Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

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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, 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 October 25, 2018 there were 38,489,055 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	23

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	33

ITEM 4. CONTROLS AND PROCEDURES	34

PART II OTHER INFORMATION	34

ITEM 1. LEGAL PROCEEDINGS	34

ITEM 1A. RISK FACTORS	35

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	46

ITEM 6. EXHIBITS	47

SIGNATURES	48
EX-2.1
EX-10.1
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,
	2018			2017
ASSETS
Current assets:
Cash and cash equivalents	$	338,673		$	407,283
Marketable securities	3,058			3,104
Accounts and other receivable, net of allowances of $2,851 and $1,748 respectively	110,440			87,429
Inventories	110,327			78,450
Income taxes receivable	4,229			1,295
Other current assets	9,777			8,129
Current assets from discontinued operations	8,273			9,535
Total current assets	584,777			595,225
Property and equipment, net	30,174			17,795
Deposits and other assets	5,608			3,051
Goodwill	102,813			53,812
Intangible assets, net	55,071			33,499
Deferred income tax assets	44,112			18,841
Non-current assets from discontinued operations	11,077			11,085
TOTAL ASSETS	$	833,632		$	733,308
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	45,620		$	48,177
Income taxes payable	23,620			5,365
Accrued payroll and employee benefits	21,443			18,412
Other accrued expenses	20,248			19,913
Customer deposits and other	7,770			6,402
Current liabilities from discontinued operations	5,895			7,850
Total current liabilities	124,596			106,119
Deferred income tax liabilities	12,763			4,556
Uncertain tax positions	14,104			17,031
Long term deferred revenue	30,216			33,402
Other long-term liabilities	40,811			36,282
Non-current liabilities from discontinued operations	11,567			15,277
Total liabilities	234,057			212,667
Commitments and contingencies (Note 18)
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; 38,716 and 39,604 issued and outstanding, respectively	39			40
Additional paid-in capital	120,628			184,843
Accumulated other comprehensive (loss) income	(2,155		)	2,533
Retained earnings	480,550			333,225
Advanced Energy stockholders’ equity	599,062			520,641
Noncontrolling interest	513			—
Total stockholders’ equity	599,575			520,641
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	833,632		$	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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017

Sales:
Product	$	144,843		$	152,363		$	485,287		$	424,478
Services	28,239			24,212			79,444			67,320
Total sales	173,082			176,575			564,731			491,798
Cost of sales:
Product	73,019			72,146			233,778			198,754
Services	14,524			12,195			40,534			34,838
Total cost of sales	87,543			84,341			274,312			233,592
Gross profit	85,539			92,234			290,419			258,206
Operating expenses:
Research and development	18,451			14,629			55,283			41,742
Selling, general and administrative	25,386			24,692			78,792			70,580
Amortization of intangible assets	1,437			1,240			3,958			3,176
Restructuring expense	403			—			403			—
Total operating expenses	45,677			40,561			138,436			115,498
Operating income	39,862			51,673			151,983			142,708
Other income (expense), net	401			153			(58		)	(3,138		)
Income from continuing operations, before income taxes	40,263			51,826			151,925			139,570
Provision (benefit) for income taxes	5,106			(31,968		)	23,998			(25,538		)
Income from continuing operations	35,157			83,794			127,927			165,108
Income (loss) from discontinued operations, net of income taxes	(371		)	70			(226		)	2,343
Net income	$	34,786		$	83,864		$	127,701		$	167,451
Income from continuing operations attributable to noncontrolling interest	7			—			82			—
Net income attributable to Advanced Energy Industries, Inc.	$	34,779		$	83,864		$	127,619		$	167,451

Basic weighted-average common shares outstanding	38,970			39,786			39,309			39,787
Diluted weighted-average common shares outstanding	39,195			40,172			39,594			40,207

Earnings per share:
Continuing operations:
Basic earnings per share	$	0.90		$	2.11		$	3.25		$	4.15
Diluted earnings per share	$	0.90		$	2.09		$	3.23		$	4.11
Discontinued operations:
Basic earnings per share	$	(0.01	)	$	—		$	(0.01	)	$	0.06
Diluted earnings per share	$	(0.01	)	$	—		$	(0.01	)	$	0.06
Net income:
Basic earnings per share	$	0.89		$	2.11		$	3.25		$	4.21
Diluted earnings per share	$	0.89		$	2.09		$	3.23		$	4.16

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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Net income	$	34,786		$	83,864		$	127,701		$	167,451
Other comprehensive income:
Foreign currency translation	(735		)	807			(4,679		)	5,333
Unrealized loss on marketable securities	—			(1		)	—			(22		)
Minimum benefit retirement liability	27			(100		)	(9		)	(254		)
Comprehensive income	34,078			84,570			123,013			172,508
Comprehensive income attributable to noncontrolling interest	7			—			82			—
Comprehensive income attributable to Advanced Energy Industries, Inc.	$	34,071		$	84,570		$	122,931		$	172,508

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)



	Nine Months Ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	127,701		$	167,451
Income (loss) from discontinued operations, net of income taxes	(226		)	2,343
Income from continuing operations, net of income taxes	127,927			165,108
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,488			6,792
Stock-based compensation expense	7,461			10,707
Provision for deferred income taxes	—			(26,185		)
Loss on foreign exchange hedge	—			3,489
Net loss on disposal of assets	167			106
Changes in operating assets and liabilities, net of assets acquired:
Accounts and other receivable, net	(6,739		)	4,119
Inventories	(22,132		)	(15,062		)
Other current assets	717			(430		)
Accounts payable	(8,553		)	(5,725		)
Other liabilities and accrued expenses	49			3,763
Income taxes	10,098			(6,375		)
Net cash provided by operating activities from continuing operations	118,483			140,307
Net cash used in operating activities from discontinued operations	(4,550		)	(7,293		)
Net cash provided by operating activities	113,933			133,014
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(93		)	(86		)
Proceeds from sale of marketable securities	6			1,883
Acquisitions, net of cash acquired	(93,801		)	(17,347		)
Purchase of foreign exchange hedge	—			(3,489		)
Purchases of property and equipment	(16,586		)	(5,646		)
Net cash used in investing activities from continuing operations	(110,474		)	(24,685		)
Net cash used in investing activities from discontinued operations	—			—
Net cash used in investing activities	(110,474		)	(24,685		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase and retirement of common stock	(69,021		)	(24,998		)
Net payments related to stock-based award activities	(2,636		)	(1,902		)
Net cash used in financing activities from continuing operations	(71,657		)	(26,900		)
Net cash used in financing activities from discontinued operations	—			—
Net cash used in financing activities	(71,657		)	(26,900		)
EFFECT OF CURRENCY TRANSLATION ON CASH	(722		)	1,138
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	(68,920		)	82,567
CASH AND CASH EQUIVALENTS, beginning of period	415,037			289,517
CASH AND CASH EQUIVALENTS, end of period	346,117			372,084
Less cash and cash equivalents from discontinued operations	7,444			5,512
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period	$	338,673		$	366,572
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	171		$	27
Cash paid for income taxes	14,180			4,599
Cash received for refunds of income taxes	734			1,153
Cash held in banks outside the United States	269,276			271,777

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, with the exception of service related activities which we continue to perform, 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 September 30, 2018, and the results of our operations and cash flows for the three and nine months ended September 30, 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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption. Early adoption is permitted.

Advanced Energy has established a cross-functional implementation team to analyze its current portfolio of lease contracts. We are currently in the process of aggregating lease agreements and completing the individual lease analysis in accordance with ASU 2016-02. The implementation team is also responsible for identifying and implementing changes to existing business processes, controls, and systems in order to support lease accounting and disclosure under the new standard. While Advanced Energy has not yet completed its evaluation we anticipate that the adoption of ASU 2016-02 will have a significant impact on our Balance Sheet values for right of use assets and the related lease liabilities, mainly driven by building and facility leases.

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.

In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718)", Improvements to Nonemployee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. Early adoption is permitted. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. Advanced Energy is currently assessing and has not yet determined the impact ASU 2018-07 may have on its Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)" ("ASU 2018-14"). ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other postretirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020. Early adoption is permitted. Advanced Energy is currently assessing and has not yet determined the impact ASU 2018-14 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 an adjustment to reflect the cumulative-effect of its adoption.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

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 ACQUISITIONS

LumaSense Technologies Holdings, Inc.

In September 2018, Advanced Energy acquired LumaSense Technologies Holdings, Inc. ("LumaSense"), a privately held company with primary operations in Santa Clara, California, Frankfurt, Germany, and Ballerup, Denmark for a purchase price of $94.9 million in cash, net of working capital adjustments.

Electrostatic Technology and Product Line

In May 2018, Advanced Energy acquired the electrostatic technology and product line from Monroe Electronics, a privately held electronics manufacturer in Lyndonville, New York for $3.0 million in cash.

Trek Holding Co., LTD

In February 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan and Lockport, New York for $11.7 million in cash. Trek has a 95% ownership interest in its U.S. subsidiary which is also its primary operation.

The components of the fair value of the total consideration transferred for our acquisitions are as follows:



	Trek			Electrostatic Product Line		LumaSense
Cash paid for acquisition, net of working capital adjustments	$	11,723		$	3,000	$	94,910
Cash acquired	(5,651		)	—		(10,181		)
Total fair value of consideration transferred	$	6,072		$	3,000	$	84,729

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

The following table summarizes estimated fair values of the assets acquired and liabilities assumed from our acquisitions:



	Trek		Electrostatic Product Line		LumaSense
Assets acquired and liabilities assumed, net	$	5,284	$	380	$	12,133
Total amortizable intangible assets	788		1,400		24,000
Total identifiable net assets	6,072		1,780		36,133
Goodwill	—		1,220		48,596
Total fair value of consideration transferred	$	6,072	$	3,000	$	84,729

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



	Trek		Electrostatic Product Line		LumaSense		Amortization Method	Useful Life
Technology	$	671	$	1,200	$	16,000	Straight-line	10
Customer relationships	117		200		8,000		Straight-line	10
Total	$	788	$	1,400	$	24,000

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 for the three and nine months ended September 30, 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.



	September 30, 2018
						Balances without
						adoption of
	As Reported		Adjustments			ASC 606
Accounts and other receivable, net	$	110,440	$	(17,343	)	$	93,097
Inventories	110,327		7,137			117,464
Total current assets	584,777		(10,206		)	574,571
TOTAL ASSETS	833,632		(10,206		)	823,426

Income taxes payable	23,620		(1,249		)	22,371
Total current liabilities	124,596		(1,249		)	123,347
Deferred income tax liabilities	12,763		(1,143		)	11,620
Total liabilities	234,057		(2,392		)	231,665

Retained earnings	480,550		(7,814		)	472,736
Advanced Energy stockholders’ equity	599,062		(7,814		)	591,248
Total stockholders’ equity	599,575		(7,814		)	591,761
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	833,632		(10,206		)	823,426

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)



	Three Months Ended September 30, 2018
						Balances without
						adoption of
	As Reported		Adjustments			ASC 606
Product sales	$	144,843	$	(3,454	)	$	141,389
Total sales	173,082		(3,454		)	169,628
Product cost of sales	73,019		(1,533		)	71,486
Total cost of sales	87,543		(1,533		)	86,010
Gross profit	85,539		(1,921		)	83,618
Operating income	39,862		(1,921		)	37,941
Income from continuing operations, before income taxes	40,263		(1,921		)	38,342
Provision for income taxes	5,106		(442		)	4,664
Income from continuing operations	35,157		(1,479		)	33,678
Net income	34,786		(1,479		)	33,307
Net income attributable to Advanced Energy Industries, Inc.	34,779		(1,479		)	33,300



	Nine Months Ended September 30, 2018
						Balances without
						adoption of
	As Reported		Adjustments			ASC 606
Product sales	$	485,287	$	(9,093	)	$	476,194
Total sales	564,731		(9,093		)	555,638
Product cost of sales	233,778		(3,577		)	230,201
Total cost of sales	274,312		(3,577		)	270,735
Gross profit	290,419		(5,516		)	284,903
Operating income	151,983		(5,516		)	146,467
Income from continuing operations, before income taxes	151,925		(5,516		)	146,409
Provision (benefit) for income taxes	23,998		(1,249		)	22,749
Income from continuing operations	127,927		(4,267		)	123,660
Net income	127,701		(4,267		)	123,434
Net income attributable to Advanced Energy Industries, Inc.	127,619		(4,267		)	123,352



	Nine Months Ended September 30, 2018
							Balances without
							adoption of
	As Reported			Adjustments			ASC 606
Net income	$	127,701		$	(4,267	)	$	123,434
Income from continuing operations, net of income taxes	$	127,927		$	(4,267	)	$	123,660
Changes in operating assets and liabilities, net of assets acquired:
Accounts and other receivable, net	(6,739		)	9,093			2,354
Inventories	(22,132		)	(3,577		)	(25,709		)
Income taxes	10,098			(1,249		)	8,849
Net cash provided by operating activities from continuing operations	118,483			—			118,483

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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 transferred 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 is less than 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 technology 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 warranty and after-market 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 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 is recognized ratably over the underlying terms as we do not have historical information which would allow us to project the estimated service usage pattern at this time. We have deferred revenue related to our extended warranties and service contracts totaling $33.3 million as of September 30, 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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Semiconductor capital market	$	96,360	$	116,468	$	359,661	$	338,136
Industrial technology capital market	48,483		35,895		125,626		86,342
Global support	28,239		24,212		79,444		67,320
Total	$	173,082	$	176,575	$	564,731	$	491,798

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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 September 30,
	2018				2017
Sales to external customers:
United States	$	108,239	62.5	%	$	115,137	65.3	%
Canada	76		—		12		—
North America	108,315		62.5		115,149		65.3

People's Republic of China	13,510		7.8		9,944		5.6
Republic of Korea	10,906		6.3		16,922		9.6
Other Asian countries	13,447		7.8		10,477		5.9
Asia	37,863		21.9		37,343		21.1

Germany	20,765		12.0		15,980		9.0
Ireland	4,158		2.4		3,988		2.3
United Kingdom	1,544		0.9		4,115		2.3
Other European countries	437		0.3		—		—
Europe	26,904		15.6		24,083		13.6
Total	$	173,082	100.0	%	$	176,575	100.0	%



	Nine Months Ended September 30,
	2018				2017
Sales to external customers:
United States	$	361,512	64.2	%	$	334,118	68.0	%
Canada	230		—		45		—
North America	361,742		64.2		334,163		68.0

People's Republic of China	35,729		6.3		26,447		5.4
Republic of Korea	42,545		7.5		42,809		8.7
Other Asian countries	45,392		8.0		31,650		6.4
Asia	123,666		21.8		100,906		20.5

Germany	61,713		10.9		42,662		8.7
Ireland	12,070		2.1		3,988		0.8
United Kingdom	5,103		0.9		10,079		2.0
Other European countries	437		0.1		—		—
Europe	79,323		14.0		56,729		11.5
Total	$	564,731	100.0	%	$	491,798	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 September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Product and service revenue recognized at point in time	$	171,806	$	175,668	$	561,578	$	489,200
Extended warranty and service contracts recognized over time	1,276		907		3,153		2,598
Total	$	173,082	$	176,575	$	564,731	$	491,798

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Sales	$	—		$	—		$	—		$	—
Cost of sales	—			944			(88		)	47
Total operating expense (benefit)	—			(441		)	31			(1,587		)
Operating income (loss) from discontinued operations	—			(503		)	57			1,540
Other income (expense)	(258		)	(86		)	(261		)	291
Income (loss) from discontinued operations before income taxes	(258		)	(589		)	(204		)	1,831
Provision (benefit) for income taxes	113			(659		)	22			(512		)
Income (loss) from discontinued operations, net of income taxes	$	(371	)	$	70		$	(226	)	$	2,343

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



	September 30,		December 31,
	2018		2017
Cash and cash equivalents	$	7,444	$	7,754
Accounts and other receivables, net	415		1,363
Inventories	414		418
Current assets of discontinued operations	$	8,273	$	9,535

Other assets	$	64	$	72
Deferred income tax assets	11,013		11,013
Non-current assets of discontinued operations	$	11,077	$	11,085

Accounts payable and other accrued expenses	$	468	$	545
Accrued warranty	5,427		7,305
Current liabilities of discontinued operations	$	5,895	$	7,850

Accrued warranty	$	11,405	$	15,112
Other liabilities	162		165
Non-current liabilities of discontinued operations	$	11,567	$	15,277

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Income from continuing operations, before income taxes	$	40,263		$	51,826		$	151,925		$	139,570
Provision (benefit) for income taxes	5,106			(31,968		)	23,998			(25,538		)
Effective tax rate	12.7		%	(61.7		)%	15.8		%	(18.3		)%

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% to 21%, effective January 1, 2018, which required a revaluation of our U.S. deferred tax assets and liabilities. 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% for the three and nine months ended September 30, 2018, 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 and nine months ended September 30, 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. Finally, the Company changed its indefinite reinvestment assertion during the third quarter of 2018, but the associated tax expense for this discrete event was offset by the discrete recognition of tax benefits resulting from the lapse of statute of limitations on certain income tax reserves.

Our foreign subsidiaries generate earnings that are not subject to U.S. income taxes so long as they are permanently reinvested in our operations outside of the U.S. Pursuant to Accounting Standard Codification Topic No. 740-30, “Income Taxes - Other Considerations or Special Areas,” undistributed earnings of foreign subsidiaries that are no longer permanently reinvested would become subject to deferred income tax recognition. Prior to the third quarter of 2018, we asserted that the undistributed earnings of all our foreign subsidiaries were permanently reinvested.

In the third quarter of 2018, following a review of our operations, liquidity and funding, tax implications of cash repatriation, and investment opportunities, we determined that the ability to access certain amounts of foreign earnings would provide greater investment returns, treasury controls, and other working capital needs. Accordingly, in the third quarter of 2018, we withdrew the permanent reinvestment assertion on $487.4 million of earnings generated by our operations through December 2017. Resulting from this change in permanent reinvestment assertion, the Company recorded a deferred tax liability of $2.4 million related to withholding and state income taxes.

There is no certainty as to the timing of when such foreign earnings will be distributed to the United States in whole or in part.

We have not provided for U.S. federal or foreign income taxes on $106.1 million of our non-U.S. subsidiaries’ undistributed earnings as of December 31, 2017. The $106.1 million of undistributed foreign earnings continue to be reinvested in our foreign operations, as we have determined that these earnings are necessary to support our planned ongoing investments in our foreign operations, and as a result, these earnings remain indefinitely reinvested in those operations. In making this decision, we considered cash needs for investing in our existing businesses, currency controls, and the tax cost of cash repatriation.

Our effective tax rates differ from the U.S. federal statutory rate of 35% for the three and nine months ended September 30, 2017, respectively, due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates. In addition, after several attempts by the Company to sell its remaining solar businesses, we elected to liquidate our U.S. solar business during the three months ended September 30, 2017 and have accordingly recognized a tax benefit of $40.2 million for a worthless stock tax deduction.

Table of Contents

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 and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Income from continuing operations	$	35,157	$	83,794	$	127,927	$	165,108
Income from continuing operations attributable to noncontrolling interest	7		—		82		—
Income from continuing operations attributable to Advanced Energy Industries, Inc.	$	35,150	$	83,794	$	127,845	$	165,108

Basic weighted-average common shares outstanding	38,970		39,786		39,309		39,787
Assumed exercise of dilutive stock options and restricted stock units	225		386		285		420
Diluted weighted-average common shares outstanding	39,195		40,172		39,594		40,207
Continuing operations:
Basic earnings per share	$	0.90	$	2.11	$	3.25	$	4.15
Diluted earnings per share	$	0.90	$	2.09	$	3.23	$	4.11

The following 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,
	2018	2017	2018	2017
Restricted stock units	1	—	—	1

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 of the share repurchase program to December 2019 from its original maturity of March 2018. In May 2018 our Board of Directors approved a $50 million increase in its authorization to repurchase shares of Company common stock under this same program. As of September 30, 2018, we had $51.0 million remaining for the future repurchase of shares of our common stock.

In order to execute the repurchase of shares of our common stock, the company periodically enters into stock repurchase agreements. During the three and nine months ended September 30, 2018 and 2017 the company has repurchased the following shares of common stock:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Amount paid to repurchase shares	$	30,962	$	24,983	$	69,021	$	24,983
Number of shares repurchased	533		351		1,121		351
Average repurchase price per share	$	58.12	$	71.12	$	61.57	$	71.12

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

There were no shares repurchased from related parties. All shares repurchased were recognized as a reduction to Additional paid-in capital. Repurchased shares were retired and assumed the status of authorized and unissued shares.

Subsequent to September 30, 2018, we repurchased in the open market an additional 227,344 shares of our common stock for $11.1 million at an average price of $48.84 per share.


NOTE 7.	MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUE

Our investments with original maturities of more than three months at the 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 certificates of deposit as follows:



	September 30, 2018				December 31, 2017
	Cost		Fair Value		Cost		Fair Value
Total marketable securities	$	3,054	$	3,058	$	3,103	$	3,104

The maturities of our marketable securities available for sale as of September 30, 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 September 30, 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 September 30, 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 September 30, 2018 and December 31, 2017.



September 30, 2018	Level 1		Level 2		Level 3		Total
Total marketable securities	$	—	$	3,058	$	—	$	3,058

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 and nine months ended September 30, 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 and nine months ended September 30, 2018. During the three and nine months ended September 30, 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 September 30, 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.

Table of Contents

ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

During the three and nine months ended September 30, 2018 and 2017 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,
	2018		2017			2018			2017
Foreign currency loss from foreign currency exchange contracts	$	—	$	(469	)	$	(750	)	$	(1,096	)

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. The hedge expired upon maturity in the first quarter of 2017. The 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:



	September 30,		December 31,
	2018		2017
Amounts billed, net	$	93,097	$	87,429
Unbilled receivables	17,343		—
Total receivables, net	$	110,440	$	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:



	September 30,		December 31,
	2018		2017
Parts and raw materials	$	81,383	$	58,567
Work in process	10,622		7,986
Finished goods	18,322		11,897
Total	$	110,327	$	78,450

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)


NOTE 11.	PROPERTY AND EQUIPMENT

Property and equipment, net is comprised of the following:



	September 30,			December 31,
	2018			2017
Buildings and land	$	1,753		$	1,788
Machinery and equipment	41,891			36,579
Computer and communication equipment	26,542			26,819
Furniture and fixtures	1,751			1,568
Vehicles	280			341
Leasehold improvements	19,579			17,286
Construction in process	1,487			802
	93,283			85,183
Less: Accumulated depreciation	(63,109		)	(67,388		)
Property and equipment, net	$	30,174		$	17,795

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,
	2018		2017		2018		2017
Depreciation expense	$	2,134	$	1,333	$	5,530	$	3,616


NOTE 12.	GOODWILL

The following summarizes the changes in goodwill during the nine months ended September 30, 2018:



	Beginning Balance		Additions		Effect of Changes in Exchange Rates			Ending Balance
September 30, 2018	$	53,812	$	49,816	$	(815	)	$	102,813

NOTE 13.INTANGIBLE ASSETS

Intangible assets consisted of the following as of September 30, 2018 and December 31, 2017:



September 30, 2018	Gross Carrying Amount		Accumulated Amortization			Net Carrying Amount
Customer relationships	$	37,794	$	(12,767	)	$	25,027
Technology	36,111		(7,050		)	29,061
Trademarks and other	2,545		(1,562		)	983
Total	$	76,450	$	(21,379	)	$	55,071



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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

Amortization expense related to intangible assets is as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Amortization expense	$	1,437	$	1,240	$	3,958	$	3,176

Estimated amortization expense related to intangibles is as follows:



Year Ending December 31,
2018 (remaining)	$	2,448
2019	7,374
2020	6,706
2021	6,605
2022	6,344
Thereafter	25,594
Total	$	55,071

NOTE 14.RESTRUCTURING COSTS

In September 2018, we recorded a total pre-tax charge of $0.4 million related to employee termination costs. The majority of this charge is expected to be paid in the fourth quarter of 2018.


NOTE 15.	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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Balances at beginning of period	$	1,981		$	3,933		$	2,312		$	2,329
Warranty liabilities acquired	213			—			305			—
Increases to accruals	436			333			920			2,722
Warranty expenditures	(590		)	(439		)	(1,492		)	(1,236		)
Effect of changes in exchange rates	(2		)	6			(7		)	18
Balances at end of period	$	2,038		$	3,833		$	2,038		$	3,833


NOTE 16.	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. 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 $0.8 million into the HiTek Plan through April 30, 2024, and then $1.8 million from May 1, 2024 through November 30, 2033.

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(in thousands except per share data)

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



	September 30,		December 31,
	2018		2017
Pension liability	$	18,938	$	19,797

The following table sets forth the components of net periodic pension cost for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Interest cost	$	205		$	242		$	637		$	742
Expected return on plan assets	(151		)	(128		)	(470		)	(394		)
Amortization of actuarial gains and losses	64			64			333			197
Net periodic pension cost	$	118		$	178		$	500		$	545


NOTE 17.	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 September 30, 2018, there were 3.2 million shares reserved and 2.6 million shares available for grant under the 2017 Plan.

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 generally 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 and nine months ended September 30, 2018 and 2017 was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018	2017
Stock-based compensation expense	$	1,024	$	3,453