Edgar Filing: ADVANCED ENERGY INDUSTRIES INC

AEIS 10Q Q3 2012

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________

FORM 10-Q

________________________________________________



þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the quarterly period ended September 30, 2012
or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
		For the transition period from to .

Commission file number: 000-26966

ADVANCED ENERGY INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)



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

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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

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

As of October 31, 2012 there were 37,875,142 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.

ADVANCED ENERGY INDUSTRIES, INC.

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I FINANCIAL STATEMENTS	3

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	3

Condensed Consolidated Balance Sheets	3

Condensed Consolidated Statements of Operations	4

Condensed Consolidated Statements of Comprehensive Income	5

Condensed Consolidated Statements of Cash Flows	6

Notes to Condensed Consolidated Financial Statements	7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28

ITEM 4. CONTROLS AND PROCEDURES	29

PART II OTHER INFORMATION	30

ITEM 1. LEGAL PROCEEDINGS	30

ITEM 1A. RISK FACTORS	30

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32

ITEM 3. DEFAULTS UPON SENIOR SECURITIES	32

ITEM 4. MINE SAFETY DISCLOSURES	32

ITEM 5. OTHER INFORMATION	32

ITEM 6. EXHIBITS	32

SIGNATURES	33
EX-31.1
EX-31.2
EX-32.1
EX-32.2

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PART I FINANCIAL STATEMENTS


ITEM 1.	UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Balance Sheets *

(In thousands, except per share amounts)



	September 30,		December 31,
	2012		2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	151,034	$	117,639
Marketable securities	22,631		25,567
Accounts receivable, net of allowances of $5,985 and $6,796, respectively	101,412		132,485
Inventories, net of reserves of $15,957 and $13,614, respectively	87,611		80,283
Deferred income tax assets	9,027		9,014
Income taxes receivable	7,971		13,826
Other current assets	6,340		11,672
Total current assets	386,026		390,486
Property and equipment, net	38,779		42,338
OTHER ASSETS:
Deposits and other	9,326		8,959
Goodwill	46,515		46,515
Other intangible assets, net	39,299		43,438
Deferred income tax assets	1,708		1,642
Total assets	$	521,653	$	533,378
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable	$	50,343	$	44,828
Income taxes payable	5,872		3,310
Accrued payroll and employee benefits	11,229		9,184
Accrued warranty expense	7,758		8,433
Other accrued expenses	10,965		10,800
Customer deposits	7,404		14,689
Total current liabilities	93,571		91,244
LONG-TERM LIABILITIES:
Deferred income tax liabilities	6,471		6,475
Uncertain tax positions	16,404		16,404
Accrued warranty expense	7,117		6,286
Other long-term liabilities	19,614		5,630
Total liabilities	143,177		126,039
Commitments and contingencies (Note 16)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.001 par value, 1,000 shares authorized, none issued and outstanding	—		—
Common stock, $0.001 par value, 70,000 shares authorized; 37,852 and 41,956
issued and outstanding, respectively	38		42
Additional paid-in capital	209,170		254,003
Retained earnings	140,499		124,767
Accumulated other comprehensive income	28,769		28,527
Total stockholders’ equity	378,476		407,339
Total liabilities and stockholders’ equity	$	521,653	$	533,378

* Amounts as of September 30, 2012 are unaudited. Amounts as of December 31, 2011 are derived from the December 31, 2011 audited Consolidated Financial Statements.

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

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Operations (Unaudited)

(In thousands, except per share amounts)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
SALES	$	117,515	$	128,498		$	338,960	$	404,304
COST OF SALES	71,788		79,651			209,760		238,035
GROSS PROFIT	45,727		48,847			129,200		166,269
OPERATING EXPENSES:
Research and development	14,564		17,592			44,181		50,591
Selling, general, and administrative	16,806		16,473			53,571		57,379
Amortization of intangible assets	1,416		989			4,139		2,831
Restructuring charges	3,003		3,119			5,434		3,119
Total operating expenses	35,789		38,173			107,325		113,920
OPERATING INCOME	9,938		10,674			21,875		52,349
OTHER INCOME (EXPENSE), NET	65		(259		)	2,251		496
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
INCOME FROM CONTINUING OPERATIONS, NET OF INCOME TAXES	5,735		7,171			15,302		39,449
Income (loss) from discontinued operations, net of income taxes	—		(579		)	430		(365		)
NET INCOME	$	5,735	$	6,592		$	15,732	$	39,084

Basic weighted-average common shares outstanding	37,807		43,535			39,148		43,515
Diluted weighted-average common shares outstanding	38,330		43,819			39,720		44,056

EARNINGS PER SHARE:
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
DISCONTINUED OPERATIONS
BASIC EARNINGS PER SHARE	$	0.00	$	(0.01	)	$	0.01	$	(0.01	)
DILUTED EARNINGS PER SHARE	$	0.00	$	(0.01	)	$	0.01	$	(0.01	)
NET INCOME:
BASIC EARNINGS PER SHARE	$	0.15	$	0.15		$	0.40	$	0.90
DILUTED EARNINGS PER SHARE	$	0.15	$	0.15		$	0.40	$	0.89

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

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Net income	$	5,735	$	6,592		$	15,732	$	39,084
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	1,095		(271		)	226		1,497
Unrealized gains (losses) on marketable securities	2		(25		)	16		(38		)
Comprehensive income	$	6,832	$	6,296		$	15,974	$	40,543

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

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ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)



	Nine Months Ended September 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	15,732		$	39,084
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	13,109			10,566
Stock-based compensation expense	10,072			9,362
Provision (benefit) for deferred income taxes	(54		)	(346		)
Restructuring charges	5,434			3,119
Net (gain) loss on sale or disposal of assets	(557		)	118
Changes in operating assets and liabilities:
Accounts receivable	31,130			(11,684		)
Inventories	(6,995		)	(16,028		)
Other current assets	4,086			(482		)
Accounts payable	7,673			(4,793		)
Other current liabilities and accrued expenses	4,344			(5,796		)
Income taxes	8,276			3,540
Non-current assets	—			(8		)
Net cash provided by operating activities	92,250			26,652
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities	(20,522		)	(22,640		)
Proceeds from sale of marketable securities	23,476			9,667
Proceeds from the sale of assets	2,200			—
Purchases of property and equipment	(6,676		)	(14,629		)
Net cash used in investing activities	(1,522		)	(27,602		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations	(71		)	(143		)
Purchase and retirement of common stock	(57,117		)	—
Proceeds from exercise of stock options	2,669			1,796
Excess tax from stock-based compensation deduction	(634		)	(572		)
Net cash provided by (used in) financing activities	(55,153		)	1,081
EFFECT OF CURRENCY TRANSLATION ON CASH	(2,180		)	1,208
INCREASE IN CASH AND CASH EQUIVALENTS	33,395			1,339
CASH AND CASH EQUIVALENTS, beginning of period	117,639			130,914
CASH AND CASH EQUIVALENTS, end of period	$	151,034		$	132,253
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest	$	14		$	36
Cash paid for income taxes	3,343			17,867
Cash received for refunds of income taxes	7,345			7,522
Cash held in banks outside the United States of America	37,543			45,233
NONCASH TRANSACTIONS:
Equipment purchased with capital lease	$	—		$	26

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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.BASIS OF PRESENTATION

Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries (“we”, “us”, “our”, “Advanced Energy”, or the “Company”) design, manufacture, sell, and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin-film deposition for various products, such as semiconductor devices, flat panel displays, 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

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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	)

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 3.	INCOME TAXES

The following table sets out the tax expense and the effective tax rate for our income from continuing operations (in thousands):



	Three Months Ended 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

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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

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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.


NOTE 8.	INVENTORIES

Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories are as follows (in thousands):



	September 30,		December 31,
	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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 9.	PROPERTY AND EQUIPMENT

Details of property and equipment are as follows (in thousands):



	September 30,			December 31,
	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


NOTE 10.	GOODWILL

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

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ADVANCED ENERGY INDUSTRIES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Other intangible assets consisted of the following as of December 31, 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.

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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


NOTE 13.	WARRANTIES

Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 18 months to 24 months following installation for Thin Films products and 5 years to 10 years following installation for Solar Energy products. Our provision for the estimated cost of warranties is recorded when revenue is recognized. The warranty provision is based on historical experience by product, configuration and geographic region.

We establish accruals for warranty issues that are probable to result in future costs. Changes in product warranty accruals are as follows (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	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.

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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

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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.

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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

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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.

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NOTE 20.	CREDIT FACILITY

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.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note on Forward-Looking Statements

The following discussion contains, in addition to historical information, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements in this report that are not historical information are forward-looking statements. For example, statements relating to our beliefs, expectations and plans are forward-looking statements, as are statements that certain actions, conditions or circumstances will continue. The inclusion of words such as “anticipate,” “expect,” “estimate,” “can,” “may,” “continue,” “enables,” “plan,” “intend,” or “believe,” as well as statements that events or circumstances “will” occur or continue, indicate forward-looking statements. Forward-looking statements involve risks and uncertainties, which are difficult to predict and many of which are beyond our control. Therefore, actual results could differ materially and adversely from those expressed in any forward-looking statements.

For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption “Risk Factors” in Part II Item 1A of this Quarterly Report on Form 10-Q and, in our Annual Report on Form 10-K for the year ended December 31, 2011. We undertake no obligation to revise or update any forward-looking statements for any reason.

BUSINESS OVERVIEW

We design, manufacture, sell and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin-film and plasma enhanced chemical and physical processing for various products as well as grid-tied power conversion. We also supply thermal and Infra-red measurement instrumentation products used for temperature measurement and control in the thin-film processing as well as melt height measurement in crystal growth processes. Our network of global service support centers provides local repair and field service capability in key regions.


•	Our power conversion products refine, modify and control the raw electrical power from a utility and convert it into power that is predictable, repeatable and customizable. Our power conversion products are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage, architectural glass, and industrial coating manufacturers.


•	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 grid-tied power conversion products offer advanced transformer-based or transformerless grid-tied PV solutions for commercial and utility-scale system installations and transformer-based solutions for residential installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. These products are used for residential, commercial and utility-scale solar projects and installations, and are sold primarily to distributors; engineering, procurement, and construction contractors; developers; and utility companies. These product revenues have seasonal variations. Installations of inverters are normally lowest during the first quarter of the year due to less favorable weather conditions and installation scheduling by our customers.


•	Our network of global service support centers offer repair services, upgrades and refurbishments to businesses that use our products.

On October 15, 2010, we sold our gas flow control business, which includes the Aera® mass flow control and related product lines, to Hitachi Metals, Ltd. Consequently, the results of operations from our gas flow control business have been excluded from our discussions relating to continuing operations.

Our analysis presented below is organized to provide the information we believe will be helpful for understanding our historical performance and relevant trends going forward. This discussion should be read in conjunction with our Condensed Consolidated Financial Statements in Part I, Item 1 of this report, including the notes thereto.

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Results of Operations

The following table sets forth, for the periods indicated, certain data derived from our Condensed Consolidated Statements of Operations (in thousands):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012		2011
Sales	$	117,515	$	128,498		$	338,960	$	404,304
Gross profit	45,727		48,847			129,200		166,269
Operating expenses	35,789		38,173			107,325		113,920
Operating income	9,938		10,674			21,875		52,349
Other income (expenses), net	65		(259		)	2,251		496
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
Income from continuing operations, net of income taxes	$	5,735	$	7,171		$	15,302	$	39,449

The following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in our Condensed Consolidated Statements of Operations:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Sales	100.0	%	100.0	%	100.0	%	100.0	%
Gross profit	38.9	%	38.0	%	38.1	%	41.1	%
Operating expenses	30.5	%	29.7	%	31.6	%	28.2	%
Operating income	8.4	%	8.3	%	6.5	%	12.9	%
Other income (expenses), net	0.1	%	(0.2	)%	0.7	%	0.1	%
Income from continuing operations before income taxes	8.5	%	8.1	%	7.2	%	13.0	%
Provision for income taxes	3.6	%	2.5	%	2.6	%	3.3	%
Income from continuing operations, net of income taxes	4.9	%	5.6	%	4.6	%	9.7	%

SALES

The following tables summarize annual sales, and percentages of sales, by segment for the three months and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended September 30,
	2012		% of Total Sales		2011		% of Total Sales		Increase/ (Decrease)			Percent Change
Thin Films:
Semiconductor capital equipment	$	29,716	25.3	%	$	29,584	23.0	%	$	132		0.4	%
Non-semiconductor capital equipment	13,510		11.5	%	33,755		26.3	%	(20,245		)	(60.0	)%
Global support	13,554		11.5	%	13,425		10.4	%	129			1.0	%
Total Thin Films	56,780		48.3	%	76,764		59.7	%	(19,984		)	(26.0	)%
Solar Energy	60,735		51.7	%	51,734		40.3	%	9,001			17.4	%
Total sales	$	117,515	100.0	%	$	128,498	100.0	%	$	(10,983	)	(8.5	)%

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	Nine Months Ended September 30,
	2012		% of Total Sales		2011		% of Total Sales		Increase/ (Decrease)			Percent Change
Thin Films:
Semiconductor capital equipment	$	104,705	31.0	%	$	119,233	29.5	%	$	(14,528	)	(12.2	)%
Non-semiconductor capital equipment	38,870		11.5	%	114,708		28.4	%	(75,838		)	(66.1	)%
Global support	38,438		11.3	%	40,253		10.0	%	(1,815		)	(4.5	)%
Total Thin Films	182,013		53.8	%	274,194		67.9	%	(92,181		)	(33.6	)%
Solar Energy	156,947		46.3	%	130,110		32.1	%	26,837			20.6	%
Total sales	$	338,960	100.1	%	$	404,304	100.0	%	$	(65,344	)	(16.2	)%

Total Sales

Overall, our sales decreased $11.0 million, or 8.5%, to $117.5 million for the three months ended September 30, 2012 from $128.5 million for the three months ended September 30, 2011. Sales decreased $65.3 million, or 16.2%, to $339.0 million for the nine months ended September 30, 2012 from $404.3 million for the nine months ended September 30, 2011. The decrease in sales during these time periods is a result of decreases in capital spending by our customers in all thin-film markets in which we compete. Sales to the non-semiconductor markets were the primary driver of the decline in sales for the current three month period of 2012 as compared to the same period of 2011, particularly in the solar panel and flat panel display markets as noted below. The decrease in sales during the nine months ended September 30, 2012 as compared to the same period in 2011 was not only due to weakness in the non-semiconductor markets, but also due to continued softness in the semiconductor market. We began to experience weakness in semiconductor capital spending in the third quarter of 2011 and that weakness continued throughout the remainder of 2011 and all of 2012. Although our Solar Energy SBU saw increases of 17.4% and 20.6% for the three and nine month periods ended 2012 as compared to 2011, respectively, the increase did not offset the large decrease in Thin Films sales.

Thin Films

Results for our Thin Films SBU for the three months and nine months ended September 30, 2012 and 2011 were as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011

Sales	$	56,780	$	76,764	$	182,013	$	274,194
Operating Income	6,065		16,015		18,113		60,881

Thin Films sales decreased 26.0% to $56.8 million, or 48.3% of sales, for the three months ended September 30, 2012 versus $76.8 million, or 59.7% of sales, for the three months ended September 30, 2011. Thin Films sales decreased 33.6% to $182.0 million, or 53.8% of sales, for the nine months ended September 30, 2012 versus $274.2 million, or 67.9% of sales, for the nine months ended September 30, 2011. This decline reflects the impact of the lower levels of capital investment in thin film markets described above.

In the three months ended September 30, 2012, sales in the thin film semiconductor market decreased 0.4% to $29.7 million, or 25.3% of sales, from $29.6 million, or 23.0% of sales for the three months ended September 30, 2011. In the nine months ended September 30, 2012, sales in the thin film semiconductor market decreased 12.2% to $104.7 million, or 31.0% of sales, from $119.2 million or 29.5% of sales for the nine months ended September 30, 2011. End user capital expansion began to slow in the third quarter of 2011 and since that time utilization rates at semiconductor foundries have slowed and remain reduced compared to previous levels. Additionally, it appears that larger semiconductor end users have begun to develop equipment reuse strategies that will continue to hinder near term growth. Given the current market dynamics and the general perception that semiconductor investment will continue to be soft in the near term, we expect our semiconductor revenue to be lower in the fourth quarter of 2012 compared to the third quarter of 2012.

Sales in the thin film non-semiconductor capital equipment markets decreased 60.0% to $13.5 million, or 11.5% of sales, for the three months ended September 30, 2012 compared to $33.8 million, or 26.3% of sales, for the three months ended September 30, 2011. Sales in the thin film non-semiconductor capital equipment markets decreased 66.1% to $38.9 million, or

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11.5% of sales, for the nine months ended September 30, 2012 compared to $114.7 million, or 28.4% of sales, for the nine months ended September 30, 2011. The markets that comprise the thin-film non-semiconductor capital equipment markets include solar panel, flat panel display, data storage, architectural glass and other industrial thin-film manufacturing equipment markets. Our customers in these markets are primarily global OEMs. The decrease in these markets for the three months and nine months ended September 30, 2012, as compared to the same period a year ago, was driven primarily by a worldwide oversupply of solar panels as well as overcapacity for production of flat panel displays due to the anticipation of technology changes.

Sales to customers in the thin film solar panel market decreased to $0.4 million, or 0.3% of total sales, for the three months ended September 30, 2012 as compared to $12.9 million, or 10.1% of total sales, for the three months ended September 30, 2011. Sales to customers in the thin film solar panel market decreased to $4.3 million, or 1.3% of total sales, for the nine months ended September 30, 2012 as compared to $49.0 million, or 12.1% of total sales, for the nine months ended September 30, 2011. This decrease is a result of a worldwide excess of solar panel manufacturing capacity and inventory, particularly in the People's Republic of China (the “PRC”). There is currently not enough marketplace demand to absorb the levels of worldwide inventory on hand. As a result, competitive consolidation has begun as a number of solar panels manufacturing companies, both domestic and international, have been acquired or have gone insolvent. We currently do not anticipate new investment in the foreseeable future as these market dynamics continue to play out and, as a result, we expect sales to the solar panel market to remain at historically low levels in the fourth quarter of 2012 and into the early part of 2013.

We experienced a 77.9% decline in flat panel market sales this quarter as compared to the same quarter in 2011, as a drop in demand for flat panel televisions has resulted in production overcapacity. This development, coupled with delays in upcoming active-matrix light-emitting diode ("AMOLED") technology transitions, has resulted in an investment pause in the flat panel display market. While we are optimistic that these new technology investments will occur in the near future, we expect sales to the flat panel display market to be flat to lower in the fourth quarter of 2012.

Our global support revenue increased to $13.6 million, or 11.5% of total sales, for the three months ended September 30, 2012, compared to $13.4 million, representing 10.4% of sales, for the three months ended September 30, 2011. Our global support revenue decreased to $38.4 million, or 11.3% of total sales, for the nine months ended September 30, 2012, compared to $40.3 million, representing 10.0% of sales, for the nine months ended September 30, 2011. Although service activity levels were relatively stable in most of our geographic regions, reduced factory utilization in both the thin film solar panel and flat panel display markets negatively impacted our customers' maintenance budgets and the need for repairs. We have also ceased providing service for the gas flow control business we sold in 2010. As a result of the factors above, we expect revenue for our service business to decrease in the fourth quarter of 2012.

Operating income for Thin Films was $6.1 million for the three months ended September 30, 2012, a decline of $10.0 million from the same period of 2011. Operating income for Thin Films was $18.1 million for the nine months ended September 30, 2012, a decline of $42.8 million from the same period of 2011. This decrease is primarily the result of the significant reduction in sales discussed above coupled with an increase in operating expenses that resulted from a change in our methodology for allocating corporate expenses to our business units. Corporate 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 in 2012 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.

Solar Energy

Results for our Solar Energy SBU for the three months and nine months ended September 30, 2012 and 2011 are as follows (in thousands):



	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011

Sales	$	60,735	$	51,734	$	156,947	$	130,110
Operating income	7,410		1,259		10,643		4,092

Solar Energy sales were $60.7 million, or 51.7% of sales, for the three months ended September 30, 2012 as compared to $51.7 million, or 40.3% of sales, for the three months ended September 30, 2011. Solar Energy sales were $156.9 million, or 46.3% of sales, for the nine months ended September 30, 2012 as compared to $130.1 million, or 32.1% of sales, for the nine months ended September 30, 2011.

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Sales for the third quarter of 2012 were up from the comparable quarter a year ago due to an increase in large utility-scale projects in North America, particularly in Canada. We continue to gain traction and win large projects in the utility space as we introduce new products to the market and provide our customers with high-efficiency inverters at the highest power ranges. We expect Solar Energy sales to be flat to slightly up in the fourth quarter of 2012.

Operating income for Solar Energy was $7.4 million for the three months ended September 30, 2012 as compared to $1.3 million for the three months ended September 30, 2011. Operating income for Solar Energy was $10.6 million for the nine months ended September 30, 2012 as compared to $4.1 million for the nine months ended September 30, 2011. The increase in operating income for the three months and nine months ended September 30, 2012 as compared to the same periods in 2011 is due to increased sales as discussed above coupled with a change in product mix to higher margin inverters for the utility markets. These increases were partially offset by an increase in operating expenses that resulted from the change in our methodology for allocating corporate expenses to our business units as discussed above.

Backlog

Our overall backlog was $80.9 million at September 30, 2012 as compared to $76.9 million at December 31, 2011. The increase from the prior year-end is due primarily to increased orders in the utility scale markets of our Solar Energy SBU.

GROSS PROFIT

Our gross profit was $45.7 million, or 38.9% of sales, for the three months ended September 30, 2012, as compared to $48.8 million, or 38.0% of sales for the three months ended September 30, 2011. Our gross profit was $129.2 million, or 38.1% of sales, for the nine months ended September 30, 2012, as compared to $166.3 million, or 41.1% of sales for the nine months ended September 30, 2011. The year-over-year decrease in terms of absolute dollars was due to the overall decline in sales in our Thin Films business in all of the markets we serve.

The increase in gross profit as a percent of sales for the third quarter of 2012 as compared to 2011 was due to a larger percentage of solar inverter sales into the utility market than in previous periods, as discussed above. Utility scale installations typically yield higher gross margins than sales to our commercial markets. The decrease in gross profit as a percentage of sales for the nine months ended September 30, 2012 as compared to the same period a year ago was due to an overall product mix shift from Thin Films products to a higher percentage of revenue from our Solar Energy product line, which has lower gross margins on an overall basis.

OPERATING EXPENSE

The following table summarizes our operating expenses as a percentage of sales for the three months and nine months ended September 30, 2012 and 2011 (in thousands):



	Three Months Ended September 30,								Nine Months Ended September 30,
	2012				2011				2012				2011
Research and development	$	14,564	12.4	%	$	17,592	13.7	%	$	44,181	13.0	%	$	50,591	12.5	%
Selling, general, and administrative	16,806		14.3	%	16,473		12.8	%	53,571		15.8	%	57,379		14.2	%
Amortization of intangible assets	1,416		1.2	%	989		0.8	%	4,139		1.2	%	2,831		0.7	%
Restructuring charges	3,003		2.6	%