Advanced Energy Industries Annual Report 2017

Plain-text annual report

Table of Contents UNITED STATESSECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the fiscal year ended December 31, 2017.oro 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: 000-26966ADVANCED ENERGY INDUSTRIES, INC.(Exact name of registrant as specified in its charter)Delaware 84-0846841(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)1625 Sharp Point Drive, Fort Collins, CO 80525(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (970) 221-4670Securities registered pursuant to Section 12(b) of the Act:Title of each class Name of each exchange on which registeredCommon Stock, $0.001 par value NASDAQ Global Select MarketSecurities registered pursuant to section 12(g) of the Act: NoneIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes þ No oIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act: Yes o No þIndicate 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 preceding12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No oIndicate 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 andposted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þNo oIndicate 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’sknowledge, 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. oIndicate 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 “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):Large accelerated filer þ Accelerated filer o Non-accelerated filer o(Do not check if a smallerreporting company) Smaller reporting company o Emerging growth company oIf an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financialaccounting standards provided pursuant to Section 13(a) of the Exchange Act. oIndicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o No þThe aggregate market value of voting and non-voting common stock held by non-affiliates of the registrant was $2,568,911,641 as of June 30, 2017, based upon the price at whichsuch common stock was last sold on such date.As of February 13, 2018, there was 39,629,120 shares of the registrant's common stock outstanding.DOCUMENTS INCORPORATED BY REFERENCEPart III of this Annual Report on Form 10-K incorporates information by reference from the registrant’s definitive proxy statement for its 2018 Annual Meeting of Stockholders (tobe filed with the Commission under Regulation 14A no later than 120 days after the end of the registrant's fiscal year ended December 31, 2017). ADVANCED ENERGY INDUSTRIES, INC.FORM 10-KTABLE OF CONTENTS PagePART I 3 ITEM 1. BUSINESS 3 ITEM 1A. RISK FACTORS 9 ITEM 1B. UNRESOLVED STAFF COMMENTS 21 ITEM 2. PROPERTIES 22 ITEM 3. LEGAL PROCEEDINGS 22 ITEM 4. MINE SAFETY DISCLOSURES 22 PART II 23 ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES 23 ITEM 6. SELECTED FINANCIAL DATA 25 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 25 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 38 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 39 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 70 ITEM 9A. CONTROLS AND PROCEDURES 70 ITEM 9B. OTHER INFORMATION 71 PART III 72 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 72 ITEM 11. EXECUTIVE COMPENSATION 72 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS 72 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE 72 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES 72 PART IV 73 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES 73 SIGNATURES 77EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1EX-32.22Table of ContentsPART IUnless the context otherwise requires, as used in this Form 10-K, references to “Advanced Energy”, “the Company”, “we”, “us” or “our” refer toAdvanced Energy Industries, Inc. and its consolidated subsidiaries.ITEM 1.BUSINESS OverviewAdvanced Energy provides highly-engineered, mission-critical, precision power conversion, measurement and control solutions to our globalcustomers. We design, manufacture, sell and support precision power products that transform electrical power into various usable forms. Our powerconversion products refine, modify and control the raw electrical power from a utility and convert it into power that is predictable, repeatable andcustomizable. Our products enable thin film manufacturing processes such as plasma enhanced chemical and physical deposition and etch for varioussemiconductor and industrial products, industrial thermal applications for material and chemical processes, and specialty power for critical industrialapplications. We also supply thermal instrumentation products for advanced temperature measurement and control in these markets. Our network of globalservice support centers provide local repair and field service capability in key regions as well as provide upgrades and refurbishment services, and sales ofused equipment to businesses that use our products.On July 3, 2017, Advanced Energy acquired all of the issued and outstanding shares of capital stock of Excelsys Holdings Limited (“Excelsys”), anelectronics manufacturer in Cork, Ireland. This acquisition is part of Advanced Energy’s strategy to continue to grow and diversify its revenue throughorganic and inorganic opportunities. The high-efficiency, low voltage, configurable power supplies that Excelsys manufactures for medical and industrialapplications will further enhance Advanced Energy’s product portfolio. See Note 2. Business Acquisition in Item 8 "Financial Statements and SupplementaryData."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 ServicesOur products are designed to enable new process technologies, improve productivity, and lower the cost of ownership for our customers. We alsoprovide repair and maintenance services for all of our products.We principally serve original equipment manufacturers ("OEM") and end customers in the semiconductor, flat panel display, high voltage, solarpanel, and other industrial capital equipment markets. Our products are used in diverse markets, applications, and processes including the manufacture ofcapital equipment for semiconductor device manufacturing, thin film applications for thin film renewables and architectural glass, and for other thin filmapplications including flat panel displays, and industrial coatings. These markets can be cyclical in nature. Therefore, demand for our products and ourfinancial results can change as demand for manufacturing equipment and repair and maintenance services change in response to consumer demand. Otherfactors, such as global economic and market conditions and technological advances in the applications we serve can also have an impact on our financialresults, both positively and negatively.Our process power 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 controlthe raw electrical power from a utility and convert it into power that may be customized and is predictable and repeatable.Our power control modules and thermal instrumentation products are used in the semiconductor industry, including adjacent thin film applicationsfor solar PV and light emitting diode ("LED") industries, and heavy industries, for thermal control and temperature measurement solutions for applications inwhich time-temperature cycles affect material properties, productivity, and yield. These products are used in rapid thermal processing, chemical vapordeposition, crystal growing, and other semiconductor and solar applications requiring non-contact temperature measurement. They are also used in chemicalprocessing, glass manufacturing and numerous other general industrial power applications.Our high voltage products are designed to meet the demanding requirements of OEMs worldwide. Our high voltage power solutions and custom-built power conversion products offer high frequency, high voltage topology, providing wide input and output operating ranges while retaining excellentstability and efficiencies ranging from benchtop and rackmount systems to micro-size printed circuit board mount modules. The products target applicationsincluding semiconductor wafer3Table of Contentsprocessing and metrology, scientific instrumentation, mass spectrometry, industrial printing and analytical x-ray systems for industrial and analyticalapplications.Our solutions are designed to meet the demanding requirements of global OEMs in the Industrial, Medical and MIL-COTS (Commercial-off-the-shelf) verticals. Our low voltage products deliver excellence in efficiency, flexibility, performance and reliability. In the Medical industry our solutions areused in a variety of applications including: clinical diagnostic equipment, lasers, X-ray machines, CT-scanners and MRI scanners. In the Industrial verticalour products are commonly used in test and measurement, lasers, optical inspection equipment and scientific instrumentation. We design and manufactureMIL-COTS power supplies that meet the high reliability and often harsh operating environments of the military electronics industry and are ideal for use in avariety of applications including: radar systems, data acquisition, communications equipment, test and measurement equipment.Our global support services group offers in-warranty and out-of-warranty repair services in the regions in which we operate, providing us withpreventive maintenance opportunities. Our customers continue to pursue low cost of ownership of their capital equipment and are increasingly sensitive tothe significant costs of system downtime. They expect that suppliers offer comprehensive local repair service and customer support. To meet these marketrequirements, we maintain a worldwide support organization comprising of both direct and indirect activities through partnership with local distributorsprimarily in the United States ("U.S."), the People’s Republic of China ("PRC"), Japan, South Korea, Taiwan, Germany, and United Kingdom.As of December 31, 2015, we discontinued our Inverter production, 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 asingle unit. However, extended warranties historically sold and reflected as “Deferred Revenue” on our Consolidated Balance Sheets, represent futurerevenue and service costs to be incurred by our global services group and are reflected as continuing operations for historical periods and future periods. SeeNote 3. Discontinued Operations in Item 8 "Financial Statements and Supplementary Data."MarketsOur products compete in markets for high tech applications using capital equipment. 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 capacityutilization, demand for customers’ products, inventory levels relative to demand, government incentives and subsidies, and access to affordable capital. Formore information related to the markets in which we compete and the current environment in those markets, see Business Environment and Trends in Item 7"Management's Discussion and Analysis of Financial Condition and Results of Operations."SEMICONDUCTOR CAPITAL EQUIPMENTCustomers in the semiconductor capital equipment market incorporate our products into equipment that make integrated circuits. Our powerconversion systems provide the energy to enable thin film processes, such as deposition and etch, and high voltage applications such as ion implant, waferinspection and metrology.Our thermal instrumentation products measure the temperature of the processed substrate or the process chamber. Our power control modules areused in rapid thermal processing applications and for epitaxial growth applications for use in photonics, microelectronics, and photovoltaics. Our remoteplasma sources deliver ionized gases for reactive chemical processes used in cleaning, surface treatment, and gas abatement. Precise control over the energydelivered to plasma-based processes enables the production of integrated circuits with reduced feature sizes and increased speed and performance.INDUSTRIAL POWEROur industrial power capital market is comprised of products for Thin Films Industrial Power and Specialty Power applications.•Thin Films Industrial Power applications include glass coating, glass manufacturing, flat panel displays, solar cell manufacturing, andsimilar thin film manufacturing, including data storage, decorative, hard and optical coating.•Specialty Power applications include power control modules and thermal instrumentation products for metal fabrication and treatment, andmaterial and chemical processing. Our high voltage industrial applications4Table of Contentsinclude scanning electron microscopy, medical equipment, and instrumentation applications such as x-ray and mass spectroscopy, as wellas general electron gun sources for scientific and industrial applications.GLOBAL SUPPORTOur network of global service support centers provides local repair and field service capability in key regions as well as provides upgrades andrefurbishment services, and sales of used equipment to businesses that use our products.CustomersOur products are sold worldwide to approximately 280 OEMs and integrators and directly to more than 1,600 end users. Our ten largest customersaccounted for approximately 70.4% of our sales in 2017, 67.7% of our sales in 2016, and 61.2% of our sales in 2015. We expect that the sale of products toour 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 33.5% of our sales in 2017, 35.2% of our sales in 2016, and 29.8% of our sales in 2015.Lam Research accounted for 23.1% of our sales in 2017, 20.7% of our sales in 2016, and 20.3% of our sales in 2015. No other customer accounted for greaterthan 10% of our sales in 2017, 2016, or 2015. The loss of Applied Materials, Inc. or Lam Research as a customer could have a material adverse effect on ourresults of operations.BacklogOur backlog was approximately $131.3 million at December 31, 2017, an 89.7% increase from $69.2 million at December 31, 2016. This increaseresulted primarily due to increased demand in the semiconductor and industrial thin film markets. For more information related to our expectations for themarkets we serve, see Business Environment and Trends in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."Backlog orders are firm orders scheduled to be filled and shipped in the next 12 months.Backlog orders are not necessarily an indicator of future sales levels because of variations in lead times and customer production demand pullsystems. Customers may delay delivery of products or cancel orders prior to shipment, subject to possible cancellation penalties. Delays in delivery schedulesand/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 andresults of operations.Marketing, Sales and DistributionWe sell our products through direct and indirect sales channels in North America, Europe and Asia. Our sales operations are primarily located in theUnited States, the PRC, the United Kingdom, Germany, Japan, South Korea, India, Singapore and Taiwan. In addition to a direct sales force, we haveindependent 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 essentialto 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, 2017, 2016, and 2015. Sales are attributed toindividual countries based on customer location. Years ended December 31,Sales to external customers: 2017 2016 2015 United States $453,095 $327,397 $268,257Canada 37 161 195North America 453,132 327,558 268,452 People's Republic of China 34,045 16,207 12,687Other Asian countries 104,595 77,638 61,839Asia 138,640 93,845 74,526 Germany 57,351 48,589 46,719United Kingdom 14,299 13,712 25,100Other European Countries 7,590 — 14Europe 79,240 62,301 71,833Total sales $671,012 $483,704 $414,8115Table of ContentsTotal sales to all countries outside of the U.S. totaled $217.9 million, $156.3 million, and $146.6 million in the years ended December 31, 2017,2016, and 2015, respectively.See Item 1A "Risk Factors" for a discussion of certain risks related to our foreign operations.ManufacturingThe manufacturing of our products is performed in Shenzhen, PRC; Ronkonkoma, New York; Littlehampton, United Kingdom; and Vancouver,Washington. Manufacturing in these locations, primarily the PRC, exposes us to risks, such as exchange controls and currency restrictions, changes in localeconomic conditions, changes in PRC laws and regulations, government actions, inability to meet customer demands if one of our facilities becomesimpaired, and unsettled political conditions.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 manufacture and support of our products. Although we makereasonable efforts to assure that parts are available from multiple qualified suppliers, some key parts may be obtained from a sole supplier or a limited groupof 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 businessprocesses including testing their components' performance, quality, and reliability on our power conversion product at our customers' and theircustomer's processes. The qualification process for Precision Power, particularly as it pertains to semiconductor customers, follows semiconductorindustry 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 endingthe 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 PropertyWe seek patent protection for inventions governing new products or technologies as part of our ongoing research and development. We currentlyhold 121 United States patents and 91 foreign-issued patents, and have 79 patent applications pending in the United States, Europe and Asia. A substantialmajority of our patents relate to our Process Power business. Generally, our efforts to obtain international patents have been concentrated in the industrializedcountries within Europe and Asia because there are other manufacturers and developers of power conversion and control systems in those countries, as well ascustomers 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 usagainst claimed infringement of the rights of others, or to determine the scope and validity of the proprietary rights of others. See "We are highly dependenton our intellectual property" in Item 1A "Risk Factors."CompetitionThe markets we serve are highly competitive and characterized by rapid technological development and changing customer requirements. Nosingle company dominates any of our markets. Significant competitive factors in our markets include product performance, compatibility with adjacentproducts, 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 componentsuppliers. We encounter substantial competition from foreign and domestic companies for each of our product lines. Some of our competitors have greaterfinancial and other resources than we do. In some cases, competitors are smaller than we are, but are well established in specific product niches. MKSInstruments, Inc., COMET Holding AG., Daihen Corp., TRUMPF Hüttinger GmbH + Co. KG., Comdel, Inc., Kyosan Electric Mfg. Co., Ltd., New PowerPlasma Co., Ltd., EN Technologies Inc., Seren IPS, Inc.,and Adtec Plasma Tech. Co., Ltd. compete with our power conversion products6Table of Contentsfor thin film processing. Spellman High Voltage Electronics Corp., Crane Co., and Matsusada Precision, Inc. offer products that compete with our highvoltage products. LumaSense Technologies, Inc., CI Systems Ltd., BASF SE., and LayTec AG. offer products that compete with our thermal instrumentationproducts. Eurotherm, Control Concepts Inc., CD Automation, and Spang Power Electronics offer products that compete with our power control modules.Artesyn Embedded Technologies, Cosel Co., LTD, TKD-Lambda Americas Inc., Mean Well, Vox Power and XP Power compete with our low voltageproducts.Additionally, a focus on local content is causing new competitors to emerge around the world, with strong support from local governments, industryleaders, and investors.Our ability to continue to compete successfully in these markets depends on our ability to make timely introductions of product enhancements andnew products, to localize these development and production activities in key world regions, and to produce quality products. We expect our competitors willcontinue to improve the design and performance of their products, and introduce new products with competitive performance characteristics. We believe thatwe compete effectively with respect to these factors, although we cannot assure that we will be able to compete effectively in the future.Research and DevelopmentThe market for our precision power conversion, thermal, and high voltage products is characterized by ongoing technological changes. We believethat continued and timely development of new highly differentiated products and enhancements to existing products to support end user and OEMrequirements is necessary for us to maintain a competitive position in the markets we serve. Accordingly, we continue to devote a significant portion of ourpersonnel and financial resources to research and development projects and seek to maintain close relationships with our key customers and other industryleaders in order to remain responsive to their product requirements now and in the future.Research and development expenses were $58.0 million in 2017, $44.4 million in 2016, and $39.6 million in 2015, representing 8.6% of our salesin 2017, 9.2% of our sales in 2016, and 9.5% of our sales in 2015.EmployeesAs of December 31, 2017, we had a total of 1,876 employees. Our employees are not represented by unions, except for statutory organization rightsapplicable to our employees in the PRC and Germany. We believe that our continued success depends, in part, on our ability to attract and retain qualifiedpersonnel. We consider our relations with our employees to be good.Effect of Environmental LawsWe are subject to federal, state, and local environmental laws and regulations, as well as the environmental laws and regulations of the foreignfederal and local jurisdictions in which we have manufacturing and service facilities. We believe we are in material compliance with all such laws andregulations.Compliance with federal, state, and local laws and regulations has not had, and is not expected to have, an adverse effect on our capitalexpenditures, competitive position, financial condition, or results of operations.Website AccessOur website address is www.advanced-energy.com. We make available, free of charge on our website, our Annual Report on Form 10-K, quarterlyreports 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, orfurnishing them to, the Securities and Exchange Commission (“SEC”). Such reports are also available at www.sec.gov. Information contained on our websiteis 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 StatementsThis Annual Report on Form 10-K includes or incorporates by reference “forward-looking statements” within the meanings of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements contained or incorporated byreference in this Annual Report on Form 10-K, other than statements of historical fact, are “forward-looking statements.” For example, statements relating toour 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 statementscan be identified by the inclusion of words such as "believe," "expect," "plan," "anticipate," "estimate," "may," "might," "could," "should," "will," "continue,""intend," "goal," and similar words.7Table of ContentsSome 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;•our ability to be successful in the design win process with our OEM customers;•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;•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 political and economic conditions; and•industry trends.Our actual results could differ materially from those projected or assumed in our forward-looking statements because forward-looking statementsby 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 Item 1A “Risk Factors.” Other factors might also contribute to the differencesbetween our forward-looking statements and our actual results. We assume no obligation to update any forward-looking statement or the reasons why ouractual results might differ.Executive Officers of the RegistrantOur executive officers, their positions and their ages as of December 31, 2017 were as follows:Yuval Wasserman, 63, has served as President & Chief Executive Officer, and as a director since October 2014. Mr. Wasserman joined us in August2007 as Senior Vice President, Sales, Marketing and Service. In October 2007, Mr. Wasserman was promoted to Executive Vice President, Sales, Marketingand Service. In April 2009, he was promoted to Executive Vice President and Chief Operating Officer of the Company, and then in August 2011, he waspromoted to President of the Thin Films Business Unit. Prior to joining the Company, Mr. Wasserman served as the President, and later as Chief ExecutiveOfficer, of Tevet Process Control Technologies, Inc., a semiconductor metrology company, until July 2007. Prior to that, he held senior executive and generalmanagement positions at Boxer Cross (a metrology company acquired by Applied Materials, Inc.), Fusion Systems (a plasma strip company that is a divisionof Axcelis Technologies, Inc.), and AG Associates (a semiconductor capital equipment company focused on rapid thermal processing). Mr. Wasserman startedhis career at National Semiconductor, Inc., where he held various process engineering and management positions. Mr. Wasserman was on8Table of Contentsthe Board of Directors of Syncroness, Inc., an outsourced engineering and product development company, from 2010 to 2017 when it was sold, and joinedthe Board of Directors of FARO Technologies, Inc., a publicly traded, manufacturer of three-dimensional (3D) measurement, imaging and realizationsystems,in December 2017. Mr. Wasserman is a National Association of Corporate Directors (NACD) Governance Fellow. Mr. Wasserman has a BSc degree inchemical engineering from BenGurion University in Israel.Thomas Liguori, 59, was our Executive Vice President and Chief Financial Officer from May 2015 until his resignation on January 26, 2018. Prior tojoining Advanced Energy, he served as Executive Vice President and Chief Financial Officer at Multi-Fineline Electronix, Inc. since 2008. Multi-FinelineElectronix, 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 andadministration functions. From February 2005 to November 2005, Mr. Liguori served as Vice President, Finance and Chief Financial Officer at IomegaCorporation, a publicly traded provider of storage and network security solutions, and from April 2000 to February 2005, as Chief Financial Officer atChannell Commercial Corporation, a publicly traded designer and manufacturer of telecommunications equipment. Prior to that time, Mr. Liguori served asChief Financial Officer of Dole Europe for Dole Food Company, serving as the top-ranking financial and IT executive in Dole’s operations in Europe, Africaand the Middle East, and as Vice President of Finance at Teledyne Technologies International Corp. Mr. Liguori began his career with Honeywell Ltd. andserved as a management consultant with Deloitte & Touche LLP. Mr. Liguori holds a Bachelor’s in Business Administration from Boston University andcompleted a M.B.A. in Finance, from Arizona State University. He is a Certified Management Accountant and a Certified Financial Manager. Mr. Liguori is aNational Association of Corporate Directors (NACD) Board Leadership Fellow.Thomas O. McGimpsey, 56, joined us in April 2009 as Vice President and General Counsel and was promoted to Executive Vice President ofCorporate Development (M&A) and General Counsel in August 2011, and held the corporate development executive position until mid-2015. In January2018, Mr. McGimpsey was appointed as the Interim Chief Financial Officer and now has the combined role of Executive Vice President, Chief FinancialOfficer & General Counsel. Mr. McGimpsey also managed Advanced Energy’s IT Department from 2010 to 2013. Prior to joining the Company, fromFebruary 2008 to April 2009, Mr. McGimpsey held the position of Vice President of Operations at First Data Corporation. During 2007, Mr. McGimpsey wasa consultant and legal advisor to various companies. From July 2000 to January 2007, Mr. McGimpsey held various positions with McDATA Corporationsuch as Executive Vice President of Business Development & Chief Legal Officer, Senior Vice President & General Counsel and Vice President of CorporateDevelopment. From February 1998 until 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 SoftwareTechnology, Inc. Mr. McGimpsey has been on the Board of Directors of CPP, Inc., an international engineering services company since August 2015 and hasbeen a Commissioner to the Colorado Commission on Higher Education since July 2015. Mr. McGimpsey received his Executive M.B.A. (with honors) fromColorado State University, his Juris Doctor degree from the University of Colorado and his B.S. degree in Computer Science (with a minor in electricalsystems) from Embry-Riddle Aeronautical University. Mr. McGimpsey is a National Association of Corporate Directors (NACD) Board Leadership Fellow.ITEM 1A.RISK FACTORSOur business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to, those setforth below, any of which could cause our results to be adversely impacted and could result in a decline in the value or loss of an investment in our commonstock. Other factors may also exist that we cannot anticipate or that we currently do not consider to be significant based on information that is currentlyavailable. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows and futureresults. Such risks and uncertainties may also impact the accuracy of forward-looking statements included in this Form 10-K and other reports we file with theSecurities and Exchange Commission. Investors should carefully consider information in this Annual Report on Form 10-K in light of the risk factorsdescribed below.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 inRonkonkoma, New York, Littlehampton, United Kingdom and Shenzhen, PRC. Our thermal instrumentation products that are used in the semiconductorindustry are manufactured in Vancouver, Washington and Littlehampton, United Kingdom. Each facility is under operating lease and interruptions inoperations could be caused by early termination of existing leases by landlords or failure by landlords to renew existing leases upon expiration, including9Table of Contentsthe possibility that suitable operating locations may not be available in proximity to existing facilities which could result in labor or supply chain risks. Eachfacility manufactures different products, and therefore, is not interchangeable. Natural, uncontrollable occurrences or other operational issues at any of ourmanufacturing facilities could significantly reduce our productivity at such site and could prevent us from meeting our customers’ requirements in a timelymanner, or at all. In particular, for certain higher demand products manufactured out of our Littlehampton, United Kingdom site, we are experiencing longerdelivery times and delayed shipments to customers which may continue over the short term. Any potential losses from such occurrences could significantlyaffect our relationship with customers, operations and results of operations for a prolonged period of time.Our restructuring and other cost reduction efforts in prior years have included transitioning manufacturing operations to our facility in Shenzhenfrom other manufacturing facilities, such as Fort Collins, Colorado and Littlehampton, United Kingdom, which renders us increasingly reliant upon ourShenzhen facility. We have been notified that we will be required to relocate our Shenzhen, PRC manufacturing facility by July 2020. A disruption inmanufacturing at our Shenzhen facility, from whatever cause, could have a significantly adverse effect on our ability to fulfill customer orders, our ability tomaintain customer relationships, our costs to manufacture our products and, as a result, our results of operations and financial condition.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 has been inShenzhen, PRC; however, we have also added specialized manufacturing at our Littlehampton, United Kingdom, and Ronkonkoma, New York facilities.From time to time we may be required to relocate manufacturing or migrate manufacturing of specific products between facilities or to third partymanufacturers. We have been notified that we will be required to relocate our Shenzhen, PRC manufacturing facility by July 2020. If we do not successfullycoordinate the timely manufacturing and distribution of our products during this time, we may have insufficient supply of products to meet customerdemand, 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 abilityto 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 timelymanufacture our products depends in part on the timely delivery of raw materials, parts, components, and subassemblies from suppliers. We rely on sole andlimited source suppliers for some of our raw materials, parts, components, and subassemblies that are critical to the manufacturing of our products.This reliance involves several risks, including the following:•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 interms 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.From time to time, our sole or limited source suppliers have given us notice that they are ending supply of critical parts, components, andsubassemblies that are required for us to deliver product. If we cannot qualify alternative suppliers before ending supply of critical parts from the sole orlimited source suppliers, we may be required to make a last-time-buy(s) and take possession of material amounts of inventory in advance of customer demand.In some instances, the last-time-buy materials required to be purchased may be for several years which in turn exposes us to additional excess andobsolescence risk. If we cannot qualify alternative suppliers before the last-time-buy materials are utilized in our products or legacy inverter warrantyoperations, we may be unable to deliver further product or legacy inverter warranty service to our customers.Qualifying alternative suppliers could be time consuming and lead to delays in, or prevention of delivery of products to our customers, as well asincreased costs. If we are unable to qualify additional suppliers and manage relationships with our existing and future suppliers successfully, if our suppliersexperience financial difficulties including bankruptcy, or if our suppliers cannot meet our performance or quality specifications or timing requirements, wemay experience shortages, delays, or increased costs of raw materials, parts, components, or subassemblies. This in turn could limit or prevent our ability to10Table of Contentsmanufacture and ship our products, which could materially and adversely affect our relationships with our current and prospective customers and ourbusiness, financial condition, and results of operations.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 ourcustomers’ 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 thatour customers’ expectations were overly optimistic or pessimistic, especially when industry or general economic conditions change. Orders with our supplierscannot always be amended in response. In addition, in order to assure availability of certain components or to obtain priority pricing, we have entered intocontracts 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 touse 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 andagreements with various suppliers to ensure the availability of components. If demand for our products does not continue at current levels, we might not beable to use all of the components that we are required to purchase under these commitments and agreements, and our reserves for excess and obsoleteinventory may increase, which could have a material adverse effect on our results of operations. If demand for our products exceeds our customers’ and ourforecasts, we may not be able to timely obtain sufficient raw materials, parts, components, or subassemblies, on favorable terms or at all, to fulfill the excessdemand.Newly enacted U.S. government tax reform could have a negative impact on the results of future operations.On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the "Tax Act") was enacted which contained substantial changes to the Internal RevenueCode, some of which could have an adverse effect on our business. The Tax Act significantly revises the U.S. corporate income tax by, among other things,lowering corporate income tax rates, implementing the territorial tax system and imposing a transition tax on deemed repatriated earnings of our foreignsubsidiaries. With the enactment of the Tax Act, our financial results for 2017 included a mandatory one-time estimated income tax expense ofapproximately $72.9 million resulting from the transition tax and the revaluation of our U.S. deferred tax assets and liabilities to reflect the recently enacted21% federal corporate tax rate effective January 1, 2018. These estimates are based on our initial analysis of the Tax Act. Given the significant complexity ofthe Tax Act, anticipated guidance from the Internal Revenue Service about implementing the Tax Act, and the potential for additional guidance from theSecurities and Exchange Commission or the Financial Accounting Standards Board related to the Tax Act, these estimates may be adjusted in future periodsduring 2018.Significant developments stemming from recent U.S. government proposals concerning tariffs and other economic proposals could have a material adverseeffect on us. Recent U.S. government proposals could impose greater restrictions and economic disincentives on international trade, particularly imports. Proposals to date include possible tariffs on goods imported into the United States, particularly from China, that could increase the cost of importedproducts. We have our primary manufacturing facility in Shenzhen, PRC and a significant portion of our products are imported into the United States. Anyincrease in the cost of our goods imported into the United States could adversely impact our competitiveness. Depending on the final regulation, we mayelect to move some of our manufacturing operations to the US which could increase our costs as well. While the final changes in regulation are not known atthis time, any final regulation that adds a cost to imported product could have a material effect on our costs and net income. Changes in U.S. social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, developmentand investment in the territories and countries where we currently develop and sell products, and any negative sentiments towards the United States as aresult of such changes, could adversely affect our business. In addition, negative sentiments towards the United States among non-U.S. customers and amongnon-U.S. employees or prospective employees could adversely affect sales or hiring and retention, respectively.Increased governmental action on income tax regulations could negatively impact our business.International governments have heightened their review and scrutiny of multinational businesses like ours which could increase our compliancecosts and future tax liability to those governments. As governments continue to look for ways to increase their revenue streams they could increase audits ofcompanies to accelerate the recovery of monies perceived as owed to them under current or past regulations. Such an increase in audit activity could have anegative impact on companies which operate internationally, as we do.11Table of ContentsActivities necessary to integrate acquisitions may result in costs in excess of current expectations or be less successful than anticipated.We have completed acquisitions in the past 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 acquiredbusinesses. The integration of acquisitions may require significant attention from our management, and the diversion of management’s attention andresources could have a material adverse effect on our ability to manage our business. Furthermore, we may not realize the degree or timing of benefits weanticipated when we first entered into the acquisition transaction. If actual integration costs are higher than amounts originally anticipated, if we are unableto 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.We have historically made acquisitions and divestitures. However, we may not find suitable acquisition candidates in the future and we may not be able tosuccessfully integrate and manage acquired businesses. In either an acquisition or a divestiture, we may be required to make fundamental changes in ourERP, 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 potentialstrategic acquisitions of complementary companies, products, and technologies. We have also divested businesses. In the future, we could:•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 potentiallysignificant professional fees and other charges in the period in which the acquisition or negotiations are terminated.We may not be able to successfully identify appropriate acquisition candidates, to integrate any businesses, products, technologies, or personnel that wemight acquire in the future or achieve the anticipated benefits of such transactions, which may harm our business.Our operations in the People’s Republic of China are subject to significant political and economic uncertainties over which we have little or no controland 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 andcurrency 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 including potential changes in U.S. policy regarding overseasmanufacturing. These factors may have a material adverse effect on our operations, business, results of operations, and financial condition. See "We areexposed to risks associated with worldwide financial markets and the global economy" risk factor below.12Table of ContentsThe PRC’s economy differs from the economies of most developed countries in many respects, including with respect to the amount of governmentinvolvement, level of development, rate of growth, control of foreign exchange and allocation of resources. While the economy of the PRC has experiencedsignificant growth in the past 20 years, growth has been uneven across different regions and amongst various economic sectors of the PRC. The PRCgovernment has implemented various measures to encourage economic development and guide the allocation of resources. Strikes by workers and picketingin front of the factory gates of certain companies in Shenzhen have caused unrest among some workers seeking higher wages, which could impact ourmanufacturing facility in Shenzhen. While some of the government's measures may benefit the overall economy of the PRC, they may have a negative effecton us. For example, our financial condition and results of operations may be materially and adversely affected by government control over capitalinvestments or changes in tax regulations that are applicable to us as well as work stoppages.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 corporateprofitabilityWe are subject to income taxes in the U.S. (federal and state) and numerous foreign jurisdictions. Tax laws, regulations, and administrative practicesin various jurisdictions may be subject to significant change due to economic, political, and other conditions, and significant judgment is required inevaluating and estimating our provision and accruals for these taxes. There are many transactions that occur during the ordinary course of business for whichthe ultimate tax determination is uncertain. Our effective tax rates could be adversely affected by earnings being lower than anticipated in jurisdictions wherewe have lower statutory rates and earnings higher than anticipated in jurisdictions where we have higher statutory rates, losses incurred in jurisdictions forwhich we are not able to realize the related tax benefit, changes in foreign currency exchange rates, entry into new businesses and geographies and changes toour existing businesses, acquisitions (including integrations) and investments, changes in our deferred tax assets and liabilities and their valuation, andchanges in the relevant tax, accounting, and other laws, regulations, administrative practices, principles, and interpretations, including fundamental changesto the tax laws applicable to corporate multinationals. The U.S., many countries in the European Union, and a number of other countries are activelyconsidering changes in this regard.For example, on October 5, 2015, the Organisation for Economic Co-operation and Development (OECD) issued the final report on all 15 BaseErosion and Profit Shifting “BEPS” Action Plans. According to the OECD, the current rules have created opportunities for Base Erosion and Profit Shiftingand suggest new rules whereby profits are taxed where economic activities take place and value is created. OECD comments include new or reinforcedinternational standards as well as concrete measures to help countries tackle BEPS. Among the highlights of the OECD Final Reports are the new transferpricing 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 analyticalreports with recommendations concerning digital economy and multilateral instruments. If countries in which we operate adopt the OECD recommendationsas outlined in the BEPS Action Plans, it is uncertain to what extent the changes could impact the Company.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 inwhich 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 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, theseconditions and uncertainty about future economic conditions could make it challenging for us to forecast our operating results and evaluate the risks thatmay affect our business, financial condition, and results of operations. As discussed in “Our orders of raw materials, parts, components, and subassembliesare based on demand forecasts,” a significant percentage of our expenses are relatively fixed and based, in part, on expectations of future net sales. If asudden decrease in demand for our products from one or more customers were to occur, the inability to adjust spending quickly enough to compensate forany shortfall would magnify the adverse impact of a shortfall in net sales on our results of operations. Conversely, if market conditions were to unexpectedlyimprove and demand for our products were to increase suddenly, we might not be able to respond quickly enough, which could have a negative impact onour results of operations and customer relations.13Table of ContentsOur 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 includingearthquakes 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 adverselyaffect our business, results of operations, or financial condition.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 andshipping expenses. These components might require us to incur higher than anticipated testing or repair costs, which would have an adverse effect on ouroperating results. Customers who have strict and extensive qualification requirements might not accept our products if these lower-cost components do notmeet their requirements. A delay or refusal by our customers to accept such products, as well as an inability of our suppliers to meet our purchasingrequirements, might require us to purchase higher-priced components from our existing suppliers or might cause us to lose sales to these customers, either ofwhich could lead to decreased revenue and gross margins and have an adverse effect on our results of operations.The industries in which we compete are subject to volatile and unpredictable cycles.As a supplier to the global semiconductor, flat panel display, solar, industrial 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 relativeto demand, and access to affordable capital. These changes have affected the timing and amounts of customers’ purchases and investments in technology, andcontinue 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 declinesin 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. Duringperiods of decreasing demand for our products, we must be able to appropriately align our cost structure with prevailing market conditions, effectivelymanage our supply chain, and motivate and retain key employees. During periods of increasing demand, we must have sufficient manufacturing capacity andinventory to fulfill customer orders, effectively manage our supply chain, and attract, retain, and motivate a sufficient number of qualified individuals. If weare 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.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 effectivecommercialization and customer acceptance of our products and services. The development, introduction and support of a broadening set of products iscritical to our continued success. Our results of operations could be adversely affected if we do not continue to develop new products, improve and developnew applications for existing products, and differentiate our products from those of competitors resulting in their adoption by customers.We must achieve design wins to retain our existing customers and to obtain new customers, although design wins achieved do not necessarily result insubstantial sales.Driven by continuing technology migration and changing customers demand the markets we serve are constantly changing in terms of advancementin applications, core technology and competitive pressures. New products we design for capital equipment manufacturers typically have a lifespan of five toten years. Our success and future growth depends on our products being designed into our customers new generations of equipment as they develop newtechnologies and applications. We must work with these manufacturers early in their design cycles to modify, enhance and upgrade our products or designnew products that meet the requirements of their new systems. The design win process is highly competitive and we may win or lose new design wins for ourexisting customers or new customers next generations of equipment. In case existing or new customers do not choose our products as a result of thedevelopment, evaluation and qualification efforts related to the design14Table of Contentswin process, our market share will be reduced, the potential revenues related to the lifespan of our customers' products, which can be 5-10 years, will not berealized, and our business, financial condition and results of operations would be materially and adversely impacted.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 istypical 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 purchase inventoryin anticipation of sales that do not materialize, resulting in excess and obsolete inventory write-offs.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 ourcustomers, 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 enhancedefficiencies and productivity. As a result of recent economic conditions and changes in various markets that we serve, our customers have experiencedsignificant cost pressures. We have observed increased price sensitivity on the part of our customers. If competition against any of our product lines shouldcome to focus solely on price rather than on product performance and technology innovation, we will need to adjust our business strategy and productofferings accordingly, and if we are unable to do so, our business, financial condition, and results of operations could be materially and adversely affected.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 ourcustomers.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 inpart on our ability to have end users specify that our products be used at their facilities. In addition, we may encounter difficulties in changing establishedrelationships of competitors that already have a large installed base of products within such facilities.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 resourcesthan we do. We expect our competitors will continue to develop new products in direct competition with ours, improve the design and performance of theirproducts, and introduce new products with enhanced performance characteristics. In order to remain competitive, we must improve and expand our productsand product offerings. In addition, we may need to maintain a high level of investment in research and development and expand our sales and marketingefforts, 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 materiallyand adversely affected.A significant portion of our sales and accounts receivable are concentrated among a few customers.Our ten largest customers accounted for 70.4%, 67.7% and 61.2% of our sales for the years ended December 31, 2017, 2016 and 2015, respectively.During the year ended December 31, 2017, sales to Applied Materials, Inc. and Lam Research were $224.8 million and $155.3 million or 33.5% and 23.1%,respectively, and accounts receivable were $36.8 million and $5.4 million , respectively. During the year ended December 31, 2016, sales to AppliedMaterials, Inc., and Lam Research were $170.2 million and $100.3 million, or 35.2% and 20.7%, respectively, and accounts receivable were $31.1 millionand $14.3 million, respectively. During the year ended December 31, 2015, sales to Applied Materials, Inc. and Lam Research were $123.5 million and $84.2million, or 29.8% and 20.3%, respectively, and accounts receivable were $17.1 million and $7.3 million, respectively. A significant decline in sales fromeither or both of these customers, or the Company's inability to collect on these sales, could materially and adversely impact our business, results ofoperations and financial condition.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, credit15Table of Contentsdeterioration, financial results, economic risk, political risk, sovereign risk or other factors. The Company intends to utilize its foreign cash to expand ourinternational operations through internal growth and strategic acquisitions. If our intent changes or if these funds are needed for our U.S. operations, or we arenegatively impacted by any of the factors above, our financial condition and results of operations could be materially adversely affected.We are subject to risks inherent in international operations.Sales to our customers outside the United States were approximately 32.5% and 32.3% of our total sales for the years ended December 31, 2017 and2016. The acquisitions of the power controls modules and high and low voltage product lines have increased our presence in international locations. Oursuccess producing goods internationally and competing in international markets is subject to our ability to manage various risks and difficulties, including,but not limited to:•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 contractrights;•trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions;•customs regulations and the import and export of goods (including customs audits in various countries that occur from time to time);•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;•timely collecting accounts receivable from foreign customers including $21.4 million in accounts receivable from foreign customers as ofDecember 31, 2017; 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 becompromised if we are unable to manage these and other international risks successfully.Globalization of sales increases risk of compliance with policy.We operate in an increasingly complex sales environment around the world which places greater importance on our global control environment andimposes additional oversight risk. Such increased complexity could adversely affect our operating results by increasing compliance costs in the near-termand by increasing the risk of control failures in the event of non-compliance.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 highlycompetitive markets in which we compete, we may be required to reduce our prices or extend payment terms to remain competitive. We have recently seenpricing pressure from our largest customers due in part to low-cost competition and market consolidation. As a result of the competitive markets we serve,from time to time we may enter into long term pricing agreements with our largest customers that results in reduced product pricing. Such reduced productpricing may result in product margin declines unless we are successful in reducing our product costs ahead of such price reductions. We believe some of ourAsian 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 meettime-to-market, performance and technology adoption cycle needs of our customers simply in order to compete for design wins, and if successful, receivepotential 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 ourexpenses in an amount sufficient to offset potential margin declines or loss of business and may not be able to meet customer product time-line expectations.The potential decrease in cash flow could materially and adversely impact our financial condition.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 technologyindependently. In addition, the laws of some foreign countries might not afford our intellectual property the same protections as do the laws of the UnitedStates. Our intellectual property is not protected16Table of Contentsby 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 forpatents in foreign countries and translating the applications into foreign languages requires us to select carefully the inventions for which we apply for patentprotection and the countries in which we seek such protection. Generally, our efforts to obtain international patents have been concentrated in the EuropeanUnion and certain industrialized countries in Asia, including Korea, Japan, and Taiwan. If we are unable to protect our intellectual property successfully, ourbusiness, 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 propertyis available under PRC law. Consequently, manufacturing our products in the PRC may subject us to an increased risk that unauthorized parties may attemptto copy our products or otherwise obtain or use our intellectual property. We may not be able to protect our intellectual property rights effectively.Additionally, we may not have adequate legal recourse in the event that we encounter infringements of our intellectual property in the PRC.Our legacy inverter products may suffer higher than anticipated litigation, damage or warranty claims.Our legacy inverter products (of which we discontinued the manufacture, engineering, and sale in December 2015 and which are reflected asDiscontinued Operations in this filing) contain components that may contain errors or defects and were sold with original product warranties ranging fromone 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 or to pay damages (including liquidated damages) or warranty claims, and we could suffersignificant harm to our reputation. We are experiencing claims from customers and suppliers and in some cases litigation related to the legacy inverterproduct line. Prior suppliers of the legacy inverter business have made claims and have pursued lawsuits ranging from allegations of losses associated withraw material inventory and other commercial claims, to an allegation of improper use of proprietary design. We review such claims and vigorously defendagainst such lawsuits in the ordinary course of our business. We cannot assure you that any such claims or litigation brought against us will not have amaterial adverse effect on our business or financial statements. Our involvement in such litigation could result in significant expense to us and divert theefforts of our technical and management personnel. We also accrue a warranty reserve for estimated costs to provide warranty services including the cost oftechnical support, product repairs, and product replacement for units that cannot be repaired. Our estimate of costs to fulfill our warranty obligations is basedon historical experience and expectation of future conditions. To the extent we experience increased warranty claim activity or increased costs associatedwith servicing those claims, our warranty accrual will increase, resulting in additional expenses in the line "Income (loss) from discontinued operations, net oftax” on our Consolidated Statement of Operations in future periods. We plan to continue supporting inverter customers with service maintenance and repairoperations. This includes performing service to fulfill obligations under existing service maintenance contracts. There is no certainty that these can beperformed profitably and could be adversely affected by higher than anticipated product failure rates, loss of critical service technician skills, an inability toobtain service parts, customer demands and disputes and cost of repair parts, among other factors. See Note 3. Discontinued Operations in Item 8 "FinancialStatements 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 intoour 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 thoseproducts, pay damages (including liquidated damages) or warranty claims, and we could suffer significant harm to our reputation. We accrue a warrantyreserve for estimated costs to provide warranty services including the cost of technical support, product repairs, and product replacement for units that cannotbe repaired. Our estimate of costs to fulfill our warranty obligations is based on historical experience and expectation of future conditions. To the extent weexperience increased warranty claim activity or increased costs associated with servicing those claims, our warranty accrual will increase, resulting indecreased gross profit. In recent years, we have experienced increased warranty costs for our legacy inverter product lines, which is reflected in "Income fromdiscontinued operations, net of income taxes." See Note 3. Discontinued Operations in Item 8 "Financial Statements and Supplementary Data".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 respectto forward exchange contracts into which we may enter. Unfavorable currency fluctuations could require us to increase prices to foreign customers, whichcould 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 currencyfluctuations, our results of17Table of Contentsoperations could be materially and adversely affected. In addition, most sales made by our foreign subsidiaries are denominated in the currency of thecountry 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 resultof exchange rate fluctuations. Given recent acquisitions in Europe, our exposure to fluctuations in the value of the Euro is becoming more significant. Fromtime to time, we enter into forward exchange contracts and local currency purchased options to reduce currency exposures related to likely or pendingtransactions including those arising from intercompany sales of inventory. However, we cannot be certain that our efforts will be adequate to protect usagainst significant currency fluctuations or that such efforts will not expose us to additional exchange rate risks, which could materially and adversely affectour results of operations.Recent developments relating to the United Kingdom's referendum vote in favor of leaving the European Union and related actions could adversely affectus.On June 23, 2016, the United Kingdom (UK) held a referendum in which voters approved an exit from the European Union ("EU"). On March 29,2017, the UK's ambassador to the EU delivered a letter to the president of the European Council that gave formal notice under Article 50 of the Lisbon Treatyof UK's withdrawal from the EU, commonly referred to as "Brexit". As a result, negotiations have commenced to determine the terms of the UK's withdrawalfrom the EU as well as its relationship with the EU going forward, including the terms of trade between the UK and the EU. Although it is unknown whatthose terms will be, it is possible that there will be greater restrictions on imports and exports between the UK and EU countries and increased regulatorycomplexities. These changes may adversely affect our sales, operations and financial results. In particular, our operations in the UK may be adversely affectedby extreme fluctuations in the UK exchange rates. Moreover, the imposition of any import restrictions and duties levied on our UK products as imported forEU customers may make our products more expensive for such customers and less competitive from a pricing perspective.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. In2016, the PRC's currency devalued by a cumulative 6.5% against the U.S. dollar, making Chinese exports cheaper and imports into the PRC more expensiveby that amount. This devaluation negatively impacts U.S. businesses that trade with the PRC because it puts them at a cost disadvantage. Any change in thevalue 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 governmentto 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 ourShenzhen facility and the cost of raw materials, parts, components, and subassemblies that we source in the PRC, thereby having a material and adverse effecton our financial condition and results of operations.Difficulties with our enterprise resource planning (“ERP”) system and other parts of our global information technology system could harm our businessand 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 coulddisrupt our ability to timely and accurately manufacture and ship products or to report our financial information in compliance with the timelines mandatedby the SEC. Any such failure, misuse, hacking, disruptions or loss would likely cause a diversion of management's attention from the underlying business andcould harm our operations. In addition, a significant failure of our global information technology system could adversely affect our ability to complete anevaluation 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 technologysystems, 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.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 andpossible 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 suchas user names, passwords or other information in order to gain access to our customers' data or our data, including our intellectual property and otherconfidential business information, or our information technology systems. Because the techniques used to obtain unauthorized access, or to sabotagesystems, change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implementadequate preventative measures. Any security18Table of Contentsbreach could result in a loss of confidence by our customers, damage our reputation, disrupt our business, lead to legal liability and negatively impact ourfuture sales.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.We may not be successful in retaining our key employees or attracting or retaining additional skilled personnel as required. Failure to retain or attract keypersonnel could significantly harm our results of operations and competitive position. We must develop our personnel to provide succession plans capable ofmaintaining 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.Deterioration of demand for our inverter services could negatively impact our business.Our business may be adversely affected by changes in national or global demand for our inverter service repair capabilities. Any such changes couldadversely affect the carrying amount of our inverter service inventories, thereby negatively affecting our financial results from Continuing 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 conductbusiness 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 of others, orto protect our interests in regulatory, tax, customs, commercial, and other disputes or similar matters. Litigation often requires a substantial amount of ourmanagement'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.Return on investments or interest rate declines on plan investments could result in additional unfunded pension obligations for the HiTek Power pensionplan.We currently have unfunded obligations in the HiTek Power pension plan. The extent of future contributions to the pension plan depends heavilyon market factors such as the discount rate used to calculate our future obligations and the actual return on plan assets which enable future payments. Weestimate future contributions to the plan using assumptions with respect to these and other items. Changes to those assumptions could have a significanteffect on future contributions. Additionally, a material deterioration in the funded status of the plan could increase pension expenses and reduce ourprofitability. See Note 14. Retirement Plans in Item 8 "Financial Statements and Supplementary Data" contained herein.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 notcurrently have investments with reduced liquidity, but external market conditions that we cannot anticipate or mitigate may impact the liquidity of ourmarketable securities. Any changes in the liquidity associated with these investments may require us to borrow funds at terms that are not favorable orrepatriate 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 onfavorable 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 cashmay prevent us from taking advantage of business opportunities that arise and may prevent us from executing some of our business plans, either of whichcould cause our business, financial condition or results of operations to be materially and adversely affected.19Table of ContentsOur intangible assets may become impaired.As of December 31, 2017, we have $53.8 million of goodwill and $33.5 million in intangible assets. We periodically review the estimated usefullives of our goodwill and identifiable intangible assets, taking into consideration any events or circumstances that might result in either a diminished fairvalue, or for intangible assets, a revised useful life. The events and circumstances include significant changes in the business climate, legal factors, operatingperformance indicators, and competition. Any impairment or revised useful life could have a material and adverse effect on our financial position and resultsof 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 andoperation of our products and control systems and regulations governing the import, export and customs duties related to our products. We might incursignificant 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 ourproducts are used. In the past, we have invested significant resources to redesign our products to comply with these directives. Compliance with futureregulations, directives, and standards could require us to modify or redesign some products, make capital expenditures, or incur substantial costs. Also, wemay incur significant costs in complying with the myriad of different import, export and customs regulations as we seek to sell our products internationally. Ifwe 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 operationscould be materially and adversely affected.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 ofnew implementing rules and regulations, and to prepare numerous studies and reports for Congress. On August 22, 2012, under the Dodd-Frank Act, the SECadopted new requirements for companies that use certain minerals and metals, known as conflict minerals, in their products, whether or not these products aremanufactured by third parties. These requirements require companies to perform due diligence, disclose and report whether or not such minerals originatefrom the Democratic Republic of Congo and adjoining countries. We have to perform sufficient due diligence to determine whether such minerals are used inthe manufacture of our products. However, the implementation of these requirements could adversely affect the sourcing, availability and pricing of suchminerals if they are found to be used in the manufacture of our products. In addition, we incur costs to comply with the disclosure requirements, includingcosts 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 beable to sufficiently verify the origins for these minerals and metals used in our products through the due diligence procedures that we implement, which mayharm 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 asconflict 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 ofsecurities of technology companies have been especially volatile and have often fluctuated for reasons that are unrelated to their operating performance. Inthe 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 thesubject of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources.Our operating results are subject to fluctuations, and if we fail to meet the expectations of securities analysts or investors, our share price may decreasesignificantly.Our annual and quarterly results may vary significantly depending on various factors, many of which are beyond our control. Because our operatingexpenses are based on anticipated revenue levels, our sales cycle for development work is relatively long, and a high percentage of our expenses are fixed forthe short term, a small variation in the timing of recognition of revenue can cause significant variations in operating results from period to period. If ourearnings do not meet the expectations of securities analysts or investors, the price of our stock could decline.20Table of ContentsDeterioration 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 ofcapital markets, consumer spending rates, energy availability and costs (including fuel surcharges) and the effects of governmental initiatives to manageeconomic conditions. Any such changes could adversely affect the demand for our products both in domestic and export markets, or the cost and availabilityof 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;•cause our lenders to depart from prior credit industry practice and make more difficult or expensive the granting of any technical or other waiversunder our debt agreements to the extent 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 COMMENTSNone.21Table of ContentsITEM 2.PROPERTIESInformation concerning our principal properties at December 31, 2017 is set forth below:Location Principal Activity OwnershipFort Collins, CO Corporate headquarters, research and development, distribution, sales, and service LeasedSan Jose, CA Distribution, sales, and service, research and development LeasedGeorgetown, MA Service LeasedRonkonkoma, New York Manufacturing, distribution, service, and research and development LeasedVancouver, WA Research and development, manufacturing, distribution, sales, and service LeasedBeijing, China Sales LeasedShanghai, China Distribution and sales LeasedShenzhen, China Manufacturing, distribution, service, and research and development LeasedXian, China Service LeasedMetzingen, Germany Distribution, sales, and service LeasedWarstein-Belecke, Germany Research, distribution, sales, and service LeasedPune, India Distribution and sales LeasedCork, Ireland Sales, service, and research and development LeasedTokyo, Japan Sales LeasedSingapore Sales and service LeasedHwasung Kyunggi-do, South Korea Distribution, sales, and service LeasedSungnam City, South Korea Distribution, sales, service and research and development OwnedVillaz-St-Pierre, Switzerland Research and development LeasedTaipei, Taiwan Distribution, sales, and service LeasedLittlehampton, United Kingdom Manufacturing, distribution, service, and research and development LeasedWe 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 PROCEEDINGSWe are presently involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount ofany 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 adverseoutcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations. An unfavorable decision in patentlitigation could require material changes in production processes and products or result in our inability to ship products or components found to haveviolated third-party patent rights. An unfavorable decision in a collection action against a customer we sold products to, or a claim or counterclaim from acustomer related to alleged product failures, could also have a material adverse effect on our financial position or reported results of operations. We areengaged presently in such disputes and legal actions with customers for the inverter product line. We accrue loss contingencies in connection with ourcommitments and contingencies, including litigation, when it is probable that a loss has occurred and the amount of the loss can be reasonably estimated.ITEM 4.MINE SAFETY DISCLOSURESNone.22Table of ContentsPART IIITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIESPrincipal Market and Price Range of Common StockOur common stock is listed on the NASDAQ Global Select Market under the symbol “AEIS.” At February 13, 2018, the number of commonstockholders of record was 324, and the closing sale price of our common stock on the NASDAQ Global Select Market on that day was $64.36 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 andwithout commissions) on the NASDAQ Global Select Market: 2017 2016 High Low High LowFirst Quarter $70.64 $53.79 $34.99 $25.45Second Quarter 86.25 63.81 38.85 32.35Third Quarter 80.85 63.66 47.32 37.24Fourth Quarter 95.00 67.39 56.91 45.73Dividend PolicyWe 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 futureearnings to finance our business or make stock repurchases and do not anticipate paying cash or other dividends on our common stock in the foreseeablefuture.Share RepurchasesIn September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock. In November 2017, our Board ofDirectors approved an extension to the share repurchase program to December 2019 from its original maturity of March 2018. As of December 31, 2017, wehad $70.0 million remaining for the authorized repurchase of shares.In November 2015 we entered into a Fixed Dollar Accelerated Share Repurchase Transaction to purchase $50.0 million of shares of our commonstock in the open market. A total of 1.7 million shares of our common stock was repurchased under the Fixed Dollar Accelerated Share Repurchase Agreementat an average price of $28.99 per share. In August and December 2017, we entered into Fixed Dollar Share Repurchase Agreements to repurchase $25.0 million and $5.0 million,respectively, of shares of our common stock in the open market. Total shares repurchased under the Fixed Dollar Share Repurchase Agreements in August andDecember 2017 were 351,292 and 70,700, respectively, at an average price of $71.16 and $70.65, respectively, per share.All shares repurchased were executed in the open market, and no shares were repurchased from related parties. Repurchased shares were retired andassumed the status of authorized and unissued shares. Accordingly, the associated cost of the repurchased shares were recognized as a reduction to Additionalpaid-in capital.23Table of ContentsThe following table summarizes information with respect to the company's purchase of its common stock during the quarter ended December 31,2017:Period Total Number ofShares Purchased Average PricePaid perShare Total Number of SharesPurchased as Part of PubliclyAnnounced Program (1) Approximate Value of Sharesthat May Yet Be PurchasedUnder the Program (2)December 1 - December 31, 2017 70,700 $70.65 70,700 $70,008,000Total 70,700 $70.65 70,700 $70,008,000(1) 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, in August andDecember 2017, we entered into two Fixed Dollar Share Repurchase Agreements to repurchase $25.0 million and $5.0 million, respectively, of shares of our common stock in theopen market.(2) While the Company has remaining authority to repurchase up to $70.0 million of our common stock, the Company has no current commitments or obligations to repurchase anyshares of our common stock.Performance GraphThe performance graph below shows the five-year cumulative total stockholder return on our common stock during the period from December 31,2012 through December 31, 2017. This is compared with the cumulative total return of the NASDAQ Composite Index and the Philadelphia SemiconductorIndex (PHLX) over the same period. The comparison assumes $100 was invested on December 31, 2012 in Advanced Energy common stock and in each ofthe foregoing indices and assumes reinvestment of dividends, if any. Dollar amounts in the graph are rounded to the nearest whole dollar. The performanceshown in the graph represents past performance and should not be considered an indication of future performance.(1) $100 invested on 12/31/2012 in our stock or index, including reinvestment of dividends. Indices and our stock performance calculated on a calendar year-end basis. 12/12 12/13 12/14 12/15 12/16 12/17Advanced Energy Industries, Inc. $100.00 $165.55 $171.63 $204.43 $396.48 $488.67NASDAQ Composite 100.00 141.63 162.09 173.33 187.19 242.29PHLX Semiconductor 100.00 130.15 167.68 156.67 208.23 292.6624Table of ContentsInformation relating to compensation plans under which our equity securities are authorized for issuance is set forth in Part III, Item 12 of thisAnnual Report on Form 10-K.ITEM 6.SELECTED FINANCIAL DATAThe selected Consolidated Statements of Operations and related Consolidated Balance Sheets data were derived from our audited ConsolidatedFinancial 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 factorsthat may affect the comparability of the information presented below: Years Ended December 31, 2017 2016 2015 2014 2013Consolidated Statements of Operations Data: Sales $671,012 $483,704 $414,811 $367,333 $299,381Operating income 200,770 126,857 106,656 86,091 47,847Income from continuing operations before income taxes 198,191 128,076 105,442 86,005 48,322Income from continuing operations, net of income taxes 136,101 116,948 83,482 69,495 59,710Income (loss) from discontinued operations, net of income taxes 1,760 10,506 (241,968) (22,513) (27,624)Net income (loss) 137,861 127,454 (158,486) 46,982 32,086Earnings per Share: Continuing Operations: Basic earnings per share $3.42 $2.94 $2.05 $1.72 $1.51Diluted earnings per share $3.39 $2.92 $2.03 $1.69 $1.47Discontinued Operations: Basic earnings (loss) per share $0.04 $0.26 $(5.94) $(0.56) $(0.70)Diluted earnings (loss) per share $0.04 $0.26 $(5.94) $(0.56) $(0.70)Net Income (Loss): Basic earnings (loss) per share $3.47 $3.21 $(3.89) $1.16 $0.81Diluted earnings (loss) per share $3.43 $3.18 $(3.89) $1.14 $0.79 Basic weighted-average common shares outstanding 39,754 39,720 40,746 40,420 39,597Diluted weighted-average common shares outstanding 40,176 40,031 41,077 41,034 40,667Consolidated Balance Sheets Data: Total assets $733,308 $571,529 $462,503 $684,409 $648,992ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSCertain statements set forth below under this caption constitute forward-looking statements. See “Special Note Regarding Forward-LookingStatements” in Item 1 "Business" of this Annual Report on Form 10-K for additional factors relating to such statements, and see “Risk Factors” in Item 1A fora discussion of certain risks applicable to our business, financial condition and results of operations.OverviewWe design, manufacture, sell, and support power conversion products that transform power into various usable forms. Our products enablemanufacturing processes that use thin film technology 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 advancedtemperature measurement and control in the thin film process for these same markets. Our power control modules provide power control solutions forindustrial applications where heat treatment and processing are used such as glass manufacturing, metal fabrication and treatment, material and chemicalprocessing. 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 processingapplications. Our network of global service support centers provides a recurring revenue opportunity as we offer repair services, conversions, upgrades, andrefurbishments and used equipment to companies using our products.Driven by continuing technology migration and changing customers demand the markets we serve are constantly changing in terms of advancementin applications, core technology and competitive pressures. New products we design for capital equipment manufacturers typically have a lifespan of five toten years. Our success and future growth depends on our products being designed into our customers new generations of equipment as they develop newtechnologies and applications. We must work with these25Table of Contentsmanufacturers early in their design cycles to modify, enhance and upgrade our products or design new products that meet the requirements of their newsystems. The design win process is highly competitive and we may win or lose new design wins for our existing customers or new customers next generationsof equipment. In case existing or new customers do not choose our products as a result of the development, evaluation and qualification efforts related to thedesign win process, our market share will be reduced, the potential revenues related to the lifespan of our customers' products, which can be 5-10 years, willnot be realized, and our business, financial condition and results of operations would be materially and adversely impacted.We enter 2018 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. CRITICAL ACCOUNTING ESTIMATESThe preparation of Consolidated Financial Statements and related disclosures in conformity with accounting principles generally accepted in theUnited States of America (“U.S. GAAP”) requires management to make judgments, assumptions, and estimates that affect the amounts reported. Note1. Operations and Summary of Significant Accounting Policies and Estimates in Item 8 "Financial Statements and Supplementary Data" describes thesignificant accounting policies used in the preparation of our Consolidated Financial Statements. The accounting positions described below are significantlyaffected by critical accounting estimates. Such accounting positions require significant judgments, assumptions, and estimates to be used in the preparationof the Consolidated Financial Statements, actual results could differ materially from the amounts reported based on variability in factors affecting thesestatements.Revenue RecognitionWe 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 ourcustomers after the date products are shipped, other than pursuant to warranty obligations. Shipping and handling fees billed to customers, if any, arerecognized 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 ofshipment. 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 customercollection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, a significantchange in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our futureoperating results. Additionally, if our credit loss rates prove to be greater than we currently estimate, we record additional reserves for doubtful accounts.InventoryWe value our inventory at the lower of cost (first-in, first-out method) or market. We regularly review inventory quantities on hand and record aprovision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on our estimated forecast ofproduct demand. Demand for our products can fluctuate significantly. Our industry is subject to technological change, new product development, andproduct technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significantunanticipated changes in demand or technological developments in excess of our current estimates could have a significant impact on the value of ourinventory and our reported operating results.Warranty CostsWe provide for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. We offer warranty coveragefor a majority of our Precision Power products for periods typically ranging from 12 to 24 months after shipment. We warranted our inverter products for fiveto ten years and provided the option to purchase additional warranty coverage up to 20 years. The product warranty expense accrued related to our standardinverter 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 12.Warranties in Item 8 "Financial Statements and Supplementary Data" for more information on our warranties from continuing operations. We estimate theanticipated costs of repairing our products under such warranties based on the historical costs of the repairs. The assumptions we use to estimate warrantyaccruals are reevaluated periodically, in light of actual experience, and when appropriate, the accruals are adjusted. Should product failure rates differ fromour estimates, actual costs could vary significantly from our expectations.26Table of ContentsGoodwill, Intangible and Other Long-Lived AssetsAs a result of our acquisitions, we recorded goodwill and intangible assets. Goodwill and indefinite-lived intangible assets are subject to annualimpairment testing, as well as testing upon the occurrence of any event that indicates a potential impairment. The annual impairment test can be performedusing 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 morelikely 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. Goodwillwould 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 determinethat 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, weuse the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flowsand other fair value measurements. The carrying value and ultimate realization of these assets is dependent upon our estimates of future earnings and benefitsthat 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 flowsrequire us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates couldresult in significant revisions to our carrying value of these assets and may result in material charges to our results of operations.In 2017, we performed an assessment of qualitative factors for our annual impairment test of the goodwill. The factors reviewed includedmacroeconomic conditions, industry and market conditions, cost factors, and overall financial performance. This assessment resulted in the conclusion thatthere was no impairment of goodwill in 2017.Income TaxesWe are subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining ourprovision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complextax laws. We record a provision for income taxes for the anticipated tax consequences of the reported results of operations using the asset and liabilitymethod. Under this method, we recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between thefinancial reporting and tax bases of assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities aremeasured 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 orsettled. We calculate tax expense consistent with intraperiod tax allocation methodology resulting in an allocation of current year tax expense/benefitbetween continuing operations and discontinued operations. We record a valuation allowance to reduce our deferred tax assets to the net amount that webelieve 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 thetax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Although we believe that we haveadequately 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 extentthat 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 inwhich such determination is made and could have a material impact on our financial condition and operating results. The provision for income taxes includesthe 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."On December 22, 2017, the U.S. enacted the 2017 Tax Cuts and Jobs Act (the Tax Act) into law and the new legislation contains several key taxprovisions that affected us, including a one-time mandatory transition tax on our accumulated foreign earnings and a reduction of the corporate income taxrate to 21%, effective January 1, 2018, among others. We are required to recognize the effect of the tax law changes in the period of enactment, such asdetermining the transition tax, re-measuring our U.S. deferred tax assets and liabilities as well as reassessing the net realizability of our deferred tax assets andliabilities. In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act(SAB 118), which allows us to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. Since the TaxAct was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, we consider theaccounting for the transition tax, deferred tax re-measurements, and other items to be incomplete due to the forthcoming guidance and our ongoing analysisof final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118.27Table of ContentsBusiness Environment and TrendsSEMICONDUCTORSInvestment in semiconductor capital equipment increased approximately 31% year over year in 2017. Sales to our semiconductor OEM customerscontinued to increase quarter over quarter throughout the year. Sales in the fourth quarter of 2017 represented a record for our semiconductor business. Thesemiconductor market is being driven by the rapid adoption of solid-state drives (SSD) deploying the latest 3D-NAND memory devices and a ramp ofadvanced Logic devices at the 10nm technology node.The industry's transition to 3D memory devices and advanced Logic is generating increasing demand for RF power supplies, matches andaccessories. The growing number of steps associated with the deposition and etch processes is driving an increase in the number of process chambers per faband higher content of more advanced power solutions per chamber. As etching processes become more challenging due to increasing aspect ratios inadvanced 3D devices, more advanced RF technology that includes pulsing and increased control and instrumentation is needed. We are capitalizing on thesetrends and providing a broader range of more complex combinations of RF power and frequencies and launching more capable matching networks to manageand control the delivered power.INDUSTRIAL POWERCustomers in the industrial capital equipment market incorporate our industrial process power and specialty power products into a wide variety ofequipment used in applications such as thin films, advanced material fabrication, and analytical instrumentation.In industrial applications, we remain focused on taking our products into new applications and world regions, increasing our penetration into Asia,Europe and North America. In 2017, we made gains across an array of industries. The flat panel display market showed continued strength with the ongoingramp of OLED mobile screen capacity. Demand for our products used in many industrial thin film coating and specialty power markets increased, particularlyin manufacturing areas for products such as solar panels, consumer device coatings, flat panel displays and analytical instrumentation. Our thermal processcontrol and measurement instruments are also making gains in North America, where we have focused for regional expansion.Results of Continuing OperationsOur analysis presented below is organized to provide the information we believe will facilitate an understanding of our historical performance andrelevant trends going forward, and should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, in Item 8"Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.Advanced Energy is organized as a single business unit, which principally serves OEM and end customers in the semiconductor, flat panel display,high and low voltage, solar panel, and other capital equipment markets. As of December 31, 2015 we discontinued our inverter products manufacturing andsales. All prior periods disclosed have been recast to reflect continuing operations. Results of discontinued operations are reflected as "Income (loss) fromdiscontinued operations, net of income taxes" in our Consolidated Statements of Operations. See Note 3. Discontinued Operations in Item 8 "FinancialStatements and Supplementary Data."The following table sets forth, for the periods indicated, certain data derived from our Consolidated Statements of Operations (in thousands): Years Ended December 31, 2017 2016 2015Sales $671,012 $483,704 $414,811Gross profit 356,381 253,147 216,870Operating expenses 155,611 126,290 110,214Operating income 200,770 126,857 106,656Other income (expense) (2,579) 1,219 (1,214)Income from continuing operations before income taxes 198,191 128,076 105,442Provision for income taxes 62,090 11,128 21,960Income from continuing operations, net of income taxes $136,101 $116,948 $83,482 28Table of ContentsThe following table sets forth, for the periods indicated, the percentage of sales represented by certain items reflected in our Consolidated Statementsof Operations (in thousands): Years Ended December 31, 2017 2016 2015Sales 100.0 % 100.0% 100.0 %Gross profit 53.1 % 52.3% 52.3 %Operating expenses 23.1 % 26.2% 26.5 %Operating income 30.0 % 26.1% 25.8 %Other income (expense) (0.4)% 0.3% (0.3)%Income from continuing operations before income taxes 29.6 % 26.4% 25.5 %Provision for income taxes 9.3 % 2.3% 5.3 %Income from continuing operations, net of income taxes 20.3 % 24.1% 20.2 %SALESThe following tables summarize annual net sales and percentages of net sales, by product line, for each of the years ended 2017, 2016 and 2015 (inthousands): Years Ended December 31, Change 2017 2016 2015 2017 v. 2016 2016 v. 2015Semiconductor capital equipment $461,701 $326,316 $266,465 $135,385 41.5% $59,851 22.5%Industrial capital equipment 116,949 84,263 84,217 32,686 38.8% 46 0.1%Global Support 92,362 73,125 64,129 19,237 26.3% 8,996 14.0%Total $671,012 $483,704 $414,811 $187,308 38.7% $68,893 16.6% Years Ended December 31, 2017 2016 2015Semiconductor capital equipment 68.8% 67.5% 64.2%Industrial power capital equipment 17.4% 17.4% 20.3%Global Support 13.8% 15.1% 15.5%Total 100.0% 100.0% 100.0%OPERATING EXPENSEThe following table summarizes our operating expense as a percentage of sales for the years ended December 31, 2017, 2016 and 2015 (inthousands): Years Ended December 31, 2017 2016 2015Research and development $57,999 8.6% $44,445 9.2% $39,551 9.5%Selling, general, and administrative 93,262 13.9% 77,678 16.1% 66,097 15.9%Amortization of intangible assets 4,350 0.6% 4,167 0.9% 4,368 1.1%Restructuring charges — —% — —% 198 —%Total operating expenses $155,611 23.1% $126,290 26.2% $110,214 26.5%2017 Results Compared To 2016SALESTotal sales for the year ended December 31, 2017 increased 38.7% to $671.0 million from $483.7 million for the year ended December 31, 2016.The increase in sales was primarily due to demand in the semiconductor market driven by accelerated demand and strength in etch and CVD applications. Wealso experienced continued growth within our industrial products and29Table of Contentsglobal services. Total sales from Excelsys, which was acquired July 3, 2017, was $7.6 million for the year ended December 31, 2017.In 2017, sales in our semiconductor market increased 41.5% to $461.7 million, and 68.8% of sales, from $326.3 million, and 67.5% of sales in 2016.Our growth in the semiconductor market has been fueled by our leadership in etch applications, specifically related to advanced memory and transition to3DNAND, along with advances in logic technology. Sales growth was driven primarily by recent program wins which have moved into production anddelivery.Sales to the industrial capital equipment markets increased 38.8% to $116.9 million in 2017 from $84.3 million in 2016. The industrial markets weserve include solar panel, flat panel display, power control modules, data storage, architectural glass, high voltage and other industrial manufacturingmarkets. Our customers in these markets are primarily global and regional original equipment manufacturers. The increase in sales was primarily due to theexpansion in advanced coating applications. Sales to the industrial capital equipment markets as a percentage of total sales remained flat at 17.4% in 2017and 2016, due primarily to the strong growth in sales in our semiconductor market. Sales from the acquisition of Excelsys for the year ended December 31,2017 was $7.6 million.Global service sales increased 26.3% to $92.4 million from $73.1 million in 2016. Increased global service sales was due to share gains as well asgrowth in our installed product base. Despite this growth, global support revenue as a percentage of total sales decreased to 13.8% in 2017 from 15.1% in2016, due to the strong growth in sales in our semiconductor market.Sales to Applied Materials Inc. and Lam Research, our two largest customers, increased $109.6 million to $380.1 million, and 56.6% of sales, in2017 from $270.5 million, and 55.9% of sales in 2016. Our sales to Applied Materials Inc. and Lam Research included sales for the semiconductor capitalequipment market, as well as industrial capital equipment used in the solar and flat panel display markets.BacklogOur backlog was $131.3 million at December 31, 2017 as compared to $69.2 million at December 31, 2016. Backlog remains strong primarily due todemand within the semiconductor market.GROSS PROFITGross profit increased $103.2 million to $356.4 million in 2017 from $253.1 million in 2016 and is primarily attributed to increased sales volume.Gross profit as a percentage of sales in 2017 increased to 53.1% from 52.3% in 2016, due to increased volume as the semiconductor capital equipment marketremains strong and favorable product mix. Gross profit from our 2017 acquisition of Excelsys was $3.1 million, which included $0.1 million associated witha step up in book basis for purchased inventory.OPERATING EXPENSEResearch and DevelopmentWe perform research and development of products for new or emerging applications, technological changes to provide higher performance, lowercost, or other attributes that we may expect to advance our customers’ products. We believe that continued development of technological applications, aswell as enhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devotesignificant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investmentsto continue.Research and development expenses in 2017 increased $13.6 million to $58.0 million, from $44.4 million in 2016 primarily due to our investmentin new programs to maintain and increase our technological leadership and provide solutions to our customers' evolving needs. Research and developmentexpense from our 2017 acquisition of Excelsys was $1.1 million.Research and development expenses as a percentage of total revenue decreased to 8.6% in 2017 from 9.2% in 2016 as successful adoption of ourproducts has driven increased sales.Selling, General and AdministrativeOur selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, third-partysales 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, including acquisition-related activities.Selling general and administrative ("SG&A") expenses increased $15.6 million to $93.3 million in 2017 as compared to $77.7 million in 2016. Theincrease in SG&A expense is primarily driven by higher stock-based compensation and performance30Table of Contentsbonus, investment in organizational structure to support business volumes and future growth, and costs associated with business development. SG&Aexpense from our 2017 acquisition of Excelsys was $1.8 million.Amortization ExpenseAmortization expense increased $0.2 million to $4.4 million in 2017 from $4.2 million in 2016. The increase of $0.2 million in 2017 is primarilydue to the amortization of intangibles recognized upon the acquisition of Excelsys, which was completed July 3, 2017, partially offset by the affect of foreignexchange rates.OTHER INCOME (EXPENSE)Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses, gains and losses on sales of fixedassets, and other miscellaneous items. Other income (expense) was a loss of $2.6 million in 2017, as compared to a gain of $1.2 million in 2016. The loss in2017 was primarily the cost of a foreign currency exchange rate forward contract that we entered into for a potential offshore acquisition that we decided notto consummate. See Note 7. Derivative Financial Instruments in Item 8 "Financial Statements and Supplementary Data.". The gain in 2016 is principallyrelated to gains recognized due to fluctuation in foreign exchange rates and our assets in different countries. Other income (expense), net includes interestexpense, net of $0.1 million and $(0.1) million in 2017 and 2016, respectively.PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONSIn 2017, we recorded income tax expense for our continuing operations of $62.1 million or an effective tax rate of 31.3%. Included in our 2017 taxexpense is the estimated impact of the Tax Act which was passed December 22, 2017. Among other provisions, the Tax Act imposes a mandatory one-timetransition tax on the accumulated earnings of our foreign subsidiaries. The Company estimates the 2017 financial statement expense related to the transitiontax will approximate $61.8 million. Additionally, the Tax Act reduced the U.S. corporate income tax rate to 21%, effective January 1, 2018, from the previous35% rate. The reduction in the U.S. corporate tax rate required the Company to re-value its net U.S. deferred tax assets and liabilities effective December 31,2017. The Company estimates the 2017 financial statement expense related to the reduction of the U.S. tax rate to be $11.1 million. Additionally, in 2017,we recorded a tax benefit of $33.8 million associated with the wind down of our solar inverter business which was discontinued in 2015. After givingconsideration to the above items, tax expense for our continuing operations would have been $23.0 million or an effective tax rate of 11.6%, as compared totax expense of $11.1 million, or 8.7%, for 2016. The increase in the 2017 tax rate of 11.6% compared to the 2016 tax rate of 8.7% is primarily due tofavorable settlements of tax audits in 2016. The 2017 effective tax rate differs from the federal statutory rate of 35% primarily due to the benefit of earnings inforeign jurisdictions which are subject to lower tax rates, benefits related to stock-based compensation and tax amortization.2016 Results Compared To 2015SALESTotal sales for the year ended December 31, 2016 increased 16.6% to $483.7 million from $414.8 million for the year ended December 31, 2015.The increase in sales was due to the rebound in the semiconductor market after a pause in the fourth quarter of 2015 as well as continued growth in our globalsupport business.In 2016, sales in our semiconductor market increased 22.5% to $326.3 million, and 67.5% of sales, from $266.5 million, and 64.2% of sales in 2015.These increases were driven by strong market conditions across the semiconductor market driven by our leadership in etch applications, specifically relatedto advanced memory and transition to 3DNAND, along with advances in logic technology.Sales to the industrial capital equipment markets increased 0.1% to $84.3 million in 2016 from $84.2 million in 2015. The industrial markets weserve include solar panels, flat panel display, architectural glass, analytical instrumentation and other industrial manufacturing markets. Our customers inthese markets are primarily global and regional original equipment manufacturers. Sales to the industrial capital equipment markets as a percentage of totalsales decreased to 17.4% in 2016 from 20.3% in 2015, due primarily to the strong growth in sales in our semiconductor market.Global support revenue increased by 14.0% to $73.1 million, and 15.1% of sales from $64.1 million, and 15.5% of sales in 2015. Increased globalservice sales was due to share gains as well as growth in the installed base. Despite this growth, global support revenue as a percentage of total sales decreaseddue to the strong growth in sales in our semiconductor market. Sales to Applied Materials Inc. and Lam Research, our two largest customers, increased $62.8 million to $270.5 million, and 55.9% of sales, in 2016 from$207.7 million, and 50.1% of sales in 2015. Our sales to Applied Materials Inc. and Lam Research included sales for the semiconductor capital equipmentmarket, as well as the solar and flat panel display markets.GROSS PROFIT31Table of ContentsGross profit increased $36.3 million to $253.1 million, and 52.3% of revenue in 2016 from $216.9 million, and 52.3% of revenue in 2015, due toincreased sales volume, higher procurement volumes, better absorption of fixed overhead and general weakening of the Chinese yuan against the U.S. dollar.A substantial part of our direct labor and variable overhead costs are denominated in Chinese yuan.OPERATING EXPENSEResearch and DevelopmentWe perform research and development of products for new or emerging applications, technological changes to provide higher performance, lowercost, or other attributes that we expect to advance our customers’ products. We believe that continued development of technological applications, as well asenhancements to existing products to support customer requirements, are critical for us to compete in the markets we serve. Accordingly, we devotesignificant personnel and financial resources to the development of new products and the enhancement of existing products, and we expect these investmentsto continue.Research and development expenses in 2016 increased $4.9 million to $44.4 million from $39.6 million in 2015 primarily due to our continuedinvestment in product development to maintain and increase our technological leadership.Research and development expenses as a percentage of total revenue decreased to 9.2% in 2016 from 9.5% in 2015 as successful adoption of ourproducts has driven increased sales.Selling, General and AdministrativeOur selling expenses support domestic and international sales and marketing activities that include personnel, trade shows, advertising, internal andthird-party sales representative commissions, and other selling and marketing activities. Our general and administrative expenses support our worldwidecorporate, legal, tax, financial, governance, administrative, information systems, and human resource functions in addition to our general management.SG&A expenses increased $11.6 million to $77.7 million in 2016 as compared to $66.1 million in 2015. The increases were primarily due to highersales expense as we expanded our sales management and marketing team to support our growth diversification and geographical expansion plans, as well as,higher stock-based compensation expense, professional fees and costs associated with acquisition opportunities.Amortization ExpenseAmortization expense decreased $0.2 million to $4.2 million in 2016 compared to $4.4 million in 2015. The decrease of $0.2 million in 2016 isprimarily due to the decrease in foreign exchange rates in EuropeRestructuring ChargesIn June 2015, we committed to a restructuring plan in relation to the wind down of our Inverter business which concluded December 31, 2015 andaccordingly our Inverter business has been reflected as a discontinued operation in our consolidate financial statements 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 corporateoverhead which had previously been reflected in our inverter segment have been included in the total operating expense in the table above in all periodspresented.OTHER INCOME (EXPENSE)Other income (expense), net consists primarily of interest income and expense, foreign exchange gains and losses, and other miscellaneous items.Other income (expense), net increased $2.4 million to $1.2 million in 2016 from $(1.2) million in 2015. These gains are principally related to gainsrecognized due to fluctuation in foreign exchange rates and our assets in different countries. Other income (expense), net includes interest expense, net of$(0.1) million and $(0.9) million in 2016 and 2015, respectively.PROVISION FOR INCOME TAXES FROM CONTINUING OPERATIONSWe recorded income tax expense of $11.1 million, or an effective tax rate of 8.7% in 2016, compared to 2015 income tax expense of $22.0 million,or an effective tax rate of 20.8%. The decrease in tax rate for 2016 is attributable to a tax benefit related to the early adoption of ASU 2016-09,"Improvements to Employee Share-Based Payment Accounting" and the favorable settlement of tax audits during 2016.The effective rate differs from the federal statutory rate of 35% primarily due to the benefit of earnings in foreign jurisdictions which are subject tolower tax rates, a benefit related to foreign tax credits, favorable settlements of tax audits, and the early adoption of ASU 2016-09, "Improvements toEmployee Share-Based Payment Accounting."32Table of ContentsDiscontinued OperationsIn December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business").Accordingly, the results of our inverter business has been reflected as “Income (loss) from discontinued operations, net of income taxes” on our CondensedConsolidated Statements of Operations for all periods presented herein.The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated BalanceSheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold,respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue is earned and the associatedservices are rendered. Extended warranties related to the inverter product line are no longer offered.The significant items included in Income (loss) from discontinued operations, net of income taxes (in thousands): Year Ended December 31, 2017 2016 2015Sales$— $— $95,856Cost of sales234 154 139,045Total operating (income) expenses (including restructuring)(1,576) (3,894) 232,262Operating income (loss) from discontinued operations1,342 3,740 (275,451)Other income (expense)337 2,636 (55)Income (loss) discontinued operations before income taxes1,679 6,376 (275,506)Benefit for income taxes(81) (4,130) (33,538)Income (loss) from discontinued operations, net of income taxes$1,760 $10,506 $(241,968)Operating income from discontinued operations for 2017 and 2016 includes the recovery of accounts receivable previously reserved for as well asthe reduced settlements primarily of warranty liabilities recorded in previous years.Operating loss from discontinued operations from 2015 includes impairment charges of $198.7 million which consisted of $153.8 million fromgoodwill and intangible assets, $17.7 million of accounts receivable, $15.0 million in excess and obsolete inventory and $12.3 million in property, plant andequipment.Non-GAAP ResultsManagement uses non-GAAP operating income and non-GAAP EPS to evaluate business performance without the impacts of certain non-cashcharges and other charges which are not part of our usual operations. We use these non-GAAP measures to assess performance against business objectives,make business decisions, including developing budgets and forecasting future periods. In addition, management's incentive plans include these non-GAAPmeasures as criteria for achievements. These non-GAAP measures are not in accordance with U.S. GAAP and may differ from non-GAAP methods ofaccounting and reporting used by other companies. However, we believe these non-GAAP measures provide additional information that enables readers toevaluate our business from the perspective of management. The presentation of this additional information should not be considered a substitute for resultsprepared in accordance with U.S. GAAP.The non-GAAP results presented below exclude the impact of non-cash related charges, such as the amortization of intangible assets, stock-basedcompensation, and restructuring charges, as well as acquisition-related costs and other nonrecurring costs, as they are not indicative of future performance.The tax effect of our non-GAAP adjustments represents the anticipated annual tax rate applied to each non-GAAP adjustment after consideration of theirrespective book and tax treatments.33Table of ContentsReconciliation of Non-GAAP measure - operating expenses and operatingincome, excluding certain items Years Ended December 31, 2017 2016 2015Gross Profit from continuing operations, as reported $356,381 $253,147 $216,870Operating expenses from continuing operations, as reported 155,611 126,290 110,214Adjustments: Restructuring charges — — (197)Acquisition-related costs (150) — —Stock-based compensation (12,549) (6,332) (2,810)Amortization of intangible assets (4,350) (4,167) (4,368)Non-GAAP operating expenses from continuing operations 138,562 115,791 102,839Non-GAAP operating income from continuing operations $217,819 $137,356 $114,031 Income from continuing operations, net of income taxes, as reported $136,101 $116,948 $83,482Adjustments: Restructuring charges — — 197Acquisition-related costs 150 — —Stock-based compensation 12,549 6,332 2,810Amortization of intangible assets 4,350 4,167 4,368Loss on foreign exchange hedge 3,489 — —Incremental expense associated with start-up of the Asia regional headquarters 1,133 — —Nonrecurring tax (benefit) expense associated with inverter business (33,837) — —Tax Cuts and Jobs Act Impact 72,867 — —Tax effect of non-GAAP adjustments (5,264) (2,854) (1,589)Non-GAAP income from continuing operations, net of income taxes $191,538 $124,593 $89,268Impact of InflationIn 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 increasedcosts 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 ResourcesLIQUIDITYWe 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 tofuture operating performance, as well as general economic, financial, competitive, legislative, regulatory, and other conditions, some of which may bebeyond our control. Our primary sources of liquidity are our available cash, investments and, cash generated from current operations.At December 31, 2017, we had $410.4 million in cash, cash equivalents, and marketable securities. We believe that adequate liquidity and cashgeneration will be important to the execution of our strategic initiatives. We believe that our current cash levels and our cash flows from future operationswill be adequate to meet anticipated working capital needs, anticipated levels of capital expenditures, and contractual obligations for the next twelvemonths.At December 31, 2017, we had $288.3 million in cash, cash equivalents, and marketable securities held by foreign subsidiaries. As a result of therecent Tax Act and the implementation of the Transition Tax, we have provided for U.S. tax on all foreign unremitted earnings. Accordingly, cash related tothese unremitted earnings could be repatriated to the U.S. with minimal additional taxes. Such additional taxes would include foreign withholding taxes andUS state income taxes. At this time, the Company has no plans to repatriate foreign cash and intends to invest such unremitted earnings indefinitely outsideof the U.S.34Table of ContentsConsistent with the Company's capital deployment initiatives, the Company intends to utilize foreign cash to expand our international operations throughinternal growth and strategic acquisitions. If our intent changes or if these funds are needed for our U.S. operations, we would be required to accrue anyassociated taxes on some or all of these undistributed earnings and our effective tax rate would be adversely affected.On February 1, 2018, we used $11.8 million of our available cash to acquire 100% of the outstanding stock of Trek Holdings Co., LTD ("Trek"), aprivately held company with operations in Tokyo, Japan and Lockport, New York. Trek has a 95% ownership interest in its U.S. subsidiary which is also itsprimary operation. Trek designs, manufactures and sells high-voltage amplifiers, power supplies and generators, high-performance electrostatic measurementinstruments and electrostatic discharge (ESD) sensors and monitors to the global marketplace. Trek's standard and custom-OEM products are used in industryand research in aerospace, automotive, electronics, electrostatics, materials, medical, military, nanotechnology, photovoltaic/solar, physics, plasma,semiconductor and test and measurement applications. For the twelve months ended December 31, 2017, Trek reported unaudited sales totalingapproximately $20 million. Trek’s comprehensive portfolio of power supply products strengthen and accelerate Advanced Energy’s growth in high voltageapplications.Credit FacilityOn July 28, 2017, the Company entered into a Loan Agreement (the “Loan Agreement”) with a bank which provides a revolving line of credit of upto $100.0 million subject to certain funding conditions through July 28, 2022. On December 21, 2017, the Company entered into the First Amendment to theLoan Agreement (“First Amendment”) to increase the line of credit to $150.0 million. The credit facility provides us greater future flexibility for execution ofour strategic plans. At December 31, 2017, we had $150.0 million in available funding under the Loan Agreement. For more information on the LoanAgreement, see "Note 19. Credit Facility" in Item 8 "Financial Statements and Supplementary Data".We terminated our previous $100.0 million secured revolving credit facility on September 9, 2016. There were no outstanding balances under thiscredit facility during 2016.Share Repurchase ProgramIn September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock over a thirty-month period (expiringin March 2018). In November 2017, our Board of Directors approved an extension to the $150.0 million share repurchase program until December 2019. AtDecember 31, 2017, there remained $70.0 million available under the share repurchase program for future share repurchases.During 2017, we entered into two Fixed Dollar Share Repurchase Agreements to purchase a total of $30.0 million of shares of our common stock inthe open market. Total shares of our common stock repurchased during 2017 were 421,992 at an average price of $71.07 per share.During 2015, we entered into a Fixed Dollar Accelerated Share Repurchase Agreement to purchase $50.0 million of shares of our common stock inthe open market. A total of 1.7 million shares of our common stock was repurchased under the Fixed Dollar Accelerated Share Repurchase Agreement at anaverage price of $28.99 per share.Shares of the company's stock that have been repurchased were retired and assumed the status of authorized and unissued shares. The associated costof shares repurchased has been recognized as a reduction to Additional paid-in capital.35Table of ContentsCASH FLOWSA summary of our cash provided by and used in operating, investing, and financing activities is as follows (in thousands): Years Ended December 31, 2017 2016 2015Net cash provided by operating activities from continuing operations $189,956 $127,144 $124,122Net cash used in operating activities from discontinued operations (7,255) (7,857) (19,413)Net cash provided by operating activities 182,701 119,287 104,709 Net cash (used in) provided by investing activities from continuing operations (28,082) 300 (13,219)Net cash used in investing activities from discontinued operations — — (46)Net cash (used in) provided by investing activities (28,082) 300 (13,265) Net cash (used in) provided by financing activities from continuing operations (31,307) 2,171 (45,528)Net cash used in financing activities from discontinued operations — (29) (14)Net cash (used in) provided by financing activities (31,307) 2,142 (45,542) EFFECT OF CURRENCY TRANSLATION ON CASH 2,208 (1,932) (1,467)INCREASE IN CASH AND CASH EQUIVALENTS 125,520 119,797 44,435CASH AND CASH EQUIVALENTS, beginning of period 289,517 169,720 125,285CASH AND CASH EQUIVALENTS, end of period 415,037 289,517 169,720Less cash and cash equivalents from discontinued operations 7,754 7,564 11,277CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period $407,283 $281,953 $158,4432017 Compared To 2016Net cash provided by operating activitiesNet cash provided by operating activities in 2017 was $182.7 million, an increase of $63.4 million, or 53.2% compared to $119.3 million for thesame period in 2016. The increase in net cash flows from operating activities was primarily due to improved earnings from continuing operations and timingof taxes, partially offset by increased cash required for accounts receivable and inventory to support current business volume.Net cash (used in) provided by investing activitiesNet cash (used in) provided by investing activities in 2017 was $(28.1) million, compared to $0.3 million in 2016. Included in cash used ininvesting activities for 2017 was $17.3 million for the acquisition of Excelsys and $3.5 million for the purchase of a foreign currency exchange hedge for ananticipated transaction which was not completed. Capital expenditures in 2017 increased $2.2 million from $6.8 million in 2016 to $9.0 million in 2017 tosupport new facilities and manufacturing operations. Net cash (used in) provided by financing activitiesNet cash (used in) provided by financing activities in 2017 was $(31.3) million, a $(33.4) million change from $2.1 million cash provided byfinancing activities in 2016. The increase in cash used in financing activities is due to the repurchase of $30.0 million in company stock in 2017.2016 Compared To 2015Net cash provided by operating activitiesNet cash provided by operating activities in 2016 was $119.3 million, compared to $104.7 million in 2015. The increase of $14.6 million in netcash flows from operating activities was due to the increase in income from continuing operations, net of income taxes, offset partially by additionalinvestment in working capital from increased sales volume.Net cash flows provided by (used in) investing activitiesNet cash provided by (used in) investing activities in 2016 was $0.3 million, a $13.6 million increase from cash used of $(13.3) million in 2015primarily due to the net change in marketable securities. 36Table of ContentsCapital expenditures increased $2.8 million to $6.8 million compared to $4.0 million in 2015. We expect to fund future capital expenditures withcash generated from operations.Net cash flows provided by (used in) financing activitiesNet cash provided by (used in) financing activities in 2016 was $2.1 million, a $47.7 million change from $(45.5) million cash used in 2015. Theincrease in cash provided by financing activities is due to the repurchase of $50.0 million in company stock in 2015.Effect of currency translation on cashThe effect of foreign currency translations on cash had a $2.2 million favorable impact for the year ended December 31, 2017 compared to a $1.9million unfavorable impact for the year ended December 31, 2016. Our foreign operations primarily sell products and incur expenses in the related localcurrency. Exchange rate 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 adverselyimpacted. The functional currencies of our worldwide operations include U.S. dollar ("USD"), Canadian Dollar ("CAD"), Swiss Franc ("CHF"), Chinese Yuan("CNY"), Euro ("EUR"), Pound Sterling ("GBP"), Indian Rupee ("INR"), Japanese Yen ("JPY"), South Korean Won ("KRW"), Singapore Dollar ("SGD") andNew Taiwan Dollar ("TWD"). Our purchasing and sales activities are primarily denominated in USD, CNY, EUR and JPY.The change in these key currency rates during the year ended December 31, 2017, 2016, and 2015 are as follows: Twelve Months Ended December 31,From To 2017 2016 2015CNY USD 6.7% (6.5)% (4.4)%EUR USD 13.9% (3.1)% (10.3)%JPY USD 3.9% 2.8 % (0.4)%KRW USD 13.0% (2.5)% (6.6)%TWD USD 8.8% 1.8 % (3.8)%GBP USD 9.3% (16.2)% (5.5)%CAD USD 7.1% 2.9 % (16.1)%CHF USD 4.4% (1.6)% (0.9)%INR USD 6.5% (2.5)% (4.6)%SGD USD 8.2% (2.0)% (6.6)%Off Balance Sheet ArrangementsWe have no off-balance sheet arrangements or variable interest entities.Contractual ObligationsThe following table sets forth our future payments due under contractual obligations as of December 31, 2017: Less than More than 5 Total 1 year 1 -3 years 4-5 years yearsOperating lease obligations $28,355 $7,109 $12,183 $5,477 $3,586Purchase obligations 142,125 142,125 — — —Income tax obligations 14,627 1,170 2,340 2,340 8,777Pension funding commitment 23,162 877 1,754 1,754 18,777Total $207,633 $151,230 $16,175 $9,469 $30,759Purchase obligations include firm commitments and agreements with various suppliers to ensure the availability of components. For moreinformation see Note 15. Commitments and Contingencies in Item 8 "Financial Statements and Supplementary Data." Income tax obligations are a result ofthe 2017 Tax Cuts and Jobs Act and includes a transition tax on unremitted foreign earnings and profits, of which we have elected to pay the estimatedamount over an eight-year period. For more information see Note 4. Income Taxes in Item 8 "Financial Statements and Supplementary Data."37Table of ContentsRecent Accounting PronouncementsFrom 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”). Unlessotherwise 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 materialimpact 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 RISKMarket Risk and Risk ManagementIn the normal course of business, we have exposures to interest rate risk from our investments, credit facility, and foreign exchange rate risk related toour foreign operations and foreign currency transactions.Interest Rate RiskOur market risk exposure relates to changes in interest rates in our investment portfolio and credit facility. We generally place our investments withhigh-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, 2017, our investments consisted primarily of certificates of deposit with maturity of less than 1 years. As a measurement of thesensitivity of our portfolio and assuming that our investment portfolio balances remain constant, a hypothetical decrease of 100 basis points (1%) in interestrates would decrease annual pre-tax earnings by a nominal amount.Foreign Currency Exchange Rate RiskWe are impacted by changes in foreign currency exchange rates through sales and purchasing transactions when we sell products and purchasematerials in currencies different from the currency in which product and manufacturing costs were incurred. The functional currencies of our worldwidefacilities primarily include the USD, EUR, KRW, TWD, GBP, and CNY. Our purchasing and sales activities are primarily denominated in the USD, JPY, EURand 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 fluctuate against each other, and other currencies, we are exposed to foreign currency exchange rate risk on sales, purchasing transactionsand labor.Acquisitions are a large component of our capital deployment strategy. A significant number of acquisition target opportunities are located outsidethe U.S. and their value is denominated in foreign currency. Changes in exchange rates therefore may have a material impact on their valuation in USD andtherefore may impact our view of their attractiveness.From time to time, we may enter into foreign currency exchange rate contracts to hedge against changes in foreign currency exchange rates on assetsand liabilities expected to be settled at a future date, including foreign currency which may be required for a potential foreign acquisition. Market risk arisesfrom the potential adverse effects on the value of derivative instruments that result from a change in foreign currency exchange rates. We may enter intoforeign currency forward contracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. Weminimize our market risk applicable to foreign currency exchange rate contracts by establishing and monitoring parameters that limit the types and degree ofour derivative contract instruments. We enter into derivative contract instruments for risk management purposes only. We do not enter into or issuederivatives 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 foreigncurrency exchange rates. Assets and liabilities of substantially all of our subsidiaries outside the U.S. are translated at period end rates of exchange for eachreporting period. Operating results and cash flow statements are translated at weighted-average rates of exchange during each reporting period. Althoughthese 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 complexinterrelationship of the worldwide supply chains and distribution channels, it is difficult to quantify the impact of a change in one or more particularexchange rates.38Table of ContentsITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAINDEX TO CONSOLIDATED FINANCIAL STATEMENTSReports of Grant Thornton LLP, Independent Registered Public Accounting Firm 40Consolidated Balance Sheets 42Consolidated Statements of Operations 43Consolidated Statements of Comprehensive Income (Loss) 44Consolidated Statements of Stockholders’ Equity 45Consolidated Statements of Cash Flows 46Notes to Consolidated Financial Statements 4739Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMBoard of Directors and ShareholdersAdvanced Energy Industries, Inc.Opinion on the financial statementsWe have audited the accompanying consolidated balance sheets of Advanced Energy Industries, Inc. (a Delaware corporation) and subsidiaries (the“Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, andcash flows for each of the three years in the period ended December 31, 2017, and the related notes (collectively referred to as the “financial statements”). Inour opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and theresults of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principlesgenerally 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) (“PCAOB”), the Company’sinternal control over financial reporting as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued bythe Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 15, 2018 expressed an unqualifiedopinion.Basis for opinionThese financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financialstatements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Companyin accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing proceduresto assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also includedevaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financialstatements. We believe that our audits provide a reasonable basis for our opinion./s/ GRANT THORNTON LLPWe have served as the Company’s auditor since 2004.Denver, COFebruary 15, 201840Table of ContentsREPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (DRAFT)Board of Directors and ShareholdersAdvanced Energy Industries, Inc.Opinion on internal control over financial reportingWe have audited the internal control over financial reporting of Advanced Energy Industries, Inc. (a Delaware corporation) and subsidiaries (the “Company”)as of December 31, 2017, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control overfinancial reporting as of December 31, 2017, 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) (“PCAOB”), the consolidatedfinancial statements of the Company as of and for the year ended December 31, 2017, and our report dated February 15, 2018 expressed an unqualifiedopinion on those financial statements.Basis for opinionThe Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness ofinternal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Controls over Financial Reportingappearing under Item 9A of the Company’s Annual Report on Form 10-K. Our responsibility is to express an opinion on the Company’s internal control overfinancial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to theCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and thePCAOB.We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonableassurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining anunderstanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. Webelieve that our audit provides a reasonable basis for our opinion.Definition and limitations of internal control over financial reportingA company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal controlover financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are beingmade only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention ortimely 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 ofeffectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliancewith the policies or procedures may deteriorate./s/ GRANT THORNTON LLPDenver, COFebruary 15, 201841Table of ContentsADVANCED ENERGY INDUSTRIES, INC.Consolidated Balance Sheets(In thousands, except per share amounts) December 31, 2017 2016ASSETS Current assets: Cash and cash equivalents $407,283 $281,953Marketable securities 3,104 4,737Accounts receivable, net of allowances of $1,748 and $1,943 respectively 87,429 75,667Inventories 78,450 55,770Income taxes receivable 1,295 1,482Other current assets 8,129 9,324Current assets from discontinued operations 9,535 9,401Total current assets 595,225 438,334Property and equipment, net 17,795 13,337Deposits and other 3,051 1,835Goodwill 53,812 42,125Intangible assets, net 33,499 28,071Deferred income tax assets 18,841 32,197Non-current assets from discontinued operations 11,085 15,630TOTAL ASSETS $733,308 $571,529LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $48,177 $46,255Income taxes payable 5,365 1,778Accrued payroll and employee benefits 18,412 13,230Other accrued expenses 19,913 14,590Customer deposits 6,402 5,774Current liabilities from discontinued operations 7,850 13,419Total current liabilities 106,119 95,046 Deferred income tax liabilities 4,556 1,008Uncertain tax positions 17,031 2,538Long-term deferred revenue 33,402 39,170Other long-term liabilities 36,282 20,536Non-current liabilities from discontinued operations 15,277 21,157Total liabilities 212,667 179,455Stockholders' 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; 39,604 and 39,712 issued and outstanding, respectively 40 40Additional paid-in capital 184,843 203,603Retained earnings 333,225 195,364Accumulated other comprehensive income (loss) 2,533 (6,933)Total stockholders’ equity 520,641 392,074TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $733,308 $571,529The accompanying notes are an integral part of these Consolidated Financial Statements.42Table of ContentsADVANCED ENERGY INDUSTRIES, INC.Consolidated Statements of Operations(In thousands, except per share amounts) Years Ended December 31, 2017 2016 2015Sales: Product $578,650 $410,580 $350,834Services 92,362 73,124 63,977Total sales 671,012 483,704 414,811Cost of sales: Product 267,587 192,694 164,889Services 47,044 37,863 33,052Total cost of sales 314,631 230,557 197,941Gross profit 356,381 253,147 216,870Operating expenses: Research and development 57,999 44,445 39,551Selling, general and administrative 93,262 77,678 66,097Amortization of intangible assets 4,350 4,167 4,368Restructuring expense — — 198Total operating expenses 155,611 126,290 110,214Operating income 200,770 126,857 106,656Other income (expense), net (2,579) 1,219 (1,214)Income from continuing operations before income taxes 198,191 128,076 105,442Provision for income taxes 62,090 11,128 21,960Income from continuing operations 136,101 116,948 83,482Income (loss) from discontinued operations, net of income taxes 1,760 10,506 (241,968)Net income (loss) $137,861 $127,454 $(158,486) Basic weighted-average common shares outstanding 39,754 39,720 40,746Diluted weighted-average common shares outstanding 40,176 40,031 41,077 Earnings (loss) per share: Continuing operations: Basic earnings per share $3.42 $2.94 $2.05Diluted earnings per share $3.39 $2.92 $2.03Discontinued operations: Basic earnings (loss) per share $0.04 $0.26 $(5.94)Diluted earnings (loss) per share $0.04 $0.26 $(5.94)Net income: Basic earnings (loss) per share $3.47 $3.21 $(3.89)Diluted earnings (loss) per share $3.43 $3.18 $(3.89)The accompanying notes are an integral part of these Consolidated Financial Statements.43Table of ContentsADVANCED ENERGY INDUSTRIES, INC.Consolidated Statements of Comprehensive Income (Loss)(In thousands) Years Ended December 31, 2017 2016 2015Net income (loss) $137,861 $127,454 $(158,486)Other comprehensive income (loss), net of tax: Foreign currency translation adjustment 8,305 (3,631) (10,228)Unrealized (losses) gains on marketable securities (2) 5 (3)Minimum retirement benefit liability adjustment 1,163 (3,841) (11)Comprehensive income (loss) $147,327 $119,987 $(168,728)The accompanying notes are an integral part of these Consolidated Financial Statements.44Table of ContentsADVANCED ENERGY INDUSTRIES, INC.Consolidated Statements of Stockholders’ Equity(In thousands, except share amounts) Accumulated Other Comprehensive Income Common Stock AdditionalPaid-in Retained Translation Unrealized gains Minimumretirementbenefit Total Stockholders’ Shares Amount Capital Earnings adjustments (losses) liability EquityBalances, January 1, 2015 40,613 $41 $237,752 $226,396 $10,249 $— $527 $474,965Stock issued from equity plans 525 — 4,121 — — — — 4,121Stock-based compensation — — 3,321 — — — — 3,321Excess tax benefit from stock-based compensation — — (99) — — — — (99)Stock buyback (1,382) (1) (49,999) — — — — (50,000)Comprehensive income: Equity adjustment from foreign currency translation — — — — (10,228) — — (10,228)Unrealized holding gains — — — — — (3) — (3)Minimum retirement benefit liability adjustment — — — — — — (11) (11)Net income — — — (158,486) — — — (158,486)Total comprehensive income (loss) — — — (158,486) (10,228) (3) (11) (168,728)Balances, December 31, 2015 39,756 $40 $195,096 $67,910 $21 $(3) $516 $263,580Stock issued from equity plans 299 — 2,175 — — — — 2,175Stock-based compensation — — 6,332 — — — — 6,332Stock buyback (343) — — — — — — —Comprehensive loss: Equity adjustment from foreign currency translation — — — — (3,631) — — (3,631)Unrealized holding losses — — — — — 5 — 5Minimum retirement benefit liability adjustment — — — — — — (3,841) (3,841)Net loss — — — 127,454 — — — 127,454Total comprehensive loss — — — 127,454 (3,631) 5 (3,841) 119,987Balances, December 31, 2016 39,712 $40 $203,603 $195,364 $(3,610) $2 $(3,325) $392,074Stock issued from equity plans 314 — (1,316) — — — — (1,316)Stock-based compensation — — 12,549 — — — — 12,549Stock buyback (422) — (29,993) — — — — (29,993)Comprehensive income (loss): Equity adjustment from foreign currency translation — — — — 8,305 — — 8,305Unrealized holding losses — — — — — (2) — (2)Minimum retirement benefit liability adjustment — — — — — — 1,163 1,163Net income — — — 137,861 — — — 137,861Total comprehensive income (loss) — — — 137,861 8,305 (2) 1,163 147,327Balances at December 31, 2017 39,604 $40 $184,843 $333,225 $4,695 $— $(2,162) $520,641The accompanying notes are an integral part of these Consolidated Financial Statements.45Table of ContentsADVANCED ENERGY INDUSTRIES, INC.Consolidated Statements of Cash Flows(In thousands) Years Ended December 31, 2017 2016 2015CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $137,861 $127,454 $(158,486)Income (loss) from discontinued operations, net of income taxes 1,760 10,506 (241,968)Income from continuing operations, net of income taxes 136,101 116,948 83,482Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,424 7,813 8,832Stock-based compensation expense 12,549 6,332 2,810Provision for deferred income taxes 28,765 3,570 3,498Non-cash reserve for potential bad debts — — 5,967Loss on foreign exchange hedge 3,489 — —Net loss (gain) on disposal of assets 122 319 (1,019)Changes in operating assets and liabilities, net of assets acquired: Accounts receivable (7,497) (21,603) 17,919Inventories (19,261) (6,359) (6,715)Other current assets (1,030) (1,358) (2,366)Accounts payable 1,812 18,957 3,220Other liabilities and accrued expenses 7,159 2,169 (9,500)Income taxes 18,323 356 17,994Net cash provided by operating activities from continuing operations 189,956 127,144 124,122Net cash (used in) operating activities from discontinued operations (7,255) (7,857) (19,413)Net cash provided by operating activities 182,701 119,287 104,709CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of marketable securities (107) (763) (30,172)Proceeds from sale of marketable securities 1,903 7,884 21,095Acquisitions, net of cash acquired (17,347) — (128)Purchase of foreign exchange hedge (3,489) — —Purchases of property and equipment (9,042) (6,821) (4,014)Net cash (used in) provided by investing activities from continuing operations (28,082) 300 (13,219)Net cash used in investing activities from discontinued operations — — (46)Net cash (used in) provided by investing activities (28,082) 300 (13,265)CASH FLOWS FROM FINANCING ACTIVITIES: Purchase and retirement of common stock (29,993) — (50,000)Net (payments) proceeds related to stock-based award activities (1,315) 2,175 4,476Other financing activities 1 (4) (4)Net cash (used in) provided by financing activities from continuing operations (31,307) 2,171 (45,528)Net cash (used in) financing activities from discontinued operations — (29) (14)Net cash (used in) provided by financing activities (31,307) 2,142 (45,542)EFFECT OF CURRENCY TRANSLATION ON CASH 2,208 (1,932) (1,467)INCREASE IN CASH AND CASH EQUIVALENTS 125,520 119,797 44,435CASH AND CASH EQUIVALENTS, beginning of period 289,517 169,720 125,285CASH AND CASH EQUIVALENTS, end of period 415,037 289,517 169,720Less cash and cash equivalents from discontinued operations 7,754 7,564 11,277CASH AND CASH EQUIVALENTS FROM CONTINUING OPERATIONS, end of period $407,283 $281,953 $158,443SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest $66 $173 $361Cash paid for income taxes 5,314 5,647 7,161Cash received for refunds of income taxes 1,448 2,232 5,377Cash held in banks outside the United States 285,686 230,168 116,259The accompanying notes are an integral part of these Consolidated Financial Statements.46Table of ContentsADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(in thousands, except per share data)In this Annual Report on Form 10-K, we use the terms “Advanced Energy”, “the Company”, “we”, “us” or “our” to refer to Advanced EnergyIndustries, Inc. and its subsidiaries.NOTE 1.OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ESTIMATESWe design, manufacture, sell and support power conversion and control products that transform power into various usable forms. Our productsenable manufacturing processes that use thin film and plasma enhanced chemical and physical processing for various products, industrial electro-thermalapplications for material and chemical processes, precision power for analytical instrumentation, as well as grid-tied power conversion. We also supplythermal instrumentation products for advanced temperature control in these markets. Our network of global service support centers provides local repair andfield service capability in key regions. As of December 31, 2015, we discontinued our Inverter production, engineering, and sales product line. As such, allInverter 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. Allintercompany accounts and transactions have been eliminated. Our Consolidated Financial Statements are stated in United States dollars and have beenprepared 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 inconformity with U.S. GAAP requires us to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, and disclosureof contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. We believe thatthe significant estimates, assumptions, and judgments when accounting for items and matters such as allowances for doubtful accounts, excess and obsoleteinventory, 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 resultsmay 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 ourmanufacturing facility in Shenzhen, The People's Republic of China (“PRC”) and our regional headquarters in Singapore, where the United States dollar isthe functional currency. Assets and liabilities of foreign subsidiaries are translated to United States dollars at period-end exchange rates, and ourConsolidated Statements of Operations and Cash Flows are translated at average exchange rates during the period. Resulting translation adjustments arerecorded 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 endtranslation) 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 pricethat would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Thecarrying amount of cash and cash equivalents, marketable securities, accounts receivable, other current assets, accounts payable, accrued liabilities, and othercurrent 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 originalmaturity of three months or less to be cash equivalents. Cash and cash equivalents are highly liquid investments that consist primarily of short-term moneymarket 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 investmentsin money market funds are on deposit with credit-worthy financial institutions and that the funds are highly liquid. The investments in money market fundsare reported at fair value, with interest income recorded in earnings and are included in “Cash and cash equivalents.” The fair values of our investments inmoney market funds are based on the quoted market prices.47Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)As of December 31, 2017 we have $1.2 million of cash included in cash and cash equivalents that is restricted from immediate withdrawal. Of thisamount, $0.5 million is a refund from a European tax authority, restricted until the tax authority completes its audit procedures, $0.2 million is restricted forChina and 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 U.S. 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 thecost and fair value of the investment is presented as a separate component of accumulated other comprehensive income (loss). We recognize gains and losseson 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 determinethe 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, marketablesecurities, and trade accounts receivable. To preserve capital and maintain liquidity, we invest with financial institutions we deem to be of high quality andsound financial condition. Our investments are in low-risk instruments and we limit our credit exposure in any one institution or type of investmentinstrument based upon criteria including creditworthiness.At December 31, 2017, our accounts receivable from Applied Materials and Lam Research were $36.8 million, or 42.0% and $5.4 million, or 6.2% ofour total accounts receivable, respectively. At December 31, 2016, our accounts receivable from Applied Materials and Lam Research were $31.1 million, or41.1% and $14.3 million, or 18.9% of our total accounts receivable, respectively. No other customer balance exceeded 10% of our total accounts receivablebalance at December 31, 2017 or December 31, 2016. We have established an allowance for doubtful accounts based upon factors surrounding the credit riskof specific customers, historical trends, and other information.Accounts Receivable and Allowance for Doubtful Accounts — Accounts receivable are recorded at net realizable value. We maintain a creditapproval process and we make significant judgments in connection with assessing our customers’ ability to pay at the time of shipment. Despite thisassessment, from time to time, our customers are unable to meet their payment obligations. We continuously monitor our customers’ credit worthiness and useour judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that wehave identified. While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we willcontinue 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 couldhave 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: Years Ended December 31, 2017 2016 2015Balances at beginning of period $1,943 $8,739 $1,052Additions - charged to expense — 1,332 7,837Deductions - write-offs, net of recoveries (195) (8,128) (150)Balances at end of period $1,748 $1,943 $8,739Inventories — Inventories include costs of materials, direct labor, manufacturing overhead, in-bound freight, and duty. Inventories are valued at thelower of cost (first-in, first-out method) or market and are presented net of reserves 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 realizablevalue, if less than cost, based primarily on historical usage and our estimated forecast of product demand. Demand for our products can fluctuatesignificantly. 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 inan increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or technologicaldevelopments could have a significant impact on the value of our inventory and our reported operating results.48Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)Property and Equipment — Property and equipment is stated at cost or estimated fair value if acquired in a business combination. Depreciation iscomputed over the estimated useful lives using the straight-line method. Estimated useful lives for financial reporting purposes are as follows: buildings, 20to 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 estimateduseful life of the assets, whichever period is shorter. Leasehold additions and improvements are capitalized, while maintenance and repairs are expensed asincurred.When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and anyrelated 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 andgoodwill. Intangible assets are valued based on estimates of future cash flows and amortized over their estimated useful lives. Goodwill is subject to annualimpairment testing, as well as testing upon the occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets aresubject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon ourestimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantlydiminished, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. When we determine that the carryingvalue 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 projectedundiscounted 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 somefactors outside of our control. Changes in these estimates can result in significant revisions to our carrying value of these assets and may result in materialcharges 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 thatgoodwill is impaired. If this assessment indicates that it is more likely than not that goodwill is impaired, the next step of impairment testing compares thefair 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 recordedcarrying value of the goodwill.Revenue Recognition — We recognize revenue from product sales upon transfer of title and risk of loss to our customers provided that there isevidence 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 tocustomers, 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 nine countries, including the United States, the PRC, Japan, Korea, Taiwan, Canada, Germany,Ireland and Great Britain. Support services include warranty and non-warranty repair services, upgrades, and refurbishments on the products we sell. Repairsthat are covered under our standard warranty do not generate revenue.As part of our ongoing service business, we satisfy our service obligations under extended warranties and preventive maintenance contracts.Extended warranties had previously been offered on our discontinued inverter products. Any up-front fees received for extended warranties or maintenanceplans are deferred and recognized ratably over the service periods, as defined in the agreements. We have deferred revenue related to our extended warrantiesand service contracts totaling $37.5 million as of December 31, 2017 and $40.8 million as of December 31, 2016.Research and Development Expenses — Costs incurred to advance, test or otherwise modify our proprietary technology or develop newtechnologies are considered research and development costs and are expensed when incurred. These costs are primarily comprised of costs associated with theoperation 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 offerwarranty coverage for a majority of our Precision Power products for periods typically ranging from 12 to 24 months after shipment. We warranted ourinverter products for five to ten years and provided the option to purchase additional warranty coverage for up to 20 years. The warranty expense accruedrelated to our standard inverter product warranties is now considered part of our discontinued operations and is recorded as such on our Consolidated BalanceSheets. See Note 3. Discontinued Operations for more information. See Note 12. Warranties for more information on our warranties from continuingoperations. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the repairs. The assumptions weuse to estimate warranty accruals are reevaluated periodically, in light of actual experience, and when49Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)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 forall share-based payment awards made to employees and directors based on estimated fair values. We have estimated the fair value of all stock options andawards 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 ofcomplex and subjective variables. These variables include our expected stock price volatility over the term of the awards, actual and projected employeeoption exercise behaviors, risk-free interest rates and expected dividends. We also estimate forfeitures at the time of grant and revise those estimates insubsequent periods if actual forfeitures differ from our estimates. Our expected volatility assumption is based on the historical daily closing price of our stockover a period equivalent to the expected life of the options.Income Taxes — We follow the liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized forfuture tax consequences. A deferred tax asset or liability is computed for both the expected future impact of differences between the financial statement andtax 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 arereflected 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 anumber of factors including historical results and taxable income projections for each jurisdiction. The ultimate realization of deferred income tax assets isdependent on the generation of taxable income in appropriate jurisdictions during the periods in which those temporary differences are deductible. Weconsider the scheduled reversal of deferred income tax liabilities, projected future taxable income, and tax planning strategies in determining the amount ofthe valuation allowance. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferredincome tax assets are deductible, we determine if we will realize the benefits of these deductible differences.Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions. In general, we are subject to regularexamination of our income tax returns by the Internal Revenue Service and other tax authorities. The first step is to evaluate the tax position for recognitionby determining, if based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolutions of relatedappeals 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 uponultimate settlement. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy ofour 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.On December 22, 2017, the Tax Act was enacted into law and the new legislation contains several key tax provisions that affected us, including aone-time mandatory transition tax on accumulated foreign earnings and a reduction of the corporate income tax rate to 21%, among others. We are requiredto recognize the effect of the tax law changes in the period of enactment, such as determining the transition tax, re-measuring our U.S. deferred tax assets andliabilities, as well as reassessing the net realizability of our deferred tax assets and liabilities. In December 2017, the SEC staff issued Staff AccountingBulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), which allows us to record provisional amounts during ameasurement period not to extend beyond one year of the enactment date.Our accounting for the following elements of the Tax Act is incomplete and we were not yet able to make reasonable estimates of the effects,therefore, no provisional adjustments were recorded. Because of the complexity of the new GILTI tax rules, we are continuing to evaluate this provision ofthe Tax Act and the application of ASC 740 Income Taxes. Under U.S. GAAP, we are required to make an accounting policy choice of either (1) treating taxesdue on future U.S. inclusions in taxable income related to GILTI as a current-period expense when incurred (the “period cost method”) or (2) factoring suchamounts into a company’s measurement of its deferred taxes (the “deferred method”). Our selection of an accounting policy with respect to the new GILTI taxrules will depend, in part, on analyzing our global income to determine whether we expect to have future U.S. inclusions in taxable income related to GILTIand, if so, what the impact is expected to be. Because whether we expect to have future U.S. inclusions in taxable income related to GILTI depends on notonly our current structure and estimated future results of global operations but also our intent and ability to modify our structure and/or our business, we arenot yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, we have not made any adjustments related to potential GILTI tax inour financial statements and have not made a policy decision regarding whether to record deferred taxes on GILTI.50Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)Since the Tax Act was passed late in the fourth quarter of 2017, and ongoing guidance and accounting interpretation is expected over the next 12 months, weconsider the accounting for the transition tax, deferred tax re-measurements, and other items to be incomplete due to forthcoming guidance and our ongoinganalysis of final year-end data and tax positions. We expect to complete our analysis within the measurement period in accordance with SAB 118. See Note 4.Income Taxes for more information.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 inherentlydifficult 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 ofoperations in a particular period. An unfavorable decision, particularly in patent litigation, could require material changes in production processes andproducts or result in our inability to ship products or components found to have violated third-party patent rights. We accrue loss contingencies when it isprobable 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 ina manner inconsistent with our expectations could have a significant impact on our results of operations and financial conditionNEW ACCOUNTING STANDARDSFrom 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”). Unlessotherwise 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 materialimpact on the Consolidated Financial Statements upon adoption.In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers" and has subsequently issued several supplemental and/orclarifying ASUs (collectively known as "ASC 606"). ASC 606 implements a five-step model for how an entity should recognize revenue in order to depict thetransfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange forthose goods or services. This guidance will be effective for fiscal periods beginning after December 15, 2017 and for the interim periods within that year.Advanced Energy has established a cross-functional implementation team to analyze its current portfolio of customer contracts. We have completed thedisaggregation of the related sales order data and are finalizing detailed testing of contract elements. The implementation team is close to completion onidentifying and implementing changes to existing business processes, controls, and systems in order to support revenue recognition and disclosure under thenew standard. Based on our completed reviews of our customer contracts and attribute testing, we expect that revenue with the majority of our customers willcontinue to be recognized at a point in time, generally upon shipment of products, consistent with our current revenue recognition model. The mostsignificant update identified in connection with the implementation of ASC 606 is related to the recognition of revenue from sales of inventory to customersunder vendor managed inventory or just-in-time inventory arrangements. Prior to implementation of ASU 606, revenue was recognized upon transfer of title,which is triggered by the customer's usage of inventory. Under ASC 606, revenue will be recognized upon delivery of inventory to customer site warehousesto align with transfer of control of the inventory. Analysis of variable consideration within customers contracts has been performed and no material updatesfor ASC 606 adoption were identified.The standard permits the use of either the retrospective or cumulative effect transition method. We will adopt the new revenue guidance effectiveJanuary 1, 2018 with a cumulative adjustment to the opening balance of Retained earnings as opposed to retrospectively adjusting our prior periods. Thisadjustment is anticipated to increase our Retained earnings by less than $10 million. Additionally, ongoing impacts of ASC 606 adoption to net income arecurrently anticipated to be immaterial. Adoption of ASC 606 will also result in future adjustments to the balances of Revenues, Costs of sales, Accountsreceivable, and Inventory. We will continue to assess the impact of ASC 606 as adoption is fully completed in 2018, and there remain areas to be fullyconcluded upon. Additionally, reviews are still underway which may alter current conclusions and the financial impact of ASC 606.In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," to increase transparency and comparability among organizations byrecognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective forfiscal years beginning after December 15, 2018, including interim periods within the year of adoption. Early adoption is permitted. Advanced Energy iscurrently assessing and has not yet determined the impact ASU 2016-02 may have on its Consolidated Financial Statements.51Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.” ASU2016-16 changes the timing of income tax recognition for an intercompany sale of assets. ASU 2016-16 requires the seller’s tax effects and the buyer’sdeferred taxes to be recognized immediately upon the sale instead of deferring accounting for the income tax implications until the assets are sold to a thirdparty or recovered through use. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 including interim periods within the year ofadoption. Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the periodof adoption. Early adoption is allowed but only if adopted in the first quarter of fiscal year 2017. Advanced Energy is currently assessing the impact of ASU2016-16 adoption and while it has not completed the assessment, it has determined the impact of ASU 2016-16 adoption will require the recognition ofdeferred tax assets totaling approximately $15 million with a corresponding increase to Retained Earnings in its Consolidated Financial Statements uponadoption.In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement BenefitCost”, an update to ASC Topic 715 – Compensation – Retirement Benefits. The amendments in ASU 2017-07 require that the service cost component of thenet periodic benefit cost be presented in the same income statement line item as other employee compensation costs arising from services rendered during theperiod. Other components of the net periodic benefit cost should be reported separately from the line item that includes the service cost and outside of anysubtotal of operating income. ASU 2017-07 is effective for annual reporting periods beginning after December 15, 2017, and for the interim periods withinthose annual reporting periods. Early adoption is permitted. The Company does not expect this standard will have a material impact on our ConsolidatedFinancial Statements.NOTE 2.BUSINESS ACQUISITIONSOn July 3, 2017, Advanced Energy acquired all of the issued and outstanding shares of capital stock of Excelsys Holdings Limited (“Excelsys”), anelectronics manufacturer in Cork, Ireland. This acquisition is part of Advanced Energy’s strategy to continue to grow and diversify its revenue throughorganic and inorganic opportunities. The high-efficiency, configurable power supplies that Excelsys manufactures for medical and industrial applicationswill further enhance Advanced Energy’s product portfolio.The components of the fair value of the total consideration transferred for the Excelsys acquisition are as follows:Cash paid to owners$18,512Cash acquired(1,165)Total fair value of consideration transferred$17,347 52Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)The following table summarizes estimated fair values of the assets acquired and liabilities assumed as of July 3, 2017:Accounts receivable$1,930Inventories1,048Income taxes receivable558Other current assets47Property and equipment256Deferred income tax asset35Accounts payable(1,342)Income taxes payable(34)Other accrued expenses(719)Deferred income tax liabilities(946) 833Amortizable intangible assets: Tradename182Customer relationships1,595Technology5,808Total amortizable intangible assets7,585Total identifiable net assets8,418Goodwill8,929Total fair value of consideration transferred$17,347A summary of the intangible assets acquired, amortization method and estimated useful lives as of July 3, 2017 follows: Amount Amortization Method Useful LifeTradename $182 Straight-line 5Customer relationships 1,595 Straight-line 10Technology 5,808 Straight-line 10 $7,585 Goodwill and intangible assets are recorded in the functional currency of the entity and are subject to changes due to translation at each balancesheet date. The goodwill associated with the acquisition is the result of expected synergies and expansion of the technology into adjacent markets we alreadyserve. Advanced Energy is in the process of finalizing the assessment of fair value for the assets acquired and liabilities assumed. NOTE 3.DISCONTINUED OPERATIONSIn December 2015, we completed the wind down of engineering, manufacturing and sales of our solar inverter product line (the "inverter business").Accordingly, the results of our inverter business have been reflected as “Income (loss) from discontinued operations, net of income taxes” on ourConsolidated Statements of Operations for all periods presented herein.The effect of our sales of extended inverter warranties to our customers continues to be reflected in deferred revenue in our Consolidated BalanceSheets. Deferred revenue for extended inverter warranties and the associated costs of warranty service will be reflected in Sales and Cost of goods sold,respectively, from continuing operations in future periods in our Consolidated Statement of Operations, as the deferred revenue, is earned and the associatedservices are rendered. Extended warranties related to the inverter product line are no longer offered. 53Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)The significant items included in "Income (loss) from discontinued operations, net of income taxes" are as follows: Year Ended December 31, 2017 2016 2015Sales$— $— $95,856Cost of sales234 154 139,045Total operating (income) expenses (including restructuring)(1,576) (3,894) 232,262Operating income (loss) from discontinued operations1,342 3,740 (275,451)Other income (expense)337 2,636 (55)Income (loss) from discontinued operations before income taxes1,679 6,376 (275,506)Benefit for income taxes(81) (4,130) (33,538)Income (loss) from discontinued operations, net of income taxes$1,760 $10,506 $(241,968)Assets and Liabilities of discontinued operations within the Consolidated Balance Sheets are comprised of the following: December 31, 2017 2016Cash and cash equivalents $7,754 $7,564Accounts and other receivables, net 1,363 1,670Inventories 418 167Current assets of discontinued operations $9,535 $9,401 Other assets 72 70Deferred income tax assets 11,013 15,560Non-current assets of discontinued operations $11,085 $15,630 Accounts payable and other accrued expenses 541 3,684Accrued warranty 7,305 9,254Accrued restructuring 4 481Current liabilities of discontinued operations $7,850 $13,419 Accrued warranty 15,112 20,976Other liabilities 165 181Non-current liabilities of discontinued operations $15,277 $21,157NOTE 4.INCOME TAXESThe geographic distribution of pretax income from continuing operations is as follows: Years Ended December 31, 2017 2016 2015Domestic $29,088 $13,776 $13,237Foreign 169,103 114,300 92,205 $198,191 $128,076 $105,442 54Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)The provision for income taxes from continuing operations is summarized as follows: Years Ended December 31, 2017 2016 2015Current: Federal $26,550 $3,187 $5,823State 601 351 335Foreign 9,621 3,081 5,950Total current provision $36,772 $6,619 $12,108Deferred: Federal $28,297 $3,110 $569State (1,000) 1,564 870Foreign (1,979) (165) 8,413Total deferred provision 25,318 4,509 9,852Total provision for income taxes $62,090 $11,128 $21,960The Company's effective income tax rate is lower than the 35% U.S. statutory tax rate primarily because of benefits from lower-taxed globaloperations. In 2017, our effective tax rate was also impacted by the effect of the recently enacted U.S. Tax Act, offset partially by a benefit related to thecontinued wind down of our solar inverter business. The following reconciles our effective tax rate on income from continuing operations to the federalstatutory rate of 35%: Years Ended December 31, 2017 2016 2015Income taxes per federal statutory rate $69,348 $44,826 $37,498State income taxes, net of federal deduction 1,794 963 1,204Change in valuation allowance 841 (85) 6,503Transition tax - U.S. Tax Reform 61,690 — —Corporate tax rate change - U.S. Tax Reform 11,177 — —Tax benefit associated with inverter business wind down (33,837) — —Stock based compensation (5,263) 1,117 (166)Tax Amortization (2,558) — —Tax effect of foreign operations (47,482) (31,651) (22,495)Uncertain tax positions 4,948 1,636 2,122Tax credits (658) (4,495) (969)Other permanent items, net 2,090 (1,183) (1,737) $62,090 $11,128 $21,960 55Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)Deferred tax assets and liabilities are recognized for the future tax consequences of differences between the carrying amounts of assets and liabilitiesand 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 assetsand liabilities consist of the following: Years Ended December 31, 2017 2016Deferred tax assets Stock based compensation $1,295 $2,281Net operating loss and tax credit carryforwards 40,572 36,145Pension obligation 3,363 2,338Excess and obsolete inventory 841 3,031Deferred revenue 4,519 11,998Employee bonuses and commissions 1,112 1,908Other 2,118 3,624Deferred tax assets 53,820 61,325Less: Valuation allowance (32,267) (26,120)Net deferred tax assets 21,553 35,205Deferred tax liabilities Depreciation and amortization 2,605 2,266Foreign other 3,448 1,538Other 62 212Deferred tax liabilities 6,115 4,016Net deferred tax assets $15,438 $31,189As of December 31, 2017, the Company has recorded a valuation allowance on a portion of its U.S. domestic deferred tax assets of approximately$2.8 million related to state net operating losses. The remaining valuation allowance on deferred tax assets approximates $29.5 million and is associatedprimarily with operations in Germany, the UK, and India including losses that are both operating and capital in nature. As of December 31, 2017, there is notsufficient positive evidence to conclude that such deferred tax assets will be recognized. The December 31, 2017 valuation allowance balance reflects anincrease of $6.1 million during the year. The current rate reconciliation includes $0.8 million of such increase and is primarily attributable to an increase inthe state valuation allowance for revisions to estimates of 2017 state income, and forecasted state income, offset by a reduction in the state effective tax rateon deferred tax balances. The balance of the current year valuation allowance increase is associated with foreign activity. Several of our foreign entitieshave full valuation allowances against their deferred tax balances. Movement during 2017 in these deferred tax balances attributable to rate changes, prioryear taxable income adjustments, and movement attributable to annual operating activities requires a corresponding adjustment to the related valuationallowance balances. The changes in valuation allowance associated with these foreign items are included in the rate reconciliation as a component of the taxeffects of foreign operations.As of December 31, 2017, the Company had foreign and state tax loss carryforwards of approximately $174.0 million, and $116.6 million,respectively. The Company plans to utilize its U.S. federal net operating loss carryforwards against the recently enacted transition tax. The U.S. state tax losscarryforwards are subject to various limitations under Section 382 of the Internal Revenue Code and applicable state laws. The U.S. state losses will expirefrom 2019 to 2037 and the majority of the foreign operating losses have no expiration date. Additionally, the majority of the foreign losses are subject to fullvaluation allowance. The majority of the foreign operating losses have no expiration date.In 2017, we began operating under a tax holiday in one of our foreign jurisdictions. This tax holiday is in effect through June 30, 2027, and may beextended if certain additional requirements are met. The tax holiday is conditional upon our meeting certain employment and investment thresholds. Theimpact of the tax holiday in 2017 decreased the tax benefit recognized on the current start up tax loss in that jurisdiction by approximately $6.0 million anddecreased our income from continuing operations by $0.15 per diluted share.Our accounting for the following elements of the Tax Act is based upon our current understanding of the Tax Act and its estimated impact.However, we were able to make reasonable estimates of certain effects and, therefore, recorded provisional56Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)adjustments as follows:The Tax Act reduces the corporate tax rate to 21%, effective January 1, 2018. For certain of our deferred tax assets and deferred tax liabilities, wehave recorded a provisional net decrease of $11.1 million with a corresponding adjustment to deferred income tax expense for the year ended December 31,2017. While we are able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analysis related to the TaxAct, including, but not limited to our calculation of deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federaltemporary differences.The Transition Tax is a one-time tax on previously untaxed accumulated earnings and profits (E&P) of our foreign subsidiaries. We are able to makea reasonable estimate of the Transition Tax and recorded a provisional Transition Tax obligation of $61.8 million. However, we are continuing to gatheradditional information to more precisely compute the amount of the Transition Tax. The Transition Tax may be paid over a period of 8 years; 8% per year foryears 1 - 5, 15% for year 6, 20% for year 7 and 25% for year 8. We intend to utilize our U.S. net operating loss carryforward to reduce the ultimate cash taxobligation and have currently reflected a total tax payable of $16 million with $1 million classified as a current liability and $15 million classified as Otherlong term liabilities in the Balance Sheet at December 31, 2017.We previously considered the earnings in our foreign subsidiaries to be indefinitely reinvested and, accordingly, recorded no deferred income taxes.Total estimated foreign earnings totaled $524.9 million at December 31, 2017. The Company continues to assert that such foreign earnings are indefinitelyinvested in operations outside the U.S. While the Transition Tax results in a reduction to undistributed foreign earnings to tax in the future, an actualrepatriation from our foreign subsidiaries could still be subject to additional foreign withholding taxes and U.S. state taxes. We will record the tax effects ofany change in our prior assertion with respect to these investments, and disclose any unrecognized deferred tax liability for temporary differences related toour foreign investments, if practicable, in the period that we are first able to make a reasonable estimate.We account for uncertain tax positions by applying a minimum recognition threshold to tax positions before recognizing these positions in thefinancial statements. The reconciliation of our total gross unrecognized tax benefits is as follows: Years Ended December 31, 2017 2016 2015Balance at beginning of period $11,401 $10,049 $8,001Additions based on tax positions taken during a prior period 1,258 104 433Additions based on tax positions taken during the current period 4,433 2,318 3,413Reductions related to a lapse of applicable statute of limitations (1,102) (1,070) (1,798)Balance at end of period $15,990 $11,401 $10,049The full $16.0 million of unrecognized tax benefits, if recognized, will impact the Company’s effective tax rate. In accordance with our accountingpolicy, we recognize accrued interest and penalties related to unrecognized tax benefits as a component of tax expense. We had $1.0 million and $0.8 millionof accrued interest and penalties at December 31, 2017 and 2016, respectively. We do not anticipate a material change to the amount of unrecognized taxpositions within the next 12 months.With few exceptions, the Company is no longer subject to federal state or foreign income tax examinations by tax authorities for years before 2014.NOTE 5.EARNINGS PER SHAREBasic earnings per share (“EPS”) is computed by dividing income available to common stockholders by the weighted-average number of commonshares outstanding during the period. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased toinclude the number of additional common shares that would have been outstanding (using the if-converted and treasury stock methods), if our outstandingstock options and restricted stock units had been converted to common shares, and if such assumed conversion is dilutive.The following is a reconciliation of the weighted-average shares outstanding used in the calculation of basic and diluted earnings per share for theyears ended December 31, 2017, 2016, and 2015:57Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data) Years Ended December 31, 2017 2016 2015Income from continuing operations, net of income taxes $136,101 $116,948 $83,482 Basic weighted-average common shares outstanding 39,754 39,720 40,746Assumed exercise of dilutive stock options and restricted stock units 422 311 331Diluted weighted-average common shares outstanding 40,176 40,031 41,077Continuing operations: Basic earnings per share $3.42 $2.94 $2.05Diluted earnings per share $3.39 $2.92 $2.03The following stock options and restricted units were excluded in the computation of diluted earnings per share because they were anti-dilutive: Years Ended December 31, 2017 2016 2015Stock options — — 155Restricted stock units — 1 1Stock BuybackIn September 2015, our Board of Directors authorized a program to repurchase up to $150.0 million of our stock. In November 2017, our Board ofDirectors approved an extension to the share repurchase program to December 2019 from its original maturity of March 2018. As of December 31, 2017, wehad $70.0 million remaining for the authorized repurchase of shares.In November 2015 we entered into a Fixed Dollar Accelerated Share Repurchase Transaction to purchase $50.0 million of shares of our commonstock in the open market. A total of 1.7 million shares of our common stock was repurchased under the Fixed Dollar Accelerated Share Repurchase Agreementat an average price of $28.99 per share. In August and December 2017, we entered into Fixed Dollar Share Repurchase Agreements to repurchase $25.0 million and $5.0 million,respectively, of shares of our common stock in the open market. Total shares repurchased under the Fixed Dollar Share Repurchase Agreements in August andDecember 2017 were 351,292 and 70,700, respectively, at an average price of $71.16 and $70.65, respectively, per share.All shares repurchased were executed in the open market, and no shares were repurchased from related parties. Repurchased shares were retired andassumed the status of authorized and unissued shares. Accordingly, the associated cost of the repurchased shares were recognized as a reduction to Additionalpaid-in capital.NOTE 6.MARKETABLE SECURITIES AND ASSETS MEASURED AT FAIR VALUEOur investments with original maturities of more than three months at time of purchase and that are intended to be held for no more than 12 months,are considered marketable securities available for sale.Our marketable securities consist of certificates of deposit as follows: December 31, December 31, 2017 2016 Cost Fair Value Cost Fair ValueCertificates of deposit3,103 3,104 4,735 4,737The maturities of our marketable securities available for sale as of December 31, 2017 are as follows: Earliest LatestCertificates of deposit 4/10/2018to10/17/201858Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)The value and liquidity of the marketable securities we hold are affected by market conditions, as well as the ability of the issuers of such securitiesto make principal and interest payments when due, and the functioning of the markets in which these securities are traded. As of December 31, 2017, we donot believe any of the underlying issuers of our marketable securities are at risk of default.The following tables present information about our marketable securities measured at fair value, on a recurring basis, as of December 31, 2017 andDecember 31, 2016. The tables indicate the fair value hierarchy of the valuation techniques utilized to determine fair value. We did not have any financialliabilities measured at fair value, on a recurring basis, as of December 31, 2017 or December 31, 2016.December 31, 2017Level 1 Level 2 Level 3 TotalCertificates of deposit$— $3,104 $— $3,104 December 31, 2016Level 1 Level 2 Level 3 TotalCertificates of deposit— 4,737 — 4,737There were no transfers in or out of Level 1, 2, or 3 fair value measurements during the year ended December 31, 2017.NOTE 7.DERIVATIVE FINANCIAL INSTRUMENTSWe 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, 2017, 2016 and 2015, we entered into foreign currency exchange forwardcontracts to manage the exchange rate risk associated with intercompany debt denominated in nonfunctional currencies. These derivative instruments are notdesignated as hedges; however, they do offset the fluctuations of our intercompany debt due to foreign exchange rate changes. These forward contracts aretypically for one-month periods. At December 31, 2017 we had outstanding Euro and Pound Sterling forward contracts. We did not have any currencyexchange rate contracts as of December 31, 2016. At December 31, 2015 we had one outstanding Euro forward contract.The notional amount of foreign currency exchange contracts outstanding at December 31, 2017 and 2015 was $16.3 million and $37.2 million,respectively, and the fair value of these contracts was not significant at December 31, 2017 and 2015.During the years ended December 31, 2017, 2016, and 2015, the gains and losses recorded related to the foreign currency exchange contracts are asfollows: Years Ended December 31, 2017 2016 2015Foreign currency gain (loss) from foreign currency exchange contracts $(1,438) $(569) $1,857These gains and losses were offset by corresponding gains and losses on the related intercompany debt and both are included as a component ofother income, net, in our Consolidated Statements of Operations.NOTE 8.INVENTORIESOur inventories are valued at the lower of cost or market and computed on a first-in, first-out (FIFO) basis. Components of inventories, net ofreserves, are as follows: December 31, 2017 2016Parts and raw materials$58,567 $43,278Work in process7,986 5,292Finished goods11,897 7,200 $78,450 $55,77059Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)NOTE 9.PROPERTY AND EQUIPMENT, NETProperty and equipment, net is comprised of the following: December 31, 2017 2016Buildings and land$1,788 $1,581Machinery and equipment36,579 32,743Computer and communication equipment26,819 24,637Furniture and fixtures1,568 1,267Vehicles341 357Leasehold improvements17,286 15,546Construction in process802 644 85,183 76,775Less: Accumulated depreciation(67,388) (63,438)Total property and equipment, net$17,795 $13,337 Depreciation expense recorded in continuing operations and included in selling, general and administrative expense is as follows: Years Ended December 31, 2017 2016 2015Depreciation expense $5,074 $3,646 $4,464NOTE 10.GOODWILLThe following summarizes the changes in goodwill during the years ended December 31, 2017 and 2016:GoodwillBeginning Balance Additions Effect of Changes inExchange Rates Ending BalanceDecember 31, 2017$42,125 $8,929 $2,758 $53,812 December 31, 2016$42,729 $— $(604) $42,125Additions during 2017 are the result of our July 3, 2017 acquisition of Excelsys as described in Note 2. Business Acquisition.NOTE 11.INTANGIBLE ASSETSIntangible assets consisted of the following as of December 31, 2017 and 2016: December 31, 2017 Gross CarryingAmount AccumulatedAmortization Net CarryingAmountTechnology-based $18,702 $(5,559) $13,143Customer relationships 30,034 (10,787) 19,247Trademarks and other 2,623 (1,514) 1,109Total intangible assets $51,359 $(17,860) $33,49960Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data) December 31, 2016 Gross CarryingAmount AccumulatedAmortization Net CarryingAmountTechnology-based $11,643 $(3,673) $7,970Customer relationships 26,608 (7,451) 19,157Trademarks and other 2,223 (1,279) 944Total intangible assets $40,474 $(12,403) $28,071Amortization expense related to intangible assets is as follows: Years Ended December 31, 2017 2016 2015Amortization expense $4,350 $4,167 $4,368Estimated amortization expense related to intangibles is as follows:Year Ending December 31, 2018 $4,8792019 4,8622020 4,1752021 4,0712022 3,809Thereafter 11,703 $33,499NOTE 12.WARRANTIESProvisions of our sales agreements include customary product warranties, ranging from 12 months to 24 months following installation. Theestimated cost of our warranty obligation is recorded when revenue is recognized and is based upon our historical experience by product, configuration andgeographic region.Our estimated warranty obligation is included in Other accrued expenses in our Consolidated Balance Sheets. Changes in our productwarranty obligation are as follows: Years Ended December 31, 2017 2016 2015Balances at beginning of period $2,329 $1,633 $1,612Warranty liabilities acquired 118 — —Increases to accruals 2,029 1,802 1,071Warranty expenditures (2,184) (1,058) (1,040)Effect of changes in exchange rates 20 (48) (10)Balances at end of period $2,312 $2,329 $1,633NOTE 13.STOCK-BASED COMPENSATIONAs of December 31, 2017, we had two active stock-based incentive compensation plans; the 2017 Omnibus Incentive Plan and the Employee StockPurchase Plan (“ESPP”). All new equity compensation grants are issued under these two plans; however, outstanding awards previously issued under inactiveplans will continue to vest and remain exercisable in accordance with the terms of the respective plans. Our stock plans are administered by the Board ofDirectors Compensation Committee. At61Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)December 31, 2017, there were 5.2 million shares reserved and 4.5 million shares available for future grant under our stock-based incentive plans.On May 4, 2017, the shareholders approved the Company's 2017 Omnibus Incentive Plan ("the 2017 Plan") and reserved 5.2 million shares underthe plan. The 2017 Plan replaced the 2008 Omnibus Incentive Plan ("the 2008 Plan"), and all awards previously granted under the 2008 Plan continue to vestand/or are exercisable under the 2017 Plan in accordance with their original terms and conditions. The 2017 Plan and 2008 Plan provide for the grant ofstock options, stock appreciation rights, restricted stock, stock units (including deferred stock units), unrestricted stock, and dividend equivalent rights.Additionally, awards issued may be issued as performance based awards to align stock compensation awards to the attainment of annual or long-termperformance goals. As of December 31, 2017, there were 4.2 million shares available for grant under the 2017 Plan.Stock-based Compensation ExpenseWe recognize stock-based compensation expense based on the fair value of the awards issued and the functional area of the employee receiving theaward. Stock-based compensation for the three years ended December 31, is as follows: Years Ended December 31, 2017 2016 2015Stock-based compensation expense $12,549 $6,332 $2,810Our 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 stock options andrestricted stock units ("RSU's") was approximately 17% for the year ended December 31, 2017 and 18% for the years ended December 31, 2016 and 2015.Restricted Stock UnitsThe fair value of our Restricted Stock Units ("RSUs") is determined based upon the closing fair market value of our common stock on the grant date.Changes in the unvested RSU's during the years ended December 31, 2017, 2016 and 2015 were as follows: 2017 2016 2015 Shares Weighted-Average GrantDate FairValue Shares Weighted-Average GrantDate FairValue Shares Weighted-Average GrantDate FairValueRSUs outstanding at beginning of period 354 $29.60 234 $26.10 357 $14.29RSUs granted 252 63.63 297 30.37 221 26.67RSUs vested (211) 30.62 (157) 25.97 (161) 14.48RSUs forfeited (9) 33.91 (20) 28.32 (183) 14.19RSUs outstanding at end of period 386 51.06 354 29.60 234 26.10The total intrinsic value of RSUs converted to shares for the years ended December 31, 2017, 2016 and 2015 were $14.8 million, $5.0 million and$3.8 million, respectively. As of December 31, 2017, there was $5.5 million of total unrecognized compensation cost, net of expected forfeitures related tonon-vested RSUs granted, which is expected to be recognized through fiscal May 2020, with a weighted-average remaining vesting period of 0.7 years.Stock OptionsStock 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 orfour-year vesting schedule or performance based vesting as determined at the time of grant. Stock option awards generally have a term of 10 years.The fair value of options granted during the year ended December 31, 2015 was estimated on the date of grant using the Black-Scholes-Mertonoption pricing model using the following assumptions: the risk-free interest rate was 1.1% - 1.4%, the expected term was 4.3 years and expected volatilitywas 43%. The risk-free interest rate is based on the five-year62Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)U.S. Treasury Bill at the time of the grant. We utilize our historical experience in determining the expected term of our stock options and volatility of ourcommon stock. We have not historically issued dividends.Changes in our outstanding stock options during the years ended December 31, 2017, 2016 and 2015 were as follows: 2017 2016 2015 Shares Weighted-AverageExercise Price Shares Weighted-AverageExercise Price Shares Weighted-AverageExercise PriceOptions outstanding at beginning of period 474 $17.47 642 $17.11 1,022 $13.32Options granted — — — — 171 26.26Options exercised (152) 14.32 (156) 15.28 (366) 12.97Options forfeited (2) 26.32 (12) 26.32 (38) 14.55Options expired (3) 11.09 — — (147) 12.46Options outstanding at end of period 317 18.97 474 17.47 642 17.11 Options vested during the year 9 11 368 The total intrinsic value of options exercised for the years ended December 31, 2017, 2016 and 2015 were $9.7 million, $2.8 million and $5.2million, respectively. As of December 31, 2017, there was $0.1 million of total unrecognized compensation cost related to stock options granted andoutstanding, net of expected forfeitures related to non-vested options, which is expected to be recognized through May 2018, with a weighted-averageremaining vesting period of 0.1 years. Information about our stock options that are outstanding, options that we expect to vest and options that areexercisable at December 31, 2017 are as follows:Options Expected to Vest: Number Weighted-AverageExercise Price Weighted-AverageRemainingContractual Life AggregateIntrinsic ValueOptions outstanding 317 $18.97 5.2 years $15,375Options expected to vest 317 18.97 5.2 years 15,375Options exercisable 270 17.71 4.8 years 13,454The following table summarizes information about the stock options outstanding at December 31, 2017: Options Outstanding Options ExercisableRange of Exercise Prices NumberOutstanding Weighted-AverageRemaining ContractualLife Weighted-AverageExercise Price NumberExercisable Weighted-AverageExercise Price 7.69 - 11.02 45 3.3 years $9.74 45 $9.74 11.21 - 13.85 41 2.5 years 12.80 41 12.80 14.02 - 14.21 13 2.8 years 14.17 13 14.17 14.50 - 14.50 10 2.8 years 14.50 10 14.50 14.52 - 14.52 8 3.1 years 14.52 8 14.52 15.65 - 15.65 12 2.1 years 15.65 12 15.65 16.25 - 16.25 10 2.3 years 16.25 10 16.25 18.77 - 18.77 57 6.8 years 18.77 57 18.77 24.31 - 24.31 5 7.4 years 24.31 3 24.31 26.32 - 26.32 116 7.1 years 26.32 71 26.327.69 - 26.32 317 5.2 years 18.97 270 17.7163Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)Employee Stock Purchase PlanThe 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 areeligible 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 maycontribute 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 ofcommon 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 dateof each plan period or 2) 85% of the fair market value of our common shares on each plan period purchase date. At December 31, 2017, 0.3 million sharesremained 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, 2017, there was $0.2 million of totalunrecognized compensation cost related to the ESPP that is expected to be recognized over a remaining period of five months. Total compensation expensewas $0.2 million for the years ended December 31, 2017, 2016, and 2015.The fair value of each purchase right granted under the ESPP was estimated on the date of grant using the Black-Scholes-Merton option pricingmodel with the following assumptions: 2017 2016 2015Risk-free interest rates 1.07% - 1.45% 0.49% - 0.60% 0.07% - 0.42%Expected dividend yield rates —% —% —%Expected term 0.5 years 0.5 years 0.5 yearsExpected volatility 33.3% 28.2% 27.8%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 forselection of the expected dividend yield. The expected term is based on historical experience. Expected volatility is based on historical volatility of ourcommon shares using daily stock price observations.NOTE 14.RETIREMENT PLANSDefined contribution plansWe have a 401(k) profit sharing and retirement savings plan covering substantially all full-time U.S. employees. Participants may defer up to themaximum amount allowed as determined by law. Participants are immediately vested in their contributions. Profit sharing contributions to the plan, whichare discretionary, are approved by the Board of Directors. Vesting in the profit sharing contribution account is based on years of service, with mostparticipants fully vested after four years of credited service. For the years ended December 31, 2017, 2016, and 2015 our contribution for participants in our401(k) plan was based on matching 50% of contributions made by employees up to 6% of the employee’s compensation. During the years endedDecember 31, 2017, 2016, and 2015 we recognized total defined contribution plan costs of $1.1 million, $1.2 million, and $0.7 million, respectively.Defined benefit plansIn connection with the acquisition of HiTek Power Group, a privately-held provider of high voltage power solutions, in 2014, we acquired the HiTekPower Limited Pension Scheme ("the HiTek Plan"). The HiTek Plan has been closed to new participants since April 1, 2002 and to additional accruals sinceApril 5, 2005. In order to measure the expense and related benefit obligation, various assumptions are made including discount rates used to value theobligation, expected return on plan assets used to fund these expenses and estimated future inflation rates. These assumptions are based on historicalexperience as well as facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. The netamount of pension liability recorded as of December 31, 2017 and December 31, 2016 was $19.8 million and $18.8 million, respectively, and is included inOther long-term liabilities in our Consolidated Balance Sheets. Anticipated payments to pensioners covered by the HiTek Plan are expected to be between$0.8 million and $1.6 million for each of the next ten years. We are committed to make annual fixed payments of $0.9 million into the Hitek Plan throughApril 30, 2024, and then $1.8 million from May 1, 2024 through November 30, 2033. 64Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)The following table sets forth the components of net periodic pension cost for the year ended December 31, 2017: Year Ended December 31, 2017 2016 2015 Interest cost$809 $993 $1,093 Expected return on plan assets(597) (527) (562) Amortization of actuarial gains and losses503 264 373 Net periodic pension cost$715 $730 $904 Assumptions used in the determination of the net periodic pension cost are: Year Ended December 31, 2017 2016 2015Discount rate2.6% 2.8% 3.9%Expected long-term return on plan assets4.8% 4.7% 4.3%The status of the HiTek Plan as reflected in "Other long-term liabilities" on our Consolidated Balance Sheets is summarized as follows: Year Ended December 31, 2017 2016Projected benefit obligation, beginning of year$31,110 $31,466Interest cost809 993Actuarial loss35 5,377Benefits paid(944) (1,186)Translation adjustment2,897 (5,540)Projected benefit obligation, end of year$33,907 $31,110 Plan assets, beginning of year$12,274 $13,677Actual return on plan assets597 527Contributions877 802Benefits paid(944) (1,186)Actuarial gain179 620Translation adjustment1,127 (2,166)Plan assets, end of year$14,110 $12,274 Funded status of plan$(19,797) $(18,836)The fair value of the Company's qualified pension plan assets by category for the years ended December 31, are as follows: December 31, 2017 Level 1 Level 2 Level 3 TotalMulti-Asset Fund$— $4,784 $— $4,784Diversified Growth Fund— 5,009 — 5,009Index-Linked Gilts— 2,102 — 2,102Corporate Bonds— 2,173 — 2,173Cash42 — — 42Total$42 $14,068 $— $14,110 65Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data) December 31, 2016 Level 1 Level 2 Level 3 TotalMulti-Asset Fund$— $3,989 $— $3,989Diversified Growth Fund— 4,259 — 4,259Index-Linked Gilts— 1,915 — 1,915Corporate Bonds— 2,013 — 2,013Cash98 — — 98Total$98 $12,176 $— $12,274At December 31, 2017 the HiTek Plan assets of $14.1 million were invested in four separate funds including a multi-asset fund (33.9%), a diversifiedgrowth fund (35.5%), an Investment grade long-term bond fund (15.4%) and an index-linked gilt fund (14.9%). The asset and growth funds aim to generatean ‘equity-like’ return over an economic cycle with significantly reduced volatility relative to equity markets and have scope to use a diverse range of assetclasses, including equities, bonds, cash and alternatives, e.g. property, infrastructure, high yield bonds, floating rate debt, private, equity, hedge funds andcurrency. The bond fund and gilt fund are invested in index-linked gilts and corporate bonds. These investments are intended to provide a degree ofprotection against changes in the value of the HiTek Plan's liabilities related to changes in long-term expectations for interest rates and inflationexpectations.NOTE 15.COMMITMENTS AND CONTINGENCIESDisputes and Legal ActionsWe are involved in disputes and legal actions arising in the normal course of our business. While we currently believe that the amount of anyultimate loss would not be material to our financial position, the outcome of these actions is inherently difficult to predict. In the event of an adverseoutcome, the ultimate loss could have a material adverse effect on our financial position or reported results of operations. An unfavorable decision in patentlitigation also could require material changes in production processes and products or result in our inability to ship products or components found to haveviolated third-party patent rights. We accrue loss contingencies in connection with our commitments and contingencies, including litigation, when it isprobable that a loss has occurred, and the amount of the loss can be reasonably estimated. The Company is currently not a party to any legal action that theCompany believes would reasonably have a material adverse impact on its business, financial condition, results of operations or cash flows.Operating LeasesWe have various operating leases for automobiles, equipment, and office and production facilities. Rent expense under operating leases wasapproximately $6.5 million in 2017, $6.4 million in 2016, and $5.3 million in 2015.The future minimum rental payments required under non-cancelable operating leases as of December 31, 2017 are as follows:2018$7,10920196,38120205,80220214,20420221,273Thereafter3,586 $28,355NOTE 16.RESTRUCTURING COSTSIn June 2015, we committed to a restructuring plan in relation to the wind down of our Inverter business. Charges related to this plan that have aneffect on continuing operations include strategic headcount reductions, streamlining operational processes and condensing administrative functions toimprove efficiencies. This plan was completed in the fourth quarter of 2015. Total cumulative costs through December 31, 2015 were $0.3 million. We didnot incur additional costs related to this plan in 2016 or 2017.66Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)NOTE 17.RELATED PARTY TRANSACTIONSMembers of our Board of Directors hold various executive positions and serve as directors at other companies, including companies that are ourcustomers. During the years ended December 31, 2017, 2016, and 2015, we engaged in the following transactions with companies related to members of ourBoard of Directors, as described below: Years Ended December 31, 2017 2016 2015Sales to related parties$1,425 $616 $706Number of related party customers1 2 3Purchases from related parties$— $43 $40Number of related party vendors— 1 2Our accounts receivable balance from related party customers with outstanding balances as of December 31, 2017 and December 31, 2016 is asfollows: December 31, December 31, 2017 2016Accounts receivable from related parties$27 $—Number of related party customers1 —We did not have any outstanding accounts payable with our related parties as of December 31, 2017 or December 31, 2016.NOTE 18.GEOGRAPHIC AND SIGNIFICANT CUSTOMER INFORMATIONWe have operations in the United States, Europe and Asia. Sales and long-lived assets by geographic area and information relating to majorcustomers are presented below. Sales attributed to individual countries are based on customer location. Years Ended December 31, 2017 2016 2015Sales to external customers: United States $453,095 67.5% $327,397 67.7% $268,257 64.7%Canada 37 —% 161 —% 195 —%North America 453,132 67.5% 327,558 67.7% 268,452 64.7% People's Republic of China 34,045 5.1% 16,207 3.4% 12,687 3.1%Other Asian countries 104,595 15.6% 77,638 16.1% 61,839 15.0%Asia 138,640 20.7% 93,845 19.5% 74,526 18.0% Germany 57,351 8.6% 48,589 10.0% 46,719 11.3%United Kingdom 14,299 2.1% 13,712 2.8% 25,100 6.0%Other European countries 7,590 1.1% — —% 14 —%Europe 79,240 11.8% 62,301 12.8% 71,833 17.3%Total sales $671,012 100.0% $483,704 100.0% $414,811 100.0%Sales to Applied Materials Inc., our largest customer, was $224.8 million or 33.5% of total sales for 2017, $170.2 million, or 35.2% of total sales for2016 and $123.5 million, or 29.8% of total sales for 2015. Sales to Lam Research were $155.3 million or 23.1% of total sales for 2017, $100.3 million, or20.7% of total sales for 2016 and $84.2 million, or 20.3% of total sales for 2015. Our sales to Applied Materials and Lam Research include precision powerproducts used in semiconductor processing and solar, flat panel display, and architectural glass applications. No other customer accounted for 10% or more ofour sales during these periods.67Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data) December 31, 2017 2016Long-lived assets: United States $32,528 $33,652Asia 7,601 3,596Europe 64,977 46,285 $105,106 $83,533Long-lived assets include property and equipment, goodwill and other intangible assets.NOTE 19.CREDIT FACILITYOn July 28, 2017, the Company entered into a Loan Agreement (the “Loan Agreement”) with Bank of America N.A. ("BA") which provides arevolving line of credit of up to $100.0 million subject to certain funding conditions through July 28, 2022. On December 21, 2017, the Company enteredinto the First Amendment to the Loan Agreement with BA to increase the line of credit to $150.0 million. Interest on amounts drawn shall be paid quarterlybased upon the LIBOR Daily Floating Rate then in effect, plus between one and one-quarter (1.25%) and one and three-quarters (1.75%) percentage pointsdepending on the Funded Debt to EBITDA ratio. As of December 31, 2017, the interest rate was 2.82%. The Loan Agreement also requires the Company topay the lender on a quarterly basis an unused commitment fee based on credit availability. The obligations under the Loan Agreement are unsecured until theFunded Debt to EBITDA ratio exceeds 2.0 to 1.0, at which time the Company and certain affiliates’ tangible and intangible personal property will be subjectto a first priority, perfected lien and security interest in favor of BA pursuant to a Security Agreement. As of December 31, 2017, the Company is incompliance with all covenants required under the Loan Agreement. Our credit availability under the Loan Agreement was $150.0 million at December 31,2017.On September 9, 2016, the Company terminated its Credit Agreement with Wells Fargo Bank, National Association ("Wells Fargo") which providedfor a secured revolving credit facility of up to $50.0 million (the "Credit Facility"), subject to a borrowing base calculation. The Company had nooutstanding balances at December 31, 2015 and no borrowing during 2016 until the determination of the Credit Agreement.Expense relating to interest, unused commitment fees and amortization of debt issuance costs included in our income from continuing operations isas follows: Years Ended December 31, 2017 2016 2015Credit facility costs 66 346 456NOTE 20.SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)The following tables present unaudited quarterly results for each of the eight quarters in the periods ended December 31, 2017 and 2016, inthousands. We believe that all necessary adjustments have been included in the amounts stated below to present fairly such quarterly information. Due to thevolatility of the industries in which our customers operate, the operating results for any quarter are not necessarily indicative of results for any subsequentperiod.68Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data) Quarter Ended December 31, 2017 September 30, 2017 June 30, 2017 March 31, 2017Sales $179,214 $176,575 $165,872 $149,351Gross Profit $98,175 $92,234 $87,141 $78,831Operating income $58,062 $51,673 $47,767 $43,268Income (loss) from continuing operations, net of income taxes $(29,007) $83,794 $45,873 $35,441Income (loss) from discontinued operations, net of income taxes $(583) $70 $179 $2,094Net income (loss) $(29,590) $83,864 $46,052 $37,535Earnings (Loss) Per Share: Continuing Operations: Basic earnings (loss) per share $(0.73) $2.11 $1.15 $0.89Diluted earnings (loss) per share $(0.73) $2.09 $1.14 $0.88Discontinued Operations: Basic earnings (loss) per share $(0.01) $— $— $0.05Diluted earnings (loss) per share $(0.01) $— $— $0.05Net Income (Loss): Basic earnings (loss) per share $(0.75) $2.11 $1.16 $0.94Diluted earnings (loss) per share $(0.75) $2.09 $1.14 $0.93 Quarter Ended December 31, 2016 September 30, 2016 June 30, 2016 March 31, 2016Sales $135,343 $126,552 $118,765 $103,044Gross Profit $71,518 $66,123 $62,046 $53,460Operating income $38,546 $34,361 $30,329 $23,621Income from continuing operations, net of income taxes $40,436 $29,038 $27,254 $20,220Income (loss) from discontinued operations, net of income taxes $3,845 $1,323 $3,277 $2,061Net income (loss) $44,281 $30,361 $30,531 $22,281Earnings per Share: Continuing Operations: Basic earnings per share $1.02 $0.73 $0.69 $0.51Diluted earnings per share $1.01 $0.73 $0.68 $0.50Discontinued Operations: Basic earnings (loss) per share $0.10 $0.03 $0.08 $0.05Diluted earnings (loss) per share $0.10 $0.03 $0.08 $0.05Net Income (loss): Basic earnings (loss) per share $1.12 $0.77 $0.77 $0.56Diluted earnings (loss) per share $1.11 $0.76 $0.76 $0.5669Table of Contents ADVANCED ENERGY INDUSTRIES, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)(in thousands, except per share data)NOTE 21.SUBSEQUENT EVENTSTrek AcquisitionOn February 1, 2018, Advanced Energy acquired Trek Holding Co., LTD ("Trek"), a privately held company with operations in Tokyo, Japan andLockport, New York for a purchase price of $11.8 million in cash. Trek has a 95% ownership interest in its U.S. subsidiary which is also its primary operation.Trek designs, manufactures and sells high-voltage amplifiers, power supplies and generators, high-performance electrostatic measurement instruments andelectrostatic discharge (ESD) sensors and monitors to the global marketplace. Trek's standard and custom-OEM products are used in industry and research inaerospace, automotive, electronics, electrostatics, materials, medical, military, nanotechnology, photovoltaic/solar, physics, plasma, semiconductor and testand measurement applications. For the twelve months ended December 31, 2017, Trek reported unaudited sales of approximately $20 million. Trek’scomprehensive portfolio of power supply products strengthen and accelerate Advanced Energy’s growth in high voltage applications.ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENone.ITEM 9A.CONTROLS AND PROCEDURESEvaluation of Disclosure Controls and ProceduresWe have established disclosure controls and procedures, which are designed to ensure that information required to be disclosed in reports filed orsubmitted under the Securities Exchange Act of 1934 (the "Act") is recorded, processed, summarized, and reported, within the time periods specified in theSecurities and Exchange Commission’s rules and forms. These disclosure controls and procedures include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed in the reports that we file or submit under the Act is accumulated and communicated tomanagement, including our Principal Executive Officer (Yuval Wasserman, Chief Executive Officer) and Principal Financial Officer (Thomas McGimpsey,Executive Vice President, General Counsel and 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 ExecutiveOfficer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures pursuant to the Exchange ActRule 13a-15(b). Based upon this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedureswere effective as of December 31, 2017. The conclusions of the Chief Executive Officer and Chief Financial Officer from this evaluation were communicatedto the Audit Committee. We intend to continue to review and document our disclosure controls and procedures, including our internal controls andprocedures for financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve withour business.Management’s Annual Report on Internal Control over Financial ReportingIt is management’s responsibility to establish and maintain effective internal control over our financial reporting, which is a process designed underthe supervision of our Chief Executive Officer and Chief Financial Officer and effected by our Board of Directors, management, and other personnel. Ourinternal control over financial reporting is designed to provide reasonable assurance concerning the reliability of our financial reporting and the preparationof 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 controlover financial reporting as of December 31, 2017, using the criteria described in Internal Control-Integrated Framework (2013) issued by the Committee ofSponsoring Organizations of the Treadway Commission. Based upon this evaluation, management concluded that our internal control over financialreporting was effective as of December 31, 2017.Grant Thornton LLP, an independent registered public accounting firm, has audited our Consolidated Financial Statements included in thisForm 10-K, and as part of the audit, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting as ofDecember 31, 2017.Attestation Report of Independent Registered Public Accounting FirmThe attestation report required under this Item 9A is contained in Item 8 of Part II of this Annual Report on Form 10-K under the heading “Report ofIndependent Registered Public Accounting Firm.”70Table of ContentsChanges in Internal Control over Financial ReportingThere was no change in our internal control over financial reporting that occurred during 2017 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.Limitations on Controls and ProceduresManagement has concluded that our disclosure controls and procedures and internal control over financial reporting provide reasonable assurancethat the objectives of our control system are met. We do not expect, however, that our disclosure controls and procedures or internal control over financialreporting will prevent or detect all misstatements, errors, or fraud, if any. All control systems, no matter how well designed and implemented, have inherentlimitations, and therefore no evaluation can provide absolute assurance that every misstatement, error, or instance of fraud, if any, or risk thereof, has been orwill be prevented or detected. The occurrence of a misstatement, error, or fraud, if any, would not necessarily require a conclusion that our controls andprocedures are not effective.ITEM 9B.OTHER INFORMATIONNone.71Table of ContentsPART IIIIn accordance with General Instruction G(3) of Form 10-K, certain information required by this Part III is incorporated by reference to the definitiveproxy statement relating to our 2018 Annual Meeting of Stockholders (the “2018 Proxy Statement”), as set forth below. The 2018 Proxy Statement will befiled with the Securities and Exchange Commission within 120 days after the end of our fiscal year.ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEThe information set forth in the 2018 Proxy Statement under the headings “Proposal No. 1/ Election of Directors” and "Section 16(a) BeneficialOwnership Reporting Compliance" is incorporated herein by reference. The information under the heading “Executive Officers of the Registrant” in Part I ofthis Form 10-K is also incorporated herein by reference.The Company has adopted a Code of Ethical Conduct that applies to all of the Company’s employees, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer and other persons performing similar functions. The Company has posted a copy of the Code of Ethical Conduct on itswebsite at www.advanced-energy.com, and such Code of Ethical Conduct is available, in print, without charge, to any shareholder who requests it from theCompany’s Secretary. The Company intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, or waivers from,the Code of Ethical Conduct by posting such information on its website at www.advanced-energy.com. The Company is not including the informationcontained on its website as part of, or incorporating it by reference into, this report.ITEM 11.EXECUTIVE COMPENSATIONThe information set forth in the 2018 Proxy Statement under the headings “Executive Compensation” is incorporated herein by reference.ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERSThe information set forth in the 2018 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 TRANSACTIONSThe information is set forth in Note 17. Related Party Transactions in ITEM 8 "Financial Statements and Supplementary Data," and in the 2018Proxy Statement under the captions "Election of Directors" and “Certain Relationships and Related Transactions” is incorporated herein by reference.ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICESThe information set forth in the 2018 Proxy Statement under the caption “Ratification of the Appointment of Grant Thornton LLP as AdvancedEnergy's Independent Registered Public Accounting Firm for 2018” is incorporated herein by reference.72Table of ContentsPART IVITEM 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 LLPConsolidated Balance Sheets at December 31, 2017 and 2016Consolidated Statements of Operations for each the years ended December 31, 2017, 2016 and 2015Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2017, 2016 and 2015Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015Notes to Consolidated Financial Statements2. Financial Statement Schedules for the years ended December 31, 2017, 2016 and 2015NOTE: All schedules have been omitted because they are either not applicable or the required information is included in the financial statements andnotes thereto.(B) Exhibits:3.1Restated Certificate of Incorporation. (2) 3.2Certificate of Amendment of Restated Certificate of Incorporation. (2) 3.3Certificate of Amendment of Restated Certificate of Incorporation. (3) 3.4Certificate of Amendment of Restated Certificate of Incorporation. (3) 3.5Amended and Restated By-laws of Advanced Energy Industries, Inc. (17) 3.6Fifth Amendment to the By-laws of Advanced Energy Industries, Inc. (28) 4.1Form of Specimen Certificate for Common Stock. (1) 10.1Lease Agreement, dated as of December 28, 2011, by and between Sharp Point Properties, LLC and Advanced Energy Industries, Inc., for abuilding located at 1625 Sharp Point Drive, Fort Collins, Colorado. (12) 10.2Lease Agreement, dated as of December 28, 2011, by and between Sharp Point Properties, LLC and Advanced Energy Industries, Inc., for abuilding located at 2424 Midpoint Drive, Fort Collins, Colorado. (12) 10.3Lease dated January 16, 2003, by and between China Great Wall Computer Shenzhen Co., Ltd., Great Wall Limited and Advanced EnergyIndustries (Shenzhen) Co., Ltd., for a building located in Shenzhen, China. (4) 10.4Form of Indemnification Agreement. (1) 10.5Form of Director Indemnification Agreement. (9) 10.6Form of Notice of Grant for Restricted Stock Unit. (16)* 10.7Form of Restricted Stock Unit Agreement. (16)* 10.8Form of Notice of Grant of Stock Option. (16)* 10.9Form of Incentive Stock Option Agreement. (16)* 10.10Form of Non-Qualified Stock Option Agreement. (16)*73Table of Contents 10.11Form of LTI Notice of Grant. (16)* 10.12Form of LTI Performance Stock Option Agreement pursuant to the 2008 Omnibus Incentive Plan. (16)* 10.13Form of LTI Performance Stock Unit Agreement pursuant to the 2008 Omnibus Incentive Plan. (16)* 10.14Non-employee Director Compensation summary. (7)* 10.15Non-Employee Director Compensation Structure. (8)* 10.16Non-Employee Director Compensation Structure for 2016.(24)* 10.172017 Long-Term Incentive (LTI) Plan. (25)* 10.182017 Short-Term Incentive (STI) Plan. (26)* 10.192017 Omnibus Incentive Plan. (25)* 10.202008 Omnibus Incentive Plan, as amended May 4, 2010. (10)* 10.21Employee Stock Purchase Plan. (1)* 10.22Form of Executive Change in Control Severance Agreement. (5)* 10.23Form of Amendment to Executive Change in Control Agreement. (14)* 10.24Offer Letter, dated September 28, 2014, by and among Advanced Energy Industries, Inc. and Yuval Wasserman. (20)* 10.25Executive Change in Control Agreement, dated September 30, 2014, by and among Advanced Energy Industries, Inc. and Yuval Wasserman.(20)* 10.26Executive Change in Control Agreement, dated April 28, 2011, by and among Advanced Energy Industries Inc. and Thomas O. McGimpsey.(13)* 10.27Executive Separation Agreement and Release of all Claims, dated May 5, 2014, by and between Advanced Energy Industries, Inc. and GordonTredger. (18)* 10.28Executive Transition and Separation Agreement, dated May 31, 2014, by and between Advanced Energy Industries, Inc. and Garry Rogerson.(19)* 10.29Executive Transition and Separation Agreement, dated November 17, 2014, by and between Advanced Energy Industries, Inc. and Danny C.Herron. (21)* 10.30Offer Letter to Thomas Liguori dated April 8, 2015. (22)* 10.31Executive Change in Control Agreement, dated May 18, 2015, by and among Advanced Energy Industries, Inc. and Thomas Liguori. (22)* 10.32Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials Inc. dated August 29, 2005. (6)+ 10.33Shipping Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials Inc. datedAugust 29, 2005. (6)+ 10.34Bridge Amendment to the Global Supply Agreement by and between Advanced Energy Industries, Inc. and Applied Materials Inc. datedJanuary 28, 2011. (11)+ 10.35Sale and Purchase Agreement by and among Advanced Energy Industries, Inc., Blitz S13-103 GmbH, Jolaos Verwaltungs GmbH and PrettlBeteiligungs Holdings, GmbH, dated as of April 8, 2013. (15) 10.36Loan Agreement, dated July 28, 2017, by and between Advanced Energy Industries, Inc. and Bank of America, N.A. (27) 74Table of Contents10.37First Amendment to Loan Agreement, dated December 21, 2017, by and between Advanced Energy Industries, Inc. and Bank of America, N.A.(29) 10.38Continuing and Unconditional Guaranty dated July 28, 2017 among Ultraviolet Group, Inc., AE Solar Energy, Inc., Ultravolt, Inc., AEI USSubsidiary, LLC, AEI Global Holdings, LLC and Sekidenko, Inc. (27) 10.39Form of Security and Pledge Agreement among Advanced Energy Industries, Inc., Ultraviolet Group, Inc., AE Solar Energy, Inc., Ultravolt,Inc., AEI US Subsidiary, LLC, AEI Global Holdings, LLC, Sekidenko, Inc. and Bank of America, N.A. (27) 10.40Fixed Dollar Accelerated Share Repurchase Transaction, dated November 6, 2015, between Advanced Energy Industries, Inc. and MorganStanley & Co. LLC. (23)11.1Computation of per share earnings (contained in Note 5 of “Notes to Consolidated Financial Statements” of the Company's Annual Report onForm 10-K for the year ended December 31, 2017). 21.1Subsidiaries of Advanced Energy Industries, Inc. 23.1Consent of Grant Thornton LLP, Independent Registered Public Accounting Firm. 31.1Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. 31.2Certification of the Principal Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as adopted pursuant toSection 302 of the Sarbanes-Oxley Act of 2002. 32.1Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 32.2Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Actof 2002. 101.INSXBRL Instance Document 101.CALXBRL Taxonomy Extension Calculation Linkbase Document 101.DEFXBRL Taxonomy Extension Definition Linkbase Document 101.LABXBRL Taxonomy Extension Label Linkbase Document 101.PREXBRL 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 yearended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Operations, (ii)the Consolidated Statements of Comprehensive Income (Loss), (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements ofCash Flows, (v) the Consolidated Statements of Stockholders’ Equity, and (vi) the Notes to the Consolidated Financial Statements._____________________________________(1)Incorporated by reference to the Registrant’s Registration Statement on Form S-1 (File No. 33-97188), filed September 21, 1995.(2)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (File No. 000-26966), filed July 28,1999.(3)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003 (File No. 000-26966), filedNovember 4, 2003.(4)Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 000-26966), filedFebruary 24, 2004.(5)Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004 (File No. 000-26966), filed March31, 2005.(6)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2005 (File No. 000-26966), filedNovember 7, 2005.(7)Incorporated by reference to the Registrant’s Current Report on Form 10-K (File No. 000-26966), filed February 24, 2016.75Table of Contents(8)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed July 28, 2006.(9)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed December 14, 2009.(10)Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010 (File No. 000-26966), filed March2, 2011.(11)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2011 (File No. 000-26966), filed May6, 2011.(12)Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966), filed December 29, 2011.(13)Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2011 (File No. 000-26966), filed March2, 2012.(14)Incorporated by reference to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2012 (File No. 000-26966), filed March6, 2013.(15)Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed April 11, 2013.(16)Incorporated by reference to the Registrant's Current Report on Form 8-K (File No. 000-26966) filed May 10, 2013.(17)Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013 (File No. 000-26966), filed August6, 2013.(18)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed May 5, 2014.(19)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed June 2, 2014.(20)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed October 1, 2014.(21)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed November 18, 2014.(22)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed April 16, 2015.(23)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966) filed November 6, 2015.(24)Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 000-26966), filedFebruary 24, 2017.(25)Incorporated by reference to Appendix A of the Registrant’s Proxy Statement for the Registrant’s 2017 Annual Meeting of Shareholders (File No.000-26966), filed March 14, 2017.(26)Incorporated by reference to Appendix B of the Registrant’s Proxy Statement for the Registrant’s 2017 Annual Meeting of Shareholders (File No.000-26966), filed March 14, 2017.(27)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed July 31, 2017.(28)Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 (File No. 000-26966), filed July 31,2017.(29)Incorporated by reference to the Registrant’s Current Report on Form 8-K (File No. 000-26966), filed December 21, 2017.* Compensation Plan+Confidential treatment has been granted for portions of this agreement.76Table of ContentsSIGNATURESPursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Annual Report onForm 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 15, 2018Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalfof the registrant and in the capacities and on the dates indicated.Signatures Title Date /s/ Yuval Wasserman Chief Executive Officer and Director February 15, 2018Yuval Wasserman /s/ Thomas McGimpsey Interim Chief Financial Officer, Executive Vice President, GeneralCounsel & Corporate Secretary February 15, 2018Thomas McGimpsey /s/ Grant H. Beard Chairman of the Board February 15, 2018Grant H. Beard /s/ Frederick A. Ball Director February 15, 2018Frederick A. Ball /s/ Ronald C. Foster Director February 15, 2018Ronald C. Foster /s/ Edward C. Grady Director February 15, 2018Edward C. Grady /s/ Thomas M. Rohrs Director February 15, 2018Thomas M. Rohrs /s/ John A. Roush Director February 15, 2018John A. Roush 77SUBSIDIARIES OF THE REGISTRANTName Jurisdiction ofIncorporation orOrganizationAdvanced Energy Japan K.K JapanAdvanced Energy Industries U.K. Limited United KingdomAdvanced Energy Industries GmbH GermanyAdvanced Energy Taiwan, Ltd. TaiwanAdvanced Energy Industries, Inc., Shanghai ChinaAdvanced Energy Industries (Shenzhen) Co., Ltd. (manufacturing) ChinaAEI International Holdings CV NetherlandsAE Korea, Ltd. South KoreaAEI Korea Services, Ltd. South KoreaTamio Limited Hong KongAdvanced Energy Industries ChinaWankia Limited Hong KongAdvanced Energy Industries Limited Hong KongFuyogo Limited Hong KongAEI Canada, Inc. CanadaAdvanced Energy Singapore, Pte. Ltd. SingaporeAdvanced Energy Services Pte. Ltd. SingaporeAE Solar Energy, Inc. OregonSekidenko, Inc. WashingtonAEI US Subsidiary, Inc. DelawareAEI Holdings, GmbH GermanyAEI Power GmbH GermanyAEI Power India Pvt. Ltd. IndiaHV Investments Ltd. U.K. United KingdomAscent Investments Ltd. U.K. United KingdomMelbourne Group Ltd. U.K. United KingdomHiTek Power Ltd. U.K. United KingdomHiTek Power GmbH GermanyUltraVolt Group, Inc. DelawareUltraVolt, Inc. New YorkSolvix GmbH SwitzerlandSolvix LLC ColoradoAEI Finance Verwaltungs GmbH GermanyAEI Finance GmbH & Co., KG GermanyAE Precision Power Products Pvt. Ltd. IndiaAEI Finance Ltd. Hong KongAdvanced Energy Xi'an Co. Ltd. ChinaAEI Irish Holdings Ltd. IrelandExcelsys Holdings Ltd. IrelandExcelsys Group Ltd. IrelandExcelsys Technologies Ltd. IrelandAES Global Holdings PTE Ltd. SingaporeAdvanced Energy Industries Israel Ltd. IsraelIllumination Merger Sub. Inc. DelawareAEI Global Holdings CV NetherlandsAEI Global Holdings LLC DelawareHiTek DB Pension Scheme Trustees Ltd. EnglandConsent of Independent RegisteredPublic Accounting FirmWe have issued our reports dated February 15, 2018, with respect to the consolidated financial statements, and internal control over financial reportingincluded in the Annual Report of Advanced Energy Industries, Inc. on Form 10-K for the year ended December 31, 2017. We consent to the incorporation byreference of said reports in the Registration Statements of Advanced Energy Industries, Inc. on Forms S-8 (File Nos. 333-01616, 333-04073, 333-46705, 333-57233, 333-65413, 333-79425, 333-79429, 333-62760, 333-69148, 333-69150, 333-87718, 333-105367, 333-105366, 333-105365, 333-129859, 333-129858, 333-147289, 333-152865, 333-167741, 333-168519, and 333-221376) and Forms S-3 (File Nos. 333-167027, 333-167027, 333-110534, 333-87720, 333-72748, 333-72748, 333-72748, 333-72748, 333-72748, 333-72748, 333-72748, 333-72748, 333-72748, 333-47114, 333-37378, 333-87455,333-87459, 333-87459, 333-87455, 333-34039, 333-34039, and 333-34039)./s/ GRANT THORNTON LLPDenver, ColoradoFebruary 15, 2018EXHIBIT 31.1 I, Yuval Wasserman, certify that:1.I have reviewed this annual report on Form 10-K for the period ended December 31, 2017 of Advanced Energy Industries, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 15, 2018 /s/ Yuval Wasserman Yuval Wasserman Chief Executive Officer EXHIBIT 31.2 I, Thomas McGimpsey, certify that:1.I have reviewed this annual report on Form 10-K for the period ended December 31, 2017 of Advanced Energy Industries, Inc.;2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport;3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this report is being prepared;b.Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under oursupervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements forexternal purposes in accordance with generally accepted accounting principles;c.Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; andd.Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's mostrecent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likelyto materially affect, the registrant's internal control over financial reporting; and5.The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; andb.Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internalcontrol over financial reporting.Date: February 15, 2018 /s/ Thomas McGimpsey Thomas McGimpsey Interim Chief Financial Officer, Executive Vice President, General Counsel &Corporate Secretary EXHIBIT 32.1Certification of the Chief Executive OfficerPursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002In connection with the accompanying annual report on Form 10-K of Advanced Energy Industries, Inc. (the “Company”) for the year ended December 31,2017 (the “Report”), I, Yuval Wasserman, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 15, 2018 /s/ Yuval Wasserman Yuval Wasserman Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished tothe Securities and Exchange Commission or its staff upon requestEXHIBIT 32.2Certification of the Chief Financial OfficerPursuant to 18 U.S.C. Section 1350,as Adopted Pursuant to Section 906of the Sarbanes-Oxley Act of 2002In connection with the accompanying annual report on Form 10-K of Advanced Energy Industries, Inc. (the “Company”) for the year ended December 31,2017 (the “Report”), I, Thomas McGimpsey, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant toSection 906 of the Sarbanes-Oxley Act of 2002, that:(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.Date: February 15, 2018 /s/ Thomas McGimpsey Thomas McGimpsey Interim Chief Financial Officer, Executive Vice President, General Counsel& Corporate Secretary A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnishedto the Securities and Exchange Commission or its staff upon request.

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