Company Quick10K Filing
Quick10K
Advanced Energy Industries
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$51.36 38 $1,960
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-04 Shareholder Vote
8-K 2019-05-14 Enter Agreement, Regulation FD, Exhibits
8-K 2019-05-06 Earnings, Exhibits
8-K 2019-05-06 Regulation FD
8-K 2019-02-04 Earnings, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-09-01 M&A, Other Events, Exhibits
8-K 2018-08-02 Officers, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-07-26 Enter Agreement, Other Events, Exhibits
8-K 2018-05-08 Officers, Exhibits
8-K 2018-05-03 Officers, Other Events, Exhibits
8-K 2018-03-27 Officers, Exhibits
8-K 2018-01-30 Earnings, Exhibits
BIIB Biogen Idec 44,300
LOMA Loma Negra Compania Industrial Argentina Sociedad Anonima 1,220
FARO Faro Technologies 911
UCFC United Community Financial 453
PRTH Priority Technology Holdings 406
CDZI Cadiz 268
PRTK Paratek Pharmaceuticals 180
INFU InfuSystem 89
NWIN Northwest Indiana Bancorp 0
MATR Mattersight 0
AEIS 2019-03-31
Part I Financial Statements
Item 1. Unaudited Condensed Consolidated Financial Statements
Note 1. Basis of Presentation
Note 2. Business Acquisitions
Note 3. Revenue
Note 5. Income Taxes
Note 6. Earnings per Share
Note 7. Marketable Securities and Assets Measured At Fair Value
Note 8. Derivative Financial Instruments
Note 9. Accounts and Other Receivable
Note 10. Inventories
Note 11. Property and Equipment
Note 12. Goodwill
Note 13.Intangible Assets
Note 14.Restructuring Costs
Note 15. Warranties
Note 16. Leases
Note 17. Pension Liability
Note 18. Stock-Based Compensation
Note 19. Commitments and Contingencies
Note 20. Related Party Transactions
Note 21. Significant Customer Information
Note 22. Credit Facility
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-3.1 amendedandrestatedby-lawso.htm
EX-31.1 aeisexhibit311q12019.htm
EX-31.2 aeisexhibit312q12019.htm
EX-32.1 aeisexhibit321q12019.htm
EX-32.2 aeisexhibit322q12019.htm

Advanced Energy Industries Earnings 2019-03-31

AEIS 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 aeis10qq12019.htm 10-Q AEIS Q1 2019 Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-Q
________________________________________________
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
 
For the quarterly period ended March 31, 2019
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

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.001 par value
 
AEIS
 
NASDAQ Global Select Market

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 þ
 
Accelerated filer o
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 May 2, 2019 there were 38,235,782 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-3.1
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.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
 
 
March 31,
 
December 31,
 
 
2019
 
2018
ASSETS
 
 
 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
351,149

 
$
349,301

Marketable securities
 
2,516

 
2,470

Accounts and other receivable, net of allowances of $2,115 and $1,856 respectively
 
102,405

 
100,442

Inventories
 
99,070

 
97,987

Income taxes receivable
 
1,945

 
2,220

Other current assets
 
11,309

 
10,173

Current assets from discontinued operations
 
4,872

 
5,855

Total current assets
 
573,266

 
568,448

Property and equipment, net
 
31,058

 
31,269

Operating lease right-of-use assets
 
35,654

 

Deposits and other assets
 
9,378

 
6,874

Goodwill
 
101,306

 
101,900

Intangible assets, net
 
52,858

 
54,910

Deferred income tax assets
 
47,513

 
47,099

Non-current assets from discontinued operations
 
5,917

 
5,984

TOTAL ASSETS
 
$
856,950

 
$
816,484

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable
 
$
44,028

 
$
39,646

Income taxes payable
 
12,584

 
13,258

Accrued payroll and employee benefits
 
16,528

 
21,775

Other accrued expenses
 
21,848

 
22,999

Customer deposits and other
 
5,510

 
7,345

Current portion of operating lease liability
 
7,298

 

Current liabilities from discontinued operations
 
4,254

 
5,286

Total current liabilities
 
112,050

 
110,309

Operating lease liability
 
29,596

 

Deferred income tax liabilities
 
6,592

 
6,988

Uncertain tax positions
 
9,987

 
14,318

Long term deferred revenue
 
28,148

 
29,108

Other long-term liabilities
 
37,947

 
37,744

Non-current liabilities from discontinued operations
 
10,486

 
10,715

Total liabilities
 
234,806

 
209,182

Commitments and contingencies (Note 19)
 
 
 
 
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; 38,236 and 38,164
issued and outstanding, respectively
 
38

 
38

Additional paid-in capital
 
98,910

 
97,418

Accumulated other comprehensive loss
 
(5,477
)
 
(3,449
)
Retained earnings
 
528,153

 
512,783

Advanced Energy stockholders’ equity
 
621,624

 
606,790

Noncontrolling interest
 
520

 
512

Total stockholders’ equity
 
622,144

 
607,302

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
856,950

 
$
816,484


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

3


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

 
Three Months Ended March 31,
 
2019
 
2018
 
 
Sales, net:
 
 
 
Product
$
112,112

 
$
171,209

Services
28,631

 
24,408

Total sales, net
140,743

 
195,617

Cost of sales:
 
 
 
Product
60,801

 
79,806

Services
14,202

 
12,166

Total cost of sales
75,003

 
91,972

Gross profit
65,740

 
103,645

Operating expenses:
 

 
 

Research and development
21,289

 
17,637

Selling, general and administrative
29,014

 
28,648

Amortization of intangible assets
1,973

 
1,257

Restructuring expense
1,673

 

Total operating expenses
53,949

 
47,542

Operating income
11,791

 
56,103

Other income, net
743

 
26

Income from continuing operations, before income taxes
12,534

 
56,129

Provision (benefit) for income taxes
(2,853
)
 
9,759

Income from continuing operations
15,387

 
46,370

Income (loss) from discontinued operations, net of income taxes
(9
)
 
140

Net income
$
15,378

 
$
46,510

Income from continuing operations attributable to noncontrolling interest
8

 
31

Net income attributable to Advanced Energy Industries, Inc.
$
15,370

 
$
46,479

 
 
 
 
Basic weighted-average common shares outstanding
38,198

 
39,619

Diluted weighted-average common shares outstanding
38,426

 
39,995

 
 
 
 
Earnings per share:
 

 
 

Continuing operations:
 

 
 

Basic earnings per share
$
0.40

 
$
1.17

Diluted earnings per share
$
0.40

 
$
1.16

Discontinued operations:
 
 
 
Basic earnings per share
$

 
$

Diluted earnings per share
$

 
$

Net income:
 
 
 
Basic earnings per share
$
0.40

 
$
1.17

Diluted earnings per share
$
0.40

 
$
1.16

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

4


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


 
Three Months Ended March 31,
 
2019
 
2018
Net income
$
15,378

 
$
46,510

Other comprehensive income:
 
 
 
Foreign currency translation
(1,975
)
 
2,472

Minimum benefit retirement liability
(53
)
 
(168
)
Comprehensive income
13,350

 
48,814

Comprehensive income attributable to noncontrolling interest
8

 
31

Comprehensive income attributable to Advanced Energy Industries, Inc.
$
13,342

 
$
48,783


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


5


ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
 
 
Common Stock
 
 
 
Accumulated Other Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional Paid-in Capital
 
Foreign Currency Translation
 
Minimum Benefit Retirement Liability
 
Retained Earnings
 
Non-controlling Interest
 
Total Stockholders’ Equity
Balances, December 31, 2017
 
39,604

 
$
40

 
$
184,843

 
$
4,695

 
$
(2,162
)
 
$
333,225

 
$

 
$
520,641

Adoption of new accounting standards
 

 

 

 

 

 
19,706

 

 
19,706

Non-controlling interest from acquisition
 

 

 

 

 

 

 
431

 
431

Stock issued from equity plans
 
113

 

 
(4,127
)
 

 

 

 

 
(4,127
)
Stock-based compensation
 

 

 
4,494

 

 

 

 

 
4,494

Stock buyback
 
(181
)
 

 
(12,750
)
 

 

 

 

 
(12,750
)
Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 

 

 

 
2,472

 

 

 

 
2,472

Minimum benefit retirement liability
 

 

 

 

 
(168
)
 

 

 
(168
)
Net income
 

 

 

 

 

 
46,479

 
31

 
46,510

Total comprehensive income (loss)
 

 

 

 
2,472

 
(168
)
 
46,479

 
31

 
48,814

Balances, March 31, 2018
 
39,536

 
$
40

 
$
172,460

 
$
7,167

 
$
(2,330
)
 
$
399,410

 
$
462

 
$
577,209

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances, December 31, 2018
 
38,164

 
$
38

 
$
97,418

 
$
(590
)
 
$
(2,859
)
 
$
512,783

 
$
512

 
$
607,302

Stock issued from equity plans
 
72

 

 
(1,707
)
 

 

 

 

 
(1,707
)
Stock-based compensation
 

 

 
3,199

 

 

 

 

 
3,199

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 

 

 

 
(1,975
)
 

 

 

 
(1,975
)
Minimum benefit retirement liability
 

 

 

 

 
(53
)
 

 

 
(53
)
Net income
 

 

 

 

 

 
15,370

 
8

 
15,378

Total comprehensive income (loss)
 

 

 

 
(1,975
)
 
(53
)
 
15,370

 
8

 
13,350

Balances at March 31, 2019
 
38,236

 
$
38

 
$
98,910

 
$
(2,565
)
 
$
(2,912
)
 
$
528,153

 
$
520

 
$
622,144


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



6


ADVANCED ENERGY INDUSTRIES, INC.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
 
 
Three Months Ended March 31,
 
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 

 
 

Net income
 
$
15,378

 
$
46,510

Income (loss) from discontinued operations, net of income taxes
 
(9
)
 
140

Income from continuing operations, net of income taxes
 
15,387

 
46,370

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

 
 
Depreciation and amortization
 
4,181

 
2,861

Stock-based compensation expense
 
3,199

 
4,494

Provision for deferred income taxes
 
(649
)
 

Net loss on disposal of assets
 
6

 
138

Changes in operating assets and liabilities, net of assets acquired:
 
 
 
 
Accounts and other receivable, net
 
(2,416
)
 
(17,457
)
Inventories
 
(1,243
)
 
(17,113
)
Other assets
 
(4,295
)
 
364

Accounts payable
 
4,546

 
11,932

Other liabilities and accrued expenses
 
(7,165
)
 
(2,346
)
Income taxes
 
(4,696
)
 
5,642

Net cash provided by operating activities from continuing operations
 
6,855

 
34,885

Net cash used in operating activities from discontinued operations
 
(1,409
)
 
(1,784
)
Net cash provided by operating activities
 
5,446

 
33,101

CASH FLOWS FROM INVESTING ACTIVITIES:
 
 

 
 
Acquisitions, net of cash acquired
 

 
(6,072
)
Purchases of property and equipment
 
(2,436
)
 
(3,923
)
Net cash used in investing activities from continuing operations
 
(2,436
)
 
(9,995
)
Net cash used in investing activities from discontinued operations
 

 

Net cash used in investing activities
 
(2,436
)
 
(9,995
)
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 

 
 

Purchase and retirement of common stock
 

 
(12,750
)
Net payments related to stock-based award activities
 
(1,707
)
 
(4,032
)
Net cash used in financing activities from continuing operations
 
(1,707
)
 
(16,782
)
Net cash used in financing activities from discontinued operations
 

 

Net cash used in financing activities
 
(1,707
)
 
(16,782
)
EFFECT OF CURRENCY TRANSLATION ON CASH
 
(566
)
 
167

INCREASE IN CASH AND CASH EQUIVALENTS
 
737

 
6,491

CASH AND CASH EQUIVALENTS, beginning of period
 
354,552

 
415,037

CASH AND CASH EQUIVALENTS, end of period
 
355,289

 
421,528

Less cash and cash equivalents from discontinued operations
 
4,140

 
7,654

CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period
 
$
351,149

 
$
413,874

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
 
 

 
 

Cash paid for interest
 
$
56

 
$
56

Cash paid for income taxes
 
2,371

 
3,404

Cash received for refunds of income taxes
 
61

 
95

Cash held in banks outside the United States
 
174,980

 
320,753

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

7


ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
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 precision power products that transform, refine, and modify the raw electrical power from the utility and convert it into various types of highly-controllable usable power that is predictable, repeatable and customizable. Our power solutions enable innovation in complex semiconductor and thin film plasma processes such as dry etch, strip, chemical and physical deposition, high and low voltage applications such as process control, analytical instrumentation and medical equipment, and in temperature-critical thermal applications such as material and chemical processing. We also supply related instrumentation products for advanced temperature measurement and control, electrostatic instrumentation products for test and measurement applications, and gas sensing and monitoring solutions for multiple industrial markets. Our network of global service support centers provides local repair and field service capability in key regions as well as provide upgrades and refurbishment services, and sales of used equipment to businesses that use our products. As of December 31, 2015, we discontinued our Inverter production, engineering, and sales product line. As such, all Inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein, and we currently report as a single unit. See Note 4. Discontinued Operations for more information.
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 as of March 31, 2019, and the results of our operations and cash flows for the three months ended March 31, 2019 and 2018.
The Unaudited 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, 2018 and other financial information filed with the SEC.
Estimates and Assumptions
The preparation of our Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe that the significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory, warranty reserves, right-of-use assets and related liabilities, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates, making it possible that a change in these estimates could occur in the near term.
Critical Accounting Policies
Our accounting policies are described in our audited Consolidated Financial Statements and Notes contained in our Annual Report on Form 10-K for the year ended December 31, 2018. See Note 16. Leases for the updated policies related to the implementation of ASU 2016-02, "Leases (Topic 842)."
New Accounting Standards
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new accounting pronouncements. Updates to the FASB Accounting Standards Codification ("ASC") are communicated through issuance of an Accounting Standards Update ("ASU"). Unless otherwise discussed, we believe that the impact of recently issued guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on the Consolidated Financial Statements upon adoption.
Recently issued accounting pronouncements not yet adopted
In June 2016, The FASB issued ASU 2016-13, "Financial Instruments—Credit Losses (Topic 326)", Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). This ASU changes the methodology for measuring credit losses on financial instruments and the timing of when such losses are recorded. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted for fiscal years, and interim periods

8

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


within those years, beginning after December 15, 2018. We are currently assessing the impact ASU 2016-13 will have on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820)" ("ASU 2018-13"). ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concepts Statement, including the consideration of costs and benefits. ASU 2018-13 is effective for fiscal years ending after December 15, 2019 and shall be applied to all periods presented on a retrospective basis. Early adoption is permitted. We are currently assessing and do not believe ASU 2018-13 will have a significant impact on our fair value measurements disclosure requirements.
In August 2018, the FASB issued ASU 2018-14, "Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20)" ("ASU 2018-14"). ASU 2018-14 eliminates requirements for certain disclosures and requires additional disclosures under defined benefit pension plans and other post-retirement plans. ASU 2018-14 is effective for fiscal years ending after December 15, 2020 and shall be applied to all periods presented on a retrospective basis. Early adoption is permitted. We are currently assessing and do not believe ASU 2018-14 will have a significant impact on our defined benefit plan disclosure requirements.
Recently adopted accounting pronouncements
In February 2018, the FASB issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income" to give companies the option to reclassify the income tax effects on items within accumulated other comprehensive income resulting from the Tax Act to retained earnings. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. We adopted ASU 2018-02 during the first quarter of fiscal year 2019 which did not have an impact on our Consolidated Financial Statements.
In June 2018, the FASB issued ASU 2018-07, "Compensation-Stock Compensation (Topic 718)", Improvements to Non-employee Share-based Payments (“ASU 2018-07”). This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from non-employees. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018. The new guidance is required to be applied retrospectively with the cumulative effect recognized at the date of initial application. We adopted ASU 2018-07 during the first quarter of fiscal year 2019 which did not have an impact on our Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017-12, "Derivatives and Hedging (Topic 815)", Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12"). This ASU simplifies certain aspects of hedge accounting and results in a more accurate portrayal of the economics of an entity’s risk management activities in its financial statements. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, and the interim periods within those fiscal years. We adopted ASU 2017-12 during the first quarter of fiscal year 2019 using the modified retrospective basis. The adoption of the provisions of ASU 2017-12 did not materially impact the company's Consolidated Balance Sheet or Statement of Operations.
In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations by recognizing lease right-of-use assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within the year of adoption. We adopted ASU 2016-02 using the modified retrospective approach and recorded $38.2 million of operating lease right-of-use assets and $38.4 million of operating lease liabilities as the cumulative-effect in the first quarter of fiscal year 2019. The adoption of ASU 2016-02 did not materially impact the company's Consolidated Statement of Operations or Consolidated Statement of Cash Flows for the period ended March 31, 2019.
NOTE 2.
BUSINESS ACQUISITIONS
LumaSense Technologies Holdings, Inc.
In September 2018, Advanced Energy acquired LumaSense Technologies Holdings, Inc. ("LumaSense"), a privately held company with primary operations in Santa Clara, California, Frankfurt, Germany, and Ballerup, Denmark for a net purchase price of $84.7 million in cash.
The components of the fair value of the total consideration transferred for our acquisition is as follows:
 
LumaSense
Cash paid for acquisition
$
94,946

Cash acquired
(10,262
)
Total fair value of consideration transferred
$
84,684


9

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


The following table summarizes estimated fair values of the assets acquired and liabilities assumed from our acquisition:
 
LumaSense
Accounts and other receivable, net
$
7,167

Inventories
9,372

Property and equipment
1,353

Goodwill
48,032

Intangible assets
26,000

Deferred income tax assets
8,116

Other assets
5,126

Total assets acquired
105,166

Accounts payable
5,734

Deferred income tax liabilities
7,984

Other liabilities
6,764

Total liabilities assumed
20,482

Total fair value of net assets acquired
$
84,684

A summary of the intangible assets acquired, amortization method and estimated useful lives are as follows:
 
LumaSense
 
Amortization Method
 
Useful Life
Technology
$
20,000

 
Straight-line
 
10
Customer relationships
6,000

 
Straight-line
 
10
Total
$
26,000

 
 
 
 
Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill represents expected operating synergies from combining operations with the acquired companies and the estimated value associated with the enhancements to our comprehensive product lines. Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed related to the LumaSense acquisition.
Pro forma results for Advanced Energy Inc. giving effect to the LumaSense Technologies Holdings, Inc. Transaction
The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy Inc. and LumaSense as if the acquisitions had been completed as of the beginning of the prior fiscal year, or January 1, 2018.  The unaudited pro forma financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisitions had taken place on January 1, 2018, nor are they indicative of future results.
The unaudited pro forma financial information for the three months ended March 31, 2019 includes Advanced Energy's results, including the post-acquisition results of LumaSense, since September 1, 2018.  The unaudited pro forma financial information for the three months ended March 31, 2018 combines Advanced Energy's results with the pre-acquisition results of LumaSense for that period.     
The unaudited pro forma results for the three months ended March 31, 2019 and 2018 are as follows:
 
March 31, 2019
 
March 31, 2018
 
As reported
 
Pro forma
 
As reported
 
Pro forma
Total sales
140,743

 
140,743

 
195,617

 
210,465

Net income attributable to Advanced Energy Industries, Inc.
15,370

 
15,491

 
46,479

 
46,310

Earnings per share:
 
 
 
 
 
 
 
Basic earnings per share
$
0.40

 
$
0.41

 
$
1.17

 
$
1.17

Diluted earnings per share
$
0.40

 
$
0.40

 
$
1.16

 
$
1.16


10

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


The unaudited pro forma results for all periods presented include adjustments made to account for certain costs and transactions that would have been incurred had the acquisitions been completed as of January 1, 2018. These adjustments including amortization charges for acquired intangible assets, adjustments for acquisition transaction costs and amortization of purchased gross profit. These adjustments are net of any applicable tax impact and were included to arrive at the pro forma results above.
LumaSense’s operating results have been included in the Advanced Energy's operating results for the periods subsequent to the completion of the acquisition on September 1, 2018. LumaSense contributed total sales of $12.0 million and a net income of $0.9 million for the three months ended March 31, 2019.
NOTE 3.
REVENUE
Revenue Recognition
We recognize revenue when we have satisfied our performance obligations which typically occurs when control of the products or services have been transferred to our customers. The transaction price is based upon the standalone selling price. In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairs that are covered under our standard warranty do not generate revenue.
Practical Expedients
We expense incremental costs of obtaining contracts when the amortization period of the costs is less than 1 year. These costs are included in selling, general, and administrative expenses.
Nature of goods and services
Products
Advanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and control solutions to our global customers. We design, manufacture, sell and support precision power products that transform electrical power into various usable forms. 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 products enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for various semiconductor and industrial products, industrial thermal applications for material and chemical processes, and specialty power for critical industrial technology applications. We also supply thermal instrumentation products for advanced temperature measurement and control in these markets.
Our products are designed to enable new process technologies, improve productivity, and lower the cost of ownership for our customers. We also provide repair and maintenance services for all our products. We principally serve original equipment manufacturers ("OEM") and end customers in the semiconductor, flat panel display, high voltage, solar panel, and other industrial capital equipment markets. Our products are used in diverse markets, applications, and processes including the manufacture of capital equipment for semiconductor device manufacturing, thin film applications for thin film renewables and architectural glass, and for other thin film applications including flat panel displays, and industrial coatings.
Services
Our global support services group offers warranty and after-market repair services in the regions in which we operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive to the costs of system downtime. They expect that suppliers offer comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide support organization comprising of both direct and indirect activities, through partnership with local distributors, primarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Germany, Singapore and United Kingdom.
As part of our ongoing service business, we satisfy our service obligations under preventative maintenance contracts and extended warranties which had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenance plans are deferred. Revenue under these arrangements is recognized ratably over the underlying terms as we do not have historical information which would allow us to project the estimated service usage pattern at this time. We have deferred revenue related to our extended warranties and service contracts totaling $32.5 million as of March 31, 2019 and $33.4 million as of December 31, 2018. We are expected to recognize between $0.1 million and $3.5 million per year through 2034.

11

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


Disaggregation of Revenue
The following table presents our net sales by product line:
 
Three Months Ended March 31,
 
2019
 
2018
Semiconductor capital market
$
67,514

 
$
136,010

Industrial technology capital market
44,598

 
35,199

Global support
28,631

 
24,408

Total
$
140,743

 
$
195,617

The following table presents our net sales by geographic region:
 
 
Three Months Ended March 31,
 
 
2019
 
2018
Sales to external customers:
 
 
United States
 
$
57,875

 
41.1
%
 
$
107,267

 
54.8
%
Other North American countries
 
631

 
0.4

 
630

 
0.3

North America
 
58,506

 
41.5

 
107,897

 
55.1

 
 

 
 
 

 
 
Republic of Korea
 
13,800

 
9.8

 
24,893

 
12.7

People's Republic of China
 
15,474

 
11.0

 
11,870

 
6.1

Taiwan
 
11,621

 
8.3

 
7,540

 
3.9

Singapore
 
6,105

 
4.3

 
13,632

 
7.0

Other Asian countries
 
11,435

 
8.1

 
8,229

 
4.2

Asia
 
58,435

 
41.5

 
66,164

 
33.9

 
 

 
 
 

 
 
Germany
 
7,573

 
5.4

 
8,261

 
4.2

Other European countries
 
15,853

 
11.3

 
13,188

 
6.7

Europe
 
23,426

 
16.7

 
21,449

 
10.9

 
 
 
 
 
 
 
 
 
Other Countries
 
376

 
0.3

 
107

 
0.1

Total
 
$
140,743

 
100.0
%
 
$
195,617

 
100.0
%
The following table presents our net sales by extended warranty and service contracts recognized over time and our product and service revenue recognized at a point in time:
 
Three Months Ended March 31,
 
2019
 
2018
Product and service revenue recognized at point in time
$
139,840

 
$
194,683

Extended warranty and service contracts recognized over time
903

 
934

Total
$
140,743

 
$
195,617

NOTE 4.
DISCONTINUED OPERATIONS
In December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business"). Accordingly, the results of our inverter business have been reflected as "Income (loss) from discontinued operations, net of income taxes" on our Consolidated Statements of Operations for all periods presented herein.
The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated Balance Sheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold, respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associated services are rendered. Extended warranties related to the inverter product line are no longer offered.

12

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


The significant items included in "Income (loss) from discontinued operations, net of income taxes" are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Sales
$

 
$

Cost of sales

 
112

Total operating expense (benefit)

 
(61
)
Operating income (loss) from discontinued operations

 
(51
)
Other income (expense)
(4
)
 
124

Income (loss) from discontinued operations before income taxes
(4
)
 
73

Provision (benefit) for income taxes
5

 
(67
)
Income (loss) from discontinued operations, net of income taxes
$
(9
)
 
$
140

Assets and Liabilities of discontinued operations within the Condensed Consolidated Balance Sheets are comprised of the following:
 
March 31,
 
December 31,
 
2019
 
2018
Cash and cash equivalents
$
4,140

 
$
5,251

Other current assets
430

 
406

Inventories
302

 
198

Current assets of discontinued operations
$
4,872

 
$
5,855

 
 
 
 
Other assets
$

 
$
67

Deferred income tax assets
5,917

 
5,917

Non-current assets of discontinued operations
$
5,917

 
$
5,984

 
 
 
 
Accounts payable and other accrued expenses
$
349

 
$
350

Accrued warranty
3,905

 
4,936

Current liabilities of discontinued operations
$
4,254

 
$
5,286

 
 
 
 
Accrued warranty
$
10,344

 
$
10,429

Other liabilities
142

 
286

Non-current liabilities of discontinued operations
$
10,486

 
$
10,715

NOTE 5.
INCOME TAXES
The following table sets out the tax expense and the effective tax rate for our income from continuing operations:
 
Three Months Ended March 31,
 
2019
 
2018
Income from continuing operations, before income taxes
$
12,534

 
$
56,129

Provision (benefit) for income taxes
(2,853
)
 
9,759

Effective tax rate
(22.8
)%
 
17.4
%
Our effective tax rates differ from the U.S. federal statutory rate of 21% for the three months ended March 31, 2019 and 2018, respectively, primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax rates, partially offset by additional GILTI tax in the U.S. The effective tax rate for the first quarter of 2019 was lower than the same period in 2018 primarily due to the release of liabilities for uncertain tax positions in 2019 based on the completion of additional procedures during the quarter to support a change in facts with respect to a specific prior period position.
NOTE 6.
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 our diluted EPS is similar to the computation of our basic EPS except that the denominator is increased to include the number of additional common shares that would have

13

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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


been outstanding (using the if-converted and treasury stock methods), if our outstanding stock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.    
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted EPS for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Income from continuing operations
$
15,387

 
$
46,370

Income from continuing operations attributable to noncontrolling interest
8

 
31

Income from continuing operations attributable to Advanced Energy Industries, Inc.
$
15,379

 
$
46,339

 
 
 
 
Basic weighted-average common shares outstanding
38,198

 
39,619

Assumed exercise of dilutive stock options and restricted stock units
228

 
376

Diluted weighted-average common shares outstanding
38,426

 
39,995

Continuing operations:
 

 
 

Basic earnings per share
$
0.40

 
$
1.17

Diluted earnings per share
$
0.40

 
$
1.16

The following restricted stock units were excluded in the computation of diluted earnings per share because they were anti-dilutive:
 
Three Months Ended March 31,
 
2019
 
2018
Restricted stock units
119

 
2

Stock Buyback
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over a thirty-month period. In November 2017, our Board of Directors approved an extension of the share repurchase program to December 2019 from its original maturity of March 2018. In May 2018 our Board of Directors approved a $50 million increase in its authorization to repurchase shares of Company common stock under this same program. As of March 31, 2019, we had $24.9 million remaining for the future repurchase of shares of our common stock.
In order to execute the repurchase of shares of our common stock, the company periodically enters into stock repurchase agreements. During the three months ended March 31, 2019 and 2018, the company has repurchased the following shares of common stock:
 
Three Months Ended March 31,
 
2019
 
2018
Amount paid to repurchase shares
$

 
$
12,750

Number of shares repurchased

 
181

Average repurchase price per share
$

 
$
70.47

There were no shares repurchased from related parties. All shares repurchased were recognized as a reduction to Additional paid-in capital. Repurchased shares were retired and assumed the status of authorized and unissued shares.
NOTE 7.
MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUE
Our investments with original maturities of more than three months at the time of purchase and that are intended to be held for no more than 12 months, are considered marketable securities available for sale.

14

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


Our marketable securities consist of certificates of deposit as follows:
 
March 31, 2019
 
December 31, 2018
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Total marketable securities
$
2,511

 
$
2,516

 
$
2,463

 
$
2,470

The maturities of our marketable securities available for sale as of March 31, 2019 are as follows:
 
 
Earliest
 
 
 
Latest
Certificates of deposit
 
4/10/2019
 
to
 
10/17/2019
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these securities are traded. As of March 31, 2019, we do not believe any of the underlying issuers of our marketable securities are at risk of default.
The following tables present information about our marketable securities measured at fair value, on a recurring basis, as of March 31, 2019 and December 31, 2018. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine fair value. We did not have any financial liabilities measured at fair value, on a recurring basis, as of March 31, 2019 and December 31, 2018.
March 31, 2019
Level 1
 
Level 2
 
Level 3
 
Total
Total marketable securities
$

 
$
2,516

 
$

 
$
2,516

 
 
December 31, 2018
Level 1
 
Level 2
 
Level 3
 
Total
Total marketable securities
$

 
$
2,470

 
$

 
$
2,470

There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the three months ended March 31, 2019.
NOTE 8.
DERIVATIVE FINANCIAL INSTRUMENTS
We are impacted by changes in foreign currency exchange rates. We may manage these risks through the use of derivative financial instruments, primarily forward contracts with banks for one-month periods. These forward contracts 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. We did not enter into any new foreign currency exchange forward contracts during the three months ended March 31, 2019 and 2018. We did not have any currency exchange rate contracts outstanding as of March 31, 2019 and 2018.
During the three months ended March 31, 2019 and 2018 the gains and losses recorded related to the foreign currency exchange contracts are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Foreign currency loss from foreign currency exchange contracts
$

 
$
(750
)
These gains and losses were offset by corresponding gains and losses on the revaluation of the underlying intercompany debt and both are included as a component of Other income, net, in our Unaudited Condensed Consolidated Statements of Operations.

15

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


NOTE 9.
ACCOUNTS AND OTHER RECEIVABLE
Accounts and other receivable are recorded at net realizable value. Components of accounts and other receivable, net of reserves, are as follows:
 
March 31,
 
December 31,
 
2019
 
2018
Amounts billed, net
$
87,607

 
$
80,709

Unbilled receivables
14,798

 
19,733

Total receivables, net
$
102,405

 
$
100,442

Amounts billed, net consist of amounts that have been invoiced to our customers in accordance with our terms and conditions and are shown net of an allowance for doubtful accounts.
Unbilled receivables consist of amounts where we have satisfied our contractual obligations related to inventory stocking contracts with customers. Such amounts typically become billable to the customer upon their consumption of the inventory managed under the stocking contracts. We anticipate that substantially all unbilled receivables will be invoiced and collected over the next twelve months.
NOTE 10.
INVENTORIES
Our inventories are valued at the lower of cost or net realizable value and computed on a first-in, first-out (FIFO) basis. Components of inventories are as follows:
 
March 31,
 
December 31,
 
2019
 
2018
Parts and raw materials
$
75,870

 
$
76,647

Work in process
9,286

 
6,644

Finished goods
13,914

 
14,696

Total
$
99,070

 
$
97,987

NOTE 11.
PROPERTY AND EQUIPMENT
Property and equipment, net is comprised of the following:
 
March 31,
 
December 31,
 
2019
 
2018
Buildings and land
$
1,719

 
$
1,737

Machinery and equipment
42,985

 
41,330

Computer and communication equipment
24,721

 
24,051

Furniture and fixtures
3,189

 
3,203

Vehicles
282

 
282

Leasehold improvements
20,487

 
20,593

Construction in process
1,113

 
867

 
94,496

 
92,063

Less: Accumulated depreciation
(63,438
)
 
(60,794
)
Property and equipment, net
$
31,058

 
$
31,269

Depreciation expense recorded in continuing operations and included in selling, general and administrative expense is as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Depreciation expense
$
2,208

 
$
1,604


16

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


NOTE 12.
GOODWILL
The following summarizes the changes in goodwill during the three months ended March 31, 2019:
 
Beginning Balance
 
Effect of Changes in Exchange Rates
 
Ending Balance
March 31, 2019
$
101,900

 
$
(594
)
 
$
101,306

NOTE 13.INTANGIBLE ASSETS
Intangible assets consisted of the following as of March 31, 2019 and December 31, 2018:
March 31, 2019
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Technology
$
39,730

 
$
(8,967
)
 
$
30,763

Customer relationships
35,416

 
(14,241
)
 
21,175

Trademarks and other
2,518

 
(1,598
)
 
920

Total
$
77,664

 
$
(24,806
)
 
$
52,858

December 31, 2018
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
Technology
$
39,879

 
$
(7,927
)
 
$
31,952

Customer relationships
35,509

 
(13,484
)
 
22,025

Trademarks and other
2,501

 
(1,568
)
 
933

Total
$
77,889

 
$
(22,979
)
 
$
54,910

Amortization expense related to intangible assets is as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Amortization expense
$
1,973

 
$
1,257

Estimated amortization expense related to intangibles is as follows:
Year Ending December 31,
 
2019 (remaining)
$
5,612

2020
6,842

2021
6,743

2022
6,486

2023
6,468

Thereafter
20,707

Total
$
52,858

NOTE 14.RESTRUCTURING COSTS
During 2018, we committed to a restructuring plan to optimize our manufacturing footprint and to improve our operating efficiencies and synergies related to our recent acquisitions. The table below summarizes the restructuring charges:
 
Three Months Ended March 31, 2019
 
Cumulative Cost Through March 31, 2019
Severance and related charges
$
153

 
$
4,392

Facility relocation and closure charges
1,520

 
1,520

Total restructuring charges
$
1,673

 
$
5,912


17

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


The following table summarizes our restructuring liabilities at March 31, 2019:
 
Balance at December 31, 2018
 
Cost Incurred and Charged to Expense
 
Cost Paid or Otherwise Settled
 
Effect of Changes in Exchange Rates
 
Balance at March 31, 2019
Total restructuring liabilities
$
3,806

 
$
1,673

 
$
(2,360
)
 
$
(11
)
 
$
3,108

As of December 31, 2018 and March 31, 2019 the accrued restructuring liabilities related primarily to severance and related charges.
NOTE 15.
WARRANTIES
Provisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months following installation. The estimated cost of our warranty obligation is recorded when revenue is recognized and is based upon our historical experience by product, configuration and geographic region.
Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets. Changes in our product warranty obligation are as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Balances at beginning of period
$
2,084

 
$
2,312

Warranty liabilities acquired

 
92

Increases to accruals
519

 
178

Warranty expenditures
(345
)
 
(506
)
Effect of changes in exchange rates
6

 
8

Balances at end of period
$
2,264

 
$
2,084

NOTE 16.
LEASES
We lease manufacturing and office space under non-cancelable operating leases. Some of these leases contain provisions for landlord funded leasehold improvements which are recorded as right of use assets with related liabilities.  Additionally, several existing operating leases had deferred rent balances under ASC 840 which resulted in adjusted right of use asset balances recorded upon adoption of ASC 842. Most leases include one or more options to renew. We regularly evaluate the renewal options and when they are reasonably certain of exercise, we include the renewal period in our lease terms, along with the right-of-use assets ("ROU") and lease liabilities. In many cases, we have lease terms that are less than one year and therefore, we have elected the practical expedient to exclude these short-term leases from our ROU assets and lease liabilities.
Our leases do not provide an implicit rate. Accordingly, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments. We have a centrally managed treasury function; therefore, based on the applicable lease terms and the current economic environment, we apply a portfolio approach for determining the incremental borrowing rate.
New leases are negotiated and executed to meet business objectives on an on-going basis. During the second fiscal quarter of 2019, we expect to record additional right of use assets and related liabilities for facilities in Metzingen, Germany and Denver, Colorado, USA. The lease in Metzingen commences on April 1, 2019 with a term of 3 years; the right of use asset and liability recorded at commencement will be $1.2 million. The lease in Denver, Colorado is expected to commence in June 2019 with a term of 10 years; the right of use asset and liability recorded at commencement will be $15.7 million.

18

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


Maturities of our lease liabilities for all operating leases at March 31, 2019 are as follows:
Year Ending December 31,
 
2019 (remaining)
$
6,003

2020
6,243

2021
5,937

2022
4,273

2023
2,974

Thereafter
17,928

Total lease payments
$
43,358

Less: Interest
(6,464
)
Present value of lease liabilities
$
36,894

The weighted average remaining lease term and discount rate for all of our operating leases were as follows as of March 31, 2019:
 
Weighted Average Remaining Lease Term
 
Weighted Average Discount Rate
Operating Leases
8.35 years
 
3.75
%

Supplemental cash flow information related to our operating leases was as follows for the period ended March 31, 2019:
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash outflow from operating leases
$
2,891

NOTE 17.
PENSION LIABILITY
In connection with the acquisition of HiTek Power Group and LumaSense, we acquired the HiTek Power Limited Pension Scheme (the "HiTek Plan") and the LumaSense Technologies GmbH pension obligation (the "LumaSense Plan"), respectively. These plans are both closed to new participants. In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historical experience as well as facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. We are committed to make annual fixed payments of $0.9 million into the HiTek Plan through April 30, 2024, and then $1.8 million from May 1, 2024 through November 30, 2033. We are not currently committed to future payments to the LumaSense Plan.
The net pension liability is included in Other long-term liabilities in our balance sheet as follows:
 
March 31,
 
December 31,
 
2019
 
2018
Pension liability
$
19,874

 
$
19,266

The following table sets forth the components of net periodic pension cost for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
2018
Interest cost
$
199

 
$
218

Expected return on plan assets
(170
)
 
(161
)
Amortization of actuarial gains and losses
118

 
136

Net periodic pension cost
$
147

 
$
193


19

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


NOTE 18.
STOCK-BASED COMPENSATION
On May 4, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan ("the 2017 Plan") and all shares that were then available for issuance under the 2008 Omnibus Incentive Plan are now available for issuance under the 2017 Plan. The 2017 Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights. Any of the awards issued under the 2017 Plan may be issued as performance-based awards to align compensation awards to the attainment of annual or long-term performance goals. As of March 31, 2019, there were 3.1 million shares reserved and 2.3 million shares available for grant under the 2017 Plan.
Restricted stock units ("RSU’s") are generally granted with a grant date fair value equal to the market price of our stock at the date of grant and with generally a three or four-year vesting schedule or performance-based vesting as determined at the time of grant.
Stock option awards are generally granted with an exercise price equal to the market price of our stock at the date of grant and with either a three or four-year vesting schedule or performance-based vesting as determined at the time of grant. Stock option awards generally have a term of 10 years.
We recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving the award. Stock-based compensation for the three months ended March 31, 2019 and 2018 was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Stock-based compensation expense
$
3,199

 
$
4,494

Changes in the outstanding RSU awards during the three months ended March 31, 2019 were as follows:
 
Three Months Ended March 31, 2019
 
Number of RSUs
 
Weighted-Average Grant Date Fair Value
RSUs outstanding at beginning of period
352

 
$
58.17

RSUs granted
331

 
$
51.94

RSUs vested
(96
)
 
$
48.14

RSUs forfeited
(10
)
 
$
32.19

RSUs outstanding at end of period
577

 
$
56.73

Changes in the outstanding stock option awards during the three months ended March 31, 2019 were as follows:
 
Three Months Ended March 31, 2019
 
Number of Options
 
Weighted-Average Exercise Price per Share
Options outstanding at beginning of period
230

 
$
20.73

Options exercised
(9
)
 
$
10.50

Options expired
(1
)
 
$
7.69

Options outstanding at end of period
220

 
$
21.21

NOTE 19.
COMMITMENTS AND CONTINGENCIES
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation as of March 31, 2019 is approximately $99.4 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.
We are involved in disputes and legal actions arising in the normal course of our business. There have been no material developments in legal proceedings in which we are involved during the three months ended March 31, 2019.

20

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


NOTE 20.
RELATED PARTY TRANSACTIONS
Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the three months ended March 31, 2019, we engaged in the following transactions with companies related to members of our Board of Directors, as described below:
 
Three Months Ended March 31,
 
2019
 
2018
Sales to related parties
$
352

 
$
73

Number of related party customers
1

 
1

Our accounts receivable balance from related party customers with outstanding balances as of March 31, 2019 and December 31, 2018 is as follows:
 
March 31,
 
December 31,
 
2019
 
2018
Accounts receivable from related parties
$
154

 
$
109

Number of related party customers
1

 
1

NOTE 21.
SIGNIFICANT CUSTOMER INFORMATION
The following table summarizes sales, and percentages of sales, by customers that individually accounted for 10% or more of our sales for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
2019
 
% of Total Sales
 
2018
 
% of Total Sales
Applied Materials, Inc.
$
36,290

 
25.8
%
 
$
69,872

 
35.7
%
LAM Research
19,667

 
14.0
%
 
39,726

 
20.3
%
The following table summarizes the accounts receivable balances, and percentages of the total accounts receivable, for customers that individually accounted for 10% or more of accounts receivable as of March 31, 2019 and December 31, 2018:
 
March 31,
 
December 31,
 
2019
 
2018
Applied Materials, Inc.
$
27,150

 
26.5
%
 
$
34,301

 
34.2
%
LAM Research
11,941

 
11.7
%
 
12,181

 
12.1
%
Our sales to Applied Materials, Inc. and LAM Research include precision power products used in semiconductor processing and solar and flat panel display. No other customer accounted for 10% or more of our sales or accounts receivable balances during these periods.
NOTE 22.
CREDIT FACILITY
The Company is party to a Loan Agreement, as amended (the "Loan Agreement") with Bank of America N.A. ("BA") which provides a revolving line of credit of up to $150.0 million subject to certain funding conditions. The Loan Agreement expires on July 28, 2022. Interest on amounts drawn shall be paid quarterly based upon the LIBOR Daily Floating Rate then in effect, plus between one and one-quarter (1.25%) and one and three-quarters (1.75%) percentage points depending on the Funded Debt to EBITDA ratio. As of March 31, 2019, the interest rate was 3.75%. The Loan Agreement also requires the Company to pay the lender on a quarterly basis an unused commitment fee based on credit availability. The obligations under the Loan Agreement are unsecured until the Funded Debt to EBITDA ratio exceeds 2.0 to 1.0, at which time the Company and certain affiliates’ tangible and intangible personal property will be subject to a first priority, perfected lien and security interest in favor of BA pursuant to a Security Agreement. As of March 31, 2019, the Company is in compliance with all covenants required under the Loan Agreement. At March 31, 2019 our credit availability under the Loan Agreement was $150.0 million.

21

Table of Contents         
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(in thousands except per share data)


Interest expense related to unused line of credit fees was as follows:
 
Three Months Ended March 31,
 
2019
 
2018
Unused line of credit fees
$
56

 
$
56

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," "might," "continue," "enables," "plan," "intend," "should," "could," "would," "likely," "potential," 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. Neither we nor any other person assumes responsibility for the accuracy and completeness of such forward-looking statements and readers are cautioned not to place undue reliance on 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, 2018. We undertake no obligation to revise or update any forward-looking statements for any reason.
BUSINESS AND MARKET OVERVIEW
Semiconductor Market
The semiconductor market is being driven by the rapid adoption of solid-state drives (SSD) deploying the latest 3D-NAND memory devices and a ramp of advanced Logic devices at the 10nm technology node. The industry's transition to 3D memory devices and advanced Logic is generating increasing demand for RF power supplies, matches and accessories. The growing number of steps associated with the deposition and etch processes is driving an increase in the number of process chambers per fab and higher content of more advanced power solutions per chamber. As etching processes become more challenging due to increasing aspect ratios in advanced 3D devices, more advanced RF technology that includes pulsing and increased control and instrumentation is needed. We are capitalizing on these trends and providing a broader range of more complex combinations of RF power and frequencies and launching more capable matching networks to manage and control the delivered power. During the year, we acquired Trek and LumaSense, which increased our presence in the electrostatic chuck, electrostatic sensor, and temperature measurement applications for the semiconductor market.
Following record revenues in the first half of 2018, we began to see a pause in the semiconductor capital equipment market in the second half of 2018 that accelerated through the end of 2018. Investment in semiconductor capital equipment continued to weaken in the first quarter of 2019 as a result of slowing growth in end market demand for semiconductor devices, ongoing digestion of equipment capacity, and inventory reduction in both semiconductor devices and finished good inventory at our customers. It is difficult to determine when or if overall market investment in semiconductor capital equipment will return to 2017 levels.
Industrial Technology Markets
Customers in the industrial capital equipment market incorporate our industrial process power and applied power products into a wide variety of equipment used in applications such as thin films, advanced material fabrication, and analytical instrumentation.
In industrial technology applications, we remain focused on taking our products into new applications and world regions, increasing our penetration into Asia, Europe and North America. In 2018, we made gains across an array of industries. In the first quarter of 2018, we saw strength in solar driven a large shipment to a thin film solar customer and solid growth in

22


our medical and high voltage products. This was offset by weakness in industrial production and consumer related markets including flat panel display and hard coating applications. Our acquisition of LumaSense further expanded our presence in pyrometry and other temperature measurement applications and contributed to both sequential and year over year growth.
The 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 Unaudited Condensed Consolidated Financial Statements in Part I, Item 1 of this report, including the notes thereto. Also included in the following analysis are measures that are not in accordance with U.S. GAAP. A reconciliation of the non-GAAP measures to U.S. GAAP is provided below.
Results of Continuing Operations
The following tables set forth certain data, and the percentage of sales each item reflects, derived from our Unaudited Condensed Consolidated Statements of Operations for the periods indicated (in thousands):
 
Three Months Ended March 31,
 
2019
 
2018
Sales
$
140,743

 
100.0
 %
 
$
195,617

 
100.0
%
Gross profit
65,740

 
46.7

 
103,645

 
53.0

Operating expenses
53,949

 
38.3

 
47,542

 
24.3

Operating income from continuing operations
11,791

 
8.4

 
56,103

 
28.7

Other income (expense), net
743

 
0.5

 
26

 

Income from continuing operations before income taxes
12,534

 
8.9

 
56,129

 
28.7

Provision (benefit) for income taxes
(2,853
)
 
(2.0
)
 
9,759

 
5.0

Income from continuing operations, net of income taxes
$
15,387

 
10.9
 %
 
$
46,370

 
23.7
%
SALES
The following tables summarize net sales and percentages of net sales, by product line, for the three months ended March 31, 2019 and 2018:
 
Three Months Ended March 31,
 
Change 2019 v. 2018
 
2019
 
2018
 
Dollar
 
Percent
Semiconductor capital market
$
67,514

 
$
136,010

 
$
(68,496
)
 
(50.4
)%
Industrial technology capital market
44,598

 
35,199

 
9,399

 
26.7
 %
Global support
28,631

 
24,408

 
4,223

 
17.3
 %
Total
$
140,743

 
$
195,617

 
$
(54,874
)
 
(28.1
)%
 
Three Months Ended March 31,
 
2019
 
2018
Semiconductor capital market
48.0
%
 
69.5
%
Industrial technology capital market
31.7

 
18.0

Global support
20.3

 
12.5

Total
100.0
%
 
100.0
%
Total Sales
Sales decreased $54.9 million, or 28.1%, to $140.7 million for the three months ended March 31, 2019 as compared to the same period in 2018 and decreased $13.4 million, or 8.7%, as compared to the three months ended December 31, 2018. The decrease in first quarter sales is principally associated with a decreased demand in the semiconductor capital equipment market. Sales for the three months ended March 31, 2019 includes $12.0 million associated with our recently acquired LumaSense business.
Sales in the semiconductor market decreased $68.5 million, or 50.4%, for the three months ended March 31, 2019 as compared to the same period in 2018 and decreased $16.0 million, or 19.1%, as compared to the three months ended December 31,

23


2018. The decrease in our semiconductor market sales is consistent with the overall market decline, as investment in new fabrication equipment has been delayed and original equipment manufacturers consume inventory.
Sales in the industrial technology markets increased $9.4 million, or 26.7%, for the three months ended March 31, 2019 as compared to the same in period in 2018, predominately due to the addition of LumaSense. Sales increased $3.0 million, or 7.3%, as compared to the three months ended December 31, 2018. The thin film and specialty power industrial markets we serve include solar panel, flat panel display, architectural glass, consumer electronics, power control modules, data storage, high voltage and other industrial manufacturing markets. Our customers in these markets are primarily global and regional original equipment manufacturers.
Global service sales increased $4.2 million, or 17.3%, for the three months ended March 31, 2019 as compared to the same period in 2018 and decreased $0.5 million, or 1.7%, as compared to the three months ended December 31, 2018. The increase in global service sales is due to continued share gains and growth in the installed base. Global service sales are also impacted by the timing and mix of projects during the periods.
Backlog
Our backlog was $61.7 million at March 31, 2019 as compared to $74.7 million at December 31, 2018. Backlog declined primarily due to slowing demand in the semiconductor market.
GROSS PROFIT
For the three months ended March 31, 2019, gross profit decreased $37.9 million to $65.7 million as compared to gross profit of $103.6 million for the same period in 2018 principally due to the reduction in sales volume. Gross profit as a percent of sales decreased to 46.7% for the three months ended March 31, 2019, from 53.0% for the same period in 2018. The change in gross profit as a percent of revenue is due to reduced operating leverage on lower volume, product mix and higher freight and customs costs. Gross profit for the three months ended March 31, 2019 includes $7.5 million from our recently acquired LumaSense business.
OPERATING EXPENSE
Operating expenses increased $6.4 million to $53.9 million, or 38.3% of sales, for the three months ended March 31, 2019 from $47.5 million, or 24.3% of sales, for the same period in 2018.
The following tables summarize our operating expenses as a percentage of sales for the periods indicated:
 
Three Months Ended March 31,
 
2019
 
2018
Research and development
$
21,289

 
15.1
%
 
$
17,637

 
9.0
%
Selling, general, and administrative
29,014

 
20.6

 
28,648

 
14.7

Amortization of intangible assets
1,973

 
1.4

 
1,257

 
0.6

Restructuring charges
1,673

 
1.2

 

 

Total operating expenses
$
53,949

 
38.3
%
 
$
47,542

 
24.3
%
Research and Development
We perform research and development of products for new or emerging applications, technological changes to provide higher performance, lower cost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, as well as enhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investments to continue.
Research and development expenses increased $3.7 million to $21.3 million, or 15.1% of sales, for the three months ended March 31, 2019 from $17.6 million, or 9.0% of sales, for the same period in 2018. The increase in research and development expense is due to increased headcount and material costs as we invest in new programs to maintain and increase our technological leadership and provide solutions to our customers' evolving needs. Research and development for the three months ended March 31, 2019 includes $2.1 million from our recently acquired LumaSense business.
Selling, General and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-party sales representative commissions, and other selling and marketing activities. Our general and administrative

24


expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information systems, and human resource functions in addition to our general management, including acquisition-related activities.
Selling, general and administrative expenses increased $0.4 million to $29.0 million, or 20.6%, of sales for the three months ended March 31, 2019 from $28.6 million, or 14.7% of sales, for the same period in 2018. Selling, general and administrative expenses for the three months ended March 31, 2019 includes $3.6 million from our recently acquired LumaSense business. The resulting decrease in selling, general and administrative expense, after giving consideration to LumaSense 2019 expenses, was attributable to reductions in payrol