("INR"), Japanese Yen ("JPY"), South Korean Won ("KRW"), and New Taiwan Dollar ("TWD"). Our purchasing and sales activities are primarily denominated in USD, CNY, EUR, and JPY. The change in these key currency rates during the three months ended March 31, 2018 and 2017 are as follows:



		Three Months Ended March 31,
From	To	2018		2017
CAD	USD	(2.7	)%	0.8	%
CHF	USD	2.3	%	1.8	%
CNY	USD	3.6	%	0.8	%
EUR	USD	2.9	%	1.5	%
GBP	USD	3.9	%	1.2	%
INR	USD	(1.8	)%	4.8	%
JPY	USD	6.0	%