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, solar panels, and architectural glass. We also supply thermal and Infra-Red measurement instrumentation products for advanced temperature measurement and control in the thin-film processing as well as melt height measurement in crystal growth processes. Our solar inverter products support renewable power generation solutions for residential, commercial, and utility-scale solar projects and installations. Our network of global service support centers 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
September 30, 2012
, and the results of our operations and cash flows for the
three months
and
nine months
ended
September 30, 2012
and
2011
.
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, 2011
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, 2011
.
NEW ACCOUNTING STANDARDS
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Condensed Consolidated Financial Statements upon adoption.
|
|
NOTE 2.
|
BUSINESS 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2011
|
|
2012
|
|
2011
|
Sales
|
|
$
|
10,726
|
|
|
$
|
8,959
|
|
|
$
|
21,280
|
|
Cost of sales
|
|
10,288
|
|
|
9,189
|
|
|
20,948
|
|
Gross profit (loss)
|
|
438
|
|
|
(230
|
)
|
|
332
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
1
|
|
|
—
|
|
|
6
|
|
Selling, general, and administrative
|
|
56
|
|
|
88
|
|
|
196
|
|
Total operating expenses
|
|
57
|
|
|
88
|
|
|
202
|
|
Operating income (loss) from discontinued operations
|
|
381
|
|
|
(318
|
)
|
|
130
|
|
Other income (expense)
|
|
(885
|
)
|
|
881
|
|
|
(117
|
)
|
Income (loss) from discontinued operations before income taxes
|
|
(504
|
)
|
|
563
|
|
|
13
|
|
Provision for income taxes
|
|
75
|
|
|
133
|
|
|
378
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(579
|
)
|
|
$
|
430
|
|
|
$
|
(365
|
)
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets out the tax expense and the effective tax rate for our income from continuing operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Provision for income taxes:
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
10,003
|
|
|
$
|
10,415
|
|
|
$
|
24,126
|
|
|
$
|
52,845
|
|
Provision for income taxes
|
|
4,268
|
|
|
3,244
|
|
|
8,824
|
|
|
13,396
|
|
Effective tax rate
|
|
42.7
|
%
|
|
31.1
|
%
|
|
36.6
|
%
|
|
25.3
|
%
|
Our effective tax rate increased from the
three months
and
nine months
ended 2012 as compared to 2011 because 2012 projected earnings are being taxed in higher tax rate jurisdictions.
We repatriated
$30.0 million
from Japan during the second quarter of
2012
for which a deferred tax liability of
$2.1 million
had been recorded in 2010. The deferred tax liability was reclassified into current taxes payable in the second quarter of 2012. Other than this repatriation, 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
and
nine months
ended
September 30, 2012
and
2011
, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Income from continuing operations, net of income taxes
|
|
$
|
5,735
|
|
|
$
|
7,171
|
|
|
$
|
15,302
|
|
|
$
|
39,449
|
|
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
37,807
|
|
|
43,535
|
|
|
39,148
|
|
|
43,515
|
|
Assumed exercise of dilutive stock options and restricted stock units
|
|
523
|
|
|
284
|
|
|
572
|
|
|
541
|
|
Diluted weighted-average common shares outstanding
|
|
38,330
|
|
|
43,819
|
|
|
39,720
|
|
|
44,056
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.39
|
|
|
$
|
0.91
|
|
Diluted earnings per share
|
|
$
|
0.15
|
|
|
$
|
0.16
|
|
|
$
|
0.39
|
|
|
$
|
0.90
|
|
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 September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Stock options
|
4,042
|
|
|
5,048
|
|
|
5,118
|
|
|
4,270
|
|
Restricted stock units
|
—
|
|
|
423
|
|
|
—
|
|
|
4
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share Repurchases
In November 2011, our Board of Directors authorized a program to repurchase up to
$75.0 million
of our common stock over a twelve-month period. Under this program, during the
nine months
ended
September 30, 2012
, we repurchased and retired
4.7 million
shares of our common stock for a total of $
57.1 million
. We completed this repurchase program during the second quarter of 2012 and no purchases of our common stock were made for the three months ended
September 30, 2012
. Total shares repurchased were
6.4 million
shares of our common stock for a total value of $
75.0 million
.
All share repurchases were executed in the open market and no shares were directly repurchased from related parties. Repurchased shares were retired and remain authorized but unissued.
|
|
NOTE 5.
|
MARKETABLE SECURITIES
|
Our investments with original maturities of more than three months at time of purchase are considered marketable securities available for sale.
The composition of our marketable securities is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Commercial paper
|
|
$
|
748
|
|
|
$
|
748
|
|
|
$
|
2,395
|
|
|
$
|
2,395
|
|
Certificates of deposit
|
|
9,769
|
|
|
9,769
|
|
|
8,333
|
|
|
8,326
|
|
Corporate bonds/notes
|
|
10,927
|
|
|
10,926
|
|
|
7,534
|
|
|
7,523
|
|
Municipal bonds/notes
|
|
287
|
|
|
287
|
|
|
—
|
|
|
—
|
|
Agency bonds/notes
|
|
900
|
|
|
901
|
|
|
7,320
|
|
|
7,323
|
|
Total marketable securities
|
|
$
|
22,631
|
|
|
$
|
22,631
|
|
|
$
|
25,582
|
|
|
$
|
25,567
|
|
The maturities of our marketable securities available for sale as of
September 30, 2012
are as follows:
|
|
|
|
|
|
|
|
|
|
Earliest
|
|
|
|
Latest
|
Commercial paper
|
|
4/5/2013
|
|
to
|
|
4/5/2013
|
Certificates of deposit
|
|
10/14/2012
|
|
to
|
|
2/18/2014
|
Corporate bonds/notes
|
|
10/1/2012
|
|
to
|
|
1/15/2014
|
Municipal bonds/notes
|
|
9/1/2013
|
|
to
|
|
9/1/2013
|
Agency bonds/notes
|
|
7/1/2013
|
|
to
|
|
7/1/2013
|
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
September 30, 2012
, 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
and
nine months
ended
September 30, 2012
and
2011
, 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.
The notional amount of foreign currency exchange contracts at
September 30, 2012
and
2011
was
$18.5 million
and
$22.0 million
, respectively, and the fair value of these contracts was not significant at
September 30, 2012
and
2011
. During the
three months
ended
September 30, 2012
and
2011
we recognized a loss of
$0.9 million
and a gain of
$1.1 million
, respectively, on our foreign currency exchange contracts. During the
nine months
ended
September 30, 2012
and
2011
, we recognized a loss of
$0.3 million
and a gain of
$1.2 million
, respectively. These gains and losses are included as a component
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of other income (expense), net, in our Condensed Consolidated Statements of Operations.
|
|
NOTE 7.
|
ASSETS MEASURED AT FAIR VALUE
|
The following tables present information about our financial assets measured at fair value, on a recurring basis, as of
September 30, 2012
, and
December 31, 2011
. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of
September 30, 2012
, and
December 31, 2011
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
Commercial paper
|
|
$
|
—
|
|
|
$
|
748
|
|
|
$
|
—
|
|
|
$
|
748
|
|
Certificates of deposit
|
|
—
|
|
|
9,769
|
|
|
—
|
|
|
9,769
|
|
Corporate bonds/notes
|
|
—
|
|
|
10,926
|
|
|
—
|
|
|
10,926
|
|
Municipal bonds/notes
|
|
—
|
|
|
287
|
|
|
—
|
|
|
287
|
|
Agency bonds/notes
|
|
901
|
|
|
—
|
|
|
—
|
|
|
901
|
|
Total marketable securities
|
|
$
|
901
|
|
|
$
|
21,730
|
|
|
$
|
—
|
|
|
$
|
22,631
|
|
|
|
|
December 31, 2011
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
(In thousands)
|
Commercial paper
|
|
$
|
—
|
|
|
$
|
2,395
|
|
|
$
|
—
|
|
|
$
|
2,395
|
|
Certificates of deposit
|
|
—
|
|
|
8,326
|
|
|
—
|
|
|
8,326
|
|
Corporate bonds/notes
|
|
—
|
|
|
7,523
|
|
|
—
|
|
|
7,523
|
|
Agency bonds/notes
|
|
7,323
|
|
|
—
|
|
|
—
|
|
|
7,323
|
|
Total marketable securities
|
|
$
|
7,323
|
|
|
$
|
18,244
|
|
|
$
|
—
|
|
|
$
|
25,567
|
|
In the third quarter of 2012, we reclassified our investments in corporate bonds and municipal bonds from Level 1 into Level 2 as we believe this more appropriately reflects the level of inputs available for valuing these financial instruments. There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the
three months
or
nine months
ended
September 30, 2012
.
Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Parts and raw materials
|
|
$
|
61,577
|
|
|
$
|
57,962
|
|
Work in process
|
|
6,519
|
|
|
3,708
|
|
Finished goods
|
|
19,515
|
|
|
18,613
|
|
Inventories, net of reserves
|
|
$
|
87,611
|
|
|
$
|
80,283
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 9.
|
PROPERTY AND EQUIPMENT
|
Details of property and equipment are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
|
2012
|
|
2011
|
Buildings and land
|
|
$
|
1,714
|
|
|
$
|
1,647
|
|
Machinery and equipment
|
|
39,854
|
|
|
40,126
|
|
Computer and communication equipment
|
|
24,268
|
|
|
24,097
|
|
Furniture and fixtures
|
|
2,028
|
|
|
2,648
|
|
Vehicles
|
|
430
|
|
|
464
|
|
Leasehold improvements
|
|
27,270
|
|
|
29,680
|
|
Construction in process
|
|
2,314
|
|
|
6,352
|
|
|
|
97,878
|
|
|
105,014
|
|
Less: Accumulated depreciation
|
|
(59,099
|
)
|
|
(62,676
|
)
|
Property and equipment, net
|
|
$
|
38,779
|
|
|
$
|
42,338
|
|
Depreciation expense recorded in continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Depreciation expense
|
|
$
|
3,075
|
|
|
$
|
2,799
|
|
|
$
|
8,970
|
|
|
$
|
7,735
|
|
The following summarizes the changes in goodwill during the
nine months
ended
September 30, 2012
(in thousands):
|
|
|
|
|
|
Gross carrying amount, December 31, 2011
|
|
$
|
46,515
|
|
Adjustments
|
|
—
|
|
Balance as of September 30, 2012
|
|
$
|
46,515
|
|
|
|
NOTE 11.
|
INTANGIBLE ASSETS
|
Included in our other intangible assets are assets acquired in a business combination that are used in research and development activities. These assets are considered to have indefinite lives until the completion or abandonment of the associated research and development efforts. As of
December 31, 2011
, one project remained as in-process research and development and is presented as non-amortizing intangibles in the table below. All in-process research and development projects were complete as of
September 30, 2012
and are classified as amortizing intangibles.
Other intangible assets consisted of the following as of
September 30, 2012
(in thousands, except weighted-average useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted-Average Useful Life in Years
|
Amortizable intangibles:
|
|
|
|
|
|
|
|
|
Technology-based
|
|
$
|
41,944
|
|
|
$
|
(9,476
|
)
|
|
$
|
32,468
|
|
|
7
|
Trademarks and other
|
|
8,210
|
|
|
(1,379
|
)
|
|
6,831
|
|
|
8
|
Total intangible assets
|
|
$
|
50,154
|
|
|
$
|
(10,855
|
)
|
|
$
|
39,299
|
|
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other intangible assets consisted of the following as of
December 31, 2011
(in thousands, except weighted-average useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted-Average Useful Life in Years
|
Amortizable intangibles:
|
|
|
|
|
|
|
|
|
Technology-based
|
|
$
|
37,922
|
|
|
$
|
(5,841
|
)
|
|
$
|
32,081
|
|
|
7
|
Trademarks and other
|
|
8,210
|
|
|
(875
|
)
|
|
7,335
|
|
|
8
|
Total amortizable intangibles
|
|
46,132
|
|
|
(6,716
|
)
|
|
39,416
|
|
|
|
Non-amortizing intangibles
|
|
4,022
|
|
|
|
|
4,022
|
|
|
|
Total intangible assets
|
|
$
|
50,154
|
|
|
$
|
(6,716
|
)
|
|
$
|
43,438
|
|
|
|
Amortization expense relating to other intangible assets included in our income from continuing operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Amortization expense
|
|
$
|
1,416
|
|
|
$
|
989
|
|
|
$
|
4,139
|
|
|
$
|
2,831
|
|
Amortization expense related to intangibles for each of the five years 2012 through 2016 and thereafter is as follows (in thousands):
|
|
|
|
|
|
Year Ending December 31,
|
|
|
2012 (remaining)
|
|
$
|
1,416
|
|
2013
|
|
8,069
|
|
2014
|
|
8,854
|
|
2015
|
|
8,407
|
|
2016
|
|
6,239
|
|
Thereafter
|
|
6,314
|
|
|
|
$
|
39,299
|
|
|
|
NOTE 12.
|
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 headcount by
233
people or
13.9%
of our total 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.
Over the next 3 months, we expect to implement the remainder of the restructuring plan as we consolidate certain facilities and centralize other activities and expect to incur an additional
$2.0
to
$3.0 million
of restructuring costs during this period. Estimated total expenses to be incurred under this plan are between
$14.5
and
$16.0 million
including the amounts recognized in 2011 and those noted below. Of this total, approximately
$6.5
to
$7.0 million
relates to severance costs,
$2.5 million
relates to asset impairments, and
$5.5
to
$6.5 million
relates to costs to close facilities and relocate portions of our manufacturing.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the components of our restructuring costs incurred under this plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Cumulative costs through
|
|
|
September 30, 2012
|
|
September 30, 2012
|
|
September 30, 2012
|
Severance and related costs
|
|
$
|
1,753
|
|
|
2,200
|
|
|
$
|
5,821
|
|
Property and equipment impairments
|
|
137
|
|
|
649
|
|
|
2,388
|
|
Facility closure costs
|
|
1,113
|
|
|
2,585
|
|
|
4,573
|
|
Total restructuring charges
|
|
$
|
3,003
|
|
|
$
|
5,434
|
|
|
$
|
12,782
|
|
The following table summarizes our restructuring liabilities under the plan (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2011
|
|
Costs incurred and charged to expense
|
|
Cost paid or otherwise settled
|
|
Effect of change in exchange rates
|
|
Balances at September 30, 2012
|
Severance and related costs
|
|
$
|
800
|
|
|
$
|
2,200
|
|
|
$
|
(1,041
|
)
|
|
$
|
(14
|
)
|
|
$
|
1,945
|
|
Property and equipment impairments
|
|
—
|
|
|
649
|
|
|
(649
|
)
|
|
—
|
|
|
—
|
|
Facility closure costs
|
|
1,019
|
|
|
2,585
|
|
|
(1,913
|
)
|
|
—
|
|
|
1,691
|
|
Total restructuring liabilities
|
|
$
|
1,819
|
|
|
$
|
5,434
|
|
|
$
|
(3,603
|
)
|
|
$
|
(14
|
)
|
|
$
|
3,636
|
|
Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from
18
months to
24
months following installation for Thin Films products and
5
years to
10
years following installation for Solar Energy products. Our provision for the estimated cost of warranties is recorded when revenue is recognized. The warranty provision is based on historical experience by product, configuration and geographic region.
We establish accruals for warranty issues that are probable to result in future costs. Changes in product warranty accruals are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Balances at beginning of period
|
|
$
|
14,057
|
|
|
$
|
14,296
|
|
|
$
|
14,719
|
|
|
$
|
12,949
|
|
Increases to accruals related to sales during the period
|
|
2,650
|
|
|
2,498
|
|
|
6,350
|
|
|
7,542
|
|
Warranty expenditures
|
|
(1,832
|
)
|
|
(2,073
|
)
|
|
(6,194
|
)
|
|
(5,770
|
)
|
Balances at end of period
|
|
$
|
14,875
|
|
|
$
|
14,721
|
|
|
$
|
14,875
|
|
|
$
|
14,721
|
|
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
$19.2 million
as of
September 30, 2012
, of which
$0.4 million
is classified in Customer deposits and
$18.8 million
is classified in Other long-term liabilities in the Condensed Consolidated Balance Sheet as of
September 30, 2012
. As of
December 31, 2011
, deferred revenue related to extended warranty contracts was
$12.9 million
, of which
$8.0 million
is classified in Customer deposits and
$4.9 million
is classified in Other long-term liabilities.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 14.
|
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
and
nine months
ended
September 30, 2012
and
2011
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Stock-based compensation expense
|
|
$
|
2,835
|
|
|
$
|
3,228
|
|
|
$
|
10,072
|
|
|
$
|
9,362
|
|
Stock Options
Stock option awards, other than awards under our 2012-2014 Long Term Incentive Plan ("LTI Plan"), are generally granted with an exercise price equal to the market price of our common stock at the date of grant, a
four
-year vesting schedule, and a term of
10
years.
Under the LTI Plan, we made grants of performance based options and awards during the first quarter of 2012, which will vest annually over a
three-year period
based on the Company's achievement of return on net assets targets established by our Board of Directors at the time the grants were made. 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
nine months
ended
September 30, 2012
is as follows (in thousands):
|
|
|
|
|
|
|
Shares
|
Options outstanding at December 31, 2011
|
|
5,821
|
|
Options granted
|
|
1,678
|
|
Options exercised
|
|
(349
|
)
|
Options forfeited
|
|
(934
|
)
|
Options expired
|
|
(221
|
)
|
Options outstanding at September 30, 2012
|
|
5,995
|
|
Restricted Stock Units
Restricted Stock Units ("RSU") 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.
A summary of our non-vested RSU activity for the
nine months
ended
September 30, 2012
is as follows (in thousands):
|
|
|
|
|
|
|
Shares
|
Balance at December 31, 2011
|
|
764
|
|
RSUs granted
|
|
19
|
|
RSUs vested
|
|
(219
|
)
|
RSUs forfeited
|
|
(124
|
)
|
Balance at September 30, 2012
|
|
440
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 15.
|
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, 2011
|
$
|
28,542
|
|
|
$
|
(15
|
)
|
|
$
|
28,527
|
|
Current period other comprehensive income (loss)
|
226
|
|
|
16
|
|
|
242
|
|
Balances at September 30, 2012
|
$
|
28,768
|
|
|
$
|
1
|
|
|
$
|
28,769
|
|
|
|
NOTE 16.
|
COMMITMENTS AND CONTINGENCIES
|
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of
September 30, 2012
is approximately
$67.7 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.
|
|
NOTE 17.
|
RELATED PARTY TRANSACTIONS
|
During the
three months
and
nine months
ended
September 30, 2012
and
2011
, we engaged in the following transactions with companies related to members of our Board of Directors, as described below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Sales - related parties
|
$
|
102
|
|
|
$
|
1,266
|
|
|
$
|
579
|
|
|
$
|
3,820
|
|
Rent expense - related parties
|
466
|
|
|
575
|
|
|
1,403
|
|
|
1,732
|
|
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
and
nine months
ended
September 30, 2012
we had sales to
two
such customers as noted above and aggregate accounts receivable from
two
such customers totaled
$82,000
at
September 30, 2012
. During the
three months
and
nine months
ended
September 30, 2011
we had sales to
two
such customers as noted above and aggregate accounts receivable from
two
such customers totaled
$48,000
at
December 31, 2011
.
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
$1.4 million
, which includes facilities rent and common area maintenance costs.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
NOTE 18.
|
SIGNIFICANT CUSTOMER INFORMATION
|
During the
three months
ended
September 30, 2012
, we have two customers that account for
10%
or more of our sales. During the three months ended
September 30, 2011
and the
nine months
ended
September 30, 2012
and
2011
, we had one customer that accounted for
10%
or more of our sales. Sales to these customers as a percent of total sales were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Applied Materials, Inc.
|
|
12.0
|
%
|
|
11.0
|
%
|
|
14.7
|
%
|
|
13.0
|
%
|
Swinterton Builders, Inc
|
|
11.1
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Swinterton Builders, Inc. accounted for
12.1%
of our gross accounts receivable as of
September 30, 2012
. No other customers accounted for
10%
or more of our gross accounts receivable as of
September 30, 2012
or
December 31, 2011
.
|
|
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 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. Our Solar Energy SBU focuses on residential, 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.
Sales with respect to our operating segments is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Thin Films
|
|
$
|
56,780
|
|
|
$
|
76,764
|
|
|
$
|
182,013
|
|
|
$
|
274,194
|
|
Solar Energy
|
|
60,735
|
|
|
51,734
|
|
|
156,947
|
|
|
130,110
|
|
Total
|
|
$
|
117,515
|
|
|
$
|
128,498
|
|
|
$
|
338,960
|
|
|
$
|
404,304
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income from continuing operations before income taxes by operating segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2012
|
|
2011
|
|
2012
|
|
2011
|
Thin Films
|
|
$
|
6,065
|
|
|
$
|
16,015
|
|
|
$
|
18,113
|
|
|
$
|
60,881
|
|
Solar Energy
|
|
7,410
|
|
|
1,259
|
|
|
10,643
|
|
|
4,092
|
|
Total segment operating income
|
|
13,475
|
|
|
17,274
|
|
|
28,756
|
|
|
64,973
|
|
Corporate expenses
|
|
(534
|
)
|
|
(3,481
|
)
|
|
(1,447
|
)
|
|
(9,505
|
)
|
Restructuring charges
|
|
(3,003
|
)
|
|
(3,119
|
)
|
|
(5,434
|
)
|
|
(3,119
|
)
|
Other income (expense)
|
|
65
|
|
|
(259
|
)
|
|
2,251
|
|
|
496
|
|
Income from continuing operations before income taxes
|
|
$
|
10,003
|
|
|
$
|
10,415
|
|
|
$
|
24,126
|
|
|
$
|
52,845
|
|
Beginning in 2012, we are allocating "Corporate expenses" in full to our business units. These expenses, which include certain support functions such as legal, human resources, information technology, accounting and finance, are now allocated in full to the business units based on sales contribution. This change was implemented in an effort to provide our chief operating decision maker with a clearer understanding of the business unit's operating performance. The remaining Corporate expenses consist of intangible amortization from past acquisitions.
Segment assets consist of inventories, net and property and equipment, net. A summary of consolidated total assets by segment is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2012
|
|
December 31, 2011
|
Thin Films
|
|
$
|
46,290
|
|
|
$
|
59,025
|
|
Solar Energy
|
|
75,911
|
|
|
62,605
|
|
Total segment assets
|
|
122,201
|
|
|
121,630
|
|
Unallocated corporate property and equipment
|
|
4,189
|
|
|
991
|
|
Unallocated Corporate assets
|
|
395,263
|
|
|
410,757
|
|
Consolidated total assets
|
|
$
|
521,653
|
|
|
$
|
533,378
|
|
Unallocated corporate assets include accounts receivable, deferred income taxes and intangible assets.
Subsequent to the end of the third quarter, 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 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 (
2.0%
) 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.
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.
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.