NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
In this Annual Report on Form 10-K, we use the terms “Advanced Energy”, “the Company”, “we”, “us” or “our” to refer to Advanced Energy Industries, Inc. and its subsidiaries.
|
|
NOTE 1.
|
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
|
We design, manufacture, sell and support power conversion and control 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, industrial electro-thermal applications for material and chemical processes, precision power for analytical instrumentation, as well as grid-tied power conversion. We also supply thermal instrumentation products for advanced temperature control in these markets. Our network of global service support centers provides local repair and field service capability in key regions. As of December 31, 2015, we discontinued our Inverter production, engineering, and sales product line. As such, all Inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein and we currently report as a single unit. See
Note 3. Discontinued Operations
for more information.
Principles of Consolidation
— Our Consolidated Financial Statements include our accounts and the accounts of our wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Our Consolidated Financial Statements are stated in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”).
Use of Estimates in the Preparation of the Consolidated Financial Statements
— The preparation of our 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 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, 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.
Foreign Currency Translation
— The functional currency of our foreign subsidiaries is their local currency, with the exception of our manufacturing facility in Shenzhen, The People's Republic of China (“PRC”) and our regional headquarters in Singapore, where the United States dollar is the functional currency. Assets and liabilities of foreign subsidiaries are translated to United States dollars at period-end exchange rates, and our Consolidated Statements of Operations and Cash Flows are translated at average exchange rates during the period. Resulting translation adjustments are recorded as a component of accumulated other comprehensive income.
Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses which are reflected as unrealized (based on period end translation) or realized (upon settlement of the transactions) in other income, net in our Consolidated Statements of Operations.
Fair Value of Financial Instruments
— We value our financial assets and liabilities using fair value measurements. Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The carrying amount of cash and cash equivalents, marketable securities, accounts receivable, other current assets, accounts payable, accrued liabilities, and other current liabilities in our Consolidated Financial Statements approximates fair value because of the short-term nature of the instruments.
Cash and Cash Equivalents
— We consider all amounts on deposit with financial institutions and highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are highly liquid investments that consist primarily of short-term money market instruments and demand deposits with insignificant interest rate risk and original maturities of three months or less at the time of purchase.
Sometimes we invest excess cash in money market funds not insured by the Federal Deposit Insurance Corporation. We believe that the investments in money market funds are on deposit with credit-worthy financial institutions and that the funds are highly liquid. The investments in money market funds are reported at fair value, with interest income recorded in earnings and are included in “Cash and cash equivalents.” The fair values of our investments in money market funds are based on the quoted market prices.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
As of
December 31, 2017
we have
$1.2 million
of cash included in cash and cash equivalents that is restricted from immediate withdrawal. Of this amount,
$0.5 million
is a refund from a European tax authority, restricted until the tax authority completes its audit procedures,
$0.2 million
is restricted for China and Taiwan Customs Clearance transactions as a guarantee of Customs Duty, adjusted annually based on projected customs clearance transactions, and
$0.5 million
is collateral for the U.S. purchasing card program, restricted for the duration of the card program.
Marketable Securities
— All of our investments in marketable securities are classified as available-for-sale at the respective balance sheet dates. Marketable securities classified as available-for-sale are recorded at fair value based upon quoted market prices, and any temporary difference between the cost and fair value of the investment is presented as a separate component of accumulated other comprehensive income (loss). We recognize gains and losses on the date our investments mature or are sold and record these gains and losses in other income, net. The specific identification method is used to determine the gains and losses on investments in marketable securities.
Concentrations of Credit Risk —
Financial instruments, which potentially subject us to credit risk, include cash and cash equivalents, marketable securities, and trade accounts receivable. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of high quality and sound financial condition. Our investments are in low-risk instruments and we limit our credit exposure in any one institution or type of investment instrument based upon criteria including creditworthiness.
At
December 31, 2017
, our accounts receivable from Applied Materials and Lam Research were
$36.8 million
, or
42.0%
and
$5.4 million
, or
6.2%
of our total accounts receivable, respectively. At
December 31, 2016
, our accounts receivable from Applied Materials and Lam Research were
$31.1 million
, or
41.1%
and
$14.3 million
, or
18.9%
of our total accounts receivable, respectively. No other customer balance exceeded
10%
of our total accounts receivable balance at
December 31, 2017
or
December 31, 2016
. We have established an allowance for doubtful accounts based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
Accounts Receivable and Allowance for Doubtful Accounts —
Accounts receivable are recorded at net realizable value. We maintain a credit approval process and we make significant judgments in connection with assessing our customers’ ability to pay at the time of shipment. Despite this assessment, from time to time, our customers are unable to meet their payment obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results.
Changes in allowance for doubtful accounts are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Balances at beginning of period
|
|
$
|
1,943
|
|
|
$
|
8,739
|
|
|
$
|
1,052
|
|
Additions - charged to expense
|
|
—
|
|
|
1,332
|
|
|
7,837
|
|
Deductions - write-offs, net of recoveries
|
|
(195
|
)
|
|
(8,128
|
)
|
|
(150
|
)
|
Balances at end of period
|
|
$
|
1,748
|
|
|
$
|
1,943
|
|
|
$
|
8,739
|
|
Inventories
— Inventories include costs of materials, direct labor, manufacturing overhead, in-bound freight, and duty. Inventories are valued at the lower of cost (first-in, first-out method) or market and are presented net of reserves for excess and obsolete inventory.
We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on historical usage and our estimated forecast of product demand. Demand for our products can fluctuate significantly. A significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand.
In addition, our industry is subject to technological change, new product development, and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
Property and Equipment
— Property and equipment is stated at cost or estimated fair value if acquired in a business combination. Depreciation is computed over the estimated useful lives using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings,
20
to
40
years; machinery, equipment, furniture and fixtures and vehicles,
three
to
10
years; and computer and communication equipment,
three
years.
Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the lease term or the estimated useful life of the assets, whichever period is shorter. Leasehold additions and improvements are capitalized, while maintenance and repairs are expensed as incurred.
When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in other income, net, in our Consolidated Statements of Operations.
Intangible Assets, Goodwill and Other Long-Lived Assets
— As a result of our acquisitions, we identified and recorded intangible assets and goodwill. Intangible assets are valued based on estimates of future cash flows and amortized over their estimated useful lives. Goodwill is subject to annual impairment testing, as well as testing upon the occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets are subject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows.
The estimation of useful lives and expected cash flows requires us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to our carrying value of these assets and may result in material charges to our results of operations.
The annual impairment test for goodwill can be performed using an assessment of qualitative factors in determining if it is more likely than not that goodwill is impaired. If this assessment indicates that it is more likely than not that goodwill is impaired, the next step of impairment testing compares the fair value of a reporting unit to its carrying value. Goodwill would be impaired if the resulting implied fair value of goodwill was less than the recorded carrying value of the goodwill.
Revenue Recognition
— We recognize revenue from product sales upon transfer of title and risk of loss to our customers provided that there is evidence of an arrangement, the sales price is fixed or determinable, and the collection of the related receivable is reasonably assured. In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales.
We maintain a worldwide support organization in nine countries, including the United States, the PRC, Japan, Korea, Taiwan, Canada, Germany, Ireland and Great Britain. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our standard warranty do not generate revenue.
As part of our ongoing service business, we satisfy our service obligations under extended warranties and preventive maintenance contracts. Extended warranties had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenance plans are deferred and recognized ratably over the service periods, as defined in the agreements. We have deferred revenue related to our extended warranties and service contracts totaling
$37.5 million
as of
December 31, 2017
and
$40.8 million
as of
December 31, 2016
.
Research and Development Expenses
— Costs incurred to advance, test or otherwise modify our proprietary technology or develop new technologies are considered research and development costs and are expensed when incurred. These costs are primarily comprised of costs associated with the operation of our laboratories and research facilities, including internal labor, materials, and overhead.
Warranty Costs
— We provide for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. We offer warranty coverage for a majority of our Precision Power products for periods typically ranging from 12 to 24 months after shipment. We warranted our inverter products for five to ten years and provided the option to purchase additional warranty coverage for up to 20 years. The warranty expense accrued related to our standard inverter product warranties is now considered part of our discontinued operations and is recorded as such on our Consolidated Balance Sheets. See
Note 3. Discontinued Operations
for more information. See
Note 12.
Warranties
for more information on our warranties from continuing operations. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the repairs. The assumptions we use to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
appropriate, the accruals are adjusted. Should product failure rates differ from our estimates, actual costs could vary significantly from our expectations.
Stock-Based Compensation
— Accounting for stock-based compensation requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. We have estimated the fair value of all stock options and awards on the date of grant using the Black-Scholes-Merton pricing model, which is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise behaviors, risk-free interest rates and expected dividends. We also estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from our estimates. Our expected volatility assumption is based on the historical daily closing price of our stock over a period equivalent to the expected life of the options.
Income Taxes
— We follow the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for future tax consequences. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry-forwards. Tax rate changes are reflected in the period such changes are enacted.
We assess the recoverability of our net deferred tax assets and the need for a valuation allowance on a quarterly basis. Our assessment includes a number of factors including historical results and taxable income projections for each jurisdiction. The ultimate realization of deferred income tax assets is dependent on the generation of taxable income in appropriate jurisdictions during the periods in which those temporary differences are deductible. We consider the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in determining the amount of the valuation allowance. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred income tax assets are deductible, we determine if we will realize the benefits of these deductible differences.
Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions. In general, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. The first step is to evaluate the tax position for recognition by determining, if based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.
On December 22, 2017, the Tax Act was enacted into law and the new legislation contains several key tax provisions that affected us, including a one-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21%, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets and liabilities, as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118,
Income Tax Accounting Implications of the Tax Cuts and Jobs Act
(SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date.
Our accounting for the following elements of the Tax Act is incomplete and we were not yet able to make reasonable estimates of the effects, therefore, no provisional adjustments were recorded. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision of the Tax Act and the application of ASC 740
Income Taxes
. Under U.S. GAAP, we are required to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring such amounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI tax rules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTI and, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on not only our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we are not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax in our financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, we consider the accounting for the transition tax, deferred tax re-measurements, and other items to be incomplete due to forthcoming guidance and our ongoing analysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118. See
Note 4. Income Taxes
for more information.
Commitments and Contingencies
— From time to time we are involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations in a particular period. An unfavorable decision, particularly in patent litigation, could require material changes in production processes and products or result in our inability to ship products or components found to have violated third-party patent rights. We accrue loss contingencies when it is probable that a loss has occurred or will occur and the amount of the loss can be reasonably estimated. Our estimates of probability of losses are subjective, involve significant judgment and uncertainties, and are based on the best information we have at any given point in time. Resolution of these uncertainties in a manner inconsistent with our expectations could have a significant impact on our results of operations and financial condition
NEW ACCOUNTING STANDARDS
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Consolidated Financial Statements upon adoption.
In May 2014, the FASB issued
ASU 2014-09, "Revenue from Contracts with Customers"
and has subsequently issued several supplemental and/or clarifying ASUs (collectively known as "ASC 606"). ASC 606 implements a five-step model for how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal periods beginning after December 15, 2017 and for the interim periods within that year. Advanced Energy has established a cross-functional implementation team to analyze its current portfolio of customer contracts. We have completed the disaggregation of the related sales order data and are finalizing detailed testing of contract elements. The implementation team is close to completion on identifying and implementing changes to existing business processes, controls, and systems in order to support revenue recognition and disclosure under the new standard.
Based on our completed reviews of our customer contracts and attribute testing, we expect that revenue with the majority of our customers will continue to be recognized at a point in time, generally upon shipment of products, consistent with our current revenue recognition model. The most significant update identified in connection with the implementation of ASC 606 is related to the recognition of revenue from sales of inventory to customers under vendor managed inventory or just-in-time inventory arrangements. Prior to implementation of ASU 606, revenue was recognized upon transfer of title, which is triggered by the customer's usage of inventory. Under ASC 606, revenue will be recognized upon delivery of inventory to customer site warehouses to align with transfer of control of the inventory. Analysis of variable consideration within customers contracts has been performed and no material updates for ASC 606 adoption were identified.
The standard permits the use of either the retrospective or cumulative effect transition method. We will adopt the new revenue guidance effective January 1, 2018 with a cumulative adjustment to the opening balance of Retained earnings as opposed to retrospectively adjusting our prior periods. This adjustment is anticipated to increase our Retained earnings by less than
$10 million
. Additionally, ongoing impacts of ASC 606 adoption to net income are currently anticipated to be immaterial. Adoption of ASC 606 will also result in future adjustments to the balances of Revenues, Costs of sales, Accounts receivable, and Inventory. We will continue to assess the impact of ASC 606 as adoption is fully completed in 2018, and there remain areas to be fully concluded upon. Additionally, reviews are still underway which may alter current conclusions and the financial impact of ASC 606.
In February 2016, the FASB issued
ASU 2016-02, "Leases (Topic 842),"
to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption. Early adoption is permitted. Advanced Energy is currently assessing and has not yet determined the impact ASU 2016-02 may have on its Consolidated Financial Statements.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
October 2016, the FASB issued
ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.”
ASU 2016-16 changes the timing of income tax recognition for an intercompany sale of assets. ASU 2016-16 requires the seller’s tax effects and the buyer’s deferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a third party or recovered through use. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 including interim periods within the year of adoption. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption. Early adoption is allowed but only if adopted in the first quarter of fiscal year 2017. Advanced Energy is currently assessing the impact of ASU 2016-16 adoption and while it has not completed the assessment, it has determined the impact of ASU 2016-16 adoption will require the recognition of deferred tax assets totaling approximately
$15 million
with a corresponding increase to Retained Earnings in its Consolidated Financial Statements upon adoption.
In March 2017, the FASB issued
ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost”
, an update to ASC Topic 715 – Compensation – Retirement Benefits. The amendments in ASU 2017-07 require that the service cost component of the net periodic benefit cost be presented in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost should be reported separately from the line item that includes the service cost and outside of any subtotal of operating income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, and for the interim periods within those annual reporting periods. Early adoption is permitted. The Company does not expect this standard will have a material impact on our Consolidated Financial Statements.
|
|
NOTE 2.
|
BUSINESS ACQUISITIONS
|
On July 3, 2017, Advanced Energy acquired all of the issued and outstanding shares of capital stock of Excelsys Holdings Limited (“Excelsys”), an electronics manufacturer in Cork, Ireland. This acquisition is part of Advanced Energy’s strategy to continue to grow and diversify its revenue through organic and inorganic opportunities. The high-efficiency, configurable power supplies that Excelsys manufactures for medical and industrial applications will further enhance Advanced Energy’s product portfolio.
The components of the fair value of the total consideration transferred for the Excelsys acquisition are as follows:
|
|
|
|
|
Cash paid to owners
|
$
|
18,512
|
|
Cash acquired
|
(1,165
|
)
|
Total fair value of consideration transferred
|
$
|
17,347
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of July 3, 2017:
|
|
|
|
|
Accounts receivable
|
$
|
1,930
|
|
Inventories
|
1,048
|
|
Income taxes receivable
|
558
|
|
Other current assets
|
47
|
|
Property and equipment
|
256
|
|
Deferred income tax asset
|
35
|
|
Accounts payable
|
(1,342
|
)
|
Income taxes payable
|
(34
|
)
|
Other accrued expenses
|
(719
|
)
|
Deferred income tax liabilities
|
(946
|
)
|
|
833
|
|
Amortizable intangible assets:
|
|
Tradename
|
182
|
|
Customer relationships
|
1,595
|
|
Technology
|
5,808
|
|
Total amortizable intangible assets
|
7,585
|
|
Total identifiable net assets
|
8,418
|
|
Goodwill
|
8,929
|
|
Total fair value of consideration transferred
|
$
|
17,347
|
|
A summary of the intangible assets acquired, amortization method and estimated useful lives as of July 3, 2017 follows:
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
Amortization Method
|
|
Useful Life
|
Tradename
|
|
$
|
182
|
|
|
Straight-line
|
|
5
|
Customer relationships
|
|
1,595
|
|
|
Straight-line
|
|
10
|
Technology
|
|
5,808
|
|
|
Straight-line
|
|
10
|
|
|
$
|
7,585
|
|
|
|
|
|
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into adjacent markets we already serve. Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed.
|
|
NOTE 3.
|
DISCONTINUED OPERATIONS
|
In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as “Income (loss) from discontinued operations, net of income taxes” on our Consolidated Statements of Operations for all periods presented herein.
The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associated services are rendered. Extended warranties related to the inverter product line are no longer offered.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
The significant items included in "Income (loss) from discontinued operations, net of income taxes" are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95,856
|
|
Cost of sales
|
234
|
|
|
154
|
|
|
139,045
|
|
Total operating (income) expenses (including restructuring)
|
(1,576
|
)
|
|
(3,894
|
)
|
|
232,262
|
|
Operating income (loss) from discontinued operations
|
1,342
|
|
|
3,740
|
|
|
(275,451
|
)
|
Other income (expense)
|
337
|
|
|
2,636
|
|
|
(55
|
)
|
Income (loss) from discontinued operations before income taxes
|
1,679
|
|
|
6,376
|
|
|
(275,506
|
)
|
Benefit for income taxes
|
(81
|
)
|
|
(4,130
|
)
|
|
(33,538
|
)
|
Income (loss) from discontinued operations, net of income taxes
|
$
|
1,760
|
|
|
$
|
10,506
|
|
|
$
|
(241,968
|
)
|
Assets and Liabilities of discontinued operations within the Consolidated Balance Sheets are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Cash and cash equivalents
|
|
$
|
7,754
|
|
|
$
|
7,564
|
|
Accounts and other receivables, net
|
|
1,363
|
|
|
1,670
|
|
Inventories
|
|
418
|
|
|
167
|
|
Current assets of discontinued operations
|
|
$
|
9,535
|
|
|
$
|
9,401
|
|
|
|
|
|
|
Other assets
|
|
72
|
|
|
70
|
|
Deferred income tax assets
|
|
11,013
|
|
|
15,560
|
|
Non-current assets of discontinued operations
|
|
$
|
11,085
|
|
|
$
|
15,630
|
|
|
|
|
|
|
Accounts payable and other accrued expenses
|
|
541
|
|
|
3,684
|
|
Accrued warranty
|
|
7,305
|
|
|
9,254
|
|
Accrued restructuring
|
|
4
|
|
|
481
|
|
Current liabilities of discontinued operations
|
|
$
|
7,850
|
|
|
$
|
13,419
|
|
|
|
|
|
|
Accrued warranty
|
|
15,112
|
|
|
20,976
|
|
Other liabilities
|
|
165
|
|
|
181
|
|
Non-current liabilities of discontinued operations
|
|
$
|
15,277
|
|
|
$
|
21,157
|
|
The geographic distribution of pretax income from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Domestic
|
|
$
|
29,088
|
|
|
$
|
13,776
|
|
|
$
|
13,237
|
|
Foreign
|
|
169,103
|
|
|
114,300
|
|
|
92,205
|
|
|
|
$
|
198,191
|
|
|
$
|
128,076
|
|
|
$
|
105,442
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
The provision for income taxes from continuing operations is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
26,550
|
|
|
$
|
3,187
|
|
|
$
|
5,823
|
|
State
|
|
601
|
|
|
351
|
|
|
335
|
|
Foreign
|
|
9,621
|
|
|
3,081
|
|
|
5,950
|
|
Total current provision
|
|
$
|
36,772
|
|
|
$
|
6,619
|
|
|
$
|
12,108
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
$
|
28,297
|
|
|
$
|
3,110
|
|
|
$
|
569
|
|
State
|
|
(1,000
|
)
|
|
1,564
|
|
|
870
|
|
Foreign
|
|
(1,979
|
)
|
|
(165
|
)
|
|
8,413
|
|
Total deferred provision
|
|
25,318
|
|
|
4,509
|
|
|
9,852
|
|
Total provision for income taxes
|
|
$
|
62,090
|
|
|
$
|
11,128
|
|
|
$
|
21,960
|
|
The Company's effective income tax rate is lower than the 35% U.S. statutory tax rate primarily because of benefits from lower-taxed global operations. In 2017, our effective tax rate was also impacted by the effect of the recently enacted U.S. Tax Act, offset partially by a benefit related to the continued wind down of our solar inverter business. The following reconciles our effective tax rate on income from continuing operations to the federal statutory rate of 35%:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Income taxes per federal statutory rate
|
|
$
|
69,348
|
|
|
$
|
44,826
|
|
|
$
|
37,498
|
|
State income taxes, net of federal deduction
|
|
1,794
|
|
|
963
|
|
|
1,204
|
|
Change in valuation allowance
|
|
841
|
|
|
(85
|
)
|
|
6,503
|
|
Transition tax - U.S. Tax Reform
|
|
61,690
|
|
|
—
|
|
|
—
|
|
Corporate tax rate change - U.S. Tax Reform
|
|
11,177
|
|
|
—
|
|
|
—
|
|
Tax benefit associated with inverter business wind down
|
|
(33,837
|
)
|
|
—
|
|
|
—
|
|
Stock based compensation
|
|
(5,263
|
)
|
|
1,117
|
|
|
(166
|
)
|
Tax Amortization
|
|
(2,558
|
)
|
|
—
|
|
|
—
|
|
Tax effect of foreign operations
|
|
(47,482
|
)
|
|
(31,651
|
)
|
|
(22,495
|
)
|
Uncertain tax positions
|
|
4,948
|
|
|
1,636
|
|
|
2,122
|
|
Tax credits
|
|
(658
|
)
|
|
(4,495
|
)
|
|
(969
|
)
|
Other permanent items, net
|
|
2,090
|
|
|
(1,183
|
)
|
|
(1,737
|
)
|
|
|
$
|
62,090
|
|
|
$
|
11,128
|
|
|
$
|
21,960
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences are expected to be reversed. Significant deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
Deferred tax assets
|
|
|
|
|
Stock based compensation
|
|
$
|
1,295
|
|
|
$
|
2,281
|
|
Net operating loss and tax credit carryforwards
|
|
40,572
|
|
|
36,145
|
|
Pension obligation
|
|
3,363
|
|
|
2,338
|
|
Excess and obsolete inventory
|
|
841
|
|
|
3,031
|
|
Deferred revenue
|
|
4,519
|
|
|
11,998
|
|
Employee bonuses and commissions
|
|
1,112
|
|
|
1,908
|
|
Other
|
|
2,118
|
|
|
3,624
|
|
Deferred tax assets
|
|
53,820
|
|
|
61,325
|
|
Less: Valuation allowance
|
|
(32,267
|
)
|
|
(26,120
|
)
|
Net deferred tax assets
|
|
21,553
|
|
|
35,205
|
|
Deferred tax liabilities
|
|
|
|
|
Depreciation and amortization
|
|
2,605
|
|
|
2,266
|
|
Foreign other
|
|
3,448
|
|
|
1,538
|
|
Other
|
|
62
|
|
|
212
|
|
Deferred tax liabilities
|
|
6,115
|
|
|
4,016
|
|
Net deferred tax assets
|
|
$
|
15,438
|
|
|
$
|
31,189
|
|
As of December 31, 2017, the Company has recorded a valuation allowance on a portion of its U.S. domestic deferred tax assets of approximately
$2.8 million
related to state net operating losses. The remaining valuation allowance on deferred tax assets approximates
$29.5 million
and is associated primarily with operations in Germany, the UK, and India including losses that are both operating and capital in nature. As of December 31, 2017, there is not sufficient positive evidence to conclude that such deferred tax assets will be recognized. The December 31, 2017 valuation allowance balance reflects an increase of
$6.1 million
during the year. The current rate reconciliation includes
$0.8 million
of such increase and is primarily attributable to an increase in the state valuation allowance for revisions to estimates of 2017 state income, and forecasted state income, offset by a reduction in the state effective tax rate on deferred tax balances. The balance of the current year valuation allowance increase is associated with foreign activity. Several of our foreign entities have full valuation allowances against their deferred tax balances. Movement during 2017 in these deferred tax balances attributable to rate changes, prior year taxable income adjustments, and movement attributable to annual operating activities requires a corresponding adjustment to the related valuation allowance balances. The changes in valuation allowance associated with these foreign items are included in the rate reconciliation as a component of the tax effects of foreign operations.
As of December 31, 2017, the Company had foreign and state tax loss carryforwards of approximately
$174.0 million
, and
$116.6 million
, respectively. The Company plans to utilize its U.S. federal net operating loss carryforwards against the recently enacted transition tax. The U.S. state tax loss carryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state laws. The U.S. state losses will expire from 2019 to 2037 and the majority of the foreign operating losses have no expiration date. Additionally, the majority of the foreign losses are subject to full valuation allowance. The majority of the foreign operating losses have no expiration date.
In 2017, we began operating under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through June 30, 2027, and may be extended if certain additional requirements are met. The tax holiday is conditional upon our meeting certain employment and investment thresholds. The impact of the tax holiday in 2017 decreased the tax benefit recognized on the current start up tax loss in that jurisdiction by approximately
$6.0 million
and decreased our income from continuing operations by
$0.15
per diluted share.
Our accounting for the following elements of the Tax Act is based upon our current understanding of the Tax Act and its estimated impact. However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
adjustments as follows:
The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and deferred tax liabilities, we have recorded a provisional net decrease of
$11.1 million
with a corresponding adjustment to deferred income tax expense for the year ended December 31, 2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysis related to the Tax Act, including, but not limited to our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal temporary differences.
The Transition Tax is a one-time tax on previously untaxed accumulated earnings and profits (E&P) of our foreign subsidiaries. We are able to make a reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of
$61.8 million
. However, we are continuing to gather additional information to more precisely compute the amount of the Transition Tax. The Transition Tax may be paid over a period of 8 years; 8% per year for years 1 - 5, 15% for year 6, 20% for year 7 and 25% for year 8. We intend to utilize our U.S. net operating loss carryforward to reduce the ultimate cash tax obligation and have currently reflected a total tax payable of
$16 million
with
$1 million
classified as a current liability and
$15 million
classified as Other long term liabilities in the Balance Sheet at December 31, 2017.
We previously considered the earnings in our foreign subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes. Total estimated foreign earnings totaled
$524.9 million
at December 31, 2017. The Company continues to assert that such foreign earnings are indefinitely invested in operations outside the U.S. While the Transition Tax results in a reduction to undistributed foreign earnings to tax in the future, an actual repatriation from our foreign subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We will record the tax effects of any change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related to our foreign investments, if practicable, in the period that we are first able to make a reasonable estimate.
We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing these positions in the financial statements. The reconciliation of our total gross unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Balance at beginning of period
|
|
$
|
11,401
|
|
|
$
|
10,049
|
|
|
$
|
8,001
|
|
Additions based on tax positions taken during a prior period
|
|
1,258
|
|
|
104
|
|
|
433
|
|
Additions based on tax positions taken during the current period
|
|
4,433
|
|
|
2,318
|
|
|
3,413
|
|
Reductions related to a lapse of applicable statute of limitations
|
|
(1,102
|
)
|
|
(1,070
|
)
|
|
(1,798
|
)
|
Balance at end of period
|
|
$
|
15,990
|
|
|
$
|
11,401
|
|
|
$
|
10,049
|
|
The full
$16.0 million
of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. In accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We had
$1.0 million
and
$0.8 million
of accrued interest and penalties at December 31, 2017 and 2016, respectively. We do not anticipate a material change to the amount of unrecognized tax positions within the next 12 months.
With few exceptions, the Company is no longer subject to federal state or foreign income tax examinations by tax authorities for years before 2014.
|
|
NOTE 5.
|
EARNINGS PER SHARE
|
Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share for the years ended
December 31, 2017
,
2016
, and
2015
:
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Income from continuing operations, net of income taxes
|
|
$
|
136,101
|
|
|
$
|
116,948
|
|
|
$
|
83,482
|
|
|
|
|
|
|
|
|
Basic weighted-average common shares outstanding
|
|
39,754
|
|
|
39,720
|
|
|
40,746
|
|
Assumed exercise of dilutive stock options and restricted stock units
|
|
422
|
|
|
311
|
|
|
331
|
|
Diluted weighted-average common shares outstanding
|
|
40,176
|
|
|
40,031
|
|
|
41,077
|
|
Continuing operations:
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
3.42
|
|
|
$
|
2.94
|
|
|
$
|
2.05
|
|
Diluted earnings per share
|
|
$
|
3.39
|
|
|
$
|
2.92
|
|
|
$
|
2.03
|
|
The following stock options and restricted units were excluded in the computation of diluted earnings per share because they were anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Stock options
|
|
—
|
|
|
—
|
|
|
155
|
|
Restricted stock units
|
|
—
|
|
|
1
|
|
|
1
|
|
Stock Buyback
In September 2015, our Board of Directors authorized a program to repurchase up to
$150.0 million
of our stock. In November 2017, our Board of Directors approved an extension to the share repurchase program to December 2019 from its original maturity of March 2018. As of December 31, 2017, we had
$70.0 million
remaining for the authorized repurchase of shares.
In November 2015 we entered into a Fixed Dollar Accelerated Share Repurchase Transaction to purchase
$50.0 million
of shares of our common stock in the open market. A total of
1.7 million
shares of our common stock was repurchased under the Fixed Dollar Accelerated Share Repurchase Agreement at an average price of
$28.99
per share.
In August and December 2017, we entered into Fixed Dollar Share Repurchase Agreements to repurchase
$25.0 million
and
$5.0 million
, respectively, of shares of our common stock in the open market. Total shares repurchased under the Fixed Dollar Share Repurchase Agreements in August and December 2017 were
351,292
and
70,700
, respectively, at an average price of
$71.16
and
$70.65
, respectively, per share.
All shares repurchased were executed in the open market, and no shares were repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued shares. Accordingly, the associated cost of the repurchased shares were recognized as a reduction to Additional paid-in capital.
|
|
NOTE 6.
|
MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUE
|
Our investments with original maturities of more than three months at time of purchase and that are intended to be held for no more than 12 months, are considered marketable securities available for sale.
Our marketable securities consist of certificates of deposit as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2017
|
|
2016
|
|
Cost
|
|
Fair Value
|
|
Cost
|
|
Fair Value
|
Certificates of deposit
|
3,103
|
|
|
3,104
|
|
|
4,735
|
|
|
4,737
|
|
The maturities of our marketable securities available for sale as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
Earliest
|
|
|
|
Latest
|
Certificates of deposit
|
|
4/10/2018
|
|
to
|
|
10/17/2018
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. As of
December 31, 2017
, we do not believe any of the underlying issuers of our marketable securities are at risk of default.
The following tables present information about our marketable securities measured at fair value, on a recurring basis, as of
December 31, 2017
and
December 31, 2016
. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of
December 31, 2017
or
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Certificates of deposit
|
$
|
—
|
|
|
$
|
3,104
|
|
|
$
|
—
|
|
|
$
|
3,104
|
|
|
|
December 31, 2016
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Certificates of deposit
|
—
|
|
|
4,737
|
|
|
—
|
|
|
4,737
|
|
There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the year ended
December 31, 2017
.
|
|
NOTE 7.
|
DERIVATIVE FINANCIAL INSTRUMENTS
|
We are impacted by changes in foreign currency exchange rates. We manage these risks through the use of derivative financial instruments, primarily forward contracts with banks. During the
years ended
December 31, 2017
,
2016
and
2015
, 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
December 31, 2017
we had outstanding Euro and Pound Sterling forward contracts. We did not have any currency exchange rate contracts as of
December 31, 2016
. At
December 31, 2015
we had one outstanding Euro forward contract.
The notional amount of foreign currency exchange contracts outstanding at
December 31, 2017
and 2015 was
$16.3 million
and
$37.2 million
, respectively, and the fair value of these contracts was not significant at
December 31, 2017
and
2015
.
During the years ended
December 31, 2017
,
2016
, and
2015
, the gains and losses recorded related to the foreign currency exchange contracts are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Foreign currency gain (loss) from foreign currency exchange contracts
|
|
$
|
(1,438
|
)
|
|
$
|
(569
|
)
|
|
$
|
1,857
|
|
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, net, in our Consolidated Statements of Operations.
Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories, net of reserves, are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Parts and raw materials
|
$
|
58,567
|
|
|
$
|
43,278
|
|
Work in process
|
7,986
|
|
|
5,292
|
|
Finished goods
|
11,897
|
|
|
7,200
|
|
|
$
|
78,450
|
|
|
$
|
55,770
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
NOTE 9.
|
PROPERTY AND EQUIPMENT, NET
|
Property and equipment, net is comprised of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2017
|
|
2016
|
Buildings and land
|
$
|
1,788
|
|
|
$
|
1,581
|
|
Machinery and equipment
|
36,579
|
|
|
32,743
|
|
Computer and communication equipment
|
26,819
|
|
|
24,637
|
|
Furniture and fixtures
|
1,568
|
|
|
1,267
|
|
Vehicles
|
341
|
|
|
357
|
|
Leasehold improvements
|
17,286
|
|
|
15,546
|
|
Construction in process
|
802
|
|
|
644
|
|
|
85,183
|
|
|
76,775
|
|
Less: Accumulated depreciation
|
(67,388
|
)
|
|
(63,438
|
)
|
Total property and equipment, net
|
$
|
17,795
|
|
|
$
|
13,337
|
|
Depreciation expense recorded in continuing operations and included in selling, general and administrative expense is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Depreciation expense
|
|
$
|
5,074
|
|
|
$
|
3,646
|
|
|
$
|
4,464
|
|
The following summarizes the changes in goodwill during the years ended
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
Beginning Balance
|
|
Additions
|
|
Effect of Changes in Exchange Rates
|
|
Ending Balance
|
December 31, 2017
|
$
|
42,125
|
|
|
$
|
8,929
|
|
|
$
|
2,758
|
|
|
$
|
53,812
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
$
|
42,729
|
|
|
$
|
—
|
|
|
$
|
(604
|
)
|
|
$
|
42,125
|
|
Additions during 2017 are the result of our July 3, 2017 acquisition of Excelsys as described in
Note 2. Business Acquisition.
|
|
NOTE 11.
|
INTANGIBLE ASSETS
|
Intangible assets consisted of the following as of
December 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Technology-based
|
|
$
|
18,702
|
|
|
$
|
(5,559
|
)
|
|
$
|
13,143
|
|
Customer relationships
|
|
30,034
|
|
|
(10,787
|
)
|
|
19,247
|
|
Trademarks and other
|
|
2,623
|
|
|
(1,514
|
)
|
|
1,109
|
|
Total intangible assets
|
|
$
|
51,359
|
|
|
$
|
(17,860
|
)
|
|
$
|
33,499
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Technology-based
|
|
$
|
11,643
|
|
|
$
|
(3,673
|
)
|
|
$
|
7,970
|
|
Customer relationships
|
|
26,608
|
|
|
(7,451
|
)
|
|
19,157
|
|
Trademarks and other
|
|
2,223
|
|
|
(1,279
|
)
|
|
944
|
|
Total intangible assets
|
|
$
|
40,474
|
|
|
$
|
(12,403
|
)
|
|
$
|
28,071
|
|
Amortization expense related to intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Amortization expense
|
|
$
|
4,350
|
|
|
$
|
4,167
|
|
|
$
|
4,368
|
|
Estimated amortization expense related to intangibles is as follows:
|
|
|
|
|
|
Year Ending December 31,
|
|
|
2018
|
|
$
|
4,879
|
|
2019
|
|
4,862
|
|
2020
|
|
4,175
|
|
2021
|
|
4,071
|
|
2022
|
|
3,809
|
|
Thereafter
|
|
11,703
|
|
|
|
$
|
33,499
|
|
Provisions of our sales agreements include customary product warranties, ranging from
12
months to
24
months following installation. The estimated cost of our warranty obligation is recorded when revenue is recognized and is based upon our historical experience by product, configuration and geographic region.
Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets. Changes in our product warranty obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Balances at beginning of period
|
|
$
|
2,329
|
|
|
$
|
1,633
|
|
|
$
|
1,612
|
|
Warranty liabilities acquired
|
|
118
|
|
|
—
|
|
|
—
|
|
Increases to accruals
|
|
2,029
|
|
|
1,802
|
|
|
1,071
|
|
Warranty expenditures
|
|
(2,184
|
)
|
|
(1,058
|
)
|
|
(1,040
|
)
|
Effect of changes in exchange rates
|
|
20
|
|
|
(48
|
)
|
|
(10
|
)
|
Balances at end of period
|
|
$
|
2,312
|
|
|
$
|
2,329
|
|
|
$
|
1,633
|
|
|
|
NOTE 13.
|
STOCK-BASED COMPENSATION
|
As of
December 31, 2017
, we had two active stock-based incentive compensation plans; the 2017 Omnibus Incentive Plan and the Employee Stock Purchase Plan (“ESPP”). All new equity compensation grants are issued under these two plans; however, outstanding awards previously issued under inactive plans will continue to vest and remain exercisable in accordance with the terms of the respective plans. Our stock plans are administered by the Board of Directors Compensation Committee. At
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
December 31, 2017
, there were
5.2 million
shares reserved and
4.5 million
shares available for future grant under our stock-based incentive plans.
On May 4, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan ("the 2017 Plan") and reserved
5.2 million
shares under the plan. The 2017 Plan replaced the 2008 Omnibus Incentive Plan ("the 2008 Plan"), and all awards previously granted under the 2008 Plan continue to vest and/or are exercisable under the 2017 Plan in accordance with their original terms and conditions. The 2017 Plan and 2008 Plan provide for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights. Additionally, awards issued may be issued as performance based awards to align stock compensation awards to the attainment of annual or long-term performance goals. As of
December 31, 2017
, there were
4.2 million
shares available for grant under the 2017 Plan.
Stock-based Compensation Expense
We recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving the award. Stock-based compensation for the three
years ended
December 31,
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Stock-based compensation expense
|
|
$
|
12,549
|
|
|
$
|
6,332
|
|
|
$
|
2,810
|
|
Our stock-based compensation expense is based on the value of the portion of share-based payment awards that are ultimately expected to vest, assuming estimated forfeitures at the time of grant. Estimated forfeiture rates for our stock-based compensation expense applicable to stock options and restricted stock units ("RSU's") was approximately
17%
for the year ended
December 31, 2017
and
18%
for the years ended
December 31, 2016
and
2015
.
Restricted Stock Units
The fair value of our Restricted Stock Units ("RSUs") is determined based upon the closing fair market value of our common stock on the grant date. Changes in the unvested RSU's during the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value
|
RSUs outstanding at beginning of period
|
|
354
|
|
|
$
|
29.60
|
|
|
234
|
|
|
$
|
26.10
|
|
|
357
|
|
|
$
|
14.29
|
|
RSUs granted
|
|
252
|
|
|
63.63
|
|
|
297
|
|
|
30.37
|
|
|
221
|
|
|
26.67
|
|
RSUs vested
|
|
(211
|
)
|
|
30.62
|
|
|
(157
|
)
|
|
25.97
|
|
|
(161
|
)
|
|
14.48
|
|
RSUs forfeited
|
|
(9
|
)
|
|
33.91
|
|
|
(20
|
)
|
|
28.32
|
|
|
(183
|
)
|
|
14.19
|
|
RSUs outstanding at end of period
|
|
386
|
|
|
51.06
|
|
|
354
|
|
|
29.60
|
|
|
234
|
|
|
26.10
|
|
The total intrinsic value of RSUs converted to shares for the years ended
December 31, 2017
,
2016
and
2015
were
$14.8 million
,
$5.0 million
and
$3.8 million
, respectively. As of
December 31, 2017
, there was
$5.5 million
of total unrecognized compensation cost, net of expected forfeitures related to non-vested RSUs granted, which is expected to be recognized through fiscal
May 2020
, with a weighted-average remaining vesting period of
0.7 years
.
Stock Options
Stock option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant and with either a three or four-year vesting schedule or performance based vesting as determined at the time of grant. Stock option awards generally have a term of
10 years
.
The fair value of options granted during the year ended December 31, 2015 was estimated on the date of grant using the Black-Scholes-Merton option pricing model using the following assumptions: the risk-free interest rate was
1.1% - 1.4%
, the expected term was
4.3 years
and expected volatility was
43%
. The risk-free interest rate is based on the five-year
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
U.S. Treasury Bill at the time of the grant. We utilize our historical experience in determining the expected term of our stock options and volatility of our common stock. We have not historically issued dividends.
Changes in our outstanding stock options during the years ended
December 31, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Shares
|
|
Weighted-Average Exercise Price
|
|
Shares
|
|
Weighted-Average Exercise Price
|
Options outstanding at beginning of period
|
|
474
|
|
|
$
|
17.47
|
|
|
642
|
|
|
$
|
17.11
|
|
|
1,022
|
|
|
$
|
13.32
|
|
Options granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
171
|
|
|
26.26
|
|
Options exercised
|
|
(152
|
)
|
|
14.32
|
|
|
(156
|
)
|
|
15.28
|
|
|
(366
|
)
|
|
12.97
|
|
Options forfeited
|
|
(2
|
)
|
|
26.32
|
|
|
(12
|
)
|
|
26.32
|
|
|
(38
|
)
|
|
14.55
|
|
Options expired
|
|
(3
|
)
|
|
11.09
|
|
|
—
|
|
|
—
|
|
|
(147
|
)
|
|
12.46
|
|
Options outstanding at end of period
|
|
317
|
|
|
18.97
|
|
|
474
|
|
|
17.47
|
|
|
642
|
|
|
17.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options vested during the year
|
|
9
|
|
|
|
|
11
|
|
|
|
|
368
|
|
|
|
The total intrinsic value of options exercised for the years ended
December 31, 2017
,
2016
and
2015
were
$9.7 million
,
$2.8 million
and
$5.2 million
, respectively. As of
December 31, 2017
, there was $
0.1 million
of total unrecognized compensation cost related to stock options granted and outstanding, net of expected forfeitures related to non-vested options, which is expected to be recognized through
May 2018
, with a weighted-average remaining vesting period of
0.1 years
. Information about our stock options that are outstanding, options that we expect to vest and options that are exercisable at
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Expected to Vest:
|
|
Number
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Life
|
|
Aggregate Intrinsic Value
|
Options outstanding
|
|
317
|
|
|
$
|
18.97
|
|
|
5.2 years
|
|
$
|
15,375
|
|
Options expected to vest
|
|
317
|
|
|
18.97
|
|
|
5.2 years
|
|
15,375
|
|
Options exercisable
|
|
270
|
|
|
17.71
|
|
|
4.8 years
|
|
13,454
|
|
The following table summarizes information about the stock options outstanding at
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Range of Exercise Prices
|
|
Number Outstanding
|
|
Weighted-Average Remaining Contractual Life
|
|
Weighted-Average Exercise Price
|
|
Number Exercisable
|
|
Weighted-Average Exercise Price
|
7.69 - 11.02
|
|
45
|
|
|
3.3 years
|
|
$
|
9.74
|
|
|
45
|
|
|
$
|
9.74
|
|
11.21 - 13.85
|
|
41
|
|
|
2.5 years
|
|
12.80
|
|
|
41
|
|
|
12.80
|
|
14.02 - 14.21
|
|
13
|
|
|
2.8 years
|
|
14.17
|
|
|
13
|
|
|
14.17
|
|
14.50 - 14.50
|
|
10
|
|
|
2.8 years
|
|
14.50
|
|
|
10
|
|
|
14.50
|
|
14.52 - 14.52
|
|
8
|
|
|
3.1 years
|
|
14.52
|
|
|
8
|
|
|
14.52
|
|
15.65 - 15.65
|
|
12
|
|
|
2.1 years
|
|
15.65
|
|
|
12
|
|
|
15.65
|
|
16.25 - 16.25
|
|
10
|
|
|
2.3 years
|
|
16.25
|
|
|
10
|
|
|
16.25
|
|
18.77 - 18.77
|
|
57
|
|
|
6.8 years
|
|
18.77
|
|
|
57
|
|
|
18.77
|
|
24.31 - 24.31
|
|
5
|
|
|
7.4 years
|
|
24.31
|
|
|
3
|
|
|
24.31
|
|
26.32 - 26.32
|
|
116
|
|
|
7.1 years
|
|
26.32
|
|
|
71
|
|
|
26.32
|
|
7.69 - 26.32
|
|
317
|
|
|
5.2 years
|
|
18.97
|
|
|
270
|
|
|
17.71
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
Employee Stock Purchase Plan
The ESPP, a stockholder-approved plan, provides for the issuance of rights to purchase up to
1,000,000
shares of common stock. In May 2010, shareholders approved an increase from
500,000
to
1,000,000
shares authorized for sale under our ESPP. Employees below the Vice President level are eligible to participate in the ESPP if employed by us for at least 20 hours per week during at least five months per calendar year. Participating employees may contribute up to the lesser of
15%
of their eligible earnings or
$5,000
during each plan period. Currently, the plan period is six months. The purchase price of common stock purchased under the ESPP is currently equal to the lower of: 1)
85%
of the fair market value of our common stock on the commencement date of each plan period or 2)
85%
of the fair market value of our common shares on each plan period purchase date. At
December 31, 2017
,
0.3 million
shares remained available for future issuance under the ESPP.
Purchase rights granted under the ESPP are valued using the Black-Scholes-Merton model. As of
December 31, 2017
, there was
$0.2 million
of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a remaining period of five months. Total compensation expense was $
0.2 million
for the years ended
December 31, 2017
,
2016
, and
2015
.
The fair value of each purchase right granted under the ESPP was estimated on the date of grant using the Black-Scholes-Merton option pricing model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Risk-free interest rates
|
|
1.07% - 1.45%
|
|
|
0.49% - 0.60%
|
|
|
0.07% - 0.42%
|
|
Expected dividend yield rates
|
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected term
|
|
0.5 years
|
|
|
0.5 years
|
|
|
0.5 years
|
|
Expected volatility
|
|
33.3
|
%
|
|
28.2
|
%
|
|
27.8
|
%
|
The risk-free interest rate is based on the six month U.S. Treasury Bill at the time of the grant. Historical company information is the primary basis for selection of the expected dividend yield. The expected term is based on historical experience. Expected volatility is based on historical volatility of our common shares using daily stock price observations.
|
|
NOTE 14.
|
RETIREMENT PLANS
|
Defined contribution plans
We have a 401(k) profit sharing and retirement savings plan covering substantially all full-time U.S. employees. Participants may defer up to the maximum amount allowed as determined by law. Participants are immediately vested in their contributions. Profit sharing contributions to the plan, which are discretionary, are approved by the Board of Directors. Vesting in the profit sharing contribution account is based on years of service, with most participants fully vested after four years of credited service. For the years ended
December 31, 2017
,
2016
, and
2015
our contribution for participants in our 401(k) plan was based on matching 50% of contributions made by employees up to 6% of the employee’s compensation. During the years ended
December 31, 2017
,
2016
, and
2015
we recognized total defined contribution plan costs of $
1.1 million
, $
1.2 million
, and $
0.7 million
, respectively.
Defined benefit plans
In connection with the acquisition of HiTek Power Group, a privately-held provider of high voltage power solutions, in 2014, we acquired the HiTek Power Limited Pension Scheme ("the HiTek Plan"). The HiTek Plan has been closed to new participants since April 1, 2002 and to additional accruals since April 5, 2005. In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. The net amount of pension liability recorded as of
December 31, 2017
and
December 31, 2016
was
$19.8 million
and
$18.8 million
, respectively, and is included in Other long-term liabilities in our Consolidated Balance Sheets. Anticipated payments to pensioners covered by the HiTek Plan are expected to be between
$0.8 million
and
$1.6 million
for each of the next ten years. We are committed to make annual fixed payments of
$0.9 million
into the Hitek Plan through April 30, 2024, and then
$1.8 million
from May 1, 2024 through November 30, 2033.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
The following table sets forth the components of net periodic pension cost for the year ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Interest cost
|
$
|
809
|
|
|
$
|
993
|
|
|
$
|
1,093
|
|
|
Expected return on plan assets
|
(597
|
)
|
|
(527
|
)
|
|
(562
|
)
|
|
Amortization of actuarial gains and losses
|
503
|
|
|
264
|
|
|
373
|
|
|
Net periodic pension cost
|
$
|
715
|
|
|
$
|
730
|
|
|
$
|
904
|
|
|
Assumptions used in the determination of the net periodic pension cost are:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Discount rate
|
2.6
|
%
|
|
2.8
|
%
|
|
3.9
|
%
|
Expected long-term return on plan assets
|
4.8
|
%
|
|
4.7
|
%
|
|
4.3
|
%
|
The status of the HiTek Plan as reflected in "Other long-term liabilities" on our Consolidated Balance Sheets is summarized as follows:
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2017
|
|
2016
|
Projected benefit obligation, beginning of year
|
$
|
31,110
|
|
|
$
|
31,466
|
|
Interest cost
|
809
|
|
|
993
|
|
Actuarial loss
|
35
|
|
|
5,377
|
|
Benefits paid
|
(944
|
)
|
|
(1,186
|
)
|
Translation adjustment
|
2,897
|
|
|
(5,540
|
)
|
Projected benefit obligation, end of year
|
$
|
33,907
|
|
|
$
|
31,110
|
|
|
|
|
|
Plan assets, beginning of year
|
$
|
12,274
|
|
|
$
|
13,677
|
|
Actual return on plan assets
|
597
|
|
|
527
|
|
Contributions
|
877
|
|
|
802
|
|
Benefits paid
|
(944
|
)
|
|
(1,186
|
)
|
Actuarial gain
|
179
|
|
|
620
|
|
Translation adjustment
|
1,127
|
|
|
(2,166
|
)
|
Plan assets, end of year
|
$
|
14,110
|
|
|
$
|
12,274
|
|
|
|
|
|
Funded status of plan
|
$
|
(19,797
|
)
|
|
$
|
(18,836
|
)
|
The fair value of the Company's qualified pension plan assets by category for the years ended
December 31,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Multi-Asset Fund
|
$
|
—
|
|
|
$
|
4,784
|
|
|
$
|
—
|
|
|
$
|
4,784
|
|
Diversified Growth Fund
|
—
|
|
|
5,009
|
|
|
—
|
|
|
5,009
|
|
Index-Linked Gilts
|
—
|
|
|
2,102
|
|
|
—
|
|
|
2,102
|
|
Corporate Bonds
|
—
|
|
|
2,173
|
|
|
—
|
|
|
2,173
|
|
Cash
|
42
|
|
|
—
|
|
|
—
|
|
|
42
|
|
Total
|
$
|
42
|
|
|
$
|
14,068
|
|
|
$
|
—
|
|
|
$
|
14,110
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Multi-Asset Fund
|
$
|
—
|
|
|
$
|
3,989
|
|
|
$
|
—
|
|
|
$
|
3,989
|
|
Diversified Growth Fund
|
—
|
|
|
4,259
|
|
|
—
|
|
|
4,259
|
|
Index-Linked Gilts
|
—
|
|
|
1,915
|
|
|
—
|
|
|
1,915
|
|
Corporate Bonds
|
—
|
|
|
2,013
|
|
|
—
|
|
|
2,013
|
|
Cash
|
98
|
|
|
—
|
|
|
—
|
|
|
98
|
|
Total
|
$
|
98
|
|
|
$
|
12,176
|
|
|
$
|
—
|
|
|
$
|
12,274
|
|
At
December 31, 2017
the HiTek Plan assets of
$14.1 million
were invested in four separate funds including a multi-asset fund (
33.9%
), a diversified growth fund (
35.5%
), an Investment grade long-term bond fund (
15.4%
) and an index-linked gilt fund (
14.9%
). The asset and growth funds aim to generate an ‘equity-like’ return over an economic cycle with significantly reduced volatility relative to equity markets and have scope to use a diverse range of asset classes, including equities, bonds, cash and alternatives, e.g. property, infrastructure, high yield bonds, floating rate debt, private, equity, hedge funds and currency. The bond fund and gilt fund are invested in index-linked gilts and corporate bonds. These investments are intended to provide a degree of protection against changes in the value of the HiTek Plan's liabilities related to changes in long-term expectations for interest rates and inflation expectations.
|
|
NOTE 15.
|
COMMITMENTS AND CONTINGENCIES
|
Disputes and Legal Actions
We are involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations. An unfavorable decision in patent litigation also could require material changes in production processes and products or result in our inability to ship products or components found to have violated third-party patent rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a loss has occurred, and the amount of the loss can be reasonably estimated. The Company is currently not a party to any legal action that the Company believes would reasonably have a material adverse impact on its business, financial condition, results of operations or cash flows.
Operating Leases
We have various operating leases for automobiles, equipment, and office and production facilities. Rent expense under operating leases was approximately
$6.5 million
in
2017
, $
6.4 million
in
2016
, and $
5.3 million
in
2015
.
The future minimum rental payments required under non-cancelable operating leases as of
December 31, 2017
are as follows:
|
|
|
|
|
2018
|
$
|
7,109
|
|
2019
|
6,381
|
|
2020
|
5,802
|
|
2021
|
4,204
|
|
2022
|
1,273
|
|
Thereafter
|
3,586
|
|
|
$
|
28,355
|
|
|
|
NOTE 16.
|
RESTRUCTURING COSTS
|
In June 2015, we committed to a restructuring plan in relation to the wind down of our Inverter business. Charges related to this plan that have an effect on continuing operations include strategic headcount reductions, streamlining operational processes and condensing administrative functions to improve efficiencies. This plan was completed in the fourth quarter of 2015. Total cumulative costs through December 31, 2015 were
$0.3 million
. We did not incur additional costs related to this plan in 2016 or 2017.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
NOTE 17.
|
RELATED PARTY TRANSACTIONS
|
Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the years ended
December 31, 2017
,
2016
, and
2015
, we engaged in the following transactions with companies related to members of our Board of Directors, as described below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
2017
|
|
2016
|
|
2015
|
Sales to related parties
|
$
|
1,425
|
|
|
$
|
616
|
|
|
$
|
706
|
|
Number of related party customers
|
1
|
|
|
2
|
|
|
3
|
|
Purchases from related parties
|
$
|
—
|
|
|
$
|
43
|
|
|
$
|
40
|
|
Number of related party vendors
|
—
|
|
|
1
|
|
|
2
|
|
Our accounts receivable balance from related party customers with outstanding balances as of
December 31, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
December 31,
|
|
2017
|
|
2016
|
Accounts receivable from related parties
|
$
|
27
|
|
|
$
|
—
|
|
Number of related party customers
|
1
|
|
|
—
|
|
We did not have any outstanding accounts payable with our related parties as of
December 31, 2017
or
December 31, 2016
.
|
|
NOTE 18.
|
GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
|
We have operations in the United States, Europe and Asia. Sales and long-lived assets by geographic area and information relating to major customers are presented below. Sales attributed to individual countries are based on customer location.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Sales to external customers:
|
|
|
United States
|
|
$
|
453,095
|
|
|
67.5
|
%
|
|
$
|
327,397
|
|
|
67.7
|
%
|
|
$
|
268,257
|
|
|
64.7
|
%
|
Canada
|
|
37
|
|
|
—
|
%
|
|
161
|
|
|
—
|
%
|
|
195
|
|
|
—
|
%
|
North America
|
|
453,132
|
|
|
67.5
|
%
|
|
327,558
|
|
|
67.7
|
%
|
|
268,452
|
|
|
64.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
People's Republic of China
|
|
34,045
|
|
|
5.1
|
%
|
|
16,207
|
|
|
3.4
|
%
|
|
12,687
|
|
|
3.1
|
%
|
Other Asian countries
|
|
104,595
|
|
|
15.6
|
%
|
|
77,638
|
|
|
16.1
|
%
|
|
61,839
|
|
|
15.0
|
%
|
Asia
|
|
138,640
|
|
|
20.7
|
%
|
|
93,845
|
|
|
19.5
|
%
|
|
74,526
|
|
|
18.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Germany
|
|
57,351
|
|
|
8.6
|
%
|
|
48,589
|
|
|
10.0
|
%
|
|
46,719
|
|
|
11.3
|
%
|
United Kingdom
|
|
14,299
|
|
|
2.1
|
%
|
|
13,712
|
|
|
2.8
|
%
|
|
25,100
|
|
|
6.0
|
%
|
Other European countries
|
|
7,590
|
|
|
1.1
|
%
|
|
—
|
|
|
—
|
%
|
|
14
|
|
|
—
|
%
|
Europe
|
|
79,240
|
|
|
11.8
|
%
|
|
62,301
|
|
|
12.8
|
%
|
|
71,833
|
|
|
17.3
|
%
|
Total sales
|
|
$
|
671,012
|
|
|
100.0
|
%
|
|
$
|
483,704
|
|
|
100.0
|
%
|
|
$
|
414,811
|
|
|
100.0
|
%
|
Sales to Applied Materials Inc., our largest customer, was $
224.8 million
or
33.5%
of total sales for
2017
, $
170.2 million
, or
35.2%
of total sales for
2016
and
$123.5 million
, or
29.8%
of total sales for
2015
. Sales to Lam Research were $
155.3 million
or
23.1%
of total sales for
2017
, $
100.3 million
, or
20.7%
of total sales for
2016
and
$84.2 million
, or
20.3%
of total sales for
2015
. Our sales to Applied Materials and Lam Research include precision power products used in semiconductor processing and solar, flat panel display, and architectural glass applications. No other customer accounted for
10%
or more of our sales during these periods.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
Long-lived assets:
|
|
|
United States
|
|
$
|
32,528
|
|
|
$
|
33,652
|
|
Asia
|
|
7,601
|
|
|
3,596
|
|
Europe
|
|
64,977
|
|
|
46,285
|
|
|
|
$
|
105,106
|
|
|
$
|
83,533
|
|
|
|
Long-lived assets include property and equipment, goodwill and other intangible assets.
|
On July 28, 2017, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America N.A. ("BA") which provides a revolving line of credit of up to
$100.0 million
subject to certain funding conditions through July 28, 2022. On December 21, 2017, the Company entered into the First Amendment to the Loan Agreement with BA to increase the line of credit to
$150.0 million
. Interest on amounts drawn shall be paid quarterly based upon the LIBOR Daily Floating Rate then in effect, plus between one and one-quarter (
1.25%
) and one and three-quarters (
1.75%
) percentage points depending on the Funded Debt to EBITDA ratio. As of
December 31, 2017
, the interest rate was
2.82%
. The Loan Agreement also requires the Company to pay the lender on a quarterly basis an unused commitment fee based on credit availability. The obligations under the Loan Agreement are unsecured until the Funded Debt to EBITDA ratio exceeds
2.0
to 1.0, at which time the Company and certain affiliates’ tangible and intangible personal property will be subject to a first priority, perfected lien and security interest in favor of BA pursuant to a Security Agreement. As of
December 31, 2017
, the Company is in compliance with all covenants required under the Loan Agreement. Our credit availability under the Loan Agreement was
$150.0 million
at
December 31, 2017
.
On September 9, 2016, the Company terminated its Credit Agreement with Wells Fargo Bank, National Association ("Wells Fargo") which provided for a secured revolving credit facility of up to
$50.0 million
(the "Credit Facility"), subject to a borrowing base calculation. The Company had
no
outstanding balances at December 31, 2015 and
no
borrowing during 2016 until the determination of the Credit Agreement.
Expense relating to interest, unused commitment fees and amortization of debt issuance costs included in our income from continuing operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
Credit facility costs
|
|
66
|
|
|
346
|
|
|
456
|
|
|
|
NOTE 20.
|
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
|
The following tables present unaudited quarterly results for each of the eight quarters in the periods ended
December 31, 2017
and 2016, in thousands. We believe that all necessary adjustments have been included in the amounts stated below to present fairly such quarterly information. Due to the volatility of the industries in which our customers operate, the operating results for any quarter are not necessarily indicative of results for any subsequent period.
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
December 31, 2017
|
|
September 30, 2017
|
|
June 30, 2017
|
|
March 31, 2017
|
Sales
|
|
$
|
179,214
|
|
|
$
|
176,575
|
|
|
$
|
165,872
|
|
|
$
|
149,351
|
|
Gross Profit
|
|
$
|
98,175
|
|
|
$
|
92,234
|
|
|
$
|
87,141
|
|
|
$
|
78,831
|
|
Operating income
|
|
$
|
58,062
|
|
|
$
|
51,673
|
|
|
$
|
47,767
|
|
|
$
|
43,268
|
|
Income (loss) from continuing operations, net of income taxes
|
|
$
|
(29,007
|
)
|
|
$
|
83,794
|
|
|
$
|
45,873
|
|
|
$
|
35,441
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
(583
|
)
|
|
$
|
70
|
|
|
$
|
179
|
|
|
$
|
2,094
|
|
Net income (loss)
|
|
$
|
(29,590
|
)
|
|
$
|
83,864
|
|
|
$
|
46,052
|
|
|
$
|
37,535
|
|
Earnings (Loss) Per Share:
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.73
|
)
|
|
$
|
2.11
|
|
|
$
|
1.15
|
|
|
$
|
0.89
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.73
|
)
|
|
$
|
2.09
|
|
|
$
|
1.14
|
|
|
$
|
0.88
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.01
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
0.05
|
|
Net Income (Loss):
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
(0.75
|
)
|
|
$
|
2.11
|
|
|
$
|
1.16
|
|
|
$
|
0.94
|
|
Diluted earnings (loss) per share
|
|
$
|
(0.75
|
)
|
|
$
|
2.09
|
|
|
$
|
1.14
|
|
|
$
|
0.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
June 30, 2016
|
|
March 31, 2016
|
Sales
|
|
$
|
135,343
|
|
|
$
|
126,552
|
|
|
$
|
118,765
|
|
|
$
|
103,044
|
|
Gross Profit
|
|
$
|
71,518
|
|
|
$
|
66,123
|
|
|
$
|
62,046
|
|
|
$
|
53,460
|
|
Operating income
|
|
$
|
38,546
|
|
|
$
|
34,361
|
|
|
$
|
30,329
|
|
|
$
|
23,621
|
|
Income from continuing operations, net of income taxes
|
|
$
|
40,436
|
|
|
$
|
29,038
|
|
|
$
|
27,254
|
|
|
$
|
20,220
|
|
Income (loss) from discontinued operations, net of income taxes
|
|
$
|
3,845
|
|
|
$
|
1,323
|
|
|
$
|
3,277
|
|
|
$
|
2,061
|
|
Net income (loss)
|
|
$
|
44,281
|
|
|
$
|
30,361
|
|
|
$
|
30,531
|
|
|
$
|
22,281
|
|
Earnings per Share:
|
|
|
|
|
|
|
|
|
Continuing Operations:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
1.02
|
|
|
$
|
0.73
|
|
|
$
|
0.69
|
|
|
$
|
0.51
|
|
Diluted earnings per share
|
|
$
|
1.01
|
|
|
$
|
0.73
|
|
|
$
|
0.68
|
|
|
$
|
0.50
|
|
Discontinued Operations:
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
0.10
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
Diluted earnings (loss) per share
|
|
$
|
0.10
|
|
|
$
|
0.03
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
Net Income (loss):
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share
|
|
$
|
1.12
|
|
|
$
|
0.77
|
|
|
$
|
0.77
|
|
|
$
|
0.56
|
|
Diluted earnings (loss) per share
|
|
$
|
1.11
|
|
|
$
|
0.76
|
|
|
$
|
0.76
|
|
|
$
|
0.56
|
|
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands, except per share data)
|
|
NOTE 21.
|
SUBSEQUENT EVENTS
|
Trek Acquisition
On February 1, 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan and Lockport, New York for a purchase price of
$11.8 million
in cash. Trek has a
95%
ownership interest in its U.S. subsidiary which is also its primary operation. Trek designs, manufactures and sells high-voltage amplifiers, power supplies and generators, high-performance electrostatic measurement instruments and electrostatic discharge (ESD) sensors and monitors to the global marketplace. Trek's standard and custom-OEM products are used in industry and research in aerospace, automotive, electronics, electrostatics, materials, medical, military, nanotechnology, photovoltaic/solar, physics, plasma, semiconductor and test and measurement applications. For the twelve months ended December 31, 2017, Trek reported unaudited sales of approximately
$20 million
. Trek’s comprehensive portfolio of power supply products strengthen and accelerate Advanced Energy’s growth in high voltage applications.