ADVANCED ENERGY INDUSTRIES INC - Quarter Report: 2010 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

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		(I.R.S. Employer Identification No.)
or organization)

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 o       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		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 August 3, 2010, there were 43,249,657 shares of the registrant’s Common Stock, par value $0.001 per share, outstanding.

 

 

ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-Q
TABLE OF CONTENTS

		Page
PART I FINANCIAL STATEMENTS			3
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS			3
Condensed Consolidated Balance Sheets			3
Condensed Consolidated Statements of Operations			4
Condensed Consolidated Statements of Cash Flows			5
Notes to Condensed Consolidated Financial Statements			6
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			28
ITEM 4. CONTROLS AND PROCEDURES			28
PART II OTHER INFORMATION			29
ITEM 1. LEGAL PROCEEDINGS			29
ITEM 1A. RISK FACTORS			29
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			30
ITEM 4. REMOVED AND RESERVED			30
ITEM 5. OTHER INFORMATION			30
ITEM 6. EXHIBITS			30
SIGNATURE			32
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I FINANCIAL STATEMENTS

ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets *

		June 30,				December 31,
		2010				2009
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	116,795			$	133,106
Marketable securities			12,066				44,401
Accounts receivable, net of allowances of $3,228 and $1,470, respectively			75,175				50,267
Inventories			56,611				28,567
Deferred income tax assets			9,183				9,222
Income taxes receivable			3,245				—
Assets of business held for sale			30,180				26,460
Other current assets			7,533				5,641
Total current assets			310,788				297,664
PROPERTY AND EQUIPMENT, net			22,244				18,687
OTHER ASSETS:
Deposits and other			8,814				9,295
Goodwill			47,920				—
Other intangible assets, net			50,219				—
Deferred income tax assets			20,268				19,479
Total assets		$	460,253			$	345,125
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	35,549			$	23,802
Income taxes payable			—				3,503
Accrued payroll and employee benefits			11,583				6,118
Accrued warranty expense			5,818				7,005
Other accrued expenses			7,604				4,277
Customer deposits and deferred revenue			5,746				3,152
Acquisition related contingent liability			38,967				—
Liabilities of business held for sale			1,493				1,477
Total current liabilities			106,760				49,334
LONG-TERM LIABILITIES:
Deferred income tax liabilities			18,746				1,200
Uncertain tax positions			15,519				14,987
Accrued warranty expense			3,815				—
Other long-term liabilities			4,780				1,270
Total liabilities			149,620				66,791
Commitments and contingencies (Note 15)
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; 43,185 and 42,044 shares issued and outstanding, respectively
			43				42
Additional paid-in capital			252,530				233,623
Retained earnings			37,097				17,261
Accumulated other comprehensive income			20,963				27,408
Total stockholders’ equity			310,633				278,334
Total liabilities and stockholders’ equity		$	460,253			$	345,125

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

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
SALES		$	100,107			$	31,551			$	169,794			$	60,313
COST OF SALES			55,548				24,619				96,028				47,647
GROSS PROFIT			44,559				6,932				73,766				12,666
OPERATING EXPENSES:
Research and development			13,515				10,308				24,657				20,965
Selling, general and administrative			17,183				9,359				29,412				17,922
Impairment of goodwill			—				—				—				63,260
Amortization of intangible assets			767				—				767				102
Restructuring charges			—				739				—				4,135
Total operating expenses			31,465				20,406				54,836				106,384
INCOME (LOSS) FROM CONTINUING OPERATIONS			13,094				(13,474	)			18,930				(93,718	)
OTHER INCOME, NET			220				627				605				909
Income (loss) from continuing operations before income taxes			13,314				(12,847	)			19,535				(92,809	)
PROVISION FOR INCOME TAXES			1,857				2,970				3,228				2,328
Earnings (loss) from continuing operations			11,457				(15,817	)			16,307				(95,136	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME			2,162				(217	)			3,529				(661	)
NET INCOME (LOSS)		$	13,619			$	(16,034	)		$	19,836			$	(95,797	)
BASIC WEIGHTED—AVERAGE COMMON SHARES OUTSTANDING			42,806				41,948				42,440				41,915
DILUTED WEIGHTED—AVERAGE COMMON SHARES OUTSTANDING			43,327				41,948				43,004				41,915
EARNINGS PER SHARE:
CONTINUING OPERATIONS:
BASIC EARNINGS (LOSS) PER SHARE		$	0.27			$	(0.38	)		$	0.38			$	(2.27	)
DILUTED EARNINGS (LOSS) PER SHARE		$	0.26			$	(0.38	)		$	0.38			$	(2.27	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES:
BASIC EARNINGS (LOSS) PER SHARE		$	0.05			$	(0.01	)		$	0.08			$	(0.02	)
DILUTED EARNINGS (LOSS) PER SHARE		$	0.05			$	(0.01	)		$	0.08			$	(0.02	)
NET INCOME (LOSS):
BASIC EARNINGS (LOSS) PER SHARE		$	0.32			$	(0.38	)		$	0.47			$	(2.28	)
DILUTED EARNINGS (LOSS) PER SHARE		$	0.31			$	(0.38	)		$	0.46			$	(2.28	)

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

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

		Six Months Ended June 30,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	19,836			$	(95,797	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities, net of assets and liabilities acquired:
Depreciation and amortization			4,709				3,936
Goodwill impairment charge			—				63,260
Stock-based compensation expense			3,820				2,904
Provision (benefit) for deferred income taxes			1,351				(681	)
Restructuring charges			—				4,135
Net loss on disposal of assets			—				165
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable			(20,526	)			23,069
Inventories			(23,709	)			6,628
Other current assets			(1,708	)			162
Accounts payable			6,196				(221	)
Other current liabilities and accrued expenses			12,282				(8,850	)
Income taxes			(6,788	)			2,277
Non-current assets			493				(1,804	)
Non-current liabilities			133				(235	)
Net cash used in operating activities			(3,911	)			(1,052	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities			(106,152	)			(141,559	)
Proceeds from sale of marketable securities			138,519				165,996
Purchase of PV Powered, Inc., net of cash acquired			(35,977	)			—
Purchase of property and equipment			(2,932	)			(1,402	)
Net cash provided by (used in) investing activities			(6,542	)			23,035
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations			(65	)			(52	)
Proceeds from exercise of stock options			401				100
Net cash provided by financing activities			336				48
EFFECT OF CURRENCY TRANSLATION ON CASH			(6,194	)			(1,063	)
INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS			(16,311	)			20,968
CASH AND CASH EQUIVALENTS, beginning of period			133,106				116,448
CASH AND CASH EQUIVALENTS, end of period		$	116,795			$	137,416
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	23			$	2
Cash paid for income taxes			11,445				1,551
Cash received for refunds of income taxes			1,667				—
Cash held in banks outside the United States			27,788				69,183
NONCASH TRANSACTIONS:
Common stock issued as partial consideration for PV Powered acquisition			14,690				—
Contingent liabililty accrued as part of PV Powered acquisition			38,967				—

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

ADVANCED ENERGY INDUSTRIES, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

NOTE 1. BASIS OF PRESENTATION

     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, 2010, and the results of our operations and cash flows for the three and six months ended June 30, 2010 and 2009.

     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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009 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 management to make estimates and assumptions 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. Significant estimates are used when establishing allowances for doubtful accounts, determining useful lives for depreciation and amortization, the valuation of assets and liabilities acquired in business combinations, assessing the need for impairment charges for identifiable intangible assets and goodwill, establishing warranty reserves, establishing the fair value of investments, the fair value and forfeiture rate of stock-based compensation, accounting for income taxes and assessing excess and obsolete inventory. Management evaluates these estimates and judgments on an ongoing basis and bases its estimates on historical experience, current conditions and various other assumptions that are believed to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. Actual results may differ from these estimates under different assumptions or conditions.

     RECLASSIFICATIONS — In June 2010, the Company approved a plan to sell its Aera^® mass flow control and related product lines (“gas flow control business”) in Hachioji, Japan (see Note 2, Business Acquisition and Disposition). Accordingly, the financial results of the gas flow control business have been retroactively reclassified as discontinued operations.

     NEW ACCOUNTING PRONOUNCEMENTS — In October 2009, the Financial Accounting Standards Board (“FASB”) issued a pronouncement that establishes the accounting and reporting guidance for arrangements including multiple revenue-generating activities and amends the criteria for separating deliverables and measuring and allocating arrangement consideration to one or more units of accounting. The amendments also establish a selling price hierarchy for determining the selling price of a deliverable. Significantly enhanced disclosures will be required to provide information about a vendor’s multiple-deliverable revenue arrangements, including information about the nature and terms, significant deliverables, and its performance within arrangements. The amendments also require providing information about the significant judgments made, changes to those judgments and about how the application of the relative selling-price method affects the timing or amount of revenue recognition. The amendments are effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early application is permitted. We are currently evaluating this new pronouncement and the impact, if any, it may have on our results of operations or financial position.

     From time to time, new accounting pronouncements are issued by the FASB or other standards setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, our management believes that the impact of recently issued standards that are not yet effective will not have a material impact on our Consolidated Financial Statements upon adoption.

NOTE 2. BUSINESS ACQUISITION AND DISPOSITION

Acquisition

     On May 3, 2010, Advanced Energy acquired PV Powered, Inc., a privately-held Oregon corporation (“PV Powered”) and a leading solar inverter company based in Bend, Oregon, pursuant to an Agreement and Plan of Merger dated March 24, 2010 between Advanced Energy, PV Powered and Neptune Acquisition Sub, Inc. (“Acquisition Sub”), an Oregon corporation and wholly-owned subsidiary of Advanced Energy, and Amendment No. 1 to the Agreement and Plan of Merger dated April 21, 2010 (together with the Agreement and Plan of Merger, the “Merger Agreement”). Pursuant to the Merger Agreement, Acquisition Sub merged with and into PV Powered, with PV Powered being the surviving corporation and a wholly-owned subsidiary of Advanced Energy (the “Merger” or “Acquisition”).

     Advanced Energy acquired all of the outstanding PV Powered common stock for total consideration with a fair value of approximately $89.6 million on May 3, 2010 consisting of approximately $36.0 million of cash, net of cash acquired, Advanced Energy common stock with a market value of approximately $14.7 million and contingent consideration payable to the former shareholders of PV Powered if certain financial targets are met during the year ending December 31, 2010 with an estimated fair value of approximately $39.0 million as of May 3, 2010.

     Shareholders of PV Powered received approximately $36.7 million of cash less certain closing date indebtedness plus approximately 1.0 million shares of Advanced Energy common stock for PV Powered’s common stock, options and warrants outstanding as of May 3, 2010. Fractional shares generated by the conversion were settled for cash. Additional cash consideration in an amount of up to $40.0 million is payable to the shareholders of PV Powered if certain financial targets are met during the year ended December 31, 2010. The fair value of the $40.0 million of contingent consideration was estimated to be $39.0 million as of May 3, 2010 based on a projected cash payout of $39.4 million in February 2011.

     PV Powered is a leading manufacturer of grid-tied PV inverters in the residential, commercial and utility-scale markets. PV Powered manufactures high-reliability transformer-based Photovoltaic (“PV”) inverters utilized in residential, commercial roof top and ground mount systems in the North American market. PV Powered has approximately 90 employees and recognized $21.4 million of revenues in 2009. Its inverters range in size from 30kw to 260kw for the commercial market and 1kw to 5kw for the residential market, with market leading efficiency ratings.

     PV Powered will continue to operate out of its facilities in Bend, Oregon as a subsidiary of Advanced Energy. The acquisition of PV Powered enables Advanced Energy to offer the solar inverter market a more complete suite of products in a wider power range and increases the number of solar array opportunities for which the Company’s products can be considered for purchase.

     Advanced Energy has recorded its acquisition of PV Powered using the acquisition method of accounting and, in accordance with authoritative accounting guidance for business combinations, the purchase price was allocated to the tangible assets, intangible assets and liabilities acquired based on estimated fair values on May 3, 2010. The excess of the purchase price (consideration transferred) over the respective fair values of identifiable assets and liabilities acquired was recorded as goodwill. The goodwill resulting from the acquisition is not tax deductible.

     Direct transaction costs include investment banking, legal and accounting fees and other external costs directly related to the Acquisition and totaled approximately $0.8 million and are included in selling, general and administrative expense in the Condensed Consolidated Statement of Operations.

     The components of the fair value of the total consideration transferred for the PV Powered Acquisition on May 3, 2010 is as follows (in thousands):

Cash paid to owners		$	36,701
Cash acquired			(724	)
Common stock issued - 997,966 shares			14,690
Present value of contingent consideration liability			38,967
Total fair value of consideration transferred		$	89,634

     The following table summarizes preliminary estimated fair values of the assets acquired and liabilities assumed as of May 3, 2010 (in thousands):

Accounts receivable		$	4,777
Inventories			8,363
Other current assets			277
Deferred tax assets			2,746
Property and equipment			4,065
Deposits and other noncurrent assets			67
Accounts payable			(5,480	)
Accrued liabilities			(2,744	)
Deferred tax liabilities			(18,604	)
Other long-term liabilities			(2,739	)
			(9,272	)
Amortizable intangible assets:
Trademarks			5,277
Technology			27,887
In process research and development			15,112
Customer relationships			2,017
Backlog			693
Total amortizable intangible assets			50,986
Total identifiable net assets			41,714
Goodwill			47,920
Total fair value of consideration transferred		$	89,634

     A summary of the intangible assets acquired, amortization method, and estimated useful lives follows (in thousands):

						Amortization
		Amount				Method		Useful Life
		(In thousands)
Trademarks		$	5,277			Accelerated		10 years
Technology			27,887			Accelerated		7 years
In process research and development			15,112			Accelerated		8 years
Customer relationships			2,017			Accelerated		10 years
Backlog			693			Straight-line		6 months
		$	50,986					8 years

     The cost of the Acquisition may increase or decrease based on the final amount payable to the former shareholders of PV Powered related to the financial targets to be met during the year ending December 31, 2010. Advanced Energy is in the process of finalizing valuations of other intangibles, estimates of the fair value of liabilities associated with the acquisition and deferred taxes and expects to complete the acquisition accounting and required disclosures prior to December 31, 2010. The amortization of in process research and development will not begin until the specific project is complete and put into production.

     The results of PV Powered operations are included in Advanced Energy’s Condensed Consolidated Statement of Operations beginning May 3, 2010 as follows (in thousands):

May 3, 2010 to June 30, 2010
Revenue		$	10,391
Net income			831

Pro forma results for PV Powered acquisition

     The following unaudited pro forma financial information presents the combined results of operations of Advanced Energy and PV Powered as if the acquisition had occurred as of the beginning of each of the periods presented. The 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 acquisition had taken place at the beginning of each of the periods presented. The unaudited pro forma financial information for the three and six months ended June 30, 2010 includes the historical results of Advanced Energy for the three months and six months ended June 30, 2010, historical results of PV Powered for the period January 1, 2010 to May 2, 2010, and the post-acquisition results of PV Powered for the period May 3, 2010 to June 30, 2010.

     The unaudited pro forma results for all periods presented include amortization charges for acquired intangible assets and related tax effects. These pro forma results include the treatment of the pending sale of the flow control and related product lines as discontinued operations. The unaudited pro forma results follow:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Revenue		$	102,556			$	34,216			$	181,654			$	64,849
Net income (loss)			12,441				(18,702	)			17,672				(100,746	)
Earnings per share:
Basic		$	0.28			$	(0.44	)		$	0.40			$	(2.35	)
Diluted			0.28				(0.44	)			0.40				(2.35	)

Disposition

     On July 21, 2010, the Company entered into a definitive agreement to sell its Aera^® mass flow control and related product lines and related inventory, building, equipment and accrued warranties for approximately $44.0 million, subject to adjustment based on the inventory balance at closing. The purchase price will be increased for each dollar over $8 million of inventory included in its gas flow control business assets at closing. Conversely, the purchase price will be decreased for each dollar under $8 million of inventory included in the gas flow control business assets at closing. The assets sold in the transaction include inventory, real property in Hachioji, Japan, equipment, certain contracts and intellectual property. Subject to the satisfaction of customary closing conditions, the Company anticipates the closing of this transaction within the third quarter of 2010, and accordingly, the Company expects to record a pre-tax gain of approximately $17.5 million in the quarter ending September 30, 2010. In accordance with authoritative accounting guidance for reporting discontinued operations, the results of its gas flow control business are now presented as discontinued operations for all periods in the Condensed Consolidated Financial Statements.

     Operating results of discontinued operations are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(In thousands)
Sales		$	15,084			$	4,016			$	26,949			$	7,881
Cost of sales			9,754				3,017				17,718				6,228
Gross margin			5,330				999				9,231				1,653
Operating Expenses:
Research and development			444				434				892				875
Selling, general and administrative			1,282				927				2,458				1,878
Total operating expenses			1,726				1,361				3,350				2,754
Income (loss) from discontinued operations before income taxes			3,604				(362	)			5,881				(1,101	)
Income tax benefit (expense)			(1,442	)			145				(2,352	)			441
Income (loss) from discontinued operations, net of income taxes		$	2,162			$	(217	)		$	3,529			$	(661	)

     Assets and liabilities held for sale consist of the following:

		June 30,				December 31,
		2010				2009
		(In thousands)
Assets
Inventories		$	12,012			$	8,551
Property and equipment			12,190				11,927
Other intangible assets			5,978				5,982
Assets of business held for sale		$	30,180			$	26,460
Liabilities
Accrued warranty expense		$	130			$	119
Deferred income tax liabilities			1,362				1,356
Other			1				1
Liabilities of business held for sale		$	1,493			$	1,477

NOTE 3. INCOME TAXES

     U.S. GAAP requires that the interim period tax provision be determined as follows:

•

At the end of each quarter, the Company estimates the tax that will be provided for the fiscal year stated as a percent of estimated “ordinary” income for the fiscal year. The term ordinary income refers to earnings from continuing operations before income taxes, excluding significant unusual or infrequently occurring items.

The estimated annual effective rate is applied to the year-to-date “ordinary” income at the end of each quarter to compute the year-to-date tax applicable to ordinary income. The tax expense or benefit related to ordinary income in each quarter is the difference between the most recent year-to-date and the prior quarter year-to-date computations.

•

The tax effects of significant unusual or infrequently occurring items are recognized as discrete items in the interim period in which the events occur. The impact of changes in tax laws or rates on deferred tax amounts, the effects of changes in judgment about beginning of the year valuation allowances and changes

in tax reserves resulting from the finalization of tax audits or reviews are examples of significant unusual or infrequently occurring items that are recognized as discrete items in the interim period in which the event occurs.

     The determination of the annual effective tax rate is based upon a number of significant estimates and judgments, including the estimated annual pretax income in each of the tax jurisdictions in which the Company operates and the development of tax planning strategies during the year. In addition, as a global commercial enterprise, Advanced Energy’s tax expense can be impacted by changes in tax rates or laws, the finalization of tax audits and reviews as well as other factors that cannot be predicted with certainty. As such, there can be significant volatility in interim tax provisions.

     The following table sets out the tax expense and the effective tax rate for the Company’s income from continuing operations:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
						(In thousands)
Income (loss) before income taxes		$	13,314			$	(12,847	)		$	19,535			$	(92,809	)
Income tax expense			1,857				2,970				3,228				2,328
Effective tax rate			14.0	%			-23.1	%			16.5	%			-2.5	%

     The Company’s overall tax rate (with continuing and discontinued operations combined) for the year ending December 31, 2010, is projected to be approximately 22.0%. This rate differs from the U.S. Federal statutory rate principally based on the distribution of income between our various locations, with a greater amount of our income being attributable to non-U.S. sources as a result of our reconfiguration of the Company’s legal entity structure completed during the three months ended December 31, 2009. Additionally in 2010, the Company expects to generate and use new tax credits to offset a portion of our U.S. taxable income. The tax rate for the year ended December 31, 2009, of negative 6.2% was driven by (i) the impairment charge for goodwill recognized in the first quarter of 2009, which was non-deductible for U.S. tax purposes; (ii) no benefit being recognized as of June 30, 2009, for taxable losses generated in the U.S. since the Company determined it did not expect to realize the benefits of those losses; and (iii) the Company’s foreign locations continued to generate taxable income for which the local taxes payable increased its overall tax expense.

     As of June 30, 2010 and December 31, 2009, the balance of our tax contingencies was $15.5 million and $15.0 million, respectively. If the tax contingencies reverse, $7.4 million and $6.9 million of the tax contingencies at June 30, 2010 and December 31, 2009, respectively, would affect our effective tax rates. The Company does not anticipate a material change to the amount of unrecognized tax positions within the next 12 months.

     The Company’s tax returns are audited by U.S., state, and foreign tax authorities and these audits may be at various stages of completion at any given time. Fiscal years remaining open to examination in significant foreign jurisdictions include 2002 and forward. The Company is subject to U.S. Federal and state income tax examinations for fiscal years 2003 and forward.

     While management believes that the Company has adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits includes estimates and judgment by management and inherently includes subjectivity. Accordingly, additional provisions on federal and foreign tax-related matters could be recorded in the future as revised estimates are made or the underlying matters are resolved.

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 which 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 such common shares, and if such assumed conversion is dilutive.

     The following is a reconciliation of the denominator used in the calculation of basic and diluted earnings per share for the three and six months ended June 30, 2010 and 2009:

		Three Months Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
		(In thousands, except per share data)
Numerator:
Net income (loss)		$	13,619			$	(16,034	)		$	19,836			$	(95,797	)
Denominator:
Basic			42,806				41,948				42,440				41,915
Assumed exercise of dilutive stock options and restricted stock units			521				—				564				—
Diluted			43,327				41,948				43,004				41,915
Income per common share:
Basic earnings (loss) per share		$	0.32			$	(0.38	)		$	0.47			$	(2.28	)
Diluted earnings (loss) per share			0.31				(0.38	)			0.46				(2.28	)

     Stock option grants and restricted stock units that were outstanding but were excluded from the computation of diluted earnings (loss) per share because their inclusion would have been anti-dilutive, totaled 3.6 million and 3.4 million during the three and six months ended June 30, 2010, respectively. For the three and six months ended June 30, 2009, all potentially dilutive common shares were excluded from the computation as the effect of including such options in the computation would be anti-dilutive due to the net loss for the period.

NOTE 5. MARKETABLE SECURITIES

     Investment securities with original maturities of more than three months at time of purchase are considered marketable securities. Investment securities that are not liquid within twelve months are considered long-term investments.

     The composition of the marketable securities is as follows at June 30, 2010 and December 31, 2009:

		June 30, 2010								December 31, 2009
		Cost				Fair Value				Cost				Fair Value
		(In thousands)
Commercial paper		$	400			$	400			$	3,996			$	3,996
Treasury bills			2,008				2,010				—				—
Certificates of deposit			2,064				2,064				5,458				5,458
Corporate bonds/notes			2,458				2,459				7,034				7,028
Municipal bonds/notes			605				605				6,423				6,423
Agency bonds/notes			4,526				4,528				—				—
Auction rate securities			—				—				21,650				18,249
Put Agreement			—				—				—				3,247
Total securities		$	12,061			$	12,066			$	44,561			$	44,401

     The maturities of the marketable securities as of June 30, 2010 are as follows:

Earliest

Latest

Available for Sale:

Commercial paper

9/8/2010

to

9/8/2010

Treasury bills

5/31/2011

to

5/31/2011

Certificates of deposit

8/9/2010

to

9/8/2010

Corporate bonds/notes

8/1/2010

to

6/3/2011

Municipal bonds/notes

9/1/2010

to

9/1/2010

Agency Bonds

10/29/2010

to

4/18/2011

     The value and liquidity of these securities are affected by market conditions as well as the ability of the issuer to

make principal and interest payments when due, and the functioning of the markets in which these securities are traded. The investments are expected to be liquidated in the next year.

     The fair values of cash and cash equivalents, which include investments in money market funds, are assumed to be equal to their carrying amounts. Cash and cash equivalents have short-term maturities.

     During June 2010, management liquidated its auction rate securities (“ARS”) at face value and the Company’s non-transferrable Auction Rate Securities Rights Agreement (the “Put Agreement”) expired on July 2, 2010 without exercise.

     As of June 30, 2010, management does not believe that any of the underlying issuers of the available for sale securities are presently at risk.

     Fair Value: Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

     Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

     Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

     Level 3: Inputs reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the valuation of the instruments.

     The following table presents information about the Company’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and indicates the fair value hierarchy of the valuation techniques the Company utilized to determine such fair value:

		Level 1				Level 2				Level 3				Total
		(In thousands)
Commercial paper		$	400			$	—			$	—			$	400
Treasury bills			2,010				—				—				2,010
Certificates of deposit			2,064				—				—				2,064
Corporate bonds/notes			2,459				—				—				2,459
Municipal bonds/notes			605				—				—				605
Agency bonds/notes			4,528				—				—				4,528
Total		$	12,066			$	—			$	—			$	12,066

     Investments in money market funds: The Company sometimes invests excess cash in money market funds not insured by the Federal Deposit Insurance Corporation (“FDIC”). The Company believes that the investments in money market funds are on deposit with credit worthy financial institutions and that the funds are highly liquid. The investments in money market funds are reported at fair value, with realized gains from interest income recorded in earnings and are included in “Cash and cash equivalents.” The fair values of our investments in money market funds are based on the quoted market prices for the net asset value of the various money market funds.

     Auction rate securities: During June 2010, management liquidated its ARS at face value. The Put Agreement expired without exercise.

     The following table reconciles the December 31, 2009 beginning and June 30, 2010 ending balances for items measured at fair value on a recurring basis in the table above that used Level 3 inputs:

		ARS				Put Agreement				Total
						(In thousands)
Balances at December 31, 2009		$	18,249			$	3,247			$	21,496
Net realized gain (loss) included in other income			—				—				—
Purchases, sales, and settlements, net			(21,650	)			—				(21,650	)
Change in fair market value			3,401				(3,247	)			154
Balances at June 30, 2010		$	—			$	—			$	—

NOTE 6. INVENTORIES

     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:

		June 30,				December 31,
		2010				2009
		(In thousands)
Parts and raw materials		$	33,523			$	18,882
Work in process			6,562				3,061
Finished goods			16,527				6,624
		$	56,611			$	28,567

     Inventories include costs of materials, direct labor and manufacturing overhead. Reserves are provided for excess and obsolete inventory, which are estimated based on a comparison of the quantity of inventory on hand to management’s forecast of customer demand. Customer demand is dependent on many factors, including both micro and macroeconomic, and requires management to use significant judgment in its forecasting process.

     The Company must also make assumptions regarding the rate at which new products will be accepted in the marketplace, the rate at which customers will transition from older products to newer products, effect of engineering changes to a product or discontinuance of a product line. If actual market conditions or customers’ product demands are less favorable than those projected, additional valuation adjustments may be necessary.

NOTE 7. PROPERTY AND EQUIPMENT

		June 30,				December 31,
		2010				2009
		(In thousands)
Buildings and land		$	488			$	533
Machinery and equipment			43,817				37,155
Computer and communication equipment			26,400				26,141
Furniture and fixtures			3,569				3,661
Vehicles			512				490
Leasehold improvements			20,689				20,641
Contruction in process			513				—
			95,988				88,621
Less: Accumulated depreciation			(73,744	)			(69,934	)
		$	22,244			$	18,687

     Depreciation expense for the three months and six months ended June 30, 2010 and 2009 is as follows:

		June 30,
		2010				2009
		(In thousands)
Depreciation expense:
3 months		$	1,756			$	1,731
6 months			3,292				2,452

NOTE 8. GOODWILL

     Goodwill is not amortized under U.S. GAAP but is tested for impairment at least annually. The following summarizes the changes in goodwill during the three and six months ended June 30, 2010 and 2009, respectively:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
		(In thousands)
Gross carrying amount, beginning of period		$	—			$	—			$	—			$	49,396
Additions			47,920				—				47,920				—
Impairments			—				—				—				(63,260	)
Effects of changes in exchange rates			—				—				—				13,864
Net carrying amount, end of period		$	47,920			$	—			$	47,920			$	—

     Additions during the year represent the difference between the purchase price paid and values assigned to identifiable assets acquired and liabilities assumed in purchase accounting, as described in Note 2, Business Acquisition and Disposition.

     Advanced Energy tests goodwill for impairment at the reporting unit level on an annual basis and more often if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The impairment tests consist of comparing the fair value of reporting units, determined using discounted cash flows, with its carrying amount including goodwill. If the carrying amount of the reporting unit exceeds its fair value, Advanced Energy compares the implied value of goodwill with its carrying amount. If the carrying amount of goodwill exceeds the implied fair value of goodwill, an impairment loss would be recognized to reduce the carrying amount to its implied fair value. There was no impairment charge recorded in the first six months of fiscal 2010. There was $63.3 million of goodwill impairment charges recorded in the first three months of fiscal 2009.

NOTE 9. INTANGIBLE ASSETS

     Other intangible assets consisted of the following as of June 30, 2010:

						Effect of												Weighted-
		Gross				Changes in								Net				Average
		Carrying				Exchange				Accumulated				Carrying				Useful Life in
		Amount				Rates				Amortization				Amount				Years
		(In thousands, except weighted-average useful life)
Amortizable intangibles:
Technology-based		$	42,998			$	—			$	(563	)		$	42,436				7
Trademarks and other			7,987				—				(204	)			7,783				9
Total amortizable intangibles		$	50,985			$	—			$	(767	)		$	50,219				8

     Other intangible assets consisted of the following as of December 31, 2009:

Effect of

Weighted-

Gross

Changes in

Net

Average

Carrying

Exchange

Accumulated

Carrying

Useful Life in

Amount

Rates

Amortization

Amount

Years

(In thousands, except weighted-average useful life)

Amortizable intangibles:

Technology-based

$

7,015

$

1,543

$

(8,558

)

$

—

0

     Amortization expense related to intangible assets is as follows:

		June 30,
		2010				2009
		(In thousands)
Amortization expense:
3 months		$	767			$	—
6 months			767				102

     Amortization expense related to our acquired intangible assets in Japan fluctuates with changes in foreign currency exchange rates between the U.S. dollar and the Japanese yen.

     Estimated amortization expense related to amortizable intangibles based on estimates of when in process research and development is anticipated to move into production for each of the five years 2010 through 2014 and thereafter is as follows (in thousands):

Year Ending December 31,
2010 (remaining)		$	2,064
2011			3,620
2012			6,130
2013			8,114
2014			8,925
Thereafter			21,366
		$	50,219

NOTE 10. CREDIT LINE AGREEMENT

     On June 2, 2009, pursuant to the Company’s Put Agreement, Advanced Energy entered into a Credit Line Account Agreement with UBS Bank. The Credit Line Agreement provided the Company with an uncommitted, demand revolving line of credit (an intended “no net cost loan”) of $16.3 million (75% of par value of our ARS), as determined by UBS Bank in its sole discretion, which was secured by our ARS. The Credit Line Agreement expired on July 2, 2010 after the Company sold its ARS and let its related Put Agreement expire. No amounts were borrowed from the Credit Line Agreement during the six months ended June 30, 2010.

NOTE 11. WARRANTIES

     Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 18 months to 10 years following installation. The 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. Accruals are established for warranty issues that are probable to result in future costs. Changes in accrued product warranties, including those acquired in the PV Powered transaction, were as follows:

		Three Months Ended								Six Month Ended
		June 30, 2010								June 30, 2010
		2010				2009				2010				2009
						(In thousands)
Balance at beginning of period		$	7,874			$	5,393			$	6,978			$	6,005
Increases to accruals related to sales during the period			2,393				1,286				4,648				2,313
Warranty expenditures			(634	)			(1,186	)			(1,993	)			(2,825	)
Balance at June 30		$	9,633			$	5,493			$	9,633			$	5,493

NOTE 12. STOCK-BASED COMPENSATION

     The Company recognizes stock-based compensation expense based on the fair value of awards issued. Stock-based compensation for the three months and six months ended June 30, 2010 and 2009 is as follows (in thousands):

		June 30,
		2010				2009
Stock-based compensation expense:
3 months		$	1,960			$	1,446
6 months			3,885				2,904

Stock Options

     Stock option awards are granted with an exercise price equal to the market price of Advanced Energy’s stock at the date of grant, a four-year vesting schedule, and a term of 10 years.

     A summary of our stock option activity for the six months ended June 30, 2010 is as follows:

		Shares
		(In thousands)
Options outstanding at December 31, 2009			4,826
Options granted			710
Options exercised			(57	)
Options cancelled			(131	)
Options outstanding at June 30, 2010			5,348

Restricted Stock

     A summary of our non-vested Restricted Stock Units (“RSU”) activity for the six months ended June 30, 2010 is as follows (in thousands):

		Shares
		(In thousands)
Non-vested RSUs outstanding December 31, 2009			385
RSUs granted			146
RSUs vested			(98	)
RSUs forfeited			(17	)
Non-vested RSUs outstanding June 30, 2010			416

NOTE 13. COMPREHENSIVE INCOME

     Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, and net unrealized holding gains (losses) on available-for-sale investments as presented below:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(In thousands)
Net income (loss)		$	13,619			$	(16,034	)		$	19,836			$	(95,797	)
Adjustments to arrive at comprehensive income (loss), net of taxes:
Unrealized holding gain (loss) on available-for-sale securities, net of taxes			3				6				7				(2	)
Cumulative translation adjustment			(3,280	)			4,421				(6,452	)			(8,241	)
Comprehensive income (loss)		$	10,342			$	(11,607	)		$	13,391			$	(104,040	)

NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME

     Accumulated other comprehensive income consisted of the following (in thousands):

Unrealized holding gain (loss) on available-for-sale securities:
Balance at December 31, 2009		$	(3	)
Unrealized holding gain, net of realized amounts reclassified to net income			7
Balance at June 30, 2010			4
Accumulated foreign currency translation adjustments:
Balance at December 31, 2009			27,411
Translation adjustments			(6,452	)
Balance at June 30, 2010			20,959
Total accumulated other comprehensive income		$	20,963

NOTE 15. COMMITMENTS AND CONTINGENCIES

     Advanced Energy is involved in disputes and legal actions from time to time in the ordinary course of its business.

     During 2008, the Customs Office of Taipei, Taiwan issued a series of orders to our Taiwanese subsidiary, Advanced Energy Taiwan, Ltd., requiring that certain of our products manufactured in mainland China and allegedly imported without proper authorization be removed from Taiwan. The Company had protested the orders based upon recent rulings of the Taiwan Bureau of Foreign Trade that the products were authorized for unrestricted import. The Company originally appealed the withdrawal order to the Taiwan High Administrative Court which ruled against the Company in May 2009. Advanced Energy then appealed that decision to the Taiwan Supreme Administrative Court. The Company previously recorded a charge of $0.3 million as its best estimate of the amount likely to be paid to resolve this matter. The case was settled in July 2010 and the charge of $0.3 million was reversed from cost of sales as of June 30, 2010.

     The Company has firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation at June 30, 2010 under these arrangements is approximately $72.3 million. Substantially all amounts under these arrangements are due in the next twelve to eighteen months. Actual expenditures will vary based upon the volume of the transactions and length of contractual service provided. In addition, the amounts paid under these arrangements may be less in the event that the arrangements are renegotiated, settled or cancelled. Certain agreements provide for potential cancellation penalties. The Company’s policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. Management believes that Advanced Energy has an

adequate provision for potential exposure related to inventory on order which may go unused.

NOTE 16. RELATED PARTY TRANSACTIONS

     The Company leases its executive offices and manufacturing facilities in Fort Collins, Colorado from a limited liability partnership in which the Company’s Chairman of the Board of Directors holds an interest. The leases relating to these spaces expire at various dates between 2010 and 2015. Each lease contains annual payments of approximately $1.0 million, including rent and common area maintenance costs.

     For the three months and six months ended June 30, 2010 and 2009, rent and related expenses attributable to these leases totaled (in thousands):

		June 30,
		2010				2009
3 months		$	742			$	683
6 months			1,441				1,399

NOTE 17. SIGNIFICANT CUSTOMER INFORMATION

     Sales to Applied Materials Inc., our largest customer, were 24% of total sales for the three months ended June 30, 2010 and 28%, of total sales for the six months ended June 30, 2010. Sales to Applied Materials Inc. were 17% of total sales for the three months ended June 30, 2009 and 17% of total sales for the six months ended June 30, 2009. Sales to Applied Materials include products used in semiconductor processing and solar, flat panel display and architectural glass applications. No other customer accounted for 10% or more of our sales during these periods.

     Our ten largest customers accounted for 57% of our sales in the three months ended June 30, 2010 and 49% of our sales in the three months ended June 30, 2009. Our ten largest customers accounted for 60% of our sales in the six months ended June 30, 2010 and 49% of our sales in the six months ended June 30, 2009.

     As of June 30, 2010 and December 31, 2009, Applied Materials, Inc. accounted for 16% and 15% of gross accounts receivable. No other customer accounted for 10% or more of our gross accounts receivable as of June 30, 2010 or December 31, 2009.

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 and Section 21E of the Securities Exchange Act of 1934. Statements that are other than 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” 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 and results of operations, see the information under the caption “Risk Factors” in Item 1A herein, in our Annual Report on Form 10-K for the year ended December 31, 2009 and our Quarterly Report on Form 10-Q for the three months ended March 31, 2010. 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 deposition for various products, such as semiconductor devices, flat panel displays, solar panels and architectural glass, as well as grid-tie power conversion in the solar market. We also supply thermal instrumentation products used for temperature control in the thin-film process for these same markets. Our network of global service support centers provides local repair and field service capability in key regions. Our installed base provides a recurring revenue opportunity as we offer repair services, conversions, upgrades and refurbishments to companies using our products.

     Our products are used in diverse markets, applications and processes, including the manufacture of capital equipment for semiconductor devices, thin film applications for solar panels and architectural glass and for other thin film applications including flat panel displays, data storage and industrial coatings as well as the commercial and residential solar inverter market. These markets can be cyclical in nature. Therefore, demand for our products and our financial results can change as demand for manufacturing equipment and services change in response to consumer demand. Other factors, such as global economic and market conditions and technological advances in fabrication processes can also have an impact on our financial results, both positively and negatively.

     On July 21, 2010, we entered into a definitive agreement to sell our gas flow control business, which includes our Aera^® mass flow control and related product lines, to Hitachi Metals Ltd. The financial information provided below is presented in accordance with discontinued operations accounting and only includes those revenues and costs related to specific items or resources that will remain as part of our continuing operation upon closing of the pending sale of our gas flow control business. Even though the divestiture transaction has not yet been completed, the assets related to its gas flow control business are held for sale and consequently any operations related to those assets are considered discontinued, and all of the revenue, costs and expenses are reported on a net basis in discontinued operations below the net income from continuing operations line on the income statement.

     We had net income for the three months ended June 30, 2010 of $13.6 million compared to a $16.0 million net loss for the three months ended June 30, 2009. We had net income for the six months ended June 30, 2010 of $19.8 million compared to a $95.8 million net loss for the six months ended June 30, 2009, which included a $63.3 million non-cash impairment of goodwill and $4.1 million of restructuring charges.

     After a challenging year in 2009 that was characterized by credit constraints in the financial markets and a weak global economy that negatively impacted all of the markets we serve, industry conditions improved significantly in 2010. While 2009 was characterized by a market posture of inventory reduction, 2010 has been characterized by manufacturers’ efforts to acquire and secure component material to meet an increase in demand. This change of posture indicates that, for the near term, a recovery in our customers’ end markets is supporting their factories running at higher utilization rates. We are optimistic that this recovery in our customers’ end markets is sustainable, and we currently anticipate that orders and net sales will increase in the third quarter and remain strong throughout 2010.

     In order to execute to the current level of demand as well as implement strategic projects that drive continued international growth and sales opportunities, we have increased headcount slightly and incurred more discretionary spending to date in 2010 than in 2009. Temporary cost reductions implemented in 2009, such as management-level pay cuts,

reductions of Board of Directors fees, company-wide shutdowns and cuts in employee benefits have been reversed in 2010. The rapid increase in demand in the markets we serve has challenged our production capacity as well as our ability to meet the tight deadlines of our customers. As a result, we have increased spending in our production facilities in order to meet our customers’ demands and take full advantage of this current market opportunity. Additionally, we have added employees and operating expenses related to the acquisition of PV Powered, Inc. These increases have been necessary in order to successfully manage the current rate and speed of business, however we remain committed to sustaining prudent spending levels.

     Our analysis presented below is organized to provide the information we believe will be instructive 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.

Business Acquisition

     On May 3, 2010, we acquired PV Powered, Inc., a privately held Oregon corporation or “PV Powered,” and a leading solar inverter company based in Bend, Oregon, pursuant to an Agreement and Plan of Merger dated March 24, 2010 among Advanced Energy, PV Powered and Neptune Acquisition Sub, Inc., an Oregon corporation and wholly-owned subsidiary of Advanced Energy, or “Acquisition Sub,” as amended by Amendment No. 1 to the Agreement and Plan of Merger dated April 21, 2010 (together with the Agreement and Plan of Merger, referred to as the “Merger Agreement”). Pursuant to the Merger Agreement, Acquisition Sub merged with and into PV Powered, with PV Powered being the surviving corporation and a wholly-owned subsidiary of Advanced Energy; this event is referred to herein as the “Merger”).

     Shareholders of PV Powered received approximately $36.7 million of cash less certain closing date indebtedness plus approximately 1.0 million shares of our common stock issued in exchange for all PV Powered common stock, options and warrants outstanding as of May 3, 2010. Fractional shares generated by the conversion were settled for cash. Additional cash consideration in an amount of up to $40.0 million is payable to the shareholders of PV Powered if certain financial targets are met during the year ended December 31, 2010. The fair value of the $40.0 million contingent consideration arrangement was estimated to be $39.0 million as of May 3, 2010 based on a projected cash payout of $39.4 million in January 2011.

     The cash consideration paid in the Merger came from existing cash and investments, as will any additional cash consideration payable if the 2010 financial targets are met.

     PV Powered is a leading manufacturer of grid-tied photovoltaic (“PV”) inverters in the residential, commercial and utility-scale markets. PV Powered manufactures high-reliability transformer-based PV inverters utilized in commercial roof top and ground mount systems in the North American market. PV Powered has approximately 90 employees and recognized $21.4 million of revenues in 2009. Its inverters range in size from 30kw to 260kw for the commercial market and 1kw to 5kw for the residential market, with market leading efficiency ratings.

     PV Powered will continue to operate out of its facilities in Bend, Oregon as a subsidiary of Advanced Energy. The acquisition of PV Powered enables us to offer the solar inverter market a complete suite of products and power ranges and increases the number of solar energy project opportunities for which our products can be considered for purchase. Results for PV Powered from the date of acquisition are included in our results of operations for the three months ended June 30, 2010.

Business Disposition

     On July 21, 2010, we entered into a definitive agreement to sell our gas flow control business, which includes our Aera^® mass flow control and related product lines, for approximately $44.0 million, subject to adjustment based on inventory balance at closing. The purchase price will be increased for each dollar over $8 million of inventory included in our gas flow control business assets at closing. Conversely, the purchase price will be decreased for each dollar under $8 million of inventory included in the gas flow control business assets at closing. The assets sold in the transaction include, without limitation, inventory, real property in Hachioji, Japan, equipment, certain contracts and intellectual property. Subject to the satisfaction of customary closing conditions, we anticipate the closing of this transaction within the third quarter of 2010, and accordingly, we expect to record a pre-tax gain of approximately $17.6 million in the quarter ended September 30, 2010. Subject to the satisfaction of customary closing conditions, we anticipate the closing of this transaction within the third quarter of 2010.

     The sale of our gas flow control business represents a significant step in our strategy to focus our global resources on power conversion. Our core technology portfolio in power conversion for the semiconductor, flat panel display, solar panel and other thin film markets as well as grid-tied PV inverters is the foundation of our long-term growth strategy. These markets provide growth opportunities as we continue to scale our business to capture opportunities across this diverse mix of industries.

     At closing, we will transfer substantially all of the assets associated with the gas flow control business to

Hitachi Metals, Ltd., which will assume certain related liabilities as well as global sales for the gas flow control business. As part of a transition period, we have agreed to manufacture certain products in the Aera^® product lines for Hitachi Metals, Ltd. for 12 months for a fee of our costs plus 5% of direct labor and overhead. The agreement provides Hitachi Metals, Ltd. a one-time option to extend the term of this manufacturing arrangement for an additional 6 months. We have also agreed to provide additional transitional services at no cost. It is also contemplated that we will become an authorized service provider for Hitachi Metals, Ltd. in all countries other than Japan.

     The results from continuing operations were reduced by the revenue and costs associated with the gas flow control business which was included in the discontinued operations line on the Condensed Consolidated Statement of Operations.

     Operating results of discontinued operations are as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
						(In thousands)
Sales		$	15,084			$	4,016			$	26,949			$	7,881
Cost of sales			9,754				3,017				17,718				6,228
Gross margin			5,330				999				9,231				1,653
Operating Expenses:
Research and development			444				434				892				875
Selling, general and administrative			1,282				927				2,458				1,878
Total operating expenses			1,726				1,361				3,350				2,754
Income (loss) from discontinued operations before income taxes			3,604				(362	)			5,881				(1,101	)
Income tax benefit (expense)			(1,442	)			145				(2,352	)			441
Income (loss) from discontinued operations, net of income taxes		$	2,162			$	(217	)		$	3,529			$	(661	)

     As a result of the pending sale, the assets and liabilities related to Aera^® have been classified as held for sale on the Condensed Consolidated Balance Sheet as of June 30, 2010. Assets and liabilities held for sale consist of the following:

		June 30,				December 31,
		2010				2009
		(In thousands)
Assets
Inventories		$	12,012			$	8,551
Property and equipment			12,190				11,927
Other intangible assets			5,978				5,982
Assets of business held for sale		$	30,180			$	26,460
Liabilities
Accrued warranty expense		$	130			$	119
Deferred income tax liabilities			1,362				1,356
Other			1				1
Liabilities of business held for sale		$	1,492			$	1,477

Results of Operations

SALES

     The following tables summarize net sales, and percentages of net sales, by market type for the three months and six

months ended June 30, 2010 and 2009:

		Three Months Ended June 30,																Increase/				Percent
		2010								2009								(Decrease)				Change
										(in thousands)
Semiconductor capital equipment market		$	43,461				43.4	%		$	10,094				31.9	%		$	33,367				330.6	%
Non-semiconductor capital equipment			44,865				44.8	%			12,996				41.2	%			31,869				245.2	%
Total Product			88,326				88.2	%			23,090				73.2	%			65,236				282.5	%
Global support			11,781				11.8	%			8,461				26.8	%			3,320				39.2	%
Total sales		$	100,107				100.0	%		$	31,551				100.0	%		$	68,556				217.3	%