AEIS 2015 Annual Report Letter to Stockholders
Dear Fellow Stockholders:
2015 was a year of many accomplishments. Semiconductor revenues reached record highs and we
achieved double digit growth in revenues, operating income and earnings per share from continuing
operations. We announced a $150 million stock repurchase plan as part of our capital deployment
strategy and completed a $50 million accelerated share repurchase as the initial phase. With the wind
down of the solar inverter manufacturing business now complete, we increase our focus on addressing
the growing number of critical applications for our precision power products and technologies. Our
ability to consistently generate cash is enabling us to pursue these opportunities while simultaneously
repurchasing shares, returning value to our stockholders.
Our strong semiconductor results this year again exemplify our leading market position as we continue
to win designs and enable advanced applications for our customers. Our ongoing commitment to
investing in the development of products and technologies and expanding our core competencies is
resulting in notable successes. Specifically, these include radio frequency (RF) technology products and
accessories targeting advanced semiconductor Plasma Processes used in logic and memory applications
such as 3D NAND and DRAM, FinFET and advanced 3D packaging. As next-generation semiconductor
devices grow more complex and require more deposition and etch processes, our advanced RF power
solutions are in increasingly high demand. Our exposure to these areas should allow us to outpace the
broader wafer fab equipment market.
While the semiconductor market remains our primary driver, one of our strategic goals is to expand our
precision power products to address a broader range of industrial applications, both organically and
inorganically. During the year, we took further steps to integrate our three recent acquisitions by
leveraging our manufacturing and global distribution channels and further penetrating existing and new
markets worldwide. We extended our geographic presence by taking our hard coatings business beyond
the Europe, Middle East and Africa (EMEA) region to India, China and North America. We also
introduced our thermal products to global channel partners in the US, India and China. By forming
important new partnerships with large industrial automation companies such as Rockwell Automation
and Siemens, we are broadening our reach into various industrial markets. We continued to diversify
our addressable markets, accessing industries such as automotive, consumer electronics and defense for
hard coating applications. In the high voltage power market, we made significant headway across
applications such as defense, analytical equipment, mass spectrometry, industrial x-ray and electron
beam. As we establish footholds in these different applications and geographies, we plan to pursue
complementary product line acquisitions and continue our expansion into adjacent and new markets.
Precision Power service continues to be a strategic part of our business. With the high semiconductor
utilization rates seen in 2015 and the increasing focus on reducing the cost of wafer processing,
customers are realizing the value of our high quality service programs to lower the total cost of
ownership of their capital equipment. In conjunction with upgrades and retrofits, our service programs
as well as our enhanced sales efforts are driving share gains across Asia and North America, which
should result in steady, sustainable growth.
In 2015, we unveiled our capital allocation strategy. This program is centered on driving shareholder
value by investing in long-term growth opportunities and making share repurchases. We intend to use
70% of our future free cash flow to make organic investments and acquisitions. By continuing to invest
in R&D and drive technology advances, we are building on our leading position in the core markets we
serve and should benefit from the anticipated growth in semiconductors driven by the migration to next
generation devices. With the addition of acquired technologies and products, we are growing our
presence in various industrial markets – increasing our total available market. With the remaining 30%
of our future free cash flow, we plan to make share repurchases.
Overall, we are executing on our strategic plan to accelerate revenue growth, increase earnings per
share and effectively utilize our cash. With our focus entirely on precision power, we plan to significantly
broaden our product line, enter and expand into new geographies and address a growing list of
precision power applications, both organically and inorganically. Together with our consistently strong
cash generation, we remain committed to effectively deploying our cash and returning value to
stockholders. Our three year aspirational goals are to achieve revenues of $600 million to $700 million,
grow Non-GAAP EPS to $3.00 to $3.50 and generate cumulative cash flow of $250 million to $300
million. We are excited about the many opportunities that lay ahead as we further distinguish ourselves
from the competition.
We look forward to reporting our progress and want to thank all of our stockholders for their continued
support of Advanced Energy.
Yuval Wasserman
President & Chief Executive Officer
Advanced Energy Industries, Inc.
Forward-Looking Statements
This letter to stockholders contains 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, including, among others, statements regarding
our plans and goals, our performance and the performance of our competitors for periods that are not historical,
ongoing investment, acquisitions and expansion, growth of our business, growth in our market share, growth in the
markets we serve, share repurchases and cash deployment that are not historical and similar statements. Forward-
looking statements are subject to known and unknown risks and uncertainties that could cause actual results to
differ materially from those expressed or implied by such statements. Such risks and uncertainties include, but are
not limited to: (a) the effects of global macroeconomic conditions upon demand for our products; (b) the volatility
and cyclicality of the industries the company serves, particularly the semiconductor industry; (c) delays in capital
spending by end-users in our served markets; (d) the accuracy of the company’s estimates related to fulfilling Solar
inverter product warranty and post-warranty obligations; (e) the company’s ability to realize on its plan to avoid
additional costs after the Solar inverter wind-down; (f) the accuracy of the company's estimates and assumptions
on which its financial statement projections are based; (g) the impact of price changes, which may result from a
variety of factors; (h) the timing of orders received from customers; (i) the company’s ability to realize benefits
from cost improvement efforts including avoided costs, restructuring plans and inorganic growth; (j) the company’s
ability to obtain in a timely manner the materials necessary to manufacture its products; and (k) unanticipated
changes to management's estimates, reserves or allowances. These and other risks are described in Advanced
Energy's Form 10-K, Forms 10-Q and other reports and statements filed with the Securities and Exchange
Commission (the “SEC”). These reports and statements are available on the SEC's website at www.sec.gov. Copies
may also be obtained from Advanced Energy's investor relations page at http://ir.advanced-energy.com or by
contacting Advanced Energy's investor relations at 970-407-6555. Forward-looking statements are made and based
on information available to the company on the date of this letter to stockholders. Aspirational goals and targets
discussed on the conference call or in the presentation materials should not be interpreted in any respect as
guidance. The company assumes no obligation to update the information in this letter to stockholders.
© Copyright 2016 Advanced Energy Industries, Inc. All rights reserved.
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-K
________________________________________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2015.
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from to .
Commission file number: 000-26966
ADVANCED ENERGY INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
1625 Sharp Point Drive, Fort Collins, CO
(Address of principal executive offices)
84-0846841
(I.R.S. Employer Identification No.)
80525
(Zip Code)
Registrant’s telephone number, including area code: (970) 221-4670
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value
Name of each exchange on which registered
NASDAQ Global Select Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes
No
Securities registered pursuant to section 12(g) of the Act: None
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
No
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 during the preceding 12 months (or for such shorter period
No
that the registrant was required to submit and post such files). Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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
Accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
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
No
The aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $1,127,440,745 as of June 30,
2015, based upon the price at which such common stock was last sold on such date. For purposes of this disclosure, shares of common stock
held by persons who hold more than 5% of the outstanding common stock and common stock held by executive officers and directors of the
registrant have been excluded because such persons are deemed to be “affiliates” as that term is defined under the rules and regulations
promulgated under the Securities Act of 1933. This determination is not necessarily conclusive for other purposes.
39,850,932
(Number of shares of Common Stock outstanding as of February 23, 2016)
DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Annual Report on Form 10-K incorporates information by reference from the registrant’s definitive proxy statement for its
2015 Annual Meeting of Stockholders, scheduled to be held on May 5, 2016. Except as expressly incorporated by reference, the registrant’s
definitive proxy statement shall not be deemed to be a part of this Annual Report on Form 10-K.
ADVANCED ENERGY INDUSTRIES, INC.
FORM 10-K
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2. PROPERTIES
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
ITEM 6. SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
SIGNATURES
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
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PART I
Unless the context otherwise requires, as used in this Form 10-K, references to “Advanced Energy”, “the
Company”, “we”, “us” or “our” refer to Advanced Energy Industries, Inc. and its consolidated subsidiaries.
ITEM 1.
BUSINESS
Overview
Advanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and control
solutions to our global customers. We do this by designing, manufacturing, selling and supporting our power conversion products
and solutions that transform power into various usable forms in various applications ranging from manufacturing and industrial
processes to instrumentation and test and measurement. The market for power conversion solutions is large with hundreds of
suppliers and subsystem/component manufacturers. We focus on highly-engineered products that solve our customers’ toughest
mission-critical applications.
Our process power products enable manufacturing processes that use thin films for various products, such as
semiconductor devices, flat panel displays, thin film renewables, hard and industrial coatings and architectural glass. We also
supply power control modules for controlling thermal processes, and thermal instrumentation products for advanced temperature
measurement, both of which provide solutions for thin film semiconductor, thin film industrial, and heavy industry. Our remote
plasma sources are used in the thin films processing industries and in gas abatement applications. Our high voltage products
offer unique power solutions for semiconductor, analytical instrumentation, industrial x-ray, and medical imaging applications.
Our network of global service support centers provides revenue as we offer repair services, conversions, upgrades, and
refurbishments to companies using our products.
On January 27, 2014, we acquired the intellectual property related to AEG Power Solutions' Power Control Modules
("PCM"). PCM is comprised of the Thyro-Family of products and accessories and serves numerous power control applications
in different industries ranging from materials' thermal processing through chemical processing, glass manufacturing and
numerous other general industrial power applications. This acquisition broadens our product offerings and was added to our
Precision Power portfolio.
On April 12, 2014, we acquired all outstanding common stock of HiTek Power Group ("HiTek"), a privately-held
provider of high voltage power solutions. Based in the United Kingdom, HiTek offers a comprehensive portfolio of high voltage
and custom built power conversion products, ranging from 100V to 500kV, designed to meet the demanding requirements of
original equipment manufacturers ("OEM") worldwide. These products target applications including semiconductor wafer
processing and metrology, scientific instrumentation, mass spectrometry, industrial printing, and analytical x-ray systems for
industrial and analytical applications. HiTek's unique product architecture, encapsulation technology and control algorithms,
combined with deep knowledge of its customer-specific applications, have made it a leading provider of critical, high-end, high
voltage power solutions. We acquired HiTek to expand our product offerings in our Precision Power portfolio.
On August 4, 2014, we acquired all outstanding common stock of UltraVolt, Inc. ("UltraVolt"), a privately-held provider
of high voltage power solutions. Based in Ronkonkoma, New York, UltraVolt offers a comprehensive portfolio of high voltage
power supplies and modules ranging from benchtop and rack mount systems to microsize printed circuit board mount modules.
Its standard DC-to-DC product line consists of over 1,500 models, which can be combined with accessories and options to create
thousands of product configurations. Serving over 100 markets, UltraVolt's fixed-frequency, high voltage topology provides
wide input and output operating ranges while retaining excellent stability and efficiencies. We acquired UltraVolt to expand our
high voltage product offerings in our Precision Power portfolio. Note 2. Business Acquisitions in ITEM 8 "Financial Statements
and Supplementary Data," describes the acquisitions of PCM, HiTek, and UltraVolt.
We incorporated in Colorado in 1981 and reincorporated in Delaware in 1995. Our executive offices are located at
1625 Sharp Point Drive, Fort Collins, Colorado 80525, and our telephone number is 970-407-4670.
Products and Services
Our products are designed to enable new process technologies, improve productivity, and lower the cost of ownership
for our customers. We also provide repair and maintenance services for all of our products.
In 2014, we changed our organizational structure from two business units (formerly known as the Thin Films Business
Unit and the Solar Energy Business Unit) to a single functional organization with various product lines organized as reportable
segments, Precision Power and Inverters. However, as of December 31, 2015, we have discontinued our Inverter production,
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engineering, and sales product line representing a strategic shift in our business. As such, all Inverter revenues, costs, assets and
liabilities are reported in Discontinued Operations for all periods presented herein and we currently report as a single unit.
We principally serve OEMs and end customers in the semiconductor, flat panel display, high voltage, solar panel,
and other industrial capital equipment markets. Our products are used in diverse markets, applications, and processes including
the manufacture of capital equipment for semiconductor devices, thin film applications for thin film renewables and architectural
glass, and for other thin film applications including flat panel displays, data storage, and industrial coatings. These markets can
be cyclical in nature. Therefore, demand for our products and our financial results can change as demand for manufacturing
equipment and repair and maintenance services change in response to consumer demand. Other factors, such as global economic
and market conditions and technological advances in fabrication processes and renewable applications can also have an impact
on our financial results, both positively and negatively.
Our thin film deposition power conversion systems include direct current ("DC"), pulsed DC low frequency, high
voltage, and radio frequency ("RF") power supplies, matching networks, remote plasma sources for reactive gas applications
and RF instrumentation. These 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, industrial
hard coating and ophthalmic optical coating equipment makers, and architectural glass manufacturers.
Our power control modules and thermal instrumentation products are used in the semiconductor industry, including
adjacent thin film applications for solar PV and light emitting diode ("LED") industries, and heavy industries, for thermal control
and 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, crystal growing, and other
semiconductor and solar applications requiring non-contact temperature measurement. They are also used in chemical processing,
glass manufacturing and numerous other general industrial power applications.
Our global support services group offers in-warranty and out-of-warranty repair services in the regions in which we
operate, providing us with preventive maintenance opportunities. Our customers continue to pursue low cost of ownership of
their capital equipment and are increasingly sensitive to the significant costs of system downtime. They expect that suppliers
offer comprehensive local repair service and customer support. To meet these market requirements, we maintain a worldwide
support organization comprising of both direct and indirect activities through partnership with local distributors primarily in the
United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Germany, and Great Britain.
Effective with the conclusion of our inverter wind-down on December 31, 2015, we consider all inverter new product
warranties historically sold to be discontinued operations. However, extended warranties historically sold and reflected as
“Deferred Revenue” on our Consolidated Balance Sheets, represent future revenue and service costs to be incurred by our global
services group and are reflected as continuing operations for historical periods and future periods. Please See Note 3. Discontinued
Operations in PART II ITEM 8 "Financial Statements and Supplementary Data."
Markets
Our products compete in markets for high tech manufacturing capital equipment and renewable energy production.
Our markets are not generally subject to seasonality; however, these markets are cyclical due to sudden changes in customers’
manufacturing capacity requirements and spending, which depend in part on capacity utilization, demand for customers’ products,
inventory levels relative to demand, government incentives and subsidies, and access to affordable capital. For more information
related to the markets in which we compete and the current environment in those markets, please see Business Environment and
Trends in Item 7. Management's Discussion and Analysis.
SEMICONDUCTOR CAPITAL EQUIPMENT
Customers in the semiconductor capital equipment market incorporate our products into equipment that make
integrated circuits. Our power conversion systems provide the energy to enable thin film processes, such as deposition and etch,
and high voltage applications such as ion implant. Our thermal instrumentation products measure the temperature of the processed
substrate or the process chamber. Our remote plasma sources deliver ionized gases for reactive chemical processes used in
cleaning, surface treatment, and gas abatement. Precise control over the energy delivered to plasma-based processes enables
the production of integrated circuits with reduced feature sizes and increased speed and performance.
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SOLAR PANEL CAPITAL EQUIPMENT
We sell our products to OEMs and manufacturers of solar cells who use our products to produce thin films using
silicon substrates, as well as glass or metal substrates. The majority of solar cell manufacturing currently uses a silicon wafer
as the substrate and employs chemical vapor deposition ("CVD") thin film processing. The solar cell industry has developed
processes for manufacturing solar cells on non-silicon substrates, such as glass and metal by using thin film processes that
employ CVD tools. Our RF and DC power supply products are designed for use in these CVD and physical vapor deposition
("PVD") tools. Our products are used in leading thin film solar cell technologies, including amorphous and microcrystalline
silicon, copper, indium, gallium, selenide, and cadmium telluride.
FLAT PANEL DISPLAY CAPITAL EQUIPMENT
Manufacturers of flat panel displays use thin film processes similar to those employed in manufacturing semiconductor
integrated circuits. Flat panel display technology produces bright, sharp, large, color-rich images on flat screens for products
ranging from hand-held devices to laptop and desktop computer monitors and flat TVs. This technology is used in manufacturing
liquid crystal display, LED backlit, and 3-dimensional ("3D") television screens. The transition to larger panel sizes and higher
display resolution is driving the need for tighter process controls to reduce manufacturing costs and defects. Increased focus
on user experience and interface drives the use for new materials and device architecture such as organic light-emitting diode
("OLED") and active-matrix organic light-emitting diode ("AMOLED") and new technologies for touch screen. The emerging
migration to flexible display drives the development of new materials and thin film technologies for encapsulation.
DATA STORAGE CAPITAL EQUIPMENT
Data storage equipment manufacturers use our products in their capital equipment which allows them to produce a
variety of products, including optical disks, such as CDs, DVDs and Blu-ray, and magnetic storage, such as computer hard discs,
including both magnetic media and thin film heads. These products use a PVD process to produce optical and magnetic thin
film layers, as well as a protective-wear layer. In this market, the trend towards higher recording densities requires thinner and
more precise films. The use of equipment incorporating optical and magnetic media to store digital data expands with the growth
of the laptop, desktop and network server computer markets, and consumer electronics including audio, video, gaming, cell
phone, and entertainment markets.
ARCHITECTURAL GLASS CAPITAL EQUIPMENT
Low Emissivity or Low-E architectural glass manufacturers use our power supplies in their production equipment.
This glass is used in commercial and residential buildings to reduce energy absorption and loss through the use of thin films
coated directly on the glass which reduces the energy absorbed in the building. The thin film deposition process employs PVD
tools which use our DC and mid-frequency power products. This market is driven by end market demand for glass related to
the residential and commercial construction industry.
INDUSTRIAL PRODUCTS CAPITAL EQUIPMENT
The thin film deposition processes are also used in the manufacturing process of products for a variety of industrial
and consumer markets. Our process power solutions allow thin films to be applied to products in plasma-based processes to
strengthen and harden surfaces on such diverse products as machine tools, automotive parts, and various other end products.
The advanced thin film production processes allow precise control of various optical and physical properties, including color,
transparency, and electrical and thermal conductivity. The improved adhesion and specular surfaces resulting from plasma-based
processing make it the preferred method of applying thin films. The need for improved films properties for both hard coating
and optical coating requires a precision power conversion technology which we achieved through the acquisition of Solvix
products and technology.
Customers
Our products are sold worldwide to approximately 316 OEMs and integrators and directly to more than 1,771 end
users. Our ten largest customers accounted for approximately 61.2% of our sales in 2015, 59.7% of our sales in 2014, and 61.6%
of our sales in 2013. We expect that the sale of products to our largest customers will continue to account for a significant
percentage of our sales for the foreseeable future.
Applied Materials Inc., our largest customer, accounted for 29.8% of our sales in 2015 and 2014, and 32.1% of our
sales in 2013. Lam Research accounted for 20.3% of our sales in 2015, 19.9% of our sales in 2014, and 16.8% of our sales in
2013. No other customer accounted for greater than 10% of our sales in 2015, 2014, or 2013. The loss of Applied Materials,
Inc. or Lam Research as a customer could have a material adverse effect on our results of operations.
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Backlog
Our backlog was approximately $43.7 million at December 31, 2015, a 31.5% decrease from $63.8 million at
December 31, 2014. This decrease resulted primarily from the pause in investment in the semiconductor capital equipment
markets in the fourth quarter of 2015. We expect overall growth in backlog as the semiconductor market rebounds in 2016. For
more information related to our expectations for the markets we serve, please see Business Environment and Trends in Item 7.
Management's Discussion and Analysis. Backlog orders are firm orders scheduled to be filled and shipped in the next 12 months
and include our just-in-time supply agreements with major OEM’s.
Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer
production demand pull systems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible
cancellation penalties. Delays in delivery schedules and/or customer changes to backlog orders during any particular period
could cause a decrease in sales and have a material adverse effect on our business and results of operations.
Marketing, Sales and Distribution
We sell our products through direct and indirect sales channels in North America, Europe, and Asia. Our sales operations
are primarily located in the United States, the PRC, the United Kingdom, Germany, Japan, South Korea, India, Singapore, and
Taiwan. In addition to a direct sales force, we have independent sales representatives and distributors that support our selling
efforts. We maintain customer service offices at many of the locations listed above, as well as other sites near our customers'
locations. We believe that customer service and technical support are important competitive factors and are essential to building
and maintaining close, long-term relationships with our customers.
The following table presents our net sales by geographic region for the years ended December 31, 2015, 2014, and
2013. Sales are attributed to individual countries based on customer location.
Sales to external customers:
United States
Canada
North America
People's Republic of China
Other Asian countries
Asia
Germany
United Kingdom
Other European Countries
Europe
Total sales
2015
Years ended December 31,
2014
(In thousands)
2013
$
$
$
268,257
195
268,452
$
230,843
347
231,190
12,687
61,839
74,526
46,719
25,100
14
71,833
414,811
$
12,903
56,938
69,841
43,343
22,670
289
66,302
367,333
$
169,362
93
169,455
27,420
62,706
90,126
31,651
5,752
2,397
39,800
299,381
Total sales to all foreign countries totaled $146.6 million, $136.5 million, and $130.0 million in the years ended
December 31, 2015, 2014, and 2013, respectively.
See “Risk Factors” in Item 1A for a discussion of certain risks related to our foreign operations.
Manufacturing
The manufacturing of our Precision Power related products is performed in Shenzhen, PRC; Ronkonkoma, New
York; and Littlehampton, United Kingdom. Manufacturing in these three locations, primarily the PRC, exposes us to risks, such
as exchange controls and currency restrictions, changes in local economic conditions, changes in PRC laws and regulations,
government actions, and unsettled political conditions. The thermal instrumentation product line is manufactured in Vancouver,
Washington.
Manufacturing requires raw materials, including a wide variety of mechanical and electrical components, to be
manufactured to our specifications. We use numerous companies, including contract manufacturers, to supply parts for the
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manufacture and support of our products. Although we make reasonable efforts to assure that parts are available from multiple
qualified suppliers.
Some key parts may be obtained from a sole supplier or a limited group of suppliers. We seek to reduce costs and to
lower the risks of production and service interruptions, as well as shortages of key parts by:
•
selecting and qualifying alternate suppliers for key parts using rigorous technical and commercial evaluation of suppliers'
products and business processes including testing their components' performance, quality, and reliability on our power
conversion product at our customers' and their customer's processes. The qualification process for Precision Power,
particularly as it pertains to semiconductor customers, follows semiconductor industry standard practices, such as “copy
exact”;
• monitoring the financial condition of key suppliers;
• maintaining appropriate inventories of key parts, including making last time purchases of key parts when notified by
suppliers that they are ending the supply of those parts;
•
•
•
qualifying new parts on a timely basis and in geographies that reduce costs without degradation in quality;
locating certain manufacturing operations in areas that are closer to suppliers and customers; and
competitively sourcing parts through electronic bidding tools to ensure the lowest total cost is achieved for the parts
needed in our products.
Intellectual Property
We seek patent protection for inventions governing new products or technologies as part of our ongoing research and
development. We currently hold 104 United States patents and 62 foreign-issued patents, and have 116 patent applications
pending in the United States, Europe and Asia. A substantial majority of our patents relate to our Precision Power business.
Generally, our efforts to obtain international patents have been concentrated in the industrialized countries within Europe and
Asia because there are other manufacturers and developers of power conversion and control systems in those countries, as well
as customers for those systems for which our intellectual property applies.
Litigation may, from time to time, be necessary to enforce patents issued to us, to protect trade secrets or know-how
owned by us, to defend us against claimed infringement of the rights of others, or to determine the scope and validity of the
proprietary rights of others. See "Risk Factors — We are highly dependent on our intellectual property" in Item 1A.
Competition
The markets we serve are highly competitive and characterized by rapid technological development and changing
customer requirements. No single company dominates any of our markets. Significant competitive factors in our markets include
product performance, compatibility with adjacent products, price, quality, reliability, and level of customer service and support.
We have seen an increase in global competition in the markets in which we compete, especially from Asian and
European-based component suppliers. We encounter substantial competition from foreign and domestic companies for each of
our product lines. Some of our competitors have greater financial and other resources than we do. In some cases, competitors
are smaller than we are, but are well established in specific product niches. MKS Instruments, Inc. ("MKSI"), Comdel, Inc.,
Daihen Corporation, Kyosan Electric Mfg. Co., Ltd., Hüttinger Elektronik GmbH, Comet Holding AG, New Plasma Products
(NPP), Entech, Plasmart (now a division of MKSI), and ADTech compete with our power conversion products for thin film
processing. Spellman High Voltage, Crane, and Matsusada Precision offer products that compete with our high voltage products.
Lumasense Technologies, CI Systems, BASF, and Laytec GmbH offer products that compete with our thermal instrumentation
products. Eurotherm by Schneider Electric, Control Concepts Inc., CD Automation, and Spang Power Electronics offer products
that compete with our power control modules.
Additionally, a focus on local content is causing new competitors to emerge around the world, with strong support
from local governments, industry leaders, and investors.
Our ability to continue to compete successfully in these markets depends on our ability to make timely introductions
of product enhancements and new products, to localize these development and production activities in key world regions, and
to produce quality products. We expect our competitors will continue to improve the design and performance of their products,
and introduce new products with competitive performance characteristics. We believe that we currently compete effectively
with respect to these factors, although we cannot assure that we will be able to compete effectively in the future.
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Research and Development
The market for our precision power conversion, thermal, and high voltage products is characterized by ongoing
technological changes. We believe that continued and timely development of new highly differentiated products and
enhancements to existing products to support end user and OEM requirements is necessary for us to maintain a competitive
position in the markets we serve. Accordingly, we continue to devote a significant portion of our personnel and financial resources
to research and development projects and seek to maintain close relationships with our key customers and other industry leaders
in order to remain responsive to their product requirements now and in the future.
Research and development expenses were $39.6 million in 2015, $36.9 million in 2014, and $35.4 million in 2013,
representing 9.5% of our sales in 2015, 10.0% of our sales in 2014, and 11.8% of our sales in 2013.
Employees
As of December 31, 2015, we had a total of 1,382 employees. Our employees are not represented by unions, except
for statutory organization rights applicable to our employees in the PRC, and we have never experienced an involuntary work
stoppage. We believe that our continued success depends, in part, on our ability to attract and retain qualified personnel. We
consider our relations with our employees to be good.
Effect of Environmental Laws
We are subject to federal, state, and local environmental laws and regulations, as well as the environmental laws and
regulations of the foreign federal and local jurisdictions in which we have manufacturing facilities. We believe we are in material
compliance with all such laws and regulations.
Compliance with federal, state, and local laws and regulations has not had, and is not expected to have, an adverse
effect on our capital expenditures, competitive position, financial condition, or results of operations.
Website Access
Our website address is www.advancedenergy.com. We make available, free of charge on our website, our Annual
Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to these reports as
soon as reasonably practicable after filing such reports with, or furnishing them to, the Securities and Exchange Commission
(“SEC”). Such reports are also available at www.sec.gov. Information contained on our website is not incorporated by reference
in, or otherwise part of, this Annual Report on Form 10-K nor any of our other filings with the SEC.
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K includes or incorporates by reference “forward-looking statements” within the
meanings of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. All statements contained or incorporated by reference in this Annual Report on Form 10-K, other than statements
of historical fact, are “forward-looking statements.” For example, statements relating to our beliefs, expectations, plans,
projections, forecasts, goals, and estimates are forward-looking statements, as are statements that specified actions, conditions,
or circumstances will continue or change. Forward-looking statements involve risks and uncertainties. In some cases, forward-
looking statements can be identified by the inclusion of words such as "believe," "expect," "plan," "anticipate," "estimate,"
"may," "might," "could," "should," "will," "continue," "intend," and similar words.
Some of the forward-looking statements in this Annual Report on Form 10-K are, or reflect, our expectations or
projections relating to:
•
•
•
•
•
our future revenues;
our future sales, including backlog orders;
unanticipated costs in fulfilling our warranty obligations for solar inverters;
our future gross profit;
our competition;
• market acceptance of, and demand for, our products;
•
the fair value of our assets and financial instruments;
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•
•
•
•
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•
•
•
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research and development expenses;
selling, general, and administrative expenses;
sufficiency and availability of capital resources;
capital expenditures;
our share repurchase program;
our tax assets and liabilities;
our other commitments and contingent liabilities;
adequacy of our reserve for excess and obsolete inventory;
adequacy of our warranty reserves;
restructuring activities and expenses;
the integration of our acquisitions;
general global economic conditions; and
industry trends.
Our actual results could differ materially from those projected or assumed in our forward-looking statements because
forward-looking statements by their nature are subject to risks and uncertainties. Factors that could contribute to these differences
or prove our forward-looking statements, by hindsight, to be overly optimistic or unachievable include the factors described in
“Risk Factors” in Item 1A. Other factors might also contribute to the differences between our forward-looking statements and
our actual results. We assume no obligation to update any forward-looking statement or the reasons why our actual results might
differ.
Executive Officers of the Registrant
Our executive officers, their positions and their ages as of December 31, 2015 are as follows:
Yuval Wasserman, 61, is our President & Chief Executive Officer and was appointed to the Board of Directors on
October 1, 2014. Mr. Wasserman joined us in August 2007 as Senior Vice President, Sales, Marketing and Service. In October
2007, he was promoted to Executive Vice President, Sales, Marketing and Service. In April 2009, he was promoted to Executive
Vice President and Chief Operating Officer of the Company and then in August 2011 he was promoted to President of the Thin
Films Business Unit. Beginning in May 2002, Mr. Wasserman served as the President, and later as Chief Executive Officer, of
Tevet Process Control Technologies, Inc., a semiconductor metrology company, until July 2007. Prior to that, he held senior
executive and general management positions at Boxer Cross (a metrology company acquired by Applied Materials, Inc.), Fusion
Systems (a plasma strip company that is a division of Axcelis Technologies, Inc.), and AG Associates (a semiconductor capital
equipment company focused on rapid thermal processing). Mr. Wasserman started his career at National Semiconductor, Inc.,
where he held various process engineering and management positions. Mr. Wasserman joined the board of Syncroness, Inc., an
outsourced engineering and product development company, in 2010. Mr. Wasserman is a National Association of Corporate
Directors (NACD) Governance Fellow. Mr. Wasserman holds a BsC in chemical engineering from Ben Gurion University in
Beer Sheva, Israel.
Thomas Liguori, 57, joined us in May 2015 as Executive Vice President and Chief Financial Officer. Prior to joining
Advanced Energy, he served as Executive Vice President and Chief Financial Officer at Multi-Fineline Electronix, Inc. since
2008. Multi-Fineline Electronix, Inc. is one of the world’s largest producers of flexible printed circuits and flexible circuit
assemblies. Prior to Multi-Fineline Electronix, Inc., Mr. Liguori served as Chief Financial Officer at Hypercom, Inc. from
November 2005 to February 2008, where he designed and built the global finance and administration functions. From February
2005 to November 2005, Mr. Liguori served as Vice President, Finance and Chief Financial Officer at Iomega Corporation, a
publicly traded provider of storage and network security solutions, and from April 2000 to February 2005, as Chief Financial
Officer at Channell Commercial Corporation, a publicly traded designer and manufacturer of telecommunications equipment.
Prior to that time, Mr. Liguori served as Chief Financial Officer of Dole Europe for Dole Food Company, serving as the top-
ranking financial and IT executive in Dole’s operations in Europe, Africa and the Middle East, and as Vice President of Finance
at Teledyne. Mr. Liguori began his career with Honeywell and served as a management consultant with Deloitte & Touche LLP.
Mr. Liguori holds a Bachelor’s in Business Administration, Summa Cum Laude, from Boston University and completed a
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Master’s in Business Administration in Finance, Summa Cum Laude, from Arizona State University. He is a Certified
Management Accountant and a Certified Financial Manager.
Thomas O. McGimpsey, 54, joined us in April 2009 as Vice President and General Counsel and was promoted to
Executive Vice President of Corporate Development and General Counsel in August 2011 and held the corporate development
position until mid-2015. From February 2008 to April 2009, Mr. McGimpsey held the position of Vice President of Operations
at First Data Corporation. During 2007, Mr. McGimpsey was a consultant and legal advisor to various companies. From July
2000 to January 2007, Mr. McGimpsey held various positions with McDATA Corporation such as Executive Vice President of
Business Development & Chief Legal Officer, Senior Vice President & General Counsel and Vice President of Corporate
Development. From February 1998 to its sale in June 2000, Mr. McGimpsey held the position of Director and Senior Corporate
Attorney at US WEST, Inc. From 1991 to 1998, Mr. McGimpsey was in private practice at national law firms. From 1984 to
1988, Mr. McGimpsey was a Senior Engineer for Software Technology, Inc. In August 2014 Mr. McGimpsey was appointed to
the board of directors of CPP, Inc., a private company with international operations that provides wind engineering and air
quality consulting services. In July 2015, Mr. McGimpsey was appointed as a Commissioner to the Colorado Commission on
Higher Education. Mr. McGimpsey is a National Association of Corporate Directors (NACD) Governance Fellow.
Mr. McGimpsey received his Masters of Business Administration from Colorado State University (with honors), his Juris Doctor
degree from the University of Colorado and his Bachelor of Science degree in Computer Science (with a minor in electrical
systems) from Embry-Riddle Aeronautical University.
ITEM 1A.
RISK FACTORS
An investment in our common stock involves a number of very significant risks. You should carefully consider the
risks described below and the other information in this Annual Report before deciding whether to purchase shares of our common
stock.
Our business, financial condition, results of operations, and cash flow, could be materially adversely affected by any
of these risks. The value of shares of our common stock could decline due to any of these risks, and you may lose all or part of
your investment.
This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results
could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the
risks faced by us described below.
We generally have no long-term contracts with our customers requiring them to purchase any specified quantities from us.
Our sales are primarily made on a purchase order basis, and we generally have no long-term purchase commitments
from our customers, which is typical in the industries we serve. As a result, we are limited in our ability to predict the level of
future sales or commitments from our current customers, which may diminish our ability to allocate labor, materials, and
equipment in the manufacturing process effectively. In addition, we may accumulate inventory in anticipation of sales that do
not materialize, resulting in excess and obsolete inventory write-offs.
The industries in which we compete are subject to volatile and unpredictable cycles.
As a supplier to the global semiconductor, flat panel display, solar, and related industries, we are subject to business
cycles, the timing, length, and volatility of which can be difficult to predict. These industries historically have been cyclical due
to sudden changes in customers’ manufacturing capacity requirements and spending, which depend in part on capacity utilization,
demand for customers’ products, inventory levels relative to demand, and access to affordable capital. These changes have
affected the timing and amounts of customers’ purchases and investments in technology, and continue to affect our orders, net
sales, operating expenses, and net income. In addition, we may not be able to respond adequately or quickly to the declines in
demand by reducing our costs. We may be required to record significant reserves for excess and obsolete inventory as demand
for our products changes.
To meet rapidly changing demand in each of the industries we serve, we must effectively manage our resources and
production capacity. During periods of decreasing demand for our products, we must be able to appropriately align our cost
structure with prevailing market conditions, effectively manage our supply chain, and motivate and retain key employees. During
periods of increasing demand, we must have sufficient manufacturing capacity and inventory to fulfill customer orders, effectively
manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If we are not able to
timely and appropriately adapt to changes in our business environment or to accurately assess where we are positioned within
a business cycle, our business, financial condition, or results of operations may be materially and adversely affected.
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Cyclicality in the semiconductor equipment industry impacts our results of operations.
Our business is affected by the capital equipment expenditures of semiconductor manufacturers, which in turn is
affected by the current and anticipated market demand for integrated circuits and products using integrated circuits. The
semiconductor industry is cyclical in nature and has experienced periodic and severe downturns and upturns. Business conditions,
therefore, historically have changed rapidly and unpredictably.
Fluctuating levels of investment by semiconductor manufacturers could continue to materially affect our revenues
and operating results. Where appropriate, we will attempt to respond to these fluctuations with cost management programs aimed
at aligning our expenditures with anticipated revenue streams, which sometimes result in restructuring charges. Even during
periods of reduced revenues, we must continue to invest in research and development and maintain extensive ongoing worldwide
customer service and support capabilities to remain competitive, which may have a temporary adverse effect on our results of
operations. During periods of increased demand, we may have difficulty obtaining sufficient components and subassemblies or
increasing production quickly enough to meet our customers’ requirements.
Market pressures and increased low-cost competition may reduce or eliminate our profitability.
Our customers continually exert pressure on us to reduce our prices and extend payment terms. Given the nature of
our customer base and the highly competitive markets in which we compete, we may be required to reduce our prices or extend
payment terms to remain competitive. We have recently seen pricing pressure from our largest customers due in part to low-
cost competition and market consolidation. We believe some of our Asian competitors benefit from local governmental funding
incentives and purchasing preferences from end-user customers in their respective countries. Moreover, in order to be successful
in the current competitive environment, we are required to accelerate our investment in research & development to meet time-
to-market, performance and technology adoption cycle needs of our customers simply in order to compete for design wins, and
if successful, receive potential purchase orders. Given such up-front investments we have to make and the competitive nature
of our markets, we may not be able to reduce our expenses in an amount sufficient to offset potential margin declines or loss of
business, and may not be able to meet customer product timeline expectations. The decrease in cash flow could materially and
adversely impact our financial condition.
A significant portion of our sales and accounts receivable are concentrated among a few customers.
Our ten largest customers accounted for 61.2% of our sales for the year ended December 31, 2015 and 59.7% of our
sales for the year ended December 31, 2014. During the year ended December 31, 2015, sales to Applied Materials, Inc. and
LAM Research were $123.5 million and $84.2 million or 29.8% and 20.3%, respectively. During the year ended December 31,
2014 sales to Applied Materials, Inc., and LAM Research were $109.3 million and $73.0 million, or 29.8% and 19.9%,
respectively. Our sales to Applied Materials, Inc. and LAM Research include precision power 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 competitive position could be weakened if we are unable to convince end users to specify that our products be used in
the equipment sold by our customers.
The end users in our markets may direct equipment manufacturers to use a specified supplier’s product in their equipment
at a particular facility. This occurs with frequency because our products are critical in manufacturing process control for thin-
film applications. Our success, therefore, depends in part on our ability to have end users specify that our products be used at
their facilities. In addition, we may encounter difficulties in changing established relationships of competitors that already have
a large installed base of products within such facilities.
We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved
do not necessarily result in substantial sales.
The constantly changing nature of technology in the markets we serve causes equipment manufacturers to continually
design new systems. We must work with these manufacturers early in their design cycles to modify our equipment or design
new equipment to meet the requirements of their new systems. Manufacturers typically choose one or two vendors to provide
the components for use with the early system shipments. Selection as one of these vendors is called a design win. It is critical
that we achieve these design wins in order to retain existing customers and to obtain new customers.
We believe that equipment manufacturers often select their suppliers based on factors including long-term relationships
and end user demand. Accordingly, we may have difficulty achieving design wins from equipment manufacturers who are not
currently our customers. In addition, we must compete for design wins for new systems and products of our existing customers,
including those with whom we have had long-term relationships. Our efforts to achieve design wins are time consuming,
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expensive, and may not be successful. If we are not successful in achieving design wins, or if we do achieve design wins but
our customers’ systems that utilize our products are not successful, our business, financial condition, and results of operations
could be materially and adversely impacted.
Once a manufacturer chooses a component for use in a particular product, it is likely to retain that component for the
life of that product. Our sales and growth could experience material and prolonged adverse effects if we fail to achieve design
wins. However, design wins do not always result in substantial sales, as sales of our products are dependent upon our customers’
sales of their products.
Our legacy inverter products may suffer higher than anticipated damage or warranty claims.
Our legacy inverter products (of which we discontinued the manufacture and sale in December 2015 and which are
reflected as Discontinued Operations in this filing) contain components that may contain errors or defects and were sold with
original product warranties ranging from one to ten years with an option to purchase additional warranty coverage for up to 20
years. If any of our products are defective or fail because of their design, we might be required to repair, redesign or recall those
products, pay damages (including liquidated damages) or warranty claims, and we could suffer significant harm to our reputation.
We accrue a warranty reserve for estimated costs to provide warranty services including the cost of technical support, product
repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is
based on historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity
or increased costs associated with servicing those claims, our warranty accrual will increase, resulting in additional expenses
in the line "Loss from discontinued operations, net of tax” on our Consolidated Statement of Operations in future periods. We
plan to continue supporting inverter customers with service maintenance and repair operations. This includes performing service
to fulfill obligations under existing service maintenance contracts. There is no certainty that these can be performed profitably
and could be adversely affected by higher than anticipated product failure rates, loss of critical service technician skills, an
inability to obtain service parts, customer demands and disputes and cost of repair parts, among other factors. Please See Note
3. Discontinued Operations in ITEM 8 "Financial Statements and Supplementary Data."
Our products may suffer from defects or errors leading to damage or warranty claims.
Our products use complex system designs and components that may contain errors or defects, particularly when we
incorporate new technology into our products or release new versions. If any of our products are defective or fail because of
their design, we might be required to repair, redesign or recall those products, pay damages (including liquidated damages) or
warranty claims, and we could suffer significant harm to our reputation. We accrue a warranty reserve for estimated costs to
provide warranty services including the cost of technical support, product repairs, and product replacement for units that cannot
be repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future
conditions. To the extent we experience increased warranty claim activity or increased costs associated with servicing those
claims, our warranty accrual will increase, resulting in decreased gross profit. In 2014 and 2015, we have experienced increased
warranty costs for our legacy inverter product lines.
We maintain significant amounts of cash in international locations.
Given the global nature of our business, we have both domestic and international concentrations of cash and investments.
The value of our cash, cash equivalents, and marketable securities can be negatively affected by liquidity, credit deterioration,
financial results, economic risk, political risk, sovereign risk or other factors. As a result, we could incur a significant impairment
of our cash, cash equivalents, and marketable securities, which could materially adversely affect our financial condition and
results of operations. For example, our recently announced capital deployment strategy as described in the Liquidity section of
Item 7. Management's Discussion and Analysis of Financial Conditions and Results of Operation of this Form 10-K, may require
us to access debt markets and there can be no assurance that access to debt at favorable terms will exist.
Changes in tax laws, tax rates, or mix of earnings in tax jurisdictions in which we do business, could impact our future tax
liabilities and related corporate profitability
We are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations,
and administrative practices in various jurisdictions may be subject to significant change due to economic, political, and other
conditions, and significant judgment is required in evaluating and estimating our provision and accruals for these taxes. There
are many transactions that occur during the ordinary course of business for which the ultimate tax determination is uncertain.
Our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions where we have lower
statutory rates and higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions
for which we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses
and geographies and changes to our existing businesses, acquisitions (including integrations) and investments, changes in our
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deferred tax assets and liabilities and their valuation, and changes in the relevant tax, accounting, and other laws, regulations,
administrative practices, principles, and interpretations, including fundamental changes to the tax laws applicable to corporate
multinationals. The U.S., many countries in the European Union, and a number of other countries are actively considering
changes in this regard.
For example, on Oct. 5, 2015, the Organisation for Economic Co-operation and Development (OECD) issued the final
report on all 15 Base Erosion and Profit Shifting “BEPS” Action Plans. According to the OECD, the current rules have created
opportunities for Base Erosion and Profit Shifting, and suggest new rules whereby profits are taxed where economic activities
take place and value is created. OECD comments include new or reinforced international standards as well as concrete measures
to help countries tackle BEPS. Among the highlights of the OECD Final Reports are the new transfer pricing approach and
reinforced international standards on tax treaties, the setting of minimum standards on harmful tax practices, treaty abuse,
country-by-country reporting and dispute resolution, action items requiring national legislation particularly in hybrid mismatches
and interest restriction, and analytical reports with recommendations concerning digital economy and multilateral instruments.
If countries in which we operate adopt the OECD recommendations as outlined in the BEPS Action Plans, it is uncertain to what
extent the changes could impact the company
Difficulties with our enterprise resource planning (“ERP”) system and other parts of our global information technology
system could harm our business and results of operation.
Like many multinational corporations, we maintain a global information technology system, including software products
licensed from third parties. Any system, network or Internet failures, misuse by system users, the hacking into or disruption
caused by unauthorized access or loss of license rights could disrupt our ability to timely and accurately manufacture and ship
products or to report our financial information in compliance with the timelines mandated by the SEC. Any such failure, misuse,
hacking, disruptions or loss would likely cause a diversion of management's attention from the underlying business and could
harm our operations. In addition, a significant failure of our global information technology system could adversely affect our
ability to complete an evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley
Act of 2002.
If our network security measures are breached and unauthorized access is obtained to a customer's data or our data or our
information technology systems, we may incur significant legal and financial exposure and liabilities.
As part of our day-to-day business, we store our data and certain data about our customers in our global information
technology system. While our system is designed with access security, unauthorized access to our data, including any regarding
our customers, could expose us to a risk of loss of this information, loss of business, litigation and possible liability. These
security measures may be breached by intentional misconduct by computer hackers, as a result of third-party action, employee
error, malfeasance or otherwise. Additionally, third parties may attempt to fraudulently induce employees or customers into
disclosing sensitive information such as user names, passwords or other information in order to gain access to our customers'
data or our data, including our intellectual property and other confidential business information, or our information technology
systems. Because the techniques used to obtain unauthorized access, or to sabotage systems, change frequently and generally
are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate
preventative measures. Any security breach could result in a loss of confidence by our customers, damage our reputation, disrupt
our business, lead to legal liability and negatively impact our future sales.
We conduct manufacturing at only a few sites and our sites are not generally interchangeable.
Our power products for the semiconductor industry are manufactured in Shenzhen, PRC. Our high voltage products
are manufactured in Ronkonkoma, New York and Littlehampton, United Kingdom. Our thermal instrumentation products that
are used in the semiconductor industry are manufactured in Vancouver, Washington. Each facility is under operating lease and
interruptions in operations could be caused by early termination of existing leases by landlords or failure by landlords to renew
existing leases upon expiration, including the possibility that suitable operating locations may not be available in proximity to
existing facilities which could result in labor or supply chain risks. For instance, our Shenzhen, PRC manufacturing facility
currently has a lease which expires in July 2017 that we are actively working on and expect to extend. Each facility manufactures
different products, and therefore, is not interchangeable. Natural or other uncontrollable occurrences at any of our manufacturing
facilities could significantly reduce our productivity at such site and could prevent us from meeting our customers’ requirements
in a timely manner, or at all. Our losses from any such occurrence could significantly affect our operations and results of
operations for a prolonged period of time.
Our restructuring and other cost-reduction efforts have included transitioning manufacturing operations to our facility
in Shenzhen from other manufacturing facilities, such as Fort Collins, Colorado and Littlehampton, UK, which renders us
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increasingly reliant upon our Shenzhen facility. A disruption in manufacturing at our Shenzhen facility, from whatever cause,
could have a significantly adverse effect on our ability to fulfill customer orders, our ability to maintain customer relationships,
our costs to manufacture our products and, as a result, our results of operations and financial condition.
Our results of operations could be affected by natural disasters and other events in the locations in which we or our
customers or suppliers operate.
We have manufacturing and other operations in locations subject to natural occurrences such as severe weather and
geological events including earthquakes or tsunamis that could disrupt operations. In addition, our suppliers and customers
also have operations in such locations. A natural disaster, fire, explosion, or other event that results in a prolonged disruption
to our operations, or the operations of our customers or suppliers, may materially adversely affect our business, results of
operations, or financial condition.
Our operations in the People’s Republic of China are subject to significant political and economic uncertainties over which
we have little or no control and we may be unable to alter our business practice in time to avoid reductions in revenues.
A significant portion of our operations outside the United States are located in the PRC, which exposes us to risks,
such as exchange controls and currency restrictions, changes in local economic conditions, changes in customs regulations,
changes in tax policies, changes in PRC laws and regulations, possible expropriation or other PRC government actions, and
unsettled political conditions. These factors may have a material adverse effect on our operations, business, results of operations,
and financial condition. Please see "We are exposed to risks associated with worldwide financial markets and the global economy"
risk factor above.
The PRC’s economy differs from the economies of most developed countries in many respects, including with respect
to the amount of government involvement, level of development, rate of growth, control of foreign exchange and allocation of
resources. While the economy of the PRC has experienced significant growth in the past 20 years, growth has been uneven
across different regions and amongst various economic sectors of the PRC. The PRC government has implemented various
measures to encourage economic development and guide the allocation of resources. Strikes by workers and picketing in front
of the factory gates of certain companies in Shenzhen have caused unrest among some workers seeking higher wages, which
could impact our manufacturing facility in Shenzhen. While some of the government's measures may benefit the overall economy
of the PRC, they may have a negative effect on us. For example, our financial condition and results of operations may be
materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable
to us as well as work stoppages.
We transitioned a significant amount of our supply base to Asian suppliers.
We transitioned the purchasing of a substantial portion of components for our thin film products to Asian suppliers
to lower our materials costs and shipping expenses. These components might require us to incur higher than anticipated testing
or repair costs, which would have an adverse effect on our operating results. Customers who have strict and extensive qualification
requirements might not accept our products if these lower-cost components do not meet their requirements. A delay or refusal
by our customers to accept such products, as well as an inability of our suppliers to meet our purchasing requirements, might
require us to purchase higher-priced components from our existing suppliers or might cause us to lose sales to these customers,
either of which could lead to decreased revenue and gross margins and have an adverse effect on our results of operations.
Our evolving manufacturing footprint may increase our risk.
The nature of our manufacturing is evolving as we continue to grow by acquisition. Historically, our principal
manufacturing location was in China; however, we have also added specialized manufacturing at our Littlehampton, UK and
Ronkonkoma, NY facilities. From time to time we may migrate manufacturing of specific products between facilities or to third
party manufacturers. If we do not successfully coordinate the timely manufacturing and distribution of our products during this
time, we may have insufficient supply of products to meet customer demand, we could lose sales, we may experience a build-
up in inventory, or we may incur additional costs.
Raw material, part, component, and subassembly shortages, exacerbated by our dependence on sole and limited source
suppliers, could affect our ability to manufacture products and systems and could delay our shipments.
Our business depends on our ability to manufacture products that meet the rapidly changing demands of our customers.
Our ability to timely manufacture our products depends in part on the timely delivery of raw materials, parts, components, and
subassemblies from suppliers. We rely on sole and limited source suppliers for some of our raw materials, parts, components,
and subassemblies that are critical to the manufacturing of our products.
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This reliance involves several risks, including the following:
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the inability to obtain an adequate supply of required parts, components, or subassemblies;
supply shortages, if a sole or limited source provider ceases operations;
the need to fund the operating losses of a sole or limited source provider;
reduced control over pricing and timing of delivery of raw materials and parts, components, or subassemblies;
the need to qualify alternative suppliers;
suppliers that may provide parts, components or subassemblies that are defective, contain counterfeit goods or are
otherwise misrepresented to us in terms of form, fit or function; and
the inability of our suppliers to develop technologically advanced products to support our growth and development of
new products.
Qualifying alternative suppliers could be time consuming and lead to delays in, or prevention of delivery of products
to our customers, as well as increased costs. If we are unable to qualify additional suppliers and manage relationships with our
existing and future suppliers successfully, if our suppliers experience financial difficulties including bankruptcy, or if our suppliers
cannot meet our performance or quality specifications or timing requirements, we may experience shortages, delays, or increased
costs of raw materials, parts, components, or subassemblies. This in turn could limit or prevent our ability to manufacture and
ship our products, which could materially and adversely affect our relationships with our current and prospective customers and
our business, financial condition, and results of operations. From time to time, our sole or limited source suppliers have given
us notice that they are ending supply of critical parts, components, and subassemblies that are required for us to deliver product.
In those cases, we have been required to make last time purchases of such supplies in advance of product demand from our
customers. If we cannot qualify alternative suppliers before these end-of-life supplies are utilized in our products or legacy
inverter warranty operations, we may be unable to deliver further product or legacy inverter warranty service to our customers.
To mitigate the risk of not having a supply of critical parts, components, and subassemblies for our products, we proactively
make additional purchases which we believe addresses such risk.
Our orders of raw materials, parts, components, and subassemblies are based on demand forecasts.
We place orders with many of our suppliers based on our customers’ quarterly forecasts and our annual forecasts. These
forecasts are based on our customers’ and our expectations as to demand for our products. As the quarter and the year progress,
such demand can change rapidly or we may realize that our customers’ expectations were overly optimistic or pessimistic,
especially when industry or general economic conditions change. Orders with our suppliers cannot always be amended in
response. In addition, in order to assure availability of certain components or to obtain priority pricing, we have entered into
contracts with some of our suppliers that require us to purchase a specified amount of components and subassemblies each
quarter, even if we are not able to use such components or subassemblies. Moreover, we have obligations to some of our customers
to hold a minimum amount of finished goods in inventory, in order to fulfill just in time orders, regardless of whether the
customers expect to place such orders. We currently have firm purchase commitments and agreements with various suppliers
to ensure the availability of components. See Note 18. Commitments and Contingencies in ITEM 8 "Financial Statements and
Supplementary Data" for more information on our commitments. If demand for our products does not continue at current levels,
we might not be able to use all of the components that we are required to purchase under these commitments and agreements,
and our reserves for excess and obsolete inventory may increase, which could have a material adverse effect on our results of
operations. If demand for our products exceeds our customers’ and our forecasts, we may not be able to timely obtain sufficient
raw materials, parts, components, or subassemblies, on favorable terms or at all, to fulfill the excess demand.
We are exposed to risks associated with worldwide financial markets and the global economy.
Our business depends on the expansion of manufacturing capacity in our end markets and the installation base for
the products we sell. In the past, severe tightening of credit markets, turmoil in the financial markets, and a weakening global
economy have contributed to slowdowns in the industries in which we operate. Some of our key markets depend largely on
consumer spending. Economic uncertainty, such as that recently experienced in the PRC, exacerbates negative trends in consumer
spending and may cause our customers to push out, cancel, or refrain from placing equipment orders.
Difficulties in obtaining capital and uncertain market conditions may also lead to a reduction of our sales and greater
instances of nonpayment. These conditions may similarly affect our key suppliers, which could affect their ability to deliver
parts and result in delays for our products. Further, these conditions and uncertainty about future economic conditions could
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make it challenging for us to forecast our operating results and evaluate the risks that may affect our business, financial condition,
and results of operations. As discussed in “Our orders of raw materials, parts, components, and subassemblies are based on
demand forecasts,” a significant percentage of our expenses are relatively fixed and based, in part, on expectations of future net
sales. If a sudden decrease in demand for our products from one or more customers were to occur, the inability to adjust spending
quickly enough to compensate for any shortfall would magnify the adverse impact of a shortfall in net sales on our results of
operations. Conversely, if market conditions were to unexpectedly recover and demand for our products were to increase suddenly,
we might not be able to respond quickly enough, which could have a negative impact on our results of operations and customer
relations.
We may not realize the expected results from the implementation of restructuring plans.
During the second quarters of 2013, 2014, and 2015, we implemented restructuring plans to align our cost structure
with current industry conditions in our business. As part of these restructuring plans we reduced staff, exited excess office and
warehouse space, relocated engineering and research and development resources closer to our customers, and transferred various
operating activities, such as supply chain management, manufacturing, engineering and other activities, to our Shenzhen, China
facility. This means we are even more dependent on our China-based operations. As with any restructuring initiative, there could
be many unintended results and there are always risks that execution may not meet expectations in the future. If we are unable
to effectively execute the initiatives under the plan or our customers' requirements change, we may not realize the expected
results or could incur restructuring charges greater than anticipated, which could materially affect our financial condition and
results of operations.
If we are unable to adjust our business strategy successfully for some of our product lines to reflect the increasing price
sensitivity on the part of our customers, our business and financial condition could be harmed.
Our business strategy for many of our product lines has been focused on product performance and technology
innovation to provide enhanced efficiencies and productivity. As a result of recent economic conditions and changes in various
markets that we serve, our customers have experienced significant cost pressures. We have observed increased price sensitivity
on the part of our customers. If competition against any of our product lines should come to focus solely on price rather than
on product performance and technology innovation, we will need to adjust our business strategy and product offerings accordingly,
and if we are unable to do so, our business, financial condition, and results of operations could be materially and adversely
affected.
The markets we operate in are highly competitive.
We face substantial competition, primarily from established companies, some of which have greater financial,
marketing, and technical resources than we do. We expect our competitors will continue to develop new products in direct
competition with ours, improve the design and performance of their products, and introduce new products with enhanced
performance characteristics. In order to remain competitive, we must improve and expand our products and product offerings.
In addition, we may need to maintain a high level of investment in research and development and expand our sales and marketing
efforts, particularly outside of the United States. We might not be able to make the technological advances and investments
necessary to remain competitive. If we were unable to improve and expand our products and product offerings, our business,
financial condition, and results of operations could be materially and adversely affected.
We are highly dependent on our intellectual property.
Our success depends significantly on our proprietary technology. We attempt to protect our intellectual property rights
through patents and non-disclosure agreements; however, we might not be able to protect our technology, and competitors might
be able to develop similar technology independently. In addition, the laws of some foreign countries might not afford our
intellectual property the same protections as do the laws of the United States. Our intellectual property is not protected by patents
in several countries in which we do business, and we have limited patent protection in other countries, including the PRC. The
cost of applying for patents in foreign countries and translating the applications into foreign languages requires us to select
carefully the inventions for which we apply for patent protection and the countries in which we seek such protection. Generally,
our efforts to obtain international patents have been concentrated in the European Union and certain industrialized countries in
Asia, including Korea, Japan, and Taiwan. If we are unable to protect our intellectual property successfully, our business, financial
condition, and results of operations could be materially and adversely affected.
The PRC commercial law is relatively undeveloped compared to the commercial law in the United States. Limited
protection of intellectual property is available under PRC law. Consequently, manufacturing our products in the PRC may subject
us to an increased risk that unauthorized parties may attempt to copy our products or otherwise obtain or use our intellectual
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property. We cannot give assurance that we will be able to protect our intellectual property rights effectively or have adequate
legal recourse in the event that we encounter infringements of our intellectual property in the PRC.
Activities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful than
anticipated.
In 2014 we acquired PCM, HiTek, and UltraVolt, and we may acquire other businesses in the future. The success of
such transactions will depend on, among other things, our ability to integrate assets and personnel acquired in these transactions
and to apply our internal controls process to these acquired businesses. The integration of acquisitions may require significant
attention from our management, and the diversion of management’s attention and resources could have a material adverse effect
on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits we anticipated when
we first entered into the acquisition transaction. If actual integration costs are higher than amounts originally anticipated, if we
are unable to integrate the assets and personnel acquired in an acquisition as anticipated, or if we are unable to fully benefit from
anticipated synergies, our business, financial condition, results of operations, and cash flows could be materially adversely
affected.
Return on investments or interest rate declines on plan investments could result in additional unfunded pension obligations
for the HiTek Power pension plan.
We currently have unfunded obligations in the HiTek Power pension plan. The extent of future contributions to the
pension plan depends heavily on market factors such as the discount rate used to calculate our future obligations and the actual
return on plan assets which enable future payments. We estimate future contributions to the plan using assumptions with respect
to these ad other items. While we are obligated to contribute $1.0 million per year through 2024 and our management believes
that these assumptions are appropriate, changes to those assumptions could have a significant effect on future contributions.
Additionally, a material deterioration in the funded status of the plan could increase pension expenses and reduce our profitability.
See Note 16. Retirement Plans in ITEM 8 "Financial Statements and Supplementary Data."
We must continually design and introduce new products into the markets we serve to respond to competition and rapid
technological changes.
We operate in a highly competitive environment where innovation is critical, our future success depends on many
factors, including the effective commercialization and customer acceptance of our products and services. The development,
introduction and support of a broadening set of products is critical to our continued success. Our results of operations could be
adversely affected if we do not continue to develop new products, improve and develop new applications for existing products,
and differentiate our products from those of competitors resulting in their adoption by customers.
We are subject to risks inherent in international operations.
Sales to our customers outside the United States were approximately 35.3% and 37.2% of our total sales for the years
ended December 31, 2015 and 2014. The recent acquisitions of the power controls modules, and high voltage product lines have
increased our presence in international locations. India is becoming a focus of possible expansion for sales, research and
development, and manufacturing. Our success producing goods internationally and competing in international markets is subject
to our ability to manage various risks and difficulties, including, but not limited to:
•
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our ability to effectively manage our employees at remote locations who are operating in different business environments
from the United States;
our ability to develop and maintain relationships with suppliers and other local businesses;
compliance with product safety requirements and standards that are different from those of the United States;
variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of
intellectual property and contract rights;
trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions;
customs regulations and the import and export of goods (including, but not limited to, any United States imposition of
antidumping or countervailing duty orders, safeguards, remedies, or compensation with respect to our products or
subcomponents of our products, particularly those produced in the PRC);
the ability to provide sufficient levels of technical support in different locations;
our ability to obtain business licenses that may be needed in international locations to support expanded operations;
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•
timely collecting accounts receivable from foreign customers including $14.5 million in accounts receivable from
foreign customers as of December 31, 2015; and
•
changes in tariffs, taxes, and foreign currency exchange rates.
Our profitability and ability to implement our business strategies, maintain market share and compete successfully
in international markets will be compromised if we are unable to manage these and other international risks successfully.
Unfavorable currency exchange rate fluctuations may lead to lower operating margins, or may cause us to raise prices,
which could result in reduced sales.
Currency exchange rate fluctuations could have an adverse effect on our sales and results of operations and we could
experience losses with respect to forward exchange contracts into which we may enter. Unfavorable currency fluctuations could
require us to increase prices to foreign customers, which could result in lower net sales by us to such customers. Alternatively,
if we do not adjust the prices for our products in response to unfavorable currency fluctuations, our results of operations could
be materially and adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the currency
of the country in which these products are sold and the currency in which they receive payment for such sales could be less
valuable at the time of receipt as a result of exchange rate fluctuations. For example, in the year ended December 31, 2015, the
currency rate for the Euro declined 10.3%. Given recent acquisitions in Europe, our exposure to fluctuations in the value of the
Euro is becoming more significant. From time to time, we enter into forward exchange contracts and local currency purchased
options to reduce currency exposure arising from intercompany sales of inventory. However, we cannot be certain that our efforts
will be adequate to protect us against significant currency fluctuations or that such efforts will not expose us to additional
exchange rate risks, which could materially and adversely affect our results of operations.
Changes in the value of the Chinese yuan could impact the cost of our operation in Shenzhen, PRC and our sales growth
in our PRC markets.
The PRC government is continually pressured by its trading partners to allow its currency to float in a manner similar
to other major currencies. In august 2015, China’s currency devalued by a cumulative 4.4% against the U.S. dollar, making
Chinese exports cheaper and imports into China more expensive by that amount. The move suggests China is looking for ways
to get its economy growing again. However, the move negatively impacts U.S. businesses that trade with China because it puts
them at a cost disadvantage and the move will likely reignite criticism that the Chinese government keeps the currency artificially
low to help its own manufacturers to the detriment of US based companies. Any change in the value of the Chinese yuan may
impact our ability to control the cost of our products in the world market. Specifically, the decision by the PRC government to
allow the yuan to begin to float against the United States dollar could significantly increase the labor and other costs incurred
in the operation of our Shenzhen facility and the cost of raw materials, parts, components, and subassemblies that we source in
the PRC, thereby having a material and adverse effect on our financial condition and results of operations.
We have been, and in the future may again be, involved in litigation. Litigation is costly and could result in further restrictions
on our ability to conduct business or make use of market relationships we have developed, or an inability to prevent others
from using technology.
Litigation may be necessary to enforce our commercial or property rights, to defend ourselves against claimed violations
of such rights, or to protect our interests in regulatory, tax, customs, commercial, and other disputes or similar matters. Litigation
often requires a substantial amount of our management's time and attention, as well as financial and other resources, including:
•
•
•
•
substantial costs in the form of legal fees, fines, and royalty payments;
restrictions on our ability to sell certain products or in certain markets;
an inability to prevent others from using technology we have developed; and
a need to redesign products or seek alternative marketing strategies.
Any of these events could have a significant adverse effect on our business, financial condition, and results of
operations.
Funds associated with our marketable securities that we have traditionally held as short-term investments may not be liquid
or readily available.
In the past, certain of our investments have been affected by external market conditions that impacted the liquidity
of the investment. We do not currently have investments with reduced liquidity, but external market conditions that we cannot
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anticipate or mitigate may impact the liquidity of our marketable securities. Any changes in the liquidity associated with these
investments may require us to borrow funds at terms that are not favorable or repatriate cash from international locations at a
significant cost. We cannot be certain that we will be able to borrow funds or continue to repatriate cash on favorable terms, or
at all. If we are unable to do so, our available cash may be reduced until those investments can be liquidated. The lack of available
cash may prevent us from taking advantage of business opportunities that arise and may prevent us from executing some of our
business plans, either of which could cause our business, financial condition or results of operations to be materially and adversely
affected.
Our intangible assets may become impaired.
As of December 31, 2015, we have $42.7 million of goodwill and $34.1 million in intangible assets. We periodically
review the estimated useful lives of our goodwill and identifiable intangible assets, taking into consideration any events or
circumstances that might result in either a diminished fair value, or for intangible assets, a revised useful life. The events and
circumstances include significant changes in the business climate, legal factors, operating performance indicators, and
competition. Any impairment or revised useful life could have a material and adverse effect on our financial position and results
of operations, and could harm the trading price of our common stock.
We are subject to numerous governmental regulations.
We are subject to federal, state, local and foreign regulations, including environmental regulations and regulations
relating to the design and operation of our products and control systems and regulations governing the import, export and customs
duties related to our products. We might incur significant costs as we seek to ensure that our products meet safety and emissions
standards, many of which vary across the states and countries in which our products are used. In the past, we have invested
significant resources to redesign our products to comply with these directives. Compliance with future regulations, directives,
and standards could require us to modify or redesign some products, make capital expenditures, or incur substantial costs. Also,
we may incur significant costs in complying with the myriad of different import, export and customs regulations as we seek to
sell our products internationally. If we do not comply with current or future regulations, directives, and standards:
• we could be subject to fines and penalties;
•
our production or shipments could be suspended; and
• we could be prohibited from offering particular products in specified markets.
If we were unable to comply with current or future regulations, directives and standards, our business, financial
condition and results of operations could be materially and adversely affected.
Recently enacted financial reform legislation will result in new laws and regulations that may increase our costs of operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") requires various federal
agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for
Congress. On August 22, 2012, under the Dodd-Frank Act, the SEC adopted new requirements for companies that use certain
minerals and metals, known as conflict minerals, in their products, whether or not these products are manufactured by third
parties. These requirements will require companies to perform due diligence, disclose and report whether or not such minerals
originate from the Democratic Republic of Congo and adjoining countries. We will have to perform sufficient due diligence to
determine whether such minerals are used in the manufacture of our products. However, the implementation of these new
requirements could adversely affect the sourcing, availability and pricing of such minerals if they are found to be used in the
manufacture of our products. In addition, we will incur additional costs to comply with the disclosure requirements, including
costs related to determining the source of any of the relevant minerals and metals used in our products. Since our supply chain
is complex, we may not be able to sufficiently verify the origins for these minerals and metals used in our products through the
due diligence procedures that we implement, which may harm our reputation. In such event, we may also face difficulties in
satisfying customers who require that all of the components of our products are certified as conflict mineral free.
The market price of our common stock has fluctuated and may continue to fluctuate for reasons over which we have no
control.
The stock market has from time to time experienced, and is likely to continue to experience, extreme price and volume
fluctuations. Prices of securities of technology companies have been especially volatile and have often fluctuated for reasons
that are unrelated to their operating performance. In the past, companies that have experienced volatility in the market price of
their stock have been the subject of securities class action litigation. If we were the subject of securities class action litigation,
it could result in substantial costs and a diversion of management’s attention and resources.
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Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors,
our share price may decrease significantly.
Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our
control. Because our operating expenses are based on anticipated revenue levels, our sales cycle for development work is
relatively long, and a high percentage of our expenses are fixed for the short term, a small variation in the timing of recognition
of revenue can cause significant variations in operating results from period to period. If our earnings do not meet the expectations
of securities analysts or investors, the price of our stock could decline.
The loss of any of our key personnel could significantly harm our results of operations and competitive position.
Our success depends to a significant degree upon the continuing contributions of our key management, technical,
marketing, and sales employees. There can be no assurance that we will be successful in retaining our key employees or that
we can attract or retain additional skilled personnel as required. Failure to retain or attract key personnel could significantly
harm our results of operations and competitive position. We must develop our personnel to provide succession plans capable of
maintaining continuity in the midst of the inevitable unpredictability of personnel retention. While we have plans for key
management succession and long-term compensation plans designed to retain our senior employees, if our succession plans do
not operate effectively, our business could be adversely affected.
We have historically made acquisitions and divestitures. However, we may not find suitable acquisition candidates in the
future and we may not be able to successfully integrate and manage acquired businesses. In either an acquisition or a
divestiture, we may be required to make fundamental changes in our ERP, business processes and tools which could disrupt
our core business and harm our financial condition.
In the past, we have made strategic acquisitions of other corporations and entities, as well as asset purchases, and we
continue to evaluate potential strategic acquisitions of complementary companies, products, and technologies. We have also
divested businesses. In the future, we could:
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•
issue stock that would dilute our current stockholders' percentage ownership;
pay cash that would decrease our working capital;
incur debt;
assume liabilities; or
incur expenses related to impairment of goodwill and amortization.
Acquisitions and divestitures also involve numerous risks, including:
problems combining or separating the acquired/divested operations, systems, technologies, or products;
an inability to realize expected sales forecasts, operating efficiencies or product integration benefits;
difficulties in coordinating and integrating geographically separated personnel, organizations, systems, and facilities;
difficulties integrating business cultures;
unanticipated costs or liabilities;
diversion of management's attention from our core business;
adverse effects on existing business relationships with suppliers and customers;
potential loss of key employees, particularly those of purchased organizations;
incurring unforeseen obligations or liabilities in connection with either acquisitions or divestitures; and
the failure to complete acquisitions even after signing definitive agreements which, among other things, would result
in the expensing of potentially significant professional fees and other charges in the period in which the acquisition or
negotiations are terminated.
We cannot assure you that we will be able to successfully identify appropriate acquisition candidates, to integrate any
businesses, products, technologies, or personnel that we might acquire in the future or achieve the anticipated benefits of such
transactions, which may harm our business.
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Our existing credit facility contains restrictions that may limit our flexibility in operating our business.
In October 2012, we entered into a credit facility with Wells Fargo Bank, N.A. The credit facility contains various
financial and negative operating covenants that limit our ability to engage in specified types of transactions. The financial
covenant requires that we maintain a minimum fixed charge coverage ratio. The operating covenants limit our ability to, among
other things:
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•
•
sell, transfer, lease or dispose of our assets;
create, incur or assume additional indebtedness;
encumber or permit liens on certain of our assets
• make restricted payments, including paying dividends on, repurchasing or making distributions with respect to our
common stock;
• make specified investments (including loans and advances);
•
•
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and
enter into certain transactions with our affiliates.
A breach of any of these covenants or a material adverse change to our business could result in a default under the
credit agreement. Upon the occurrence of an event of default under our credit agreement, our lenders could elect to declare all
amounts outstanding to be immediately due and payable and terminate all commitments to extend further credit. If we were
unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure such indebtedness.
Please see Note 22. Credit Facility in ITEM 8 "Financial Statements and Supplementary Data" for more information on our
credit facility.
Deterioration of economic conditions could negatively impact our business.
Our business may be adversely affected by changes in national or global economic conditions, including inflation, interest rates,
availability of capital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects
of governmental initiatives to manage economic conditions. Any such changes could adversely affect the demand for our products
both in domestic and export markets, or the cost and availability of our needed raw materials and packaging materials, thereby
negatively affecting our financial results.
A disruption in credit and other financial markets and deterioration of national and global economic conditions, could, among
other things:
•
negatively impact global demand for our products, which could result in a reduction of sales, operating income and
cash flows;
• make it more difficult or costly for us to obtain financing for our operations or investments or to refinance our debt in
the future;
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cause our lenders to depart from prior credit industry practice and make more difficult or expensive the granting of any
technical or other waivers under our debt agreements to the extend we may seek them in the future;
decrease the value of our investments; and
impair the financial viability of our insurers.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
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ITEM 2.
PROPERTIES
Information concerning our principal properties at December 31, 2015 is set forth below:
Location
Fort Collins, CO
Principal Activity
Corporate headquarters, research and development, distribution, sales, and
service
Ownership
Leased
Villaz-St-Pierre, Switzerland
Research and development
San Jose, CA
Vancouver, WA
Georgetown, MA
Toronto, Canada
Shanghai, China
Shenzhen, China
Distribution, sales, and service, research and development
Research and development, manufacturing, distribution, sales, and service
Service
Service
Distribution and sales
Manufacturing, distribution, service, and research and development
Metzingen, Germany
Distribution, sales, and service
Warstein-Belecke, Germany
Research, distribution, sales, and service
Pune, India
Tokyo, Japan
Distribution and sales
Sales
Hwasung Kyunggi-do, South Korea
Distribution, sales, and service
Sungnam City, South Korea
Distribution, sales, service and research and development
Singapore
Taipei, Taiwan
Sales and service
Distribution, sales, and service
Littlehampton, United Kingdom
Manufacturing, distribution, service, and research and development
Ronkonkoma, New York
Manufacturing, distribution, service, and research and development
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Leased
We consider the properties that we own or lease as adequate to meet our current and future requirements. We regularly
assess the size, capability, and location of our global infrastructure and periodically make adjustments based on these assessments.
ITEM 3.
LEGAL PROCEEDINGS
We are presently involved in disputes and legal actions arising in the normal course of our business. While we currently
believe that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is
inherently difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our
financial position or reported results of operations. An unfavorable decision in patent litigation could require material changes in
production processes and products or result in our inability to ship products or components found to have violated third-party
patent rights. An unfavorable decision in a collection action against a customer we sold products to, or a claim or counterclaim
from a customer related to alleged product failures, could also have a material adverse effect on our financial position or reported
results of operations. We are engaged presently in such disputes and legal actions with customers for the inverter product line. We
accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it is probable that a
loss has occurred and the amount of the loss can be reasonably estimated.
German Lawsuit against Jolaos related to Purchase Price Adjustment in Acquisition of Refusol
On April 8, 2013, our subsidiary AEI Holdings GmbH (“AEI Holdings”) acquired all the outstanding shares of Refusol
Holding GmbH ("Refusol") from Jolaos Verwaltungs GmbH ("Jolaos") pursuant to the terms of a Sale and Purchase Agreement
(the “SPA”). Under the SPA, the preliminary base price paid for the shares of Refusol was subject to a post-closing balance sheet
adjustment based on confirmation of the financial statements of Refusol effective as of the closing date. AEI Holdings and Jolaos
are in disagreement on various accounting adjustments to the closing date financial statements of Refusol. After repeated
unsuccessful attempts to have Jolaos submit the dispute to an independent German accounting firm as required under the SPA, in
December 2013 AEI Holdings petitioned the designated District Court in Stuttgart (Landgericht Stuttgart), Germany to review
the dispute. Jolaos claimed that legal interpretations were required before the closing date financial statements could be submitted
to an independent German accounting firm. AEI Holdings disagreed with Jolaos’ contentions in the case. This matter was settled
in the fourth quarter of 2015.
ITEM 4.
MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market and Price Range of Common Stock
Our common stock is listed on the NASDAQ Global Select Market under the symbol “AEIS.” At February 23, 2016,
the number of common stockholders of record was 384, and the closing sale price of our common stock on the NASDAQ Global
Select Market on that day was $29.14 per share.
The table below shows the range of high and low closing sale prices for our common stock as quoted (without retail
markup or markdown and without commissions) on the NASDAQ Global Select Market:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Dividend Policy
2015
2014
High
Low
High
Low
$ 27.35
$ 22.29
$ 28.88
$ 22.88
29.39
27.73
29.88
24.31
23.47
26.14
25.86
19.90
24.19
16.87
16.60
16.72
We have not declared or paid any cash dividends on our capital stock in our history as a public company. We currently
intend to retain all future earnings to finance our business or make stock repurchases and do not anticipate paying cash or other
dividends on our common stock in the foreseeable future.
Share Repurchases
In May 2014, our Board of Directors authorized a program to repurchase up to $25.0 million of our stock over a twelve-
month period. Under this program, we repurchased and retired 1.4 million shares of our common stock for a total of $25.0 million.
As of June 30, 2014 we completed the share repurchase program. All shares repurchased were executed in the open market and
no shares were repurchased from related parties. Repurchased shares were retired and assumed the status of authorized and unissued
shares.
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over
a thirty-month period. Under this program, on November 6, 2015, we entered into an accelerated stock repurchase arrangement
with Morgan Stanley & Co. LLC (the “Counterparty”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (the
“ASR Agreement”) to purchase $50.0 million of shares of our common stock. On November 9, 2015, we advanced $50.0 million
to the Counterparty. This transaction used $39.6 million and we received 1.4 million shares of our common stock based on then-
current market prices of the $50.0 million advanced, representing 79% of the estimated shares to be repurchased under the ASR
Agreement. The initial payment was recorded as a reduction to Stockholders' equity in our Consolidated Balance Sheets as of
December 31, 2015. The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-
weighted average prices of the common stock during the term of the Agreement, less a discount. At settlement, if the Counterparty
pays less than the original amount advanced, they will be required to reimburse us. If the Counterparty pays more than the original
advance, we will chose to reimburse the Counterparty with either cash or additional shares. Final settlement of the ASR Agreement
is expected to occur in the second quarter of 2016.
The following table summarizes information with respect to the company's purchase of its common stock during the
year ended December 31, 2015 (in thousands, except for average price per share):
Month
November - ASR (1)
Total
Total Number
of Shares
Purchased
Average Price
Paid per
Share
1,382
$
28.67
1,382
Total Number of Shares
Purchased as Part of
Publicly Announced
Program
Approximate Value of
Shares that May Yet Be
Purchased Under the
Program
1,382
1,382
$
110,387
(1) Shares purchased in November 2015 does not include the final share delivery amount under the ASR Agreement.
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Performance Graph
The performance graph below shows the five-year cumulative total stockholder return on our common stock during
the period from December 31, 2010 through December 31, 2015. This is compared with the cumulative total return of the NASDAQ
Composite Index and the Philadelphia Semiconductor Index (PHLX) over the same period. The comparison assumes $100 was
invested on December 31, 2010 in Advanced Energy common stock and in each of the foregoing indices and assumes reinvestment
of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performance shown in the graph
represents past performance and should not be considered an indication of future performance.
*$100 invested on 12/31/10 in our stock or index, including reinvestment of dividends. Indices and our stock performance calculated on a
calendar year-end basis.
Advanced Energy Industries, Inc.
NASDAQ Composite
PHLX Semiconductor
12/10
12/11
12/12
12/13
12/14
12/15
$
100.00
100.00
100.00
$
78.67
100.53
103.93
$
101.24
116.92
114.90
$
167.60
166.19
152.42
$
173.75
188.78
194.30
$
206.96
199.95
180.02
24
Table of Contents
ITEM 6.
SELECTED FINANCIAL DATA
The selected Consolidated Statements of Operations data and the related Consolidated Balance Sheets data were derived
from our audited Consolidated Financial Statements. The information below is not necessarily indicative of results of future
operations and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” of this Form 10-K in order to understand more fully the factors that may affect the comparability of the
information presented below:
Consolidated Statements of Operations Data:
Sales
Operating income
Income from continuing operations before income taxes
Income from continuing operations, net of income taxes
(Loss) income from discontinued operations, net of income taxes
Net (loss) income
Earnings per Share:
2015
$ 414,811
106,656
105,442
83,482
(241,968)
(158,486)
2014
2012
Years Ended December 31,
2013
(In thousands, except per share data)
$ 228,287
$ 299,381
$ 367,333
17,446
47,847
86,091
19,698
48,322
86,005
11,997
59,710
69,495
8,584
(27,624)
(22,513)
20,581
32,086
46,982
2011
$ 301,473
42,847
43,749
31,944
4,370
36,314
Continuing Operations:
Basic earnings per share
Diluted earnings per share
Discontinued Operations:
Basic (loss) earnings per share
Diluted (loss) earnings per share
Net (Loss) Income:
Basic (loss) earnings per share
Diluted (loss) earnings per share
Basic weighted-average common shares outstanding
Diluted weighted-average common shares outstanding
Consolidated Balance Sheets Data:
Total assets
$
$
$
$
$
$
2.05
2.03
$
$
1.72
1.69
$
$
1.51
1.47
$
$
(5.94) $
(5.94) $
(0.56) $
(0.56) $
(0.70) $
(0.70) $
(3.89) $
(3.89) $
1.16
1.14
$
$
0.81
0.79
$
$
0.31
0.30
0.22
0.22
0.53
0.52
$
$
$
$
$
$
0.73
0.73
0.10
0.10
0.84
0.83
40,746
41,077
40,420
41,034
39,597
40,667
38,879
39,447
43,465
43,954
$ 462,688
$ 684,568
$ 652,977
$ 537,242
$ 532,460
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements set forth below under this caption constitute forward-looking statements. See “Business — Special
Note Regarding Forward-Looking Statements” in ITEM 1 of this Annual Report on Form 10-K for additional factors relating to
such statements, and see “Risk Factors” in Item 1A for a discussion of certain risks applicable to our business, financial condition
and results of operations.
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 for various products, such as semiconductor devices, flat panel
displays, thin film renewables, architectural glass, optical coating and consumer products decorative and functional coating. We
also supply thermal instrumentation products for advanced temperature control in the thin film process for these same markets.
Our power control modules provide power control solutions for industrial applications where heat treatment and processing are
used such as glass manufacturing, metal fabrication and treatment, material and chemical processing. Our high voltage power
supplies and modules are used in applications such as semiconductor ion implantation, scanning electron microscopy, chemical
analysis such as mass spectrometry and various applications using X-ray technology and electron guns for both analytical and
processing applications. Our network of global service support centers provides a recurring revenue opportunity as we offer repair
services, conversions, upgrades, and refurbishments and used equipment to companies using our products.
As of December 31, 2015, we have discontinued our inverter engineering, manufacturing and sales of our inverter product
line. As such, all inverter product revenues, costs, assets and liabilities are reported in "Loss from discontinued operations, net of
income taxes" in all periods in our Consolidated Statements of Operations.
As always, we enter 2016 looking to strengthen our position and grow revenue through new products, design wins, new
applications and geographical growth, continuously emphasizing margin expansion, cash generation and cost improvement.
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CRITICAL ACCOUNTING ESTIMATES
The preparation of Consolidated Financial Statements and related disclosures in conformity with accounting principles
generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions, and
estimates that affect the amounts reported. Note 1. Operations and Summary of Significant Accounting Policies and Estimates in
ITEM 8 "Financial Statements and Supplementary Data" describes the significant accounting policies used in the preparation of
our Consolidated Financial Statements. The accounting positions described below are significantly affected by critical accounting
estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparation of
the Consolidated Financial Statements, actual results could differ materially from the amounts reported based on variability in
factors affecting these statements.
Revenue Recognition
We recognize revenue from product sales upon transfer of title and risk of loss to our customers provided that there is
evidence of an arrangement, the sales price is fixed or determinable, and the collection of the related receivable is reasonably
assured. In most transactions, we have no obligations to our customers after the date products are shipped, other than pursuant to
warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and
handling costs are recognized in cost of sales.
We maintain a credit approval process and we make significant judgments in connection with assessing our customers’
ability to pay at the time of shipment. Despite this assessment, from time to time, our customers are unable to meet their payment
obligations. We continuously monitor our customers’ credit worthiness, and use our judgment in establishing a provision for
estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the provisions established, a significant change in the
liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable
and our future operating results. Additionally, if our credit loss rates prove to be greater than we currently estimate, we record
additional reserves for doubtful accounts.
Inventory
We value our inventory at the lower of cost (first-in, first-out method) or market. We regularly review inventory quantities
on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost,
based primarily on our estimated forecast of product demand. Demand for our products can fluctuate significantly. Our industry
is subject to technological change, new product development, and product technological obsolescence that could result in an
increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or
technological developments in excess of our current estimates could have a significant impact on the value of our inventory and
our reported operating results.
Warranty Costs
We provide for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue.
We offer warranty coverage for a majority of our Precision Power products for periods typically ranging from 12 to 24 months
after shipment. We warranted our inverter products for five to ten years and provided the option to purchase additional warranty
coverage up to 20 years. The warranty expense accrued related to our standard inverter product warranties is now considered part
of our discontinued operations and is recorded as such on our Consolidated Balance Sheets. See Note 3. Discontinued Operations
in ITEM 8 "Financial Statements and Supplementary Data" for more information on our discontinued operations and Note 14.
Warranties in ITEM 8 "Financial Statements and Supplementary Data" for more information on our warranties from continuing
operations. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the
repairs. The assumptions we use to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when
appropriate, the accruals are adjusted. Should product failure rates differ from our estimates, actual costs could vary significantly
from our expectations.
Intangible Assets, Goodwill and Other Long-Lived Assets
As a result of our acquisitions, we recorded intangible assets and goodwill. Goodwill and indefinite-lived intangible
assets are subject to annual impairment testing, as well as testing upon the occurrence of any event that indicates a potential
impairment. The annual impairment test can be performed using an assessment of qualitative factors in determining if it is more
likely than not that goodwill is impaired. If this assessment indicates that it is more likely than not that goodwill is impaired, then
the next step of impairment testing compares the fair value of a reporting unit to its carrying value. Goodwill would be impaired
if the resulting implied fair value of goodwill was less than the recorded carrying value of the goodwill.
Finite-lived intangible assets and other long-lived assets are subject to an impairment test if there is an indicator of
impairment. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based
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upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine
whether an impairment exists, and then measure the impairment using discounted cash flows and other fair value measurements.
The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefits that
we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible
assets, long-lived assets, and goodwill may be impaired and the resulting charge to operations may be material. Additionally, the
estimation of useful lives and expected cash flows require us to make significant judgments regarding future periods that are
subject to some factors outside of our control. Changes in these estimates could result in significant revisions to our carrying value
of these assets and may result in material charges to our results of operations.
In 2015, we performed an assessment of qualitative factors for our annual impairment test of the goodwill associated
with our Precision Power business unit. The factors reviewed included macroeconomic conditions, industry and market conditions,
cost factors, and overall financial performance of each business unit. This assessment resulted in the conclusion that there was no
impairment of goodwill in our Precision Power business in 2015.
In June 2015 the Company completed its six-month long process of seeking strategic alternatives for its inverter business
and no satisfactory offers were received for all or a part of the inverter business. On June 29, 2015, we announced our decision
to wind down our solar inverter business to focus solely on our Precision Power business. The result of this assessment was the
recording of various asset impairments including Goodwill and Intangibles which is reflected in the "Loss from discontinued
operations, net of income taxes" on our Consolidated Statements of Operations, as we have discontinued our inverter products as
of December 31, 2015. See Note 3. Discontinued Operations in ITEM 8 "Financial Statements and Supplementary Data."
Income Taxes
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required
in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the
application of accounting principles and complex tax laws. We record a provision for income taxes for the anticipated tax
consequences of the reported results of operations using the asset and liability method. Under this method, we recognize deferred
tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using the tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are
expected to be realized or settled. We record a valuation allowance to reduce our deferred tax assets to the net amount that we
believe is more likely than not to be realized. We recognize tax benefits from uncertain tax positions only if we believe that it is
more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits
of the position. Although we believe that we have adequately reserved for our uncertain tax positions, we can provide no assurance
that the final tax outcome of these matters will not be materially different. We make adjustments to these reserves when facts and
circumstances change, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome
of these matters is different than the amounts recorded, such differences will affect the provision for income taxes in the period
in which such determination is made and could have a material impact on our financial condition and operating results. The
provision for income taxes includes the effects of any reserves that we believe are appropriate, as well as the related net interest
and penalties. For more details see Note. 4 Income Taxes in ITEM 8 "Financial Statements and Supplementary Data."
Business Environment and Trends
SEMICONDUCTORS
Investment in semiconductor capital equipment spending worldwide was essentially flat year over year in 2015. After
entering into 2015 with a record first quarter sales to our semiconductor OEM customers that continued near this level through
Q3, there was a decrease in investments in Q4. Even as the semi equipment industry experienced this pause, the trends of increased
usage of mobility, connectivity and the cloud continue to increase demand for higher density memory, high speed logic devices
and lower power consumption, which we expect to continue going forward. Capital spending across the industry should lend itself
to next-generation technologies, such as 3D devices, 3D packaging and multi-patterning in logic and foundry.
The industry's transition to 3D devices is generating increasing demand for RF power supplies and accessories. The
growing number of steps associated with the deposition and etch processes is driving an increase in the number of process chambers
per fab and higher content of more advanced power solutions per chamber. As etching processes become more challenging due
to increasing aspect ratios in advanced 3D devices, more advanced RF technology that includes pulsing and increased control and
instrumentation is needed. We are capitalizing on these trends and providing a broader range of more complex combinations of
RF power and frequencies and launching more capable matching networks to manage and control the delivered power.
INDUSTRIAL CAPITAL EQUIPMENT
In industrial applications, we remain focused on taking our products to new applications and world regions, increasing
our penetration into Asia, Europe, and North America. We made gains across an array of industries ranging from defense to
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analytical equipment. We believe large area LCD demand will continue in 2016 with an improved outlook for larger and higher
definition TVs. We believe our power conversion technologies for both AC and DC sputtering are well-positioned in these markets
and we will benefit from increased demand as panels with thin film technologies improve efficiencies.
Throughout 2015, demand for our products used in many industrial thin film coating markets increased, particularly in
industrial manufacturing areas for products such as automotive parts, machine tools, electro-magnetic interference films, aesthetic,
optical and tribological coatings. We expect this demand to continue in 2016. AE will continue to strengthen its position in these
markets through internal product development and potential acquisition of complimentary product lines. These complimentary
products will also allow us to participate in emerging and established precision power conversion applications by delivering
customers value through improved process control with more flexibility to address diverse application requirements.
Results of Operations
Our analysis presented below is organized to provide the information we believe will facilitate an understanding of our
historical performance and relevant trends going forward. Our results of operations include the results of PCM, HiTek, and UltraVolt
from their respective acquisition dates of: January 27, 2014, April 12, 2014, and August 4, 2014, through December 31, 2014 and
the full year ended December 31, 2015. This discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, in Item 8 of this Annual Report on Form 10-K.
REPORTING IN FISCAL 2015
As of December 31, 2015, Advanced Energy is organized as a single business unit, as we discontinued our inverter
products, manufacturing and sales as of December 31, 2015. See Note 3. Discontinued Operations in ITEM 8 "Financial Statements
and Supplementary Data." All prior periods disclosed have been recast to reflect continuing operations. Results of discontinued
operations are reflected in the "Loss from discontinued operations, net of income taxes" in our Consolidated Statements of
Operations. We principally serve our OEM and end customers in the semiconductor, flat panel display, high voltage, solar panel,
and other capital equipment markets.
The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of
Operations (in thousands):
Years Ended December 31,
2014
2013
2015
Sales
Gross profit
Operating expenses
Operating income
Other income (expense)
Income from continuing operations before income taxes
Provision (benefit) for income taxes
Income from continuing operations, net of income taxes
$ 414,811
216,870
110,214
106,656
(1,214)
105,442
21,960
83,482
$
$
$
367,333
188,060
101,969
86,091
(86)
86,005
16,510
69,495
$ 299,381
145,593
97,746
47,847
475
48,322
(11,388)
59,710
$
The following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in
our Consolidated Statements of Operations:
Sales
Gross profit
Operating expenses
Operating income
Other income (expense)
Income from continuing operations before income taxes
Provision (benefit) for income taxes
Income from continuing operations, net of income taxes
28
Years Ended December 31,
2015
2014
2013
100.0 %
100.0 %
100.0 %
52.3 %
26.5 %
25.8 %
(0.3)%
25.5 %
5.3 %
20.2 %
51.2 %
27.7 %
23.5 %
— %
23.5 %
4.5 %
19.0 %
48.6 %
32.7 %
15.9 %
0.1 %
16.0 %
(3.8)%
19.8 %
Table of Contents
SALES
The following tables summarize annual net sales, and percentages of net sales, by product line for each of the years
ended 2015, 2014, and 2013 (in thousands):
Semiconductor capital equipment market
Industrial capital equipment
Global Support
Total
Years Ended December 31,
Increase
2015
$ 266,465
84,217
64,129
$ 414,811
2014
$ 234,223
78,585
54,525
$ 367,333
2013
$ 176,230
70,575
52,576
$ 299,381
2015 v.
2014
$ 32,242
5,632
9,604
$ 47,478
2014 v.
2013
$ 57,993
8,010
1,949
$ 67,952
Percent Change
2014 v.
2015 v.
2014
2013
13.8%
7.2%
17.6%
12.9%
32.9%
11.3%
3.7%
22.7%
Semiconductor capital equipment market
Industrial capital equipment
Global Support
Total
2015 SALES COMPARED TO 2014
Years Ended December 31,
2013
2014
2015
64.2%
20.3%
15.5%
100.0%
63.8%
21.4%
14.8%
100.0%
58.9%
23.6%
17.6%
100.0%
Total sales for the twelve months ended December 31, 2015 increased 12.9% to $414.8 million from $367.3 million
for the twelve months ended December 31, 2014. The increase in sales was driven by strong semiconductor sales through the third
quarter, coupled with the addition of a full year of sales from our high voltage lines acquired mid-year in 2014.
In 2015, sales in our thin film semiconductor market increased 13.8% to $266.5 million, or 64.2% of sales, from $234.2
million, or 63.8% of sales in 2014. This increase was driven by strong market conditions across the semiconductor market driven
by our leadership in etch applications. As expected, we saw investment levels decrease in the fourth quarter in line with the rest
of the market.
Sales to the industrial capital equipment markets increased 7.2% to $84.2 million, or 20.3% of sales in 2015, from
$78.6 million, or 21.4% of sales in 2014. The markets that comprise our Industrial capital equipment markets include flat panel
display, thin film renewables, data storage, architectural glass, and other industrial thin-film manufacturing equipment markets
such as automotive parts and optical coatings. Our acquisitions of high voltage and power control module product lines were a
primary driver of the increase in the Industrial market.
Global support revenue increased by 17.6% for 2015 to $64.1 million, or 15.5% of total sales, as compared to $54.5
million, or 14.8% of total sales in 2014. This increase in sales due to market share gains in break/fix repairs as key end users move
back to AE and away from third party repairs. Additionally, our non-break/fix business saw the accelerated growth in upgrades
and retrofits of older AE Legacy products experienced in 2014 continue into 2015.
2014 SALES COMPARED TO 2013
Total sales increased 22.7% to $367.3 million in 2014 as compared to $299.4 million in 2013. The increase in sales
was driven by an increase in spending in the semiconductor market, with large capital investments being made for new production
capacity. Additionally, the acquisitions of high voltage and power control module product lines in early to mid-2014 drove higher
sales in the industrial business.
In 2014, sales in our thin film semiconductor market increased 32.9% to $234.2 million, or 63.8% of sales, from $176.2
million or 58.9% of sales in 2013. This increase was driven by a strong increase in capital investments in the second half of 2014
and our increasing presence in etch applications from design wins for our new RF pulsing technology products. Additionally, our
high voltage product line acquisitions added to our semiconductor market sales.
Sales to the industrial capital equipment markets increased 11.3% to $78.6 million, or 21.4% of sales in 2014, from $70.6
million, or 23.6% of sales in 2013. The markets that comprise our Industrial capital equipment markets include flat panel display,
thin film renewables, data storage, architectural glass, and other industrial thin-film manufacturing equipment markets such as
automotive parts and optical coatings. Our acquisitions of high voltage and power control module product lines were a primary
driver of the increase in the Industrial market.
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Global support revenue increased by 3.7% for 2014 to $54.5 million, or 14.8% of total sales, as compared to $52.6
million, or 17.6% of total sales in 2013. Despite slight market share loss early in the year, the latter half of 2014 saw an increase
in sales due to market share gains in break/fix repairs.
Applied Materials Inc., our largest customer, accounted for $123.5 million or 29.8% of our sales in 2015; $109.3 million,
or 29.8% of our sales in 2014; and $96.2 million, or 32.1%, of our sales in 2013. Our sales to Applied Materials Inc. included
sales for the semiconductor capital equipment market, as well as the solar and flat panel display markets.
GROSS PROFIT
Our gross profit was $216.9 million or 52.3% of revenue in 2015 compared to $188.1 million or 51.2% of revenue in
2014. The increase was primarily driven by an increase in sales as we expand into new markets with higher margins and continue
to drive design wins.
Gross profit was $188.1 million, or 51.2% of revenue in 2014 and $145.6 million, or 48.6% of revenue in 2013. The
increase in terms of absolute dollars was a result of higher sales. Additionally, continuous improvement on manufacturing
efficiencies is driving higher revenue.
OPERATING EXPENSE
The following table summarizes our operating expenses as a percentage of sales for the years ended 2015, 2014 and
2013 (in thousands):
2015
Years Ended December 31,
2014
2013
Research and development
Selling, general, and administrative
Amortization of intangible assets
Restructuring charges
Total operating expenses
$
39,551
66,097
4,368
198
$ 110,214
9.5% $
15.9%
1.1%
—%
36,915
58,549
4,998
1,507
26.5% $ 101,969
10.0% $
15.9%
1.4%
0.4%
27.7% $
35,383
57,334
850
4,179
97,746
11.8%
19.2%
0.3%
1.4%
32.7%
We expect to continue to leverage our selling, general and administrative costs as revenues grow and expect to increase
our investment in research and development.
In June 2015, we committed to a restructuring plan in relation to the wind down of our Inverter business which concluded
December 31, 2015 and has been reflected as discontinued operation as of December 31, 2015. See Note 3. Discontinued Operations
in ITEM 8 "Financial Statements and Supplementary Data." As a result of discontinued operations, amounts of general corporate
overhead which had previously been reflected in our inverter segment have been included in the total operating expense in the
table above in all periods presented.
In April 2014, we committed to a restructuring plan to take advantage of additional cost savings opportunities in connection
with our acquisitions and realignment to a single organizational structure based on product line. The plan called for consolidating
certain facilities and rebranding of products to allow us to use our resources more efficiently. This plan was completed in the fourth
quarter of 2014.
In April 2013, we committed to a restructuring plan to take advantage of additional cost saving opportunities in connection
with our acquisition of Refusol. The plan called for consolidating certain facilities, further centralizing our manufacturing and
rationalizing certain products to most effectively meet customer needs. All activities under this restructuring plan were completed
prior to December 31, 2013.
Research and Development
The markets we serve constantly present opportunities to develop products for new or emerging applications and require
technological changes driving for higher performance, lower cost, and other attributes that will advance our customers’ products.
We believe that continued and timely development of new and differentiated products, as well as enhancements to existing products
to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devote significant
personnel and financial resources to the development of new products and the enhancement of existing products, and we expect
these investments to continue. All of our research and development costs have been expensed as incurred.
Research and development expenses for the twelve months ended December 31, 2015 increased $2.6 million from the
same period in 2014 and $1.5 million in the twelve months ended December 31, 2014 as compared to the same period in 2013.
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The increase is mainly due to the full year of costs from PCM, HiTek, and UltraVolt, in 2015, which were acquired throughout
2014. The acquisitions also drove the increase between the years ended December 31, 2014 and 2013.
Selling, General and Administrative
Our selling expenses support domestic and international sales and marketing activities that include personnel, trade
shows, advertising, internal and third-party sales representative commissions, and other selling and marketing activities. Our
general and administrative expenses support our worldwide corporate, legal, tax, financial, governance, administrative, information
systems, and human resource functions in addition to our general management.
Selling general and administrative ("SG&A") expenses increased $7.5 million in the twelve months ended December 31,
2015 as compared to the same period in 2014 primarily due to an increase in asset retirement obligations and bad debt expense,
offset slightly by lower corporate spending.
SG&A expenses increased $1.2 million in the twelve months ended December 31, 2014 as compared to the same period
in 2013. The increase is due to the acquisitions of PCM, HiTek, and UltraVolt throughout 2014.
Amortization Expense
Amortization expense was $4.4 million for the twelve months ended December 31, 2015, compared to $5.0 million for
the same period ending December 31, 2014 and $0.9 million for the same period ending December 31, 2013. The decrease of $0.6
million in 2015 is primarily due to the completion of the amortization of short-lived intangible assets acquired from PCM in 2014
coupled with the decrease in foreign exchange rates in Europe. The increase in amortization expense between 2013 and 2014 is
due primarily to the acquisitions of PCM, HiTek, and UltraVolt, which added $15.0 million, $12.6 million, and $10.9 million,
respectively, of amortizable intangible assets.
Restructuring Charges
As a result of declines in certain markets that we serve, we initiated a plan in September 2011 to re-align our manufacturing
and research and development activities to be closer to our customers and reduce production costs. These initiatives included
headcount reductions, facilities closures, and asset impairments and were completed in the fourth quarter of 2012.
In April 2013, in connection with our acquisition of Refusol described in Note 2. Business Acquisitions in ITEM 8
"Financial Statements and Supplementary Data," we committed to a restructuring plan to take advantage of additional cost saving
opportunities. These initiatives also included reductions in headcount, facility closures, and intangible asset impairments. This
plan was substantially completed as of December 31, 2013.
In April 2014, we committed to a restructuring plan to take advantage of additional cost savings opportunities in connection
with our acquisitions and realignment to a single organizational structure based on product line. The plan called for consolidating
certain facilities and rebranding of products to allow us to use our resources more efficiently. This plan was completed as of
December 31, 2014.
Other Income
Other income consists primarily of interest income and expense, foreign exchange gains and losses, and other
miscellaneous items.
Interest (expense) income for the twelve month periods ending December 31, 2015, 2014, and 2013 was $(0.9) million,
$(0.5) million, and $0.4 million, respectively. The change between all periods was driven by reductions in interest income due to
lower marketable securities held and lower interest rates in China.
Other (expense) income, net was $(1.2) million in 2015, $(0.1) million in 2014 and $0.5 million in 2013. The change
between 2015 and 2014 was driven by the decrease in foreign exchange rates coupled with a one-time settlement related to ending
our relationship with a third-party service provider.
Provision for Income Taxes
We recorded a 2015 income tax expense of $22.0 million or an effective tax rate of 20.8%. The effective rate differs
from the federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower
tax rates, federal research and development tax credit benefit, offset by a valuation allowance recorded on prior year foreign
inverter business deferred tax assets.
We recorded a 2014 income tax expense of $16.5 million or an effective tax rate of 19.2%. The effective rate differs from
the federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower tax
rates, and a benefit from the federal research and development tax credit.
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We recorded a 2013 income tax benefit of $11.4 million or an effective tax rate of (23.6%). The effective rate differs
from the federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions which are subject to lower
tax rates, federal tax credits, state income tax benefits, and a benefit from the domestic production activities deduction.
Our future effective income tax rate depends on various factors, such as changes in tax laws, regulations, accounting
principles, or interpretations thereof, and the geographic composition of our pre-tax income. We carefully monitor these factors
and adjust our effective income tax rate accordingly.
Discontinued Operations
In June 2015, the Company completed its six-month long process of seeking strategic alternatives for its inverter business
and no satisfactory offers were received for all or a part of the inverter business. On June 29, 2015, we announced our decision
to wind down our solar inverter business to focus solely on our Precision Power business. The result of this assessment was the
recording of various asset impairments including Goodwill and Intangibles, as disclosed in previous filings, which are reflected
in the "Loss from discontinued operations, net of income taxes" in our Consolidated Statements of Operations, as we have
discontinued our inverter engineering, sales, and production as of December 31, 2015. See Note 3. Discontinued Operations in
ITEM 8 "Financial Statements and Supplementary Data." This constituted a strategic shift as inverter engineering, manufacturing
and sales constituted a separate reporting segment for the Company.
The significant items included in Loss from discontinued operations, net of income taxes:
Sales
Cost of sales
Total operating expenses (including restructuring)
Operating loss from discontinued operations
Other expense
Loss from discontinued operations before income taxes
Provision for income taxes
Loss from discontinued operations, net of income taxes
Non-GAAP Results
Year Ended December 31,
2015
2014
2013
$
$
$
95,856
139,045
232,262
(275,451)
(55)
(275,506)
(33,538)
(241,968) $
$
215,763
209,795
51,637
(45,669)
(658)
(46,327)
(23,814)
(22,513) $
247,623
183,080
97,767
(33,224)
(814)
(34,038)
(6,414)
(27,624)
To evaluate business performance against business objectives and for planning purposes, management uses non-GAAP
results. We believe these measures will enhance investors’ ability to review our business from the same perspective as management
and facilitate comparisons of this period’s results with prior periods. These non-GAAP measures are not in accordance with U.S.
GAAP and may differ from non-GAAP methods of accounting and reporting used by other companies. The presentation of this
additional information should not be considered a substitute for results prepared in accordance with U.S. GAAP.
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The non-GAAP results presented below exclude the impact of restructuring charges, stock-based compensation,
amortization of intangible assets, acquisition-related costs, and nonrecurring executive severance (in thousands):
Reconciliation of Non-GAAP measure - operating expenses and
operating income, excluding certain items
Years Ended December 31,
2014
2013
2015
Gross Profit from continuing operations, as reported
$
216,870
$
188,060
$
Operating expenses from continuing operations, as reported
110,214
101,969
Adjustments:
Restructuring charges
Acquisition-related costs
Stock-based compensation
Amortization of intangible assets
Nonrecurring executive severance
Non-GAAP operating expenses from continuing operations
Non-GAAP operating income from continuing operations
Income from continuing operations, net of income taxes, as
reported
Adjustments, net of tax
$
$
Restructuring charges
Acquisition-related costs
Stock-based compensation
Amortization of intangible assets
Nonrecurring executive severance
(198)
—
(2,810)
(4,368)
—
102,838
(1,507)
(730)
(3,712)
(4,998)
(867)
90,155
114,032
$
97,905
$
145,593
97,746
(4,179)
—
(9,849)
(850)
—
82,868
62,725
83,482
$
69,495
$
59,710
157
—
2,225
3,459
—
1,218
590
2,999
4,039
701
3,379
—
7,963
687
—
Non-GAAP income from continuing operations, net of income
taxes
$
89,323
$
79,042
$
71,739
This table discusses Non-GAAP results from continuing operations only. See Note 3. Discontinued Operations in ITEM 8
"Financial Statements and Supplementary Data" for more information on discontinued operations.
Impact of Inflation
In recent years, inflation has not had a significant impact on our operations. However, we continuously monitor operating
price increases, particularly in connection with the supply of component parts used in our manufacturing process. To the extent
permitted by competition, we pass increased costs on to our customers by increasing sales prices over time. Sales price increases,
however, were not significant in any of the years presented herein.
Liquidity and Capital Resources
LIQUIDITY
We believe that adequate liquidity and cash generation is important to the execution of our strategic initiatives. Our
ability to fund our operations, acquisitions, capital expenditures, and product development efforts may depend on our ability to
generate cash from operating activities which is subject to future operating performance, as well as general economic, financial,
competitive, legislative, regulatory, and other conditions, some of which may be beyond our control. Our primary sources of
liquidity are our available cash, investments, cash generated from current operations and availability under our credit facilities
noted below.
At December 31, 2015, we had $170.4 million in cash, cash equivalents, and marketable securities. We believe that
adequate liquidity and cash generation will be important to the execution of our strategic initiatives. We believe that our current
cash levels and our cash flows from future operations will be adequate to meet anticipated working capital needs, anticipated
levels of capital expenditures, and contractual obligations for the next twelve months.
At December 31, 2015, we had $116.3 million of cash, cash equivalents, and marketable securities held by foreign
subsidiaries. Except as required under U.S. tax laws, we do not provide for U.S. taxes on the undistributed earnings of our foreign
subsidiaries since we intend to invest such undistributed earnings indefinitely outside of the U.S. If our intent changes or if these
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funds are needed for our U.S. operations, we would be required to accrue U.S. taxes on some or all of these undistributed earnings
and our effective tax rate would be adversely affected.
On October 12, 2012, we entered into an agreement with Wells Fargo Bank, National Association which provides for a
secured revolving credit facility ("Credit Facility") of up to $50.0 million. As of December 31, 2015, we had $9.9 million of
availability on our Wells Fargo Credit Facility. Borrowings under the Credit Facility are subject to a borrowing base based upon
our accounts receivable and inventory and are available for various corporate purposes. The reduction in receivables from our
inverter business lowered our availability. The Credit Facility provides us further flexibility for execution of our strategic plans
including acquisitions. Refusol initially had two outstanding notes with various banks that provided up to 12.0 million Euros of
borrowing, which we assumed in the acquisition. During the year ended December 31, 2014 the last of the revolving lines was
repaid and canceled. As of December 31, 2014, there was no outstanding balance on these notes. For more information on these
Credit Facilities, see Note 22. Credit Facilities in ITEM 8 "Financial Statements and Supplementary Data."
In May 2014, our Board of Directors authorized a program to repurchase up to $25.0 million of our stock over a twelve-
month period. Under this program, during the twelve months ended December 31, 2015, we repurchased and retired 1.4 million
shares of our common stock for a total of $25.0 million. We completed the share repurchase program in the second quarter of
2014. All shares repurchased were executed in the open market and no shares were repurchased from related parties. Repurchased
shares were retired and assumed the status of authorized and unissued shares.
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over a
thirty-month period. Under this program, on November 6, 2015, we entered into an accelerated stock repurchase arrangement with
Morgan Stanley & Co. LLC (the “Counterparty”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (the “ASR
Agreement”) to purchase $50.0 million of shares of our common stock. On November 9, 2015, we advanced $50.0 million to the
Counterparty. This transaction used $39.6 million and we received 1.4 million shares of our common stock based on then-current
market prices of the $50.0 million advanced, representing 79% of the estimated shares to be repurchased under the ASR Agreement.
The initial payment was recorded as a reduction to Stockholders' equity in our Consolidated Balance Sheets as of December 31,
2015. The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-weighted
average prices of the common stock during the term of the Agreement, less a discount. At settlement, if the Counterparty pays
less than the original amount advanced, they will be required to reimburse us. If the Counterparty pays more than the original
advance, we will chose to reimburse the Counterparty with either cash or additional shares. Final settlement of the ASR Agreement
is expected to occur in the second quarter of 2016.
CASH FLOWS
A summary of our cash provided by and used in operating, investing, and financing activities is as follows (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Effect of currency translation on cash
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of the period
2015 CASH FLOWS COMPARED TO 2014
Net cash provided by operating activities
Years Ended December 31,
2013
2014
2015
$ 104,808
(13,265)
(45,641)
(1,467)
44,435
125,285
$ 75,586
(54,996)
(32,480)
(950)
(12,840)
138,125
$ 35,316
(70,926)
26,313
858
(8,439)
146,564
$ 169,720
$ 125,285
$ 138,125
Net cash provided by operating activities for the twelve months ended December 31, 2015 was $104.8 million, compared
to $75.6 million for the same period ended December 31, 2014. The increase of $29.2 million in net cash flows from operating
activities is primarily due to the increase in income from continuing operations, net of income taxes, and decreases in accounts
receivable. The overall increase in sales discussed above resulted in higher collections throughout the year.
Net cash used in investing activities
Net cash used in investing activities for the twelve months ended December 31, 2015 was $13.3 million, a decrease
of $41.7 million from the prior year. We used significantly more cash in 2014 for the purchases of PCM, HiTek, and UltraVolt,
which was only slightly offset by our increase in investments in marketable securities in 2015.
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Capital expenditures in 2015 were slightly higher than 2014 and are expected to remain at current levels. We expect
to fund future capital expenditures with cash generated from operations.
Net cash provided by (used in) financing activities
Net cash used in financing activities in the twelve months ended December 31, 2015 was $45.6 million, a $13.2 million
increase from the $32.5 million used in the same period of 2014. This was primarily due to $50.0 million stock buyback program
in 2015. The exercise of stock options provided $4.5 million of cash in 2015 as compared to $15.8 million in 2014. Furthermore,
the paydown of the Commerzbank and Bayern notes utilized $16.3 million in cash in 2014, which is reflected in the Net cash used
in financing activities from discontinued operations line on our Consolidated Statements of Cash Flows.
2014 CASH FLOWS COMPARED TO 2013
Net cash provided by operating activities
Net cash provided by operating activities for the twelve months ended December 31, 2014 was $75.6 million, compared
to $35.3 million for the same period ended December 31, 2013. The increase of $40.3 million in net cash flows from operating
activities was primarily due to the increase in net income, and decreases in accounts receivable and inventory. The overall increase
in sales discussed above resulted in higher collections throughout the year
Net cash flows used in investing activities
Net cash used in investing activities for the twelve months ended December 31, 2014 was $55.0 million, a decrease of
$15.9 million from the prior year. The decrease is the result of the lower cash used for the acquisitions of PCM, HiTek, and Ultravolt
compared to the acquisition of Refusol in 2013. Capital expenditures in 2014 were consistent with 2013.
Net cash flows provided by (used in) financing activities
Net cash used in financing activities in the twelve months ended December 31, 2014 was $32.5 million, a $58.8 million
change from the cash provided by financing activities of $26.3 million in the same period of 2013. This was primarily due to the
settlement of performance stock units in cash of $11.2 million in the first quarter of 2014, coupled with the completion of the $25.0
million stock buyback program. Additionally, the exercise of stock options provided $15.8 million of cash in 2014 as compared
to $26.3 million in 2013. Furthermore, the paydown of the Commerzbank and Bayern notes utilized $16.3 million in cash in 2014.
Effect of currency translation on cash
The effect of foreign currency translations on cash changed $0.5 million to a $1.5 million negative impact for the year
ended December 31, 2015 compared to a $1.0 million negative impact for the year ended December 31, 2014. The net effect of
foreign currency translations on cash changed $1.8 million to a $1.0 million negative impact for the year ended December 31,
2014 compared to a $0.9 million positive impact for the year ended December 31, 2013.
The functional currencies of our worldwide operations primarily include U.S. dollar ("USD"), Japanese Yen ("JPY"),
Chinese Yuan Renminbi ("CNY"), New Taiwan Dollar ("TWD"), South Korean Won ("KRW"), British Pound ("GBP"), Swiss
Franc ("CHF"), Canadian Dollar ("CAD") , Euro ("EUR"), and Indian Rupee ("INR"). Our purchasing and sales activities are
primarily denominated in USD, JPY, CNY, and EUR. The change in these key currency rates during the twelve months ended
December 31, 2015, 2014, and 2013 are as follows:
From
To
Twelve Months Ended December 31,
2014
2013
2015
CNY
EUR
JPY
KRW
TWD
GBP
CAD
CHF
INR
USD
USD
USD
USD
USD
USD
USD
USD
USD
(2.4)%
(12.0)%
(12.1)%
(3.9)%
(5.3)%
(5.9)%
(8.6)%
(10.2)%
(2.1)%
2.9 %
4.2 %
(17.6)%
0.7 %
(3.0)%
1.9 %
(6.6)%
2.5 %
(11.3)%
(4.4)%
(10.3)%
(0.4)%
(6.6)%
(3.8)%
(5.5)%
(16.1)%
(0.9)%
(4.61)%
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Off Balance Sheet Arrangements
We have no off-balance sheet arrangements or variable interest entities.
Contractual Obligations
The following table sets forth our future payments due under contractual obligations as of December 31, 2015 (in
thousands):
Operating lease obligations
Purchase obligations
Pension Funding Commitment
Total
Total
Less than
1 year
20,923
44,176
8,622
73,721
$
$
5,898
44,176
958
51,032
$
$
1 -3 years
5,746
$
—
2,874
8,620
$
4-5 years
4,732
$
—
1,916
6,648
$
$
$
More
than 5
years
4,547
—
2,874
7,421
As of December 31, 2015, we have recorded liabilities of $10.4 million related to uncertain tax positions including
accrued interest and penalties. Because of the uncertainty of the amounts to be ultimately paid, as well as the timing of such
payments, these liabilities are not reflected in the contractual obligations table. Purchase obligations include firm commitments
and agreements with various suppliers to ensure the availability of components. For more information see Note 18. Commitments
and Contingencies in ITEM 8 "Financial Statements and Supplementary Data."
Recent 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 (“ASC”) are communicated through
issuance of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued
guidance, whether adopted or to be adopted in the future, is not expected to have a material impact on our Consolidated Financial
Statements upon adoption.
To understand the impact of recently issued guidance, whether adopted or to be adopted, please review the information
provided in Note 1. Operations and Summary of Significant Accounting Policies and Estimates in ITEM 8 "Financial Statements
and Supplementary Data."
ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk and Risk Management
In the normal course of business, we have exposures to interest rate risk from our investments, credit facility, and foreign
exchange rate risk related to our foreign operations and foreign currency transactions.
Interest Rate Risk
Our market risk exposure relates to changes in interest rates in our investment portfolio and credit facility. We generally
place our investments with high-credit quality issuers and by policy are averse to principal loss and seek to protect and preserve
our invested funds by limiting default risk, market risk, and reinvestment risk.
As of December 31, 2015, our investments consisted primarily of certificates of deposit with maturity of less than
1 years. As a measurement of the sensitivity of our portfolio and assuming that our investment portfolio balances remain constant,
a hypothetical decrease of 100 basis points (1%) in interest rates would decrease annual pre-tax earnings by a nominal amount.
We had no debt outstanding as of December 31, 2015. Assuming a full drawdown on all outstanding loan agreements
subject to variable interest rates, and holding other variables constant, a hypothetical immediate one percentage point change in
interest rates would be expected to have an impact on pre-tax earnings and cash flows of approximately $0.5 million over the
course of 12 months.
Foreign Currency Exchange Rate Risk
We are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when we
sell products and purchase materials in currencies different from the currency in which product and manufacturing costs were
incurred. The functional currencies of our worldwide facilities primarily include the USD, EUR, KRW, TWD, GBP, and CNY.
Our purchasing and sales activities are primarily denominated in the USD, JPY, EUR and CNY. We may be impacted by changes
in the relative buying power of our customers, which may impact sales volumes either positively or negatively. As these currencies
36
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fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing
transactions and labor.
From time to time, we enter into foreign currency exchange rate contracts to hedge against changes in foreign currency
exchange rates on assets and liabilities expected to be settled at a future date. Market risk arises from the potential adverse effects
on the value of derivative instruments that result from a change in foreign currency exchange rates. In 2011 we entered into foreign
currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional
currencies. We minimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring
parameters that limit the types and degree of our derivative contract instruments. We enter into derivative contract instruments for
risk management purposes only. We do not enter into or issue derivatives for trading or speculative purposes.
Our reported financial results of operations, including the reported value of our assets and liabilities, are also impacted
by changes in foreign currency exchange rates. Assets and liabilities of substantially all of our subsidiaries outside the U.S. are
translated at period end rates of exchange for each reporting period. Operating results and cash flow statements are translated at
weighted-average rates of exchange during each reporting period. Although these translation changes have no immediate cash
impact, the translation changes may impact future borrowing capacity, and overall value of our net assets.
Currency exchange rates vary daily and often one currency strengthens against the USD while another currency weakens.
Because of the complex interrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the
impact of a change in one or more particular exchange rates.
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ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Reports of Grant Thornton LLP, Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
39
41
42
43
44
45
46
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Advanced Energy Industries, Inc.
We have audited the accompanying consolidated balance sheets of Advanced Energy Industries, Inc. (a Delaware corporation)
and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2015.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Advanced Energy Industries, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their operations and
their cash flows for each of the three years in the period ended December 31, 2015 in conformity with accounting principles
generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of December 31, 2015, based on criteria established in the 2013 Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our report dated February 25, 2016 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Denver, Colorado
February 25, 2016
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Advanced Energy Industries, Inc.
We have audited the internal control over financial reporting of Advanced Energy Industries, Inc. (a Delaware corporation) and
subsidiaries (the “Company”) as of December 31, 2015, based on criteria established in the 2013 Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s
management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal
Control over Financial Reporting appearing under Item 9A of the Company’s Annual Report on Form 10-K (“Management’s
Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control
over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December
31, 2015, based on criteria established in the 2013 Internal Control-Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated financial statements of the Company as of and for the year ended December 31, 2015, and our report dated February
25, 2016 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Denver, Colorado
February 25, 2016
40
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ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Balance Sheets
(In thousands, except per share amounts)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Marketable securities
Accounts receivable, net of allowances of $8,739 and $1,052, respectively
Inventories
Deferred income tax assets
Income taxes receivable
Other current assets
Current assets from discontinued operations
Total current assets
Property and equipment, net
Deposits and other
Goodwill
Other intangible assets, net
Deferred income tax assets
Non-current assets from discontinued operations
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable
Income taxes payable
Accrued payroll and employee benefits
Accrued warranty expense
Other accrued expenses
Customer deposits and other
Current liabilities from discontinued operations
Total current liabilities
Deferred income tax liabilities
Uncertain tax positions
Long term deferred revenue
Other long-term liabilities
Non-current liabilities from discontinued operations
Total liabilities
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; 39,756 and 40,613
issued and outstanding, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
December 31,
2015
2014
$
158,443
$
121,401
11,986
54,959
52,573
6,004
9,040
7,868
41,902
342,775
9,645
1,729
42,729
34,141
30,398
1,271
3,083
79,053
46,092
5,103
14,472
6,146
101,403
376,753
9,759
1,666
43,875
40,311
35,997
176,207
$
462,688
$
684,568
$
27,246
$
13,972
9,175
1,633
12,258
3,319
36,481
104,084
1,181
2,086
45,584
18,871
27,302
24,540
1,495
10,496
1,612
11,790
4,067
58,568
112,568
1,439
6,484
47,246
23,192
18,674
199,108
209,603
—
40
195,096
67,910
534
263,580
—
41
237,752
226,396
10,776
474,965
$
462,688
$
684,568
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Operations
(In thousands, except per share amounts)
SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES:
Research and development
Selling, general, and administrative
Amortization of intangible assets
Restructuring charges and asset impairment
Total operating expenses
OPERATING INCOME
Interest (expense) income
Other (expense) income, net
Total other (expense) income
Income from continuing operations before income taxes
Provision (benefit) for income taxes
INCOME FROM CONTINUING OPERATIONS, NET OF INCOME TAXES
LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES
NET (LOSS) INCOME
Basic weighted-average common shares outstanding
Diluted weighted-average common shares outstanding
EARNINGS (LOSS) PER SHARE:
CONTINUING OPERATIONS:
BASIC EARNINGS PER SHARE
DILUTED EARNINGS PER SHARE
DISCONTINUED OPERATIONS
BASIC LOSS PER SHARE
DILUTED LOSS PER SHARE
NET INCOME:
BASIC (LOSS) EARNINGS PER SHARE
DILUTED (LOSS) EARNINGS PER SHARE
Years Ended December 31,
2015
2014
2013
$ 414,811
$
367,333
$ 299,381
197,941
216,870
179,273
188,060
153,788
145,593
39,551
66,097
4,368
198
110,214
106,656
(880)
(334)
(1,214)
105,442
21,960
83,482
36,915
58,549
4,998
1,507
101,969
86,091
(476)
390
(86)
86,005
16,510
69,495
(241,968)
$ (158,486) $
(22,513)
46,982
$
40,746
41,077
40,420
41,034
35,383
57,334
850
4,179
97,746
47,847
398
77
475
48,322
(11,388)
59,710
(27,624)
32,086
39,597
40,667
$
$
$
$
$
$
2.05
2.03
$
$
1.72
1.69
$
$
1.51
1.47
(5.94) $
(5.94) $
(0.56) $
(0.56) $
(0.70)
(0.70)
(3.89) $
(3.89) $
1.16
1.14
$
$
0.81
0.79
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Comprehensive (Loss) Income
(In thousands)
Net (loss) income
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment
Unrealized (losses) gains on marketable securities
Comprehensive (loss) income
Years Ended December 31,
2015
(158,486) $
$
2014
2013
46,982
$
32,086
(10,228)
(14)
(23,214)
533
$
(168,728) $
24,301
$
3,733
(1)
35,818
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Stockholders’ Equity
(In thousands, except share amounts)
Common Stock
Shares
Amount
Additional
Paid-in Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
Balances, January 1, 2013
Stock issued from equity plans
Stock-based compensation
Excess tax benefit from stock-based compensation
Comprehensive income:
Equity adjustment from foreign currency translation
Unrealized holding gains
Net income
Total comprehensive income
Balances, December 31, 2013
Stock issued from equity plans
Stock-based compensation
RSUs settled in cash
Excess tax benefit from stock-based compensation
Stock buyback
Comprehensive income:
Equity adjustment from foreign currency translation
Unrealized holding losses
Net income
Total comprehensive income
Balances, December 31, 2014
Stock issued from equity plans
Stock-based compensation
Excess tax benefit from stock-based compensation
Stock buyback
Comprehensive income:
Equity adjustment from foreign currency translation
Unrealized holding losses
Net loss
Total comprehensive loss
Balances at December 31, 2015
37,991
$
2,513
—
—
—
—
—
—
40,504
$
1,485
—
—
(1,376)
—
—
—
—
40,613
$
525
—
—
38
3
—
—
—
—
—
—
41
1
—
—
(1)
—
—
—
—
41
—
—
—
—
—
—
—
39,756
$
—
—
—
—
40
$
212,520
$
147,328
$
29,725
$
389,611
26,334
13,742
(1,046)
—
—
—
—
—
—
—
—
—
32,086
32,086
—
—
—
3,733
(1)
—
3,732
26,337
13,742
(1,046)
3,733
(1)
32,086
35,818
$
251,550
$
179,414
$
33,457
$
464,462
15,830
4,993
(11,198)
1,576
(24,999)
—
—
—
—
—
—
—
—
—
—
46,982
46,982
—
—
—
—
15,831
4,993
(11,198)
1,576
(25,000)
(23,214)
(23,214)
533
—
(22,681)
533
46,982
24,301
$
237,752
$
226,396
$
10,776
$
474,965
4,121
3,321
(99)
—
—
—
—
—
—
—
—
—
—
(158,486)
(158,486)
—
—
—
—
(10,228)
(14)
—
(10,242)
4,121
3,321
(99)
(50,000)
(10,228)
(14)
(158,486)
(168,728)
$
195,096
$
67,910
$
534
$
263,580
(1,382)
(1)
(49,999)
The accompanying notes are an integral part of these Consolidated Financial Statements.
44
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ADVANCED ENERGY INDUSTRIES, INC.
Consolidated Statements of Cash Flows
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income
Loss from discontinued operations, net of income taxes
Income from continuing operations, net of income taxes
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation expense
Provision for deferred income taxes
Non-cash restructuring charges
Non-cash reserve for potential bad debts
Net (gain) loss on disposal of assets
Changes in operating assets and liabilities, net of assets acquired:
Accounts receivable
Inventories
Other current assets
Accounts payable
Other current liabilities and accrued expenses
Income taxes
Net cash provided by operating activities from continuing operations
Net cash provided by (used in) operating activities from discontinued operations
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities
Proceeds from sale of marketable securities
Proceeds from the sale of assets
Acquisitions, net of cash acquired
Purchases of property and equipment
Net cash provided by (used in) investing activities from continuing operations
Net cash used in investing activities from discontinued operations
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Settlement of performance stock units
Purchase and retirement of common stock
Proceeds from exercise of stock options
Excess tax from stock-based compensation deduction
Other financing activities
Net cash provided by (used in) financing activities from continuing operations
Net cash provided by (used in) financing activities from discontinued operations
Net cash provided by (used in) financing activities
EFFECT OF CURRENCY TRANSLATION ON CASH
INCREASE (DECREASE ) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, beginning of period
CASH AND CASH EQUIVALENTS, end of period
Less cash and cash equivalents from discontinued operations
CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Cash paid for income taxes
Cash received for refunds of income taxes
Cash held in banks outside the United States
Years Ended December 31,
2014
2013
2015
$ (158,486) $
(241,968)
83,482
46,982
(22,513)
69,495
$ 32,086
(27,624)
59,710
8,832
2,810
3,498
—
5,967
(1,019)
17,919
(6,715)
(2,267)
3,220
(9,500)
17,994
124,221
(19,413)
104,808
(30,172)
21,095
—
(128)
(4,014)
(13,219)
(46)
(13,265)
10,461
3,712
(21,561)
—
—
502
(3,835)
(7,416)
3,029
1,866
(5,135)
11,085
62,203
13,383
75,586
(6,432)
14,835
(156)
(57,138)
(3,449)
(52,340)
(2,656)
(54,996)
6,988
9,849
4,829
2,968
—
680
(18,084)
(2,086)
5,249
12,694
17,223
(26,548)
73,472
(38,156)
35,316
(19,034)
33,093
—
—
(2,588)
11,471
(82,397)
(70,926)
—
(50,000)
4,476
(99)
(4)
(45,627)
(14)
(45,641)
(1,467)
44,435
125,285
169,720
11,277
$ 158,443
(11,198)
(25,000)
15,830
1,576
(2)
(18,794)
(13,686)
(32,480)
(950)
(12,840)
138,125
125,285
3,884
$ 121,401
—
—
26,337
(1,046)
(1)
25,290
1,023
26,313
858
(8,439)
146,564
138,125
10,657
$ 127,468
$
361
7,161
5,377
116,259
$
234
5,241
7,261
44,573
$
63
13,396
1,569
27,064
The accompanying notes are an integral part of these Consolidated Financial Statements.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In this Annual Report on Form 10-K, we use the terms “Advanced Energy”, “the Company”, “we”, “us” or “our” to refer
to Advanced Energy Industries, Inc. and its subsidiaries.
NOTE 1.
OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATES
We design, manufacture, sell and support power conversion and control products that transform power into various usable
forms. Our products enable manufacturing processes that use thin film and plasma enhanced chemical and physical processing
for various products, industrial electro-thermal applications for material and chemical processes, precision power for analytical
instrumentation, as well as grid-tied power conversion. We also supply thermal instrumentation products for advanced temperature
control in these markets. Our network of global service support centers provides local repair and field service capability in key
regions. As of December 31, 2015, we have discontinued our Inverter production, engineering, and sales product line. As such,
all Inverter revenues, costs, assets and liabilities are reported in Discontinued Operations for all periods presented herein and we
currently report as a single unit. See Note 3. Discontinued Operations for more information.
Principles of Consolidation — Our Consolidated Financial Statements include our accounts and the accounts of our
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated. Our Consolidated Financial
Statements are stated in United States dollars and have been prepared in accordance with accounting principles generally accepted
in the United States (“U.S. GAAP”).
Use of Estimates in the Preparation of the Consolidated Financial Statements — The preparation of our Consolidated
Financial Statements in conformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the
reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting period. We believe that the significant estimates, assumptions,
and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsolete inventory,
warranty reserves, acquisitions, asset valuations, asset life, depreciation, amortization, recoverability of assets, impairments,
deferred revenue, stock option and restricted stock grants, taxes, and other provisions are reasonable, based upon information
available at the time they are made. Actual results may differ from these estimates, making it possible that a change in these
estimates could occur in the near term.
Foreign Currency Translation — The functional currency of our foreign subsidiaries is their local currency, with the
exception of our manufacturing facility in Shenzhen, The People's Republic of China (“PRC”) where the United States dollar is
the functional currency. Assets and liabilities of foreign subsidiaries are translated to United States dollars at period-end exchange
rates, and our Consolidated Statements of Operations and Cash Flows are translated at average exchange rates during the period.
Resulting translation adjustments are recorded as a component of accumulated other comprehensive income.
Transactions denominated in currencies other than the local currency are recorded based on exchange rates at the time
such transactions arise. Subsequent changes in exchange rates result in foreign currency transaction gains and losses which are
reflected as unrealized (based on period end translation) or realized (upon settlement of the transactions) in other income, net in
our Consolidated Statements of Operations.
Fair Value of Financial Instruments — We value our financial assets and liabilities using fair value measurements.
Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The carrying amount of cash and cash equivalents, marketable securities, accounts
receivable, other current assets, accounts payable, accrued liabilities, and other current liabilities in our Consolidated Financial
Statements approximates fair value because of the short-term nature of the instruments.
Cash and Cash Equivalents — We consider all amounts on deposit with financial institutions and highly liquid
investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are highly liquid
investments that consist primarily of short-term money market instruments and demand deposits with insignificant interest rate
risk and original maturities of three months or less at the time of purchase.
Sometimes we invest excess cash in money market funds not insured by the Federal Deposit Insurance Corporation.
We believe 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 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.
As of December 31, 2015 we have $1.3 million of cash included in cash and cash equivalents that is restricted from
immediate withdrawal. Of this amount, $0.7 million is a refund from a European tax authority, restricted until the tax authority
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
completes its audit procedures, $0.1 million is restricted for Taiwan Customs Clearance transactions as a guarantee of Customs
Duty, adjusted annually based on projected customs clearance transactions, and $0.5 million is collateral for the US purchasing
card program, restricted for the duration of the card program.
Marketable Securities — All of our investments in marketable securities are classified as available-for-sale at the
respective balance sheet dates. Marketable securities classified as available-for-sale are recorded at fair value based upon quoted
market prices, and any temporary difference between the cost and fair value of the investment is presented as a separate component
of accumulated other comprehensive income (loss). We recognize gains and losses on the date our investments mature or are sold
and record these gains and losses in other income, net. The specific identification method is used to determine the gains and losses
on investments in marketable securities.
Concentrations of Credit Risk — Financial instruments, which potentially subject us to credit risk, include cash and
cash equivalents, marketable securities, and trade accounts receivable. To preserve capital and maintain liquidity, we invest with
financial institutions we deem to be of high quality and sound financial condition. Our investments are in low-risk instruments
and we limit our credit exposure in any one institution or type of investment instrument based upon criteria including
creditworthiness.
At December 31, 2015, our accounts receivable from Applied Materials and Lam Research were $17.1 million, or 31.2%
of our total accounts receivable, and $7.3 million, or 13.3% of our total accounts receivable, respectively. At December 31, 2014,
our accounts receivable from Applied Materials and Lam Research were $20.0 million, or 25.3% of our total accounts receivable,
and $10.6 million, or 13.4% of our total accounts receivable, respectively. No other customer balance exceeded 10% of our total
accounts receivable balance at December 31, 2015 or December 31, 2014. We have established an allowance for doubtful accounts
based upon factors surrounding the credit risk of specific customers, historical trends, and other information.
Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at net realizable
value. We have not historically charged interest on overdue balances, although we do notify our customers that we reserve the
right to do so. We maintain a credit approval process and we make significant judgments in connection with assessing our customers’
ability to pay at the time of shipment. Despite this assessment, from time to time, our customers are unable to meet their payment
obligations. We continuously monitor our customers’ credit worthiness and use our judgment in establishing a provision for
estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified.
While such credit losses have historically been within our expectations and the provisions established, there is no assurance that
we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial
position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating
results.
Changes in allowance for doubtful accounts are summarized as follows (in thousands):
Balances at beginning of period
Additions - charged to expense
Deductions - write-offs, net of recoveries
Balances at end of period
Years Ended December 31,
2013
2014
2015
$ 1,052
7,837
(150)
$ 8,739
$
$
1,390
332
(670)
1,052
$
$
4,100
—
(2,710)
1,390
During 2015, we recorded an allowance for doubtful accounts related to our inverter business of $16.3 million. Of this
amount, $6.0 million is related to our inverter service business and is recorded in Selling, general and administrative expense and
the remainder is recorded in Income from discontinued operations in our Consolidated Financial Statements. For more information
on our discontinued operations, please see Note 3. Discontinued Operations.
Inventories — Inventories include costs of materials, direct labor, manufacturing overhead, in-bound freight, and duty.
Inventories are valued at the lower of cost (first-in, first-out method) or market and are presented net of reserves for excess and
obsolete inventory.
Reserves are provided for excess and obsolete inventory. We regularly review inventory quantities on hand and record
a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on
our estimated forecast of product demand. Demand for our products can fluctuate significantly. A significant decrease in demand
could result in an increase in the charges for excess inventory quantities on hand.
In addition, our industry is subject to technological change, new product development, and product technological
obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significant
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and
our reported operating results.
During 2015, we recorded an impairment related to our legacy inverter inventory of $25.1 million, which is recorded
in Income from discontinued operations in our Consolidated Financial Statements. For more information on discontinued
operations, please see Note 3. Discontinued Operations.
Property and Equipment — Property and equipment is stated at cost or estimated fair value if acquired in a business
combination. Depreciation is computed over the estimated useful lives using the straight-line method. Estimated useful lives for
financial reporting purposes are as follows: buildings, 20 to 40 years; machinery, equipment, furniture and fixtures and vehicles,
three to 10 years; and computer and communication equipment, three years.
Amortization of leasehold improvements and leased equipment is calculated using the straight-line method over the lease
term or the estimated useful life of the assets, whichever period is shorter. Additions, improvements, and major renewals are
capitalized, while maintenance, repairs, and minor renewals are expensed as incurred. When depreciable assets are retired, or
otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses
are included in other income, net, in our Consolidated Statements of Operations.
Intangible Assets, Goodwill and Other Long-Lived Assets — As a result of our acquisitions, we identified and recorded
intangible assets and goodwill. Intangible assets are valued based on estimates of future cash flows and amortized over their
estimated useful lives. Goodwill is subject to annual impairment testing, as well as testing upon the occurrence of any event that
indicates a potential impairment. Intangible assets and other long-lived assets are subject to an impairment test if there is an indicator
of impairment. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and
benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished,
intangible assets and goodwill may be impaired and the resulting charge to operations may be material. When we determine that
the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more
indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and
then measure the impairment using discounted cash flows.
The estimation of useful lives and expected cash flows requires us to make significant judgments regarding future
periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to our
carrying value of these assets and may result in material charges to our results of operations.
The annual impairment test for goodwill can be performed using an assessment of qualitative factors in determining if
it is more likely than not that goodwill is impaired. If this assessment indicates that it is more likely than not that goodwill is
impaired, the next step of impairment testing compares the fair value of a reporting unit to its carrying value. Goodwill would be
impaired if the resulting implied fair value of goodwill was less than the recorded carrying value of the goodwill.
In June 2015, the Company completed its six-month long process of seeking strategic alternatives for its inverter business
and no satisfactory offers were received for all or a part of the inverter business. On June 29, 2015, we announced our decision to
wind down our solar inverter business to focus solely on our Precision Power business. The result of this assessment was the
recording of various asset impairments including Goodwill and Intangibles which is reflected in the "Loss from discontinued
operations, net of income taxes" in our Consolidated Statements of Operations, as we have discontinued our inverter product line
as of December 31, 2015. See Note 3. Discontinued Operations.
Revenue Recognition — We recognize revenue from product sales upon transfer of title and risk of loss to our customers
provided that there is evidence of an arrangement, the sales price is fixed or determinable, and the collection of the related receivable
is reasonably assured. In most transactions, we have no obligations to our customers after the date products are shipped, other than
pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related
shipping and handling costs are recognized in cost of sales.
We maintain a worldwide support organization in eight countries, including the United States, the PRC, Japan, Korea,
Taiwan, Canada, Germany, and Great Britain. Support services include warranty and non-warranty repair services, upgrades, and
refurbishments on the products we sell. Revenue from repairs and replacements, that are non-warranty in nature, are recognized
as the work is performed on a time and materials basis. Repairs that are covered under our standard warranty do not generate
revenue.
As part of our ongoing service business, we also provide our customers with extended warranty and preventive
maintenance service contract options on the products we sell. Any up-front fees received for extended warranties or maintenance
plans are deferred and recognized ratably over the service periods, as defined in the agreements. We deferred revenue related to
extended warranties totaling $45.6 million as of December 31, 2015 and $47.2 million as of December 31, 2014, including the
current portion.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Based on the credit worthiness of certain customers, we may require payment prior to the manufacture or shipment of
products purchased by these customers. Cash payments received prior to shipment are recorded as customer deposits, a current
liability, and then recognized as revenue when appropriate based upon the revenue recognition criteria discussed earlier in this
section. As of December 31, 2015 and December 31, 2014 the total amount of customer deposits was $3.3 million and $4.1 million,
respectively. We do not offer price protection to customers, or allow returns, unless covered by our normal policy for repair of
defective products.
We occasionally agree to make payments to certain customers in order to participate in anticipated sales activity. Payments
made to customers are accounted for as a reduction of revenue unless they are made in exchange for identifiable goods or services
with fair values that can be reasonably estimated. These reductions in revenues are recognized immediately to the extent that the
payments cannot be attributed to anticipated future sales, and are recognized in future periods to the extent that the payments relate
to future sales, based on the specific facts and circumstances underlying each payment.
Taxes Collected from Customers — In the course of doing business we collect various taxes from customers including,
but not limited to, sales taxes and value added taxes. It is our policy to record revenue net of taxes collected from customers in
our Consolidated Statements of Operations.
Shipping and Handling Costs — Amounts billed to customers for shipping and handling are recorded in sales. Shipping
and handling costs incurred by us for the delivery of products to customers are included in cost of sales.
Advertising Costs — Advertising costs are expensed when incurred and are included in selling, general, and
administrative expenses.
Research and Development Expenses — Costs incurred to advance, test or otherwise modify our proprietary technology
or develop new technologies are considered research and development costs and are expensed when incurred. These costs are
primarily comprised of costs associated with the operation of our laboratories and research facilities, including internal labor,
materials, and overhead.
Warranty Costs — We provide for the estimated costs to fulfill customer warranty obligations upon the recognition of
the related revenue. We offer warranty coverage for a majority of our Precision Power products for periods typically ranging from
12 to 24 months after shipment. We warranted our inverter products for five to ten years and provided the option to purchase
additional warranty coverage up to 20 years. The warranty expense accrued related to our standard inverter product warranties is
now considered part of our discontinued operations and is recorded as such on our Consolidated Balance Sheets. See Note 3.
Discontinued Operations for more information. See Note 13. Warranties for more information on our warranties from continuing
operations. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the
repairs. The assumptions we use to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when
appropriate, the accruals are adjusted. Should product failure rates differ from our estimates, actual costs could vary significantly
from our expectations.
Stock-Based Compensation — Accounting for stock-based compensation requires the measurement and recognition
of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. We
have estimated the fair value of all stock options and awards on the date of grant using the Black-Scholes-Merton pricing model,
which is affected by our stock price, as well as assumptions regarding a number of complex and subjective variables. These
variables include our expected stock price volatility over the term of the awards, actual and projected employee option exercise
behaviors, risk free interest rates and expected dividends. We also estimate forfeitures at the time of grant and revise those estimates
in subsequent periods if actual forfeitures differ from our estimates. Our expected volatility assumption is based on the historical
daily closing price of our stock over a period equivalent to the expected life of the options. Our 2012-2014 Long-term Incentive
Plan included a cash settlement option for awards of restricted stock units.
Income Taxes — We follow the liability method of accounting for income taxes under which deferred tax assets and
liabilities are recognized for future tax consequences. A deferred tax asset or liability is computed for both the expected future
impact of differences between the financial statement and tax basis of assets and liabilities and for the expected future tax benefit
to be derived from tax loss and tax credit carry-forwards. Tax rate changes are reflected in the period such changes are enacted.
We assess the recoverability of our net deferred tax assets and the need for a valuation allowance on a quarterly basis.
Our assessment includes a number of factors including historical results and taxable income projections for each jurisdiction. The
ultimate realization of deferred income tax assets is dependent on the generation of taxable income in appropriate jurisdictions
during the periods in which those temporary differences are deductible. We consider the scheduled reversal of deferred income
tax liabilities, projected future taxable income, and tax planning strategies in determining the amount of the valuation allowance.
Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred
income tax assets are deductible, we determine if we will realize the benefits of these deductible differences.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions. In general,
we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. The
first step is to evaluate the tax position for recognition by determining, if based on the technical merits, it is more likely than not
that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second
step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement.
We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes. This evaluation is based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit, and new audit activity.
Commitments and Contingencies — From time to time we are involved in disputes and legal actions arising in the
normal course of our business. While we currently believe that the amount of any ultimate loss would not be material to our
financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverse outcome, the ultimate
loss could have a material adverse effect on our financial position or reported results of operations in a particular period. An
unfavorable decision, particularly in patent litigation, could require material changes in production processes and products or result
in our inability to ship products or components found to have violated third-party patent rights. We accrue loss contingencies when
it is probable that a loss has occurred or will occur and the amount of the loss can be reasonably estimated. Our estimates of
probability of losses are subjective, involve significant judgment and uncertainties, and are based on the best information we have
at any given point in time. Resolution of these uncertainties in a manner inconsistent with our expectations could have a significant
impact on our results of operations and financial condition.
NEW ACCOUNTING STANDARDS
From time to time, the Financial Accounting Standards Board ("FASB") or other standards setting bodies issue new
accounting pronouncements. Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance
of an Accounting Standards Update (“ASU”). Unless otherwise discussed, we believe that the impact of recently issued guidance,
whether adopted or to be adopted in the future, is not expected to have a material impact on the Consolidated Financial Statements
upon adoption.
In April 2014, the FASB issued guidance redefining discontinued operations and requiring only those disposals of
components of an entity, including classifications as held for sale, that represent a strategic shift that has, or will have, a major
effect on an entity’s operations and financial results to be reported as discontinued operations. In addition, the new standard expands
the disclosure requirements of discontinued operations. As of December 31, 2015, we have discontinued our inverter engineering,
sales, and production and have applied this guidance to our Consolidated Financial Statements herein.
In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step
process for how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This
guidance will be effective for fiscal periods beginning after December 15, 2017 and for the interim periods within that year. Early
application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We
are currently evaluating the impact that the adoption will have on our Consolidated Financial Statements and related disclosures.
We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing reporting.
In November 2015, the FASB issued guidance requiring entities to present deferred tax assets and liabilities as noncurrent
in a classified balance sheet instead of separating into current and noncurrent amounts. This guidance is effective for financial
statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods, on a
prospective or retrospective basis. Early adoption is permitted for all companies in any interim or annual period. Advanced Energy
has not determined in what period it will adopt or what adoption method it will use and is currently assessing the impact that this
guidance may have on its Consolidated Financial Statements.
NOTE 2.
BUSINESS ACQUISITIONS
Refusol Holding
On April 8, 2013, we acquired all the outstanding shares of Refusol Holding GmbH pursuant to a Sale and Purchase
Agreement (the "SPA") between AEI Holdings, GmbH (formerly Blitz S13-103, GmbH) ("AEI Holdings"), an indirect wholly-
owned subsidiary of Advanced Energy Industries, Inc.; Jolaos Verwaltungs GmbH ("Jolaos") and Prettl Beteilgungs Holding
GmbH. Refusol Holding GmbH ("Refusol Holding") owns all of the shares of Refusol GmbH and its subsidiaries (collectively
and together with Refusol Holding, "Refusol"). Refusol developed, manufactured, distributed and serviced PV inverters. The
acquisition of Refusol is intended to broaden our portfolio and extend our geographic distribution.
Consideration paid totaled approximately $87.2 million, consisting of a cash payment of $75.4 million, net of cash acquired
and a working capital reduction and assumption of debt totaling $11.9 million. The agreement called for additional cash consideration
50
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
if certain stretch financial targets were met by our Inverters segment and Refusol, on a combined basis, at the end of the twelve
(12) calendar months following April 1, 2013. These financial targets were not met.
The components of the fair value of the total consideration transferred for the Refusol acquisition are as follows (in
thousands):
Cash paid to owners
Debt assumed
Working capital adjustment
Cash acquired
Total fair value of consideration transferred
$
$
79,550
11,873
(2,340)
(1,836)
87,247
The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of April 8, 2013
(in thousands):
Accounts receivable
Inventories
Other current assets
Property and equipment
Other long-term assets
Deferred tax assets
Current liabilities
Long-term liabilities
Amortizable intangible assets:
Trademarks
Technology
Customer relationships
Total amortizable intangible assets
Total identifiable net assets
Goodwill
Total fair value of consideration transferred
$
$
8,868
13,610
6,769
4,708
130
(3,156)
(33,397)
(41,646)
(44,114)
1,300
5,700
3,500
10,500
(33,614)
120,861
87,247
A summary of the intangible assets acquired, amortization method and estimated useful lives as of April 8, 2013 follows
(in thousands, except useful life):
Trademarks
Technology
Customer relationships
Amount
Amortization Method
Useful Life
$
1,300
5,700
3,500
$ 10,500
Straight-line
Straight-line
Straight-line
1.5
5
5
During the first two quarters of 2014, we finalized the purchase price accounting of Refusol and made adjustments to
Goodwill of $29.4 million, primarily consisting of adjustments to the opening balance of accrued warranty and other accrued
expenses. All assets and liabilities are recorded in the functional currency of the entity and are subject to changes due to translation
at each balance sheet date. The goodwill associated with the acquisition was fully impaired in 2015 as part of our inverter wind
down. See Note 3. Discontinued Operations for more information.
Power Control Module
On January 27, 2014, we acquired the intellectual property related to AEG Power Solutions' Power Control Modules
("PCM"). PCM is comprised of the Thyro-Family of products and accessories and serves numerous power control applications in
different industries ranging from materials thermal processing through chemical processing, glass manufacturing and numerous
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
other general industrial power applications. This acquisition is expected to broaden our product offerings and will be added to our
precision power portfolio. We paid total consideration of $31.5 million including contingent consideration, of which $15.0 million
is included in Intangibles, $16.4 million in Goodwill, and $0.1 million in Property, plant, and equipment. Included in Goodwill is
$1.4 million of contingent consideration that was paid in the first quarter of 2015. All assets and liabilities are recorded in the
functional currency of the entity and are subject to changes due to translation at each balance sheet date. The goodwill associated
with the acquisition is the result of expected synergies and expansion of our product offerings into new markets.
HiTek Power Group
On April 12, 2014, Advanced Energy acquired all outstanding common stock of HiTek Power Group ("HiTek"), a privately-
held provider of high voltage power solutions. Based in the United Kingdom, HiTek offers a comprehensive portfolio of high
voltage and custom built power conversion products, ranging from 100V to 500kV, designed to meet the demanding requirements
of OEMs worldwide. These products target applications including semiconductor wafer processing and metrology, scientific
instrumentation, mass spectrometry, industrial printing, and analytical x-ray systems for industrial and analytical applications.
HiTek's unique product architecture, encapsulation technology and control algorithms, combined with deep knowledge of its
customer-specific applications, have made it a leading provider of critical, high-end, high voltage power solutions. We acquired
HiTek to expand our product offerings in our precision power portfolio.
The components of the fair value of the total consideration transferred for the HiTek acquisition are as follows (in
thousands):
Cash paid to owners
Cash acquired
Total fair value of consideration received
$
$
3,525
(6,889)
(3,364)
The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of April 12, 2014
(in thousands):
Accounts receivable
Inventories
Other current assets
Property and equipment
Deferred taxes on intangible values
Current liabilities
Long-term liabilities
Total tangible assets, net
Amortizable intangible assets:
Tradename
Technology
Customer relationships
Total amortizable intangible assets
Total identifiable net assets
Gain on bargain purchase *
$
2,867
4,980
415
1,291
2,020
(3,836)
(22,725)
(14,988)
336
4,029
8,225
12,590
(2,398)
(966)
(3,364)
Total fair value of consideration received
*A gain (bargain purchase gain) is recorded when the fair value of assets acquired exceeds the fair value of the liabilities assumed and
consideration paid. This gain is recorded in Other income on our Consolidated Statements of Operations.
$
52
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the intangible assets acquired, amortization method and estimated useful lives as of April 12, 2014 follows
(in thousands, except useful life):
Technology
Tradename
Customer relationships
Amount
Amortization Method
Useful Life
$
4,029
336
8,225
$ 12,590
Straight-line
Straight-line
Straight-line
10
2.5
15
All assets and liabilities are recorded in the functional currency of the entity and are subject to changes due to translation
at each balance sheet date.
UltraVolt, Inc.
On August 4, 2014, Advanced Energy acquired all outstanding common stock of UltraVolt, Inc. ("UltraVolt"), a privately-
held provider of high voltage power solutions. Based in Ronkonkoma, New York, UltraVolt offers a comprehensive portfolio of
high voltage power supplies and modules ranging from benchtop and rack mount systems to microsize printed circuit board mount
modules. Its standard DC-to-DC product line consists of over 1,500 models, which can be combined with accessories and options
to create thousands of product configurations. Serving over 100 markets, UltraVolt's fixed-frequency, high-voltage topology
provides wide input and output operating ranges while retaining excellent stability and efficiencies. We acquired UltraVolt to
expand our high voltage product offerings in our precision power portfolio.
The components of the fair value of the total consideration transferred for the UltraVolt acquisition are as follows (in
thousands):
Purchase price
Net working capital adjustment
Total fair value of consideration transferred
$
$
30,200
1,073
31,273
The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of August 4, 2014
(in thousands):
Cash
Accounts receivable
Inventories
Other current assets
Property and equipment
Long-term assets
Deferred taxes on intangible values
Current liabilities
Total tangible assets, net
Amortizable intangible assets:
Technology
Tradename
Customer relationships
Total amortizable intangible assets
Total identifiable net assets
Goodwill
Total fair value of consideration transferred
53
$
$
758
1,694
2,599
264
424
711
(2,087)
(1,053)
3,310
2,100
200
8,600
10,900
14,210
17,063
31,273
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
A summary of the intangible assets acquired, amortization method and estimated useful lives as of August 4, 2014 follows
(in thousands, except useful life):
Technology
Tradename
Customer relationships
Amount
Amortization Method
Useful Life
$
2,100
200
8,600
$ 10,900
Straight-line
Straight-line
Straight-line
10
2.5
12
The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into
additional markets that we already serve.
NOTE 3.
DISCONTINUED OPERATIONS
In June 2015, the Company completed its six-month long process of seeking strategic alternatives for its inverter business
and no satisfactory offers were received for all or a part of the inverter business. On June 29, 2015 we announced our decision to
wind-down our inverter product business to focus solely on our core Precision Power business. This constituted a strategic shift
as inverter engineering, manufacturing and sales constituted a separate reporting segment for the Company. The wind down was
completed in December 2015 and as such inverter engineering, manufacturing and sales has been reflected as “Loss from
discontinued operations, net of income taxes” on our Consolidated Statements of Operations for all periods presented herein.
The sale of extended inverter warranties are reflected in deferred revenue on our Consolidated Balance Sheets and will
be reflected in Continuing operations in future periods as the deferred revenue is earned and the associated services are rendered.
The significant items included in "Loss from discontinued operations, net of income taxes" are as follows:
Sales
Cost of sales
Total operating expenses (including restructuring)
Operating loss from discontinued operations
Other expense
Loss from discontinued operations before income taxes
Provision for income taxes
Loss from discontinued operations, net of income taxes
Year Ended December 31,
2015
2014
2013
$
$
$
95,856
139,045
232,262
(275,451)
(55)
(275,506)
(33,538)
(241,968) $
$
215,763
209,795
51,637
(45,669)
(658)
(46,327)
(23,814)
(22,513) $
247,623
183,080
97,767
(33,224)
(814)
(34,038)
(6,414)
(27,624)
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets and Liabilities of discontinued operations within the Consolidated Balance Sheets are comprised of the
following:
Cash and cash equivalents
Account and other receivables, net*
Inventories
Deferred income tax assets
Current assets of discontinued operations
Property, plant and equipment, net
Intangibles and other assets, net
Non-current assets of discontinued operations
Accounts payable and other accrued expenses
Accrued warranty*
Accrued restructuring*
Current liabilities of discontinued operations
Accrued warranty*
Other liabilities
Non-current liabilities of discontinued operations
December 31,
2015
2014
11,277
$
16,331
—
14,294
3,884
39,620
48,990
8,909
41,902
$
101,403
—
1,271
1,271
$
19,217
156,990
176,207
19,261
11,852
5,368
36,481
27,124
178
27,302
$
$
41,985
16,157
426
58,568
18,352
322
18,674
$
$
$
$
$
*Any changes in the estimates which underlie these accruals and reserves will be reflected in “Loss from discontinued
operations, net of tax” in future periods.
NOTE 4.
INCOME TAXES
The geographic distribution of pretax income from continuing operations is as follows (in thousands):
Years Ended December 31,
2014
2013
2015
Domestic
Foreign
$
$
13,237
92,205
105,442
$
$
16,735
69,270
86,005
$
$
28,459
19,863
48,322
The provision (benefit) for income taxes from continuing operations is summarized as follows (in thousands):
Years Ended December 31,
2014
2013
2015
Current:
Federal
State
Foreign
Total current provision (benefit)
Deferred:
Federal
State
Foreign
Total deferred provision (benefit)
Total provision (benefit) for income taxes
$
$
$
$
$
5,823
335
5,950
12,108
569
870
8,413
9,852
21,960
$
$
$
$
$
6,436
481
4,312
11,229
832
587
3,862
5,281
16,510
$
$
$
$
$
(8,631)
(769)
3,850
(5,550)
(4,351)
(635)
(852)
(5,838)
(11,388)
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following reconciles our effective tax rate on income from continuing operations to the federal statutory rate of 35%
(in thousands):
Years Ended December 31,
2014
2013
2015
Income taxes per federal statutory rate
State income taxes, net of federal deduction
Change in valuation allowance
Stock based compensation
Executive compensation
Domestic production activity benefit
Tax effect of foreign operations
Tax credits
Other permanent items, net
$
$
37,498
1,204
6,503
(166)
—
—
(22,495)
(969)
385
21,960
$
$
29,786
135
12
(112)
751
(124)
(12,081)
(2,208)
351
16,510
$
$
16,747
(1,329)
(393)
(296)
56
(135)
(22,268)
(3,551)
(219)
(11,388)
Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying
amounts of assets and liabilities and their respective tax bases using enacted tax rates in effect for the year in which the differences
are expected to be reversed. Significant deferred tax assets and liabilities consist of the following (in thousands):
Deferred tax assets
Stock based compensation
Net operating loss and tax credit carryforwards
Pension obligation
Excess and obsolete inventory
Deferred revenue
Vacation accrual
Restructuring
Bad debt reserve
Employee bonuses and commissions
Unrealized gain/loss
Warranty reserve
Other
Deferred tax assets
Less: Valuation allowance
Net deferred tax assets
Deferred tax liabilities
Depreciation and amortization
Foreign other
Other
Deferred tax liabilities
Net deferred tax assets (liabilities)
Years Ended December 31,
2015
2014
$
$
3,716
49,374
3,662
3,692
12,423
750
83
114
1,191
1,506
91
899
77,501
(37,208)
40,293
3,875
1,050
260
5,185
$
35,108
$
4,029
19,434
4,242
3,308
13,271
939
115
341
128
1,020
170
369
47,366
(2,940)
44,426
4,666
555
153
5,374
39,052
As of December 31, 2015, the Company has recorded a valuation allowance on its U.S. domestic deferred tax assets of
approximately $1.1 million related to state tax losses. The remaining valuation allowance on deferred tax assets approximates
$36.1 million and relates to foreign losses that are both operating and capital in nature. The foreign operating losses are attributable
to Germany, the UK, Japan, and India. As of December 31, 2015, there is not sufficient positive evidence to conclude that such
56
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
losses will be recognized. The foreign capital losses are attributable to the UK and may carry forward to offset future capital gains
only. The Company has determined that the future utilization of these capital losses is not more likely than not.
As of December 31, 2015, the Company had federal, foreign, and state tax loss carryforwards of approximately $47.4
million, $132.8 million, and $75.2 million, respectively. The federal and state tax loss carryforwards are subject to various
limitations under Section 382 of the Internal Revenue Code and applicable state laws. The US federal tax losses will expire from
2028 to 2035. The US state losses will expire from 2018 to 2035. The foreign tax losses consist of approximately $101.4 million
of German losses, $23.8 million of UK losses, $4.5 million of Japan losses, and $3.1 million of India losses, and, as noted above,
are currently subject to a full valuation allowance. The Germany, UK, and India losses have no expiration date and the Japan
losses will begin to expire in 2021.
As of December 31, 2015, the Company has not provided for U.S. income tax or foreign withholding taxes on approximately
$255.0 million of undistributed foreign earning because such earnings are considered to be permanently reinvested. The Company
believes it is not practicable to calculate the deferred taxes associated with these earnings because of the variability of multiple
factors that would need to be assessed at the time of any assumed repatriation. The Company believes, however, that foreign tax
credits may be available to reduce federal income taxes in the event of distribution.
We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing
these positions in the financial statements. The reconciliation of our total gross unrecognized tax benefits is as follows (in thousands):
Balance at beginning of period
Additions based on tax positions taken during a prior period
Additions based on tax positions taken during the current period
Reductions related to a lapse of applicable statute of limitations
Balance at end of period
$
$
8,001
433
3,413
(1,798)
10,049
$
$
5,523
136
3,757
(1,415)
8,001
$
$
2013
12,810
1,006
1,495
(9,788)
5,523
Years Ended December 31,
2014
2015
The full $10.0 million of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. In
accordance with our accounting policy, we recognize accrued interest and penalties related to unrecognized tax benefits as a
component of tax expense. We had an immaterial amount of accrued interest and penalties at December 31, 2015 and 2014.
We do not anticipate a material change to the amount of unrecognized tax positions within the next 12 months.
The Company is currently under examination by the Internal Revenue Service (“IRS”) for the 2012 through 2014 tax
years. As of December 31, 2015, the IRS has issued no notices of proposed assessment. The Company regularly assesses the
likelihood of an adverse outcome resulting from such examinations. As of December 31, 2015, the Company believes the
resolution of the current IRS audit will not have a material adverse impact on the Company’s financial statements. With few
exceptions, the Company is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax
authorities for years before 2012.
NOTE 5.
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.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted
earnings per share for the years ended December 31, 2015, 2014, and 2013 (in thousands, except per share data):
Years Ended December 31,
2014
2013
2015
Income from continuing operations, net of income taxes
$
83,482
$
69,495
$
59,710
Basic weighted-average common shares outstanding
Assumed exercise of dilutive stock options and restricted stock units
Diluted weighted-average common shares outstanding
Continuing operations:
Basic earnings per share
Diluted earnings per share
40,746
331
41,077
40,420
614
41,034
39,597
1,070
40,667
$
$
2.05
2.03
$
$
1.72
1.69
$
$
1.51
1.47
The following stock options and restricted units were excluded in the computation of diluted earnings per share because
they were anti-dilutive (in thousands):
Years Ended December 31,
2014
2013
2015
Stock options
Restricted stock units
Stock Buyback
155
1
91
—
413
—
In May 2014, our Board of Directors authorized a program to repurchase up to $25.0 million of our stock over a twelve-
month period. Under this program, during the twelve months ended December 31, 2015, we repurchased and retired 1.4 million
shares of our common stock for a total of $25.0 million. We completed the share repurchase program in the second quarter of
2014.
In September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over
a thirty-month period. Under this program, on November 6, 2015, we entered into an accelerated stock repurchase arrangement
with Morgan Stanley & Co. LLC (the “Counterparty”) pursuant to a Fixed Dollar Accelerated Share Repurchase Transaction (the
“ASR Agreement”) to purchase $50.0 million of shares of our common stock. On November 9, 2015, we advanced $50.0 million
to the Counterparty. This transaction used $39.6 million and we received 1.4 million shares of our common stock based on then-
current market prices of the $50.0 million advanced, representing 79% of the estimated shares to be repurchased under the ASR
Agreement. The initial payment was recorded as a reduction to Stockholders' equity in our Consolidated Balance Sheets as of
December 31, 2015. The total number of shares repurchased under the ASR Agreement is based on the average of the daily volume-
weighted average prices of the common stock during the term of the Agreement, less a discount. At settlement, if the Counterparty
pays less than the original amount advanced, they will be required to reimburse us. If the Counterparty pays more than the original
advance, we will chose to reimburse the Counterparty with either cash or additional shares. Final settlement of the ASR Agreement
is expected to occur in the second quarter of 2016.
All shares repurchased were executed in the open market and no shares were repurchased from related parties. Repurchased
shares were retired and assumed the status of authorized and unissued shares.
NOTE 6.
MARKETABLE SECURITIES
Our investments with original maturities of more than three months at time of purchase are considered marketable securities
available for sale.
Our marketable securities consist of commercial paper and certificates of deposit as follows (in thousands):
December 31,
2015
2014
Commercial paper
Certificates of deposit
Total marketable securities
Cost
4,989
7,008
11,997
Fair Value
4,995
$
6,991
11,986
$
$
$
$
$
58
Cost
Fair Value
—
3,083
3,083
$
— $
3,083
3,083
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The maturities of our marketable securities available for sale as of December 31, 2015 are as follows:
Commercial paper
Certificates of deposit
Earliest
1/21/2016
3/1/2016
Latest
4/28/2016
9/18/2017
to
to
The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of
the issuers of such securities to make principal and interest payments when due, and the functioning of the markets in which these
securities are traded. Our current investments in marketable securities are expected to be liquidated during the next twelve months.
As of December 31, 2015, we do not believe any of the underlying issuers of our marketable securities are at risk of
default.
NOTE 7.
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 with banks. During the years ended December 31, 2015, 2014, and 2013 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. These forward contracts are typically for one month
periods. At December 31, 2015, 2014, and 2013 we had EUR forward contracts. At December 31, 2013 we also had CAD and
CHF forward contracts.
The notional amount of foreign currency exchange contracts at December 31, 2015, 2014, and 2013 was $37.2 million,
$14.9 million, and $25.0 million, respectively, and the fair value of these contracts was not significant at December 31, 2015,
2014, and 2013. During the years ended December 31, 2015, 2014, and 2013, we recognized a gain of $1.9 million, a gain of $0.1
million and a loss of $0.9 million, respectively, on our foreign currency exchange contracts. These gains and losses were offset by
corresponding gains and losses on the related intercompany debt and both are included as a component of other income, net, in
our Consolidated Statements of Operations.
NOTE 8.
ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
Fair Value Hierarchy
Financial assets and liabilities recorded at fair value in our 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:
Level 2:
Level 3:
Quoted market prices in active markets for identical assets or liabilities at the measurement date.
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.
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.
A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is
significant to the fair value measurement.
59
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present information about our financial assets measured at fair value, on a recurring basis, as of
December 31, 2015, and December 31, 2014. The fair value hierarchy of the valuation techniques utilized to determine such fair
value, is as follows (in thousands):
December 31, 2015
Commercial paper
Certificates of deposit
Total marketable securities
December 31, 2014
Certificates of deposit
Total marketable securities
Level 1
Level 2
Level 3
Total
$
$
$
$
— $
—
— $
4,995
6,991
11,986
Level 1
Level 2
— $
— $
3,083
3,083
$
$
$
$
— $
—
— $
4,995
6,991
11,986
Level 3
Total
— $
— $
3,083
3,083
We did not have any Level 3 investments or financial liabilities measured at fair value, on a recurring basis, as of
December 31, 2015 and December 31, 2014. There were no transfers in or out of Level 1, 2, or 3 fair value measurements during
the year ended December 31, 2015.
NOTE 9.
INVENTORIES
For information regarding the valuation of our inventory refer to Note 1. Operations and Summary of Significant
Accounting Policies and Estimates.
Our inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components
of inventories, net of reserves, are as follows (in thousands):
Parts and raw materials
Work in process
Finished goods
NOTE 10.
PROPERTY AND EQUIPMENT, NET
Details of property and equipment, net are as follows (in thousands):
Buildings and land
Machinery and equipment
Computer and communication equipment
Furniture and fixtures
Vehicles
Leasehold improvements
Construction in process
Less: Accumulated depreciation
Total property and equipment, net
60
December 31,
2015
2014
40,578
5,643
6,352
52,573
$
$
28,014
5,645
12,433
46,092
December 31,
2015
2014
1,623
30,479
19,744
1,319
215
15,173
15
68,568
(58,923)
9,645
$
$
1,745
27,495
20,035
1,527
130
15,243
—
66,175
(56,416)
9,759
$
$
$
$
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation expense recorded in continuing operations and included in selling, general and administrative expense is
as follows (in thousands):
Years Ended December 31,
2014
2013
2015
Depreciation expense
$
4,464
$
5,463
$
6,138
NOTE 11.
GOODWILL
The following summarizes the changes in goodwill during the years ended December 31, 2015 and 2014 (in thousands):
Consolidated
$
43,875
$
453
$
(1,599) $
42,729
December 31, 2014
Additions
Effect of
Currency
Translation
December 31, 2015
Consolidated
December 31, 2013
14,212
$
Additions
32,997
$
$
Effect of
Currency
Translation
December 31, 2014
43,875
(3,334) $
Additions during the year represent the difference between the purchase price paid and the values assigned to identifiable
assets acquired and liabilities assumed in purchase accounting, as described in Note 2. Business Acquisitions.
NOTE 12.
INTANGIBLE ASSETS
Other intangible assets consisted of the following as of December 31, 2015 (in thousands, except weighted-average useful
life):
Gross Carrying
Amount
$
$
14,130
31,276
2,892
48,298
$
$
Effect of
Changes in
Exchange
Rates
Accumulated
Amortization
Net Carrying
Amount
Weighted-
Average Useful
Life in Years
(1,535) $
(2,805)
(247)
(4,587) $
(2,828) $
(5,550)
(1,192)
(9,570) $
9,767
22,921
1,453
34,141
10
12
10
Technology-based
Customer relationships
Trademarks and other
Total intangible assets
Other intangible assets consisted of the following as of December 31, 2014 (in thousands, except weighted-average useful
life):
Gross
Carrying
Amount
Effect of
Changes in
Exchange
Rates
Accumulated
Amortization
Net Carrying
Amount
Weighted-
Average Useful
Life in Years
Technology-based
Customer relationships
Trademarks and other
Total intangible assets
$
$
14,130
$
31,276
2,892
48,298
$
(928) $
(1,710)
(149)
(2,787) $
(1,526) $
(2,873)
(801)
(5,200) $
11,676
26,693
1,942
40,311
12
12
17
Amortization expense relating to other intangible assets included in our income from continuing operations is as follows
(in thousands):
Amortization expense
$
4,368
$
4,998
$
850
61
Years Ended December 31,
2014
2013
2015
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated amortization expense related to intangibles for each of the five years 2016 through 2020 and thereafter is as
follows (in thousands):
Year Ending December 31,
2016
2017
2018
2019
2020
Thereafter
$
$
4,215
3,990
3,977
3,961
3,332
14,666
34,141
NOTE 13.
OTHER ACCRUED EXPENSES
As of December 31, 2015 and 2014, Other accrued liabilities was $12.3 million and $11.8 million, respectively. No
individual items in Other accrued expenses exceeded 5% of total current liabilities.
NOTE 14.
WARRANTIES
Provisions of our sales agreements include product warranties customary to these types of agreements, ranging from 12
months to 24 months following installation for Precision Power products and 3 years to 10 years following installation for our
legacy inverter products. Costs related to legacy Inverter new product warranties are reflected in "Loss from discontinued operations,
net of income taxes" in our Consolidated Statements of Operations, for all periods presented. Our provision for the estimated cost
of warranties is recorded when revenue is recognized. We estimate the anticipated costs of repairing our products under such
warranties based on the historical cost of the repairs. The assumptions we use to estimate warranty accruals are reevaluated
periodically, in light of actual experience, and when appropriate, the accruals are adjusted. We also offer our legacy inverter
customers the option to purchase additional warranty coverage up to 20 years after the base warranty period expires. These
warranties, reflected as deferred revenue at time of sale, are included in Continuing operations on our Consolidated Statements
of Operations as we will realize revenue in future periods as such warranty costs are incurred.
We establish accruals for warranty issues that are probable to result in future costs. Changes in product warranty accruals
are as follows (in thousands):
Years Ended December 31,
2014
2013
2015
Balances at beginning of period
Warranty liabilities acquired
Increases to accruals related to sales during the period
Warranty expenditures
Effect of changes in exchange rates
Balances at end of period
NOTE 15.
STOCK-BASED COMPENSATION
$
$
1,612
—
1,071
(1,040)
(10)
1,633
$
$
3,187
260
788
(2,618)
(5)
1,612
$
$
2,601
—
2,849
(2,290)
27
3,187
As of December 31, 2015, we had two active stock-based incentive compensation plans; the 2008 Omnibus Incentive
Plan and the Employee Stock Purchase Plan (“ESPP”). All new equity compensation grants are issued under these two plans;
however, outstanding awards previously issued under inactive plans will continue to vest and remain exercisable in accordance
with the terms of the respective plans. At December 31, 2015, there were 3.4 million shares reserved and 2.5 million shares available
for future grant under our stock-based incentive plans.
2008 OMNIBUS INCENTIVE PLAN — The 2008 Omnibus Incentive Plan (the “Plan”) provides officers, directors, key
employees, and other persons an opportunity to acquire or increase a direct proprietary interest in our operations and future success.
Our Board of Directors currently administers the Plan, and makes all decisions concerning which officers, directors, employees,
and other persons are granted awards, how many to grant to each recipient, when awards are granted, how the Plan should be
interpreted, whether to amend or terminate the Plan, and whether to delegate administration of the Plan to a committee. In May
2010, our shareholders approved an increase from 3,500,000 to 7,500,000 shares authorized for issuance under the Plan. The Plan
provides for the grant of stock options, stock appreciation rights, restricted stock, stock units (including deferred stock units),
62
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
unrestricted stock, and dividend equivalent rights. Any of the awards may be made as performance incentives to reward attainment
of annual or long-term performance goals in accordance with the terms of the Plan. Stock options granted under the Plan may be
non-qualified stock options or incentive stock options except that stock options granted to outside directors, consultants, or advisers
providing services to us shall in all cases be non-qualified stock options. Included in the Plan is our 2012-2014 Long Term Incentive
Plan ("2012-2014 LTI Plan") and our 2015 Long Term Incentive Plan ("2015 LTI Plan"). The Plan will terminate on May 7, 2018
unless the administrator terminates the Plan earlier. As of December 31, 2015, 2,120,030 shares of common stock were available
for grant under the Plan.
Stock-based Compensation Expense
Non-cash stock-based compensation expense is primarily included in selling, general and administrative expense and
was $2.8 million, $3.7 million, and $9.8 million for the years ending December 31, 2015, 2014, and 2013, respectively.
Our stock-based compensation expense is based on the value of the portion of share-based payment awards that are
ultimately expected to vest, assuming estimated forfeitures at the time of grant. Estimated forfeiture rates for our stock-based
compensation expense applicable to options and RSUs was approximately 18% for the year ended December 31, 2015, 17% for
the year ended December 31, 2014, and 16% for the year ended December 31, 2013.
Stock Options
Stock option awards are generally granted with an exercise price equal to the market price of our stock at the date of
grant and with either a three or four-year vesting schedule and a term of 10 years, except as noted below.
Under our 2012-2014 LTI Plan, we made grants of performance based options during the first quarter of 2012, which
vested in the first quarters of 2013, 2014, and 2015 based on the Company's achievement of return on net assets targets established
by our Board of Directors at the beginning of 2012. Under our 2015 LTI Plan, we made grants of time-based options during the
first quarter of 2015, which will vest annually over a three-year period. The fair value of options granted during the years ended
December 31, 2015, 2014 and 2013 was estimated on the date of grant using the Black-Scholes-Merton option-pricing model
using the following assumptions by grant year:
Fair value assumptions - stock options:
Risk-free interest rates
Expected dividend yield rates
Expected term
Expected volatility
2015
2014
2013
1.1% - 1.4%
—%
4.3 years
43%
1.7% - 1.9%
—%
5.3 years
53%
0.74%
—%
5.6 years
69%
The risk free interest rate is based on the five-year U.S. Treasury Bill at the time of the grant. Historically, company
information is the primary basis for selection of the expected dividend yield. The expected term is based on historical experience.
Expected volatility is based on historical volatility of our common stock using daily stock price observations.
The weighted-average fair value of options issued and total intrinsic value of options exercised were (in thousands, except
share prices):
Weighted-average grant date fair value of options
Total intrinsic value of options exercised
2015
2014
2013
$
$
9.50
5,203
$
$
10.80
13,657
$
$
10.55
12,917
63
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in outstanding time based stock options during the year ended December 31, 2015 were as follows (in thousands,
except share prices):
Options outstanding at beginning of period
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at end of period
Options vested during the year
2015
2014
2013
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
14.18
26.26
13.95
14.55
16.25
18.06
$
642
171
(229)
(38)
(3)
543
$
304
13.29
18.77
13.01
12.93
21.97
14.18
1,573
$
57
(910)
(76)
(2)
642
180
$
4,036
$
13.61
—
(2,055)
(199)
(209)
1,573
294
$
—
13.31
13.01
19.74
13.29
Changes in outstanding performance based stock options during the year ended December 31, 2015 were as follows (in
thousands, except share prices):
Options outstanding at beginning of period
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at end of period
Options vested during the year
2015
2014
2013
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
Weighted-
Average
Exercise
Price
Shares
12.58
—
11.35
—
13.06
12.68
$
$
380
—
(137)
—
(144)
99
64
13.38
26.53
11.03
17.12
12.12
12.58
$
$
1,239
51
(408)
(384)
(118)
380
364
12.65
17.80
11.02
11.02
11.10
13.38
$
$
1,623
43
(89)
(87)
(251)
1,239
314
During each of the three years ended December 31, 2015, 2014 and 2013, the value of shares withheld for taxes from
both time-based and performance based option exercises totaled $1.0 million, $1.6 million, and $1.3 million, respectively.
As of December 31, 2015, there was $1.0 million of total unrecognized compensation cost related to stock options granted
and outstanding, net of expected forfeitures related to non-vested options, which is expected to be recognized through fiscal year
2017, with a weighted-average remaining vesting period of 2.0 years. Information about our stock options that are outstanding,
options that we expect to vest and options that are exercisable at December 31, 2015 were as follows (in thousands except share
prices and lives):
Options Expected to Vest:
Options outstanding
Options expected to vest
Options exercisable
Weighted-
Average
Exercise Price
17.10
$
16.63
13.53
Number
642
606
439
Weighted-
Average
Remaining
Contractual
Life
Aggregate
Intrinsic
Value
$
6.3 years
6.1 years
5.0 years
7,146
7,031
6,454
64
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes information about the stock options outstanding at December 31, 2015 (in thousands,
except share prices and lives):
Range of Exercise Prices
$7.69 to $9.51
$11.02 to $11.02
$11.21 to $12.77
$13.70 to $14.21
$14.50 to $15.65
$16.25 to $18.77
$20.19 to $24.31
$25.28 to $25.28
$26.32 to $26.32
$26.76 to $26.76
$7.69 to $26.76
Restricted Stock Units
Number
Outstanding
51
94
69
70
87
82
24
2
160
3
642
Options Outstanding
Weighted-Average
Remaining
Contractual Life
Weighted-
Average
Exercise Price
8.98
$
11.02
12.34
14.00
14.83
17.99
22.69
25.28
26.32
26.76
17.10
$
Options Exercisable
Number
Exercisable
51
94
69
70
87
44
19
2
—
3
439
Weighted-
Average
Exercise Price
8.98
$
11.02
12.35
14.00
14.83
17.32
22.29
25.28
—
26.76
13.53
$
4.7 years
6.0 years
4.5 years
4.4 years
4.7 years
7.4 years
2.9 years
8.3 years
9.1 years
8.1 years
6.3 years
The fair value of our RSUs is determined based upon the closing fair market value of our common stock on the grant
date. Changes in the unvested time based restricted stock units during the year ended December 31, 2015 were as follows (in
thousands):
2015
2014
2013
Weighted-
Average
Grant
Date Fair
Value
Shares
Weighted-
Average
Grant
Date Fair
Value
Shares
Weighted-
Average
Grant
Date Fair
Value
Shares
115
159
(86)
(14)
174
$
$
13.00
26.70
14.05
12.69
24.88
230
86
(163)
(38)
115
$
$
13.41
21.05
14.72
13.39
13.00
442
99
(242)
(69)
230
$
$
12.96
17.58
12.99
12.88
13.41
Balance at beginning of period
RSUs granted
RSUs vested
RSUs forfeited
Balance at end of period
Changes in the unvested performance based restricted stock units during the year ended December 31, 2015 were as
follows (in thousands):
Balance at beginning of period
RSUs granted
RSUs vested
RSUs settled in cash
RSUs forfeited
Balance at end of period
2015
2014
2013
Weighted-
Average
Grant
Date Fair
Value
Shares
Weighted-
Average
Grant
Date Fair
Value
Shares
Weighted-
Average
Grant
Date Fair
Value
Shares
242
62
(75)
—
(169)
60
$
$
13.86
26.27
13.81
—
14.25
26.27
1,344
59
—
(418)
(743)
242
$
$
11.42
26.53
—
12.29
13.14
13.86
1,631
50
(235)
—
(102)
1,344
$
$
11.15
17.80
11.10
—
11.02
11.42
65
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The weighted-average fair value of RSUs issued and total fair value of RSUs converted to shares were (in thousands,
except share prices):
Weighted-average grant date fair value of RSUs
Total fair value of RSUs converted to shares
2015
2014
2013
$
$
26.66
3,782
$
$
22.87
5,439
$
$
17.73
11,032
As of December 31, 2015, there was $2.5 million of total unrecognized compensation cost, net of expected forfeitures
related to non-vested RSUs granted, which is expected to be recognized through fiscal 2018, with a weighted-average remaining
vesting period of 1.2 years.
Employee Stock Purchase Plan
The ESPP, a stockholder-approved plan, provides for the issuance of rights to purchase up to 1,000,000 shares of common
stock. In May 2010, shareholders approved an increase from 500,000 to 1,000,000 shares authorized for sale under our ESPP.
Employees below the Vice President level are eligible to participate in the ESPP if employed by us for at least 20 hours per week
during at least five months per calendar year. Participating employees may contribute up to the lesser of 15% of their eligible
earnings or $5,000 during each plan period. Currently, the plan period is six months. The purchase price of common stock purchased
under the ESPP is currently equal to the lower of: 1) 85% of the fair market value of our common stock on the commencement
date of each plan period or 2) 85% of the fair market value of our common shares on each plan period purchase date. At December 31,
2015, 338,948 shares remained available for future issuance under the ESPP.
Purchase rights granted under the ESPP are valued using the Black-Scholes-Merton model. As of December 31, 2015,
there was $0.1 million of total unrecognized compensation cost related to the ESPP that is expected to be recognized over a
remaining period of five months. Total compensation expense was $0.2 million for the year ended December 31, 2015, $0.4 million
for the year ended December 31, 2014, and $0.2 million for the year ended December 31, 2013.
The fair value of each purchase right granted under the ESPP was estimated on the date of grant using the Black-Scholes-
Merton option pricing model with the following assumptions:
Risk-free interest rates
Expected dividend yield rates
Expected term
Expected volatility
2015
2013
2014
0.07% - 0.42% 0.06% - 0.08% 0.07% - 0.10%
—%
0.5 years
61.5%
—%
0.5 years
27.8%
—%
0.5 years
52.0%
The risk free interest rate is based on the six month U.S. Treasury Bill at the time of the grant. Historical company
information is the primary basis for selection of the expected dividend yield. The expected term is based on historical experience.
Expected volatility is based on historical volatility of our common shares using daily stock price observations.
NOTE 16.
RETIREMENT PLANS
Defined contribution plans
We have a 401(k) profit sharing and retirement savings plan covering substantially all full-time U.S. employees.
Participants may defer up to the maximum amount allowed as determined by law. Participants are immediately vested in their
contributions. Profit sharing contributions to the plan, which are discretionary, are approved by the Board of Directors. Vesting in
the profit sharing contribution account is based on years of service, with most participants fully vested after four years of credited
service.
For the years ended December 31, 2015, 2014, and 2013 our contribution for participants in our 401(k) plan was 50%
matching on contributions by employees up to 6% of the employee’s compensation.
During the years ended December 31, 2015, 2014, and 2013 we recognized total defined contribution plan costs of $0.7
million, $0.6 million, and $0.6 million, respectively, in "Selling, general, and administrative" expense on our Consolidated
Statements of Operations.
Defined benefit plans
In connection with the HiTek acquisition discussed in Note 2. Business Acquisitions, we acquired the HiTek Power Limited
Pension Scheme ("the HiTek Plan"). The HiTek Plan has been closed to new participants and additional accruals since 2006. In
66
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value
the obligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions
are based on historical experience as well as facts and circumstances. An actuarial analysis is used to measure the expense and
liability associated with pension benefits. The net amount of the pension liability on our balance sheet recorded in Other long-
term liabilities as of December 31, 2015 and December 31, 2014 was $17.8 million and $20.1 million, respectively. Anticipated
payments to pensioners covered by the HiTek Plan are expected to be between $1.0 million and $1.5 million for each of the next
ten years. We are committed to make annual fixed payments of $1.0 million into the Hitek plan through 2024.
The following table sets forth the components of net periodic pension cost for the year ended December 31, 2015 (in
thousands):
Interest cost
Expected return on plan assets
Amortization of actuarial gains and losses
Net periodic pension cost
Assumptions used in the determination of the net periodic pension cost are:
Discount Rate
Expected long-term return on plan assets
Year Ended December 31,
2015
2014
$
$
$
1,093
(562)
373
904
$
1,061
(532)
—
529
Year Ended December 31,
2015
2014
3.9%
4.3%
3.6%
4.0%
We have derived the expected return on assets of 4.3% per annum from the weighted expected return on each of the major
categories of assets.
The status of the HiTek Plan as reflected in "Other long-term liabilities" on our Consolidated Balance Sheets is summarized
as follows (in thousands):
Projected benefit obligation, beginning of year
Acquisition
Interest cost
Actuarial (gain) loss
Benefits paid
Translation adjustment
Projected benefit obligation, end of year
Plan assets, beginning of year
Acquisitions
Actual return on plan assets
Contributions
Benefits paid
Actuarial (gain)
Translation adjustment
Plan assets, end of year
Funded status of plan
67
Year Ended December 31,
2015
2014
34,475
—
1,093
(1,435)
(825)
(1,842)
31,466
14,339
—
562
958
(825)
(583)
(774)
13,677
$
$
$
$
—
34,816
1,061
1,672
(460)
(2,614)
34,475
—
12,091
532
3,084
(460)
(8)
(900)
14,339
(17,789) $
(20,136)
$
$
$
$
$
Table of Contents
ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The fair value of the Company's qualified pension plan assets by category for the year ended December 31, 2015 are as
follows (in thousands):
Multi-Asset Fund
Diversified Growth Fund
Index-Linked Gilts
Corporate Bonds
Cash
Total
$
$
Level 1
Level 2
Level 3
Total
— $
4,460
$
— $
—
—
—
237
237
4,767
2,113
2,100
—
—
—
—
—
$
13,440
$
— $
13,677
4,460
4,767
2,113
2,100
237
At December 31, 2015 the HiTek Plan assets of $13.7 million were invested in four separate funds including a multi-
asset fund (32.6%), a diversified growth fund (34.9%), an Investment grade long term bond fund (15.4%) and an index-linked gilt
fund (15.4%). The asset and growth funds aim to generate an ‘equity-like’ return over an economic cycle with significantly reduced
volatility relative to equity markets and have scope to use a diverse range of asset classes, including equities, bonds, cash and
alternatives, e.g. property, infrastructure, high yield bonds, floating rate debt, private, equity, hedge funds and currency. The bond
fund and gilt fund are invested in index-linked gilts and corporate bonds. These investments are intended to provide a degree of
protection against changes in the value of the HiTek Plan's liabilities related to changes in long-term expectations for interest rates
and inflation expectations, i.e. the protection assets provide a direct hedge against increases in the value of the HiTek Plan's
liabilities caused by changes in financial conditions. The current strategy might be expected to generate a return of around 1.7%
per annum in excess of the long-term expected return from gilts.
The fair value of the Company's qualified pension plan assets by category for the year ended December 31, 2014 are as
follows (in thousands):
Multi-Asset Fund
Diversified Growth Fund
Index-Linked Gilts
Corporate Bonds
Cash
Total
Level 1
Level 2
Level 3
Total
$
$
— $
—
—
—
218
218
$
4,685
4,950
2,248
2,238
—
14,121
$
$
— $
—
—
—
—
— $
4,685
4,950
2,248
2,238
218
14,339
NOTE 17.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income consisted of the following (in thousands):
Foreign
Currency
Adjustments
Unrealized
Gains (Losses)
on Marketable
Securities
Total
Accumulated
Other
Comprehensive
Income
$
$
10,249
(10,228)
21
$
$
527
(14)
513
$
$
10,776
(10,242)
534
Balances at December 31, 2014
Current period other comprehensive income (loss)
Balances at December 31, 2015
NOTE 18.
COMMITMENTS AND CONTINGENCIES
Disputes and Legal Actions
We are involved in disputes and legal actions arising in the normal course of our business. While we currently believe
that the amount of any ultimate loss would not be material to our financial position, the outcome of these actions is inherently
difficult to predict. In the event of an adverse outcome, the ultimate loss could have a material adverse effect on our financial
position or reported results of operations. An unfavorable decision in patent litigation also could require material changes in
production processes and products or result in our inability to ship products or components found to have violated third-party
68
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
patent rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it
is probable that a loss has occurred and the amount of the loss can be reasonably estimated.
German Lawsuit against Jolaos related to Purchase Price Adjustment in Acquisition of Refusol
On April 8, 2013, our subsidiary AEI Holdings GmbH (“AEI Holdings”) acquired all the outstanding shares of Refusol
Holding GmbH (“Refusol”) from Jolaos Verwaltungs GmbH ("Jolaos") pursuant to the terms of the SPA. Jolaos is an affiliate of
various Prettl entities which are contract manufacturers of certain Refusol three phase string inverters. Under the SPA, the
preliminary base price paid for the shares of Refusol was subject to a post-closing balance sheet adjustment based on confirmation
of the financial statements of Refusol effective as of the closing date. AEI Holdings and Jolaos were in disagreement on various
accounting adjustments to the closing date financial statements of Refusol. After repeated unsuccessful attempts to have Jolaos
submit the dispute to an independent German accounting firm as required under the SPA, in December 2013 AEI Holdings petitioned
the designated District Court in Stuttgart (Landgericht Stuttgart), Germany to review the dispute. This dispute was settled in the
fourth quarter of 2015.
Operating Leases
We have various operating leases for automobiles, equipment, and office and production facilities. Rent expense under
operating leases was approximately $5.3 million in 2015, $5.7 million in 2014, and $6.1 million in 2013.
The future minimum rental payments required under non-cancelable operating leases as of December 31, 2015 are as
follows (in thousands):
2016
2017
2018
2019
2020
Thereafter
$
$
5,898
3,348
2,398
2,388
2,344
4,547
20,923
*Future estimated payments on leases denominated in foreign currency are reflected above based on the estimated spot rate for that currency
converted to US Dollars at December 31, 2015 and are subject to change.
Purchase Commitments
We have firm purchase commitments and agreements with various suppliers to ensure the availability of components.
The obligation as of December 31, 2015 is approximately $44.2 million. Our policy with respect to all purchase commitments,
is to record losses, if any, when they are probable and reasonably estimable. We continuously monitor these commitments for
exposure to potential losses and will record a provision for losses when it is deemed necessary.
NOTE 19.
RESTRUCTURING COSTS
During the period, we recorded net restructuring expense related to continuing operations of approximately $0.2 million.
See Note 3. Discontinued Operations for more information on restructuring related to discontinued operations. This was comprised
of $0.3 million related to the current period activity offset by $0.1 million, related to the expiration of obligations associated with
the 2013 plan.
In June 2015, we committed to a restructuring plan in relation to the wind-down of our Inverter operations which has
been completed as of December 31, 2015. Charges related to this plan that have an effect on continuing operations include strategic
headcount reductions, streamlining operational processes and condensing administrative functions to improve efficiencies. This
plan was completed in the fourth quarter of 2015.
In April 2014, we committed to a restructuring plan to take advantage of additional cost savings opportunities in connection
with our acquisitions and realignment to a single organizational structure based on product line. The plan called for consolidating
certain facilities and rebranding of products to allow us to use our resources more efficiently. This plan was completed in the fourth
quarter of 2014.
In April 2013, we committed to a restructuring plan to take advantage of additional cost saving opportunities in connection
with our acquisition of Refusol. The plan called for consolidating certain facilities, further centralizing our manufacturing and
rationalizing certain products to most effectively meet customer needs. All activities under this restructuring plan were completed
prior to December 31, 2013.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the components of our restructuring costs incurred under the 2015 plan as of December 31,
2015 (in thousands):
Severance and related costs
Contract settlement costs
Total restructuring charges
Twelve Months Ended
December 31,
2015
Cumulative costs through
December 31,
2015
$
$
184
73
257
$
$
184
73
257
The following table summarizes the components of our restructuring costs incurred under the 2014 plan as of December 31,
2015 (in thousands):
Severance and related costs
Facility closure costs
Total restructuring charges
Twelve Months Ended
December 31,
2015
Cumulative costs through
December 31,
2015
$
$
— $
—
— $
1,282
582
1,864
The following table summarizes the components of our restructuring costs incurred under the 2013 plan as of December 31,
2015 (in thousands):
Twelve Months Ended
December 31,
2015
Cumulative costs through
December 31,
2015
Severance and related costs
Property and equipment and intangible asset impairments
Facility closure costs
Total restructuring charges
$
$
— $
—
(59)
(59) $
2,762
43
1,206
4,011
The following table summarizes our restructuring liabilities under the 2015 plan (in thousands):
Balances at
December 31,
2014
Costs incurred
and charged to
expense
Cost paid or
otherwise
settled
Effect of
change in
exchange
rates
Balances at
December 31,
2015
Severance and related costs
Contract settlement costs
Total restructuring liabilities
$
$
— $
—
— $
184
73
257
$
$
(182) $
(69)
(251) $
— $
—
— $
2
4
6
The following table summarizes our restructuring liabilities under the 2014 plan (in thousands):
Balances at
December 31,
2014
Costs incurred
and charged to
expense
Cost paid or
otherwise
settled
Effect of
change in
exchange
rates
Balances at
December 31,
2015
Severance and related costs
Facility closure costs
Total restructuring liabilities
$
$
825
51
876
$
$
— $
—
— $
(824) $
(49)
(873) $
(1) $
(2)
(3) $
—
—
—
70
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes our restructuring liabilities under the 2013 plan (in thousands):
Balances at
December 31,
2014
Costs incurred
and charged to
expense
Cost paid or
otherwise
settled
Effect of
change in
exchange
rates
Balances at
December 31,
2015
Severance and related costs
Facility closure costs
Total restructuring liabilities
$
$
— $
84
84
$
— $
(59)
(59) $
— $
(12)
(12) $
— $
(13)
(13) $
—
—
—
NOTE 20.
RELATED PARTY TRANSACTIONS
During the years ended December 31, 2015, 2014, and 2013, we engaged in the following transactions with companies
related to members of our Board of Directors, as described below (in thousands):
Sales to related parties
Rent expense to related parties
Purchases from related parties
Sales - Related Parties
Years Ended December 31,
2015
2014
2013
$
$
706
—
40
$
321
1,850
—
622
1,880
—
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 year ended December 31, 2015, we had sales to three such companies as noted above
and there was accounts receivable from one such customer totaling $0.1 million at December 31, 2015. During the year ended
December 31, 2014 we had sales to four such companies as noted above and there were no aggregate accounts receivable from
these customers at December 31, 2014. During the year ended December 31, 2013 we had sales to one such company as noted
above and there were no aggregate accounts receivable from this customer at December 31, 2013.
Purchases - Related Parties
During the year ended December 31, 2015, we had purchases from two such companies as noted above and there were
no aggregate accounts payable from these vendors at December 31, 2015.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 21.
GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATION
We have operations in the United States, Europe and Asia. Our disclosure related to sales and long-lived assets by
geographic area and information relating to major customers are presented below. Sales attributed to individual countries are based
on customer location.
Sales to external customers:
United States
Canada
North America
People's Republic of China
Other Asian countries
Asia
Germany
United Kingdom
Other European countries
Europe
Total sales
2015
Years Ended December 31,
2014
(In thousands)
2013
$ 268,257
195
268,452
64.7 % $ 230,843
347
64.7 % 231,190
— %
62.8 % $ 169,362
0.1 %
93
62.9 % 169,455
12,687
61,839
74,526
3.1 %
15.0 %
18.0 %
12,903
56,938
69,841
3.5 %
15.6 %
19.0 %
27,420
62,706
90,126
46,719
25,100
14
71,833
$ 414,811
43,343
11.3 %
22,670
6.1 %
289
(0.1)%
66,302
17.3 %
100.0 % $ 367,333
31,651
11.8 %
5,752
6.2 %
2,397
— %
39,800
18.0 %
100.0 % $ 299,381
56.6%
—%
56.6%
9.2%
20.8%
30.1%
10.6%
1.9%
0.8%
13.3%
100.0%
Sales to Applied Materials Inc., our largest customer, were $123.5 million or 29.8% of total sales for 2015, $109.3 million,
or 29.8% of total sales, for 2014 and $96.2 million, or 32.1% of total sales for 2013. Sales to Lam Research were $84.2 million
or 20.3% of total sales for 2015, $73.0 million, or 19.9% of total sales, for 2014 and $50.4 million, or 16.8% of total sales for
2013. Our sales to Applied Materials and Lam Research include precision power 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.
December 31,
2015
2014
*Long lived assets:
United States
Asia
Europe
$
$
$
(In thousands)
31,556
3,134
51,825
86,515
$
31,711
3,456
58,778
93,945
* Long-lived assets include property and equipment, goodwill and other intangible assets.
NOTE 22.
CREDIT FACILITY
In October 2012, we, along with two of our wholly-owned subsidiaries, AE Solar Energy, Inc. and Sekidenko, Inc., entered
into a Credit Agreement, subsequently amended in November 2012 and August 2013, (the "Credit Agreement") with Wells Fargo
Bank, National Association ("Wells Fargo"), as agent for and on behalf of certain lenders (each a "Lender"), which provides for a
new secured revolving credit facility of up to $50.0 million (the "Credit Facility"). The Credit Facility provides us with the ability
to borrow up to $50.0 million, although the amount of the Credit Facility may be increased by an additional $25.0 million up to
a total of $75.0 million subject to receipt of lender commitments and other conditions. Borrowings under the Credit Facility are
subject to a borrowing base based upon our domestic accounts receivable and inventory and are available for various corporate
purposes, including general working capital, capital expenditures, and certain permitted acquisitions. The Credit Agreement also
permits us to issue letters of credit which reduce availability under the Credit Agreement. The maturity date of the Credit Facility
is October 12, 2017.
At our election, the loans comprising each borrowing will bear interest at a rate per annum equal to either: (a) a "base
rate" plus between one-half (0.5%) and one (1.0%) full percentage point depending on the amount available for additional draws
under the Credit Facility ("Base Rate Loan"); or (b) the LIBOR rate then in effect plus between one and one-half (1.5%) and two
(2%) percentage points depending on the amount available for additional draws under the Credit Facility. The "base rate" for any
72
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Base Rate Loan will be the greatest of the federal funds rate plus one-half (0.5%) percentage point; the one-month LIBOR rate
plus one (1.0%) percentage point; and Wells Fargo's "prime rate" then in effect. As of December 31, 2015, the rate in effect was
4.0%.
The Credit Agreement requires us to pay certain fees to the Lenders and contains affirmative and negative covenants,
which, among other things, require us to deliver to the Lenders specified quarterly and annual financial information, and limit us
and our Guarantors (as defined below), subject to various exceptions and thresholds, from, among other things: (i) creating liens
on our assets; (ii) merging with other companies or engaging in other extraordinary corporate transactions; (iii) selling certain
assets or properties; (iv) entering into transactions with affiliates; (v) making certain types of investments; (vi) changing the nature
of our business; and (vii) paying certain distributions or certain other payments to affiliates. Additionally, there are the following
financial covenants: (i) during any period in which $12.5 million or less is available to us under the Credit Facility and for sixty
(60) days thereafter, the Credit Agreement requires the maintenance of a defined consolidated fixed charge coverage ratio; and
(ii) if there is any indebtedness under any issued and outstanding convertible notes, we are required to maintain a specified level
of liquidity.
The Credit Agreement requires us to pay certain fees to the Lenders, including a $2,500 collateral management fee for
each month that the Credit Facility is in place, and a fee based on the unused amount of the Credit Facility. During the twelve
months ended December 31, 2015 and 2014, we expensed $0.5 million and $0.4 million, respectively, in interest and fees related
to unused line of credit fees and amortization of debt issuance costs. We did not borrow against the Credit Facility during the
twelve months ended December 31, 2015. As of December 31, 2015, we had $9.9 million of availability on our Wells Fargo Credit
Facility. During the third quarter of 2015, the lender issued a letter of credit in the amount of $2.0 million related to a customer
contract.
Pursuant to a Guaranty and Security Agreement (the "GS Agreement"), borrowings under the Credit Facility are guaranteed
by our wholly-owned subsidiaries Aera Corporation and AEI US Subsidiary, Inc., (collectively the " Guarantors"). Under the GS
Agreement, we and the Guarantors granted the Lenders a security interest in certain, but not all, of our and the Guarantors' assets.
As part of the acquisition of Refusol described in Note 2. Business Acquisitions, we assumed the outstanding debt of
Refusol as of the acquisition date. There were three outstanding loans with banks related to this debt, of which one was repaid and
cancelled during the third quarter of 2013.
Refusol, GmbH had an outstanding loan agreement with Commerzbank Aktiengesellschaft ("Commerzbank") for up to
8.0 million Euros ("Commerzbank Loan Agreement"). The agreement allowed Refusol to borrow up to 8.0 million Euros through
various types of instruments including an overdraft (revolving) facilities, money market (term) loans, surety loans, or guarantees.
There was no maturity date. Borrowings under the revolving credit facility bore interest at 5.32%. Surety and guarantee loans bore
interest at 1.5%. The Commerzbank Loan Agreement required the payment of a credit commission of 0.5% of the total loan amount.
The agreement contained various covenants including a financial covenant requiring a specified level of equity. This line of credit
was repaid and cancelled in the second quarter of 2014.
Refusol, GmbH also had an outstanding loan agreement with Bayerische Landesbank ("Bayern") which allowed it to
borrow up to 4.0 million Euros either as overdraft facilities, term loans, or guarantees with repayment occurring one lump sum at
the maturity date of the individual transaction with respect to term loans, or maturity of the loan agreement which was July 31,
2013 (the "Bayern Loan Agreement"). The overdraft facility bore interest at 4.5%. Term loans bore interest at the money market
rate established by Bayern at the time of the loan plus a margin of 1.9%. Guarantees bore interest at 1.25% and had an issuing fee
per guarantee. Loan commitment fees were 0.25% on the unused portion of the total loan amount. The Bayern Loan Agreement
contained certain reporting requirements and a financial covenant requiring a specified level of equity.
Upon expiration of this agreement, Refusol, GmbH entered into a new loan agreement with Bayern under which it had
the ability to borrow up to 4.0 million Euros (equal to $4.3 million on December 31, 2015) as either bank overdrafts, term loans,
guarantees, or letters of credit. The overdraft facility bore interest at 3.9%, guarantees bore a rate of 1.64% and interest on term
loans was a fixed rate set for each term loan period based on money market rates. Loan commitment fees were 0.25%. This line
of credit was repaid and cancelled in the third quarter of 2014.
Refusol, Inc., a wholly-owned subsidiary of Refusol, GmbH located in the United States, had a revolving line of credit
with Wells Fargo with an aggregate principal amount of $1.5 million and a maturity date of July 1, 2013. Borrowings under the
line of credit were secured by all of Refusol, Inc.'s accounts receivable, inventory, and property, plant, and equipment and a letter
of credit issued under the Commerzbank Loan Agreement. The line of credit bore interest at either (a) a fluctuating rate per annum
one quarter of one percent (0.25%) above the Prime Rate or (b) the LIBOR rate then in effect plus two percent (2.0%). Refusol,
Inc. had the option to select the method of interest each month. A commitment fee of 0.125% was payable by Refusol, Inc. on the
unused portion of the line of credit. The line of credit contained certain affirmative and negative covenants limiting Refusol, Inc.'s
ability to borrow additional funds or guarantee the debt of others. This line of credit was paid down and cancelled on its maturity
date of July 1, 2013.
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ADVANCED ENERGY INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 23.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables present unaudited quarterly results for each of the eight quarters in the period ended December 31,
2015, in thousands. We believe that all necessary adjustments have been included in the amounts stated below to present fairly
such quarterly information. Due to the volatility of the industries in which our customers operate, the operating results for any
quarter are not necessarily indicative of results for any subsequent period.
Quarter Ended
December 31,
2015
September 30,
2015
June 30,
2015
March 31,
2015
Sales
Gross Profit
Restructuring
Operating income
Income from continuing operations, net of income
taxes
Income (loss) from discontinued operations, net of
income taxes*
Net income
Earnings per Share:
Continuing Operations:
Basic earnings per share
Diluted earnings per share
Discontinued Operations:
Basic earnings (loss) per share
Diluted earnings (loss) per share
Net Income (Loss):
Basic earnings (loss) per share
Diluted earnings (loss) per share
$
$
$
$
$
$
$
86,891
42,684
(117)
16,173
11,490
24,775
36,265
0.29
0.28
0.62
0.61
0.90
0.89
$
$
$
$
$
$
$
$
109,756
58,538
317
30,168
$
108,654
56,549
—
28,779
109,510
59,099
(2)
31,536
23,313
23,024
25,655
(6,881)
16,432
(255,483)
(232,459)
(4,379)
21,276
0.57
0.56
$
$
(0.17) $
(0.17) $
0.40
0.40
$
$
0.56
0.56
$
$
(6.24) $
(6.24) $
(5.68) $
(5.68) $
0.63
0.62
(0.11)
(0.11)
0.52
0.52
Sales
Gross Profit
Restructuring
Operating income
Income from continuing operations, net of income
taxes
Loss from discontinued operations, net of income
taxes*
Net income
Earnings per Share:
Continuing Operations:
Basic earnings per share
Diluted earnings per share
Discontinued Operations:
Basic loss per share
Diluted loss per share
Net Income:
Basic earnings per share
Diluted earnings per share
*See Note 3. Discontinued Operations.
Quarter Ended
December 31,
2014
September 30,
2014
June 30,
2014
March 31,
2014
$
$
$
$
$
$
$
$
110,163
56,543
863
28,609
23,312
(13,993)
9,319
0.58
0.57
$
$
(0.35) $
(0.35) $
0.23
0.23
$
$
$
91,584
46,130
560
20,130
15,917
(3,615)
12,302
0.40
0.39
$
$
(0.09) $
(0.09) $
0.31
0.30
$
$
$
82,226
42,387
84
16,000
13,127
(2,481)
10,646
0.32
0.32
$
$
(0.06) $
(0.06) $
0.26
0.26
$
$
83,360
42,999
—
21,353
17,139
(2,424)
14,715
0.42
0.41
(0.06)
(0.06)
0.36
0.35
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures, which are designed to ensure that information required to be
disclosed in reports filed or submitted under the Securities Exchange Act of 1934 (the "Act") is recorded, processed, summarized,
and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be
disclosed in the reports that we file or submit under the Act is accumulated and communicated to management, including our
Principal Executive Officer (Yuval Wasserman, Chief Executive Officer) and Principal Financial Officer (Thomas Liguori,
Executive Vice President & Chief Financial Officer), as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, with the participation of management,
including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure
controls and procedures pursuant to the Exchange Act Rule 13a-15(b). Based upon this evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015. The
conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicated to the Audit
Committee. We intend to continue to review and document our disclosure controls and procedures, including our internal controls
and procedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to
ensure that our systems evolve with our business.
Management’s Annual Report on Internal Control over Financial Reporting
It is management’s responsibility to establish and maintain effective internal control over our financial reporting, which
is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer and effected by our Board
of Directors, management, and other personnel. Our internal control over financial reporting is designed to provide reasonable
assurance concerning the reliability of our financial reporting and the preparation of our financial statements for external purposes
in accordance with generally accepted accounting principles.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness
of our internal control over financial reporting as of December 31, 2015, using the criteria described in Internal Control-Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation,
management concluded that our internal control over financial reporting was effective as of December 31, 2015.
Grant Thornton LLP, an independent registered public accounting firm, has audited our Consolidated Financial Statements
included in this Form 10-K, and as part of the audit, has issued a report, included herein, on the effectiveness of our internal control
over financial reporting as of December 31, 2015.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting, except as discussed below, that occurred during the
fourth quarter of 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
Our policy is to implement effective internal controls for all acquisitions within one year of the acquisition date consistent
with the rest of the organization. HiTek was acquired in April 2014 and UltraVolt was acquired in August 2014. During the third
quarter and fourth quarter prior to the filing of Form 10-K for the period ended December 31,2015, the Company completed its
efforts to ensure the existence of controls primarily related to cash disbursements, revenue, inventory procurement, segregation
of duties, computer access controls, and computer change management controls.
Limitations on Controls and Procedures
Management has concluded that our disclosure controls and procedures and internal control over financial reporting
provide reasonable assurance that the objectives of our control system are met. We do not expect, however, that our disclosure
controls and procedures or internal control over financial reporting will prevent or detect all misstatements, errors, or fraud, if any.
All control systems, no matter how well designed and implemented, have inherent limitations, and therefore no evaluation can
provide absolute assurance that every misstatement, error, or instance of fraud, if any, or risk thereof, has been or will be prevented
or detected. The occurrence of a misstatement, error, or fraud, if any, would not necessarily require a conclusion that our controls
and procedures are not effective.
ITEM 9B.
OTHER INFORMATION
None.
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PART III
In accordance with General Instruction G(3) of Form 10-K, certain information required by this Part III is
incorporated by reference to the definitive proxy statement relating to our 2016 Annual Meeting of Stockholders (the “2016
Proxy Statement”), as set forth below. The 2016 Proxy Statement will be filed with the Securities and Exchange Commission
within 120 days after the end of our fiscal year.
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information set forth in the 2016 Proxy Statement under the headings “Proposal No. 1/ Election of Directors” and
"Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. The information under the
heading “Executive Officers of the Registrant” in Part I of this Form 10-K is also incorporated herein by reference.
ITEM 11.
EXECUTIVE COMPENSATION
The information set forth in the 2016 Proxy Statement under the headings “Executive Compensation” is incorporated
herein by reference.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information set forth in the 2016 Proxy Statement under the headings “Security Ownership of Certain Beneficial
Owners and Management” and “Equity Compensation Plan Information” is incorporated herein by reference.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information is set forth in Note 20. Related Party Transactions in ITEM 8 "Financial Statements and Supplementary
Data," and in the 2016 Proxy Statement under the caption “Certain Relationships and Related Transactions” is incorporated herein
by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information set forth in the 2016 Proxy Statement under the caption “Proposal No. 2/Ratification of the Appointment
of Grant Thornton LLP as Advanced Energy's Independent Registered Public Accounting Firm for 2016” is incorporated herein
by reference.
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PART IV
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) Documents filed as part of this Annual Report on Form 10-K are as follows:
1. Financial Statements:
Reports of Grant Thornton LLP
Consolidated Financial Statements:
Balance Sheets at December 31, 2015 and 2014
Statements of Operations for each of the three years in the period ended December 31, 2015
Statements of Comprehensive Income for each of the three years in the period ended December 31, 2015
Statements of Stockholders’ Equity for each of the three years in the period ended December 31, 2015
Statements of Cash Flows for each of the three years in the period ended December 31, 2015
Notes to Consolidated Financial Statements
2. Financial Statement Schedules for each of the three years in the period ended December 31, 2015
NOTE: All schedules have been omitted because they are either not required or the information is included in the
financial statements and notes thereto.
(B) Exhibits:
3.1 Restated Certificate of Incorporation, as amended. (1)
3.2 Restated By-laws, as amended. (19)
3.3 Amendment to Bylaws. (3)
3.4 Second Amendment to the By-laws of Advanced Energy Industries, Inc. (21)
3.5 Third Amendment to the By-Laws of Advanced Energy Industries, Inc. (22)
4.1 Form of Specimen Certificate for Common Stock. (2)
10.1 Lease, dated June 12, 1984, amended June 11, 1992, by and between Prospect Park East Partnership and Advanced
Energy Industries, Inc., for property located in Fort Collins, Colorado. (2)
10.2 Lease, dated March 14, 1994, as amended, by and between Sharp Point Properties, L.L.C., and Advanced Energy
Industries, Inc., for property located in Fort Collins, Colorado. (2)
10.3 Lease, dated May 19, 1995, by and between Sharp Point Properties, L.L.C. and Advanced Energy Industries, Inc., for
a building located in Fort Collins, Colorado. (2)
10.4 Lease dated March 20, 2000, by and between Sharp Point Properties, L.L.C. and Advanced Energy Industries, Inc.,
for a building located in Fort Collins, Colorado. (5)
10.5 Lease Amendment, dated as of April 26, 2010 by and between Sharp Point Properties, LLC and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado. (23)
10.6 Lease Amendment, dated as of August 19, 2010, by and between Sharp Point Properties, LLC and Advanced Energy
Industries, Inc., for a building located in Fort Collins, Colorado. (25)
10.7 Lease Termination Agreement, dated as of December 28, 2011, by and between Sharp Point Properties, LLC and
Advanced Energy Industries, Inc., for buildings located in Fort Collins, Colorado. (27)
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10.8 Lease Agreement, dated as of December 28, 2011, by and between Sharp Point Properties, LLC and Advanced
Energy Industries, Inc., for a building located at 1625 Sharp Point Drive, Fort Collins, Colorado. (27)
10.9 Lease Agreement, dated as of December 28, 2011, by and between Sharp Point Properties, LLC and Advanced
Energy Industries, Inc., for a building located at 2424 Midpoint Drive, Fort Collins, Colorado. (27)
10.10 Lease dated January 16, 2003, by and between China Great Wall Computer Shenzhen Co., Ltd., Great Wall Limited
and Advanced Energy Industries (Shenzhen) Co., Ltd., for a building located in Shenzhen, China. (6)
10.11 Form of Indemnification Agreement. (2)
10.12 Form of Director Indemnification Agreement. (21)
10.13 1995 Stock Option Plan, as amended and restated through February 7, 2001. (7)*
10.14 1995 Non-Employee Directors’ Stock Option Plan, as amended and restated through February 7, 2001. (7)*
10.15 2001 Employee Stock Option Plan. (1)*
10.16 2002 Employee Stock Option Plan. (1)*
10.17 2003 Stock Option Plan. (1)*
10.18 Amendment No. 1 to 2003 Stock Option Plan, dated January 31, 2005. (8)*
10.19 Form of Stock Option Agreement pursuant to the 2003 Stock Option Plan. (8)*
10.20 Amended and Restated 2003 Employees’ Stock Option Plan. (4)*
10.21 2003 Non-Employee Directors’ Stock Option Plan. (1)*
10.22 2003 Non-Employee Directors’ Stock Option Plan, as amended and restated. (4)*
10.23 Form of Restricted Stock Unit Award Agreement pursuant to the 2003 Non-Employee Directors’ Stock Option Plan,
as amended and restated as of February 15, 2006. (9)*
10.24 Form of Restricted Stock Unit Agreement pursuant to the 2003 Non-Employee Directors’ Stock Option Plan. (10)*
10.25 Restricted Stock Unit Agreement pursuant to the 2003 Stock Option Plan. (11)*
10.26 Form of Notice of Grant for Restricted Stock Unit. (36)*
10.27 Form of Restricted Stock Unit Agreement. (36)*
10.28 Form of Notice of Grant of Stock Option. (36)*
10.29 Form of Incentive Stock Option Agreement. (36)*
10.30 Form of Non-Qualified Stock Option Agreement. (36)*
10.31 Form of LTI Notice of Grant. (36)*
10.32 Form of LTI Performance Stock Option Agreement pursuant to the 2008 Omnibus Incentive Plan. (36)*
10.33 Form of LTI Performance Stock Unit Agreement pursuant to the 2008 Omnibus Incentive Plan. (36)*
10.34 Non-employee Director Compensation summary. (12)*
10.35 Non-Employee Director Compensation Structure. (17)*
10.36 2012 - 2014 Long-Term Incentive (LTI) Plan. (44)*
10.37 2012 - 2014 Short Term Incentive (STI) Plan, as revised.*
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10.38 2015 Long-Term Incentive (LTI) Plan. (45)*
10.39 2015 Short-Term Incentive (STI) Plan. (45)*
10.40 2016 Long-Term Incentive (LTI) Plan.*
10.41 2016 Short-Term Incentive (STI) Plan.*
10.42 2008 Omnibus Incentive Plan, as amended May 4, 2010. (26)*
10.43 Executive Change in Control Severance Agreement. (13)
10.43.1 Form of Amendment to Executive Change in Control Agreement. (34)
10.44 Retirement Term Sheet relating to Douglas S. Schatz. (14)
10.45 Offer Letter, dated September 28, 2014, by and among Advanced Energy Industries, Inc. and Yuval Wasserman. (39)
10.46 Executive Change in Control Agreement, dated April 28, 2011, by and among Advanced Energy Industries Inc. and
Thomas O. McGimpsey. (31)
10.47 Executive Change in Control Agreement, dated September 30, 2014, by and among Advanced Energy Industries, Inc.
and Yuval Wasserman. (39)
10.48 Relocation Agreement, dated August 5, 2013, by and among Advanced Energy Industries, Inc. and Yuval
Wasserman. (19)
10.49 Executive Separation Agreement and Release of all Claims, dated May 5, 2014, by and between Advanced Energy
Industries, Inc. and Gordon Tredger. (37)
10.50 Executive Transition and Separation Agreement, dated May 31, 2014, by and between Advanced Energy Industries,
Inc. and Garry Rogerson. (38)
10.51 Executive Transition and Separation Agreement, dated November 17, 2014, by and between Advanced Energy
Industries, Inc. and Danny C. Herron. (40)
10.52 Offer Letter to Thomas Liguori dated April 8, 2015. (41)
10.53 Executive Change in Control Agreement, dated May 18, 2015, by and among Advanced Energy Industries, Inc. and
Thomas Liguori. (41)
10.54 Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials Inc. dated
August 29, 2005. (16)+
10.55 Shipping Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc. and
Applied Materials Inc. dated August 29, 2005. (16)+
10.56 Bridge Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied
Materials Inc. dated January 26, 2011. (30)+
10.57 Sale and Purchase Agreement by and among Advanced Energy Industries, Inc., Blitz S13-103 GmbH, Jolaos
Verwaltungs GmbH and Prettl Beteiligungs Holdings, GmbH, dated as of April 8, 2013. (35)
10.58 Credit Agreement, dated October 12, 2012, by and among Wells Fargo Bank, National Association, as administrative
agent for certain lenders, Advanced Energy Industries, Inc., AE Solar Energy Inc., and Sekidenko, Inc. (33)
10.59 Guaranty and Security Agreement dated October 12, 2012 among Wells Fargo Bank, National Association,
Advanced Energy Industries, Inc., AE Solar Energy, Inc., Sekidenko, Inc., AEI US Subsidiary, Inc. and Aera
10.60 Amendment No. 1 to Credit Agreement dated November 8, 2012 among Wells Fargo Bank, National Association,
Advanced Energy Industries, Inc., AE Solar Energy, Inc., Sekidenko, Inc., AEI US Subsidiary, Inc. and Aera
Corporation. (34)
10.61 Wells Fargo Credit Facility Amendment dated September 24, 2015. (42)
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10.62 Fixed Dollar Accelerated Share Repurchase Transaction, dated November 6, 2015, between Advanced Energy
Industries, Inc. and Morgan Stanley & Co. LLC. (43)
14.1 Code of Ethical Conduct, as revised.
21.1 Subsidiaries of Advanced Energy Industries, Inc.
23.1 Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm.
31.1 Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
Attached as Exhibit 101 to this report are the following materials from Advanced Energy, Inc.’s Annual Report on
Form 10-K for the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language):
(i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Earnings, (iii)
the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements
of Stockholders’ Equity, and (vi) the Notes to the Consolidated Financial Statements.
_____________________________________
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003 (File No. 000-26966), filed November 4, 2003.
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 33-97188), filed September
2, 1995.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed December 5,
2007.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007 (File
No. 000-26966), filed August 3, 2007.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000 (File
No. 000-26966), filed March 27, 2001.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (File
No. 000-26966), filed February 24, 2004.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001
(File No. 000-26966), filed May 9, 2001.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed February 3,
2005.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed May 31, 2006.
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(10)
(11)
(12)
(13)
(14)
(15)
(16)
(17)
(18)
(19)
(20)
(21)
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
(44)
(45)
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006 (File
No. 000-26966), filed August 9, 2006.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (File
No. 000-26966), filed March 28, 2006.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed February 1,
2006.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K (File No. 000-26966), filed March 31,
2005.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed August 9, 2005.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed July 6, 2005.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2005 (File No. 000-26966), filed November 7, 2005.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed July 28, 2006.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed April 4, 2008.
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 000-26966), filed August 6,
2013.
Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File
No. 000-26966), filed February 27, 2009.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed December 14,
2009.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed April 23, 2010.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed May 7, 2010.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed August 16,
2010.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed August 20,
2010.
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-26966), filed March 2, 2011.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966), filed December 29,
2011.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966), filed August 2, 2011.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966), filed August 4, 2011.
Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q (File No. 000-26966), filed May 6, 2011.
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-26966) filed March 2, 2012.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed April 30, 2012.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed October 15,
2012.
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-26966) filed March 6, 2013.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed April 11, 2013.
Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed May 10, 2013.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed May 5, 2014.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed June 2, 2014.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed October 1, 2014.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed November 18,
2014.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed April 16, 2015.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26966) filed November 5,
2015.
Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed November 6,
2015.
Incorporated by reference to the Registrant's Annual Report on Form 10-K (File No. 000-26966), filed March 6, 2013.
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q (File No. 000-26966) filed May 6, 2015.
* Compensation Plan
+ Confidential treatment has been granted for portions of this agreement.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
ADVANCED ENERGY INDUSTRIES, INC.
(Registrant)
/s/ Yuval Wasserman
________________________________________________________________________________________________________________________
Yuval Wasserman
Chief Executive Officer
Date: February 25, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ Yuval Wasserman
Yuval Wasserman
/s/ Thomas Liguori
Thomas Liguori
/s/ Grant H. Beard
Grant H. Beard
/s/ Frederick A. Ball
Frederick A. Ball
/s/ Terry F. Hudgens
Terry F. Hudgens
/s/ Ronald C. Foster
Ronald C. Foster
/s/ Edward C. Grady
Edward C. Grady
/s/ Thomas M. Rohrs
Thomas M. Rohrs
Chief Executive Officer and Director
February 25, 2016
Executive Vice President and Chief Financial Officer
February 25, 2016
Chairman of the Board
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
February 25, 2016
Director
Director
Director
Director
Director
82