Fei 10Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_____________________________________________

FORM 10-Q

_____________________________________________



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

For the quarterly period ended September 30, 2012



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

For the transition period from to

Commission File No. 000-22780

_____________________________________________

FEI COMPANY

(Exact name of registrant as specified in its charter)

_____________________________________________



Oregon		93-0621989
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5350 NE Dawson Creek Drive, Hillsboro, Oregon		97124-5793
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: 503-726-7500

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

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

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



Large accelerated filer	x		Accelerated filer	o

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

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

The number of shares of common stock outstanding as of October 29, 2012 was 38,107,724.

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FEI COMPANY

FORM 10-Q QUARTERLY REPORT

TABLE OF CONTENTS



		Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011	2

	Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended September 30, 2012 and October 2, 2011	3

	Consolidated Statements of Comprehensive Income (Loss) for the thirteen and thirty-nine weeks ended September 30, 2012 and October 2, 2011	4

	Consolidated Statements of Cash Flows for the thirty-nine weeks ended September 30, 2012 and October 2, 2011	5

	Condensed Notes to the Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 6.	Exhibits	40

Signatures		41

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PART I - FINANCIAL INFORMATION


Item 1.	Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)



	September 30, 2012		December 31, 2011
Assets
Current Assets:
Cash and cash equivalents	$	261,892	$	320,361
Short-term investments in marketable securities	37,914		16,213
Short-term restricted cash	5,993		22,564
Receivables, net of allowances for doubtful accounts of $5,414 and $5,553	221,814		185,955
Inventories	196,504		182,010
Deferred tax assets	16,696		18,899
Other current assets	34,593		27,964
Total current assets	775,406		773,966
Non-current investments in marketable securities	31,840		53,341
Long-term restricted cash	22,165		43,669
Property, plant and equipment, net of accumulated depreciation of $114,803 and $106,760	99,774		85,082
Intangible assets, net of accumulated amortization of $8,898 and $5,706	52,416		6,938
Goodwill	129,667		58,053
Deferred tax assets	4,573		934
Non-current inventories	66,366		57,575
Other assets, net	9,185		10,351
Total Assets	$	1,191,392	$	1,089,909
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	57,945	$	52,470
Accrued payroll liabilities	34,801		46,698
Accrued warranty reserves	12,298		11,683
Accrued agent commissions	11,756		9,005
Short-term deferred revenue	69,722		72,730
Income taxes payable	8,355		11,260
Accrued restructuring, reorganization, relocation and severance	—		2,213
Convertible debt	89,010		—
Other current liabilities	53,402		48,623
Total current liabilities	337,289		254,682
Long-term convertible debt	—		89,011
Long-term deferred revenue	25,681		23,423
Deferred tax liabilities	17,295		6,607
Other liabilities	15,737		19,372
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	—		—
Common stock - 70,000 shares authorized; 38,107 and 37,866 shares issued and outstanding, no par value	507,912		493,698
Retained earnings	257,684		178,661
Accumulated other comprehensive income	29,794		24,455
Total Shareholders’ Equity	795,390		696,814
Total Liabilities and Shareholders’ Equity	$	1,191,392	$	1,089,909

See accompanying Condensed Notes to the Consolidated Financial Statements.

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FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Net sales:
Products	$	172,359		$	161,255		$	514,347		$	486,183
Service and components	49,426			44,080			146,445			127,253
Total net sales	221,785			205,335			660,792			613,436
Cost of sales:
Products	86,333			85,228			259,664			255,079
Service and components	31,296			28,882			94,432			85,533
Total cost of sales	117,629			114,110			354,096			340,612
Gross profit	104,156			91,225			306,696			272,824
Operating expenses:
Research and development	23,908			19,212			69,936			56,771
Selling, general and administrative	41,931			37,051			125,299			111,607
Restructuring, reorganization, relocation and severance	—			47			—			1,115
Total operating expenses	65,839			56,310			195,235			169,493
Operating income	38,317			34,915			111,461			103,331
Other expense:
Interest income	299			737			1,254			1,918
Interest expense	(990		)	(1,032		)	(3,077		)	(3,207		)
Other, net	(1,021		)	(306		)	(3,207		)	(427		)
Total other expense, net	(1,712		)	(601		)	(5,030		)	(1,716		)
Income before income taxes	36,605			34,314			106,431			101,615
Income tax expense	7,447			8,137			21,313			27,066
Net income	$	29,158		$	26,177		$	85,118		$	74,549
Basic net income per share	$	0.76		$	0.68		$	2.24		$	1.93
Diluted net income per share	$	0.71		$	0.63		$	2.08		$	1.80
Cash dividends declared per share	$	0.08		$	—		$	0.16		$	—
Shares used in per share calculations:
Basic	38,082			38,421			37,987			38,628
Diluted	41,771			42,030			41,644			42,284

See accompanying Condensed Notes to the Consolidated Financial Statements.

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FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

(Unaudited)



	Thirteen Weeks Ended					Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011			September 30, 2012			October 2, 2011
Net income	$	29,158	$	26,177		$	85,118		$	74,549
Other comprehensive income (loss), net of taxes:
Change in cumulative translation adjustment	11,642		(27,017		)	2,025			(1,994		)
Change in unrealized gain (loss) on available-for-sale securities	8		25			(13		)	9
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	2,223		(3,937		)	1,240			2,065
Reclassification to net income of previously deferred losses (gains) related to hedge derivatives instruments	708		(1,051		)	2,087			(3,879		)
Comprehensive income (loss)	$	43,739	$	(5,803	)	$	90,457		$	70,750

See accompanying Condensed Notes to the Consolidated Financial Statements.

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FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)



	Thirty-Nine Weeks Ended
	September 30, 2012			October 2, 2011
Cash flows from operating activities:
Net income	$	85,118		$	74,549
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	16,317			14,037
Amortization	3,472			1,450
Stock-based compensation	10,083			7,783
Other	4			3
Income taxes payable, net	16			21,842
Deferred income taxes	(566		)	(9,750		)
Increase, net of acquisitions, in:
Receivables	(31,758		)	(18,648		)
Inventories	(23,044		)	(38,371		)
Other assets	(7,894		)	(7,509		)
Increase (decrease), net of acquisitions, in:
Accounts payable	3,787			3,247
Accrued payroll liabilities	(18,331		)	5,815
Accrued warranty reserves	451			2,677
Deferred revenue	(9,061		)	(7,663		)
Accrued restructuring, reorganization, relocation and severance	(2,212		)	(4,606		)
Other liabilities	(1,064		)	7,932
Net cash provided by operating activities	25,318			52,788
Cash flows from investing activities:
Decrease (increase) in restricted cash	38,111			(4,330		)
Acquisition of property, plant and equipment	(14,746		)	(9,105		)
Payments for acquisitions, net of cash acquired	(93,368		)	—
Purchase of investments in marketable securities	(109,689		)	(110,567		)
Redemption of investments in marketable securities	109,478			114,025
Other	(10,524		)	(888		)
Net cash used in investing activities	(80,738		)	(10,865		)
Cash flows from financing activities:
Dividends paid on common stock	(3,046		)	—
Withholding taxes paid on issuance of vested restricted stock units	(1,545		)	(1,592		)
Proceeds from exercise of stock options and employee stock purchases	7,618			20,162
Excess tax benefit for share based payment arrangements	904			1,066
Repurchases of common stock	(890		)	(50,000		)
Other financing activities	(1,869		)	—
Net cash provided by (used in) financing activities	1,172			(30,364		)
Effect of exchange rate changes	(4,221		)	(181		)
(Decrease) increase in cash and cash equivalents	(58,469		)	11,378
Cash and cash equivalents:
Beginning of period	320,361			277,617
End of period	$	261,892		$	288,995
Supplemental Cash Flow Information:
Cash paid for income taxes, net	$	20,437		$	8,384
Cash paid for interest	2,051			2,191
Increase in fixed assets related to transfers with inventories	13,482			2,623
Dividends declared but not paid	3,049			—

See accompanying Condensed Notes to the Consolidated Financial Statements.

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FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


NOTE 1.	ORGANIZATION AND BASIS OF PRESENTATION

Nature of Business

We are a leading supplier of scientific instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research applications. We report our revenue based on a market-focused organization: the Electronics market segment, the Materials Science market segment, the Life Sciences market segment and the Service and Components market segment.

Our products include transmission electron microscopes, or TEMs; scanning electron microscopes, or SEMs; DualBeam^TM systems which combine a SEM and a focused ion beam system, or FIB, on a single platform; and stand-alone FIBs.

Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small-stage DualBeam systems”).

We have research and development and manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; Munich, Germany; and Delmont, Pennsylvania, and software development in Bordeaux, France and Brisbane, Australia. Our sales and service operations are conducted in the United States (U.S.) and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

Basis of Presentation

The consolidated financial statements include the accounts of FEI Company and our wholly-owned subsidiaries (collectively, “FEI”). All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the thirteen and thirty-nine week periods ended September 30, 2012 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission (“SEC”) on February 17, 2012.

Use of Estimates in Financial Reporting

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.

Significant accounting policies and estimates underlying the accompanying consolidated financial statements include:


•	the timing of revenue recognition;


•	the allowance for doubtful accounts;


•	valuations of excess and obsolete inventory;


•	the lives and recoverability of equipment and other long-lived assets such as goodwill;


•	restructuring, reorganization, relocation and severance costs;


•	tax valuation allowances and unrecognized tax benefits;


•	warranty liabilities;


•	stock-based compensation; and


•	accounting for derivatives.

It is reasonably possible that management's estimates may change in the future.

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NOTE 2.	EARNINGS PER SHARE

Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):



	Thirteen Weeks Ended						Thirteen Weeks Ended
	September 30, 2012						October 2, 2011
	Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	29,158	38,082	$	0.76		$	26,177	38,421	$	0.68
Dilutive effect of 2.875% convertible debt	455		3,033	(0.04		)	451		3,033	(0.04		)
Dilutive effect of stock options, restricted stock units, and shares issuable to Philips	—		656	(0.01		)	—		576	(0.01		)
Diluted EPS	$	29,613	41,771	$	0.71		$	26,628	42,030	$	0.63



	Thirty-Nine Weeks Ended						Thirty-Nine Weeks Ended
	September 30, 2012						October 2, 2011
	Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	85,118	37,987	$	2.24		$	74,549	38,628	$	1.93
Dilutive effect of 2.875% convertible debt	1,365		3,033	(0.13		)	1,353		3,033	(0.11		)
Dilutive effect of stock options, restricted stock units, and shares issuable to Philips	—		624	(0.03		)	—		623	(0.02		)
Diluted EPS	$	86,483	41,644	$	2.08		$	75,902	42,284	$	1.80

The following table sets forth the schedule of anti-dilutive securities excluded from the computation of diluted EPS (number of shares, in thousands):



	Thirteen Weeks Ended		Thirty-Nine Weeks Ended
	September 30, 2012	October 2, 2011	September 30, 2012	October 2, 2011
Stock options	32	47	271	96
Restricted stock units	17	24	6	24


NOTE 3.	STOCK-BASED COMPENSATION

Employee Share Purchase Plan

At our 2012 Annual Meeting of Shareholders, which was held on May 10, 2012, our shareholders approved an amendment to our Employee Share Purchase Plan to increase the number of shares of our common stock reserved for issuance under the plan from 3,450,000 to 3,700,000.

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Also at our 2012 Annual Meeting of Shareholders, our shareholders approved an amendment to our 1995 Stock Incentive Plan (the “1995 Plan”) to increase the number of shares of our common stock reserved for issuance under the plan from 10,500,000 to 10,750,000 shares of our common stock. Our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of 500,000 shares of our common stock.

The following table sets forth certain information regarding the 1995 Plan and the 1995 Supplemental Plan:



	September 30, 2012
Shares available for grant	2,515,423
Shares of common stock reserved for issuance	4,166,968

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The following table sets forth certain information regarding all options outstanding and exercisable:



	September 30, 2012
	Options Outstanding		Options Exercisable
Number	820,818		242,415
Weighted average exercise price	$	29.55	$	21.89
Aggregate intrinsic value	$ 19.7 million		$ 7.7 million
Weighted average remaining contractual term	4.5 years		2.3 years

The following table sets forth certain information regarding all RSUs nonvested and expected to vest:



	September 30, 2012
	RSUs Nonvested		RSUs Expected to Vest
Number	830,729		739,364
Weighted average grant date per share fair value	$	34.42	$	34.07
Aggregate intrinsic value	$ 44.4 million		$ 39.6 million
Weighted average remaining term to vest	1.4 years		1.3 years

As of September 30, 2012, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $27.4 million, which will be recognized over the weighted average remaining vesting period of 1.9 years.

Performance RSU

In 2011, our Compensation Committee approved performance-based restricted stock units to our Chief Executive Officer. The number of restricted stock units ultimately received depends on our business performance against specified performance targets set by the Compensation Committee. If the performance criteria are satisfied, the performance based restricted stock units will be granted following the public announcement of FEI's financial results for 2012. One-third of the units will vest upon grant, one-third will vest on the one-year anniversary of grant and the remaining one-third will vest on the two-year anniversary of grant.

Stock-Based Compensation Expense

Our stock-based compensation expense was included in our Consolidated Statements of Operations as follows (in thousands):



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Cost of sales	$	463	$	349	$	1,327	$	1,028
Research and development	438		404		1,395		1,302
Selling, general and administrative	2,506		1,423		7,361		5,453
Total stock-based compensation	$	3,407	$	2,176	$	10,083	$	7,783


NOTE 4.	CREDIT FACILITIES AND RESTRICTED CASH

Multibank Credit Agreement

We have a multibank credit agreement (the “Credit Agreement”), which provides for a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. The credit agreement expires in April 2016. We may, upon notice to JPMorgan Chase Bank, N.A. (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. As of September 30, 2012, there were no revolving loans or letters of credit outstanding under the Credit Agreement, we were in compliance with all covenants and we were not in default under the Credit Agreement.

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Restricted Cash

As part of our contracts with certain customers, we are required to provide letters of credit or bank guarantees which these customers can draw against in the event we do not perform in accordance with our contractual obligations. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheets.

The following table sets forth information related to guarantees and letters of credit (in thousands):



	September 30, 2012
Guarantees and letters of credit outstanding	$	28,183
Amount secured by restricted cash deposits:
Current	$	5,993
Long-term	22,165
Total secured by restricted cash	$	28,158


NOTE 5.	INVENTORIES

Inventories are stated at the lower of cost or market, with cost determined by standard cost methods, which approximate the first-in, first-out method. Inventory costs include material, labor and manufacturing overhead. Service inventories that exceed the estimated requirements for the next 12 months based on recent usage levels are reported as other long-term assets. Management has established inventory reserves based on estimates of excess and/or obsolete current and non-current inventory.

Inventories consisted of the following (in thousands):



	September 30, 2012		December 31, 2011
Raw materials and assembled parts	$	74,408	$	68,105
Service inventories, estimated current requirements	16,207		13,978
Work-in-process	80,234		66,275
Finished goods	25,655		33,652
Total current inventories	$	196,504	$	182,010
Non-current inventories	$	66,366	$	57,575


NOTE 6.	GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The roll-forward of activity related to our goodwill was as follows (in thousands):



	Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011
Balance, beginning of period	$	58,053	$	44,800
Goodwill additions	69,253		—
Goodwill translation adjustments	2,361		2
Balance, end of period	$	129,667	$	44,802

Additions to goodwill represent goodwill from acquisitions made during the period. Adjustments to goodwill include translation adjustments resulting from a portion of our goodwill being recorded on the books of our foreign subsidiaries.

Acquisition of ASPEX Corporation

On January 9, 2012, we acquired 100% of the outstanding shares of ASPEX Corporation, a manufacturer of durable scanning electron microscopes for industrial applications. The total purchase price of the acquisition was $30.5 million. We paid $0.2 million in transaction costs related to the acquisition. These costs were expensed as incurred in the selling, general and administrative line on our Consolidated Statements of Operations.

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The total purchase price was allocated to the net tangible and intangible assets acquired based on their preliminary fair values as of January 9, 2012. The fair value of net tangible assets acquired was $1.9 million and the fair value of intangible assets acquired was $9.7 million. The acquired intangible assets consisted primarily of developed technology of $6.4 million and customer relationships of $1.7 million. The developed technology has a weighted-average amortization period of 7.0 years and the customer relationships has a weighted-average amortization period of 5.0 years. The excess of the purchase price over the fair value of the net assets acquired, adjusted for deferred tax liabilities, of $22.0 million was recorded as goodwill in our Materials Science segment.

The goodwill arising from the acquisition of ASPEX Corporation is primarily related to expected future cash flows from synergies related to the integration of the durable SEM solution. $1.3 million of the goodwill from this acquisition is tax deductible. The operating results of ASPEX Corporation have been included prospectively from the date of acquisition in the Materials Science and Service and Components segments based on the nature of the product or service sold. For the thirteen and thirty-nine week periods ended September 30, 2012, ASPEX Corporation contributed $3.3 million and $9.5 million of revenue, respectively, and net income of $0.3 million and $0.5 million, respectively, to our consolidated financial results.

Acquisition of AP Tech

On July 9, 2012, we acquired certain assets of AP Tech, a sales and service agent in Korea, for a purchase price of $12.0 million. We paid $0.4 million in transaction costs related to this acquisition. These costs were expensed as incurred in the selling, general and administrative line on our Consolidated Statements of Operations.

The total purchase price was allocated to the net tangible and intangible assets acquired based on their preliminary fair values as of July 9, 2012. The fair value of net tangible assets acquired was $2.0 million and the fair value of intangible assets acquired was $4.6 million, consisting entirely of customer relationships which have an amortization period of 10 years. The excess of the purchase price over the fair value of the net assets acquired of $5.4 million was recorded as goodwill in our Service and Components segment.

The goodwill arising from the acquisition of certain AP Tech assets is primarily related to expected future cash flows from synergies arising from the establishment of a sales and service workforce in Korea. All of the goodwill from this acquisition is tax deductible.

The acquisition of certain assets of AP Tech led to the formation of a FEI subsidiary in Korea, FEI Korea. The operating results of FEI Korea have been included prospectively from the date of acquisition in the Service and Components segment. For the thirteen and thirty-nine week periods ended September 30, 2012, AP Tech contributed $1.6 million of revenue and net income of $0.1 million to our consolidated financial results.

Acquisition of Visualization Sciences Group

On August 1, 2012, we acquired 100% of the outstanding shares of Visualization Sciences Group ("VSG") of Bordeaux, France. VSG provides high-performance 3D visualization software products and tools to a range of markets. The total purchase price of the acquisition was €44.8 million ($55.1 million). We paid $0.4 million in transaction costs related to this acquisition. These costs were expensed as incurred in the selling, general and administrative line on our Consolidated Statements of Operations.

The total purchase price was allocated to the net tangible and intangible assets acquired based on their preliminary fair values as of August 1, 2012. The fair value of net tangible liabilities assumed was $1.0 million, the fair value of deferred revenue acquired was $4.3 million and the fair value of intangible assets acquired was $22.6 million. The acquired deferred revenue will be recognized over the next 3.5 years. The acquired intangible assets consisted primarily of customer relationships of $12.5 million, developed technology of $8.3 million and trademarks of $1.8 million. The customer relationships and developed technology have amortization periods of 10 years and the trademarks have an amortization period of 5 years. The excess of the purchase price over the fair value of the net assets acquired, adjusted for deferred tax liabilities, of $41.9 million was recorded as goodwill.

The goodwill arising from the acquisition of VSG is primarily related to expected future cash flows from synergies related to the integration of the 3D imaging technology. The operating results of VSG have been included prospectively from the date of acquisition in the Materials Science segment. For the thirteen and thirty-nine week periods ended September 30, 2012, VSG contributed $3.0 million of revenue and net income of $0.3 million to our consolidated financial results.

No Pro Forma Disclosures Provided

Pro forma disclosures have not been provided for these acquisitions as they are insignificant individually and in the aggregate.

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Other Intangible Assets

Patents, trademarks and other are amortized under the straight-line method over their estimated useful lives of 2 to 15 years. Customer relationships are amortized under the straight-line method over their estimated useful lives of 5 to 10 years. Developed technology is amortized under the straight-line method over the estimated useful life of the related technology, which ranges from 5.5 to 10 years. Note issuance costs are amortized over the life of the related debt, which is 7 years.

The gross amount of our other intangible assets and the related accumulated amortization were as follows (in thousands):



	September 30, 2012			December 31, 2011
Patents, trademarks and other	$	21,612		$	7,744
Accumulated amortization	(4,901		)	(3,698		)
Net patents, trademarks and other	16,711			4,046
Customer relationships	19,811			152
Accumulated amortization	(602		)	(3		)
Net customer relationships	19,209			149
Developed technology	17,446			2,303
Accumulated amortization	(1,183		)	(55		)
Net developed technology	16,263			2,248
Note issuance costs	2,445			2,445
Accumulated amortization	(2,212		)	(1,950		)
Net note issuance costs	233			495
Total intangible assets included in other long-term assets	$	52,416		$	6,938

Amortization expense was as follows (in thousands):



	Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011
Patents, trademarks and other	$	1,222	$	947
Customer relationships	599		—
Developed technology	1,128		—
Note issuance costs	262		262
Total amortization expense	$	3,211	$	1,209

Expected amortization, without consideration for foreign currency effects, is as follows over the next five years and thereafter (in thousands):



	Patents, Trademarks and Other		Customer Relationships		Developed Technology		Note Issuance Costs		Total
Remainder of 2012	$	592	$	568	$	570	$	87	$	1,817
2013	3,103		2,163		2,207		146		7,619
2014	2,747		2,163		2,207		—		7,117
2015	2,620		2,163		2,207		—		6,990
2016	2,410		2,163		2,207		—		6,780
Thereafter	5,239		9,989		6,865		—		22,093
Total future amortization expense	$	16,711	$	19,209	$	16,263	$	233	$	52,416

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NOTE 7.	WARRANTY RESERVES

Our products generally carry a one-year warranty. A reserve is established at the time of sale to cover estimated warranty costs and certain commitments for product upgrades as a component of cost of sales on our consolidated statements of operations. Our estimate of warranty cost is primarily based on our history of warranty repairs and maintenance, as applied to systems currently under warranty. For our new products without a history of known warranty costs, we estimate the expected costs based on our experience with similar product lines and technology. While most new products are extensions of existing technology, the estimate could change if new products require a significantly different level of repair and maintenance than similar products have required in the past. Our estimated warranty costs are reviewed and updated on a quarterly basis. Changes to the reserve occur as volume, product mix and warranty costs fluctuate.

The following is a summary of warranty reserve activity (in thousands):



	Thirty-Nine Weeks Ended
	September 30, 2012			October 2, 2011
Balance, beginning of period	$	11,683		$	8,648
Reductions for warranty costs incurred	(8,567		)	(6,922		)
Warranties issued	9,191			9,600
Translation and changes in estimates	(9		)	(32		)
Balance, end of period	$	12,298		$	11,294


NOTE 8.	INCOME TAXES

Our tax provision for the thirteen and thirty-nine week periods ended September 30, 2012 consisted primarily of taxes accrued in the U.S. and foreign jurisdictions. We continue to record a valuation allowance against a portion of our U.S. and foreign deferred tax assets as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.

Deferred Income Taxes

Net deferred tax assets were classified on the balance sheet as follows (in thousands):



	September 30, 2012			December 31, 2011
Deferred tax assets – current	$	16,696		$	18,899
Deferred tax assets – non-current	4,573			934
Deferred tax liabilities – current	(31		)	(18		)
Deferred tax liabilities – non-current	(17,295		)	(6,607		)
Net deferred tax assets	$	3,943		$	13,208
Valuation allowance	$	2,511		$	2,216

Unrecognized Tax Benefits

During the thirteen and thirty-nine week periods ended September 30, 2012, unrecognized tax benefits increased $0.2 million and $0.8 million, respectively, primarily due to uncertainty surrounding permanent establishment and tax credits. There were no increases or decreases in prior unrecognized tax benefits resulting from settlements with taxing authorities or lapses of statutes of limitations during the periods. We recognize interest and penalties related to unrecognized tax benefits in tax expense.

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of September 30, 2012:



Jurisdiction		Open Tax Years
U.S.		2007 and forward
The Netherlands		2008 and forward
Czech Republic		2009 and forward

The IRS is currently examining our 2007-2009 U.S. tax returns.

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NOTE 9.	RELATED-PARTY ACTIVITY

Related parties with which we had transactions during the thirteen and thirty-nine week periods ended September 30, 2012 were as follows:


•	one of the members of our Board of Directors serves on the Board of Directors of Applied Materials, Inc. and Lattice Semiconductor Corporation;


•	our Chief Financial Officer is on the Board of Directors of Cascade Microtech, Inc.; and


•	one of the members of our Board of Directors serves on the Supervisory Board of TMC BV.

Transactions with these related parties were as follows (in thousands):



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
Sales to Related Parties	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Product sales:
Applied Materials, Inc.	$	798	$	1,566	$	931	$	2,691
Cascade Microtech, Inc.	—		—		4		—
Total product sales to related parties	798		1,566		935		2,691
Service sales:
Applied Materials, Inc.	120		134		382		354
Cascade Microtech, Inc.	8		8		24		26
Total service sales to related parties	128		142		406		380
Total sales to related parties	$	926	$	1,708	$	1,341	$	3,071
Purchases from Related Parties
TMC BV	$	32	$	4	$	97	$	32
Cascade Microtech, Inc.	—		—		—		1
Total purchases from related parties	$	32	$	4	$	97	$	33

Amounts due from (to) related parties were as follows (in thousands):



	September 30, 2012
Applied Materials, Inc.	$	947
Cascade Microtech, Inc.	8
TMC BV	(109		)
Due from related parties, net	$	846


NOTE 10.	COMMITMENTS AND CONTINGENCIES

From time to time, we may be a party to litigation arising in the ordinary course of business. Other than as discussed below, we are not a party to any litigation that we believe would have a material adverse effect on our financial position, results of operations or cash flows.

Legal Matters

Beginning in November 2009, Hitachi High-Technologies Corporation (“Hitachi”) commenced a series of legal and administrative proceedings in Japan and Korea against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”) alleging infringement of certain Hitachi patents relating to focused ion beam ("FIB") systems, and FEI Japan filed a series of counter-claims against Hitachi related to such proceedings. In August 2012, we entered into an agreement for the mutual settlement and release of any and all claims relating to infringement of each party's respective FIB patents and a global cross license for such patents. All pending claims and counter-claims in the proceedings have been dismissed. We also agreed to make a one-time payment of $15.0 million to Hitachi covering past damages and future rights to the licensed technology. Of that amount, $5.4 million is attributed to past damages related to this technology, the majority of which was charged to SG&A expense in the fourth quarter of 2011. The remaining $9.6 million is attributed to future technology license rights, was recorded as prepaid royalties and will be amortized over an economic life of 8 years.

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Purchase Obligations

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $80.1 million at September 30, 2012. These commitments expire at various times through the fourth quarter of 2013.


NOTE 11.	SEGMENT INFORMATION

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Chief Executive Officer.

We report our segments based on a market-focused organization. Our segments are: Electronics, Materials Science, Life Sciences and Service and Components.

The following tables summarize various financial amounts for each of our business segments (in thousands):



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Sales to External Customers:
Electronics	$	76,923	$	56,589	$	236,317	$	204,927
Materials Science	72,267		74,450		213,963		200,245
Life Sciences	23,169		30,216		64,067		81,011
Service and Components	49,426		44,080		146,445		127,253
Total	$	221,785	$	205,335	$	660,792	$	613,436
Gross Profit:
Electronics	$	42,561	$	30,730	$	128,780	$	107,613
Materials Science	34,097		30,451		99,236		85,977
Life Sciences	9,368		14,846		26,668		37,514
Service and Components	18,130		15,198		52,012		41,720
Total	$	104,156	$	91,225	$	306,696	$	272,824



	September 30, 2012		December 31, 2011
Goodwill:
Electronics	$	18,114	$	18,115
Materials Science	84,101		17,991
Life Sciences	16,906		16,895
Service and Components	10,546		5,052
Total	$	129,667	$	58,053
Total Assets:
Electronics	$	169,658	$	121,311
Materials Science	282,238		180,607
Life Sciences	73,497		67,445
Service and Components	185,924		158,542
Corporate and Eliminations	480,075		562,004
Total	$	1,191,392	$	1,089,909

Market segment disclosures are presented to the gross profit level as this is the primary performance measure for which the segment general managers are responsible. Selling, general and administrative, research and development and other operating expenses are managed and reported at the corporate level and, given allocation to the market segments would be arbitrary, have not been allocated to the market segments. See our Consolidated Statements of Operations for reconciliations from gross profit to income before income taxes. These reconciling items are not included in the measure of profit and loss for each reportable segment.

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NOTE 12.	RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

Manufacturing Transfer

In 2008 we entered into an arrangement to outsource aspects of our manufacturing processes. In 2011, we notified our largest contract manufacturer, accounting for approximately 10% of our revenue, that we were terminating the arrangement and that we would transfer the manufacturing process back to FEI. The termination contract was signed during the fourth quarter of 2011 and the manufacturing process was transitioned back to FEI as of April 2, 2012. The costs associated with the termination of the outsourcing arrangement were accrued in the fourth quarter of 2011. No additional costs were incurred in 2012 and we do not expect to incur any significant additional costs associated with the termination of this arrangement.

Restructuring, Reorganization, Relocation and Severance Accrual

The following table summarizes the charges, expenditures, write-offs and adjustments related to our restructuring, reorganization, relocation and severance accrual (in thousands):



Thirty-Nine Weeks Ended September 30, 2012	Severance, outplacement and related benefits for terminated employees			Manufacturing transfer			Total
Beginning accrued liability	$	113		$	2,100		$	2,213
Charged to expense, net	—			—			—
Expenditures	—			(2,100		)	(2,100		)
Write-offs and adjustments	(113		)	—			(113		)
Ending accrued liability	$	—		$	—		$	—


NOTE 13.	FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:


•	Level 1 – quoted prices in active markets for identical securities as of the reporting date;


•	Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and


•	Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.

The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.

Following are the disclosures related to the fair value of our financial assets and (liabilities) (in thousands):



September 30, 2012	Level 1		Level 2			Level 3		Total
Available for sale marketable securities:
U.S. treasury notes	$	30,256	$	—		$	—	$	30,256
Agency bonds	—		31,014			—		31,014
Certificates of deposit	—		5,503			—		5,503
Trading securities:
Equity securities – mutual funds	2,982		—			—		2,982
Derivative contracts, net	—		(1,423		)	—		(1,423		)
Total	$	33,238	$	35,094		$	—	$	68,332

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December 31, 2011	Level 1		Level 2			Level 3		Total
Available for sale marketable securities:
Agency bonds	$	—	$	58,533		$	—	$	58,533
Commercial paper	—		5,000			—		5,000
Certificates of deposit	—		3,211			—		3,211
Trading securities:
Equity securities – mutual funds	2,810		—			—		2,810
Derivative contracts, net	—		(13,967		)	—		(13,967		)
Total	$	2,810	$	52,777		$	—	$	55,587

Agency bonds are securities backed by U.S. government-sponsored entities.

We use an income approach to value the assets and liabilities for outstanding derivative contracts using current market information as of the reporting date, such as spot rates, interest rate differentials and implied volatility.

There were no changes to our valuation techniques during the thirty-nine week period ended September 30, 2012.

We believe the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

Our fixed rate convertible debt outstanding was as follows (in thousands):



	September 30, 2012
Fixed rate convertible debt on balance sheet	$	89,010
Fair value of fixed rate convertible debt	164,182

The fair value of our fixed rate convertible debt is based on open market trades. During the third quarter of 2012, one of our note holders converted a $1,000 note into 34 shares of FEI common stock. The remaining $89.0 million of convertible notes outstanding at September 30, 2012 are convertible into 3,032,709 shares of our common stock, at the note holder’s option, at a price of $29.35 per share.


NOTE 14.	DERIVATIVE INSTRUMENTS

In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from movements in foreign currency exchange rates.

The aggregate notional amount of outstanding derivative contracts were as follows (in thousands):



	September 30, 2012		December 31, 2011
Cash flow hedges	$	192,000	$	193,000
Balance sheet hedges	210,111		131,391
Total outstanding derivative contracts	$	402,111	$	324,391

The outstanding contracts at September 30, 2012 have varying maturities through the first quarter of 2014. We do not enter into derivative financial instruments for speculative purposes.

We attempt to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and nonperformance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at September 30, 2012. In addition, there are no credit contingent features in our derivative instruments.

Balance Sheet Related

In countries outside of the U.S., we transact business in U.S. dollars and in various other currencies. We attempt to mitigate our currency exposures for recorded transactions by using forward exchange contracts to reduce the risk that our future cash flows will be adversely affected by changes in exchange rates. We enter into forward sale or purchase contracts for foreign currencies to economically hedge specific cash, receivables or payables positions denominated in foreign currencies.

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Changes in fair value of derivatives entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other income (expense) together with the transaction gain or loss from the respective balance sheet position as follows (in thousands):



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Foreign currency loss, inclusive of the impact of derivatives	$	(1,019	)	$	(305	)	$	(4,064	)	$	(873	)

Cash Flow Hedges

We use zero cost collar contracts and option contracts to hedge certain anticipated foreign currency exchange transactions. The foreign exchange hedging structure is set up, generally, on a 24 month time horizon. The hedging transactions we undertake primarily limit our exposure to changes in the U.S. dollar/euro and the U.S. dollar/Czech koruna exchange rate. The zero cost collar contract hedges are designed to protect us as the U.S. dollar weakens, but also provide us with some flexibility if the dollar strengthens.

These derivatives meet the criteria to be designated as hedges and, accordingly, we record the change in fair value of the effective portion of these hedge contracts relating to anticipated transactions in other comprehensive income rather than net income until the underlying hedged transaction affects net income. Gains and losses resulting from the ineffective portion of the hedge contracts, if any, are recognized as a component of net income. Gains and losses related to cash flow derivative contracts not designated as hedging instruments are recorded as a component of net income.

Summary

The fair value carrying amount of our derivative instruments was included in our balance sheet as follows (in thousands):



	Fair Value of Derivatives at				Fair Value of Derivatives at
	September 30, 2012				December 31, 2011
	Other Current Assets		Other Current Liabilities		Other Current Assets		Other Current Liabilities
Derivatives Designated as Hedging Instruments
Foreign exchange contracts in asset position	$	—	$	—	$	—	$	—
Foreign exchange contracts in liability position	—		1,148		—		7,252
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts in asset position	$	1,435	$	—	$	1,668	$	—
Foreign exchange contracts in liability position	—		1,710		—		8,383

The effect of derivative instruments was as follows (in thousands):



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
Foreign Exchange Contracts in Cash Flow Hedging Relationships	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Amount of gain/(loss):
Recognized in OCI (effective portion)	$	1,892		$	(2,856	)	$	7,260		$	7,325
Reclassified from accumulated OCI into cost of sales (effective portion)	(705		)	1,101			(2,097		)	3,766
Recognized in other, net (ineffective portion and amount excluded from effectiveness testing)	(3		)	(50		)	10			113
Foreign Exchange Contracts Not in Cash Flow Hedging Relationships
Amount of gain/(loss):
Recognized in other, net	$	(2,241	)	$	(5,095	)	$	(5,872	)	$	(306	)

The unrealized gains at September 30, 2012 are expected to be reclassified to net income during the next 24 months as a result of the underlying hedged transactions also being recorded in net income.

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NOTE 15.	NEW ACCOUNTING PRONOUNCEMENTS

ASU 2011-04

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” which amends the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and disclosing information about fair value measurements as well as clarifies existing fair value measurement guidance and new disclosure requirements. Amendments in this ASU include: (1) allow an entity to measure the fair value of financial assets and liabilities which have offsetting positions in market risks or counterparty credit risk and meet certain conditions on a net basis; (2) for Level 3 fair value measurements, entities must disclose quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, entities must disclose the fair value hierarchy level in which the fair value measurements were determined; (4) entities must disclose the highest-and-best use of a nonfinancial asset when this use differs from the asset's current use, and the reason for the difference; and (5) disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011, with no early adoption permitted. All required disclosures are included in Note 13 of the Condensed Notes to the Consolidated Financial Statements.

ASU 2011-05 and ASU 2011-12

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income” which revises the manner in which entities can present comprehensive income in their financial statements. The new guidance requires entities to present the components of net income and other comprehensive income in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive financial statements, consisting of an income statement followed by a separate statement of other comprehensive income. Under either method of presentation, entities are also required to present adjustments for items reclassified from other comprehensive income to net income in both net income and other comprehensive income.

In December 2011, the FASB issued ASU No. 2011-12, "Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05" which defers the requirement within ASU 2011-05 to present reclassification adjustments from other comprehensive income to net income on the face of the financial statements pending further deliberation by the FASB.

ASU 2011-05 requires retrospective application and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. We will continue to present the components of net income and other comprehensive income in separate but consecutive financial statements and will evaluate the impact of the requirements deferred by ASU 2011-12 at which time they become effective.

ASU 2011-11

In December 2011, the FASB issued ASU No. 2011-11, “Disclosures About Offsetting Assets and Liabilities” which creates new disclosure requirements about the nature of an entity's rights of offset associated with its financial instruments and derivative instruments. ASU No. 2011-11 requires retrospective application, and it is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. As the requirements of this ASU relate only to disclosures, we do not expect the adoption of this guidance to have an impact on our financial position, results of operations or cash flows.

ASU 2012-02

In July 2012, the FASB issued ASU 2012-02, "Intangibles - Goodwill and Other (Topic 350), Testing Indefinite-Lived Intangible Assets for Impairment", which allows an entity to perform a qualitative assessment of the fair value of an indefinite-lived intangible asset before calculating the fair value of the asset. If, through the qualitative assessment, the entity determines that it is more likely than not that the fair value of the indefinite-lived intangible asset is greater than its carrying value, the quantitative impairment test would be unnecessary. The qualitative assessment is optional, allowing entities to go directly to the quantitative assessment. This update is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. We do not expect the adoption of this standard to have a material effect on our financial position, results of operations or cash flows.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as “anticipate,” “estimate,” “expect,” "will," "are expected," “project,” “intend,” “plan,” “believe,” “appear,” “assume” and other words and terms of similar meaning. Such forward-looking statements include any statements regarding expectations of earnings, revenues, bookings, gross margins, operating and non-operating expenses, tax rates, net income, foreign currency rates, payment of dividends, funding opportunities or other financial items, as well as backlog, order levels and activity of our company as a whole or in particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing or insourcing initiatives; any statements of factors that may affect our 2012 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings or anticipated performance of products or services; any statements related to acquisitions of other companies; any statements related to future capital expenditures; any statements related to the needs or expected growth or spending of our target markets; any statements concerning the effects of litigation, on our financial condition or otherwise; any statements concerning our effective tax rates, the resolution of any tax positions or use of tax assets; any statements concerning the effect of new accounting pronouncements on our financial position, results of operations or cash flows; any statements regarding future economic conditions or performance; any statements of belief; any statements of assumptions underlying any of the foregoing; and any statements made under the heading “Outlook for the Remainder of 2012.”

From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. You also should read the section entitled “Risk Factors” included in Part II, Item 1A. of this Quarterly Report on Form 10-Q for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors could also adversely affect us.

Summary of Products and Segments

The Electronics market segment consists of customers in the semiconductor equipment and related industries such as manufacturers of data storage equipment, solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures.

The Materials Science market segment includes universities, public and private research laboratories and customers in a wide range of industries, including natural resources (mining and oil and gas), petrochemicals, metals, automobiles, aerospace, and forensics. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration. Our products are also used in root cause failure analysis and quality control applications across a range of industries.

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The Life Sciences market segment includes universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products’ ultra-high resolution imaging allows structural and cellular biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.

The Service and Components market segment provides support for products and customers for the entire life cycle of a tool from installation through the warranty period, and after warranty period through contract coverage or on a time and materials basis. We believe strong technical support is an important part of the value proposition that we offer customers when a tool is sold. Our Service and Components market segment provides support across all markets and all regions.

Overview - Orders and Backlog

Orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog. We only recognize backlog for purchase commitments for which the terms of the sale have been agreed upon, including price, configuration, options and payment terms. Product backlog consists of all open orders meeting these criteria. Service and Components backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds. At September 30, 2012, our total backlog was $425.2 million, compared to $430.7 million at December 31, 2011. At September 30, 2012, our backlog consisted of $330.5 million of products and $94.7 million related to Service and Components compared to product backlog of $343.3 million and Service and Components backlog of $87.4 million at December 31, 2011.

Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been low. However, in the last two years, this long-standing trend changed somewhat and, as a result, our cancellation rates may increase in the future. During the first thirty-nine weeks of 2012 and all of 2011, we experienced cancellations of $1.4 million and $3.5 million, respectively. From time to time, we have experienced difficulty in shipping our product from backlog due to single-sourcing issues and problems in securing electronic components from a certain vendor. In addition, product shipments have been extended due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate movements. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

Outlook for the Remainder of 2012

Revenue in the first three quarters of 2012 grew by 8% compared with the first three quarters of 2011. We expect year-over-year revenue growth in the fourth quarter of 2012 to be in the same range, driven in part by the additional revenue of ASPEX, FEI Korea and VSG. Gross margin in the first nine months of the year was 46.4%, and we expect fourth quarter margin to be at or above that level. Diluted earnings per share has averaged $0.69 for the first three quarters of 2012, and we expect fourth quarter results to be at or above that level.

Electronics revenue for the rest of 2012 is expected to be below the first three quarters of the year, and Electronics bookings are expected to slow based on the timing of orders from major customers. We expect overall bookings for Materials Science and Life Sciences products to maintain at current levels, driven by orders from Asia and developing economies, as more orders from these regions compensate for fewer orders in the U.S. and Europe. Life Sciences bookings and revenue progression will continue to vary by quarter because of the large size of some individual orders. Toward the end of the year, we expect to see some positive impact on Life Sciences from our strategic initiatives, including collaborative agreements on structural and cell biology and our 2011 acquisition of TILL Photonics. We expect growth in the natural resources business to continue to positively impact the Materials Science segment as sales of Natural Resources products contribute additional revenue and higher average gross margin.

Critical Accounting Policies and the Use of Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We believe the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain.

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2011 Annual Report on Form 10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the first thirty-nine weeks of 2012, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2011, which was filed with the Securities and Exchange Commission on February 17, 2012.

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Results of Operations

The following tables set forth our statement of operations data, in absolute dollars and as a percentage⁽¹⁾ of consolidated net sales (dollars in thousands):



	Thirteen Weeks Ended					Thirteen Weeks Ended
	September 30, 2012					October 2, 2011
Net sales	$	221,785		100.0	%	$	205,335		100.0	%
Cost of sales	117,629			53.0		114,110			55.6
Gross profit	104,156			47.0		91,225			44.4
Research and development	23,908			10.8		19,212			9.4
Selling, general and administrative	41,931			18.9		37,051			18.0
Restructuring, reorganization, relocation and severance	—			—		47			—
Operating income	38,317			17.3		34,915			17.0
Other expense, net	(1,712		)	(0.8	)	(601		)	(0.3	)
Income before income taxes	36,605			16.5		34,314			16.7
Income tax expense	7,447			3.4		8,137			4.0
Net income	$	29,158		13.1	%	$	26,177		12.7	%



	Thirty-Nine Weeks Ended					Thirty-Nine Weeks Ended
	September 30, 2012					October 2, 2011
Net sales	$	660,792		100.0	%	$	613,436		100.0	%
Cost of sales	354,096			53.6		340,612			55.5
Gross profit	306,696			46.4		272,824			44.5
Research and development	69,936			10.6		56,771			9.3
Selling, general and administrative	125,299			19.0		111,607			18.2
Restructuring, reorganization, relocation and severance	—			—		1,115			0.2
Operating income	111,461			16.9		103,331			16.8
Other expense, net	(5,030		)	(0.8	)	(1,716		)	(0.3	)
Income before income taxes	106,431			16.1		101,615			16.6
Income tax expense	21,313			3.2		27,066			4.4
Net income	$	85,118		12.9	%	$	74,549		12.2	%

___________________________


⁽¹⁾	Percentages may not add due to rounding.

Net Sales

Net sales increased $16.5 million, or 8.0%, to $221.8 million in the thirteen week period ended September 30, 2012 (the third quarter of 2012) compared to $205.3 million in the thirteen week period ended October 2, 2011 (the third quarter of 2011). Net sales increased $47.4 million, or 7.7%, to $660.8 million in the thirty-nine week period ended September 30, 2012 compared to $613.4 million in the thirty-nine week period ended October 2, 2011. The factors affecting net sales are discussed in more detail in the Net Sales by Segment discussion below.

The strengthening of the dollar during the third quarter of 2012 decreased net sales for the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 as approximately 67% of our net sales were denominated in foreign currencies that fluctuated against the U.S. dollar. Strengthening of the U.S. dollar against these foreign currencies generally has the effect of decreasing net sales and backlog.

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Net Sales by Segment

Net sales by market segment (in thousands) and as a percentage of net sales were as follows:



	Thirteen Weeks Ended
	September 30, 2012				October 2, 2011
Electronics	$	76,923	34.7	%	$	56,589	27.6	%
Materials Science	72,267		32.6		74,450		36.2
Life Sciences	23,169		10.4		30,216		14.7
Service and Components	49,426		22.3		44,080		21.5
Consolidated net sales	$	221,785	100.0	%	$	205,335	100.0	%



	Thirty-Nine Weeks Ended
	September 30, 2012				October 2, 2011
Electronics	$	236,317	35.8	%	$	204,927	33.4	%
Materials Science	213,963		32.4		200,245		32.6
Life Sciences	64,067		9.6		81,011		13.2
Service and Components	146,445		22.2		127,253		20.8
Consolidated net sales	$	660,792	100.0	%	$	613,436	100.0	%

Electronics

The $20.3 million, or 35.9%, increase and the $31.4 million, or 15.3%, increase, respectively, in Electronics sales in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increased demand for certain products as the industry shifts to smaller nodes. As our customers migrate from SEM-based to more TEM-based lab analysis, we realize increases in unit sales of our TEM products as well as our small DualBeam products. Currency fluctuations decreased Electronics sales compared to the same periods of 2011.

Materials Science

The $2.2 million, or 2.9%, decrease in Materials Science sales in the thirteen week period ended September 30, 2012 compared to the same period of 2011 was primarily due to a change in product mix and the timing of shipments as well as the impact of currency fluctuations which decreased Materials Science sales compared to the same period of 2011. The $13.7 million, or 6.9%, increase in Materials Science sales in the thirty-nine week period ended September 30, 2012 compared to the same period of 2011 was primarily due to increased advanced research spending in Asia and the inclusion of product sales from ASPEX Corporation ("ASPEX"), which we acquired January 9, 2012, and from Visualization Sciences Group ("VSG"), which we acquired on August 1, 2012. Also contributing to the increase was growth in sales to our natural resources customers driven by continued penetration in the oil and gas and mining industries. This was partially offset by currency fluctuations, which decreased Materials Science sales compared to the same period of 2011.

Life Sciences

The $7.0 million, or 23.3%, decrease and the $16.9 million, or 20.9%, decrease, respectively, in Life Sciences sales in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to a decrease in the number of high-end TEM units sold during the period. Historically, we have seen significant volatility in the sale of high-end TEMs for Life Sciences and that may continue. Additionally, currency fluctuations decreased Life Sciences sales compared to the same periods of 2011.

Service and Components

The $5.3 million, or 12.1%, increase and the $19.2 million, or 15.1%, increase, respectively, in Service and Components sales in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were due primarily to a larger install base and the inclusion of service revenue for our ASPEX product line as well as service revenue from our Korean subsidiary resulting from the acquisition of certain assets of AP Tech, which occurred on July 9, 2012. This was partially offset by currency fluctuations, which decreased Service and Components sales compared to the same periods of 2011.

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Net Sales by Geographic Region

A significant portion of our net sales has been derived from customers outside of the U.S., which we expect to continue. The following tables show our net sales by geographic region (dollars in thousands):



	Thirteen Weeks Ended
	September 30, 2012				October 2, 2011
U.S. and Canada	$	75,590	34.1	%	$	60,408	29.4	%
Europe	64,390		29.0		74,529		36.3
Asia-Pacific Region and Rest of World	81,805		36.9		70,398		34.3
Consolidated net sales	$	221,785	100.0	%	$	205,335	100.0	%



	Thirty-Nine Weeks Ended
	September 30, 2012				October 2, 2011
U.S. and Canada	$	220,067	33.3	%	$	198,213	32.3	%
Europe	174,408		26.4		191,840		31.3
Asia-Pacific Region and Rest of World	266,317		40.3		223,383		36.4
Consolidated net sales	$	660,792	100.0	%	$	613,436	100.0	%

U.S. and Canada

The $15.2 million, or 25.1%, increase and the $21.9 million, or 11.0%, increase, respectively, in sales to the U.S. and Canada in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to an increase in shipments to semiconductor customers as well as growth in sales to our natural resources customers.

Europe

Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia.

The $10.1 million, or 13.6%, decrease and the $17.4 million, or 9.1%, decrease, respectively, in sales to Europe in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to a shift in the mix of semiconductor sales away from European customers to Asian customers, as well as a decrease in the number of high-end TEM units sold in our Life Sciences segment. Currency fluctuations also decreased sales to Europe compared to the same periods of 2011.

Asia-Pacific Region and Rest of World

The $11.4 million, or 16.2%, increase and the $42.9 million, or 19.2%, increase, respectively, in sales to the Asia-Pacific Region and Rest of World in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily driven by increased spending in the semiconductor industry as well as increased advanced research spending by our Materials Science customers. Currency fluctuations negatively impacted sales to this region in the thirteen week period ended September 30, 2012 and increased sales to this region in the thirty-nine week period ended September 30, 2012 compared to the same periods of 2011.

Cost of Sales and Gross Margin

Our gross margin (gross profit as a percentage of net sales) by segment was as follows:



	Thirteen Weeks Ended				Thirty-Nine Weeks Ended
	September 30, 2012		October 2, 2011		September 30, 2012		October 2, 2011
Electronics	55.3	%	54.3	%	54.5	%	52.5	%
Materials Science	47.2		40.9		46.4		42.9
Life Sciences	40.4		49.1		41.6		46.3
Service and Components	36.7		34.5		35.5		32.8
Overall	47.0		44.4		46.4		44.5

Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead, as well as all of the costs of our customer service function such as labor, materials, travel and overhead. The five primary drivers affecting gross margin include: product mix (including the effect of price competition), volume, cost reduction efforts, competitive pricing pressure and currency movements.

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Cost of sales increased $3.5 million, or 3.1%, to $117.6 million in the thirteen week period ended September 30, 2012 compared to $114.1 million in the thirteen week period ended October 2, 2011 and increased $13.5 million, or 4.0%, to $354.1 million in the thirty-nine week period ended September 30, 2012 compared to $340.6 million in the comparable period of 2011, primarily due to increased sales. Currency fluctuations reduced cost of sales in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

The strengthening of the dollar during the third quarter of 2012 positively impacted our gross margin for the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011. This benefit was partially offset by hedge losses.

Electronics

The increases in Electronics gross margin during the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were due primarily to an increased number of high-end TEM units sold and improved margins on those high-end TEMs. Electronics gross margin also benefited from a stronger dollar in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

Materials Science

The increase in Materials Science gross margin in the thirteen week period ended September 30, 2012 compared to the same period of 2011 was primarily because our higher-margin natural resources products comprised a larger proportion of revenue for this segment. Additionally, the acquisition of VSG during the third quarter of 2012 positively impacted margins for this segment.

The increase in the thirty-nine week period ended September 30, 2012 compared to the same period of 2011 was because our higher-margin natural resources products comprised a larger proportion of revenue for this segment. The acquisition of VSG during the third quarter of 2012 also positively impacted margins for this segment. We continue to realize some operational cost savings for our TEM product line resulting from manufacturing a higher percentage of products at our Brno, Czech Republic facility. As the move was substantially complete in the second quarter of 2011, the cost savings effect of the transfer is diminishing on a year-over-year comparison basis. Materials Science gross margins also benefited from a stronger dollar in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

Life Sciences

The decreases in Life Sciences gross margin in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to a decrease in the number of high-end TEM units sold. This was partially offset by an increase in Life Sciences gross margin driven by a stronger dollar in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

Service and Components

The increases in Service and Components gross margin in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to increased sales, including sales from our newly created Korean subsidiary, and the more effective use of resources. Service and Components gross margin also benefited from a stronger dollar in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

Research and Development Costs

Research and Development (“R&D”) costs include labor, materials, overhead and payments to third parties for research and development of new products and new software or enhancements to existing products and software and are expensed as incurred. We periodically receive funds from various organizations to subsidize our research and development. These funds are reported as an offset to research and development expense. During the 2012 and 2011 periods, we received subsidies from European governments for technological developments for semiconductor and life sciences equipment.

R&D costs are reported net of subsidies and were as follows (in thousands):



	Thirteen Weeks Ended						Thirty-Nine Weeks Ended
	September 30, 2012			October 2, 2011			September 30, 2012			October 2, 2011
Gross spending	$	25,465		$	20,511		$	75,379		$	60,722
Less subsidies	(1,557		)	(1,299		)	(5,443		)	(3,951		)
Net expense	$	23,908		$	19,212		$	69,936		$	56,771

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R&D costs increased in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 primarily due to increased headcount and project spending to support current growth opportunities, as well as the inclusion of the R&D expenses for our recently acquired companies, TILL, ASPEX and VSG. The impact of currency fluctuations on R&D costs were decreases of $2.0 million and $4.4 million, respectively, in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011.

We anticipate that we will invest between 10% and 11% of revenue in R&D for the foreseeable future. Accordingly, as revenues increase, we currently anticipate that R&D expenditures will also increase. Actual future spending, however, will depend on market conditions.

Selling, General and Administrative Costs

Selling, general and administrative (“SG&A”) costs include labor, travel, outside services and overhead incurred in our sales, marketing, management and administrative support functions. SG&A costs also include sales commissions paid to our employees as well as to our agents.

SG&A costs increased $4.9 million, or 13.2%, to $41.9 million in the thirteen week period ended September 30, 2012 compared to $37.1 million in the thirteen week period ended October 2, 2011 and increased $13.7 million, or 12.3%, to $125.3 million in the thirty-nine week period ended September 30, 2012 compared to $111.6 million in the thirty-nine week period ended October 2, 2011. These increases were primarily due to increased headcount, higher stock-based compensation cost associated with a higher stock price and more sales commissions paid as a result of increased sales. Also causing the increase is the inclusion of SG&A costs of our four recently acquired companies, including amortization expense of the acquired intangibles, and the costs associated with executing the acquisitions. Currency fluctuations decreased SG&A costs by $2.0 million and $4.0 million, respectively, in thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods in 2011.

Restructuring, Reorganization, Relocation and Severance

Manufacturing Transfer

For information regarding the related accrued liability, see Note 12 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Other Expense, Net

Other expense, net includes interest income, interest expense, foreign currency gains and losses and other miscellaneous items.

Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $0.3 million and $1.3 million, respectively, in the thirteen and thirty-nine week periods ended September 30, 2012 and $0.7 million and $1.9 million, respectively, in the comparable periods of 2011. The decreases in the thirteen and thirty-nine week periods ended September 30, 2012 compared to the same periods of 2011 were primarily due to lower investment balances and continued low interest rates.

Interest expense was $1.0 million and $3.1 million, respectively, in the thirteen and thirty-nine week periods ended September 30, 2012 and $1.0 million and $3.2 million, respectively, in the comparable periods of 2011 and included interest expense related to our 2.875% convertible notes.

Other, net primarily consists of foreign currency gains and losses on transactions and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions. Other, net was a net expense of $1.0 million and $3.2 million in the thirteen and thirty-nine week periods ended September 30, 2012, respectively, and was a net expense of $0.3 million and $0.4 million, respectively, in the comparable periods of 2011. The larger expense is attributed to more volatility in the euro and Czech koruna and an increased amount of expenses that the company is hedging.

Income Tax Expense

Our effective income tax rates for the thirty-nine week periods ended September 30, 2012 and October 2, 2011 were 20.0% and 26.6%, respectively, and reflected taxes accrued in the U.S. and foreign jurisdictions. The rate for the first thirty-nine weeks of 2012 is lower than a year ago due to an agreement with the tax authorities in the Netherlands to apply a 5% tax rate to a portion of our Dutch income attributed to intellectual property. The agreement was not in place during the first thirty-nine weeks of 2011.

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Our effective tax rate may differ from the U.S. federal statutory tax rate primarily as a result of the effects of state and foreign income taxes, research and development tax credits earned in the U.S. and foreign jurisdictions, adjustments to our unrecognized tax benefits and our ability or inability to utilize various carry forward tax items. In addition, our effective income tax rate may be affected by changes in statutory tax rates and laws in the U.S. and foreign jurisdictions and other factors.

As of September 30, 2012 and December 31, 2011, total unrecognized tax benefits were $16.9 million and $16.0 million, respectively, and related primarily to uncertainty surrounding tax credits and permanent establishment. All unrecognized tax benefits would decrease the effective tax rate if recognized.

Our net deferred tax assets totaled $3.9 million and $13.2 million, respectively, at September 30, 2012 and December 31, 2011. Valuation allowances on deferred tax assets totaled $2.5 million and $2.2 million as of September 30, 2012 and December 31, 2011, respectively. We continue to record a valuation allowance against a portion of U.S. and foreign deferred tax assets, as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.

Liquidity and Capital Resources

Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of September 30, 2012 consisted of $305.8 million of cash, cash equivalents, short-term restricted cash and short-term investments, $31.8 million in non-current investments, $22.2 million of long-term restricted cash, $100.0 million available under revolving credit facilities, as well as potential future cash flows from operations. $155.3 million of our $359.8 million in total cash, cash equivalents, restricted cash and investments, are held outside of the United States. Although we do not intend to do so, if these funds were ever repatriated, we would need to accrue and pay taxes on these funds. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2017.

We believe that we have sufficient cash resources and available credit lines to meet our expected operational and capital needs for at least the next twelve months from September 30, 2012.

In the thirty-nine week period ended September 30, 2012, cash and cash equivalents and short-term restricted cash decreased $75.0 million to $267.9 million as of September 30, 2012 from $342.9 million as of December 31, 2011 primarily as a result of $93.4 million used for acquisition related activities, $14.7 million used for the purchase of property, plant and equipment, $15.0 million used to settle litigation with Hitachi, dividends paid on common stock of $3.0 million, and a $4.2 million unfavorable effect of exchange rate changes. These factors were partially offset by $25.3 million provided by operations, and $7.6 million of proceeds from the exercise of employee stock options.

In the thirty-nine week period ended October 2, 2011, cash and cash equivalents and short-term restricted cash increased $15.6 million to $315.3 million as of October 2, 2011 from $299.7 million as of December 31, 2010 primarily as a result of $52.8 million provided by operations, $20.2 million of proceeds from the exercise of employee stock options and the net redemption of $3.5 million of marketable securities. These factors were partially offset by repurchases of common stock of $50.0 million, a $0.2 million unfavorable effect of exchange rate changes and $9.1 million used for the purchase of property, plant and equipment.

Accounts receivable increased $35.8 million to $221.8 million as of September 30, 2012 from $186.0 million as of December 31, 2011. This increase was primarily driven by a corresponding increase in sales. The September 30, 2012 balance included a $0.9 million increase related to fluctuations in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 91 days at September 30, 2012 and 80 days at December 31, 2011.

Inventories increased $14.5 million to $196.5 million as of September 30, 2012 compared to $182.0 million as of December 31, 2011, due to increased production volumes. The September 30, 2012 balance included a $1.5 million increase related to fluctuations in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 1.8 times for the quarter ended September 30, 2012 and 1.8 times for the quarter ended October 2, 2011.

Deferred tax assets, current and long term, net of deferred tax liabilities decreased $9.3 million to $3.9 million as of September 30, 2012 compared to $13.2 million as of December 31, 2011 primarily due to an increase in deferred tax liabilities relating to the acquisitions of ASPEX and VSG and utilization of tax credit carryforwards against current and prior year tax expense.

Other current assets increased $6.6 million to $34.6 million as of September 30, 2012 compared to $28.0 million as of December 31, 2011, primarily due to an increase in our current income taxes receivable.

Expenditures for property, plant and equipment of $14.7 million and transfers to fixed assets from inventories of $13.5 million in the thirty-nine week period ended September 30, 2012 primarily consisted of expenditures for facilities improvements at our manufacturing sites and demonstration equipment. We expect to spend over $30 million for capital expenditures in 2012 primarily for facilities improvements at our manufacturing sites, the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our ERP system.

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Accrued payroll liabilities decreased $11.9 million to $34.8 million as of September 30, 2012 compared to $46.7 million as of December 31, 2011, primarily due to the payment of 2011 employee incentive compensation.

Income taxes payable decreased $2.9 million to $8.4 million as of September 30, 2012 compared to $11.3 million as of December 31, 2011 primarily due to accruals for U.S. and foreign taxes on current period income. Our receivable for income taxes of $7.7 million at September 30, 2012 is included as a component of other current assets.

Other Credit Facilities and Letters of Credit

We have a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. The credit agreement expires in April 2016. We may, upon notice to JPMorgan Chase Bank, N.A. (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million There were no amounts outstanding under this facility as of September 30, 2012.

We mitigate credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our lenders and believe them to be insignificant.

The following table sets forth information related to guarantees and letters of credit (in thousands):



	September 30, 2012
Guarantees and letters of credit outstanding	$	28,183
Amount secured by restricted cash deposits:
Current	$	5,993
Long-term	22,165
Total secured by restricted cash	$	28,158

Share Repurchase Plan

A plan to repurchase up to a total of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010 and does not have an expiration date. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice.

We did not repurchase any shares during the third quarter of 2012. During the first thirty-nine weeks of 2012 we repurchased 20,500 shares for a total of $0.9 million, or an average of $43.41 per share. During the thirteen and thirty-nine week periods ended October 2, 2011, we repurchased 1,654,400 shares for a total of $50.0 million, or an average of $30.19 per share. As of September 30, 2012, 2,119,800 shares remained available for purchase pursuant to this plan.

Dividends to Shareholders

In June 2012, the Company announced its plans to initiate a quarterly dividend of $0.08 per share of common stock. On June 7, 2012, our Board of Directors declared a dividend of $0.08 per share of common stock, or approximately$3.0 million. The dividend was paid on July 24, 2012 to shareholders of record on July 11, 2012. On September 13, 2012, our Board of Directors declared a dividend of $0.08 per share of common stock, or approximately $3.0 million. The dividend was paid on October 23, 2012 to shareholders of record on October 10, 2012. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors.

New Accounting Pronouncements

See Note 15 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements.

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Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2011 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 17, 2012.


Item 4.	Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management evaluated, with the participation and under the supervision of our President and Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our President and Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

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PART II – OTHER INFORMATION


Item 1.	Legal Proceedings

We are involved in various legal proceedings and receive claims from time to time, arising in the normal course of our business activities, including claims for alleged infringement or violation of intellectual property rights.

Item 1A. Risk Factors

A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2 of this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings and public disclosures. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.

We operate in highly competitive industries, and we cannot be certain that we will be able to compete successfully in such industries.

The industries in which we operate are intensely competitive. Established companies, both domestic and foreign, compete with us in each of our product lines. Some of our competitors have greater financial, engineering, manufacturing and marketing resources than we do and may price their products very aggressively. In addition, these competitors may be willing to operate at a less profitable level than at which we would expect to operate. Our significant competitors include, among others: JEOL Ltd., Carl Zeiss SMT A.G., Hitachi High Technologies Corporation and Tescan, a.s. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other.

Our customers must make a substantial investment to install and integrate capital equipment into their laboratories and process applications. As a result, once a manufacturer has selected a particular vendor’s capital equipment, the manufacturer generally relies on that equipment for a specific production line or process control application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a particular customer selects a competitor’s capital equipment, we expect to experience difficulty selling to that customer for a significant period of time.

Our ability to compete successfully depends on a number of factors both within and outside of our control, including:


•	price;


•	product quality;


•	breadth of product line;


•	system performance;


•	ease of use;


•	cost of ownership;


•	global technical service and support;


•	success in developing or otherwise introducing new products; and


•	foreign currency fluctuations.

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We cannot be certain that we will be able to compete successfully on these or other factors, which could negatively impact our revenues, gross margins and net income in the future.

Because many of our shipments occur in the last month of a quarter, we are at risk of one or more transactions not being delivered according to forecast.

We have historically shipped approximately 70% of our products in the last month of each quarter. As any one sale may be significant to meeting our quarterly sales projection (as our average selling price for a tool is approximately $1 million), any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.

Because we have significant operations outside of the U.S., we are subject to political, economic and other international conditions that could result in increased operating expenses and regulation of our products and increased difficulty in maintaining operating and financial controls.

Because a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. In the first thirty-nine weeks of 2012 and in each of the last three years, more than 66% of our sales came from outside of the U.S. We have manufacturing facilities in Brno, Czech Republic, Eindhoven, The Netherlands and Munich, Germany and sales offices in many other countries. Over 80% of our products are manufactured in Europe.

Moreover, we operate in over 50 countries, 24 with a direct presence. Some of our global operations are geographically isolated, are distant from corporate headquarters and/or have little infrastructure support. Therefore, maintaining and enforcing operating and financial controls can be difficult. Failure to maintain or enforce controls could have a material adverse effect on our control over service inventories, quality of service, customer relationships and financial reporting.

Our exposure to the business risks presented by foreign economies will increase to the extent we continue to expand our global operations. International operations will continue to subject us to a number of risks, including:


•	longer sales cycles;


•	multiple, conflicting and changing governmental laws and regulations;


•	protectionist laws and business practices that favor local companies;


•	price and currency exchange rates and controls;


•	taxes and tariffs;


•	export restrictions;


•	difficulties in collecting accounts receivable;


•	travel and transportation difficulties resulting from actual or perceived health risks (e.g., avian or swine influenza);


•	changes in the regulatory environment in countries where we do business could lead to delays in the importation of products into those countries;


•	the implementation and administration of the Control of Electronic Information Products (often referred to as China RoHS) regulations could lead to delays in the importation of products into China;


•	political and economic instability (e.g. Thai riots, Mexican crimewave, unrest in Egypt, Greece and the Middle East);


•	risk of failure of internal controls and failure to detect unauthorized transactions; and


•	potential labor unrest.

The industries in which we sell our products are cyclical, which may cause our results of operations to fluctuate.

Our business depends in large part on the capital expenditures of customers within our Electronics, Materials Science and Life Sciences market segments. See “Net Sales by Segment” included in Part I, Item 2 of this Quarterly Report on Form 10-Q for additional information.

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The largest sub-parts of the Electronics market segment are the semiconductor and data storage industries. These industries are cyclical and have experienced significant economic downturns at various times in the last decade. Such downturns have been characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. A downturn in one or both of these industries, or the businesses of one or more of our customers, could have a material adverse effect on our business, prospects, financial condition and results of operations. Beginning with the second half of 2007, we experienced significant variability in bookings and revenue in our Electronics segment due to the downturn in the spending cycle in the semiconductor and data storage industry. The semiconductor capital equipment market recovered in 2010, but the duration of the recovery is uncertain. General global economic conditions may be beginning to stabilize, but economic recovery is tentative and its strength is unknown. During downturns, our sales and gross profit margins generally decline.

The Materials Science market segment is also affected by overall economic conditions, but is not as cyclical as the Electronics market segment.

The Life Sciences market segment is a smaller and still emerging market, and the tools we sell into that market often have average selling prices ranging from $0.5 million to over $5.0 million. Consequently, loss of demand among a relatively small group of potential customers can have a material impact on the overall demand for our products. As a result, movement of a small number of sales from one quarter to the next could cause significant variability in quarter-to-quarter growth rates, even as we believe that this market has the potential for long-term growth.

A significant portion of our Materials Science and Life Sciences revenue is dependent on government investments in research and development of new technology. To the extent that governments, especially in Europe or the U.S., reduce their spending in response to budget deficits and debt limitations, demand for our products could be affected. To date, we have not seen an impact from such actions, although the U.S. government has indicated that it plans to reduce funding for research. The funding cycles for our customers tend to extend over multiple quarters and several countries have reaffirmed their commitment to scientific research, but the longer-term impact of potential government fiscal austerity measures on our growth rate cannot be determined at this time. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are threatened by the recent volatility in capital markets worldwide.

As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who could delay expenditures or cancel orders in reaction to variations in their businesses or general economic conditions. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses quickly in response to revenue shortfalls. In a prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as manufacturing overhead, capital equipment or research and development costs, which may cause our gross margins to erode and our net loss to increase or earnings to decline.

Our acquisition and investment strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.

In addition to our efforts to develop new technologies from internal sources, we may also seek to acquire new technologies or operations from external sources. On November 14, 2011, we acquired TILL Photonics of Munich, Germany to expand our Life Sciences business and on January 9, 2012 we acquired ASPEX Corporation of Delmont, Pennsylvania to expand our natural resources footprint. On July 9, 2012 we acquired certain assets of AP Tech, a sales and service agent in Korea, and on August 1, 2012 we acquired Visualization Sciences Group ("VSG") of Bordeaux, France, which provides high-performance 3D visualization software products and tools to a range of markets. We continue to work to integrate these new entities. As part of this effort, we may make acquisitions of, or make significant debt and equity investments in, businesses with complementary products, services and/or technologies. Acquisitions can involve numerous risks, including management issues and costs in connection with the integration of the operations and personnel, technologies and products of the acquired companies, the possible write-downs of impaired assets and the potential loss of key employees of the acquired companies. The inability to effectively manage any of these risks could seriously harm our business. Additionally, difficulties in integrating any potential acquisitions into our internal control structure could result in a failure of our internal control over financial reporting, which, in turn, could create a material weakness.

To the extent we make investments in entities that we control, or have significant influence in, our financial results will reflect our proportionate share of the financial results of the entity.

We may suffer manufacturing capacity limitations on occasion and are planning expansion.

Recently, demand for our product has accelerated and as orders increase, we may not be able to ramp our manufacturing capacity and supply chain fast enough to keep pace with order intake for every product line offered. We recently experienced challenges regarding manufacturing capacity for our TEM products driven by rapid growth. As a consequence, our ability to realize revenue on orders may be delayed or, in some cases, reduced and we may suffer cancellations. In addition, the quality of the products we ship may suffer, damaging our reputation and future sales. Further, we are planning expansion to address future capacity needs and failure to plan adequately or execute on those plans could constrain capacity in the future.

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If our customers cancel or reschedule orders or if an anticipated order for even one of our systems is not received in time to permit shipping during a certain fiscal period, our operating results for that fiscal period may fluctuate and our business and financial results for such period could be materially and adversely affected. Cancellation risks rise in periods of economic downturn.

Our customers are able to cancel or reschedule orders, generally with limited or no penalties, depending on the product’s stage of completion. The amount of purchase orders at any particular date, therefore, is not necessarily indicative of sales to be made in any given period. Our build cycle, or the time it takes us to build a product to customer specifications, typically ranges from one to six months. During this period, the customer may cancel the order, although generally we will be entitled to receive a cancellation fee based on the agreed-upon shipment schedule. The risks of cancellation are higher during times of economic downturn, such as the U.S. and global economies are presently experiencing. In addition, we derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems, with a large portion in the last month of the quarter. Further, in some cases, our customers have to make changes to their facilities to accommodate the site requirements for our systems and may reschedule their orders because of the time required to complete these facility changes. This is particularly true of our high-performance TEMs. As a result, the timing of revenue recognition for a single transaction could have a material effect on our revenue and results of operations for a particular fiscal period.

Due to these and other factors, our net revenues and results of operations have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and annual basis. It is possible that in some future quarter or quarters our results of operations will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly.

Due to our extensive international operations and sales, we are exposed to foreign currency exchange rate risks that could adversely affect our revenues, gross margins and results of operations.

A significant portion of our sales and expenses are denominated in currencies other than the U.S. dollar, principally the euro and Czech Koruna. For the first thirty-nine weeks of 2012 and for all of 2011 and 2010, approximately 25% to 35% of our revenue was denominated in euros, while more than half of our expenses were denominated in euros, Czech Koruna, or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, principally the euro, Czech Koruna and Japanese Yen, can impact our revenues, gross margins, results of operations and cash flows. We undertake hedging transactions to limit our exposure to changes in the dollar/euro exchange rate. The hedges are designed to protect us as the dollar weakens but also provide us with some flexibility if the dollar strengthens.

Achieving hedge designation is based on evaluating the effectiveness of the derivative contracts’ ability to mitigate the foreign currency exposure of the linked transaction. We are required to monitor the effectiveness of all new and open derivative contracts designated as hedges on a quarterly basis. Failure to meet the hedge accounting requirements could result in the requirement to record deferred and current realized and unrealized gains and losses into net income in the current period. This failure could result in significant fluctuations in operating results. In addition, we will continue to recognize unrealized gains and losses related to the changes in fair value of derivative contracts not designated as hedges in the current period net income. Accordingly, the related impact to operating results may be recognized in a different period than the foreign currency impact of the hedged transaction.

We also enter into foreign forward exchange contracts that are designed to partially mitigate the impact of specific cash, receivables or payables positions denominated in foreign currencies. See Note 14 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.

The recent extreme volatility of dollar-euro exchange rates can make it more difficult for us to deploy our hedging program and create effective hedges.

Current economic conditions may adversely affect our industry, business and results of operations.

The global economy is suffering an extended slowdown with a high rate of unemployment and the future economic climate may continue to be less favorable than that of the past. This slowdown has, and could further lead to, reduced consumer and business spending in the foreseeable future, including by our customers, and the purchasers of their products and services. If such spending continues to slow down or decrease, our industry, business and results of operations may be adversely impacted. Also, in times of economic distress, hardship, bankruptcy and insolvency among our customers could increase. This may make it more difficult to collect on receivables.

Gross margins on our products vary between product lines and markets and, accordingly, changes in product mix will affect our results of operations.

If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. Our Electronics business, which ultimately depends on consumers who buy electronic devices, began to experience recovery in 2010, but the duration of the recovery is uncertain. To the extent that the recovery in this market segment slows or stalls, our overall margins may be negatively affected.

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Our business is complex, and changes to the business may not achieve their desired benefits.

Our business is based on a myriad of technologies, encompassed in multiple different product lines, addressing various customers in a range of markets in different regions of the world. A business of our breadth and complexity requires significant management time, attention and resources. In addition, significant changes to our business, such as changes in manufacturing, operations, product lines, market focus or organizational structure or focus, can be distracting, time-consuming and expensive. These changes can have short-term adverse effects on our financial results. In addition, the complexity of product lines and diversity of our customer base creates manufacturing planning and control challenges that may lead to higher costs of materials and labor, increased service costs, delayed shipments and excessive inventory. Failure to effectively manage these manufacturing issues may materially impact our financial position, results of operations or cash flow.

A portion of our manufacturing operations were relocated between existing facilities which involved significant costs and risks of operational interruption and product quality.

We executed a plan during 2010 and 2011 to shift manufacturing for certain products to other of our factories. Moving product manufacturing includes, among others, the following risks:


•	unanticipated additional costs connected to such moves;


•	delay or failure in being able to build the transferred product at the new sites;


•	unanticipated additional labor and materials costs related to such moves;


•	logistical issues arising from the moves; and


•	product quality falling short of the product standard when manufactured at the prior location.

Any of these factors could cause us to miss product orders, cause a decline in product quality and completeness, damage our reputation, increase costs of goods sold or decrease revenue and gross margins.

Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.

As part of our efforts to streamline operations and cut costs, we have been outsourcing aspects of our manufacturing processes and other functions and we evaluate additional outsourcing at times. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, and replacement manufacturers may be unavailable, which may preclude us from fulfilling our customer orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Moreover, delays could cause us to suffer penalties with our customers, which could also impact our profitability.

In 2011, we notified our largest contract manufacturer, accounting for approximately 10% of our revenue, that we plan to terminate the arrangement and to take over the manufacturing process which we did ourselves as late as 2008. The termination contract was signed during the fourth quarter of 2011 and the manufacturing process was transitioned back to FEI as of April 2, 2012.

We rely on a limited number of suppliers to provide parts and components. Failure of any of these suppliers to provide us with quality products in a timely manner could negatively affect our revenues and results of operations.

Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business, including our ability to convert backlog into revenue. Although we currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, AP Tech, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. A portion of the subcomponents that make up the components and sub-assemblies supplied to us are proprietary in nature and are provided to our suppliers only from single sources. We monitor those parts subject to single or a limited source supply to seek to minimize factory down time due to unavailability of such parts, which could impact our ability to meet manufacturing schedules. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. If our suppliers are not able to meet our supply requirements, constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, restrictions regulating the use of certain hazardous substances in electrical and electronic equipment in various jurisdictions may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

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Our service business depends on our ability to reliably supply replacement parts and consumables to our customers and failure to deliver high quality parts and consumables in a timely manner could cause our service business to suffer.

Our service business addresses a large and diverse install base of over 8,600 tools involving diverse products of varying ages, configurations, use cases, condition, and customer requirements that are dispersed in approximately 50 countries around the globe. Providing logistical support for delivery of spare parts and consumables to these tools, particularly the older tools, can be difficult. We have attempted to address the complexity of our service requirements, in part, through a remote diagnostics system that allows us to remotely access tools through a virtual private network. If we are unable to effectively manage and support the supply and delivery of spare parts and consumables to our customers we may damage our reputation and service business.

We rely on the security and integrity of our electronic data systems and our business could be damaged by a security breach or other compromise of these systems.

If we are unable to safeguard our electronic data, our intellectual property could be compromised, which may harm our reputation and damage customer relationships. Further, we maintain personal information of our employees and a data breach that leads to the misuse or misappropriation of this information could cause the company to incur liability, damage our relationship with our employees and our reputation. Moreover, if we suffer an unauthorized intrusion into our own systems or the virtual private network providing for remote tool diagnostics at customer sites, we, or our customers, may suffer a loss of proprietary information that could create liability for us and undermine our business. Additionally, if our systems are inaccessible for a period of time, it may compromise our ability to perform business functions in a timely manner.

We depend on certain business processes for order entry and failure to adhere to those processes could impair our ability to properly book and fulfill orders.

We use business processes, including automated systems, to enter and track customer orders. Failure to adhere to these processes could result in errors in bookings and discounts on tool sales. Further, inaccurate booking information could lead to delays in shipping and having to rework orders. These problems could, in turn, cause reduced margins and delayed revenue.

Our sales contracts often require delivery of multiple elements with complex terms and conditions that may cause our quarterly results to fluctuate.

Our system sales contracts are complex and often include multiple elements such as delivery of more than one system, installation obligations (sometimes for multiple tools), accessories and/or service contracts, as well as provisions for customer acceptance. Typically, we recognize revenue as the various elements are delivered to the customer or the related services are provided. However, certain of these contracts have complex terms and conditions or technical specifications that require us to deliver most, or sometimes all, elements under the contract before revenue can be recognized. This could result in a significant delay between production and delivery of products and when revenue is recognized, which may cause volatility in, or adversely impact, our quarterly results of operations and cash flows.

The loss of one or more of our key customers would result in the loss of significant net revenues.

A relatively small number of customers account for a large percentage of our net revenues, although no customer has accounted for more than 10% of total annual net revenues in the recent past. Our business will be seriously harmed if we do not generate as much revenue as we expect from these key customers, if we experience a loss of any of our key customers or if we suffer a substantial reduction in orders from these customers. Our ability to continue to generate revenues from our key customers will depend on our ability to introduce new products that are desirable to these customers.

We may not be able to enforce our intellectual property rights, especially in foreign countries, which could have a material adverse affect on our business.

Our success depends in large part on the protection of our proprietary rights. We incur significant costs to obtain and maintain patents and defend our intellectual property. We also rely on the laws of the U.S. and other countries where we develop, manufacture or sell products to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect or other parties may challenge, invalidate or circumvent these rights.

Further, our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as they are in the U.S. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. For the first thirty-nine weeks of 2012 and each of the last three years, we derived more than 66% of our sales from countries outside of the U.S. If we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.

Infringement of our proprietary rights could result in weakened capacity to compete for sales and increased litigation costs, both of which could have a material adverse effect on our business, prospects, financial condition and results of operations.

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If third parties assert that we violate their intellectual property rights, our business and results of operations may be materially adversely affected.

Several of our competitors hold patents covering a variety of technologies that may be included in some of our products. In addition, some of our customers may use our products for applications that are similar to those covered by these patents. From time to time, we, and our respective customers, have received correspondence from our competitors claiming that some of our products, as sold by us or used by our customers, may be infringing one or more of these patents. Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running the business.

In addition, our competitors or other entities may assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions may result in costly litigation or require us to obtain a license to use intellectual property rights of others. Additionally, if claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.

If we become subject to additional infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question or defending our position. These licenses, however, may not be available on satisfactory terms or at all. If we are not able to negotiate the necessary licenses on commercially reasonable terms or successfully defend our position, these potential infringement claims could have a material adverse effect on our business, prospects, financial condition and results of operations.

We have fixed debt obligations, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future manufacturing capacity and research and development needs.

The degree to which we are leveraged could have important consequences, including our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited. In addition our shareholders may be further diluted if holders of all or a portion of our outstanding 2.875% subordinated convertible notes elect to convert their notes. Our ability to pay interest and principal on our debt securities, to satisfy our other debt obligations and to make planned expenditures will be dependent on our future operating performance, which could be affected by changes in economic conditions and other factors, some of which are beyond our control. A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. We cannot guarantee that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. As a result, we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.

If we are unable to pay quarterly dividends or repurchase our stock at intended levels, our reputation and stock price may be harmed.

In September 2010, our Board of Directors approved a plan to repurchase up to a total of 4.0 million shares of our common stock. In June 2012, our Board of Directors approved the initiation of quarterly cash dividends to holders of our common stock. The indicated quarterly cash dividend, subject to declaration by our Board of Directors and capital availability, is $0.08 per share of common stock. Dividends have been paid under this program each quarter since its inception. The dividend and stock repurchase program may require the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures. Further, our Board of Directors may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. The stock repurchase program does not have an expiration date and may be limited at any time. Our ability to pay dividends and repurchase stock will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends or repurchase stock after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price.

Restructuring activities may be disruptive to our business and financial performance. Any delay or failure by us to execute planned cost reductions could also be disruptive and could result in total costs and expenses that are greater than expected.

We have historically engaged in various corporate wide restructuring and infrastructure improvement programs in order to increase operational efficiency, reduce costs and balance the effects of currency fluctuations on our financial results. These actions have previously included reductions of work-force as well as the costs to migrate portions of our supply chain to dollar-linked contracts.

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Restructuring has the potential to adversely affect our business, financial condition and results of operations in other respects as well. This includes potential disruption of manufacturing operations, our supply chain and other aspects of our business. Employee morale and productivity could also suffer and result in unintended employee attrition. Loss of sales, service and engineering talent, in particular, could damage our business. Restructuring requires substantial management time and attention and has the potential to divert management from other important work. Moreover, we could encounter delays in executing our plans, which could cause further disruption and additional unanticipated expense. Some of our employees work in areas, such as Europe and Asia, where workforce reductions are highly regulated, and this could slow the implementation of planned workforce reductions. Restructuring plans may also fail to achieve the stated aims for reasons similar to those described in the prior paragraph.

During the course of executing a restructuring, we could incur material non-cash charges such as write-downs of inventories or other tangible assets. We test our goodwill and other intangible assets for impairment annually or when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it could have a material impact on our results of operations.

Because we do not have long-term contracts with our customers, our customers may stop purchasing our products at any time, which makes it difficult to forecast our results of operations and to plan expenditures accordingly.

We do not have long-term contracts with our customers. Accordingly:


•	customers can stop purchasing our products at any time without penalty;


•	customers may cancel orders that they previously placed;


•	customers may purchase products from our competitors;


•	we are exposed to competitive pricing pressure on each order; and


•	customers are not required to make minimum purchases.

If we do not succeed in obtaining new sales orders from new and existing customers, our results of operations will be negatively impacted.

Many of our projects are funded under various government contracts and if we are found to have violated the terms of the government contracts or applicable statutes and regulations, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse effect on our business and results of operations.

Many of our projects are funded under various government contracts worldwide. Government contracts are subject to specific procurement regulations, contract provisions and requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated, we could be suspended or debarred from government contracting or subcontracting, including federally funded projects at the state level. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer the loss of the contracts, which could have a material adverse effect on our business and results of operations.

Changes and fluctuations in government spending priorities could adversely affect our revenue.

Because a significant part of our overall business is generated either directly or indirectly as a result of worldwide federal and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions or government administration, which are often unpredictable, may affect our revenues.

Political instability in key regions around the world, the U.S. government’s commitment to military related expenditures and current uncertainty around global sovereign debt put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. Also, changes in U.S. Congressional appropriations practices could result in decreased funding for some of our customers. At the state and local levels, the need to compensate for reductions in federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. A potential reduction of federal funding may adversely affect our business. Moreover, due to the world-wide economic downturn, many state and national governments are seeing significant declines in tax revenue, while also seeing increased demand for services. This could reduce the money available to our potential customers from government funding sources that could be used to purchase our products and services.

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We have long sales cycles for our systems, which may cause our results of operations to fluctuate.

Our sales cycle can be 12 months or longer and is unpredictable. Variations in the length of our sales cycle could cause our net sales and, therefore, our business, financial condition, results of operations, operating margins and cash flows, to fluctuate widely from period to period. These variations could be based on factors partially or completely outside of our control.

The length of time it takes us to complete a sale depends on many factors, including:


•	the efforts of our sales force and our independent sales representatives;


•	changes in the composition of our sales force, including the departure of senior sales personnel;


•	the history of previous sales to a customer;


•	the complexity of the customer’s manufacturing processes;


•	the introduction, or announced introduction, of new products by our competitors;


•	the economic environment;


•	the internal technical capabilities and sophistication of the customer; and


•	the capital expenditure budget cycle of the customer.

Our sales cycle also extends in situations where the sale involves developing new applications for a system or technology. As a result of these and a number of other factors that could influence sales cycles with particular customers, the period between initial contact with a potential customer and the time when we recognize revenue from that customer, if we ever do, may vary widely.

The loss of key management or our inability to attract and retain managerial, engineering and other technical personnel could have a material adverse effect on our business, financial condition and results of operations.

Attracting qualified personnel is difficult, and our recruiting efforts may not be successful. Specifically, our product generation efforts depend on hiring and retaining qualified engineers. The market for qualified engineers is very competitive. In addition, experienced management and technical, marketing and support personnel in the technology industry are in high demand, and competition for such talent is intense. The loss of key personnel, or our inability to attract key personnel, could have an adverse effect on our business, financial condition or results of operations.

Our customers experience rapid technological changes, with which we must keep pace. We may be unable to properly ascertain new market needs, or introduce new products responsive to those needs, on a timely and cost-effective basis.

Customers in each of our market segments experience rapid technological change that requires new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to understand these changes and develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices that respond to, and accurately predict, new market requirements. We may fail to ascertain and respond to the needs of our customers or fail to develop and introduce new and enhanced products that meet their needs, which could adversely affect our financial position. In addition, new product introductions or enhancements by competitors could cause a decline in our sales or a loss of market acceptance of our existing products. Increased competitive pressure also could lead to intensified price competition, resulting in lower margins, which could materially adversely affect our business, prospects, financial condition and results of operations.

Our success in developing, introducing and selling new and enhanced systems depends on a variety of factors, including:


•	selection and development of product offerings;


•	timely and efficient completion of product design and development;


•	timely and efficient implementation of manufacturing processes;


•	effective sales, service and marketing functions; and


•	product performance.

Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for products under development and the equipment required to produce such products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. On occasion, certain product and application developments have taken longer than expected. These delays can have an adverse affect on product shipments and results of operations.

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The process of developing new high technology capital equipment products and services is complex and uncertain, and failure to accurately anticipate customers’ changing needs and emerging technological trends, to complete engineering and development projects in a timely manner and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will result in products that the market will accept.

To the extent that a market does not develop for a new product, we may decide to discontinue or modify the product. These actions could involve significant costs and/or require us to take charges in future periods. If these products are accepted by the marketplace, sales of our new products may cannibalize sales of our existing products. Further, after a product is developed, we must be able to manufacture sufficient volume quickly and at low cost. To accomplish this objective, we must accurately forecast production volumes, mix of products and configurations that meet customer requirements. If we are not successful in making accurate forecasts, our business and results of operations could be significantly harmed.

In addition, new product launches are costly and may not always prove to be successful. For example, in the fourth quarter of 2009, we sold our Phenom product line as it did not deliver the level of revenues we had originally forecast.

We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would impact our financial position.

As a corporation with operations both in the U.S. and abroad, we are subject to income taxes in both the U.S. and various foreign jurisdictions. Our effective tax rate is subject to significant fluctuation from one period to the next as the income tax rates for each year are a function of the following factors, among others:


•	the effects of a mix of profits or losses earned by us and our subsidiaries in numerous foreign tax jurisdictions with a broad range of income tax rates;


•	our ability to utilize recorded deferred tax assets;


•	changes in uncertain tax positions, interest or penalties resulting from tax audits; and


•	changes in tax rates and laws or the interpretation of such laws.

Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial results.

We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the U.S. and various foreign jurisdictions.

We are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits.

Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot assure you that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.

Many of our current and planned products are highly complex and may contain defects or errors that can only be detected after installation, which may harm our reputation and damage our business.

Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we could have to replace certain components and/or provide remediation in response to the discovery of defects in products after they are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.

Some of our systems use hazardous gases and high voltage power supplies as well as emit x-rays, which, if not properly contained, could result in property damage, bodily injury and death.

A product safety failure, such as a hazardous gas, high voltage power supply, x-ray leak or extreme pressure release, could result in substantial liability and could also significantly damage customer relationships and our reputation and disrupt future sales. Moreover, remediation could require redesign of the tools involved, creating additional expense, increasing tool costs and damaging sales. In addition, the matter could involve significant litigation that would divert management time and resources and cause unanticipated legal expense. Further, if such a leak or release involved violation of health and safety laws, we may suffer substantial fines and penalties in addition to the other damage suffered. Finally, failure to properly manage the regulatory requirements for shipment of dangerous products could cause delays in clearing customs and thereby cause delay or loss of revenue in any particular quarter.

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Natural disasters, catastrophic events, terrorist acts and acts of war may seriously harm our business and revenues, costs and expenses and financial condition.

Our worldwide operations could be subject to earthquakes, volcanic eruptions, telecommunications failures, power interruptions, water shortages, closure of transport routes, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics, terrorist acts, acts of war and other natural or manmade disasters or business interruptions. For many of these events we carry no insurance. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. The impact of such events could be disproportionately greater on us than on other companies as a result of our significant international presence. Our corporate headquarters, and a portion of our research and development activities, are located on the Pacific coast, and other critical business operations and some of our suppliers are located in Asia, near major earthquake faults. We rely on major logistics hubs, primarily in Europe, Asia and the U.S. to manufacture and distribute our products and to move products to customers in various regions. Our operations could be adversely affected if manufacturing, logistics or other operations in these locations are disrupted for any reason, including those described above. The ultimate impact on us, our significant suppliers and our general infrastructure of being consolidated in certain geographical areas is unknown, but our revenue, profitability and financial condition could suffer in the event of a catastrophic event.

Unforeseen health, safety and environmental costs could impact our future net earnings.

Some of our operations use substances that are regulated by various federal, state and international laws governing health, safety and the environment. We could be subject to liability if we do not handle these substances in compliance with safety standards for storage and transportation and applicable laws. We will record a liability for any costs related to health, safety or environmental remediation when we consider the costs to be probable and the amount of the costs can be reasonably estimated.

We may not be successful in obtaining the necessary export licenses to conduct operations abroad, and the U.S. Congress may prevent proposed sales to foreign customers.

We are subject to export control laws that limit which products we sell and where and to whom we sell our products. Moreover, export licenses are required from government agencies for some of our products in accordance with various statutory authorities, including U.S. statutes such as the Export Administration Act of 1979, the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. Depending on the shipment, we are also subject to Dutch or Czech law regarding export controls and licensing requirements. We may not be successful in obtaining these necessary licenses in order to conduct business abroad. Failure to comply with applicable export controls or the termination or significant limitation on our ability to export certain of our products would have an adverse effect on our business, results of operations and financial condition.

Changes in accounting pronouncements or taxation rules or practices may affect how we conduct our business.

Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. New rules, changes to existing rules, if any, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.

Provisions of our charter documents, our shareholder rights plan and Oregon law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our shareholders.

Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Our Board of Directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our Board of Directors, may deter efforts to obtain control of us and may make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholder.

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Item 6.	Exhibits

The following exhibits are filed herewith or incorporated by reference hereto and this list is intended to constitute the exhibit index:



3.1		Third Amended and Restated Articles of Incorporation.⁽¹⁾

3.2		Articles of Amendment to the Third Amended and Restated Articles of Incorporation.⁽²⁾

3.3		Amended and Restated Bylaws, as amended on February 18, 2009.⁽³⁾

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema Document.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document.

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document.

101.LAB		XBRL Taxonomy Extension Label Linkbase Document.

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document.

_____________________________


(1)	Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 28, 2003.


(2)	Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 27, 2005.


(3)	Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2009.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		FEI COMPANY

Dated:	November 1, 2012	/s/ DON R. KANIA
		Don R. Kania
		President and Chief Executive Officer
		(Principal Executive Officer)

		/s/ RAYMOND A. LINK
		Raymond A. Link
		Executive Vice President and
		Chief Financial Officer
		(Principal Financial Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Good

Fei (FEIC) Inactive 10-Q2012 Q3 Quarterly report

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