10-Q 1 aeis10qq12013master.htm 10-Q AEIS 10Q Q1 2013 Master
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
For the quarterly period ended March 31, 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 April 30, 2013 there were 39,257,248 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-31.1
EX-31.2
EX-32.1
EX-32.2


2


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)
 
 
March 31,
 
December 31,
 
 
2013
 
2012
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
169,728

 
$
146,564

Marketable securities
 
12,543

 
25,683

Accounts receivable, net of allowances of $4,606 and $4,589, respectively
 
96,738

 
83,914

Inventories, net of reserves of $14,521 and $14,629, respectively
 
79,522

 
81,482

Deferred income tax assets
 
19,459

 
19,477

Income taxes receivable
 
3,090

 
4,315

Other current assets
 
8,338

 
9,075

Total current assets
 
389,418

 
370,510

Property and equipment, net
 
37,139

 
39,523

OTHER ASSETS:
 
 
 
 
Deposits and other
 
7,417

 
7,529

Goodwill
 
59,885

 
60,391

Other intangible assets, net
 
43,714

 
46,209

Deferred income tax assets
 
13,956

 
13,998

Total assets
 
$
551,529

 
$
538,160

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Accounts payable
 
$
42,521

 
$
41,044

Income taxes payable
 
4,430

 
11,029

Accrued payroll and employee benefits
 
8,321

 
11,675

Accrued warranty expense
 
8,220

 
7,419

Other accrued expenses
 
15,368

 
15,399

Customer deposits
 
3,519

 
2,080

Total current liabilities
 
82,379

 
88,646

LONG-TERM LIABILITIES:
 
 
 
 
Deferred income tax liabilities
 
20,967

 
16,832

Uncertain tax positions
 
13,669

 
13,669

Accrued warranty expense
 
5,519

 
7,378

Other long-term liabilities
 
24,193

 
24,004

Total liabilities
 
146,727

 
150,529

Commitments and contingencies (Note 17)
 


 


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

 

Common stock, $0.001 par value, 70,000 shares authorized; 39,238 and 37,991
 
 

 
 

issued and outstanding, respectively
 
39

 
38

Additional paid-in capital
 
225,705

 
212,520

Retained earnings
 
152,174

 
145,348

Accumulated other comprehensive income
 
26,884

 
29,725

Total stockholders’ equity
 
404,802

 
387,631

Total liabilities and stockholders’ equity
 
$
551,529

 
$
538,160

*    Amounts as of March 31, 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


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

 
 
Three Months Ended March 31,
 
 
2013
 
2012
SALES
 
$
111,814

 
$
105,787

COST OF SALES
 
69,975

 
66,043

GROSS PROFIT
 
41,839

 
39,744

OPERATING EXPENSES:
 
 

 
 

Research and development
 
14,253

 
15,115

Selling, general and administrative
 
17,654

 
20,059

Amortization of intangible assets
 
2,213

 
1,372

Restructuring charges
 

 
2,575

Total operating expenses
 
34,120

 
39,121

OPERATING INCOME
 
7,719

 
623

OTHER INCOME (EXPENSE), NET
 
(203
)
 
411

Income from continuing operations before income taxes
 
7,516

 
1,034

Provision for income taxes
 
690

 
268

INCOME FROM CONTINUING OPERATIONS, NET OF INCOME TAXES
 
6,826

 
766

Income from discontinued operations, net of income taxes
 

 
303

NET INCOME
 
$
6,826

 
$
1,069

 
 
 
 
 
Basic weighted-average common shares outstanding
 
38,775

 
40,781

Diluted weighted-average common shares outstanding
 
39,598

 
41,292

 
 
 
 
 
EARNINGS PER SHARE:
 
 

 
 

CONTINUING OPERATIONS:
 
 

 
 

BASIC EARNINGS PER SHARE
 
$
0.18

 
$
0.02

DILUTED EARNINGS PER SHARE
 
$
0.17

 
$
0.02

DISCONTINUED OPERATIONS
 
 

 
 

BASIC EARNINGS PER SHARE
 
$
0.00

 
$
0.01

DILUTED EARNINGS PER SHARE
 
$
0.00

 
$
0.01

NET INCOME:
 
 

 
 

BASIC EARNINGS PER SHARE
 
$
0.18

 
$
0.03

DILUTED EARNINGS PER SHARE
 
$
0.17

 
$
0.03


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

4


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


 
 
Three Months Ended March 31,
 
 
2013
 
2012
Net income
 
$
6,826

 
$
1,069

Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment
 
(2,834
)
 
(1,798
)
Unrealized gains (losses) on marketable securities
 
(7
)
 
19

Comprehensive income (loss)
 
$
3,985

 
$
(710
)


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


5


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

 
 
Three Months Ended March 31,
 
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
6,826

 
$
1,069

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

 
 

Depreciation and amortization
 
5,286

 
4,213

Stock-based compensation expense
 
2,034

 
5,009

Provision (benefit) for deferred income taxes
 
4,117

 
478

Restructuring charges
 

 
2,575

Net loss on sale or disposal of assets
 
289

 
632

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
(13,782
)
 
28,760

Inventories
 
1,429

 
(2,306
)
Other current assets
 
167

 
1,108

Accounts payable
 
1,864

 
(6,824
)
Other current liabilities and accrued expenses
 
(3,399
)
 
1,753

Income taxes
 
(5,380
)
 
(1,776
)
Non-current assets
 

 

Net cash provided by (used in) operating activities
 
(549
)
 
34,691

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of marketable securities
 
(11,630
)
 
(4,335
)
Proceeds from sale of marketable securities
 
24,722

 
4,563

Purchases of property and equipment
 
(1,417
)
 
(3,120
)
Net cash provided by (used in) investing activities
 
11,675

 
(2,892
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Purchase and retirement of common stock
 

 
(21,934
)
Proceeds from exercise of stock options
 
13,111

 
101

Excess tax from stock-based compensation deduction
 
(947
)
 
(254
)
Other financing activities
 
(26
)
 
(23
)
Net cash provided by (used in) financing activities
 
12,138

 
(22,110
)
EFFECT OF CURRENCY TRANSLATION ON CASH
 
(100
)
 
(1,910
)
INCREASE IN CASH AND CASH EQUIVALENTS
 
23,164

 
7,779

CASH AND CASH EQUIVALENTS, beginning of period
 
146,564

 
117,639

CASH AND CASH EQUIVALENTS, end of period
 
$
169,728

 
$
125,418

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid for interest
 
$
3

 
$
14

Cash paid for income taxes
 
5,010

 
1,168

Cash received for refunds of income taxes
 
1,303

 
5

Cash held in banks outside the United States of America
 
14,100

 
57,034

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

6


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 our 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 and transformer-based solutions for residential 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 March 31, 2013, and the results of our operations and cash flows for the three months ended March 31, 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

7

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

guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.
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 $15.3 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 $2.8 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. Solvix has approximately 10 employees and had revenues of $5.2 million in its fiscal year ended September 30, 2012.
The Solvix product line will continue to be manufactured in Switzerland under a contract manufacturing agreement with CPA Group until production is moved to our Shenzhen facility in 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


8

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
 
744

 
Straight-line
 
7
Customer relationships - design
 
4,643

 
Straight-line
 
12
 
 
$
8,216

 
 
 
 
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.
The results of Solvix operations are included in our Condensed Consolidated Statements of Operations beginning November 8, 2012. The results of Solvix's operations for the three months ended March 31, 2013 are as follows (in thousands):
Sales
$
1,222

Net loss
(234
)
Pro Forma Results for Solvix Acquisition
The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and Solvix 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

9

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

January 1, 2012. The unaudited pro forma financial information for the three months ended March 31, 2012 includes the historical results of Advanced Energy for the three months ended March 31, 2012 and the historical results of Solvix 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 March 31,
 
2012
Sales
$
107,317

Net income
1,070

Earnings per share:
 
Basic
$
0.03

Diluted
0.03

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.
Operating results of discontinued operations are as follows (in thousands):
 
 
Three Months Ended March 31,

 
2012
Sales
 
$
4,576

Cost of sales
 
5,145

Gross profit (loss)
 
(569
)
Operating expenses:
 


  Research and development
 

  Selling, general, and administrative
 
45

    Total operating expenses
 
45

Operating income (loss) from discontinued operations
 
(614
)
  Other income
 
1,023

    Income from discontinued operations before income taxes
 
409

Provision for income taxes
 
106

Income from discontinued operations, net of income taxes
 
$
303


10

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

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 March 31,
 
 
2013
 
2012
Income from continuing operations before income taxes
 
$
7,516

 
$
1,034

Provision for income taxes
 
690

 
268

Effective tax rate
 
9.2
%
 
25.9
%
Our tax rate is lower than the U.S. federal income tax rate primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates. In addition, during the three months ended March 31, 2013, we recognized a discrete tax benefit of $1.4 million related to the January 2, 2013 reinstatement of the 2012 U.S. research and development tax credit.
Undistributed earnings of foreign subsidiaries are considered to be permanently reinvested and accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made.
Our policy is to classify accrued penalties and interest related to unrecognized tax benefits in our income tax provision. For the three months ended March 31, 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.
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 March 31,
 
 
2013
 
2012
Income from continuing operations, net of income taxes
 
$
6,826

 
$
766

 
 
 
 
 
Basic weighted-average common shares outstanding
 
38,775

 
40,781

Assumed exercise of dilutive stock options and restricted stock units
 
823

 
511

Diluted weighted-average common shares outstanding
 
39,598

 
41,292

Income from continuing operations:
 
 

 
 

Basic earnings per share
 
$
0.18

 
$
0.02

Diluted earnings per share
 
$
0.17

 
$
0.02

The following stock options and restricted units were excluded in the computation of diluted earnings per share because they were anti-dilutive:
 
Three Months Ended March 31,
 
2013
 
2012
Stock options
853

 
5,847

Restricted stock units

 
23





11

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

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 months ended March 31, 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):
 
 
March 31,
 
December 31,
 
 
2013
 
2012
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Commercial paper
 
$

 
$

 
$
749

 
$
749

Certificates of deposit
 
12,260

 
12,260

 
12,498

 
12,498

Corporate bonds/notes
 

 

 
11,274

 
11,253

Municipal bonds/notes
 
283

 
283

 
285

 
285

Agency bonds/notes
 

 

 
900

 
898

Total marketable securities
 
$
12,543

 
$
12,543

 
$
25,706

 
$
25,683

The maturities of our marketable securities available for sale as of March 31, 2013 are as follows:
 
 
Earliest
 
 
 
Latest
Certificates of deposit
 
4/2/2013

to

2/17/2015
Municipal bonds/notes
 
9/1/2013
 
to
 
9/1/2013
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. Our current investments in marketable securities are expected to be liquidated during the next twelve months.
As of March 31, 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 months ended March 31, 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 March 31, 2013 and December 31, 2012 we had outstanding Euro, Swiss Franc, and Canadian Dollar forward contracts.
The notional amount of foreign currency exchange contracts at March 31, 2013 and 2012 was $24.2 million and $41.5 million, respectively, and the fair value of these contracts was not significant at March 31, 2013 and 2012. During the three months ended March 31, 2013 and 2012, we recognized a gain of $0.6 million and a loss of $1.0 million, respectively, on our foreign currency exchange contracts. These gains and losses were offset by corresponding gains and losses on the related intercompany debt and both are included as a component of Other income (expense), net, in our Condensed Consolidated Statements of Operations.





12

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


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 March 31, 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 March 31, 2013, and December 31, 2012.
March 31, 2013
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Certificates of deposit
 

 
12,260

 

 
12,260

Municipal bonds/notes
 

 
283

 

 
283

Total marketable securities
 
$

 
$
12,543

 
$

 
$
12,543

 
 
 
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 months ended March 31, 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):
 
 
March 31,
 
December 31,
 
 
2013
 
2012
Parts and raw materials
 
$
61,570

 
$
59,484

Work in process
 
6,523

 
3,728

Finished goods
 
11,429

 
18,270

Inventories, net of reserves
 
$
79,522

 
$
81,482











13

Table of Contents         
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):
 
 
March 31,
 
December 31,
 
 
2013
 
2012
Buildings and land
 
$
1,715

 
$
1,794

Machinery and equipment
 
40,241

 
40,993

Computer and communication equipment
 
23,017

 
22,895

Furniture and fixtures
 
1,835

 
1,845

Vehicles
 
384

 
359

Leasehold improvements
 
27,972

 
27,976

Construction in process
 
3,909

 
3,362

 
 
99,073

 
99,224

Less: Accumulated depreciation
 
(61,934
)
 
(59,701
)
Property and equipment, net
 
$
37,139

 
$
39,523

    
Depreciation expense recorded in continuing operations is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Depreciation expense
 
$
3,073

 
$
2,841

NOTE 10.
GOODWILL
The following summarizes the changes in goodwill during the three months ended March 31, 2013 (in thousands):
Balance as of December 31, 2012
 
$
60,391

Adjustments
 
(11
)
Translation adjustments
 
(495
)
Balance as of March 31, 2013
 
$
59,885

NOTE 11.
INTANGIBLE ASSETS
Other intangible assets consisted of the following as of March 31, 2013 (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

 
$
(14
)
 
$
(12,613
)
 
$
32,041

 
7
Trademarks and other
 
13,714

 
(29
)
 
(2,012
)
 
11,673

 
9
Total amortizable intangibles
 
$
58,382

 
$
(43
)
 
$
(14,625
)
 
$
43,714

 
 
    



14

Table of Contents         
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 from continuing operations is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Amortization expense
 
$
2,213

 
$
1,372

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)
 
$
6,689

2014
 
9,681

2015
 
9,228

2016
 
7,031

2017
 
3,621

Thereafter
 
7,464

 
 
$
43,714

NOTE 12.
OTHER ACCRUED EXPENSES    
Other accrued expenses consisted of the following (in thousands):
 
 
March 31,
 
December 31,
 
 
2013
 
2012
Other accrued expenses:
 
 
 
 
Current deferred tax liability
 
$
4,137

 
$
4,137

Accrued restructuring costs
 
655

 
1,853

Current contingent consideration
 
2,773

 
2,773

Accrued sales and use tax
 
983

 
1,010

Other*
 
6,820

 
5,626

Total Other accrued expenses
 
$
15,368

 
$
15,399

*Other accrued expenses consisted of items that are individually less than 5% of total current liabilities.
NOTE 13.
RESTRUCTURING COSTS
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

15

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

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 the 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 March 31, 2013
Severance and related costs
 
$
1,345

 
$

 
$
(1,044
)
 
$
(26
)
 
$
275

Facility closure costs
 
508

 

 
(128
)
 

 
380

Total restructuring liabilities
 
$
1,853

 
$

 
$
(1,172
)
 
$
(26
)
 
$
655

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 March 31,
 
 
2013
 
2012
Balances at beginning of period
 
$
14,797

 
$
14,719

Increases to accruals related to sales during the period
 
2,001

 
1,835

Warranty expenditures
 
(3,059
)
 
(2,235
)
Balances at end of period
 
$
13,739

 
$
14,319

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 $20.8 million as of March 31, 2013, of which $0.3 million is classified in Customer deposits and $20.5 million is classified in Other long-term liabilities in the Condensed Consolidated Balance Sheet as of March 31, 2013. 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 months ended March 31, 2013 and 2012 is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Stock-based compensation expense
 
$
2,034

 
$
5,009

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

16

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

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 5.9 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.
A summary of our stock option activity for the three months ended March 31, 2013 is as follows (in thousands):
 
 
Shares
Options outstanding at December 31, 2012
 
5,659

Options granted
 

Options exercised
 
(1,068
)
Options forfeited
 
(415
)
Options expired
 
(21
)
Options outstanding at March 31, 2013
 
4,155

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 three months ended March 31, 2013 is as follows (in thousands):
 
 
Shares
Balance at December 31, 2012
 
2,073

RSUs granted
 

RSUs vested
 
(273
)
RSUs forfeited
 
(22
)
Balance at March 31, 2013
 
1,778

NOTE 16.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
 
Foreign Currency Adjustments
 
Unrealized Gains (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)
(2,834
)
 
(7
)
 
(2,841
)
Balances at March 31, 2013
$
26,896

 
$
(12
)
 
$
26,884

NOTE 17.
COMMITMENTS AND CONTINGENCIES
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of March 31, 2013 is approximately $62.6 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.






17

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

NOTE 18.
RELATED PARTY TRANSACTIONS
During the three months ended March 31, 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 March 31,
 
2013
 
2012
Sales - related parties
$
31

 
$
154

Rent expense - related parties
475

 
460

Sales - Related Parties
Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the three months ended March 31, 2013, we had sales to two such customers as noted above and accounts receivable from one such customers totaled $23,160 at March 31, 2013. During the three months ended March 31, 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 $1.5 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.
    




18

Table of Contents         
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 March 31,
 
 
2013
 
2012
Thin Films
 
$
61,777

 
$
60,390

Solar Energy
 
50,037

 
45,397

Total
 
$
111,814

 
$
105,787

Income from continuing operations before income taxes by operating segment is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Thin Films
 
$
7,511

 
$
3,167

Solar Energy
 
208

 
493

Total segment operating income
 
7,719

 
3,660

Corporate expenses
 

 
(462
)
Restructuring charges
 

 
(2,575
)
Other income (expense), net
 
(203
)
 
411

Income from continuing operations before income taxes
 
$
7,516

 
$
1,034

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):
 
 
March 31, 2013
 
December 31, 2012
Thin Films
 
$
38,932

 
$
40,965

Solar Energy
 
73,593

 
76,393

Total segment assets
 
112,525

 
117,358

Unallocated corporate property and equipment
 
4,136

 
3,647

Unallocated corporate assets
 
434,868

 
417,155

Consolidated total assets
 
$
551,529

 
$
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 months ended March 31, 2013, we had two customers accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $18.7 million or 16.7% of total sales and sales to Fluor Enterprises, Inc. were $13.5 million or 12.1% of total sales. During the three months ended March 31, 2012, we had one customer accounting for 10% or more of our sales. Sales to Applied Materials, Inc. were $17.8 million or 16.9% of total sales. Our sales to Applied Materials, Inc. include thin film products used in semiconductor processing and solar, flat panel display, and architectural glass applications and our sales to Fluor Enterprises include power stations. No other customer accounted for 10% or more of our sales during these periods.
NOTE 20.
CREDIT FACILITY
In October 2012, we, along with two of our wholly-owned subsidiaries, AE Solar Energy, Inc. and Sekidenko, Inc., entered into a Credit Agreement (the “Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”), as agent for and on behalf of certain lenders (each a “Lender”), which provides for a new secured revolving credit facility of up to $50.0 million (the “Credit Facility”). The Credit Facility provides us with the ability to borrow up to $50.0 million, although the amount of the Credit Facility may be increased by an additional $25.0 million up to a total of $75.0 million subject to receipt of lender commitments and other conditions. Borrowings under the Credit Facility are subject to a borrowing base based upon our domestic accounts receivable and inventory and are available for various corporate purposes, including general working capital, capital expenditures, and certain permitted acquisitions. The Credit Agreement also permits us to issue letters of credit. The maturity date of the Credit

19


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 March 31, 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, 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.
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. In addition, if the Credit Agreement is terminated by us within one (1) year we will be obligated to pay an early termination fee equal to one percent (1%) of the maximum amount that may be drawn or borrowed under the Credit Facility. During the three months ended March 31, 2013, we expensed $0.1 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 first quarter 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.
NOTE 21.
SUBSEQUENT EVENT
On April 8, 2013, Advanced Energy and Blitz S13-103, GmbH, an indirect wholly-owned subsidiary of Advanced Energy (“Purchaser”) entered into a Sale and Purchase Agreement (the “Agreement ”) with Jolaos Verwaltungs GmbH (“Seller”) and Prettl Beteilgungs Holding Gmbh (“Seller's Guarantor”) whereby the Purchaser acquired from Seller, on the same date, all of the shares of RefuSol Holding GmbH (“Refusol Holding”) which 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.
Under the terms of the Agreement, Seller received €59.0 million in cash, we assumed €9.0 million of debt and had a working capital reduction of €1.8 million. 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. Each party has agreed to pay its own expenses related to the transaction.
Additional earn-out cash and stock consideration, up to a maximum of €10.0 million total, is payable to Seller if certain stretch financial targets are met by Advanced Energy's Solar Energy Business Unit and RefuSol, on a combined basis, at the end of the twelve (12) calendar months following April 1, 2013. Half of the earn-out, or up to €5.0 million, is payable in cash. The other half of the earn-out, up to €5.0 million is payable in Advanced Energy common stock at a price of approximately $18.85 per share. The per share price was determined based on the volume-weighted average price of Advanced Energy's common stock during the fifteen (15) trading days prior to April 5, 2013. No more than 342,105 shares are issuable pursuant to the earn-out.

20


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, 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 and transformer-based solutions for residential 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 residential, 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 months ended March 31, 2013. Note 2. Business Acquisition & Disposition in Part I Item 1 of this Form 10-Q describes the acquisition of Solvix.
As noted in Note 21. Subsequent Event in Part I Item 1 of this Form 10-Q, we acquired Refusol Holdings GmbH ("Refusol") on April 8, 2013, subsequent to the end of the first quarter. As such, the results of Refusol are not included in the discussion below of financial results for the three months ended March 31, 2013.

21


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 accounting principles generally accepted in the United States of America (“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 March 31,
 
 
2013
 
2012
Sales
 
$
111,814

 
$
105,787

Gross profit
 
41,839

 
39,744

Operating expenses
 
34,120

 
39,121

Operating income
 
7,719

 
623

Other income (expenses), net
 
(203
)
 
411

Income from continuing operations before income taxes
 
7,516

 
1,034

Provision for income taxes
 
690

 
268

Income from continuing operations, net of income taxes
 
$
6,826

 
$
766

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 March 31,
 
 
2013
 
2012
Sales
 
100.0
 %
 
100.0
%
Gross profit
 
37.4
 %
 
37.6
%
Operating expenses
 
30.5
 %
 
37.0
%
Operating income
 
6.9
 %
 
0.6
%
Other income (expenses), net
 
(0.2
)%
 
0.4
%
Income from continuing operations before income taxes
 
6.7
 %
 
1.0
%
Provision for income taxes
 
0.6
 %
 
0.3
%
Income from continuing operations, net of income taxes
 
6.1
 %
 
0.7
%
SALES
The following tables summarize annual sales, and percentages of sales, by segment for the three months ended March 31, 2013 and 2012 (in thousands):
 
 
Three Months Ended March 31,
 
 
 
 
 
 
2013
 
% of Total Sales
 
2012
 
% of Total Sales
 
Increase/ (Decrease)
 
Percent Change
Thin Films:
 
 
 
 
 
 
 
 
 
 
 
 
Semiconductor capital equipment
 
$
32,700

 
29.2
%
 
$
38,348

 
36.3
%
 
$
(5,648
)
 
(14.7
)%
Non-semiconductor capital equipment
 
16,610

 
14.9
%
 
10,068

 
9.5
%
 
6,542

 
65.0
 %
Global support
 
12,467

 
11.1
%
 
11,974

 
11.3
%
 
493

 
4.1
 %
Total Thin Films
 
61,777

 
55.2
%
 
60,390

 
57.1
%
 
1,387

 
2.3
 %
Solar Energy
 
50,037

 
44.8
%
 
45,397

 
42.9
%
 
4,640

 
10.2
 %
Total sales
 
$
111,814

 
100.0
%
 
$
105,787

 
100.0
%
 
$
6,027

 
5.7
 %


22


Total Sales
Overall, our sales increased $6.0 million, or 5.7%, to $111.8 million for the three months ended March 31, 2013 from $105.8 million for the three months ended March 31, 2012. The increase in sales is the result of increased solar inverter sales, primarily to the utility markets, in the first quarter of 2013 as compared to the same period in 2012. Although Thin Film sales were relatively flat, we did experience a decline in semiconductor sales during the three months ended March 31, 2013 as compared to 2012 and an offsetting increase in the non-semiconductor markets. The continued decline of capital spending in the semiconductor market throughout 2012 drove the decline in the first quarter of 2013 compared to 2012. The increase in sales in non-semiconductor markets is partially due to the acquisition of Solvix in the fourth quarter of 2012. The first quarter of 2013 included a full quarter of sales of those products. The remaining increase is due to improvements in the flat panel display markets.
Thin Films
Results for our Thin Films SBU for the three months ended March 31, 2013 and 2012 were as follows (in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Sales
$
61,777

 
$
60,390

Operating Income
7,511

 
3,167

Thin Films sales increased 2.3% to $61.8 million, or 55.2% of sales, for the three months ended March 31, 2013 versus $60.4 million, or 57.1% of sales, for the three months ended March 31, 2012. The increase reflects the market improvements noted above coupled with a full quarter of sales attributable to our acquisition of Solvix.
In the three months ended March 31, 2013, sales in the thin film semiconductor market decreased 14.7% to $32.7 million, or 29.2% of sales, from $38.3 million, or 36.3% of sales for the three months ended March 31, 2012. The decline in end user capital expansion that began in the third quarter of 2011 continued throughout 2012 resulting in utilization rates at semiconductor foundries that remain reduced compared to previous levels. This drove the decline in sales in the first quarter of 2013 as compared to the same period of 2012. Although sales are still down compared to the first quarter of 2012, markets began to improve during the first quarter of 2013 resulting in sequential growth in sales from the fourth quarter of 2012. Utilization rates are increasing and capital spending is expected to remain stronger into the second quarter of 2013.
Sales in the thin film non-semiconductor capital equipment markets increased 65.0% to $16.6 million, or 14.9% of sales, for the three months ended March 31, 2013 compared to $10.1 million, or 9.5% of sales, for the three months ended March 31, 2012. The markets that comprise the thin-film non-semiconductor capital equipment markets include solar panel, flat panel display, data storage, architectural glass and other industrial thin-film manufacturing equipment markets. Our customers in these markets are primarily global OEMs. The increase in these markets for the three months ended March 31, 2013, as compared to the same period a year ago, was driven by investment in the flat panel display market.
Sales to customers in the thin film solar panel market decreased to $0.3 million, or 0.3% of total sales, for the three months ended March 31, 2013 as compared to $2.0 million, or 1.9% of total sales, for the three months ended March 31, 2012. Capacity in the solar panel market continues to exceed demand. We currently do not anticipate new investment in the foreseeable future as consolidation of manufacturers continues. As a result, we expect sales to the solar panel market to remain at historically low levels through the first half of 2013.
The flat panel market experienced significant growth in the first quarter of 2013, increasing 548.3% compared to the same quarter in 2012. This increase was driven by investments in the transition to active-matrix light-emitting diode ("AMOLED") technology. We expect continued investment in this new technology keeping sales stronger through the first half of 2013.
Our global support revenue increased to $12.5 million, or 11.1% of total sales, for the three months ended March 31, 2013, compared to $12.0 million, representing 11.3% of sales, for the three months ended March 31, 2012. Fab utilization rates have stabilized and preventive maintenance has increased resulting in the increase in sales this quarter. We expect to see continued improvements in utilization rates through 2013 resulting in stable revenues for our global support business.
Operating income for Thin Films was $7.5 million for the three months ended March 31, 2013, an increase of $4.3 million from the same period of 2012. The increase is the result of improved gross margins coupled with declines in operating expenses as a result of the restructuring efforts completed in 2012.


23


Solar Energy
Results for our Solar Energy SBU for the three months March 31, 2013 and 2012 are as follows (in thousands):

Three Months Ended March 31,
 
2013
 
2012
 
 
 
 
Sales
$
50,037

 
$
45,397

Operating income
208

 
493

Solar Energy sales were $50.0 million, or 44.8% of sales, for the three months ended March 31, 2013 as compared to $45.4 million, or 42.9% of sales, for the three months ended March 31, 2012.
Sales for the first quarter of 2013 were up from the comparable quarter a year ago due to an increased presence in Canada. Sales to the Canadian market grew significantly in the second half of 2012 and have continued to grow, although at a slower pace. We expect Solar Energy sales to increase in the second quarter of 2013 due to the acquisition discussed in "Note 21. Subsequent Event" in Part I Item I of this Form 10-Q.
Operating income for Solar Energy was $0.2 million for the three months ended March 31, 2013 as compared to $0.5 million for the three months ended March 31, 2012. The decrease in operating income for the three months ended March 31, 2013 as compared to the same periods in 2012 is due to lower gross margins resulting from changes in the mix of products sold.
Backlog
Our overall backlog was $86.9 million at March 31, 2013 as compared to $92.7 million at December 31, 2012. The decrease from the prior year-end is due primarily to lower orders in our Solar Energy SBU resulting from the push out of projects due to permit and financing delays.
GROSS PROFIT
Our gross profit was $41.8 million, or 37.4% of sales, for the three months ended March 31, 2013, as compared to $39.7 million, or 37.6% of sales for the three months ended March 31, 2012. The year-over-year increase in terms of absolute dollars was due to the overall increase in sales in our Solar Energy business. Gross profit as a percentage of sales was relatively flat in the first quarter of 2013 as compared to the same period of 2012.
OPERATING EXPENSE
The following table summarizes our operating expenses as a percentage of sales for the three months ended March 31, 2013 and 2012 (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Research and development
 
$
14,253

 
12.7
%
 
$
15,115

 
14.3
%
Selling, general, and administrative
 
17,654

 
15.8
%
 
20,059

 
19.0
%
Amortization of intangible assets
 
2,213

 
2.0
%
 
1,372

 
1.3
%
Restructuring charges
 

 
%
 
2,575

 
2.4
%
Total operating expenses
 
$
34,120

 
30.5
%
 
$
39,121

 
37.0
%
As a result of declines in certain markets that we serve, we initiated a plan in September 2011 to re-align our manufacturing and research and development activities to be closer to our customers and reduce production costs. These initiatives included headcount reductions, facilities closures, and asset impairments and were completed in the fourth quarter of 2012.
In connection with our acquisition of Refusol Holdings GmbH ("Refusol") described in Note 21. Subsequent Event in Part I Item I of this Form 10-Q, we committed to a restructuring plan to take advantage of additional cost saving opportunities. Over the next nine months, we will consolidate several facilities including moving the remaining manufacturing in Bend, Oregon to our Fort Collins, Colorado facility; transfer the remaining supply chain activities of our Thin Films business unit to the Shenzhen, China manufacturing facility; and rationalize the inverter product line. As a result, we anticipate total charges in the amount of $30.0 to $35.0 million, of which approximately $7.0 million to $15.0 million are expected to be cash expenditures. The charges

24


are expected to include approximately $4.0 million to $6.0 million of severance costs, $5.5 million to $6.0 million for space consolidation, and $20.5 million to $23.0 million for product rationalization and impairments of the intangible assets associated with the technology around those products. The actions taken under this restructuring plan as well those underway and already taken are expected to deliver annual savings of approximately $70.0 to $75.0 million.
Research and Development
The markets we serve constantly present opportunities to develop products for new or emerging applications and require technological changes driving for higher performance, lower cost, and other attributes that we expect may advance our customers’ products. We believe that continued and timely development of new and differentiated products, as well as enhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue. All of our research and development costs have been expensed as incurred, except those incurred as a result of a business acquisition.
Research and development expenses for the three months ended March 31, 2013 were $14.3 million, or 12.7% of sales, as compared to $15.1 million, or 14.3% of sales, for the three months ended March 31, 2012. Research and development costs declined in the three months ended March 31, 2013 as compared to the same period in 2012 primarily due to lower costs of materials and supplies.
Selling, General and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, and human resource functions in addition to our general management.
Selling, general and administrative ("SG&A") expenses decreased $2.4 million in the three months ended March 31, 2013 as compared to the same period in 2012. The decrease for the three months ended March 31, 2013 as compared to the same period in 2012 is due to lower incentive compensation accruals in the current period based on company performance as compared to plan targets partially offset by increased purchased services for due diligence related to the business acquisition discussed in Note 21. Subsequent Event in Part I Item I of this Form 10-Q.
Amortization Expense
Amortization of intangible assets expense was $2.2 million for the three months ended March 31, 2013, compared to $1.4 million for the same period ending March 31, 2012. The increase in amortization is due to in process research and development projects that were placed in service the first quarter of 2012 and therefore began amortization in the second quarter of 2012. This project was in process at the acquisition date of PV Powered and was recorded as a non-amortizing intangible asset at the acquisition date. As the projects acquired were completed they began amortizing over their estimated useful lives.
Other Income (expenses), net
Other income (expenses), net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixed assets, and other miscellaneous items. Other income (expenses), net was a $0.2 million loss for the three months ended March 31, 2013 as compared to a $0.4 million gain in the same period of 2012. The loss in the current year is primarily due to foreign exchange losses while the prior year gain resulted from the sale of fixed assets.
Provision for Income Taxes
We recorded an income tax provision from continuing operations for the three months ended March 31, 2013 of $0.7 million compared to $0.3 million for the three months ended March 31, 2012, resulting in effective tax rates of 9.2% and 25.9%, respectively. Our tax rate is lower than the U.S. federal income tax rate primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates. In addition, during the three months ended March 31, 2013, we recognized a discrete tax benefit of $1.4 million related to the January 2, 2013 reinstatement of the 2012 U.S. research and development tax credit.
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting principles, or interpretations thereof and the geographic composition of our pre-tax income. We carefully monitor these factors and adjust our effective income tax rate accordingly.
Discontinued Operations

25


On October 15, 2010, we completed the sale of our gas flow control business, which includes the Aera® mass flow control and related product lines to Hitachi, for $43.3 million. Assets and liabilities sold include, without limitation, inventory, real property in Hachioji, Japan, equipment, certain contracts, intellectual property rights related to the gas flow control business, and certain warranty liability obligations. Results of continuing operations for 2012 were reduced by the revenue and costs associated with the gas flow control business which are included in Income from discontinued operations, net of income taxes, in our Condensed Consolidated Statements of Operations.
Non-GAAP Results
To evaluate business performance against business objectives and for planning purposes, management uses non-GAAP results. We believe these measures will enhance investors’ ability to review our business from the same perspective as management and facilitate comparisons of this period’s results with prior periods. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of this additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.
The non-GAAP results presented below exclude the impact of restructuring charges, stock-based compensation, amortization of intangible assets, and acquisition-related costs (in thousands):
 
Three Months Ended March 31,
 
2013
 
2012
Income from continuing operations, net of tax, as reported
$
6,826

 
$
766

Adjustments, net of tax
 
 
 
Restructuring charges

 
1,651

Acquisition-related costs
993

 

Stock-based compensation
1,847

 
3,191

Amortization of intangible assets
2,010

 
874

Non-GAAP income from continuing operations, net of tax
$
11,676

 
$
6,482

 
 
 
 
Diluted weighted-average common shares outstanding
39,598

 
41,292

Non-GAAP Earnings Per Share
$
0.29

 
$
0.16


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

26



Liquidity and Capital Resources
LIQUIDITY
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to generate cash from operating activities which is subject to future operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of liquidity are our available cash, investments, and cash generated from current operations as well as our credit facility discussed in Note 20. Credit Facility in Part I Item 1 of this Form 10-Q.
At March 31, 2013, we had $182.3 million in cash, cash equivalents, and marketable securities. We believe that our current cash levels and our cash flows from future operations will be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, and contractual obligations for the next twelve months. We may seek additional financing from time to time.
On October 12, 2012, we entered into an agreement with Wells Fargo Bank, National Association which provides for a secured revolving credit facility ("Credit Facility") of up to $50.0 million. Borrowings under the Credit Facility are subject to a borrowing base based upon our accounts receivable and inventory and are available for various corporate purposes. The Credit Facility provides us further flexibility for execution of our strategic plans including acquisitions. For more information on the Credit Facility see Note 20 - Credit Facility of our Consolidated Financial Statements.
On October 30, 2012, we announced a $25.0 million share repurchase program authorized by our Board of Directors. The repurchase program is authorized through October 2013, requires no minimum number of shares to be repurchased, and may be discontinued at any time. No repurchases have been made under this program.
CASH FLOWS
A summary of our cash provided by and used in operating, investing and financing, activities is as follows (in thousands):
 
 
Three Months Ended March 31,
 
 
2013
 
2012
Net cash provided by (used in) operating activities
 
$
(549
)
 
$
34,691

Net cash provided by (used in) investing activities
 
11,675

 
(2,892
)
Net cash provided by (used in) financing activities
 
12,138

 
(22,110
)
Effect of currency translation on cash
 
(100
)
 
(1,910
)
Increase in cash and cash equivalents
 
23,164

 
7,779

Cash and cash equivalents, beginning of the period
 
146,564

 
117,639

Cash and cash equivalents, end of the period
 
$
169,728

 
$
125,418

2013 CASH FLOWS COMPARED TO 2012
Net cash provided by (used in) operating activities
Net cash used in operating activities for the three months ended March 31, 2013 was $0.5 million, compared to cash provided by operating activities of $34.7 million for the same period ended March 31, 2012. The decrease of $35.2 million in net cash flows from operating activities is primarily due to significant collections of accounts receivable in the first quarter of 2013 driving overall receivables balances down from previous levels.
Net cash provided by (used in) investing activities
Net cash provided by investing activities for the three months ended March 31, 2013 was $11.7 million, an increase of $14.6 million from the same period ended March 31, 2012. The increase in cash provided by investing activities in 2013 is due to proceeds from the liquidation of a portion of our marketable securities. Movement of cash between marketable securities and cash and cash equivalents is related to our cash needs at a point in time and may fluctuate from one period to the next. Capital expenditures for the three months ended March 31, 2013 were down $1.7 million compared to the same period in 2012. We expect to fund future capital expenditures with cash generated from operations.

27


Net cash provided by (used in) financing activities
Net cash provided by financing activities in the three months ended March 31, 2013 was $12.1 million, a $34.2 million change from the cash used in financing activities of $22.1 million in the same period of 2012. The exercise of stock options provided $13.1 million of cash in 2013 as compared to $0.1 million in 2012. The first quarter of 2012 included stock repurchases of $21.9 million while no repurchases have been made in 2013.
Effect of currency translation on cash
During the three months ended March 31, 2013, currency translation had a negative $0.1 million impact on cash compared to a negative impact of $1.9 million in the same period of 2012. The functional currencies of our worldwide operations primarily include U.S. dollar ("USD"), Japanese Yen ("JPY"), Chinese Yuan ("CNY"), New Taiwan Dollar ("NTD"), South Korean Won ("KRW"), British Pound ("GBP"), Swiss Franc ("CHF"), Canadian Dollar ("CAD") and Euro ("EUR"). Our purchasing and sales activities are primarily denominated in USD, JPY, CNY, and EUR. The change in these key currency rates during the three months ended March 31, 2013 and 2012 are as follows:
 
 
 
 
Three Months Ended March 31,
From
 
To
 
2013
 
2012
CNY
 
USD
 
0.3
 %
 
0.2
 %
EUR
 
USD
 
(2.8
)%
 
3.2
 %
JPY
 
USD
 
(7.9
)%
 
(5.6
)%
KRW
 
USD
 
(4.4
)%
 
2.6
 %
NTD
 
USD
 
(2.8
)%
 
2.9
 %
GBP
 
USD
 
(6.4
)%
 
3.4
 %
CAD
 
USD
 
(2.5
)%
 
2.5
 %
CHF
 
USD
 
(3.6
)%
 
4.2
 %
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements or variable interest entities.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in the Condensed Consolidated Financial Statements and accompanying notes. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012 describes the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. Our critical accounting estimates, discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2012, include estimates for allowances for doubtful accounts, determining useful lives for depreciation and amortization, the valuation of assets and liabilities acquired in business combinations, assessing the need for impairment charges for identifiable intangible assets and goodwill, establishing warranty reserves, accounting for income taxes, and assessing excess and obsolete inventories. Such accounting policies and estimates require significant judgments and assumptions to be used in the preparation of the Condensed Consolidated Financial Statements and actual results could differ materially from the amounts reported based on variability in factors affecting these estimates.
Our management discusses the development and selection of our critical accounting policies and estimates with the Audit Committee of our Board of Directors at least annually. Our management also internally discusses the adoption of new accounting policies or changes to existing policies at interim dates, as it deems necessary or appropriate.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our market risk exposure relates to changes in interest rates in our investment portfolio and credit facility. We generally place our investments with high-credit quality issuers and by policy are averse to principal loss and seek to protect and preserve our invested funds by limiting default risk, market risk, and reinvestment risk.

28


As of March 31, 2013, our investments consisted primarily of certificates of deposit, municipal bonds, and institutional money markets, all with maturity of less than 2 years. As a measurement of the sensitivity of our portfolio and assuming that our investment portfolio balances remain constant, a hypothetical decrease of 100 basis points (1%) in interest rates would decrease annual pre-tax earnings by approximately $0.1 million.
We had no debt outstanding as of March 31, 2013. Our only debt instrument at March 31, 2013 was the Credit Facility, which would be subject to variable interest rates and principal payments should we decide to borrow against it. However, assuming a full drawdown on the revolving credit facility, and holding other variables constant, a hypothetical immediate one percentage point change in interest rates would be expected to have an impact on pre-tax earnings and cash flows of approximately $0.5 million over the course of 12 months.
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when we sell products and purchase materials in currencies different from the currency in which product and manufacturing costs were incurred. Our purchasing and sales activities are primarily denominated in the USD, JPY, CNY and EUR. As these currencies fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactions and labor.
Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted by changes in foreign currency exchange rates. Assets and liabilities of many of our subsidiaries outside the U.S. are translated at period end rates of exchange for each reporting period. Operating results and cash flow statements are translated at weighted-average rates of exchange during each reporting period. Although these translation changes have no immediate cash impact, the translation changes may impact future borrowing capacity, and overall value of our net assets.
From time to time, we enter into foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assets and liabilities expected to be settled at a future date. Market risk arises from the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring parameters that limit the types and degree of our derivative contract instruments. We enter into derivative contract instruments for risk management purposes only. We do not enter into or issue derivatives for trading or speculative purposes.
Currency exchange rates vary daily and often one currency strengthens against the USD while another currency weakens. Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the impact of a change in one or more particular exchange rates.
See the “Risk Factors” set forth in Part I, Item 1A of our Annual Report on Form 10-K for more information about the market risks to which we are exposed. There have been no material changes in our exposure to market risk from December 31, 2012.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our Principal Executive Officer (Garry Rogerson, Chief Executive Officer) and Principal Financial Officer (Danny C. Herron, Executive Vice President & Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2013. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit Committee. We intend to continue to review and document our disclosure controls and procedures, including our internal controls and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.


29


Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the fiscal quarter covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

30


PART II OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
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 quarter ended March 31, 2013. For a description of previously reported legal proceedings refer to Part I, Item 3, “Legal Proceedings” of our Annual Report on Form 10-K for the year ended December 31, 2012.

ITEM 1A.
RISK FACTORS
Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2012 describes some of the risks and uncertainties associated with our business. The risk factors set forth below update such disclosures. Other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currently available. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows and future results. Such risks and uncertainties also may impact the accuracy of forward-looking statements included in this Form 10-Q and other reports we file with the Securities and Exchange Commission.

Activities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful than anticipated.
 
As noted in Note 21. Subsequent Event in Part I Item 1 of this Form 10-Q, we recently acquired Refusol Holding GmbH, and we may acquire other businesses in the future. The success of such transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions and to apply our internal controls process to these acquired businesses. The integration of acquisitions may require significant attention from our management, and the diversion of management's attention and resources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when we first enter into the acquisition transaction, or the acquired business may cause us to incur unanticipated costs or liabilities. If actual integration costs are higher than amounts originally anticipated, if we are unable to integrate the assets and personnel acquired in an acquisition as anticipated, if we are unable to benefit from anticipated sales, or if we are unable to fully benefit from anticipated synergies, our business, financial condition, results of operations and cash flows could be materially adversely affected.


ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4.
MINE SAFETY DISCLOSURES
None.
ITEM 5.
OTHER INFORMATION
None.



31



ITEM 6.
EXHIBITS
 
 
3.1

Restated Bylaws, as amended
 
 
31.1

Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2

Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1

Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2

Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




32


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ADVANCED ENERGY INDUSTRIES, INC.
 
 
 
 
Dated:
May 8, 2013
 
/s/ Danny C. Herron
 
 
 
Danny C. Herron
 
 
 
Executive Vice President and Chief Financial Officer


33


INDEX TO EXHIBITS

 
 
 
3.1

 
Restated Bylaws, as amended
 
 
 
31.1

 
Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2

 
Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1

 
Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2

 
Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


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