ADVANCED ENERGY INDUSTRIES INC - Quarter Report: 2011 September (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 or organization)		(I.R.S. Employer Identification No.)
1625 Sharp Point Drive, Fort Collins, CO		80525
(Address of principal executive offices)		(Zip Code)

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

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

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

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

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

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

As of October 31, 2011, there were 43,660,364 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			19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			27
ITEM 4. CONTROLS AND PROCEDURES			28
PART II OTHER INFORMATION			28
ITEM 1. LEGAL PROCEEDINGS			28
ITEM 1A. RISK FACTORS			29
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES			29
ITEM 4. REMOVED AND RESERVED			29
ITEM 5. OTHER INFORMATION			29
ITEM 6. EXHIBITS			30
SIGNATURE			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I FINANCIAL STATEMENTS

ITEM 1.		UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ADVANCED ENERGY INDUSTRIES, INC.

Condensed Consolidated Balance Sheets *

		September 30,				December 31,
		2011				2010
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	132,253			$	130,914
Marketable securities			22,669				9,640
Accounts receivable, net of allowances of $2,631 and $3,440, respectively			132,048				119,893
Inventories			92,822				77,593
Deferred income tax assets			7,689				7,510
Income taxes receivable			6,570				6,061
Other current assets			12,393				10,156
Total current assets			406,444				361,767
PROPERTY AND EQUIPMENT, net			40,837				34,569
OTHER ASSETS:
Uncertain tax positions and deposits			8,868				8,874
Goodwill			46,515				48,360
Other intangible assets, net			45,590				48,421
Deferred income tax assets			5,176				3,166
Total assets		$	553,430			$	505,157
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	50,559			$	56,185
Income taxes payable			7,387				3,602
Accrued payroll and employee benefits			8,881				23,202
Accrued warranty expense			8,336				7,144
Other accrued expenses			11,250				5,389
Customer deposits			10,145				6,803
Total current liabilities			96,558				102,325
LONG-TERM LIABILITIES:
Deferred income tax liabilities			5,271				5,155
Uncertain tax positions			14,176				14,176
Accrued warranty expense			6,385				5,805
Other long-term liabilities			5,943				3,728
Total liabilities			128,333				131,189
Commitments and contingencies (Note 17)
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; 43,644 and 43,330 shares issued and outstanding, respectively			44				43
Additional paid-in capital			268,985				258,398
Retained earnings			127,535				88,453
Accumulated other comprehensive income			28,533				27,074
Total stockholders’ equity			425,097				373,968
Total liabilities and stockholders’ equity		$	553,430			$	505,157

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

ADVANCED ENERGY INDUSTRIES, INC.

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
SALES		$	128,498			$	140,966			$	404,304			$	310,760
COST OF SALES			79,651				80,276				238,035				176,304
GROSS PROFIT			48,847				60,690				166,269				134,456
OPERATING EXPENSES:
Research and development			17,592				16,672				50,591				41,329
Selling, general and administrative			16,473				20,545				57,379				49,955
Amortization of intangible assets			989				1,177				2,831				1,945
Restructuring charges			3,119				—				3,119				—
Total operating expenses			38,173				38,394				113,920				93,229
OPERATING INCOME			10,674				22,296				52,349				41,227
OTHER INCOME (LOSS), NET			(259	)			1,224				496				1,828
Income from continuing operations before income taxes			10,415				23,520				52,845				43,055
Provision for income taxes			3,244				5,964				13,396				9,192
INCOME FROM CONTINUING OPERATIONS, NET OF INCOME TAXES			7,171				17,556				39,449				33,863
Income (loss) from discontinued operations, net of income taxes			(579	)			2,392				(365	)			5,921
NET INCOME		$	6,592			$	19,948			$	39,084			$	39,784
Basic weighted-average common shares outstanding			43,535				43,254				43,515				42,711
Diluted weighted-average common shares outstanding			43,819				43,849				44,056				43,293
EARNINGS PER SHARE:
CONTINUING OPERATIONS:
BASIC EARNINGS PER SHARE		$	0.16			$	0.41			$	0.91			$	0.79
DILUTED EARNINGS PER SHARE		$	0.16			$	0.40			$	0.90			$	0.78
DISCONTINUED OPERATIONS:
BASIC EARNINGS PER SHARE		$	(0.01	)		$	0.06			$	(0.01	)		$	0.14
DILUTED EARNINGS PER SHARE		$	(0.01	)		$	0.05			$	(0.01	)		$	0.14
NET INCOME:
BASIC EARNINGS PER SHARE		$	0.15			$	0.46			$	0.90			$	0.93
DILUTED EARNINGS PER SHARE		$	0.15			$	0.45			$	0.89			$	0.92

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

ADVANCED ENERGY INDUSTRIES, INC.

		Nine Months Ended
		September 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	39,084			$	39,784
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			10,566				7,646
Stock-based compensation expense			9,362				5,895
Provision (benefit) for deferred income taxes			(346	)			137
Restructuring charges			3,119				—
Net loss on disposal of assets			118				—
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable			(11,684	)			(54,938	)
Inventories			(16,028	)			(31,733	)
Other current assets			(482	)			(2,638	)
Accounts payable			(4,793	)			6,645
Other current liabilities and accrued expenses			(5,796	)			19,408
Income taxes			3,540				(7,621	)
Non-current assets			(8	)			560
Non-current liabilities			—				253
Net cash provided by (used in) operating activities			26,652				(16,602	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities			(22,640	)			(108,104	)
Proceeds from sale of marketable securities			9,667				141,755
Purchase of PV Powered, Inc., net of cash acquired			—				(35,977	)
Purchase of property and equipment			(14,629	)			(6,921	)
Net cash used in investing activities			(27,602	)			(9,247	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital lease obligations			(143	)			(140	)
Proceeds from exercise of stock options			1,796				1,408
Excess tax benefit from stock-based compensation deduction			(572	)			—
Net cash provided by financing activities			1,081				1,268
EFFECT OF CURRENCY TRANSLATION ON CASH			1,208				(6,959	)
INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS			1,339				(31,540	)
CASH AND CASH EQUIVALENTS, beginning of period			130,914				133,106
CASH AND CASH EQUIVALENTS, end of period		$	132,253			$	101,566
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest		$	36			$	35
Cash paid for income taxes			17,867				19,442
Cash received for refunds of income taxes			7,522				1,679
Cash held in banks outside the United States			45,233				22,891
NONCASH TRANSACTIONS:
Common stock issued as partial consideration for PV Powered acquisition		$	—			$	14,690
Contingent liability accrued as part of PV Powered acquisition			—				39,600
Equipment purchased with capital lease			26				223

ADVANCED ENERGY INDUSTRIES, INC.

NOTE 1. BASIS OF PRESENTATION

We design, manufacture, sell and support power conversion products that transform power into various usable forms. Our products enable manufacturing processes that use thin-film processing and etching for various products, such as semiconductor devices, flat panel displays, solar panels and architectural glass. We also supply thermal instrumentation products for advanced temperature control in the thin-film process for these same markets. Our solar inverter products support renewable power generation solutions for residential, commercial and utility-scale solar projects and installations. Our network of global service support centers offer repair services, conversions, upgrades and refurbishments to companies using our products. We also offer a wide variety of operations and maintenance service plans that can be tailored for individual photovoltaic (“PV”) sites of all sizes.

We are organized into two strategic business units (“SBU”) based on the products and services provided.

Thin Films Processing Power Conversion and Thermal Instrumentation (“Thin Films”) SBU offers our products for direct current (“DC”), pulsed DC mid frequency, and radio frequency (“RF”) power supplies, matching networks and RF instrumentation as well as thermal instrumentation products.

Solar Energy SBU offers both a transformer-based or transformerless advanced grid-tied PV inverter solution for residential, commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power.

In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements contain all adjustments, consisting of normal, recurring adjustments, necessary to present fairly the financial position of Advanced Energy Industries, Inc., a Delaware corporation, and its wholly-owned subsidiaries (“we”, “us”, “our”, “Advanced Energy”, or the “Company”) at September 30, 2011, and the results of our operations and cash flows for the three months and nine months ended September 30, 2011 and 2010.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 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. We believe that the significant estimates, assumptions and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventories, warranty reserves, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments, deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information available at the time they are made. Actual results may differ from these estimates under different assumptions or conditions.

REVENUE RECOGNITION — Our multiple deliverable arrangements involve the delivery of product, training, and installation services to our customers and can be long-term in nature. We have determined that the deliverables under these arrangements qualify as separate units of accounting. Revenue is allocated to the separate units of accounting based on vendor specific objective evidence as we sell each element on a stand-alone basis. Revenue is recognized for each element as it is delivered. Product delivery occurs based on the shipping terms included in the agreement.

NEW ACCOUNTING PRONOUNCEMENTS — 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 are communicated through issuance of an Accounting Standards Update. 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 our Condensed Consolidated Financial Statements upon adoption.

NOTE 2. BUSINESS ACQUISITION AND DISPOSITION

Acquisition

On May 3, 2010, we acquired all of the outstanding common stock of PV Powered, Inc. (“PV Powered”), a privately-held Oregon corporation based in Bend, Oregon, for approximately $90.3 million consisting of 1.0 million shares of our common stock with a market value of approximately $14.7 million and cash payments totaling $75.6 million, net of cash acquired.

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 PV inverters utilized in residential, commercial roof top and ground mount systems for the North American market. Its inverters range in size from 30 kilowatts (“kW”) to two megawatts for the commercial market and 1kW to 5kW for the residential market, with market leading efficiency ratings. PV Powered is included in our Solar Energy SBU.

We recorded the acquisition of PV Powered using the acquisition method of accounting and the purchase price was allocated to the tangible assets, intangible assets, and liabilities acquired based on estimated fair values as of the date of acquisition. 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. Our purchase price allocation is final as of June 30, 2011.

The components of the fair value of the total consideration transferred for the PV Powered acquisition are as follows (in thousands):

Cash paid to owners		$	76,301
Cash acquired			(724	)
Common stock issued - 997,966 shares			14,690
Total fair value of consideration transferred		$	90,267

The following table summarizes the final fair values of the assets acquired and liabilities assumed in the acquisition (in thousands):

Accounts receivable		$	4,777
Inventories			8,363
Other current assets			277
Deferred tax assets			4,591
Property and equipment			4,065
Deposits and other noncurrent assets			67
Accounts payable			(5,480	)
Accrued liabilities			(2,744	)
Deferred tax liabilities			(18,711	)
Other long-term liabilities			(2,739	)
			(7,534	)
Other intangible assets:
Trademarks			5,277
Technology			28,208
In process research and development			14,868
Customer relationships			2,213
Backlog			720
Total other intangible assets			51,286
Total identifiable net assets			43,752
Goodwill			46,515
Total fair value of consideration transferred		$	90,267

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

Amortization

Amount

Method

Useful Life

Trademarks

$

5,277

Accelerated

10 years

Technology

28,208

Accelerated

7 years

In process research and development

14,868

Customer relationships

2,213

Accelerated

7 years

Backlog

720

Straight-line

6 months

$

51,286

Our amortization of in process research and development does not begin until the specific project is complete and put into production.

Disposition

On October 15, 2010, we completed the sale of our gas flow control business, which includes our Aera^® mass flow control and related product lines, to Hitachi Metals, Ltd. for approximately $43.3 million.

In connection with the closing of this asset disposition, we entered into a Master Services Agreement and a Supplemental Transition Service Agreement (“Transition Services Agreement”) pursuant to which we agreed to provide certain transition services until October 11, 2011. The Transition Services Agreement has been extended through March 2012.

In accordance with authoritative accounting guidance for reporting discontinued operations, the revenues and costs associated with our gas flow control business are excluded from income from continuing operations and are presented as income from discontinued operations, net of taxes, in our Condensed Consolidated Statements of Operations.

Operating results from discontinued operations are as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Sales		$	10,726			$	15,722			$	21,280			$	42,671
Cost of sales			10,288				11,488				20,948				29,206
Gross profit			438				4,234				332				13,465
Operating expenses:
Research and development			1				922				6				1,814
Selling, general and administrative			56				480				196				2,692
Amortization of intangible assets			—				—				—				246
Total operating expenses			57				1,402				202				4,752
Operating income (loss) from discontinued operations			381				2,832				130				8,713
Other income (loss)			(885	)			—				(117	)			—
Income (loss) from discontinued operations before income taxes			(504	)			2,832				13				8,713
Income taxes on income from discontinued operations			75				440				378				2,792
Income (loss) from discontinued operations, net of income taxes		$	(579	)		$	2,392			$	(365	)		$	5,921

NOTE 3. INCOME TAXES

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Income from continuing operations before income taxes		$	10,415			$	23,520			$	52,845			$	43,055
Provision for income taxes			3,244				5,964				13,396				9,192
Effective tax rate			31.1	%			25.4	%			25.3	%			21.3	%

Our tax rate is lower than the U.S. federal income tax rate primarily due to the benefit of earnings in foreign jurisdictions, which are subject to lower tax rates. We plan to repatriate approximately $30.0 million from Japan during the fourth quarter of 2011, for which a deferred income tax expense of $2.1 million was recorded in 2010. Other than this planned repatriation, undistributed earnings of foreign subsidiaries are considered to be permanently reinvested and accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made.

Our policy is to classify accrued penalties and interest related to unrecognized tax benefits in our income tax provision. For the three months and nine months ended September 30, 2011 and 2010, the amount of interest and penalties accrued related to our unrecognized tax benefits was immaterial.

NOTE 4. EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the numerator is increased to exclude charges that would not have been incurred, and the denominator is increased to include the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if securities containing potentially dilutive common shares (stock options and restricted stock units) had been converted to common shares, and if such assumed conversion is dilutive.

The following is a reconciliation of our weighted-average shares outstanding used in the calculation of basic and diluted earnings per share for the three months and nine months ended September 30, 2011 and 2010, respectively, (in thousands, except per share data):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Income from continuing operations, net of income taxes		$	7,171			$	17,556			$	39,449			$	33,863
Basic weighted-average shares outstanding			43,535				43,254				43,515				42,711
Assumed exercise of dilutive stock options and restricted stock units			284				595				541				582
Diluted weighted-average shares outstanding			43,819				43,849				44,056				43,293
Income from Continuing Operations:
Earnings per common share:
Basic earnings per share		$	0.16			$	0.41			$	0.91			$	0.79
Diluted earnings per share		$	0.16			$	0.40			$	0.90			$	0.78

The following stock options and restricted stock units were excluded in the computation of diluted earnings per share because they were anti-dilutive (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Stock options			5,048				3,560				4,270				3,560
Restricted stock units			423				77				4				49

NOTE 5. MARKETABLE SECURITIES

Our investments with original maturities of more than three months at time of purchase are considered marketable securities available for sale.

The composition of our marketable securities is as follows (in thousands):

		September 30, 2011								December 31, 2010
		Cost				Fair Value				Cost				Fair Value
Commercial paper		$	1,349			$	1,349			$	—			$	—
Treasury bills			—				—				2,003				2,006
Certificates of deposit			6,998				6,985				3,126				3,126
Corporate bonds/notes			6,270				6,251				1,002				1,004
Agency bonds/notes			8,084				8,084				3,503				3,504
Total marketable securities		$	22,701			$	22,669			$	9,634			$	9,640

The maturities of our marketable securities available for sale as of September 30, 2011 are as follows:

		Earliest				Latest
Commercial paper		12/5/2011		to			12/16/2011
Certificates of deposit		10/14/2011		to			9/23/2013
Corporate bonds/notes		2/15/2012		to			12/17/2012
Agency bonds / notes		7/15/2012		to			11/2/2012

The value and liquidity of our marketable securities are affected by market conditions, 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. Our current investments in marketable securities are expected to be liquidated during the next 18 months.

As of September 30, 2011, we do not believe any of the underlying issuers of our marketable securities are presently at risk of default.

NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates. We manage these risks through the use of derivative financial instruments, primarily forward contracts. During the three months and nine months ended September 30, 2011, we entered into foreign currency exchange forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they do offset the fluctuations of our intercompany debt due to foreign exchange rate changes.

The notional amount of foreign currency exchange contracts was $22.0 million at September 30, 2011 and the fair value of these contracts was immaterial at September 30, 2011. During the three months and nine months ended September 30, 2011, we recognized $1.1 million and $1.2 million of losses, respectively, on our foreign currency exchange contracts. These losses were offset by corresponding gains on the related intercompany debt and both are included as a component of other income (loss), net, in our Condensed Consolidated Statements of Operations.

We did not enter into foreign currency forward contracts during 2010.

NOTE 7. ASSETS AND LIABILITIES MEASURED AT FAIR VALUE

The fair value hierarchy established by U.S GAAP prioritizes the inputs used to measure fair value into the following levels:

Level 1:

Quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2:

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 tables present information about our financial assets measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value (in thousands):

As of September 30, 2011:		Level 1				Level 2				Level 3				Total
Commercial paper		$	—			$	1,349			$	—			$	1,349
Certificates of deposit			—				6,985				—				6,985
Corporate bonds/notes			6,251				—				—				6,251
Agency bonds/notes			8,084				—				—				8,084
Total		$	14,335			$	8,334			$	—			$	22,669

As of December 31, 2010:		Level 1				Level 2				Level 3				Total
Treasury bills		$	2,006			$	—			$	—			$	2,006
Certificates of deposit			—				3,126				—				3,126
Corporate bonds/notes			1,004				—				—				1,004
Agency bonds/notes			3,504				—				—				3,504
Total		$	6,514			$	3,126			$	—			$	9,640

We did not have any Level 3 investments or financial liabilities measured at fair value on a recurring basis as of September 30, 2011 and December 31, 2010. In the first quarter of 2011, we reclassified our investments in certificates of deposits from Level 1 into Level 2 as we believe this more appropriately reflects the level of inputs available for valuing these financial instruments. There were no transfers in and out of Level 1, 2 or 3 fair value measurements during the nine months ended September 30, 2011.

NOTE 8. INVENTORIES

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

		September 30,				December 31,
		2011				2010
Parts and raw materials		$	62,570			$	53,755
Work in process			6,071				5,594
Finished goods			24,181				18,244
		$	92,822			$	77,593

NOTE 9. PROPERTY AND EQUIPMENT

Detail of our property and equipment is as follows (in thousands):

		September 30,				December 31,
		2011				2010
Buildings and land		$	1,616			$	1,701
Machinery and equipment			38,820				53,885
Computer and communication equipment			24,172				23,296
Furniture and fixtures			3,004				5,717
Vehicles			463				541
Leasehold improvements			29,371				28,003
Construction in process			6,608				3,996
			104,054				117,139
Less: Accumulated depreciation			(63,217	)			(82,570	)
		$	40,837			$	34,569

Depreciation expense recorded in continuing operations for the three months and nine months ended September 30, 2011 and 2010 is as follows (in thousands):

		September 30,
		2011				2010
Three months		$	2,799			$	1,444
Nine months			7,735				4,656

NOTE 10. GOODWILL

During the three months ended June 30, 2011 we finalized the PV Powered purchase price allocation. As a result, we increased our estimate of the value of PV Powered’s pre-acquisition net operating losses and recorded a $1.8 million increase to our noncurrent deferred income tax assets and reduced goodwill accordingly.

The following summarizes changes in our goodwill during the three months and nine months ended September 30, 2011 and 2010 (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Gross carrying amount, beginning of period		$	46,515			$	47,920			$	48,360			$	—
Additions			—				440				—				48,360
Adjustments			—				—				(1,845	)			—
Impairments			—				—				—				—
Gross carrying amount, end of period		$	46,515			$	48,360			$	46,515			$	48,360

NOTE 11. OTHER INTANGIBLE ASSETS

Included in our other intangible assets are assets acquired in a business combination that are used in research and development activities. These assets are considered to have indefinite lives until the completion or abandonment of the associated research and development efforts and are presented as non-amortizable intangibles in the tables below.

Our other intangible assets consisted of the following as of September 30, 2011 (in thousands, except weighted-average useful life):

														Weighted-
		Gross												Average
		Carrying				Accumulated				Net Carrying				Useful Life
		Amount				Amortization				Amount				in Years
Amortizable intangibles:
Technology-based		$	37,922			$	(4,891	)		$	33,031				7
Trademarks and other			8,210				(805	)			7,405				8
Total amortizable intangibles			46,132				(5,696	)			40,436
Non-amortizable intangibles			5,154				—				5,154
Total other intangible assets		$	51,286			$	(5,696	)		$	45,590

Our other intangible assets consisted of the following as of December 31, 2010 (in thousands, except weighted-average useful life):

														Weighted-
		Gross												Average
		Carrying				Accumulated				Net Carrying				Useful Life
		Amount				Amortization				Amount				in Years
Amortizable intangibles:
Technology-based		$	31,553			$	(2,271	)		$	29,282				7
Trademarks and other			8,210				(594	)			7,616				8
Total amortizable intangibles			39,763				(2,865	)			36,898
Non-amortizable intangibles			11,523				—				11,523
Total other intangible assets		$	51,286			$	(2,865	)		$	48,421

Amortization expense relating to other intangible assets included in our income from continuing operations for the three months and nine months ended September 30, 2011 and 2010 is as follows (in thousands):

		September 30,
		2011				2010
Three months		$	989			$	1,177
Nine months			2,831				1,945

Our estimated amortization expense for each of the five years 2011 through 2015 and thereafter is as follows (in thousands):

Year Ending December 31,
2011 (Remaining)		$	1,021
2012			5,646
2013			7,541
2014			8,192
2015			7,675
Thereafter			10,361
		$	40,436

NOTE 12. RESTRUCTURING

During the three months ended September 30, 2011, we approved and committed to several initiatives to realign our manufacturing and research and development activities. The initiatives under the plan are intended to foster growth and enhance profitability by aligning research and development activities with the location of our customer base and reducing product costs for the Solar Energy business.

We estimate that over the next 12 to 18 months we will incur between $12.0 and $16.0 million related to this plan, including the amounts recognized during the three months ended September 30, 2011 noted below. Of this total approximately $3.5 to 4.0 million relates to severance costs, $0.4 million relates to asset impairments, and $8.0 to $12.0 relates to costs to close facilities and relocate portions of our manufacturing.

Approximately $9.0 to 13.0 million of the charges noted above have resulted in or will result in cash expenditures.

Restructuring charges recognized during the three months ended September 30, 2011 are as follows:

Severance and related costs		$	2,769
Property and equipment impairments			350
Total restructuring charges		$	3,119

Liabilities associated with the restructuring plan and changes during the nine months ended September 30, 2011 are as follows:

		Balance at				Costs incurred				Cost paid or								Balance at
		December 31,				and charged				otherwise				Effect of Change				September 30,
		2010				to expense				settled				in Exchange Rates				2011
Severance and related costs		$	—			$	2,769			$	(707	)		$	(11	)		$	2,051

NOTE 13. WARRANTIES

Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 18 months to 24 months following installation for the Thin Films SBU and 5 years to 10 years following installation for the Solar Energy SBU. Customers of our Solar Energy SBU have the option to purchase extended warranties up to 20 years. Our provision for the estimated cost of warranties is recorded when revenue is recognized. Our 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 for the three months and nine months ended September 30, 2011 and 2010, including those acquired on May 3, 2010 as part of the PV Powered acquisition, were as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Balances at beginning of period		$	14,296			$	11,179			$	12,949			$	6,978
Warranty liabilities acquired			—				—				—				1,546
Increases to accruals related to sales during the period			2,498				3,441				7,542				8,089
Warranty expenditures			(2,073	)			(2,558	)			(5,770	)			(4,551	)
Balances at end of period		$	14,721			$	12,062			$	14,721			$	12,062

NOTE 14. STOCK-BASED COMPENSATION

We recognize stock-based compensation expense based on the fair value of awards issued. Stock-based compensation for the three months and six months ended September 30, 2011 and 2010 is as follows (in thousands):

		September 30,
		2011				2010
Three months		$	3,228			$	2,075
Nine months			9,362				5,895

Stock Options

Stock option awards are granted with an exercise price equal to the market price of our stock at the date of grant, a four-year vesting schedule, and a term of 10 years, except as noted below.

During the third quarter of 2011, we granted non-qualified stock options to our Chief Executive Officer that will vest based on the achievement of certain stock price targets. The stock-based compensation cost and derived service periods for these stock options were estimated using the Monte Carlo simulation method utilizing a volatility of 61.6% and a risk-free rate of 2.4%. The weighted-average fair value of these awards is $2.92 per share and the derived service periods range from approximately one and one-half years to approximately two years. As of September 30, 2011, no part of the grant had been achieved. If the targets are not met, the non-qualified stock options will expire on the third anniversary of the grant date.

A summary of our stock option activity for the nine months ended September 30, 2011 is as follows (in thousands):

		Shares
Options outstanding at December 31, 2010			5,709
Options granted			1,484
Options exercised			(198	)
Options forfeited			(483	)
Options expired			(260	)
Options outstanding at September 30, 2011			6,252

Restricted Stock Units

A summary of our non-vested Restricted Stock Units activity for the nine months ended September 30, 2011 is as follows (in thousands):

		Shares
Balance at December 31, 2010			447
RSUs granted			512
RSUs vested			(123	)
RSUs forfeited			(86	)
Balance at September 30, 2011			750

NOTE 15. COMPREHENSIVE INCOME

Comprehensive income consists of net income, foreign currency translation adjustments and net unrealized holding gains (losses) on available-for-sale investments. Our comprehensive income for the three months and nine months ended September 30, 2011 and 2010 is presented below (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Net income		$	6,592			$	19,948			$	39,084			$	39,784
Unrealized holding gain (loss) on available-for-sale securities			(25	)			6				(38	)			13
Cumulative translation adjustment			(271	)			4,074				1,497				(2,377	)
Comprehensive income		$	6,296			$	24,028			$	40,543			$	37,420

NOTE 16. 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, 2010		$	6
Unrealized holding loss, net of realized amounts reclassified to net income			(38	)
Balance at September 30, 2011			(32	)
Accumulated foreign currency translation adjustments:
Balance at December 31, 2010		$	27,068
Translation adjustments			1,497
Balance at September 30, 2011			28,565
Total accumulated other comprehensive income		$	28,533

NOTE 17. COMMITMENTS AND CONTINGENCIES

We are involved in disputes and legal actions from time to time in the ordinary course of our business.

We have firm purchase commitments and agreements with various suppliers to ensure the availability of components. The obligation at September 30, 2011 is approximately $65.4 million. Our policy with respect to all purchase commitments is to record losses, if any, when they are probable and reasonably estimable. We believe we have an adequate provision for potential exposure related to inventory on order which may go unused.

NOTE 18. RELATED PARTY TRANSACTIONS

During the three months and nine months ended September 30, 2011 and 2010, we had the following related party transactions (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Sales — related parties		$	1,266			$	4,878			$	3,820			$	7,047
Rent expense — related parties			575				713				1,732				2,154

Sales — Related Parties

Members of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are our customers. During the three months and nine months ended September 30, 2011 we had sales to two such companies as noted above and aggregate accounts receivable from three such customers totaled $1.0 million at September 30, 2011. During the three months and nine months ended September 30, 2010 we had sales to two such companies as noted above and aggregate accounts receivable from three such companies totaled $0.4 million at December 31, 2010.

Rent Expense — Related Parties

We lease our executive offices and manufacturing facilities in Fort Collins, Colorado from a limited liability partnership in which Douglas Schatz, our Chairman of the Board and former Chief Executive Officer, holds an interest. The leases relating to these spaces expire during 2015 and obligate us to total annual payments of approximately $2.4 million, which includes facilities rent and common area maintenance costs.

NOTE 19. SIGNIFICANT CUSTOMER INFORMATION

Applied Materials, Inc. is our largest customer and our only customer that accounts for 10% or more of our sales. Sales to Applied Materials as a percent of total sales for the three months and nine months ended September 30, 2011 and 2010 were as follows:

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Applied Materials			11	%			16	%			13	%			22	%

ULVAC, Inc. accounted for 11% of gross accounts receivable as of December 31, 2010. No other customer accounted for 10% or more of our gross accounts receivable as of September 30, 2011 or December 31, 2010.

NOTE 20. SEGMENT INFORMATION

During the first quarter of fiscal 2011, we began to operate as two reportable business segments. The creation of two business units, Thin Films and Solar Energy, has improved our execution and strategic focus in two distinct markets. The re-alignment of our businesses reflects the success of our strategy to maintain leadership in thin-film markets, while also expanding into high-growth renewable markets with our inverter product portfolio. The creation of these two business units will enable greater focus on each business’ unique needs and requirements, allowing each to expand and accelerate growth by better serving each of these very different industries.

Our chief operating decision maker and management personnel began reviewing our performance and making resource allocation decisions by reviewing the results of our two business segments separately. Revenue and operating profit is now reviewed by our chief operating decision maker, however, we have only divided inventory and property and equipment based on business segment. Due to the structure of our internal organization and the manner in which expenses were tracked and managed and as a result of the design of our internal systems during fiscal 2010, we were unable to recast related financial information by operating segment for fiscal 2010 and prior. As such, segment information, other than revenue, for the three months and nine months ended September 30, 2010 is not reported as it is impracticable to do so.

We are organized into the Thin Films and Solar Energy strategic business units (“SBU”) based on the products and services provided.

Thin Films Processing Power Conversion and Thermal Instrumentation (“Thin Films”) SBU offers our products for direct current (“DC”), pulsed DC mid frequency, and radio frequency (“RF”) power supplies, matching networks and RF instrumentation as well as thermal instrumentation products. Our Thin Films SBU principally serves original equipment manufacturers (“OEMs”) and end customers in the semiconductor, flat panel display, solar module and other capital equipment markets.

	•		Our power conversion systems refine, modify and control the raw electrical power from a utility and convert it into power that may be customized and is predictable and repeatable. Our power conversion systems are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage and architectural glass manufacturers.
	•		Our thermal instrumentation products provide temperature measurement solutions for applications in which time-temperature cycles affect material properties, productivity and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement.
	•		Our network of global service support centers offer repair services, conversions, upgrades and refurbishments to companies using our products.

Solar Energy SBU offers both a transformer-based or transformerless advanced grid-tied PV inverter solution for residential, commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. Our Solar Energy SBU focuses on residential, commercial and utility-scale solar projects and installations, selling primarily to distributors; engineering, procurement, and construction contractors; developers; and utility companies. Our Solar Energy revenue has seasonal variations. Installations of inverters are normally lowest during the first quarter as a result of typically poor weather and installation scheduling by our customers.

Revenue with respect to operating segments for the three months and nine months ending September 30, 2011 and 2010 is as follows (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Thin Films		$	76,764			$	103,616			$	274,194			$	256,736
Solar Energy			51,734				37,350				130,110				54,024
Total		$	128,498			$	140,966			$	404,304			$	310,760

Income from continuing operations before income taxes by operating segment for the three months and nine months ended September 30, 2011 is as follows (in thousands):

		Three Months Ended				Nine Months Ended
		September 30, 2011				September 30, 2011
Thin Films		$	16,015			$	60,881
Solar Energy			1,259				4,092
Total segment operating income			17,274				64,973
Corporate expenses			(6,600	)			(12,624	)
Other income (loss), net			(259	)			496
Income from continuing operations before income taxes		$	10,415			$	52,845

Segment assets consist of inventories and property and equipment, net. A summary of consolidated total assets by segment as of September 30, 2011 follows (in thousands):

Thin Films		$	62,437
Solar Energy			70,199
Total segment assets			132,636
Unallocated corporate property and equipment			1,023
Corporate assets			419,771
Consolidated total assets		$	553,430

“Corporate” is a non-operating business segment with the main purpose of supporting operations. Our amortization of intangibles is not allocated to business segment financial statements reviewed by our chief operating decision maker and management personnel. Unallocated corporate assets include accounts receivable, deferred income taxes and intangible assets.

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

Special Note on Forward-Looking Statements

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

For additional information regarding factors that may affect our actual financial condition, results of operations and accuracy of our forward-looking statements, see the information under the caption “Risk Factors” in Part II Item 1A of this Quarterly Report on Form 10-Q and, in our Annual Report on Form 10-K for the year ended December 31, 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 processing and etching for various products as well as grid-tied power conversion. We also supply thermal instrumentation products used for temperature control in the thin-film process. Our network of global service support centers provides local repair and field service capability in key regions.

	•		Our power conversion products refine, modify and control the raw electrical power from a utility and converts it into power that is predictable, repeatable and customizable. Our power conversion products are primarily used by semiconductor, solar panel and similar thin-film manufacturers including flat panel display, data storage and architectural glass manufacturers.
	•		Our thermal instrumentation products provide temperature measurement solutions for applications in which time-temperature cycles affect material properties, productivity and yield. These products are used in rapid thermal processing, chemical vapor deposition, and other semiconductor and solar applications requiring non-contact temperature measurement.
	•		Our grid-tied power conversion products offer both an advanced transformer-based or transformerless grid-tied PV solutions for residential, commercial and utility-scale system installations. Our PV inverters are designed to convert renewable solar power, drawn from large and small scale solar arrays, into high-quality, reliable electrical power. These products are used for residential, commercial and utility-scale solar projects and installations, and are sold primarily to distributors; engineering, procurement, and construction contractors; developers; and utility companies. These product revenues have seasonal variations. Installations of inverters are normally lowest during the first quarter of the year due to less favorable weather conditions and installation scheduling by our customers.
	•		Our network of global service support centers offer repair services, conversions, upgrades and refurbishments to businesses that use our products.

On May 3, 2010, we acquired PV Powered, Inc. (“PV Powered”), a privately-held Oregon corporation based in Bend, Oregon. PV Powered is a leading manufacturer of grid-tied PV inverters in the residential, commercial and utility-scale markets. We now provide our customers with solutions in a wider power range and an increased number of solar array opportunities where our products can be utilized.

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

During the first quarter of fiscal 2011, we began to operate as two reportable business segments. The creation of two business units, Thin Films and Solar Energy, has improved our execution and strategic focus in two distinct markets. This re-alignment of our businesses reflects the success of our strategy to maintain leadership in thin-film markets, while also expanding into high-growth renewable markets with our inverter product portfolio. The creation of these two units will enable greater focus on each business’ unique needs and requirements, allowing each to expand and accelerate growth by better serving each of these very different industries.

Due to the structure of our internal organization and the manner in which expenses were tracked and managed and, as a result of the design of our internal reporting systems during fiscal 2010, we were unable to recast related financial information by operating segment for fiscal 2010 and prior. As such, segment information, other than revenue, for the three months and nine months ended September 30, 2010 is not reported as it is impracticable to do so.

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.

Results of Operations

OVERALL RESULTS

The following table sets forth, for the three months and nine months ended September 30, 2011 and 2010, certain data from our Condensed Consolidated Statements of Operations (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Sales		$	128,498			$	140,966			$	404,304			$	310,760
Gross profit		$	48,847			$	60,690			$	166,269			$	134,456
Operating expenses			38,173				38,394				113,920				93,229
Operating income			10,674				22,296				52,349				41,227
Other income (loss), net			(259	)			1,224				496				1,828
Income from continuing operations before income taxes			10,415				23,520				52,845				43,055
Provision for income taxes			3,244				5,964				13,396				9,192
Income from continuing operations, net of income taxes		$	7,171			$	17,556			$	39,449			$	33,863