XNAS:AEIS Advanced Energy Industries Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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 June 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 July 31, 2012 there were 37,778,291 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.

 



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


2


PART I FINANCIAL STATEMENTS
ITEM 1.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ADVANCED ENERGY INDUSTRIES, INC.
Condensed Consolidated Balance Sheets *
(In thousands, except per share amounts)
 
 
June 30,
 
December 31,
 
 
2012
 
2011
ASSETS
 
 

 
 

CURRENT ASSETS:
 
 

 
 

Cash and cash equivalents
 
$
120,266

 
$
117,639

Marketable securities
 
28,754

 
25,567

Accounts receivable, net of allowances of $6,282 and $6,796, respectively
 
100,850

 
132,485

Inventories, net of reserves of $15,753 and $13,614, respectively
 
80,609

 
80,283

Deferred income tax assets
 
9,014

 
9,014

Income taxes receivable
 
7,712

 
13,826

Other current assets
 
10,626

 
11,672

Total current assets
 
357,831

 
390,486

Property and equipment, net
 
39,668

 
42,338

OTHER ASSETS:
 
 
 
 
Deposits and other
 
9,131

 
8,959

Goodwill
 
46,515

 
46,515

Other intangible assets, net
 
40,715

 
43,438

Deferred income tax assets
 
1,706

 
1,642

Total assets
 
$
495,566

 
$
533,378

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

CURRENT LIABILITIES:
 
 

 
 

Accounts payable
 
$
42,031

 
$
44,828

Income taxes payable
 
7,172

 
3,310

Accrued payroll and employee benefits
 
10,411

 
9,184

Accrued warranty expense
 
8,581

 
8,433

Other accrued expenses
 
8,643

 
10,800

Customer deposits
 
6,071

 
14,689

Total current liabilities
 
82,909

 
91,244

LONG-TERM LIABILITIES:
 
 
 
 
Deferred income tax liabilities
 
5,920

 
6,475

Uncertain tax positions
 
16,404

 
16,404

Accrued warranty expense
 
5,476

 
6,286

Other long-term liabilities
 
17,098

 
5,630

Total liabilities
 
127,807

 
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; 37,679 and 41,956
 
 

 
 

issued and outstanding, respectively
 
38

 
42

Additional paid-in capital
 
205,285

 
254,003

Retained earnings
 
134,764

 
124,767

Accumulated other comprehensive income
 
27,672

 
28,527

Total stockholders’ equity
 
367,759

 
407,339

Total liabilities and stockholders’ equity
 
$
495,566

 
$
533,378

*    Amounts as of June 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.

3


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

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
SALES
 
$
115,658

 
$
138,154

 
$
221,445

 
$
275,806

COST OF SALES
 
71,929

 
82,777

 
137,972

 
158,384

GROSS PROFIT
 
43,729

 
55,377

 
83,473

 
117,422

OPERATING EXPENSES:
 
 

 
 

 
 

 
 

Research and development
 
14,502

 
17,137

 
29,617

 
32,999

Selling, general, and administrative
 
16,706

 
20,001

 
36,765

 
40,906

Amortization of intangible assets
 
1,351

 
921

 
2,723

 
1,842

Restructuring charges (benefit)
 
(144
)
 

 
2,431

 

Total operating expenses
 
32,415

 
38,059

 
71,536

 
75,747

OPERATING INCOME
 
11,314

 
17,318

 
11,937

 
41,675

OTHER INCOME, NET
 
1,775

 
92

 
2,186

 
755

Income from continuing operations before income taxes
 
13,089

 
17,410

 
14,123

 
42,430

Provision for income taxes
 
4,288

 
3,898

 
4,556

 
10,152

INCOME FROM CONTINUING OPERATIONS, NET OF INCOME TAXES
 
8,801

 
13,512

 
9,567

 
32,278

Income from discontinued operations, net of income taxes
 
127

 
74

 
430

 
214

NET INCOME
 
$
8,928

 
$
13,586

 
$
9,997

 
$
32,492

 
 
 
 
 
 
 
 
 
Basic weighted-average common shares outstanding
 
38,974

 
43,571

 
39,877

 
43,505

Diluted weighted-average common shares outstanding
 
39,583

 
44,187

 
40,460

 
44,156

 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE:
 
 

 
 

 
 
 
 
CONTINUING OPERATIONS:
 
 

 
 

 
 
 
 
BASIC EARNINGS PER SHARE
 
$
0.23

 
$
0.31

 
$
0.24

 
$
0.74

DILUTED EARNINGS PER SHARE
 
$
0.22

 
$
0.31

 
$
0.24

 
$
0.73

DISCONTINUED OPERATIONS
 
 

 
 

 
 

 
 

BASIC EARNINGS PER SHARE
 
$
0.00

 
$
0.00

 
$
0.01

 
$
0.00

DILUTED EARNINGS PER SHARE
 
$
0.00

 
$
0.00

 
$
0.01

 
$
0.00

NET INCOME:
 
 

 
 

 
 

 
 

BASIC EARNINGS PER SHARE
 
$
0.23

 
$
0.31

 
$
0.25

 
$
0.75

DILUTED EARNINGS PER SHARE
 
$
0.23

 
$
0.31

 
$
0.25

 
$
0.74


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

4


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


 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Net income
 
$
8,928

 
$
13,586

 
$
9,997

 
$
32,492

Other comprehensive income (loss), net of tax:
 
 
 
 
 

 

Foreign currency translation adjustment
 
929

 
2,055

 
(869
)
 
1,768

Unrealized gains (losses) on securities
 
(5
)
 
(10
)
 
14

 
(13
)
Comprehensive income
 
$
9,852

 
$
15,631

 
$
9,142

 
$
34,247



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


5


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

 
 
Six Months Ended June 30,
 
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
9,997

 
$
32,492

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
8,618

 
6,813

Stock-based compensation expense
 
7,237

 
6,139

Provision (benefit) for deferred income taxes
 
(614
)
 
(181
)
Restructuring charges
 
2,431

 

Net (gain) loss on sale or disposal of assets
 
(1,223
)
 
57

Changes in operating assets and liabilities:
 
 

 
 

Accounts receivable
 
30,990

 
(7,056
)
Inventories
 
(522
)
 
(21,944
)
Other current assets
 
898

 
761

Accounts payable
 
(2,172
)
 
(7,483
)
Other current liabilities and accrued expenses
 
(547
)
 
482

Income taxes
 
9,710

 
3,333

Non-current assets
 

 
91

Net cash provided by operating activities
 
64,803

 
13,504

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 

Purchases of marketable securities
 
(13,767
)
 
(7,449
)
Proceeds from sale of marketable securities
 
10,566

 
7,001

Proceeds from the sale of assets
 
2,200

 

Purchases of property and equipment
 
(4,209
)
 
(8,657
)
Net cash used in investing activities
 
(5,210
)
 
(9,105
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Payments on capital lease obligations
 
(47
)
 
(70
)
Purchase and retirement of treasury stock
 
(57,117
)
 

Proceeds from exercise of stock options
 
1,635

 
1,862

Excess tax from stock-based compensation deduction
 
(476
)
 
(564
)
Net cash provided by (used in) financing activities
 
(56,005
)
 
1,228

EFFECT OF CURRENCY TRANSLATION ON CASH
 
(961
)
 
(977
)
INCREASE IN CASH AND CASH EQUIVALENTS
 
2,627

 
4,650

CASH AND CASH EQUIVALENTS, beginning of period
 
117,639

 
130,914

CASH AND CASH EQUIVALENTS, end of period
 
$
120,266

 
$
135,564

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid for interest
 
$
15

 
$
47

Cash paid for income taxes
 
2,555

 
14,595

Cash received for refunds of income taxes
 
7,334

 
7,522

Cash held in banks outside the United States
 
30,249

 
49,399

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

6


ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1.BASIS OF PRESENTATION
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 deposition for various products, such as semiconductor devices, flat panel displays, solar panels, and architectural glass. We also supply thermal instrumentation products for advanced temperature control in the thin-film process for these same markets. Our solar inverter products support renewable power generation solutions for 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 residential, commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power.
In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries (“we”, “us”, “our”, “Advanced Energy”, or the “Company”) at June 30, 2012, and the results of our operations and cash flows for the three months and six months ended June 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
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

7

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

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, net in our Condensed Consolidated Statements of Operations for the second quarter of 2012. 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 June 30,
 
Six Months Ended June 30,

 
2012
 
2011
 
2012
 
2011
Sales
 
$
4,383

 
$
4,208

 
$
8,959

 
$
10,554

Cost of sales
 
4,044

 
3,974

 
9,189

 
10,660

Gross profit (loss)
 
339

 
234

 
(230
)
 
(106
)
Operating expenses:
 


 


 


 


  Research and development
 

 
(3
)
 

 
5

  Selling, general, and administrative
 
43

 
90

 
88

 
140

    Total operating expenses
 
43

 
87

 
88

 
145

Operating income (loss) from discontinued operations
 
296

 
147

 
(318
)
 
(251
)
  Other income (expense)
 
(142
)
 
157

 
881

 
768

    Income from discontinued operations before income taxes
 
154

 
304

 
563

 
517

Provision for income taxes
 
27

 
230

 
133

 
303

Income from discontinued operations, net of income taxes
 
$
127

 
$
74

 
$
430

 
$
214

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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Provision for income taxes:
 
 
 
 
 
 
 
 
Income from continuing operations before income taxes
 
$
13,089

 
$
17,410

 
$
14,123

 
$
42,430

Provision for income taxes
 
4,288

 
3,898

 
4,556

 
10,152

Effective tax rate
 
32.8
%
 
22.4
%
 
32.3
%
 
23.9
%

8

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

 
Our effective tax rate is lower than the corporate statutory U.S. federal income tax rate primarily due to the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates. Our effective tax rate increased from the three months and six months ended 2012 as compared to 2011 because 2012 projected earnings are being taxed in higher tax rate jurisdictions as compared to 2011.
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 six months ended June 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
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 (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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Income from continuing operations, net of income taxes
 
$
8,801

 
$
13,512

 
$
9,567

 
$
32,278

Basic weighted-average common shares outstanding
 
38,974

 
43,571

 
39,877

 
43,505

Assumed exercise of dilutive stock options and restricted stock units
 
609

 
616

 
583

 
651

Diluted weighted-average common shares outstanding
 
39,583

 
44,187

 
40,460

 
44,156

Income from Continuing Operations:
 
 

 
 

 
 
 
 
Basic earnings per share
 
$
0.23

 
$
0.31

 
$
0.24

 
$
0.74

Diluted earnings per share
 
$
0.22

 
$
0.31

 
$
0.24

 
$
0.73

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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Stock options
4,875

 
3,831

 
5,303

 
3,690

Restricted stock units
1

 
4

 

 
3

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 three months and six months ended June 30, 2012, we repurchased and retired 2.7 million and 4.7 million shares of our common stock for a total of $35.2 million and $57.1 million, respectively. As of June 30, 2012, we have completed this repurchase program. Total shares repurchased are 6.4 million shares of our common stock for $75.0 million.
All share repurchases 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.


9

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


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):
 
 
June 30,
 
December 31,
 
 
2012
 
2011
 
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Commercial paper
 
$
1,200

 
$
1,200

 
$
2,395

 
$
2,395

Certificates of deposit
 
10,457

 
10,457

 
8,333

 
8,326

Corporate bonds/notes
 
9,717

 
9,716

 
7,534

 
7,523

Municipal bonds/notes
 
289

 
289

 

 

Agency bonds/notes
 
7,093

 
7,092

 
7,320

 
7,323

Total marketable securities
 
$
28,756

 
$
28,754

 
$
25,582

 
$
25,567

The maturities of our marketable securities available for sale as of June 30, 2012 are as follows:
 
 
Earliest
 
 
 
Latest
Commercial paper
 
7/2/2012
 
to
 
7/23/2012
Certificates of deposit
 
7/20/2012
 
to
 
2/14/2014
Corporate bonds/notes
 
7/2/2012
 
to
 
6/17/2013
Municipal bonds/notes
 
9/1/2013
 
to
 
9/1/2013
Agency bonds/notes
 
7/15/2012
 
to
 
7/3/2013
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 June 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 six months ended June 30, 2012 and June 30, 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 June 30, 2012 and 2011 was $31.2 million and $14.5 million, respectively, and the fair value of these contracts was not significant at June 30, 2012 and 2011. During the three months ended June 30, 2012 and 2011 we recognized a gain of $1.5 million and a loss of $0.1 million, respectively, on our foreign currency exchange contracts. During the six months ended June 30, 2012 and 2011, we recognized a gain of $0.5 million and a loss $0.1 million, respectively. 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 Condensed Consolidated Statements of Operations.





10

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

NOTE 7.
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
The following tables present information about our financial assets measured at fair value, on a recurring basis, as of June 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 June 30, 2012, and December 31, 2011.
June 30, 2012
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
(In thousands)
Commercial paper
 
$

 
$
1,200

 
$

 
$
1,200

Certificates of deposit
 

 
10,457

 

 
10,457

Corporate bonds/notes
 
9,716

 

 

 
9,716

Municipal bonds/notes
 
289

 

 

 
289

Agency bonds/notes
 
7,092

 

 

 
7,092

Total
 
$
17,097

 
$
11,657

 
$

 
$
28,754

 
 
 
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
 
$
14,846

 
$
10,721

 
$

 
$
25,567


There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three months or six months ended June 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):
 
 
June 30,
 
December 31,
 
 
2012
 
2011
Parts and raw materials
 
$
56,308

 
$
57,962

Work in process
 
6,240

 
3,708

Finished goods
 
18,061

 
18,613

 
 
$
80,609

 
$
80,283











11

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


NOTE 9.
PROPERTY AND EQUIPMENT
Details of property and equipment are as follows (in thousands):
 
 
June 30,
 
December 31,
 
 
2012
 
2011
Buildings and land
 
$
1,667

 
$
1,647

Machinery and equipment
 
41,747

 
40,126

Computer and communication equipment
 
24,878

 
24,097

Furniture and fixtures
 
2,286

 
2,648

Vehicles
 
430

 
464

Leasehold improvements
 
29,190

 
29,680

Construction in process
 
2,119

 
6,352

 
 
102,317

 
105,014

Less: Accumulated depreciation
 
(62,649
)
 
(62,676
)
 
 
$
39,668

 
$
42,338

    
Depreciation expense recorded in continuing operations is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Depreciation expense
 
$
3,054

 
$
2,630

 
$
5,895

 
$
4,971

NOTE 10.
GOODWILL
The following summarizes the changes in goodwill during the three months and six months ended June 30, 2012 and 2011 (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Gross carrying amount, beginning of period
 
$
46,515

 
$
48,360

 
$
46,515

 
$
48,360

Additions and adjustments
 

 
(1,845
)
 

 
(1,845
)
Impairments
 

 

 

 

Gross carrying amount, end of period
 
$
46,515

 
$
46,515

 
$
46,515

 
$
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-amortizable intangibles in the table below. All in-process research and development projects were complete as of June 30, 2012 and are classified as amortizing intangibles.







12

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

Other intangible assets consisted of the following as of June 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

 
$
(8,228
)
 
$
33,716

 
7
Trademarks and other
 
8,210

 
(1,211
)
 
6,999

 
8
Total intangible assets
 
$
50,154

 
$
(9,439
)
 
$
40,715

 
 
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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Amortization expense
 
$
1,351

 
$
921

 
$
2,723

 
$
1,842

Estimated 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)
 
$
2,831

2013
 
8,069

2014
 
8,854

2015
 
8,407

2016
 
6,239

Thereafter
 
6,315

 
 
$
40,715

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 product costs. Under this plan, we have reduced our global headcount by approximately 218 people or 13.0% 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.

13

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

Over the next 3 to 9 months, we will implement the remainder of the restructuring plan as we close facilities and relocate certain functions and expect to incur an additional $4.0 to $9.0 million of restructuring costs during this period. Estimated total expenses to be incurred under this plan are between $13.0 and $18.0 million including the amounts recognized in 2011 and those noted below. Of this total, approximately $5.0 to $6.0 million relates to severance costs, $2.5 million relates to asset impairments, and $5.5 to $9.5 million relates to costs to close facilities and relocate portions of our manufacturing.
The following table summarizes the components of our restructuring costs incurred under this plan (in thousands):
 
 
Three months ended
 
Six months ended
 
Cumulative costs through
 
 
June 30, 2012
 
June 30, 2012
 
June 30, 2012
Severance and related costs
 
$
74

 
447

 
$
4,068

Property and equipment impairments
 
(300
)
 
512

 
2,251

Facility closure costs
 
82

 
1,472

 
3,460

Total restructuring charges
 
$
(144
)
 
$
2,431

 
$
9,779

The gain on property and equipment in the current quarter is due to an adjustment of an estimate of lease impairments that was recognized in the first quarter of 2012.
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 June 30, 2012
Severance and related costs
 
$
800

 
$
447

 
$
(902
)
 
$
(20
)
 
$
325

Property and equipment impairments
 

 
512

 
(512
)
 

 

Facility closure costs
 
1,019

 
1,472

 
(1,698
)
 

 
793

Total restructuring liabilities
 
$
1,819

 
$
2,431

 
$
(3,112
)
 
$
(20
)
 
$
1,118

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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Balances at beginning of period
 
$
14,319

 
$
13,428

 
$
14,719

 
$
12,949

Increases to accruals related to sales during the period
 
1,865

 
2,493

 
3,700

 
5,044

Warranty expenditures
 
(2,127
)
 
(1,625
)
 
(4,362
)
 
(3,697
)
Balances at end of period
 
$
14,057

 
$
14,296

 
$
14,057

 
$
14,296

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 $16.9 million as of June 30, 2012, of which $0.5 million is classified in Customer deposits and $16.4 million is classified in Other long-term liabilities in the Condensed Consolidated Balance Sheet as of June 30, 2012. At 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.


14

Table of Contents         
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 six months ended June 30, 2012 and 2011 is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Stock-based compensation expense
 
$
2,228

 
$
3,399

 
$
7,237

 
$
6,139

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 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. 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 six months ended June 30, 2012 is as follows (in thousands):
 
 
Shares
Options outstanding at December 31, 2011
 
5,821

Options granted
 
1,621

Options exercised
 
(204
)
Options forfeited
 
(572
)
Options expired
 
(154
)
Options outstanding at June 30, 2012
 
6,512

Restricted Stock Units
A summary of our non-vested Restricted Stock Units ("RSU") activity for the six months ended June 30, 2012 is as follows (in thousands):
 
 
Shares
Balance at December 31, 2011
 
764

RSUs granted
 
13

RSUs vested
 
(178
)
RSUs forfeited
 
(87
)
Balance at June 30, 2012
 
512







15

Table of Contents         
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 Securities
 
Total Accumulated Other Comprehensive Income
Balances at December 31, 2011
$
28,542

 
$
(15
)
 
$
28,527

Current period other comprehensive income (loss)
(869
)
 
14

 
(855
)
Balances at June 30, 2012
$
27,673

 
$
(1
)
 
$
27,672

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 June 30, 2012 is approximately $69.4 million. Our policy with respect to all purchase commitments, is to record losses, if any, when they are probable and reasonably estimable. We continuously monitor these commitments for exposure to potential losses and will record a provision for losses when it is deemed necessary.

NOTE 17.
RELATED PARTY TRANSACTIONS
During the three months and six months ended June 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 June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
Sales - related parties
$
323

 
$
1,544

 
$
477

 
$
2,554

Rent expense - related parties
477

 
545

 
937

 
1,157

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 six months ended June 30, 2012 we had sales to two such companies as noted above and aggregate accounts receivable from one such customer totaled $16,000 at June 30, 2012. During the three months and six months ended June 30, 2011 we had sales to three such companies 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.
NOTE 18.
SIGNIFICANT CUSTOMER INFORMATION
Applied Materials, Inc. is our largest customer and our only customer that accounted for 10% or more of our sales during the three months and six months ended June 30, 2012 and 2011. Sales to Applied Materials as a percent of total sales were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Applied Materials
 
15.4
%
 
14.0
%
 
16.1
%
 
15.0
%

16

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

Applied Materials accounted for 10.8% of our accounts receivable as of June 30, 2012. No other customer accounted for 10% or more of our gross accounts receivable as of June 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 residential, commercial, and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. Our Solar Energy SBU focuses on 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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Thin Films
 
$
64,843

 
$
97,331

 
$
125,233

 
$
197,430

Solar Energy
 
50,815

 
40,823

 
96,212

 
78,376

Total
 
$
115,658

 
$
138,154

 
$
221,445

 
$
275,806

Income from continuing operations before income taxes by operating segment is as follows (in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Thin Films
 
$
8,881

 
$
20,042

 
$
12,048

 
$
44,866

Solar Energy
 
2,740

 
321

 
3,233

 
2,833

Total segment operating income
 
11,621

 
20,363

 
15,281

 
47,699

Corporate expenses
 
(451
)
 
(3,045
)
 
(913
)
 
(6,024
)
Restructuring charges (benefit)
 
144

 

 
(2,431
)
 

Other income
 
1,775

 
92

 
2,186

 
755

Income from continuing operations before income taxes
 
$
13,089

 
$
17,410

 
$
14,123

 
$
42,430

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 investors with a clearer understanding of the business unit's operating performance. The remaining Corporate Expenses consist of intangible amortization from past acquisitions that management determined should not be charged to either business unit.

17

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

Segment assets consist of inventories, net and property and equipment, net. A summary of consolidated total assets by segment follows (in thousands):
 
 
June 30, 2012
 
December 31, 2011
Thin Films
 
$
50,815

 
$
59,025

Solar Energy
 
65,339

 
62,605

Total segment assets
 
116,154

 
121,630

Unallocated corporate property and equipment
 
4,124

 
991

Unallocated Corporate assets
 
375,288

 
410,757

Consolidated total assets
 
$
495,566

 
$
533,378


Unallocated corporate assets include accounts receivable, deferred income taxes and intangible assets.

18


no 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 processing and etching for various products as well as grid-tied power conversion. We also supply thermal instrumentation products used for temperature control in the thin-film process. 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 converts it into power that is predictable, repeatable and customizable. Our power conversion products are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage and architectural glass manufacturers.
Our thermal instrumentation products 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 both an advanced transformer-based or transformerless grid-tied PV solutions for residential, commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. These products are used for 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, conversions, 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.




19


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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Sales
 
$
115,658

 
$
138,154

 
$
221,445

 
$
275,806

Gross profit
 
43,729

 
55,377

 
83,473

 
117,422

Operating expenses
 
32,415

 
38,059

 
71,536

 
75,747

Operating income
 
11,314

 
17,318

 
11,937

 
41,675

Other income, net
 
1,775

 
92

 
2,186

 
755

Income from continuing operations before income taxes
 
13,089

 
17,410

 
14,123

 
42,430

Provision for income taxes
 
4,288

 
3,898

 
4,556

 
10,152

Income from continuing operations, net of income taxes
 
$
8,801

 
$
13,512

 
$
9,567

 
$
32,278

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 June 30,
 
Six Months Ended June 30,
 
 
2012
 
2011
 
2012
 
2011
Sales
 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Gross profit
 
37.8
%
 
40.0
%
 
37.7
%
 
42.6
%
Operating expenses
 
28.0
%
 
27.4
%
 
32.3
%
 
27.5
%
Operating income
 
9.8
%
 
12.6
%
 
5.4
%
 
15.1
%
Other income, net
 
1.5
%
 
0.1
%
 
1.0
%
 
0.3
%
Income from continuing operations before income taxes
 
11.3
%
 
12.7
%
 
6.4
%
 
15.4
%
Provision for income taxes
 
3.7
%
 
2.8
%
 
2.1
%
 
3.7
%
Income from continuing operations, net of income taxes
 
7.6
%
 
9.9
%
 
4.3
%
 
11.7
%
SALES
The following tables summarize annual net sales, and percentages of net sales, by segment for the three months and six months ended June 30, 2012 and 2011 (in thousands):
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2012
 
% of Total Sales
 
2011
 
% of Total Sales
 
Increase/ (Decrease)
 
Percent Change
Thin Films:
 
 
 
 
 
 
 
 
 
 
 
 
Semiconductor capital equipment market
 
$
36,641

 
31.7
%
 
$
43,694

 
31.6
%
 
$
(7,053
)
 
(16.1
)%
Non-semiconductor capital equipment
 
15,292

 
13.2
%
 
40,505

 
29.4
%
 
(25,213
)
 
(62.2
)%
Global support
 
12,910

 
11.2
%
 
13,132

 
9.5
%
 
(222
)
 
(1.7
)%
Total Thin Films
 
64,843

 
56.1
%
 
97,331

 
70.5
%
 
(32,488
)
 
(33.4
)%
Solar Energy
 
50,815

 
43.9
%
 
40,823

 
29.5
%
 
9,992

 
24.5
 %
Total sales
 
$
115,658

 
100.0
%
 
$
138,154

 
100.0
%
 
$
(22,496
)
 
(16.3
)%

20


 
 
Six Months Ended June 30,
 
 
 
 
 
 
2012
 
% of Total Sales
 
2011
 
% of Total Sales
 
Increase/ (Decrease)
 
Percent Change
Thin Films:
 
 
 
 
 
 
 
 
 
 
 
 
Semiconductor capital equipment market
 
$
74,989

 
33.9
%
 
$
89,649

 
32.5
%
 
$
(14,660
)
 
(16.4
)%
Non-semiconductor capital equipment
 
25,360

 
11.5
%
 
80,953

 
29.4
%
 
(55,593
)
 
(68.7
)%
Global support
 
24,884

 
11.2
%
 
26,828

 
9.7
%
 
(1,944
)
 
(7.2
)%
Total Thin Films
 
125,233

 
56.6
%
 
197,430

 
71.6
%
 
(72,197
)
 
(36.6
)%
Solar Energy
 
96,212

 
43.4
%
 
78,376

 
28.4
%
 
17,836

 
22.8
 %
Total sales
 
$
221,445

 
100.0
%
 
$
275,806

 
100.0
%
 
$
(54,361
)
 
(19.7
)%

Total Sales
Overall, our sales decreased $22.5 million, or 16.3%, to $115.7 million for the three months ended June 30, 2012 from $138.2 million for the three months ended June 30, 2011. Sales decreased $54.4 million, or 19.7%, to $221.4 million for the six months ended June 30, 2012 from $275.8 million for the six months ended June 30, 2011. The decrease in sales during these time periods is a result of decreases over the course of the past 12 months in our customers' capital spending in all thin-film markets in which we compete. Our semiconductor sales for the second quarter in 2012 decreased 16.1% from the same quarter a year ago as the markets could not sustain the elevated spending levels and capacity expansion that marked the second half of 2010 and early 2011; however a more significant impact was felt in our non-semiconductor capital equipment markets, which for the second quarter in 2012 declined 62.2% from the same quarter in 2011. Of particular note were the decreases in both the solar panel and flat panel display markets, for which more detail is provided below. Although our Solar Energy SBU saw an increase of 24.5% for the second quarter in 2012 from the same quarter a year ago, 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 six months ended June 30, 2012 and 2011 were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Sales
$
64,843

 
$
97,331

 
$
125,233

 
$
197,430

Operating Income
8,881

 
20,042

 
12,048

 
44,866


Thin Films sales dipped 33.4% to $64.8 million, or 56.1% of sales, for the three months ended June 30, 2012 versus $97.3 million, or 70.5% of sales, for the three months ended June 30, 2011. Thin Films sales dipped 36.6% to $125.2 million, or 56.6% of sales, for the six months ended June 30, 2012 versus $197.4 million, or 71.6% of sales, for the six months ended June 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 June 30, 2012, sales in the thin film semiconductor market decreased 16.1% to $36.6 million, or 31.7% of sales, from $43.7 million, or 31.6% of sales for the three months ended June 30, 2011. In the six months ended June 30, 2012, sales in the thin film semiconductor market decreased 16.4% to $75.0 million, or 33.9% of sales, from $89.6 million or 32.5% of sales for the six months ended June 30, 2011. As mentioned above, end user capital expansion has reverted to more modest levels when compared to the elevated spending levels of 2010 and early 2011 and utilization rates at semiconductor foundries remain down. Additionally, it appears that slower adoption rates for larger capacity tablet PCs is driving slower demand for investment in solid state drive production. Given the current market dynamics and the general perception that semiconductor investment will be soft in the near term, we expect our semiconductor revenue to be lower in the third quarter of 2012 compared to the second quarter of 2012.
Sales in the thin film non-semiconductor capital equipment markets decreased 62.2% to $15.3 million, or 13.2% of sales, for the three months ended June 30, 2012 compared to $40.5 million, or 29.4% of sales, for the three months ended June 30, 2011. Sales in the thin film non-semiconductor capital equipment markets decreased 68.7% to $25.4 million, or 11.5%

21


of sales, for the three months ended June 30, 2012 compared to $81.0 million, or 29.4% of sales, for the six months ended June 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 six months ended June 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 $1.9 million, or 1.7% of total sales, for the three months ended June 30, 2012 as compared to $15.8 million, or 11.4% of total sales, for the three months ended June 30, 2011. Sales to customers in the thin film solar panel market decreased to $3.9 million, or 1.9% of total sales, for the six months ended June 30, 2012 as compared to $36.1 million, or 13.1% of total sales, for the six months ended June 30, 2011. This decrease is a result of a worldwide excess of panel 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, 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 third quarter of 2012.
We experienced an 82.7% 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 upcoming 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 late this year, we expect sales to the flat panel display market to be flat to lower in the third quarter of 2012.
Our global support revenue decreased to $12.9 million, or 11.2% of total sales, for the three months ended June 30, 2012, compared to $13.1 million, representing 9.5% of sales, for the three months ended June 30, 2011. Our global support revenue decreased to $24.9 million, or 11.2% of total sales, for the six months ended June 30, 2012, compared to $26.8 million, representing 9.7% of sales, for the six months ended June 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. The outlook for our service business continues to be strong, as our product offerings to include maintenance contracts in the growing solar array market gain traction and we ramp up our efforts to sell spare parts and used equipment in our Thin Film service business.
Operating income for Thin Films was $8.9 million for the three months ended June 30, 2012, a decline of $11.2 million from the same period of 2011. Operating income for Thin Films was $12.0 million for the six months ended June 30, 2012, a decline of $32.8 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 investors with a clearer understanding of the business unit's operating performance.
Solar Energy
Results for Solar Energy for the three months and six months ended June 30, 2012 and 2011 are as follows (in thousands):

Three Months Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
Sales
$
50,815

 
$
40,823

 
$
96,212

 
$
78,376

Operating income
2,740

 
321

 
3,233

 
2,833

Solar Energy sales were $50.8 million, or 43.9% of sales, for the three months ended June 30, 2012 as compared to $40.8 million, or 29.5% of sales, for the three months ended June 30, 2011. Solar Energy sales were $96.2 million, or 43.4% of sales, for the six months ended June 30, 2012 as compared to $78.4 million, or 28.4% of sales, for the six months ended June 30, 2011.