AEIS 10Q Q3 2013 Master
Table Of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
For the quarterly period ended September 30, 2013
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
For the transition period from            to           .

Commission file number: 000-26966
ADVANCED ENERGY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)

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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated filer þ
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

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

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

 



ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
EX-10.1
EX-10.2
EX-31.1
EX-31.2
EX-32.1
EX-32.2


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Table Of Contents

PART I FINANCIAL STATEMENTS
ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ENERGY INDUSTRIES, INC.
Condensed Consolidated Balance Sheets *
(In thousands, except per share amounts)
 
 
September 30,
 
December 31,
 
 
2013
 
2012
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
92,449

 
$
146,564

Marketable securities
 
12,277

 
25,683

Accounts receivable, net of allowances of $4,372 and $4,589, respectively
 
130,311

 
83,914

Inventories, net of reserves of $16,341 and $14,629, respectively
 
123,152

 
81,482

Deferred income tax assets
 
19,465

 
19,477

Income taxes receivable
 
9,249

 
4,315

Other current assets
 
13,908

 
9,075

Total current assets
 
400,811

 
370,510

Property and equipment, net
 
36,348

 
39,523

OTHER ASSETS:
 
 
 
 
Deposits and other
 
7,641

 
7,529

Goodwill
 
148,432

 
60,391

Other intangible assets, net
 
20,494

 
46,209

Deferred income tax assets
 
13,953

 
13,998

Total assets
 
$
627,679

 
$
538,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Accounts payable
 
$
67,563

 
$
41,044

Income taxes payable
 
2,017

 
11,029

Accrued payroll and employee benefits
 
11,713

 
11,675

Accrued warranty expense
 
11,710

 
7,419

Other accrued expenses
 
21,946

 
15,399

Customer deposits
 
3,849

 
2,080

Notes payable to banks
 
11,436

 

Total current liabilities
 
130,234

 
88,646

LONG-TERM LIABILITIES:
 
 
 
 
Deferred income tax liabilities
 
18,095

 
16,832

Uncertain tax positions
 
13,669

 
13,669

Accrued warranty expense
 
6,426

 
7,378

Other long-term liabilities
 
44,414

 
24,004

Total liabilities
 
212,838

 
150,529

 
 


 


STOCKHOLDERS’ EQUITY:
 
 
 
 
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding
 

 

Common stock, $0.001 par value, 70,000 shares authorized; 39,959 and 37,991
 
 

 
 

issued and outstanding, respectively
 
40

 
38

Additional paid-in capital
 
240,157

 
212,520

Retained earnings
 
143,079

 
145,348

Accumulated other comprehensive income
 
31,565

 
29,725

Total stockholders’ equity
 
414,841

 
387,631

Total liabilities and stockholders’ equity
 
$
627,679

 
$
538,160

*    Amounts as of September 30, 2013 are unaudited. Amounts as of December 31, 2012 are derived from the December 31, 2012 audited Consolidated Financial Statements.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

3

Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.
Condensed Consolidated Statements of Operations (Unaudited)
(In thousands, except per share amounts)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
SALES
 
$
142,899

 
$
117,515

 
$
394,424

 
$
338,960

COST OF SALES
 
86,688

 
71,788

 
243,115

 
209,760

GROSS PROFIT
 
56,211

 
45,727

 
151,309

 
129,200

OPERATING EXPENSES:
 
 

 
 

 
 

 
 

Research and development
 
15,105

 
14,564

 
45,098

 
44,181

Selling, general and administrative
 
22,138

 
16,806

 
62,702

 
53,571

Amortization of intangible assets
 
626

 
1,416

 
4,814

 
4,139

Restructuring charges and asset impairment
 
19,884

 
3,003

 
44,090

 
5,434

Total operating expenses
 
57,753

 
35,789

 
156,704

 
107,325

OPERATING INCOME (LOSS)
 
(1,542
)
 
9,938

 
(5,395
)
 
21,875

OTHER INCOME (EXPENSE), NET
 
164

 
65

 
(369
)
 
2,251

Income (loss) from continuing operations before income taxes
 
(1,378
)
 
10,003

 
(5,764
)
 
24,126

Provision (benefit) for income taxes
 
(2,065
)
 
4,268

 
(3,495
)
 
8,824

INCOME (LOSS) FROM CONTINUING OPERATIONS, NET OF INCOME TAXES
 
687

 
5,735

 
(2,269
)
 
15,302

Income from discontinued operations, net of income taxes
 

 

 

 
430

NET INCOME (LOSS)
 
$
687

 
$
5,735

 
$
(2,269
)
 
$
15,732

 
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
39,878

 
37,807

 
39,365

 
39,148

Diluted weighted-average common shares outstanding
 
40,577

 
38,330

 
40,150

 
39,720

 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 

 
 

 
 
 
 
CONTINUING OPERATIONS:
 
 

 
 

 
 
 
 
BASIC EARNINGS (LOSS) PER SHARE
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.39

DILUTED EARNINGS (LOSS) PER SHARE
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.39

DISCONTINUED OPERATIONS
 
 

 
 

 
 
 
 
BASIC EARNINGS PER SHARE
 
$
0.00

 
$
0.00

 
$
0.00

 
$
0.01

DILUTED EARNINGS PER SHARE
 
$
0.00

 
$
0.00

 
$
0.00

 
$
0.01

NET INCOME:
 
 

 
 

 
 
 
 

BASIC EARNINGS (LOSS) PER SHARE
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.40

DILUTED EARNINGS (LOSS) PER SHARE
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.40


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

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Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)


 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Net income (loss)
 
$
687

 
$
5,735

 
$
(2,269
)
 
$
15,732

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
5,376

 
1,095

 
1,851

 
226

Unrealized gains (losses) on marketable securities
 
(5
)
 
2

 
(12
)
 
16

Comprehensive income (loss)
 
$
6,058

 
$
6,832

 
$
(430
)
 
$
15,974


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


5

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ADVANCED ENERGY INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

 
 
Nine Months Ended September 30,
 
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income (loss)
 
$
(2,269
)
 
$
15,732

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 

 
 

Depreciation and amortization
 
14,487

 
13,109

Stock-based compensation expense
 
9,310

 
10,072

Benefit for deferred income taxes
 
(13
)
 
(54
)
Restructuring charges and asset impairment
 
44,090

 
5,434

Net gain (loss) on sale or disposal of assets
 
421

 
(557
)
Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(35,711
)
 
31,130

Inventories
 
(23,453
)
 
(6,995
)
Other current assets
 
(727
)
 
4,086

Accounts payable
 
8,356

 
7,673

Other current liabilities and accrued expenses
 
(5,665
)
 
4,344

Income taxes
 
(13,472
)
 
8,276

Net cash provided by (used in) operating activities
 
(4,646
)
 
92,250

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of marketable securities
 
(16,137
)
 
(20,522
)
Proceeds from sale of marketable securities
 
29,493

 
23,476

Proceeds from the sale of assets
 

 
2,200

Purchases of property and equipment
 
(6,589
)
 
(6,676
)
Acquisitions, net of cash acquired
 
(75,374
)
 

Net cash used in investing activities
 
(68,607
)
 
(1,522
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Borrowings from lines of credit
 
(916
)
 

Purchase and retirement of common stock
 

 
(57,117
)
Proceeds from exercise of stock options
 
20,026

 
2,669

Excess tax from stock-based compensation deduction
 
(604
)
 
(634
)
Other financing activities
 
(69
)
 
(71
)
Net cash provided by (used in) financing activities
 
18,437

 
(55,153
)
EFFECT OF CURRENCY TRANSLATION ON CASH
 
701

 
(2,180
)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
 
(54,115
)
 
33,395

CASH AND CASH EQUIVALENTS, beginning of period
 
146,564

 
117,639

CASH AND CASH EQUIVALENTS, end of period
 
$
92,449

 
$
151,034

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid for interest
 
$
70

 
$
14

Cash paid for income taxes
 
14,888

 
3,343

Cash received for refunds of income taxes
 
2,945

 
7,345

Cash held in banks outside the United States of America
 
29,068

 
37,543

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

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Table Of Contents

ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.
BASIS OF PRESENTATION
Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries ("we," "us," "our," "Advanced Energy," or the "Company") design, manufacture, sell, and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin film deposition for various products, such as semiconductor devices, flat panel displays, thin film renewables, and architectural glass. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these same markets. Our solar inverter products support renewable power generation solutions for primarily commercial, and utility-scale solar projects and installations. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, and refurbishments to companies using our products. We also offer a wide variety of operations and maintenance service plans that can be tailored for individual photovoltaic ("PV") sites of all sizes.
We are organized into two strategic business units ("SBU") based on the products and services provided.
Thin Films Processing Power Conversion and Thermal Instrumentation ("Thin Films") SBU offers products for direct current ("DC"), pulsed DC mid frequency, and radio frequency ("RF") power supplies, matching networks and RF instrumentation as well as thermal instrumentation products.
Solar Energy SBU offers both a transformer-based or transformerless advanced grid-tied PV inverter solution for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power.
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of the Company at September 30, 2013, and the results of our operations and cash flows for the three and nine months ended September 30, 2013 and 2012.
The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") have been condensed or omitted pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and other financial information filed with the SEC.
ESTIMATES AND ASSUMPTIONS
The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory, warranty reserves, acquisitions, asset valuations, goodwill, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.
REVENUE RECOGNITION
Our accounting policies are described in our audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2012.
NEW ACCOUNTING STANDARDS
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance,

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

whether adopted or to be adopted in the future, is not expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.
NOTE 2.
BUSINESS ACQUISITION & DISPOSITION
Acquisition
Solvix SA
On November 8, 2012, we acquired Solvix SA ("Solvix"), a privately-held Switzerland based company, pursuant to a stock purchase agreement dated November 8, 2012 between AEI International Holdings, CV ("AEI CV"), a wholly-owned subsidiary of Advanced Energy incorporated in the Netherlands, and CPA Group SA ("CPA Group"), a privately held Switzerland company. Pursuant to the stock purchase agreement, AEI CV purchased 100% of the outstanding stock of Solvix.
We acquired all of the outstanding Solvix common stock for total consideration with a fair value of approximately $21.2 million consisting of cash payments totaling $16.0 million, net of cash acquired, and contingent consideration payable to the former shareholders of Solvix. The additional cash consideration of up to $7.9 million is payable to CPA Group if certain milestone targets are met during the year ending December 31, 2013 and certain financial targets are met in the three years ended December 31, 2015. The estimated fair value of this contingent consideration is approximately $5.3 million as of November 8, 2012, of which the remaining balance of $0.9 million is included in Other accrued expenses and $2.3 million is included in Other long-term liabilities on the Condensed Consolidated Balance Sheet.
Solvix is a manufacturer of power supplies for the surface treatment and thin films industry. Solvix manufactures products that bring plasma-based sputtering and cathodic arc deposition applications to Advanced Energy's existing product portfolio and is included in our Thin Film business unit. Solvix has approximately 10 employees and had revenues of $5.2 million in its fiscal year ended September 30, 2012.
During 2013, we initiated the move of the Solvix product line from a contract manufacturer in Switzerland to our Shenzhen facility. The move will be completed by the end of the fourth quarter of 2013.
The components of the fair value of the total consideration transferred for the Solvix acquisition are as follows (in thousands):
Cash paid to owners
$
16,673

Contingent consideration
5,253

Cash acquired
(680
)
Total fair value of consideration transferred
$
21,246


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Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of November 8, 2012 (in thousands):
Cash
$
680

Accounts receivable
1,074

Inventories
57

Other receivables
32

Other current assets
46

Property and equipment
43

Accounts payable
(390
)
Accrued payroll and employee benefits
(186
)
Other accrued expenses
(159
)
Customer deposits
(38
)
Deferred tax liabilities
(1,628
)
 
(469
)
Amortizable intangible assets:
 
Trademarks
106

Technology
2,723

Customer relationships
5,398

Total amortizable intangible assets
8,227

Total identifiable net assets
7,758

Goodwill
13,488

Total fair value of consideration transferred
$
21,246

A summary of the intangible assets acquired, amortization method and estimated useful lives as of November 8, 2012 follows (in thousands, except useful life):
 
 
Amount
 
Amortization Method
 
Useful Life
Trademarks
 
$
106

 
Straight-line
 
3
Technology
 
2,723

 
Straight-line
 
9
Customer relationships - other
 
755

 
Straight-line
 
7
Customer relationships - design
 
4,643

 
Straight-line
 
12
 
 
$
8,227

 
 
 
 
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date.
The cost of the acquisition may increase or decrease based on the final amount payable to the former owner of Solvix related to the financial targets to be met during the three years ending December 31, 2015. Advanced Energy is in the process of finalizing valuations of other intangibles, estimates of the fair value of liabilities associated with the acquisition and deferred taxes and expects to complete the acquisition accounting and required disclosures prior to December 31, 2013.
Refusol Holding
On April 8, 2013, we acquired all the outstanding shares of Refusol Holding GmbH pursuant to a Sale and Purchase Agreement (the "Agreement ") between AEI Holdings, GmbH (formerly Blitz S13-103, GmbH) ("AEI Holdings"), an indirect wholly-owned subsidiary of Advanced Energy Industries, Inc. and Jolaos Verwaltungs GmbH ("Jolaos") and Prettl Beteilgungs Holding GmbH. Refusol Holding GmbH ("Refusol Holding") owns all of the shares of Refusol GmbH and its subsidiaries (collectively and together with Refusol Holding, "Refusol"). Refusol develops, manufactures, distributes and services photovoltaic inverters.
All of the outstanding shares of Refusol Holding were acquired for total consideration of approximately $87.2 million, consisting of a cash payment of $75.4 million, net of cash acquired and a working capital reduction and assumption of debt totaling $11.9 million. The agreement calls for additional cash consideration if certain stretch financial targets are met by our Solar Energy

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

business unit and Refusol, on a combined basis, at the end of the twelve (12) calendar months following April 1, 2013. The contingent consideration has no estimated fair value as of April 8, 2013 based on management's estimates of operating income for the Solar Energy business unit for the specified period. The preliminary base price is subject to a post-closing adjustment based on confirmation of the financial statements of Refusol effective as of the closing date.
Refusol develops three-phase string inverters for commercial customers across Europe and Asia. Its three-phase string inverter offerings range in size from 8kW to 24kW broadening the range of solar inverter products offered by Advanced Energy. Refusol is included in our Solar Energy business unit. Refusol had revenues of $170.5 million in its fiscal year ended December 31, 2012.
The components of the fair value of the total consideration transferred for the Refusol acquisition are as follows (in thousands):
Cash paid to owners
$
79,550

Debt assumed
11,873

Working capital adjustment
(2,340
)
Cash acquired
(1,836
)
Total fair value of consideration transferred
$
87,247

The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of April 8, 2013 (in thousands):
Accounts receivable
10,705

Inventories
17,477

Other current assets
7,028

Property and equipment
5,165

Other long-term assets
130

Current liabilities
(21,257
)
Long-term liabilities
(23,664
)
Deferred tax liabilities
(2,985
)
 
(7,401
)
Amortizable intangible assets:
 
Trademarks
1,300

Technology
5,700

Customer relationships
3,500

Total amortizable intangible assets
10,500

Total identifiable net assets
3,099

Goodwill
84,148

Total fair value of consideration transferred
$
87,247

A summary of the intangible assets acquired, amortization method and estimated useful lives as of April 8, 2013 follows (in thousands, except useful life):
 
 
Amount
 
Amortization Method
 
Useful Life
Trademarks
 
$
1,300

 
Straight-line
 
1.5
Technology
 
5,700

 
Straight-line
 
5
Customer relationships
 
3,500

 
Straight-line
 
5
 
 
$
10,500

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

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The cost of the acquisition may increase or decrease based on the final amount payable to the former owner of Refusol related to the financial targets to be met during the twelve month period subsequent to April 1, 2013 and a post-closing working capital adjustment based on confirmation of the financial statements of Refusol effective as of the closing date. Advanced Energy is in the process of finalizing valuations of accounts receivable, inventory, other intangibles, property, plant and equipment, estimates of the fair value of liabilities associated with the acquisition and deferred taxes.
The results of Refusol operations are included in our Condensed Consolidated Statements of Operations beginning April 8, 2013. For the period ended September 30, 2013, net sales of approximately $43.8 million and operating loss of $3.1 million attributable to Refusol were included in the Condensed Consolidated Statements of Operations. Refusol's results of operations included restructuring charges of $3.7 million and amortization of purchased intangible assets of $1.4 million.
Pro Forma Results for Refusol Acquisition
The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and Refusol as if the acquisition had occurred as of January 1, 2012. The pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at January 1, 2012. The unaudited pro forma financial information for the three and nine months ended September 30, 2012 includes the historical results of Advanced Energy for the three and nine months ended September 30, 2012 and the historical results of Refusol for the same periods.
The unaudited pro forma results for all periods presented include amortization charges for acquired intangible assets and related tax effects. These pro forma results consider the sale of the gas flow control business and related product lines as discontinued operations. The unaudited pro forma results follow (in thousands, except per share data):
 
(Unaudited)
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Sales
$
142,899

 
$
175,874

 
$
414,507

 
$
295,015

Net income (loss)
687

 
5,679

 
(6,975
)
 
9,433

Earnings (loss) per share:
 
 
 
 
 
 
 
Basic
$0.02
 
$
0.15

 
$
(0.18
)
 
$
0.24

Diluted
$0.02
 
$
0.14

 
$
(0.17
)
 
$
0.24

Disposition
On October 15, 2010, we completed the sale of our gas flow control business, which included the Aera® mass flow control and related product lines to Hitachi Metals, Ltd. ("Hitachi"), for approximately $43.3 million. Assets and liabilities sold included, without limitation, inventories, real property in Hachioji, Japan, equipment, certain contracts, intellectual property rights related to the gas flow control business and certain warranty liability obligations.
In connection with the closing of this asset disposition, we entered into a Master Services Agreement and a Supplemental Transition Services Agreement pursuant to which we provided certain transition services until October 2011 and we became an authorized service provider for Hitachi in all countries other than Japan. In March 2012, we entered into an agreement to sell certain fixed assets to Hitachi and cease providing contract manufacturing services. As of May 31, 2012, we ceased providing contract manufacturing services to Hitachi and completed the sale of certain fixed assets related to that manufacturing. The sale of these assets resulted in a $1.9 million gain, which is recorded in Other income (expense), net in our Condensed Consolidated Statements of Operations. As of June 30, 2012, all manufacturing activities and relationships with Hitachi related to the previously owned gas flow control business have ended. We do not anticipate any additional activity with Hitachi in respect of these assets that would materially impact our financial statements in the future.
In accordance with authoritative accounting guidance for reporting discontinued operations, for the periods reported in this Form 10-Q, the results of continuing operations were reduced by the revenue and costs associated with the gas flow control business, which are included in the Income from discontinued operations, net of income taxes, in our Condensed Consolidated Statements of Operations.
    

11

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Operating results of discontinued operations are as follows (in thousands):
 
 
Nine Months Ended September 30,

 
2012
Sales
 
$
8,959

Cost of sales
 
9,189

Gross profit (loss)
 
(230
)
Operating expenses:
 
 
  Research and development
 

  Selling, general, and administrative
 
88

    Total operating expenses
 
88

Operating income (loss) from discontinued operations
 
(318
)
  Other income
 
881

    Income from discontinued operations before income taxes
 
563

Provision for income taxes
 
133

Income from discontinued operations, net of income taxes
 
$
430

NOTE 3.
INCOME TAXES
The following table sets out the tax expense and the effective tax rate for our income from continuing operations (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Income (loss) from continuing operations before income taxes
 
$
(1,378
)
 
$
10,003

 
$
(5,764
)
 
$
24,126

Provision (benefit) for income taxes
 
(2,065
)
 
4,268

 
(3,495
)
 
8,824

Effective tax rate
 
149.9
%
 
42.7
%
 
60.6
%
 
36.6
%
The effective tax rates for the three and nine months ended September 30, 2013 differ from the federal statutory rate of 35% primarily due to the effect of changes in foreign earnings coupled with the impact of the restructuring charges in the period. The effective tax rate is also impacted by discrete items recorded in the period.
For the three months ended September 30, 2013, the company recognized $4.9 million in net discrete tax benefits related to unrecognized tax benefits including the expiration of the statutes of limitations for multiple tax years. As of September 30, 2013, the total amount of gross unrecognized tax benefits was $4.7 million, all of which, if recognized, would impact the effective tax rate.
Our policy is to classify accrued interest and penalties related to unrecognized tax benefits in our income tax provision. For the three and nine months ended September 30, 2013 and 2012, the amount of interest and penalties accrued related to our unrecognized tax benefits was not significant.
NOTE 4.
EARNINGS PER SHARE FOR CONTINUING OPERATIONS
Basic earnings per share ("EPS") is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator is increased to exclude charges that would not have been incurred, and the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if securities containing potentially dilutive common shares (e.g., stock options and restricted stock units) had been converted to common shares, and if such assumed conversion is dilutive.

12

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted EPS (in thousands, except per share data):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Income (loss) from continuing operations, net of income taxes
 
$
687

 
$
5,735

 
$
(2,269
)
 
$
15,302

 
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
39,878

 
37,807

 
39,365

 
39,148

Assumed exercise of dilutive stock options and restricted stock units
 
699

 
523

 
785

 
572

Diluted weighted-average common shares outstanding
 
40,577

 
38,330

 
40,150

 
39,720

Income from continuing operations:
 
 

 
 

 
 

 
 

Basic earnings (loss) per share
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.39

Diluted earnings (loss) per share
 
$
0.02

 
$
0.15

 
$
(0.06
)
 
$
0.39

The following stock options were excluded in the computation of diluted earnings per share because they were anti-dilutive:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Stock options
382

 
4,042

 
609

 
5,118

Share Repurchases
In October 2012, our Board of Directors authorized a program to repurchase up to $25.0 million of our stock over a twelve-month period. Under this program, during the three and nine months ended September 30, 2013, we have not yet repurchased any shares.
NOTE 5.
MARKETABLE SECURITIES
Our investments with original maturities of more than three months at time of purchase are considered marketable securities available for sale.
The composition of our marketable securities is as follows (in thousands):
 
 
September 30,
 
December 31,
 
 
2013
 
2012
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Commercial paper
 
$

 
$

 
$
749

 
$
749

Certificates of deposit
 
12,277

 
12,277

 
12,498

 
12,498

Corporate bonds/notes
 

 

 
11,274

 
11,253

Municipal bonds/notes
 

 

 
285

 
285

Agency bonds/notes
 

 

 
900

 
898

Total marketable securities
 
$
12,277

 
$
12,277

 
$
25,706

 
$
25,683

The maturities of our marketable securities available for sale as of September 30, 2013 are as follows:
 
 
Earliest
 
 
 
Latest
Certificates of deposit
 
10/8/2013

to

8/17/2015
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. Our current investments in marketable securities are expected to be liquidated during the next twelve months.

13

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

As of September 30, 2013, we do not believe any of the underlying issuers of our marketable securities are presently at risk of default.
NOTE 6.
DERIVATIVE FINANCIAL INSTRUMENTS
We are impacted by changes in foreign currency exchange rates. We manage these risks through the use of derivative financial instruments, primarily forward contracts. During the three and nine months ended September 30, 2013 and 2012, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they do offset the fluctuations of our intercompany debt due to foreign exchange rate changes. These forward contracts are typically for one month periods. At September 30, 2013 and December 31, 2012 we had outstanding Euro, Swiss Franc, and Canadian Dollar forward contracts. At September 30, 2013, we also had outstanding Japanese Yen forward contracts.
The notional amount of foreign currency exchange contracts at September 30, 2013 and 2012 was $36.0 million and $31.2 million, respectively, and the fair value of these contracts was not significant at September 30, 2013 and 2012. During the three months ended September 30, 2013 and 2012, we recognized losses of $1.3 million and $0.9 million, respectively, on our foreign currency exchange contracts. During the nine months ended September 30, 2013 and 2012, we recognized losses of $0.6 million and $0.3 million, respectively. These losses were offset by corresponding gains on the related intercompany debt and both are included as a component of Other income (expense), net, in our Condensed Consolidated Statements of Operations.
NOTE 7.
ASSETS MEASURED AT FAIR VALUE
The following tables present information about our financial assets measured at fair value, on a recurring basis, as of September 30, 2013, and December 31, 2012. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of September 30, 2013, and December 31, 2012.
September 30, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Certificates of deposit
 
$

 
$
12,277

 
$

 
$
12,277

Total marketable securities
 
$

 
$
12,277

 
$

 
$
12,277

 
 
 
December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Commercial paper
 
$

 
$
749

 
$

 
$
749

Certificates of deposit
 

 
12,498

 

 
12,498

Corporate bonds/notes
 

 
11,253

 

 
11,253

Municipal bonds/notes
 

 
285

 

 
285

Agency bonds/notes
 
898

 

 

 
898

Total marketable securities
 
$
898

 
$
24,785

 
$

 
$
25,683

There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three or nine months ended September 30, 2013.
NOTE 8.
INVENTORIES
Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories are as follows (in thousands):
 
 
September 30,
 
December 31,
 
 
2013
 
2012
Parts and raw materials
 
$
85,789

 
$
59,484

Work in process
 
6,017

 
3,728

Finished goods
 
31,346

 
18,270

Inventories, net of reserves
 
$
123,152

 
$
81,482


14

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 9.
PROPERTY AND EQUIPMENT
Details of property and equipment are as follows (in thousands):
 
 
September 30,
 
December 31,
 
 
2013
 
2012
Buildings and land
 
$
1,776

 
$
1,794

Machinery and equipment
 
42,681

 
40,993

Computer and communication equipment
 
24,169

 
22,895

Furniture and fixtures
 
4,370

 
1,845

Vehicles
 
370

 
359

Leasehold improvements
 
23,472

 
27,976

Construction in process
 
4,719

 
3,362

 
 
101,557

 
99,224

Less: Accumulated depreciation
 
(65,209
)
 
(59,701
)
Property and equipment, net
 
$
36,348

 
$
39,523

Depreciation expense recorded in continuing operations is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Depreciation expense
 
$
3,269

 
$
3,075

 
$
9,673

 
$
8,970

NOTE 10.
GOODWILL
The following summarizes the changes in goodwill during the nine months ended September 30, 2013 (in thousands):
Gross carrying amount, beginning of period
 
$
60,391

Additions
 
84,148

Translation adjustments
 
3,893

Gross carrying amount, end of period
 
$
148,432

NOTE 11.
INTANGIBLE ASSETS
Other intangible assets consisted of the following as of September 30, 2013 (in thousands, except weighted-average useful life):
 
 
Gross Carrying Amount
 
Effect of Changes in Exchange Rates
 
Impairment
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted-Average Useful Life in Years
Amortizable intangibles:
 
 
 
 
 
 
 
 
 
 
 
 
Technology-based
 
$
50,368

 
$
323

 
$
(26,167
)
 
$
(14,006
)
 
$
10,518

 
4
Trademarks and other
 
18,515

 
386

 
(5,705
)
 
(3,220
)
 
9,976

 
7
Total amortizable intangibles
 
$
68,883

 
$
709

 
$
(31,872
)
 
$
(17,226
)
 
$
20,494

 
 
    

15

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other intangible assets consisted of the following as of December 31, 2012 (in thousands, except weighted-average useful life):
 
 
Gross Carrying Amount
 
Effect of Changes in Exchange Rates
 
Accumulated Amortization
 
Net Carrying Amount
 
Weighted-Average Useful Life in Years
Amortizable intangibles:
 
 
 
 
 
 
 
 
 
 
Technology-based
 
$
44,668

 
$
83

 
$
(10,775
)
 
$
33,976

 
7
Trademarks and other
 
13,703

 
167

 
(1,637
)
 
12,233

 
9
Total amortizable intangibles
 
$
58,371

 
$
250

 
$
(12,412
)
 
$
46,209

 
 
Amortization expense relating to other intangible assets included in our income (loss) from continuing operations is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Amortization expense
 
$
626

 
$
1,416

 
$
4,814

 
$
4,139

Amortization expense related to intangibles for each of the five years 2013 through 2017 and thereafter is as follows (in thousands):
Year Ending December 31,
 
 
2013 (remaining)
 
$
1,322

2014
 
5,062

2015
 
3,979

2016
 
2,744

2017
 
2,744

Thereafter
 
4,643

 
 
$
20,494

NOTE 12.
OTHER ACCRUED EXPENSES
Other accrued expenses consisted of the following (in thousands):
 
 
September 30,
 
December 31,
 
 
2013
 
2012
Other accrued expenses:
 
 
 
 
Current deferred tax liability
 
$
4,139

 
$
4,137

Accrued restructuring costs
 
3,445

 
1,853

Current contingent consideration
 
851

 
2,773

Accrued sales and use tax
 
3,597

 
1,010

Other*
 
9,914

 
5,626

Total Other accrued expenses
 
$
21,946

 
$
15,399

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

16

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 13.
RESTRUCTURING COSTS
In April 2013, we committed to a restructuring plan to take advantage of additional cost saving opportunities in connection with our acquisition of Refusol. The plan called for consolidating certain facilities, further centralizing our manufacturing and rationalizing certain products to most effectively meet customer needs. Collectively, these steps will enable us to more efficiently use our resources to achieve strategic goals.
As a part of the product rationalization initiated under the restructuring plan, we determined that the intangible assets associated with certain technology should be tested for recoverability. To test the intangible assets for recoverability, we compared the carrying value of the assets with their fair value which resulted in an impairment of $36.2 million which is recorded in restructuring charges and asset impairment in the Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2013.

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

The following table summarizes the components of our restructuring costs incurred under the 2013 plan (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
Cumulative costs through
 
 
September 30, 2013
 
September 30, 2013
 
September 30, 2013
Severance and related costs
 
$
1,590

 
$
6,010

 
$
6,010

Property and equipment and intangible asset impairments
 
18,475

 
36,219

 
36,219

Facility closure costs
 
(181
)
 
1,861

 
1,861

Total restructuring charges
 
$
19,884

 
$
44,090

 
$
44,090

The following table summarizes our restructuring liabilities under the 2013 plan (in thousands):
 
 
Balances at December 31, 2012
 
Costs incurred and charged to expense
 
Cost paid or otherwise settled
 
Effect of change in exchange rates
 
Balances at September 30, 2013
Severance and related costs
 
$

 
$
6,011

 
$
(3,417
)
 
$
(100
)
 
$
2,494

Property and equipment and intangible asset impairments
 

 
36,219

 
(36,219
)
 

 

Facility closure costs
 

 
1,860

 
(1,518
)
 
19

 
361

Total restructuring liabilities
 
$

 
$
44,090

 
$
(41,154
)
 
$
(81
)
 
$
2,855

    

17

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

In September 2011, we approved and committed to several initiatives to realign our manufacturing and research and development activities in order to foster growth and enhance profitability. These initiatives are designed to align research and development activities with the location of our customers and reduce production costs. Under this plan, we reduced our global headcount, consolidated our facilities by terminating or exiting several leases, and recorded impairments for assets no longer in use due to the restructuring of our business. All activities under this restructuring plan were completed prior to December 31, 2012. The following table summarizes our restructuring liabilities under this plan (in thousands):
 
 
Balances at December 31, 2012
 
Costs incurred and charged to expense
 
Cost paid or otherwise settled
 
Effect of change in exchange rates
 
Balances at September 30, 2013
Severance and related costs
 
$
1,345

 
$

 
$
(1,137
)
 
$

 
$
208

Facility closure costs
 
508

 

 
(126
)
 

 
382

Total restructuring liabilities
 
$
1,853

 
$

 
$
(1,263
)
 
$

 
$
590


18

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 14.
WARRANTIES
Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 18 months to 24 months following installation for Thin Films products and 5 years to 10 years following installation for Solar Energy products. Our provision for the estimated cost of warranties is recorded when revenue is recognized. The warranty provision is based on historical experience by product, configuration and geographic region.
We establish accruals for warranty issues that are probable to result in future costs. Changes in product warranty accruals are as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Balances at beginning of period
 
$
20,419

 
$
14,057

 
$
14,797

 
$
14,719

Warranty liabilities acquired
 

 

 
10,678

 

Increases to accruals related to sales during the period
 
2,404

 
2,650

 
8,108

 
6,350

Warranty expenditures
 
(4,687
)
 
(1,832
)
 
(15,447
)
 
(6,194
)
Balances at end of period
 
$
18,136

 
$
14,875

 
$
18,136

 
$
14,875

We also offer our Solar Energy customers the option to purchase additional warranty coverage up to 20 years after the base warranty period expires. Deferred revenue related to such extended warranty contracts was $24.9 million as of September 30, 2013 and is all classified in Other long-term liabilities in the Condensed Consolidated Balance Sheet. As of December 31, 2012, deferred revenue related to extended warranty contracts was $20.5 million, of which $0.4 million is classified in Customer deposits and $20.1 million is classified in Other long-term liabilities.
NOTE 15.
STOCK-BASED COMPENSATION
We recognize stock-based compensation expense based on the fair value of the awards issued. Stock-based compensation for the three and nine months ended September 30, 2013 and 2012 is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Stock-based compensation expense
 
$
4,106

 
$
2,835

 
$
9,310

 
$
10,072

Stock Options
Stock option awards, other than awards under our 2012-2014 Long Term Incentive Plan ("LTI Plan"), are generally granted with an exercise price equal to the market price of our common stock at the date of grant, a four-year vesting schedule, and a term of 10 years.
Under the LTI Plan, we made grants of performance based options and awards during the first quarter of 2012, which will vest annually over a three-year period based on the Company's achievement of return on net assets targets established by our Board of Directors at the beginning of each year. These awards are granted with an exercise price equal to the market price of our common stock at the date of grant and have a term of 10 years. The fair value of each grant was estimated on the date of grant using the Black-Scholes-Merton option pricing model utilizing an expected volatility of 61.5%, a risk-free rate of 1.2%, a dividend yield of zero, and an expected term of 5.6 years. The weighted-average grant date fair value of the options is $6.19 per share. The weighted average grant date fair value of the awards is $11.03 per share.
In the second quarter of 2013, we granted additional options and awards under the LTI plan to our chief executive officer who was not previously a participant in the plan. The fair value of these shares was estimated using the Black-Scholes-Merton option pricing model utilizing an expected volatility of 68.9%, a risk free rate of 0.74%, a dividend yield of zero, and an expected term of 5.6 years. The weighted-average grant date fair value of the options is $10.55 and the weighted-average grant date fair value of the awards is $17.92.

19

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Also in the second quarter of 2013, we awarded restricted stock units to our chief executive officer which vest one-third on the grant date and one-third each on September 30, 2013 and December 31, 2013. The grant-date fair value of the awards is $17.92.
A summary of our stock option activity for the nine months ended September 30, 2013 is as follows (in thousands):
 
 
Shares
Options outstanding at December 31, 2012
 
5,659

Options granted
 
43

Options exercised
 
(1,624
)
Options forfeited
 
(728
)
Options expired
 
(122
)
Options outstanding at September 30, 2013
 
3,228

Restricted Stock Units
Restricted Stock Units ("RSU") are generally granted with a four-year vesting schedule.
A summary of our non-vested RSU activity for the nine months ended September 30, 2013 is as follows (in thousands):
 
 
Shares
Balance at December 31, 2012
 
2,073

RSUs granted
 
379

RSUs vested
 
(434
)
RSUs forfeited
 
(290
)
Balance at September 30, 2013
 
1,728

NOTE 16.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
 
Foreign Currency Adjustments
 
Unrealized Losses on Marketable Securities
 
Total Accumulated Other Comprehensive Income
Balances at December 31, 2012
$
29,730

 
$
(5
)
 
$
29,725

Current period other comprehensive income (loss)
1,852

 
(12
)
 
1,840

Balances at September 30, 2013
$
31,582

 
$
(17
)
 
$
31,565


NOTE 17.
COMMITMENTS AND CONTINGENCIES
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of September 30, 2013 is approximately $59.4 million. Our policy with respect to all purchase commitments, is to record losses, if any, when they are probable and reasonably estimable. We continuously monitor these commitments for exposure to potential losses and will record a provision for losses when it is deemed necessary.
We are involved in disputes and legal actions arising in the normal course of our business. There have been no material developments in legal proceedings in which we are involved during the three and nine months ended September 30, 2013.

20

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 18.
RELATED PARTY TRANSACTIONS
During the three and nine months ended September 30, 2013 and 2012, we engaged in the following transactions with companies related to members of our Board of Directors, as described below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Sales - related parties
$
20

 
$
102

 
$
635

 
$
579

Rent expense - related parties
465

 
466

 
1,407

 
1,403

Sales - Related Parties
Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the three and nine months ended September 30, 2013, we had sales to two such customers as noted above and accounts receivable from one such customers totaled $3,800 at September 30, 2013. During the three and nine months ended September 30, 2012, we had sales to two such customers as noted above and no aggregate accounts receivable from these customers at December 31, 2012.
Rent Expense - Related Parties
We lease our executive offices, research and development, and manufacturing facilities in Fort Collins, Colorado from a limited liability partnership in which Douglas Schatz, our Chairman of the Board and former Chief Executive Officer, holds an interest. The leases relating to these spaces expire during 2021 and obligate us to total annual payments of approximately $2.0 million, which includes facilities rent and common area maintenance costs.
NOTE 19.
SEGMENT INFORMATION
Our Thin Films SBU offers power conversion products for direct current, pulsed DC mid frequency, and radio frequency power supplies, matching networks, and RF instrumentation, as well as thermal instrumentation products. Our power conversion systems refine, modify, and control the raw electrical power from a utility and convert it into power that may be customized and is predictable and repeatable. Our thermal instrumentation products provide temperature measurement solutions for applications in which time-temperature cycles affect material properties, productivity, and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement. Our network of global service support centers offer repair services, conversions, upgrades, and refurbishments to companies using our products. Our Thin Films SBU principally serves original equipment manufacturers ("OEMs") and end customers in the semiconductor, flat panel display, solar panel, and other capital equipment markets.
Our Solar Energy SBU offers both a transformer-based and a transformerless advanced grid-tied PV inverter solution primarily for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. Our Solar Energy SBU focuses on commercial and utility-scale solar projects and installations, selling primarily to distributors, engineering, procurement, and construction contractors, developers, and utility companies. Our Solar Energy revenue has seasonal variations. Installations of inverters are normally lowest during the first quarter as a result of typically poor weather and installation scheduling by our customers.
Our chief operating decision maker, who is our Chief Executive Officer, and other management personnel regularly review our performance and make resource allocation decisions by reviewing the results of our two business segments separately. Revenue and operating profit is reviewed by our chief operating decision maker. We have also divided inventory and property and equipment based on business segment.
    

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Sales with respect to our operating segments is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Thin Films
 
$
75,409

 
$
56,780

 
$
208,888

 
$
182,013

Solar Energy
 
67,490

 
60,735

 
185,536

 
156,947

Total
 
$
142,899

 
$
117,515

 
$
394,424

 
$
338,960

Income from continuing operations before income taxes by operating segment is as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Thin Films
 
$
18,150

 
$
6,065

 
$
40,067

 
$
18,113

Solar Energy
 
192

 
7,410

 
(1,372
)
 
10,643

Total segment operating income
 
18,342

 
13,475

 
38,695

 
28,756

Corporate expenses
 

 
(534
)
 

 
(1,447
)
Restructuring charges
 
(19,884
)
 
(3,003
)
 
(44,090
)
 
(5,434
)
Other income (expense), net
 
164

 
65

 
(369
)
 
2,251

Income (loss) from continuing operations before income taxes
 
$
(1,378
)
 
$
10,003

 
$
(5,764
)
 
$
24,126

Corporate expenses in 2012 consist of intangible amortization that is now being allocated to the business units.
Segment assets consist of inventories, net and property and equipment, net. A summary of consolidated total assets by segment follows (in thousands):
 
 
September 30, 2013
 
December 31, 2012
Thin Films
 
$
42,513

 
$
40,965

Solar Energy
 
115,383

 
76,393

Total segment assets
 
157,896

 
117,358

Unallocated corporate property and equipment
 
1,603

 
3,647

Unallocated corporate assets
 
468,180

 
417,155

Consolidated total assets
 
$
627,679

 
$
538,160

"Corporate" is a non-operating business segment with the main purpose of supporting operations. Unallocated corporate assets include accounts receivable, deferred income taxes, other current assets and intangible assets.
During the three and nine months ended September 30, 2013, we had one customer accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $23.5 million or 16.9% of total sales for the three month period and $65.0 million or 16.5% of total sales for the nine month period. During the three and nine months ended September 30, 2012, we had one customer accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $14.1 million or 12.0% of total sales during the three month period and $49.8 million or 14.7% of total sales during the nine month period. Our sales to Applied Materials, Inc. include thin film products used in semiconductor processing and solar, flat panel display, and architectural glass applications. No other customer accounted for 10% or more of our sales during these periods.

NOTE 20.
CREDIT FACILITIES
In October 2012, we, along with two of our wholly-owned subsidiaries, AE Solar Energy, Inc. and Sekidenko, Inc., entered into a Credit Agreement, subsequently amended in November 2012 and August 2013, (the "Credit Agreement") with Wells Fargo Bank, National Association ("Wells Fargo"), as agent for and on behalf of certain lenders (each a "Lender"), which provides for a

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new secured revolving credit facility of up to $50.0 million (the "Credit Facility"). The Credit Facility provides us with the ability to borrow up to $50.0 million, although the amount of the Credit Facility may be increased by an additional $25.0 million up to a total of $75.0 million subject to receipt of lender commitments and other conditions. Borrowings under the Credit Facility are subject to a borrowing base based upon our domestic accounts receivable and inventory and are available for various corporate purposes, including general working capital, capital expenditures, and certain permitted acquisitions. The Credit Agreement also permits us to issue letters of credit. The maturity date of the Credit Facility is October 12, 2017.
At our election, the loans comprising each borrowing will bear interest at a rate per annum equal to either: (a) a "base rate" plus between one-half (0.5%) and one (1.0%) full percentage point depending on the amount available for additional draws under the Credit Facility ("Base Rate Loan"); or (b) the LIBOR rate then in effect plus between one and one-half (1.5%) and two (2%) percentage points depending on the amount available for additional draws under the Credit Facility. The "base rate" for any Base Rate Loan will be the greatest of the federal funds rate plus one-half (0.5%) percentage point; the one-month LIBOR rate plus one (1.0%) percentage point; and Wells Fargo's "prime rate" then in effect. As of September 30, 2013, the rate in effect was 4.25%.
The Credit Agreement requires us to pay certain fees to the Lenders and contains affirmative and negative covenants, which, among other things, require us to deliver to the Lenders specified quarterly and annual financial information, and limit us and our Guarantors (as defined below), subject to various exceptions and thresholds, from, among other things: (i) creating liens on our assets; (ii) merging with other companies or engaging in other extraordinary corporate transactions; (iii) selling certain assets or properties; (iv) entering into transactions with affiliates; (v) making certain types of investments; (vi) changing the nature of our business; and (vii) paying certain distributions or certain other payments to affiliates. Additionally, there are the following financial covenants: (i) during any period in which $12.5 million or less is available to us under the Credit Facility and for sixty (60) days thereafter, the Credit Agreement requires the maintenance of a defined consolidated fixed charge coverage ratio; and (ii) if there is any indebtedness under any issued and outstanding convertible notes, we are required to maintain a specified level of liquidity.
The Credit Agreement requires us to pay certain fees to the Lenders, including a $2,500 collateral management fee for each month that the Credit Facility is in place, and a fee based on the unused amount of the Credit Facility. During the nine months ended September 30, 2013, we expensed $0.2 million in interest and fees related to unused line of credit fees and amortization of debt issuance costs. We did not borrow against the Credit Facility in the three and nine month periods of 2013.
Pursuant to a Guaranty and Security Agreement (the "GS Agreement"), borrowings under the Credit Facility are guaranteed by our wholly-owned subsidiaries Aera Corporation and AEI US Subsidiary, Inc., (collectively the " Guarantors"). Under the GS Agreement, we and the Guarantors granted the Lenders a security interest in certain, but not all, of our and the Guarantors' assets.
As part of the acquisition of Refusol described in Note 2. Business Acquisitions and Disposition, we assumed the outstanding debt of Refusol as of the acquisition date. There were three outstanding loans with banks related to this debt, of which one was repaid and cancelled during the third quarter of 2013.
Refusol, GmbH has an outstanding loan agreement with Commerzbank Aktiengesellschaft ("Commerzbank") for up to 8.0 million Euros ("Commerzbank Loan Agreement"). The agreement allows Refusol to borrow up to 8.0 million Euros through various types of instruments including an overdraft (revolving) facilities, money market (term) loans, surety loans, or guarantees. There is no maturity date. Borrowings under the revolving credit facility bear interest at 5.32%. Surety and guarantee loans bear interest at 1.5%. Money market loans are granted by separate agreement when requested and must meet certain Euro thresholds related to the value depending on the maturity date chosen. The Commerzbank Loan Agreement requires the payment of a credit commission of 0.5% of the total loan amount. The agreement contains a various covenants including a financial covenant requiring a specified level of equity.
Refusol, GmbH also had an outstanding loan agreement with Bayerische Landesbank ("Bayern") which allowed it to borrow up to 4.0 million Euros either as overdraft facilities, term loans, or guarantees with repayment occurring one lump sum at the maturity date of the individual transaction with respect to term loans, or maturity of the loan agreement which was July 31, 2013 (the "Bayern Loan Agreement"). The overdraft facility bore interest at 4.5%. Term loans bore interest at the money market rate established by Bayern at the time of the loan plus a margin of 1.9%. Guarantees bore interest at 1.25% and had an issuing fee per guarantee. Loan commitment fees were 0.25% on the unused portion of the total loan amount. The Bayern Loan Agreement contained certain reporting requirements and a financial covenant requiring a specified level of equity.
Upon expiration of this agreement, Refusol, GmbH entered into a new loan agreement with Bayerische Landesbank ("Bayern") under which it has the ability to borrow up to 4.0 million Euros as either bank overdrafts, term loans, guarantees, or letters of credit. The overdraft facility bears interest at 3.9%, guarantees bears a rate of 1.64% and interest on term loans is a fixed rate set for each term loan period based on money market rates. Loan commitment fees are 0.25%. The loan matures on July 31,

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2014.
Refusol, Inc., a wholly-owned subsidiary of Refusol, GmbH located in the United States, has a revolving line of credit with Wells Fargo with an aggregate principal amount of $1.5 million and a maturity date of July 1, 2013. Borrowings under the line of credit are secured by all of Refusol, Inc.'s accounts receivable, inventory, and property, plant, and equipment and a letter of credit issued under the Commerzbank Loan Agreement. The line of credit bears interest at either (a) a fluctuating rate per annum one quarter of one percent (0.25%) above the Prime Rate or (b) the LIBOR rate then in effect plus two percent (2.0%). Refusol, Inc. has the option to select the method of interest each month. A commitment fee of 0.125% is payable by Refusol, Inc. on the unused portion of the line of credit. The line of credit contains certain affirmative and negative covenants limiting Refusol, Inc.'s ability to borrow additional funds or guarantee the debt of others. This line of credit was paid down and cancelled on its maturity date of July 1, 2013.



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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Special Note on Forward-Looking Statements
The following discussion contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions or circumstances will continue. The inclusion of words such as "anticipate," "expect," "estimate," "can," "may," "continue," "enables," "plan," "intend," or "believe," as well as statements that events or circumstances "will" occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control. Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements.
For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption "Risk Factors" in Part II Item 1A of this Quarterly Report on Form 10-Q and, in our Annual Report on Form 10-K for the year ended December 31, 2012. We undertake no obligation to revise or update any forward-looking statements for any reason.
BUSINESS OVERVIEW
We design, manufacture, sell and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin film and plasma enhanced chemical and physical processing for various products as well as grid-tied power conversion. We also supply thermal instrumentation products for advanced temperature control in the thin film process for these markets. Our network of global service support centers provides local repair and field service capability in key regions.
Our power conversion products refine, modify and control the raw electrical power from a utility and convert it into power that is predictable, repeatable and customizable. Our power conversion products are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage, hard and optical coating, and architectural glass manufacturers.
Our thermal instrumentation products, used primarily in the semiconductor industry, provide temperature measurement and control solutions for applications in which time-temperature cycles affect productivity and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement.
Our grid-tied power conversion products offer advanced transformer-based or transformerless grid-tied PV solutions for commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. These products are used for commercial and utility-scale solar projects and installations, and are sold primarily to distributors; engineering, procurement, and construction contractors; developers; and utility companies. These product revenues have seasonal variations. Installations of inverters are normally lowest during the first quarter of the year due to less favorable weather conditions and installation scheduling by our customers.
Our network of global service support centers offer repair services, upgrades and refurbishments to businesses that use our products.
On October 15, 2010, we sold our gas flow control business, which includes the Aera® mass flow control and related product lines, to Hitachi Metals, Ltd. Consequently, the results of operations from our gas flow control business have been excluded from our discussions relating to continuing operations.
On November 8, 2012, we acquired Solvix SA ("Solvix"), a privately held company based in Villaz-Saint-Pierre, Switzerland. The financial results discussed below include the financial results of Solvix for the three and nine months ended September 30, 2013. Note 2. Business Acquisition & Disposition in Part I Item 1 of this Form 10-Q describes the acquisition of Solvix.
As also noted in Note 2. Business Acquisitions and Disposition in Part I Item 1 of this Form 10-Q, we acquired Refusol Holdings GmbH ("Refusol") on April 8, 2013. The financial results discussed below include the financial results of Refusol for the period April 8, 2013 through September 30, 2013.

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Our analysis presented below is organized to provide the information we believe will be helpful for understanding our historical performance and relevant trends going forward. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is also provided.
Results of Operations
The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Operations (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Sales
 
$
142,899

 
$
117,515

 
$
394,424

 
$
338,960

Gross profit
 
56,211

 
45,727

 
151,309

 
129,200

Operating expenses
 
57,753

 
35,789

 
156,704

 
107,325

Operating income (loss)
 
(1,542
)
 
9,938

 
(5,395
)
 
21,875

Other income (expenses), net
 
164

 
65

 
(369
)
 
2,251

Income (loss) from continuing operations before income taxes
 
(1,378
)
 
10,003

 
(5,764
)
 
24,126

Provision (benefit) for income taxes
 
(2,065
)
 
4,268

 
(3,495
)
 
8,824

Income (loss) from continuing operations, net of income taxes
 
$
687

 
$
5,735

 
$
(2,269
)
 
$
15,302

The following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in our Condensed Consolidated Statements of Operations:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Sales
 
100.0
 %
 
100.0
%
 
100.0
 %
 
100.0
%
Gross profit
 
39.3
 %
 
38.9
%
 
38.4
 %
 
38.1
%
Operating expenses
 
40.4
 %
 
30.5
%
 
39.7
 %
 
31.6
%
Operating income (loss)
 
(1.1
)%
 
8.4
%
 
(1.3
)%
 
6.5
%
Other income (expenses), net
 
0.1
 %
 
0.1
%
 
(0.1
)%
 
0.7
%
Income (loss) from continuing operations before income taxes
 
(1.0
)%
 
8.5
%
 
(1.4
)%
 
7.2
%
Provision (benefit) for income taxes
 
(1.4
)%
 
3.6
%
 
(0.9
)%
 
2.6
%
Income (loss) from continuing operations, net of income taxes
 
0.4
 %
 
4.9
%
 
(0.5
)%
 
4.6
%








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SALES
The following tables summarize sales, and percentages of sales, by segment for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
 
Three Months Ended September 30,
 
 
 
 
 
 
2013
 
% of Total Sales
 
2012
 
% of Total Sales
 
Increase/ (Decrease)
 
Percent Change
Thin Films:
 
 
 
 
 
 
 
 
 
 
 
 
Semiconductor capital equipment
 
$
43,100

 
30.2
%
 
$
29,716

 
25.3
%
 
$
13,384

 
45.0
 %
Non-semiconductor capital equipment
 
19,495

 
13.6
%
 
13,510

 
11.5
%
 
5,985

 
44.3
 %
Global support
 
12,814

 
9.0
%
 
13,554

 
11.5
%
 
(740
)
 
(5.5
)%
Total Thin Films
 
75,409

 
52.8
%
 
56,780

 
48.3
%
 
18,629

 
32.8
 %
Solar Energy
 
67,490

 
47.2
%
 
60,735

 
51.7
%
 
6,755

 
11.1
 %
Total sales
 
$
142,899

 
100.0
%
 
$
117,515

 
100.0
%
 
$
25,384

 
21.6
 %
 
 
Nine Months Ended September 30,
 
 
 
 
 
 
2013
 
% of Total Sales
 
2012
 
% of Total Sales
 
Increase/ (Decrease)
 
Percent Change
Thin Films:
 
 
 
 
 
 
 
 
 
 
 
 
Semiconductor capital equipment
 
$
116,867

 
29.6
%
 
$
104,705

 
30.9
%
 
$
12,162

 
11.6
 %
Non-semiconductor capital equipment
 
54,599

 
13.8
%
 
38,870

 
11.5
%
 
15,729

 
40.5
 %
Global suppo