Fei (FEIC) 10-K 2012 FY Annual report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 _____________________________________________

FORM 10-K

 _____________________________________________

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

For the fiscal year ended December 31, 2012

OR

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

Securities registered pursuant to Section 12(b) of the Act: Common Stock and associated Preferred Stock

Purchase Rights (currently attached to and trading only with the Common Stock)

Name of each exchange on which registered: NASDAQ Global Stock Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes  ý    No  ¨

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨    No  ý

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  ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 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  ý    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ý

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 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 Act).    Yes  ¨    No  ý

The aggregate market value of the voting and non-voting common stock held by non-affiliates, computed by reference to the last sales price ($47.69) as reported by The NASDAQ Global Stock Market, as of the last business day of the Registrant’s most recently completed second fiscal quarter (July 1, 2012), was $1,809,326,218.

The number of shares outstanding of the registrant’s Common Stock as of February 15, 2013 was 38,529,293 shares.

_____________________________________________

Documents Incorporated by Reference

The Registrant has incorporated by reference into Part III of this Annual Report on Form 10-K portions of its Proxy Statement for its 2013 Annual Meeting of Shareholders to be filed within 120 days of the Registrant's fiscal year ended December 31, 2012 pursuant to Regulation 14A.

FEI COMPANY

2012 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

		Page
	PART I
Item 1.	Business	2
Item 1A.	Risk Factors	8
Item 1B.	Unresolved Staff Comments	19
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19
	PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	20
Item 6.	Selected Financial Data	22
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	42
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	81
Item 9A.	Controls and Procedures	81
Item 9B.	Other Information	83
	PART III
Item 10.	Directors, Executive Officers of the Registrant and Corporate Governance Matters	84
Item 11.	Executive Compensation	84
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	84
Item 13.	Certain Relationships and Related Transactions and Director Independence	84
Item 14.	Principal Accounting Fees and Services	84
	PART IV
Item 15.	Financial Statement Schedules and Exhibits	85
Signatures		88

1

PART I

Item 1.Business

Overview

We were founded in 1971 and incorporated in Oregon in the same year and our shares began trading on The NASDAQ Stock Market in 1995. We are a leading supplier of scientific instruments for nanoscale applications and solutions for industry and science. 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. Beginning with the first quarter of 2013, we intend to change our reporting segments as previously disclosed in an 8-K filed with the SEC on January 14, 2013.

Our products include transmission electron microscopes, or TEMs; scanning electron microscopes, or SEMs; DualBeam^TMsystems which combine a SEM and a focused ion beam system, or FIB, on a single platform; stand-alone FIBs; and high-performance optical microscopes. TEMs provide the highest resolution images of samples and their internal structure, down to the atomic level. SEMs provide detailed images of the surface and shape of samples. Optical microscopes provide a wider field of view than SEMs and TEMs. DualBeams and FIBs image, manipulate, mill and deposit material for a variety of purposes, including preparation of samples for TEMs. Substantially all of these product categories are sold into all of our market segments. Individual models of our products are increasingly designed to provide specific solutions and applications in each of our market segments.

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 approximately50other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

The Electronicsmarket segment consists of customers in semiconductor integrated circuit manufacturing and related industries such as manufacturers of data storage equipment and other technologies. For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, increasing complexity in their materials such as high-k metal gates and low-k dielectrics and increasing device complexity such as 3D transistor architectures. Our products are used primarily in laboratories or near the fabrication line 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 functionality.

The Materials Sciencemarket 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 enable scientific discovery and advancement for researchers and help manufacturers develop, analyze and produce advanced products. Our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration and laboratory analysis. Our products are also used in root cause failure analysis and quality control applications across a range of industries.

The Life Sciencesmarket 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 biologists to create detailed 3D reconstructions of complex biological structures such as proteins and viruses. Cellular biologists use our tools to correlate wide-field, lower resolution optical images with higher resolution electron microscope imaging. Our products are also used by drug researchers and in particle analysis and a range of pathology and quality control applications.

The Service and Componentsmarket 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.

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Core Technologies

We use several core technologies to deliver a range of value-added customer solutions. Our core technologies include:

• focused ion beams, which allow modification of structures in sub-micron geometries;

• focused electron beams, which allow imaging, analysis and measurement of structures at sub-micron and even atomic levels;

• beam gas chemistries, which increase the effectiveness of ion and electron beams and allow etching and deposition of materials on structures at sub-micron levels;

• domain software, system automation and sample management tools, which provide faster access to data and improved ease of use for operators of our systems;

• three dimensional visualization software which enables scientists, engineers and application developers greater insight into complex 3-D image data; and

• high-end digital light microscopy for the Life Sciences market.

Particle beam technologies—focused ion beams and electron beams. The emission and focusing of ions, which are positively or negatively charged atoms, or electrons from a source material, is fundamental to many of our products. Particle beams are accelerated and focused on a sample for purposes of high resolution imaging and sample processing. The fundamental properties of ion and electron beams permit them to perform various functions. The relatively low mass subatomic electrons interact with the sample and release secondary electrons. When collected, these secondary electrons can provide high quality images at nanometer-scale resolution. In previously thinned samples, collection of high energy electrons transmitted through the sample can yield image resolution at the atomic scale. The much greater mass ions dislodge surface particles, also resulting in displacement of secondary ions and electrons. Through the use of FIBs, the surface can be modified or milled with sub-micron precision by direct action of the ion beam or in combination with gases. Secondary electrons and ions may also be collected for imaging and compositional analysis. Our ion and electron beam technologies provide advanced capabilities and applications when coupled with our other core technologies.

Beam gas chemistry. Beam gas chemistry plays an important role in enabling our electron and ion beam based products to perform many tasks successfully. Beam gas chemistry involves the interaction of the primary ion beam with an injected gas near the surface of the sample. This interaction results in either the deposition of material or the enhanced removal of material from the sample. Both of these processes are critical to optimizing and expanding FIB and SEM applications. Our markets have growing needs for gas chemistry technologies, and we have aimed our development strategy at meeting these requirements.

• Deposition: Deposition of materials enables our FIBs to connect or isolate features electrically on, for example, an integrated circuit. A deposited layer of metal also can be used before FIB milling to protect surface features for more accurate cross-sectioning or sample preparation.

• Etching: The fast, clean and selective removal of material is the most important function of our FIBs. Our FIBs have the ability to mill specific types of material faster than other surrounding material. This process is called selective etching and is used to enhance image contrast or aid in the modification of various structures.

System automation and sample management. Drawing on our knowledge of application needs, and using robotics and image recognition and reconstruction software, we have developed automation capabilities that allow us to increase system performance, speed and precision. These capabilities have been especially important to our development efforts for in-line products and applications in the Electronics market segment and are expected to be increasingly important in emerging production and process control applications in the Materials Science and Life Sciences market segments. Two important areas where we have developed significant automation technologies are TEM sample preparation and 3D process control. TEMs are widely used in the semiconductor and data storage markets to obtain valuable high-resolution images of extremely small, even atomic-level, structures. TEM sample preparation has traditionally been a slow and difficult manual process. With our DualBeam systems and proprietary software, we have automated this process, significantly improving the sample consistency and overall throughput. Similarly, by automating 3D process control applications, we allow customers to acquire previously unobtainable subsurface process metrics directly from within the production line, improving process management.

Research and Development

We have research and development operations in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; Bordeaux, France; Munich, Germany; Delmont, Pennsylvania; and Brisbane, Australia.

Our research and development staff at December 31, 2012 consisted of 492 employees, including scientists, engineers, designer draftsmen, technicians and software developers.

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In the last year, we introduced several new and improved products, including:

• the Titan ETEM G2, an environmental transmission electron microscope ("ETEM") that enables time-resolved in-situ studies of processes and materials exposed to reactive gases and elevated temperatures;

• the Verios XHR SEM, which provides sub-nanometer resolution and enhanced contrast for precise measurements on beam-sensitive materials;

• the MLA EXpress, a bench-top automated mineralogy analyzer that extends mineral liberation analysis to a broader scale of mining operations;

• new Helios NanoLab DualBeam tools focused on providing semiconductor manufacturers with faster, better images of their most advanced device architectures as well as new capabilities for process development at the 28nm device geometry node and below;

• the Tecnai with iCorr and CorrSight, a suite of solutions that link light and electron microscopy, allowing cell biologists to correlate information from the cellular down to the molecular level, to enable discoveries that improve their understanding and treatment of diseases; and

• a "core-to-pore" petrography workflow for core analysis of unconventional gas reservoirs in the oil and gas industry, utilizing SEM and DualBeam  systems, MAPS (Modular Automated Processing System) imaging software, a QEMSCAN petrographic analyzer, and a specific sample preparation method.

Additionally, in May 2012, we launched a Cooperative Research and Development Agreement with the National Institutes of Health ("NIH") to create the NIH/FEI Living Lab Structural Biology Center to promote structural biology research through the workflow integration of cryo-electron microscopy, nuclear magnetic resonance spectroscopy, and X-ray diffraction which may accelerate important medical discoveries relating to global health challenges such as HIV/AIDS and cancer.

In September 2011, we announced a partnership with the Knight Cancer Institute at Oregon Health and Science University ("OHSU") to create the OHSU/FEI Living Lab for Cell Biology that will provide researchers with several state-of-the-art electron microscopes to advance the understanding and treatment of complex diseases such as cancer and AIDS.

On January 9, 2012, we completed the acquisition of ASPEX Corporation of Delmont, Pennsylvania, which gives us a durable SEM for industrial applications. We also completed the acquisition of Visualization Sciences Group ("VSG") of Bordeaux, France in August 2012, giving the Company high-performance 3D visualization software products and tools to a range of markets.

We believe our knowledge of field emission technology and products incorporating focused ion beams remain critical to our performance in the focused charged particle beam business. Drawing on this technology, we have developed a number of product innovations, including:

• Enhancement in the scanning/transmission electron microscope ("S/TEM") system platform with unprecedented stability coupled with new aberration correctors and monochromator technology, enabling sub-angstrom resolution;

• Enhanced robotics, processes and tool connectivity, enabling in-line sample lift-out and S/TEM imaging from semiconductor wafers for defect analysis and process control applications with new automation software that improves the quality and consistency of multiple site-specific samples;

• Advanced image processing hardware and software enabling high performance 3D tomographic, TEM-based imaging and advance cryogenic fixation technology and subsequent imaging of aqueous samples at cryo temperatures in a TEM for aqueous biological and colloidal polymer, pigment and nanoparticle samples;

• High-speed analytic characterization technology that includes the proprietary X-Field Emission Guns (“X-FEG”) ultra-high brightness electron source and Super-X, our new Energy Dispersive X-ray (“EDX”) detection system based on Silicon Drift Detector (“SDD”) technology; and

• Direct electron detector technology with improved quantum efficiency, capturing more information from a given electron dose, and accelerating the rate at which the signal-to-noise ratio improves over the exposure period.

From time to time, we engage in joint research and development projects with some of our customers and other parties. In Europe, our electron microscope development is conducted in collaboration with universities and research institutions, often supported by European Union research and development programs. We periodically have received public funds under Dutch government, German government and European Union-funded research and development programs, and expect to continue to leverage these funding opportunities in the future. However, these funds can vary from year to year and we are not able to predict the amount of future funding. We also maintain other informal collaborative relationships with universities and other research institutions, and we work with several of our customers to evaluate new products.

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The markets into which we sell our principal products are subject to rapid technological development, product innovation and competitive pressures. Consequently, we have expended substantial amounts of money on research and development. We generally intend to continue investing in research and development and believe that continued investment will be important to our ability to address the needs of our customers and to develop additional product offerings. Research and development efforts continue to be directed toward development of next generation product platforms, new applications, new ion and electron columns, beam chemistries and system automation. We believe these areas hold promise of yielding significant new products and existing product enhancements. Research and development efforts are subject to change due to product evolution and changing market needs. Often, these changes cannot be predicted.

Net research and development expense was $95.0 million in 2012, $78.3 million in 2011 and $66.3 million in 2010.

Manufacturing

We have manufacturing operations located in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; Delmont, Pennsylvania; and Munich, Germany. Our manufacturing staff at December 31, 2012 consisted of 688 employees. Our system manufacturing operations consist largely of final assembly and the testing of finished products. Product performance is documented and validated with factory acceptance and selective customer witness acceptance tests before these products are shipped. We also fabricate electron and ion source materials and manufacture component products at our facilities in Oregon and the Czech Republic.

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, NTS Group, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc., Edax Inc. and Bruker Corp. 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.

Sales, Marketing and Service

Sales, marketing and service operations are conducted in the U.S. and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

Our sales and marketing staff at December 31, 2012 consisted of 420 employees, including account managers, direct salespersons, sales support management, administration, demo lab personnel, marketing support, product managers, product marketing engineers, applications specialists and technical writers. Applications specialists identify and develop new applications for our products. Our sales force and marketing efforts are organized through four geographic sales and services divisions: North America, Europe, the Asia-Pacific region and Japan. Our service staff at December 31, 2012 consisted of 675 employees.

We require sales representatives to have the technical expertise and understanding of the businesses of our principal and potential customers to meet the requirements for selling our products. Normally, a sales representative will have the knowledge of, and experience with, our products or similar products, markets or customers at the time the sales representative is hired. We also provide additional training to our sales force on an ongoing basis. Our marketing efforts include presentations at trade shows, advertising in trade journals, development of printed collateral materials, customer forums, public relations efforts in trade media and our website. In addition, our employees publish articles in scientific journals and make presentations at scientific conferences.

In a typical sale, our sales representatives provide a potential customer with information about our products, including specifications and performance data. The customer then often participates in a product demonstration at our facilities, using samples provided by the customer. The sales cycle for our systems typically ranges from three to 18 months, but can be longer when our customers are evaluating new applications of our technology.

Our products are sold generally with a 12 month warranty. Customers may purchase service contracts for our products of one year or more in duration after expiration of any warranty. We employ service engineers in each of the four regions in which we have sales and service divisions. We also contract with independent service representatives for product service in some foreign countries.

Competition

The markets for our products are highly competitive. Some of our competitors and potential competitors have greater financial, marketing and production resources than we do. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other. Additionally, markets for our products are subject to constant change, due in part to evolving customer needs. As we respond to this change, the elements of competition as well as the specific competitors may change. Moreover, one or more of our competitors might achieve a technological advance that could put us at a competitive disadvantage.

5

Our significant competitors include, among others: JEOL Ltd., Carl Zeiss SMT A.G., Hitachi High Technologies Corporation and Tescan, a.s. We believe the key competitive factors are performance, range of features, reliability and price. We believe that we are competitive with respect to each of these factors. Our ability to remain competitive depends in part upon our success in developing new and enhanced systems and introducing these systems at competitive prices on a timely basis.

Due to the highly specialized nature of our products and technology, and because of the critical mass necessary to support a worldwide field service capability, FEI has a distinct advantage over competitors who can provide service to our installed base of systems. Some of our older, less sophisticated equipment, particularly in the Materials Science market segment, is serviced by independent field service engineers who compete directly with us. We believe we will continue to provide most of the field service for our products.

Also see the section titled "Risk Factors" in Part I, Item 1A. of this Annual Report on Form 10-K.

Patents and Intellectual Property

We rely on a combination of trade secret protection (including use of nondisclosure agreements), trademarks, copyrights and patents to establish and protect our proprietary rights. These intellectual property rights may not have commercial value or may not be sufficiently broad to protect the aspect of our technology to which they relate or competitors may design around the patents. We own, solely or jointly, approximately 238 patents in the U.S. and approximately 433 patents outside of the U.S., many of which correspond to the U.S. patents. Further, we license additional patents from third parties. Our patents expire over a period of time from 2013 to 2031.

Several of our competitors hold patents covering a variety of focused ion beam products and applications and methods of use of focused ion and electron beam products. Some of our customers may use our products for applications that are similar to those covered by these patents. As the number and sophistication of focused ion and electron beam products in the industry increase through the continued introduction of new products by us and others, and the functionality of these products further overlaps, manufacturers and users of ion and electron beam products may become increasingly subject to infringement claims.

We claim trademarks on a number of our products and have registered some of these marks. Use of the registered and unregistered marks, however, may be subject to challenge with the potential consequence that we would have to cease using marks or pay fees for their use.

Our automation software incorporates software from third-party suppliers, which is licensed to end users along with our proprietary software. We depend on these outside software suppliers to continue to develop automation capacities. The failure of these suppliers to continue to offer and develop software consistent with our automation efforts could undermine our ability to deliver product applications.

Employees

At December 31, 2012, we had 2,444 full-time equivalent, permanent employees and 74 temporary employees worldwide. Some of the 1,737 employees who are employed outside of the U.S. are covered by national, industry-wide agreements or national work regulations that govern various aspects of employment conditions and compensation. None of our U.S. employees are subject to collective bargaining agreements, and we have never experienced a work stoppage, slowdown or strike in any of our worldwide operations. We believe we maintain good employee relations.

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 December 31, 2012, our total backlog was $424.8 million, compared to $430.7 million at December 31, 2011. At December 31, 2012, our backlog consisted of $327.9 million of products and $96.9 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. Generally, at least 90% of our backlog is shippable within one year.

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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. During2012 and 2011, we experienced cancellations of $4.0 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.

Geographic Revenue and Assets

The following table summarizes sales by geographic region (in thousands):

	Year Ended December 31, 2012
	U.S. and Canada		Europe		Asia-Pacific Region and Rest of World		Total
Product sales	$	200,778	$	185,598	$	305,120	$	691,496
Service and Component sales	90,942		59,124		50,176		200,242
Total sales	$	291,720	$	244,722	$	355,296	$	891,738

Our long-lived assets were geographically located as follows (in thousands):

	December 31, 2012
United States	$	74,319
The Netherlands	32,679
Other	58,277
Total	$	165,275

See also Note 21 of the the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional geographic and segment information.

Seasonality

Our history shows that our revenues and bookings normally peak in the fourth quarter as our customers spend funds remaining in their fiscal budgets. These seasonal trends can be offset by numerous other factors, including our introduction of new products, the overall economic cycle and the business cycles in the semiconductor and data storage industries.

Where You Can Find More Information

Our principal executive offices are located at 5350 NE Dawson Creek Drive, Hillsboro, Oregon 97124. Our website is at http://www.fei.com. We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”) under the Securities Exchange Act of 1934, as amended. We make available free of charge on our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports as soon as reasonably practicable after we file such material with, or furnish it to, the SEC. Our committee charters are also available free of charge on our website. You can inspect and copy our reports, proxy statements and other information filed with the SEC at the offices of the SEC’s Public Reference Room located at 100 F Street, NE, Washington D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operation of Public Reference Rooms. The SEC also maintains an Internet website at http://www.sec.gov where you can obtain most of our SEC filings. You can also obtain copies of these materials free of charge by contacting our investor relations department at 503-726-7500.

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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 Annual Report on Form 10-K 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 II, Item 7 of this Annual Report on Form 10-K and elsewhere in this Annual Report on Form 10-K 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;

• type and breadth of product applications;

• cost of ownership;

• global technical service and support;

• success in developing or otherwise introducing new products; and

• foreign currency fluctuations.

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.

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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 2012 and in each of the last three years, more than 66% of our sales came from outside of the U.S. Our sales to China have grown considerably in recent years. 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, including in 25 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;

• European Union Regulation of Hazardous Substances (RoHS) which could create problems in manufacture and delivery of certain products in Europe;

• political and economic instability (e.g. 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 II, Item 7 of this Annual Report on Form 10-K for additional information.

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. We saw weakness in semiconductor equipment spending in the early part of 2012 and we expect this to continue in early to mid 2013. 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.

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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 $0.1 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 muted recovery from the 2008 recession.

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.

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, failure to properly integrate acquisitions, 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 our 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.

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.

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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. During 2012 and 2011, we experienced cancellations of $4.0 million and $3.5 million, respectively.

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 2012, 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 23 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K and Part II, Item 7A., "Qualitative and Quantitative Disclosures About Market Risk" of this Annual Report on Form 10-K 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, is volatile but contributes, on average, a higher proportion of our gross margin. Any significant downturn in the market would have a negative impact to our overall performance.

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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 will be moved to a new facility in 2014 which may involve significant costs and risks of operational interruption and product quality.

We are planning to move our operations in the Czech Republic to a new facility beginning in 2014. 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.

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, NTS Group, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc., Edax Inc. and Bruker Corp. 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.

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 nearly 9,000 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.

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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 and 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, discounts on tool sales and failure to meet our global export compliance obligations. Further, inaccurate booking information could lead to delays in shipping and having to rework orders. These problems could, in turn, cause us to suffer reduced margins, delayed revenue and governmental fines and penalties.

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. More specifically, we depend on trade secrets used in the development and manufacture of our products. We endeavor to protect these trade secrets but the measures taken to protect these trade secrets may be in adequate or ineffective.

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 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, product gross margins, 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 will be 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 in June 2012. 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.

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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.

From time to time, we have engaged in various 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.

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.

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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.

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

Our sales cycle can be 18 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.

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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.

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.

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.

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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.

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 and accessories 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. In addition, we may suffer from process failures that would cause us to violate export laws. 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.

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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.

Item 1B.Unresolved Staff Comments

None.

Item 2.Properties

Our corporate headquarters is located in a facility we own in Hillsboro, Oregon. This facility totals approximately 180,000 square feet and houses a range of activities, including manufacturing, research and development, corporate finance and administration and sales and marketing and is primarily used by the Electronics and Service and Components market segments.

We also maintain a major facility in Eindhoven, The Netherlands, consisting of 271,449 square feet. The lease for this space expires in 2018. Present lease payments are approximately $300,000 per month. This facility is used for research and development, manufacturing, sales, marketing and administrative functions and is primarily used by the Life Sciences, Materials Science and Service and Components market segments.

We maintain a manufacturing and development facility in Brno, Czech Republic, which consists of a total of 140,652 square feet of space, and is leased for approximately $170,000 per month. The lease has various expiration dates extending through 2018. We are planning to move our Czech operations to a new larger facility in 2014 and have a lease agreement with an initial 10-year term with multiple options to renew. Lease payments of approximately $230,000 per month will begin in early 2014 at the commencement of the lease.

We operate, in leased facilities, a software development and licensing business in Bordeaux, France, an optical microscopy business in Munich, Germany, and an electron microscopy business in Delmont, Pennslyvania. In Australia, we operate offices for sales, service and some research and development, in leased facilities, which directly supports our natural resources business.

We also operate support offices for sales, service and some research and development in leased facilities in the People’s Republic of China, Japan, Hong Kong, Singapore, Korea, The Netherlands, Germany and the U.S., as well as other smaller offices in the other countries where we have direct sales and service operations. In some of these locations, we lease space directly.

We expect that our facilities arrangements will be adequate to meet our needs for the foreseeable future and, overall, believe we can meet increased demand for facilities that may be required to meet increased demand for our products. In addition, we believe that, if product demand increases, we can use outsourced manufacturing, additional manufacturing shifts and currently underutilized space as a means of adding capacity without increasing our direct investment in additional facilities.

Item 3.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 4.Mine Safety Disclosures

Not applicable.

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PART II

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Stock Prices, Issuances of Common Stock and Dividends

Our common stock is quoted on the NASDAQ Global Market under the symbol FEIC. The high and low intraday sales prices on the NASDAQ Global Market and cash dividends paid for the past two years were as follows:

2011	High		Low		Dividend Paid
Quarter 1	$	35.47	$	25.75	$	—
Quarter 2	41.56		30.20		—
Quarter 3	40.78		28.05		—
Quarter 4	43.00		26.61		—
2012	High		Low		Dividend Paid
Quarter 1	$	49.75	$	40.00	$	—
Quarter 2	52.01		42.18		—
Quarter 3	56.48		45.23		0.08
Quarter 4	56.06		49.40		0.08

The approximate number of beneficial shareholders and shareholders of record at February 11, 2013 was 24,468 and 73, respectively.

We did not pay or declare any cash dividends in 2011. In June 2012, the Company announced its plans to initiate a quarterly dividend of $0.08 per share of common stock.Dividends have been paid under this program each quarter since its inception in June 2012. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors. See also "Dividends to Shareholders" included in Part II, Item 7 of this Annual Report on Form 10-K for further discussion.

PEO Combination

On February 21, 1997, we acquired substantially all of the assets and liabilities of the electron optics business of Koninklijke Philips Electronics N.V. (the “PEO Combination”), in a transaction accounted for as a reverse acquisition. As part of the PEO Combination, we agreed to issue to Philips additional shares of our common stock whenever stock options that were outstanding on the date of the closing of the PEO Combination are exercised. Any such additional shares are issued at a rate of approximately 1.22 shares to Philips for each share issued on exercise of these options. We receive no additional consideration for these shares issued to Philips under this agreement. We did not issue any shares in 2012, 2011 or 2010to Philips under this agreement. As ofDecember 31, 2012, 165,000shares of our common stock are potentially issuable and reserved for issuance as a result of this agreement.

Share Repurchases

A plan to repurchase up to a total of4.0 millionshares 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. No repurchases were made in the fourth quarter of 2012.

During 2012 we repurchased 20,500 shares for a total of $0.9 million, or an average of $43.41 per share and during 2011 we repurchased 1,654,400 shares for a total of $50.0 million or an average of $30.19 per share. As of December 31, 2012, 2,119,800shares remained available for purchase pursuant to this plan.

Equity Compensation Plans

Information regarding securities authorized for issuance under equity compensation plans will be included in the section titled “Securities Authorized for Issuance Under Equity Compensation Plans” in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

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Stock Performance Graph

The following line-graph presentation compares cumulative five-year shareholder returns on an indexed basis, assuming a $100 initial investment and reinvestment of dividends, of (a) FEI Company, (b) a broad-based equity market index, (c) an industry-specific index and (d) SIC 3826: Laboratory Analytical Instruments. The broad-based market index used is the NASDAQ Composite Index and the industry-specific index used is the NASDAQ Non-Financial Index.

	Base Period		Indexed Returns Year Ended
Company/Index	12/31/2007		12/31/2008		12/31/2009		12/31/2010		12/31/2011		12/31/2012
FEI Company	$	100.00	$	75.96	$	94.08	$	106.38	$	164.27	$	224.14
NASDAQ Composite	100.00		60.02		87.25		103.08		102.27		120.41
NASDAQ Non-Financial	100.00		57.01		88.64		104.98		104.84		122.87
SIC 3826	100.00		59.19		89.35		127.90		125.52		131.15

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Item 6.Selected Financial Data

The selected consolidated financial data below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included elsewhere in this Form 10-K.

In thousands, except per share amounts	Year Ended December 31,
Statement of Operations Data	2012			2011			2010			2009			2008
Net sales	$	891,738		$	826,426		$	634,222		$	577,344		$	599,179
Cost of sales	476,108			459,060			364,958			347,840			364,638
Gross profit	415,630			367,366			269,264			229,504			234,541
Total operating expenses(1)	267,543			240,315			213,806			197,882			203,413
Operating income	148,087			127,051			55,458			31,622			31,128
Other expense, net(2)	(7,539		)	(4,186		)	(3,236		)	(3,961		)	(4,528		)
Income from continuing operations before income taxes	140,548			122,865			52,222			27,661			26,600
Income tax expense (benefit)(3)	25,628			19,228			(1,326		)	5,017			8,612
Net income	$	114,920		$	103,637		$	53,548		$	22,644		$	17,988
Basic net income per share	$	3.02		$	2.70		$	1.41		$	0.60		$	0.49
Diluted net income per share	$	2.80		$	2.51		$	1.34		$	0.60		$	0.48
Shares used in basic per share calculations	38,065			38,384			38,083			37,537			36,766
Shares used in diluted per share calculations	41,728			42,047			41,737			37,905			37,158

In thousands	December 31,
Balance Sheet Data	2012		2011		2010		2009		2008
Cash and cash equivalents	$	266,302	$	320,361	$	277,617	$	124,199	$	146,521
Working capital	486,830		519,284		493,518		435,034		355,917
Total assets	1,234,223		1,089,909		984,422		953,969		832,172
Short-term line of credit	—		—		—		59,600		—
Current portion of convertible debt	89,010		—		—		—		—
Convertible debt, net of current portion	—		89,011		89,012		100,000		115,000
Shareholders’ equity	839,903		696,814		633,174		567,524		519,089

1. Included in operating expenses was $2.9 million, $3.2 million, $11.1 million, $3.5 million and $4.3 million of restructuring, reorganization, relocation and severance in 2012, 2011, 2010, 2009 and 2008, respectively. Also included in operating expenses in 2011 is $5.3 million for a contingent litigation accrual matter and a $1.4 million impairment of certain intellectual property.

2. Included in other income (expense), net in 2009 were the following:

• a $2.0 million gain on the early redemption of our 2.875% notes;

• a $0.5 million net gain on our auction rate securities (“ARS”) and our put right with UBS AG (together with its affiliates, “UBS”) (the “Put Right”); and

• a $1.3 million charge for cash flow hedge ineffectiveness, 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.

Included in other income (expense), net in 2008 were the following:

• $18.4 million of unrealized losses on our ARS and a $17.9 million gain related to the fair value of the put right we received pursuant to an agreement we entered into with UBS, the issuer of the ARS. The put right requires UBS to repurchase all of our ARS at par on or before June 30, 2010;

• a $1.3 million charge for ineffectiveness of certain of our cash flow hedges due to increased currency volatility;

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• a $1.3 million gain related to the disposal of an insignificant sales subsidiary; and

• $6.3 million of non-cash interest expense related to our $150 million zero coupon convertible notes.

3. Our 2012 tax provision reflected lower tax rates in foreign jurisdictions where we earn a majority of our profits. The benefit of lower tax rates was partially offset by an increase in unrecognized tax benefits for positions taken on current and prior year returns.

Our 2011 tax provision reflected taxes on earnings in the U.S. and foreign jurisdictions, and included a $12.4 millionbenefit relating to an agreement with The Netherlands to tax profits from intellectual property at a reduced rate. This benefit was partially offset by an increase of unrecognized tax benefits for positions taken on current and prior year returns.

Our 2010 tax provision reflected benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions. As a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Our 2009 tax provision reflected taxes accrued in foreign jurisdictions, reduced by a tax benefit of $3.9 million related to the release of valuation allowances recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S. The tax provision also reflected the release of tax liabilities totaling $1.3 million due to the lapses of statutes of limitations and effective settlements with tax authorities.

Our 2008 tax provision reflected taxes on foreign earnings offset by a $1.5 million release of unrecognized tax benefits, including interest and penalties, as a result of the settlement of foreign tax audits and a tax benefit of $0.5 million related to the release of a valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S.

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Item 7.Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS

This Annual Report on Form 10-Kcontains 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, 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 corporate reorganization; any statements of factors that may affect our2013operating 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 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 for2013.”

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 thisAnnual Report on Form 10-Kare 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 Forms10-Q and 8-K filed with, or furnished to, the SEC. You also should read the section entitled “Risk Factors” included in Part I, Item 1A. of this Annual Report on Form 10-Kfor 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

We are a leading supplier of scientific instruments for nanoscale applications and solutions for industry and science. 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. Beginning with the first quarter of 2013, we intend to change our reporting segments as previously disclosed in an 8-K filed with the SEC on January 14, 2013.

Our products include transmission electron microscopes, or TEMs; scanning electron microscopes, or SEMs; DualBeam^TMsystems which combine a SEM and a focused ion beam system, or FIB, on a single platform; stand-alone FIBs; and high-performance optical microscopes. TEMs provide the highest resolution images of samples and their internal structure, down to the atomic level. SEMs provide detailed images of the surface and shape of samples. Optical microscopes provide a wider field of view than SEMs and TEMs. DualBeams and FIBs image, manipulate, mill and deposit material for a variety of purposes, including preparation of samples for TEMs. Substantially all of these product categories are sold into all of our market segments. Individual models of our products are increasingly designed to provide specific solutions and applications in each of our market segments.

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 approximately50other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.

The Electronicsmarket segment consists of customers in semiconductor integrated circuit manufacturing and related industries such as manufacturers of data storage equipment and other technologies. For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, increasing complexity in their materials such as high-k metal gates and low-k dielectrics and increasing device complexity such as 3D transistor architectures. Our products are used primarily in laboratories or near the fabrication line 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 functionality.

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The Materials Sciencemarket 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 enable scientific discovery and advancement for researchers and help manufacturers develop, analyze and produce advanced products. Our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration and laboratory analysis. Our products are also used in root cause failure analysis and quality control applications across a range of industries.

The Life Sciencesmarket 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 biologists to create detailed 3D reconstructions of complex biological structures such as proteins and viruses. Cellular biologists use our tools to correlate wide-field, lower resolution optical images with higher resolution electron microscope imaging. Our products are also used by drug researchers and in particle analysis and a range of pathology and quality control applications.

The Service and Componentsmarket 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.

SALES AND BACKLOG

Net sales increased to $891.7 million in 2012 compared to $826.4 million in 2011. This increase reflects increases in all of our market segments, except Life Sciences, as described more fully below.

At December 31, 2012, our total backlog was $424.8 million compared to $430.7 million at December 31, 2011. As discussed in the section entitled “Business” included in Part I, Item 1 of this Annual Report on Form 10-K, orders received in a particular period that cannot be built and shipped to the customer in that period represent backlog.

OUTLOOK FOR 2013

During 2012, we experienced revenue growth of 8% over 2011 and we expect another year of moderate growth in 2013. Our backlog has stabilized at just under 6 months of revenue at current run rates and we expect revenue and bookings growth to be approximately equal in the coming year.

In January 2013, we executed a business reorganization that divided our operations into two primary groups. The business groups are titled Industry and Science and beginning in 2013, we will report our revenue and earnings in two segments that align with these business groups. Service revenue will be reported as part of each group.

Electronics revenue was up in 2012. We expect the early part of 2013 to be below 2012 levels, but believe Electronics bookings and revenue will increase as the year progresses. The semiconductor capital equipment industry experienced a cyclical downturn at the end of 2012 and we expect it will continue in early to mid 2013. Because our equipment is used in laboratories for new process development and yield improvement, we are less affected by cyclical swings than some equipment suppliers, but the industry downturn does have some impact. As evidence, our Electronics bookings were up 2% in 2012 compared with an industry decline of 8%. For 2013, we expect to benefit from a cyclical recovery in the industry, the introduction of new products, and increasing demand for higher-resolution images from semiconductor customers as they invest in more advanced processes, which require more of our TEMs and DualBeams in particular.

Revenue for the natural resources business was up in 2012 and we expect continued growth in 2013. This business serves mining, oil and gas companies with automated mineralogy solutions that help those companies improve yields and lower costs. We have new solutions for both laboratory and on-site applications that are in the early stages of penetration in these markets.

Our Materials Science segment experienced modest revenue growth in 2012, and we expect that to continue in 2013. Growth has primarily come from developing countries as these economies continue to invest in education infrastructure, offsetting potential weakness in the United States due to political uncertainty and a mixed economic picture in Europe. We also expect contributions from new products introduced in 2012 and others planned for release in 2013.

Life Sciences 2012 bookings were consistent with 2011 while 2012 revenue declined compared with 2011 revenue. The timing of new product introductions and funding difficulties, especially in the U.S., limited growth in 2012. For 2013, we expect bookings and revenue to grow based on new correlative microscopy products for cell biology research and continued penetration of electron microscopy into structural biology applications.

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Our Service and Components business grows mostly with the expansion of our installed base and is expected to continue that growth in 2013.

Gross margin increased by 210 basis points from 2011 to 2012, and we expect continued gross margin improvement in 2013. In addition to increasing our proportion of newer, higher-margin products and application-specific products, we expect lower costs from increased production volume in the Czech Republic and continued sourcing improvements, including the full-year impact of termination of a manufacturing services agreement in Hillsboro.

Operating expenses are expected to increase in 2013 due to acquisitions, the increase in staff in customer-facing parts of the company to manage our growth and increased spending for research and development. We expect to continue to report a net expense for other income (expense), net, due to low market interest earned on our investments and the impact of currency costs. Global foreign exchange rates could have a significant impact on our results. In general, a stronger U.S. dollar compared with the euro will reduce our revenue growth rate and improve our operating income, while a weaker dollar has the opposite effect. In addition, a weaker yen compared to the dollar could reduce our margins modestly. We expect our overall effective tax rate to stabilize and we are estimating that it will be around 20% for 2013.

In recent years, our sales to customers in China have grown and will continue to be an area of focus for us in 2013.

Please see the risk factors listed in Part I, Item 1A. of this Annual Report on Form 10-K for the risk factors that could cause our results to vary from this Outlook for 2013.

RESULTS OF OPERATIONS

The following table sets forth our statement of operations data (in thousands):

	Year Ended December 31,
	2012			2011			2010
Net sales	$	891,738		$	826,426		$	634,222
Cost of sales	476,108			459,060			364,958
Gross profit	415,630			367,366			269,264
Research and development	94,965			78,318			66,274
Selling, general and administrative	169,719			158,782			136,465
Restructuring, reorganization, relocation and severance costs	2,859			3,215			11,067
Operating income	148,087			127,051			55,458
Other expense, net	(7,539		)	(4,186		)	(3,236		)
Income before income taxes	140,548			122,865			52,222
Income tax expense (benefit)	25,628			19,228			(1,326		)
Net income	$	114,920		$	103,637		$	53,548

The following table sets forth our statement of operations data as a percentage⁽¹⁾of consolidated net sales:

	Year Ended December 31,
	2012		2011		2010
Net sales	100.0	%	100.0	%	100.0	%
Cost of sales	53.4		55.5		57.5
Gross profit	46.6		44.5		42.5
Research and development	10.6		9.5		10.4
Selling, general and administrative	19.0		19.2		21.5
Restructuring, reorganization, relocation and severance costs	0.3		0.4		1.7
Operating income	16.6		15.4		8.7
Other expense, net	(0.8	)	(0.5	)	(0.5	)
Income before income taxes	15.8		14.9		8.2
Income tax expense (benefit)	2.9		2.3		(0.2	)
Net income	12.9	%	12.5	%	8.4	%

⁽¹⁾  Percentages may not add due to rounding.

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Net sales increased$65.3 million, or 7.9%, to $891.7 million in 2012 compared to $826.4 million in 2011 and increased$192.2 million, or 30.3%, in 2011 compared to $634.2 million in 2010. The factors affecting net sales are discussed in more detail in the Net Sales by Segment discussion below.

Currency fluctuations decreased net sales by $18.6 million in 2012 compared to 2011 and decreased net sales by approximately $22.4 million in 2011 compared to 2010 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. See also "Foreign Currency Exchange Rate Risk" included in Item 7A. of this Annual Report on Form 10-K for further discussion of currency impact on our results of operations.

Net Sales by Segment

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

	Year Ended December 31,
	2012				2011				2010
Electronics	$	293,132	32.9	%	$	259,730	31.4	%	$	222,795	35.1	%
Materials Science	315,502		35.4		292,092		35.4		182,430		28.8
Life Sciences	82,862		9.3		102,777		12.4		74,555		11.8
Service and Components	200,242		22.4		171,827		20.8		154,442		24.3
Consolidated net sales	$	891,738	100.0	%	$	826,426	100.0	%	$	634,222	100.0	%

Electronics

The $33.4 million, or 12.9%, increase in Electronics sales in 2012 compared to 2011 was primarily due to increased demand for certain products as the industry shifts to smaller semiconductor manufacturing process 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, both of which have higher average selling prices than SEM products. Currency fluctuationsdecreasedElectronics sales by $1.7 million as compared to the prior year.

The $36.9 million, or 16.6%, increase in Electronics sales in 2011 compared to 2010 was primarily due to an increase in semiconductor and data storage company capital spending for capacity expansion and new process development. We realized increases in unit sales of our wafer-level and small DualBeam products. In addition, currency fluctuations increasedElectronics sales by $5.4 million as compared to the prior year.

Materials Science

The $23.4 million, or 8.0%, increase in Materials Science sales in 2012 compared to 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, whichdecreasedMaterials Science sales by $9.1 million in 2012 compared to 2011.

The $109.7 million, or 60.1%, increase in Materials Science sales in 2011 compared to 2010 was primarily due to strong sales of our high-end TEMs as a result of increased spending in research institutions. We generally see our customers shifting from SEM-based tools to TEM-based tools as the demand to image on an increasingly small scale continues. The increase also reflects continued investment in education infrastructure in developing countries like Korea and China as well as increasing demand for our evolving line of natural resources product offerings. Currency fluctuations increasedMaterials Science sales by $7.7 million in 2011 compared to 2010.

Life Sciences

The $19.9 million, or 19.4%, decrease, in Life Sciences sales in 2012 compared to 2011 was primarily due to a decrease in the number of high-end TEM units sold during the period. The Life Sciences market is heavily dependent on government funding for research grants and this funding has been under pressure, resulting in fewer large awards for FEI class of tools. Historically, we have seen significant volatility in the sale of high-end TEMs for Life Sciences and that may continue. Additionally, currency fluctuationsdecreasedLife Sciences sales by $3.0 million in 2012 compared to 2011.

The $28.2 million, or 37.9%, increase in Life Sciences sales in 2011 compared to 2010 was primarily due to an increase in the number of high-end TEM units sold during the period due in part to increased penetration in electron microscopy in Life Sciences research. Currency fluctuations increasedLife Sciences sales by $4.1 million in 2011 compared to 2010.

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Service and Components

The $28.4 million, or 16.5%, increase in Service and Components sales in 2012 compared to 2011 was 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 decreasedService and Components sales by $4.8 million in 2012 compared to 2011.

The $17.4 million, or 11.3%, increase in Service and Components sales in 2011 compared to 2010 was due primarily to a larger install base and improved market conditions in the semiconductor industry, which contributed to an increase in service contracts. Currency fluctuations increasedService and Components sales by $5.2 million in 2011 compared to 2010.

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 table shows our net sales by geographic region (dollars in thousands):

	Year Ended December 31,
	2012				2011				2010
U.S. and Canada	$	291,720	32.7	%	$	257,244	31.1	%	$	204,002	32.2	%
Europe	244,722		27.5		261,313		31.6		207,394		32.7
Asia-Pacific Region and Rest of World	355,296		39.8		307,869		37.3		222,826		35.1
Consolidated net sales	$	891,738	100.0	%	$	826,426	100.0	%	$	634,222	100.0	%

U.S. and Canada

The $34.5 million, or 13.4%, increase in sales to the U.S. and Canada in 2012 compared to 2011 was primarily due to an increase in shipments to semiconductor customers, growth in sales to our natural resources customers, and an increase in service revenues driven by continued organic growth, expansion of our install base and the inclusion of service revenue for our ASPEX product line.

The $53.2 million, or 26.1%, increase in sales to the U.S. and Canada in 2011 compared to 2010 was primarily due to continued strong semiconductor capital equipment spending and an increase in Life Sciences sales related to an increase in high-end TEM units sold.

Europe

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

The $16.6 million, or 6.3%, decrease in sales to Europe in 2012 compared to 2011 was 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 alsodecreased sales to Europe by $19.0 million in 2012 compared to 2011.

The $53.9 million, or 26.0%, increase in sales to Europe in 2011 compared to 2010 was primarily due to increased semiconductor capital equipment spending and continued improvement in spending by research institutions. Currency fluctuations increased sales to Europe by $10.4 million in 2011 compared to 2010.

Asia-Pacific Region and Rest of World

The $47.4 million, or 15.4%, increase in sales to the Asia-Pacific Region and Rest of World in 2012 compared to 2011 was primarily driven by increased spending in the semiconductor industry and increased advanced research spending by our Materials Science customers as well as increased service revenue driven by the inclusion of service revenue from our Korean subsidiary. Sales to customers in China also helped drive the increase. Despite the adverse impact of the weakening yen, overall currency fluctuationsincreased sales to this region by $0.4 million in 2012 compared to 2011.

The $85.0 million, or 38.2%, increase in sales to the Asia-Pacific Region and Rest of World in 2011 compared to 2010 was primarily driven by the strengthening economy, additional investment in educational infrastructure in emerging Asian economies and increased spending by research institutions in Materials Science and Life Sciences. Currency fluctuations increased sales to this region by $12.0 million in 2011 compared to 2010.

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Cost of Sales and Gross Margin

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

	Year Ended December 31,
	2012		2011		2010
Electronics	54.1	%	52.8	%	50.2	%
Materials Science	47.6		43.1		41.0
Life Sciences	42.9		45.8		41.0
Service and Components	35.6		33.4		33.7
Overall	46.6		44.5		42.5

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.

Cost of sales increased$17.0 million, or 3.7%, to $476.1 million in 2012 compared to $459.1 million in 2011, primarily due to increased sales. Currency fluctuationsreduced cost of sales by $24.7 million in 2012 compared to 2011. The net effect on our gross margin from currency fluctuations during 2012 compared to 2011 was an increase of $6.1 million, or 1.6 percentage points.

Cost of sales increased$94.1 million, or 25.8%, to $459.1 million in 2011 compared to $365.0 million in 2010 primarily due to increased sales. The impact of currency fluctuations on cost of sales was an increase cost of sales by $6.0 million in 2011 compared to 2010. The net effect on our gross margin from currency fluctuations during 2011 compared to 2010 was an increase of $16.4 million, or 0.8 percentage points.

Electronics

The increase in Electronics gross margin in 2012 compared to 2011 was due primarily to an increased number of high-end TEM units sold and improved margins on those high-end TEMs. Currency fluctuations improvedElectronics gross margin in 2012 compared to 2011 by 0.5 percentage points.

The increase in Electronics gross margin in 2011 compared to 2010 was due primarily to increased demand for our higher-margin small DualBeams, as well as abnormally low gross margins in the prior year as we worked through orders that were priced in late 2009 and early 2010 when we were under greater pricing pressure. We also realized product cost savings related to our consolidation of the manufacturing of our small DualBeam products at our Brno, Czech Republic facility. Currency fluctuations improvedElectronics gross margin in 2011 compared to 2010 by 1.3 percentage points.

Materials Science

The increase in Materials Science gross margin in 2012 compared to 2011 was primarily because our higher-margin natural resources products comprised a larger proportion of revenue for this segment and we realized materials cost savings on the TEM product line. The acquisition of VSG during the third quarter of 2012 also positively impacted margins for this segment. Further, 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. Currency fluctuations impacted Materials Science gross margin by a 2.1 percentage point increase in 2012 compared to 2011.

The increase in Materials Science gross margin in 2011 compared to 2010 was primarily due to an increase in the number of small DualBeam and high-end TEM units sold, as well as growth in sales of our higher-margin natural resources products. We also realized product cost savings related to the consolidation of the manufacturing of our small DualBeam products and a portion of our mid-range TEMs at our Brno, Czech Republic facility. Currency fluctuations impacted Materials Science gross margin in 2011 compared to 2010 by a 0.9 percentage point increase.

Life Sciences

The decrease in Life Sciences gross margin in 2012 compared to 2011 was primarily due to a decrease in the number of high-end TEM units sold. This was partially offset by currency fluctuations which increasedLife Sciences gross margin by 2.6 percentage points in 2012 compared to 2011.

The increase in Life Sciences gross margin in 2011 compared to 2010 was primarily due to an increase in the number of high-end TEM units sold. This was partially offset by currency fluctuations which increasedLife Sciences gross margin in 2011 compared to 2010 by 0.8 percentage points.

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Service and Components

The increase in Service and Components gross margin in 2012 compared to 2011 was primarily due to increased sales, including sales from our Korean subsidiary resulting from the acquisition of certain assets of AP Tech, which occurred on July 9, 2012, and the more effective use of resources. Currency fluctuations impacted Service and Components gross margin by a 1.9 percentage point increase in 2012 compared to 2011.

The decrease in Service and Components gross margin in 2011 compared to 2010 was primarily due to an increase in employee incentive compensation. Currency fluctuations impacted Service and Components gross margin in 2011 compared to 2010 by a 0.1 percentage point decrease.

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, 2011 and 2010 periods, we received subsidies from European governments for technological developments for semiconductor and life sciences equipment.

R&D costs, net of subsidies, were as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
Gross spending	$	102,309		$	83,612		$	71,682
Less subsidies	(7,344		)	(5,294		)	(5,408		)
Net expense	$	94,965		$	78,318		$	66,274

R&D costs increased in 2012 compared to 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. Currency fluctuationsreduced R&D costs by $5.1 million in 2012 compared to 2011.

R&D costs increased in 2011 compared to 2010 primarily due to increased headcount and employee incentive compensation. The impact of currency fluctuations on R&D costs was an increase of $2.7 million in 2011 compared to 2010.

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$10.9 million, or 6.9%, in 2012 compared to 2011 primarily due to increased headcount, higher stock-based compensation cost associated with a higher stock price and more 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 fluctuationsdecreased SG&A costs by $4.9 million in 2012 compared to 2011.

SG&A costs increased in $22.3 million, or 16.4%, in 2011 compared to 2010 primarily due to increased commissions driven by the increase in revenue and increased employee incentive compensation, as well as an impairment charge of $1.4 million to write off the unamortized value of intellectual property and a $5.3 million charge for contingent litigation accruals. This activity was partially offset by a decrease in bad debt write-offs. In the first quarter of 2010, we recorded a $2.1 million charge to fully write off amounts receivable from one customer. Currency fluctuations increased SG&A costs by $3.9 million in 2011 compared to 2010.

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Restructuring, Reorganization, Relocation and Severance

Group Structure Reorganization

In January 2013, we announced our intention to reorganize the company into a group structure in order to enable us to efficiently execute our growth strategy. The reorganization will be effective beginning in the first quarter of 2013 and is expected to be implemented over the next six months. The costs associated with the reorganization will include primarily severance costs and we anticipate that it will result in the termination of certain positions throughout the company. In anticipation of this reorganization, we incurred$2.9 millionof severance costs during the fourth quarter of 2012 and as the reorganization continues, we expect to incur approximately$1.9 millionin additional restructuring charges. All of the costs related to this plan are expected to result in cash expenditures and we currently expect the total cost of the reorganization to be approximately$4.8 million.

The reduction in positions as a result of the group structure reorganization is expected to reduce operating expenses by approximately $3 million per year when fully implemented.

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.Noadditional costs were incurred in 2012 and we do not expect to incur any significant additional costs associated with the termination of this arrangement.

The insourcing of our manufacturing operations is expected to reduce manufacturing costs by approximately $2 million to $3 million per year when fully implemented.

April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The move, which has been substantially completed, resulted in severance costs, costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional small DualBeam production. In addition to the product line move, the April 2010 restructuring plan involved organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus. Costs incurred in connection with this plan were related to the consolidation of the manufacturing of our small DualBeam product line in Brno.

Information for costs related to the April 2010 restructuring plan is as follows (in thousands):

	Year Ended December 31,
Costs Incurred	2012		2011		2010		Life of Plan
Severance costs related to work force reduction and reorganization	$	—	$	184	$	6,433	$	6,617
Product line transfer, training of Brno employees and facility build-out in Brno	—		963		872		1,835
Total costs incurred	$	—	$	1,147	$	7,305	$	8,452

All of the costs incurred resulted in cash expenditures. We do not expect to incur significant additional costs associated with this plan.

The actions related to our April 2010 restructuring plan are expected to reduce manufacturing costs and operating expenses and increase cash flow by approximately $4.5 million per year.

April 2008 Restructuring

Our April 2008 restructuring plan was related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. Also included in these costs were amounts related to IT system upgrades, which were expected to increase the efficiency of our manufacturing operations. These activities reduced operating expenses, improved our factory utilization and helped to offset the effect of currency fluctuations on our cost of goods sold. The main activities and related costs are described in the table below.

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The April 2008 restructuring plan was completed in 2010. Total costs incurred related to this plan were$11.6 million. In 2010 we incurred $3.8 million, under the April 2008 restructuring plan and incurred noadditional costs related to this plan in2011 or 2012. All of the costs resulted in cash expenditures and we do not expect to incur any additional costs under this plan.

A summary of the expenses related to our April 2008 restructuring plan is as follows (in millions):

Type of Expense	Total Costs
Severance costs related to work force reduction of 3% (approximately 60 employees)	$	3.3
Transfer of manufacturing and other activities	0.3
Shift of supply chain	5.9
IT system upgrades	2.1

The actions related to our 2008 restructuring plan reduced manufacturing costs and operating expenses and increased cash flow by approximately $6.0 million annually.

For information regarding the related accrued liability, see Note 14 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

Other Expense, Net

Other expense, netincludes 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$1.6 million in 2012, $2.4 million in 2011 and $2.6 million in 2010. The decrease in 2012 compared to 2011 was primarily due to lower investment balances and continued low interest rates. The decrease in 2011 compared to 2010 was primarily due to lower market interest rates.

Interest expense for 2012, 2011 and 2010included interest expense related to our 2.875% convertible notes.

The amortization of capitalized note issuance costs related to our convertible note issuances is also included as a component of interest expense. Interest expense in 2010 included $0.1 million related to the write-off of note issuance costs in connection with the early redemption of a total of $11.0 million of our 2.875% convertible notes.

Assuming no additional note repurchases, amortization of our remaining convertible note issuance costs will total approximately $0.1 million per quarter through the second quarter of 2013.

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 in 2012 of $5.0 million expense is attributed to more volatility in the euro and Czech koruna and an increased amount of expenses that the company is hedging.

Other, net in 2011 of $2.5 million expense resulted primarily from volatility in market exchange rates and increased volatility in our hedges.

Other, net in 2010 included a $0.1 million gain on the early redemption of a portion of our 2.875% convertible notes.

Income Tax Expense

Our effective income tax rate of 18.2% for 2012 reflected lower tax rates in foreign jurisdictions where we earn a majority of our profits. The benefit of lower tax rates was partially offset by an increase in unrecognized tax benefits for positions taken on current and prior year returns.

Our effective income tax rate of 15.6% for 2011 reflected taxes accrued in the U.S. and foreign jurisdictions, and included a $12.4 millionbenefit relating to an agreement with The Netherlands to tax profits from intellectual property at a reduced rate. This benefit was partially offset by an increase of unrecognized tax benefits for positions taken on current and prior year returns.

Our income tax benefit of $1.3 million in 2010 primarily resulted from benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions.

In June 2010, as a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, we released valuation allowance and tax reserves of approximately $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

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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 December 31, 2012, total unrecognized tax benefits were $25.1 million 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 (liabilities) assets totaled ($0.3) million and $13.2 million, respectively, at December 31, 2012 and 2011. Valuation allowances on deferred tax assets totaled $2.1 million and $2.2 million as of December 31, 2012 and 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 December 31, 2012 consisted of $360.4 millionof cash, cash equivalents, short-term restricted cash and short-term investments,$29.2 million in non-current investments, $27.4 million of long-term restricted cash, $100.0 millionavailable under revolving credit facilities, as well as potential future cash flows from operations.$162.4 million of our $417.0 millionin 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 through2018.

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 fromDecember 31, 2012.

In 2012, cash and cash equivalents and short-term restricted cash decreased$62.1 million to $280.8 million as of December 31, 2012 from $342.9 million as of December 31, 2011 primarily as a result of $93.4 million used for acquisition related activities, $39.4 million used in the net purchase of marketable securities, $22.1 million used for the purchase of property, plant and equipment, $15.0 million used to settle litigation with Hitachi, and dividends paid on common stock of $6.1 million. These factors were partially offset by $85.0 millionprovided by operations, $13.1 million of proceeds from the exercise of employee stock options and a $0.5 millionfavorable effect of exchange rate changes.

In 2011, cash and cash equivalents and short-term restricted cash increased$43.2 million to $342.9 million as of December 31, 2011 from $299.7 million as of December 31, 2010 primarily as a result of $102.7 millionprovided by operations, $24.4 million of proceeds from the exercise of employee stock options and $12.9 million provided by the net redemption of marketable securities. These factors were partially offset by repurchases of common stock of $50.0 million, $14.1 million used for acquisition related activities, $13.8 million used for the purchase of property, plant and equipment and a $9.7 millionunfavorable effect of exchange rate changes.

Accounts receivable increased$25.2 million to $211.2 million as of December 31, 2012 from $186.0 million as of December 31, 2011. This increase was primarily driven by a corresponding increase in sales. The December 31, 2012 balance included a $0.3 millionincrease related to fluctuations in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 83 days at December 31, 2012 and 80 days at December 31, 2011.

Inventories increased$10.5 million to $192.5 million as of December 31, 2012 compared to $182.0 million as of December 31, 2011, due to increased production volumes. The December 31, 2012 balance included a $4.4 millionincrease related to fluctuations in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 1.9 times for the quarter ended December 31, 2012 and 2.0 times for the quarter ended December 31, 2011.

Deferred tax (liabilities) assets, current and long term, net of deferred tax liabilitiesdecreased$13.5 million to ($0.3) million as of December 31, 2012 compared to $13.2 million as of December 31, 2011primarily 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$1.3 million to $29.3 million as of December 31, 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$22.1 millionand transfers to fixed assets from inventories of$21.2 million in 2012primarily consisted of expenditures for facilities improvements at our manufacturing sites and demonstration equipment. We expect to spend over $60 million for capital expenditures in 2013primarily for leasehold improvements to our new facility in Brno, demonstration units, operations and R&D tools.

Accrued payroll liabilities decreased$7.6 million to $39.1 million as of December 31, 2012 compared to $46.7 million as of December 31, 2011, primarily due to a decrease in the accrual for employee incentive compensation.

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Income taxes payable decreased$10.0 million to $1.3 million as of December 31, 2012 compared to $11.3 million as of December 31, 2011primarily due to payments made to settle prior year taxes accrued in foreign jurisdictions. Our receivable for income taxes of$6.7 million at December 31, 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 millionwith 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 December 31, 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.

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):

	December 31, 2012
Guarantees and letters of credit outstanding	$	41,965
Amount secured by restricted cash deposits:
Current	$	14,522
Long-term	27,425
Total secured by restricted cash	$	41,947

Share Repurchase Plan

A plan to repurchase up to a total of4.0 millionshares 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.

During 2012 we repurchased 20,500 shares for a total of $0.9 million, or an average of $43.41 per share and during 2011 we repurchased 1,654,400 shares for a total of $50.0 million or an average of $30.19 per share. As of December 31, 2012, 2,119,800shares 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.Our Board of Directors declared dividends of $0.08 per share of common stock, or approximately$3.0 million, for the second, third and forth quarters of 2012. Our total dividend payments during 2012 was$6.1 million. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors.

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CONTRACTUAL PAYMENT OBLIGATIONS

A summary of our contractual commitments and obligations as of December 31, 2012 was as follows (in thousands):

	2013		2014 and 2015		2016 and 2017		2018 and beyond		Total
Convertible Debt	$	89,010	$	—	$	—	$	—	$	89,010
Convertible Debt Interest	1,066		—		—		—		1,066
Letters of Credit and Bank Guarantees	14,440		26,709		747		69		41,965
Purchase Order Commitments	62,586		621		—		—		63,207
Pension Related Obligations	61		147		223		3,430		3,861
Deferred Compensation Liability	—		—		—		3,046		3,046
Capital Leases	1,903		2,376		352		—		4,631
Operating Leases	8,453		17,957		14,962		22,652		64,024
Total	$	177,519	$	47,810	$	16,284	$	29,197	$	270,810

In June 2012, we entered into a lease agreement for two new buildings for a manufacturing, warehouse and multi-storage office facility located in Brno, Czech Republic. The payment term of the lease agreement will be from April 1, 2014 through April 1, 2024, with the option to extend for two five year periods. The lease commencement date will be during the second quarter of 2013 at which time we will start to expense the lease costs. The table above includes estimated lease payments for the minimum lease commitment of 10 years.

We also have other liabilities of $15.7 million relating to additional uncertain tax positions. However, as we are unable to reliably estimate the timing of future payments related to these additional uncertain tax positions, we have excluded this amount from the table above.

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.

RECENTLY ISSUED ACCOUNTING GUIDANCE

See Note 2 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for a summary of recently issued accounting guidance.

CRITICAL ACCOUNTING POLICIES AND THE USE OF ESTIMATES

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;

• the valuations of intangible assets;

• 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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Revenue Recognition

We recognize revenue when persuasive evidence of a contractual agreement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed and determinable, and collectability is reasonably assured.

For products demonstrated to meet our published specifications, revenue is recognized when the title to the product and the risks and rewards of ownership pass to the customer. The portion of revenue related to installation, of which the estimated fair value is generally4%of the total revenue of the transaction, is deferred until such installation at the customer site and final customer acceptance are completed. For products produced according to a particular customer’s specifications, revenue is recognized when the product meets the customer’s specifications and when the title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue applicable to installation is recognized upon meeting specifications at the customer's installation site. For new applications of our products where performance cannot be assured prior to meeting specifications at the customer's installation site, no revenue is recognized until such specifications are met.

We enter into arrangements with customers whereby they purchase products, accessories and service contracts from us at the same time. For sales arrangements containing multiple elements (products or services), revenue relating to the undelivered elements is deferred at the estimated selling price of the element as determined using the sales price hierarchy established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 605-25. To be considered a separate element, the deliverable in question must represent a separate element under the accounting guidance and fulfill the following criteria: the delivered item or items must have value to the customer on a standalone basis; and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transactions is deferred until all elements are delivered.

For sales arrangements that contain multiple deliverables (products or services), to the extent that the deliverables within a multiple-element arrangement are not accounted for pursuant to other accounting standards, revenue is allocated among the deliverables using the selling price hierarchy established in ASC 605-25 to determine the selling price of each deliverable. The selling price hierarchy allows for the use of an estimated selling price (“ESP”) to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement in the absence of vendor specific objective evidence (“VSOE”) or third-party evidence (“TPE”). We determine the selling price in multiple-element arrangements using VSOE or TPE if available. VSOE is determined based on the price charged for the same deliverable when sold separately and TPE is established based on the price charged by our competitors or third parties for the same deliverable. If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of allocating total arrangement consideration among the elements by considering several internal and external factors such as, but not limited to, historical sales of similar products, costs incurred to manufacture the product and normal profit margins from the sale of similar products, geographical considerations and overall pricing practices.

These factors are subject to change as we modify our pricing practices and such changes could result in changes to determination of VSOE, TPE and ESP, which could result in our future revenue recognition from multiple-element arrangements being materially different than our results in the current period.

Generally, revenue from all elements in a multiple-element arrangement is recognized within 18 months of the shipment of the first item in the arrangement.

We provide maintenance and support services under renewable, term maintenance agreements. Maintenance and support fee revenue is recognized ratably over the contractual term, which is generally 12 months, and commences from the start date.

Revenue from time and materials-based service arrangements is recognized as the service is performed. Spare parts revenue is generally recognized upon shipment.

Deferred revenue represents customer deposits on equipment orders, orders awaiting customer acceptance and prepaid service contract revenue. Deferred revenue is recognized in accordance with our revenue recognition policies described above.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on collection experience and known trends with current customers. The large number of entities comprising our customer base and their dispersion across many different industries and geographies somewhat mitigates our credit risk exposure and the magnitude of our allowance for doubtful accounts. Our estimates of the allowance for doubtful accounts are reviewed and updated on a quarterly basis. Changes to the reserve may occur based upon changes in revenue levels and associated balances in accounts receivable and estimated changes in individual customers’ credit quality. Write-offs include amounts written off for specifically identified bad debts. Historically, we have not incurred significant write-offs of accounts receivable, however, an individual loss could be significant due to the relative size of our sales transactions. Our bad debt expense totaled $0.2 million, zero and $2.5 million, respectively, in 2012, 2011 and 2010. Our allowance for doubtful accounts totaled $2.7 million and $5.6 million, respectively, at December 31, 2012 and 2011.

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Valuation of Excess and Obsolete Inventory

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.

Manufacturing inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence.

To support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during a service call and are generally classified in current inventory as our stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service call.

We also maintain a substantial supply of repairable and reusable spare parts for possible use in future repairs and customer field service of our install base. We have classified this inventory as a long-term asset given these parts can be repaired and reused in the service business over many years. As these service parts age over the related product group’s post-production service life, we reduce the net carrying value of our repairable spare part inventory to account for the excess that builds over the service life. The post-production service life of our systems is generallysevenyears and, at the end of the service life, the carrying value for these parts is reduced to zero. We also perform periodic monitoring of our installed base for premature or increased end of service life events. If required, we expense, through cost of goods sold, the remaining net carrying value of any related spare parts inventory in the period incurred.

Provision for manufacturing inventory valuation adjustments totaled$2.7 million, $4.2 million and $3.6 million, respectively, in 2012, 2011 and 2010. Provision for service spare parts inventory valuation adjustments totaled $6.6 million, $6.6 million and $6.2 million, respectively, in 2012, 2011 and 2010.

Lives and Recoverability of Equipment and Other Long-Lived Assets

We evaluate the remaining life and recoverability of equipment and other assets that are to be held and used, including purchased technology and other intangible assets with finite useful lives, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If there is an indication of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. Long lived assets to be disposed of by sale are valued at the lower of book value or fair value less cost to sell.

We estimate the fair value of an intangible asset or asset group using the income approach and internally developed discounted cash flow models. These models include, among others, the following assumptions: projections of revenue and expenses and related cash flows based on assumed long-term growth rates and demand trends; estimated royalty, income tax, and attrition rates; and estimated discount rates. We base these assumptions on our historical data and experience, third-party appraisals, industry projections, micro and macro general economic condition projections, and our expectations.

See Note 9 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for information on impairments recognized in 2011. No impairments related to our equipment or other long-lived assets were recognized during 2012 and 2010.

Goodwill

Goodwill represents the excess purchase price over fair value of net assets acquired. Goodwill and other identifiable intangible assets with indefinite useful lives are not amortized, but instead, are tested for impairment at least annually during the fourth quarter. In 2011, we adopted ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for Impairment", which allows an entity to perform a qualitative assessment of the fair value of its reporting units before calculating the fair value of the reporting unit in step one of the two-step goodwill impairment model. We have defined our reporting units to be our operating segments. If, through the qualitative assessment, the entity determines that it is more likely than not that a reporting unit's fair value is greater than its carrying value, the remaining impairment steps would be unnecessary.

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If there are indicators that goodwill has been impaired and thus the two-step goodwill impairment model is necessary, step 1 is to determine the fair value of each reporting unit and compare it to the reporting unit's carrying value. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long-term cash flow growth rates. Discount rates are determined based on the cost of capital for the reporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. No impairments were identified in our annual impairment analysis during thefourth quarter of 2012, 2011 and 2010.

Restructuring, Reorganization, Relocation and Severance Costs

Restructuring, reorganization, relocation and severance costs are recognized and recorded at fair value as incurred. Such costs include severance and other costs related to employee terminations as well as facility costs related to future abandonment of various leased office and manufacturing sites. Also included are certain period costs to move our existing supply chain, as well as migration of certain IT systems to new platforms. Changes in our estimates could occur, and have occurred, due to fluctuations in exchange rates, the sublease of unused space, unanticipated voluntary departures before severance was required and unanticipated redeployment of employees to vacant positions. See Note 14 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the assets and liabilities. We record a valuation allowance to reduce deferred tax assets to the amount expected to “more likely than not” be realized in our future tax returns.

During 2010 we released $32.9 million in valuation allowances relating to U.S. deferred tax assets utilized to offset U.S. taxable income generated during the respective periods. We did not release any valuation allowance in 2012 or 2011. Should we determine that we would not be able to realize all or part of our remaining net deferred tax assets in the future, increases to the valuation allowance for deferred tax assets may be required. Conversely, if we determine that certain tax assets that have been reserved for may be realized in the future, we may reduce our valuation allowance in future periods. Our net deferred tax (liabilities) assets totaled ($0.3) million and $13.2 million, respectively, at December 31, 2012 and 2011 and our valuation allowance totaled $2.1 million and $2.2 million in the same periods, respectively.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate or effective settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. When applicable, associated interest and penalties have been recognized as a component of income tax expense.

At December 31, 2012 and 2011, total unrecognized tax benefits were $25.1 million and $16.0 million, respectively, all of which would have an impact on the effective tax rate if recognized. Included in the liabilities for unrecognized tax benefits were accruals for interest and penalties of $2.0 million and $1.4 million, respectively. Unrecognized tax benefits relate mainly to uncertainty surrounding various tax credits and permanent establishment in foreign jurisdictions. See Note 13 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for additional information.

Warranty Liabilities

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.

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Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee share purchase plan based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes valuation model for valuing our stock option awards.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates at the time they are made, but these estimates involve inherent uncertainties and the determination of expense could be materially different in the future.

We amortize stock-based compensation expense on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Vesting periods are generallyfouryears. The exercise price of issued options equals the grant date fair value of the underlying shares and the options generally have a legal life ofseven years.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

Accounting for Derivatives

We use a combination of forward contracts, zero cost collar contracts, option contracts and other instruments to hedge certain anticipated foreign currency exchange transactions.When specific hedge criteria have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income.One of the criteria for this accounting treatment is that the hedge contract amounts should not be in excess of specifically identified anticipated transactions. By their nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below hedged levels, or when the timing of transactions changes significantly, we reclassify a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other income (expense) during the quarter in which such changes occur.

We also use foreign forward exchange contracts to mitigate the foreign currency exchange impact of our cash, receivables and payables denominated in foreign currencies. These derivatives do not meet the criteria for hedge accounting and, accordingly, changes in the fair value are recognized in net income in the current period.

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Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency Exchange Rate Risk

A large portion of our business is conducted outside of the U.S. through a number of foreign subsidiaries. Each of the foreign subsidiaries keeps its accounting records in its respective local currency. These local-currency-denominated accounting records are translated at exchange rates that fluctuate up or down from period to period and consequently affect our consolidated results of operations and financial position. The major foreign currencies in which we experience periodic fluctuations are the euro, the Czech koruna, the Japanese yen and the British pound sterling. For each of the last three years, more than 66% of our sales occurred outside of the U.S.

In addition, because of our substantial research, development and manufacturing operations in Europe, we incur a greater proportion of our costs in Europe than the revenue we derive from sales in that geographic region. Our raw materials, labor and other manufacturing costs are primarily denominated in U.S. dollars, euros and Czech korunas. This situation negatively affects our gross margins and results of operations when the dollar weakens in relation to the euro or koruna. A strengthening of the dollar in relation to the euro or koruna would have a net positive effect on our gross margins and results of operations. Movement of Asian currencies in relation to the dollar and euro can also affect our reported sales and results of operations because we derive more revenue than we incur costs from the Asia-Pacific region. In addition, several of our competitors are based in Japan and a weakening of the Japanese yen has the effect of lowering their prices relative to ours.

Assets and liabilities of foreign subsidiaries are translated using the exchange rates in effect at the balance sheet date. Revenues and expenses are translated using the average exchange rate during the period. The resulting translation adjustments increased shareholders’ equity and comprehensive income in 2012 by $9.9 million. Holding other variables constant, if the U.S. dollar weakened by 10% against all currencies that we translate, shareholders’ equity would increase by approximately $52.0 million as of December 31, 2012. Holding other variables constant, if the U.S. dollar strengthened by 10% against all currencies that we translate, shareholders’ equity would decrease by approximately $42.6 million as of December 31, 2012.

Risk Mitigation

We use derivatives to mitigate financial exposure resulting from fluctuations in foreign currency exchange rates. When specific hedge criteria have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income. Changes in fair value for derivatives not designated as hedging instruments are recognized in net income in the current period. As of December 31, 2012, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $165.0 million. These contracts have varying maturities through the second quarter of 2014. The aggregate notional amount of our outstanding balance sheet-related derivative contracts at December 31, 2012 was $225.9 million, which contracts have varying maturities through the first quarter of 2013. We do not enter into derivative financial instruments for speculative purposes.

Holding other variables constant, if the U.S. dollar weakened by 10%, the market value of our foreign currency contracts outstanding as of December 31, 2012 would increase by approximately $17.0 million. The increase in value relating to the forward sale or purchase contracts would, however, be substantially offset by the revaluation of the transactions being hedged. A 10% increase in the U.S. dollar relative to the hedged currencies would have a similar, but negative, effect on the value of our foreign currency contracts, substantially offset again by the revaluation of the transactions being hedged.

Balance Sheet Related

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 hedge specific cash, receivables or payables positions denominated in foreign currencies. Changes in fair value of derivatives entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other expense currently together with the transaction gain or loss from the hedged balance sheet position.

The hedging transactions we undertake are intended to limit our exposure to changes in the dollar/euro exchange rate. Foreign currency losses recorded in other expense, inclusive of the impact of derivatives, totaled $5.7 million, $2.2 million and $1.2 million, respectively, in 2012, 2011 and 2010.

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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. We recognized realized losses of $2.5 million in 2012 in cost of sales related to hedge results, compared to realized gains of $3.6 million in 2011 and losses of $1.9 million in 2010. As of December 31, 2012, $1.5 million of deferred unrealized net gains on outstanding derivatives have been recorded in other comprehensive income and 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. We recorded an insignificant gain in 2012, compared to a gain of $0.1 million in 2011 and charges of $0.1 million in 2010 as a result of currency volatility. We continually monitor our hedge positions and forecasted transactions and, in the event changes to our forecast occur, we may have dedesignations of our cash flow hedges in the future. Additionally, given the volatility in the global currency markets, the effectiveness attributed to these hedges may decrease or, in some instances, may result in dedesignation as a cash flow hedge, which would require us to record a charge in other expense in the period of ineffectiveness or dedesignation.

Interest Rate Risk

Our exposure to market risk for changes in interest rates primarily relates to our investments. Since we had no variable interest rate debt outstanding at December 31, 2012, our interest expense is relatively fixed and not affected by changes in interest rates. In the event we issue any new debt in the future, increases in interest rates will increase the interest expense associated with the debt.

The primary objective of our investment activities is to preserve principal while maximizing yields without significantly increasing risk. This objective is accomplished by making diversified investments, consisting only of investment grade securities.

Cash, Cash Equivalents and Restricted Cash

As of December 31, 2012, we held cash and cash equivalents of $266.3 million and short-term restricted cash of $14.5 million that consisted of cash and other highly liquid marketable securities with maturities of three months or less at the date of acquisition. Declines of interest rates over time would reduce our interest income from our highly liquid short-term investments. A decrease in interest rates of one percentage point would cause a corresponding decrease in annual interest income of approximately $2.7 million assuming our cash and cash equivalent balances at December 31, 2012 remained constant and were earning at least 1% per annum, which, at December 31, 2012, they were not. Due to the nature of our highly liquid cash equivalents, an increase in interest rates would not materially change the fair market value of our cash and cash equivalents.

Fixed Rate Debt Securities

As of December 31, 2012, we held short-term fixed rate investments of $79.5 million that consisted of marketable debt securities, certificates of deposit, commercial paper and government-backed securities. These investments are recorded on our balance sheet as available-for-sale securities at fair value based on quoted market prices. Unrealized gains/losses resulting from changes in the fair value are recorded, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income (loss). Interest rate fluctuations impact the fair value of these investments, however, given our ability to hold these investments until maturity or until the unrealized losses recover, we do not expect these fluctuations to have a material impact on our results of operations, financial position or cash flows. Declines in interest rates over time would reduce our interest income from our short-term investments, as our short-term portfolio is re-invested at current market interest rates. A decrease in interest rates of one percentage point would cause a corresponding decrease in our annual interest income from these items of approximately $0.8 million assuming our investment balances at December 31, 2012 remained constant and were earning at least 1% per annum, which, at December 31, 2012, they were not.

Fair Value of Convertible Debt

The fair market value of our fixed rate convertible debt is subject to interest rate risk. Generally, the fair market value of fixed interest rate debt will increase as interest rates fall and decrease as interest rates rise. The interest rate changes affect the fair market value of our long-term debt, but do not impact earnings or cash flows. At December 31, 2012, we had $89.0 million of fixed rate convertible debt outstanding. Based on open market trades, we have determined that the fair market value of our long-term fixed interest rate debt was approximately $168.6 million at December 31, 2012.

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Item 8.Financial Statements and Supplementary Data

Unaudited quarterly financial data for each of the eight quarters in the two-year period ended December 31, 2012 is as follows:

2012 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	217,555		$	221,452		$	221,785		$	230,946
Cost of sales	119,444			117,023			117,629			122,012
Gross profit	98,111			104,429			104,156			108,934
Total operating expenses(1)	64,045			65,351			65,839			72,308
Operating income	34,066			39,078			38,317			36,626
Other expense, net	(2,063		)	(1,255		)	(1,712		)	(2,509		)
Income before income taxes	32,003			37,823			36,605			34,117
Income tax expense	6,336			7,530			7,447			4,315
Net income	$	25,667		$	30,293		$	29,158		$	29,802
Basic net income per share	$	0.68		$	0.80		$	0.76		$	0.78
Diluted net income per share	$	0.63		$	0.74		$	0.71		$	0.72
Shares used in basic per share calculation	37,886			37,993			38,082			38,295
Shares used in diluted per share calculation	41,518			41,614			41,771			41,897

2011 (In thousands, except per share data)	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter
Net sales	$	196,960		$	211,141		$	205,335		$	212,990
Cost of sales	111,056			115,446			114,110			118,448
Gross profit	85,904			95,695			91,225			94,542
Total operating expenses(2)	54,007			59,176			56,310			70,822
Operating income	31,897			36,519			34,915			23,720
Other expense, net	(222		)	(893		)	(601		)	(2,470		)
Income before income taxes	31,675			35,626			34,314			21,250
Income tax expense (benefit)(3)	9,363			9,566			8,137			(7,838		)
Net income	$	22,312		$	26,060		$	26,177		$	29,088
Basic net income per share	$	0.58		$	0.67		$	0.68		$	0.77
Diluted net income per share	$	0.54		$	0.62		$	0.63		$	0.72
Shares used in basic per share calculation	38,478			38,883			38,421			37,727
Shares used in diluted per share calculation	42,101			42,566			42,030			41,293

(1) Operating expenses in the fourth quarter of 2012 included $2.9 million of restructuring, reorganization, relocation and severance expense.

(2) Operating expenses in the first, second, third and fourth quarters of 2011 included $0.3 million, $0.8 million, $0.0 million and $2.1 million, respectively, of restructuring, reorganization, relocation and severance expense. Also included in operating expenses for the fourth quarter of 2011 is $5.3 million for a litigation accrual matter and a $1.4 million impairment of certain intellectual property.

(3) Income tax benefit in the fourth quarter of 2011 included a net benefit of $12.4 million relating to an agreement with The Netherlands to tax profits from intellectual property at a reduced rate. See also Note 13 of the Notes to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

FEI Company:

We have audited the accompanying consolidated balance sheets of FEI Company and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the years in the three‑year period ended December 31, 2012. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FEI Company and subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for each of the years in the three‑year period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of FEI Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February, 20, 2013 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.

/s/ KPMG LLP

Portland, Oregon

February 20, 2013

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FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

	December 31,
	2012		2011
Assets
Current Assets:
Cash and cash equivalents	$	266,302	$	320,361
Short-term investments in marketable securities	79,532		16,213
Short-term restricted cash	14,522		22,564
Receivables, net of allowances for doubtful accounts of $2,718 and $5,553	211,160		185,955
Inventories	192,540		182,010
Deferred tax assets	12,245		18,899
Other current assets	29,332		27,964
Total current assets	805,633		773,966
Non-current investments in marketable securities	29,179		53,341
Long-term restricted cash	27,425		43,669
Property, plant and equipment, net of accumulated depreciation of $121,560 and $106,760	109,872		85,082
Intangible assets, net of accumulated amortization of $10,984 and $5,706	51,499		6,938
Goodwill	131,320		58,053
Deferred tax assets	5,092		934
Non-current inventories	65,116		57,575
Other assets, net	9,087		10,351
Total Assets	$	1,234,223	$	1,089,909
Liabilities and Shareholders’ Equity
Current Liabilities:
Accounts payable	$	54,847	$	52,470
Accrued payroll liabilities	39,100		46,698
Accrued warranty reserves	12,049		11,683
Accrued agent commissions	8,124		9,005
Short-term deferred revenue	74,736		72,730
Income taxes payable	1,343		11,260
Accrued restructuring, reorganization, relocation and severance	2,692		2,213
Convertible debt	89,010		—
Other current liabilities	36,902		48,623
Total current liabilities	318,803		254,682
Long-term convertible debt	—		89,011
Long-term deferred revenue	26,668		23,423
Deferred tax liabilities	17,588		6,607
Other liabilities	31,261		19,372
Commitments and contingencies
Shareholders’ Equity:
Preferred stock - 500 shares authorized; none issued and outstanding	—		—
Common stock - 70,000 shares authorized; 38,478 and 37,866 shares issued and outstanding, no par value	516,907		493,698
Retained earnings	284,440		178,661
Accumulated other comprehensive income	38,556		24,455
Total Shareholders’ Equity	839,903		696,814
Total Liabilities and Shareholders’ Equity	$	1,234,223	$	1,089,909

See accompanying Notes to the Consolidated Financial Statements.

44

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

	Year Ended December 31,
	2012			2011			2010
Net sales:
Products	$	691,496		$	654,599		$	479,780
Service and components	200,242			171,827			154,442
Total net sales	891,738			826,426			634,222
Cost of sales:
Products	347,224			344,575			262,571
Service and components	128,884			114,485			102,387
Total cost of sales	476,108			459,060			364,958
Gross profit	415,630			367,366			269,264
Operating expenses:
Research and development	94,965			78,318			66,274
Selling, general and administrative	169,719			158,782			136,465
Restructuring, reorganization, relocation and severance	2,859			3,215			11,067
Total operating expenses	267,543			240,315			213,806
Operating income	148,087			127,051			55,458
Other expense:
Interest income	1,606			2,361			2,632
Interest expense	(4,098		)	(4,037		)	(4,504		)
Other, net	(5,047		)	(2,510		)	(1,364		)
Total other expense, net	(7,539		)	(4,186		)	(3,236		)
Income before income taxes	140,548			122,865			52,222
Income tax expense (benefit)	25,628			19,228			(1,326		)
Net income	$	114,920		$	103,637		$	53,548
Basic net income per share	$	3.02		$	2.70		$	1.41
Diluted net income per share	$	2.80		$	2.51		$	1.34
Cash dividends declared per share	$	0.24		$	—		$	—
Shares used in per share calculations:
Basic	38,065			38,384			38,083
Diluted	41,728			42,047			41,737

See accompanying Notes to the Consolidated Financial Statements.

45

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive Income

(In thousands)

	Year Ended December 31,
	2012			2011			2010
Net income	$	114,920		$	103,637		$	53,548
Other comprehensive income, net of taxes:
Change in cumulative translation adjustment	9,922			(20,022		)	(12,077		)
Change in unrealized (loss) gain on available-for-sale securities	(14		)	23			—
Change in minimum pension liability	(796		)	—			—
Changes due to cash flow hedging instruments:
Net gain (loss) on hedge instruments	2,487			(910		)	(1,466		)
Reclassification to net income of previously deferred losses (gains) related to hedge derivatives instruments	2,502			(3,641		)	2,057
Comprehensive income	$	129,021		$	79,087		$	42,062

See accompanying Notes to the Consolidated Financial Statements.

46

FEI Company and Subsidiaries

Consolidated Statements of Shareholders’ Equity

For The Years Ended December 31, 2012, 2011 and 2010

(In thousands)

	Common Stock					Retained Earnings			Accumulated Other Comprehensive Income			Total Shareholders’ Equity
	Shares		Amount
Balance at December 31, 2009	37,859		$	485,557		$	21,476		$	60,491		$	567,524
Net income	—		—			53,548			—			53,548
Employee purchases of common stock through employee share purchase plan	281		4,860			—			—			4,860
Restricted shares issued and stock options exercised related to employee stock-based compensation plans	447		3,099			—			—			3,099
Stock-based compensation expense	—		10,482			—			—			10,482
Restricted stock unit taxes for net share settlement	(102	)	(2,075		)	—			—			(2,075		)
Repurchase of common stock	(205	)	(4,862		)	—			—			(4,862		)
Tax benefit of non-qualified stock option exercises and restricted stock unit vests	—		12,084			—			—			12,084
Translation adjustment	—		—			—			(12,077		)	(12,077		)
Net adjustment for fair value of hedge derivatives	—		—			—			591			591
Balance at December 31, 2010	38,280		509,145			75,024			49,005			633,174
Net income	—		—			103,637			—			103,637
Employee purchases of common stock through employee share purchase plan	212		5,458			—			—			5,458
Restricted shares issued and stock options exercised related to employee stock-based compensation plans	1,133		18,854			—			—			18,854
Stock-based compensation expense	—		11,111			—			—			11,111
Restricted stock unit taxes for net share settlement	(105	)	(3,789		)	—			—			(3,789		)
Repurchase of common stock	(1,654	)	(50,000		)	—			—			(50,000		)
Tax benefit of non-qualified stock option exercises and restricted stock unit vests	—		2,918			—			—			2,918
Conversion of convertible debt	—		1			—			—			1
Translation adjustment	—		—			—			(20,022		)	(20,022		)
Unrealized gain on available for sale securities	—		—			—			23			23
Net adjustment for fair value of hedge derivatives	—		—			—			(4,551		)	(4,551		)
Balance at December 31, 2011	37,866		493,698			178,661			24,455			696,814
Net income	—		—			114,920			—			114,920
Employee purchases of common stock through employee share purchase plan	195		7,007			—			—			7,007
Restricted shares issued and stock options exercised related to employee stock-based compensation plans	551		5,714			—			—			5,714
Stock-based compensation expense	—		14,154			—			—			14,154
Restricted stock unit taxes for net share settlement	(113	)	(5,913		)	—			—			(5,913		)
Repurchase of common stock	(21	)	(891		)	—			—			(891		)
Tax benefit of non-qualified stock option exercises and restricted stock unit vests	—		3,137			—			—			3,137
Conversion of convertible debt	—		1			—			—			1
Translation adjustment	—		—			—			9,922			9,922
Unrealized loss on available for sale securities	—		—			—			(14		)	(14		)
Dividends declared on common stock ($0.24 per share)	—		—			(9,141		)	—			(9,141		)
Minimum pension liability, net of taxes	—		—			—			(796		)	(796		)
Net adjustment for fair value of hedge derivatives	—		—			—			4,989			4,989
Balance at December 31, 2012	38,478		$	516,907		$	284,440		$	38,556		$	839,903

See accompanying Notes to the Consolidated Financial Statements.

47

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

	Year Ended December 31,
	2012			2011			2010
Cash flows from operating activities:
Net income	$	114,920		$	103,637		$	53,548
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation	22,814			18,931			17,371
Amortization	5,852			2,054			2,669
Stock-based compensation	14,154			11,111			10,482
Asset impairments and write-offs of intangible assets	—			1,434			—
Other	9			3			318
Income taxes (receivable) payable, net	(3,979		)	6,908			(7,926		)
Deferred income taxes	2,350			(5,175		)	4,814
(Increase) decrease, net of acquisitions, in:
Receivables	(22,077		)	(5,389		)	(29,347		)
Inventories	(24,309		)	(42,337		)	(31,398		)
Other assets	(2,949		)	(11,072		)	2,178
Increase (decrease), net of acquisitions, in:
Accounts payable	397			1,324			11,812
Accrued payroll liabilities	(12,685		)	15,832			13,183
Accrued warranty reserves	176			3,077			1,235
Deferred revenue	(4,703		)	(8,544		)	18,446
Accrued restructuring, reorganization, relocation and severance	397			(2,860		)	4,585
Other liabilities	(5,413		)	13,784			3,028
Net cash provided by operating activities	84,954			102,718			74,998
Cash flows from investing activities:
Decrease (increase) in restricted cash	25,083			(5,059		)	(13,539		)
Acquisition of property, plant and equipment	(22,111		)	(13,775		)	(8,886		)
Payments for acquisitions, net of cash acquired	(93,368		)	(14,050		)	—
Purchase of investments in marketable securities	(173,908		)	(146,571		)	(179,698		)
Redemption of investments in marketable securities	134,478			159,520			261,190
Proceeds from the sale of auction rate securities	—			—			98,925
Other	(10,874		)	(992		)	(536		)
Net cash (used in) provided by investing activities	(140,700		)	(20,927		)	157,456
Cash flows from financing activities:
Dividends paid on common stock	(6,095		)	—			—
Redemption of 2.875% convertible note	—			—			(10,893		)
Withholding taxes paid on issuance of vested restricted stock units	(5,913		)	(3,789		)	(2,076		)
Repayments on line of credit	—			—			(59,600		)
Proceeds from exercise of stock options and employee stock purchases	13,131			24,382			7,983
Excess tax benefit for share based payment arrangements	2,873			1,425			—
Repurchases of common stock	(891		)	(50,000		)	(4,862		)
Other financing activities	(1,869		)	(1,367		)	—
Net cash provided by (used in) financing activities	1,236			(29,349		)	(69,448		)
Effect of exchange rate changes	451			(9,698		)	(9,588		)
(Decrease) increase in cash and cash equivalents	(54,059		)	42,744			153,418
Cash and cash equivalents:
Beginning of period	320,361			277,617			124,199
End of period	$	266,302		$	320,361		$	277,617
Supplemental Cash Flow Information:
Cash paid (received) for income taxes, net	$	23,802		$	9,391		$	(983	)
Cash paid for interest	3,559			3,539			3,833
Increase in fixed assets related to transfers with inventories	21,239			9,034			8,697
Increase in goodwill from acquisition-related liabilities	—			3,456			—
Dividends declared but not paid	3,046			—			—

See accompanying Notes to the Consolidated Financial Statements.

48

FEI COMPANY AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business

We are a leading supplier of scientific instruments for nanoscale applications and solutions for industry and science. 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^TMsystems which combine a SEM and a focused ion beam system, or FIB, on a single platform; stand-alone FIBs; and high-performance optical microscopes. TEMs provide the highest resolution images of samples and their internal structure, down to the atomic level. SEMs provide detailed images of the surface and shape of samples. Optical microscopes provide a wider field of view than SEMs and TEMs. DualBeams and FIBs image, manipulate, mill and deposit material for a variety of purposes, including preparation of samples for TEMs. Substantially all of these product categories are sold into all of our market segments. Individual models of our products are increasingly designed to provide specific solutions and applications in each of our market segments.

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 approximately50other 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.

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;

• the valuations of intangible assets;

• 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.

49

Concentration of Credit Risk

Instruments that potentially subject the Company to concentration of credit risk consist principally of cash and cash equivalents, short-term investments and receivables. Our investment policy limits investments with any one issuer to 10% or less of the total investment portfolio, with the exception of money market funds and securities issued by the U.S. government or its agencies which may comprise up to 100% of the total investment portfolio. Our exposure to credit risk concentrations within our receivables balance is limited due to the large number of entities comprising our customer base and their dispersion across many different industries and geographies.

Dependence on Key Suppliers

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, NTS Group, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc., Edax Inc. and Bruker Corp. 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.

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.

Cash and Cash Equivalents

Cash and cash equivalents include cash deposits in banks, money market funds and other highly liquid marketable securities with maturities of three months or less at the date of acquisition.

Restricted Cash

Our restricted cash balances are held in deposit accounts with banks that have issued guarantees and letters of credit to our customers for system sales transactions and customer advance deposits relating to prepayments for service contracts, mainly in Europe and Asia. This restricted cash can be drawn on by the bank if goods are not delivered or services are not properly performed. In addition, while the restricted cash is held in the bank it is earning interest. Given these deposit accounts require satisfaction of conditions other than a withdrawal demand for us to receive a return of principal, are interest bearing and are held for extended periods of time, we have concluded these balances are similar in nature to our other investments and that inclusion in investing activities on our statement of cash flows is appropriate and consistent with our treatment of other investments. 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.

Allowance for Doubtful Accounts

The allowance for doubtful accounts is estimated based on collection experience and known trends with current customers. The large number of entities comprising our customer base and their dispersion across many different industries and geographies somewhat mitigates our credit risk exposure and the magnitude of our allowance for doubtful accounts. Our estimates of the allowance for doubtful accounts are reviewed and updated on a quarterly basis. Changes to the reserve may occur based upon changes in revenue levels and associated balances in accounts receivable and estimated changes in individual customers’ credit quality. Write-offs include amounts written off for specifically identified bad debts. Historically, we have not incurred significant write-offs of accounts receivable, however, an individual loss could be significant due to the relative size of our sales transactions.

50

Activity within our accounts receivable allowance was as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
Balance, beginning of period	$	5,553		$	5,685		$	3,306
Expense	(154		)	(18		)	2,499
Write-offs	(2,732		)	(25		)	(63		)
Translation adjustments	51			(89		)	(57		)
Balance, end of period	$	2,718		$	5,553		$	5,685

Investments

Our investments include marketable debt securities, certificates of deposit, commercial paper and government-backed securities with maturities greater than 90 days at the time of purchase. These investments are recorded on our balance sheet as available-for-sale securities at fair value based on quoted market prices. Unrealized gains/losses resulting from changes in the fair value are recorded, net of tax, in shareholders’ equity as a component of accumulated other comprehensive income (loss).

Certain equity securities held in short-term and long-term investments related to the executive deferred compensation plan are classified as trading securities (see Note 6 the Notes to the Consolidated Financial Statements). Investments designated as trading securities are carried at fair value on the balance sheet, with the unrealized gains or losses recorded in interest income (expense) or other income (expense) in the period incurred. Investments for which it is not practical to estimate fair value are included at cost and primarily consist of investments in privately-held companies.

Realized gains and losses on all investments are recorded on the specific identification method and are included in interest income (expense) or other income (expense) in the period incurred. Investments with maturities greater than 12 months from the balance sheet date are classified as non-current investments, unless they are expected to be liquidated within the next 12 months; in which case, the investment is classified as current.

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.

Manufacturing inventory is reviewed for obsolescence and excess quantities on a quarterly basis, based on estimated future use of quantities on hand, which is determined based on past usage, planned changes to products and known trends in markets and technology. Changes in support plans or technology could have a significant impact on obsolescence.

To support our world-wide service operations, we maintain service spare parts inventory, which consists of both consumable and repairable spare parts. Consumable service spare parts are used within our service business to replace worn or damaged parts in a system during a service call and are generally classified in current inventory as our stock of this inventory turns relatively quickly. However, if there has been no recent usage for a consumable service spare part, but the part is still necessary to support systems under service contracts, the part is considered to be non-current and included within non-current inventories within our consolidated balance sheet. Consumables are charged to cost of goods sold when issued during the service call.

We also maintain a substantial supply of repairable and reusable spare parts for possible use in future repairs and customer field service of our install base. We have classified this inventory as a long-term asset given these parts can be repaired and reused in the service business over many years. As these service parts age over the related product group’s post-production service life, we reduce the net carrying value of our repairable spare part inventory to account for the excess that builds over the service life. The post-production service life of our systems is generallysevenyears and, at the end of the service life, the carrying value for these parts is reduced to zero. We also perform periodic monitoring of our installed base for premature or increased end of service life events. If required, we expense, through cost of goods sold, the remaining net carrying value of any related spare parts inventory in the period incurred.

Provision for manufacturing inventory valuation adjustments totaled$2.7 million, $4.2 million and $3.6 million, respectively, in 2012, 2011 and 2010. Provision for service spare parts inventory valuation adjustments totaled $6.6 million, $6.6 million and $6.2 million, respectively, in 2012, 2011 and 2010.

51

Income Taxes

We account for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and tax bases of the assets and liabilities. We record a valuation allowance to reduce deferred tax assets to the amount expected to “more likely than not” be realized in our future tax returns.Should we determine that we would not be able to realize all or part of our remaining net deferred tax assets in the future, increases to the valuation allowance for deferred tax assets may be required. Conversely, if we determine that certain tax assets that have been reserved for may be realized in the future, we may reduce our valuation allowance in future periods.

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate or effective settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. When applicable, associated interest and penalties have been recognized as a component of income tax expense.

Unrecognized tax benefits relate mainly to uncertainty surrounding various tax credits and permanent establishment in foreign jurisdictions.Included in the liabilities for unrecognized tax benefits were accruals for interest and penalties. If recognized, the total unrecognized tax benefits would have an impact on the effective tax rate. See Note 13 of the Notes to the Consolidated Financial Statements for additional information.

Property, Plant and Equipment

Land is stated at cost. Buildings and improvements are stated at cost and depreciated over estimated useful lives of approximately 40 years using the straight-line method. Leasehold improvements are amortized over the shorter of their economic lives or the lease term. Machinery and equipment, including systems used in production and research and development activities, are stated at cost and depreciated over estimated useful lives of approximately three to seven years using the straight-line method.

Demonstration systems consist primarily of internally manufactured products and related accessories that we use for marketing purposes in our demonstration laboratories (“NanoPorts”) or for trade shows. These systems are not held for sale and accordingly are recorded as a component of property, plant and equipment and depreciated using the straight-line method over their expected useful lives of approximately three to seven years with the expense being reflected as a component of selling, general and administrative.

Other fixed assets include computer software and hardware, automobiles and furnitures and fixtures. These assets are stated at cost and are depreciated over estimated useful lives of approximately three to seven years. Maintenance and repairs are expensed as incurred.

On occasion, we loan systems to customers on a temporary basis while they wait for their tool to be manufactured or for evaluation. These systems are included in our finished goods inventories and the lending/evaluation periods are typically for a time period of less than one year. The sale of disposable products or services is not typically included in these arrangements. Any expense associated with these systems is recorded as a component of cost of sales.

Additionally, we lease systems to customers as operating type leases where we are the lessor. Under the operating method, rental revenue is recognized over the lease period. The leased asset is depreciated over the life of the lease. In addition to the depreciation charge, maintenance costs and the cost of any other services rendered under the provision of the lease that pertain to the current accounting period are charged to expense.

Lives and Recoverability of Equipment and Other Long-Lived Assets

We evaluate the remaining life and recoverability of equipment and other assets that are to be held and used, including purchased technology and other intangible assets with finite useful lives, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. If there is an indication of impairment, we prepare an estimate of future, undiscounted cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying value of the asset, we adjust the carrying amount of the asset to its estimated fair value. Long lived assets to be disposed of by sale are valued at the lower of book value or fair value less cost to sell.

We estimate the fair value of an intangible asset or asset group using the income approach and internally developed discounted cash flow models. These models include, among others, the following assumptions: projections of revenue and expenses and related cash flows based on assumed long-term growth rates and demand trends; estimated royalty, income tax, and attrition rates; and estimated discount rates. We base these assumptions on our historical data and experience, third-party appraisals, industry projections, micro and macro general economic condition projections, and our expectations.

52

See Note 9 of the Notes to the Consolidated Financial Statements for information on impairments recognized in 2011. No impairments related to our equipment or other long-lived assets were recognized during 2012 and 2010.

Goodwill

Goodwill represents the excess purchase price over fair value of net assets acquired. Goodwill and other identifiable intangible assets with indefinite useful lives are not amortized, but instead, are tested for impairment at least annually during the fourth quarter. In 2011, we adopted ASU 2011-08, "Intangibles - Goodwill and Other (Topic 350), Testing Goodwill for Impairment", which allows an entity to perform a qualitative assessment of the fair value of its reporting units before calculating the fair value of the reporting unit in step one of the two-step goodwill impairment model. We have defined our reporting units to be our operating segments. If, through the qualitative assessment, the entity determines that it is more likely than not that a reporting unit's fair value is greater than its carrying value, the remaining impairment steps would be unnecessary.

If there are indicators that goodwill has been impaired and thus the two-step goodwill impairment model is necessary, step 1 is to determine the fair value of each reporting unit and compare it to the reporting unit's carrying value. Fair value is determined based on the present value of estimated cash flows using available information regarding expected cash flows of each reporting unit, discount rates and the expected long-term cash flow growth rates. Discount rates are determined based on the cost of capital for the reporting unit. If the fair value of the reporting unit exceeds the carrying value, goodwill is not impaired and no further testing is performed. The second step is performed if the carrying value exceeds the fair value. The implied fair value of the reporting unit’s goodwill must be determined and compared to the carrying value of the goodwill. If the carrying value of a reporting unit’s goodwill exceeds its implied fair value, an impairment loss equal to the difference will be recorded. No impairments were identified in our annual impairment analysis during thefourth quarter of 2012, 2011 and 2010.

Derivatives

We use a combination of forward contracts, zero cost collar contracts, option contracts and other instruments to hedge certain anticipated foreign currency exchange transactions.When specific hedge criteria have been met, changes in fair values of hedge contracts relating to anticipated transactions are recorded in other comprehensive income rather than net income until the underlying hedged transaction affects net income.One of the criteria for this accounting treatment is that the hedge contract amounts should not be in excess of specifically identified anticipated transactions. By their nature, our estimates of anticipated transactions may fluctuate over time and may ultimately vary from actual transactions. When anticipated transaction estimates or actual transaction amounts decrease below hedged levels, or when the timing of transactions changes significantly, we reclassify a portion of the cumulative changes in fair values of the related hedge contracts from other comprehensive income to other income (expense) during the quarter in which such changes occur.

We also use foreign forward exchange contracts to mitigate the foreign currency exchange impact of our cash, receivables and payables denominated in foreign currencies. These derivatives do not meet the criteria for hedge accounting and, accordingly, changes in the fair value are recognized in net income in the current period.

Segment Reporting

We have determined that we operate in four reportable operating segments: Electronics, Materials Science, Life Sciences and Service and Components. There are no differences between the accounting policies used for our business segments compared to those used on a consolidated basis.

Revenue Recognition

We recognize revenue when persuasive evidence of a contractual agreement exists, delivery has occurred or services have been rendered, the seller’s price to the buyer is fixed and determinable, and collectability is reasonably assured.

For products demonstrated to meet our published specifications, revenue is recognized when the title to the product and the risks and rewards of ownership pass to the customer. The portion of revenue related to installation, of which the estimated fair value is generally4%of the total revenue of the transaction, is deferred until such installation at the customer site and final customer acceptance are completed. For products produced according to a particular customer’s specifications, revenue is recognized when the product meets the customer’s specifications and when the title and the risks and rewards of ownership have passed to the customer. In each case, the portion of revenue applicable to installation is recognized upon meeting specifications at the customer's installation site. For new applications of our products where performance cannot be assured prior to meeting specifications at the customer's installation site, no revenue is recognized until such specifications are met.

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We enter into arrangements with customers whereby they purchase products, accessories and service contracts from us at the same time. For sales arrangements containing multiple elements (products or services), revenue relating to the undelivered elements is deferred at the estimated selling price of the element as determined using the sales price hierarchy established in Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 605-25. To be considered a separate element, the deliverable in question must represent a separate element under the accounting guidance and fulfill the following criteria: the delivered item or items must have value to the customer on a standalone basis; and, if the arrangement includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. If the arrangement does not meet all criteria above, the entire amount of the transactions is deferred until all elements are delivered.

For sales arrangements that contain multiple deliverables (products or services), to the extent that the deliverables within a multiple-element arrangement are not accounted for pursuant to other accounting standards, revenue is allocated among the deliverables using the selling price hierarchy established in ASC 605-25 to determine the selling price of each deliverable. The selling price hierarchy allows for the use of an estimated selling price (“ESP”) to determine the allocation of arrangement consideration to a deliverable in a multiple-element arrangement in the absence of vendor specific objective evidence (“VSOE”) or third-party evidence (“TPE”). We determine the selling price in multiple-element arrangements using VSOE or TPE if available. VSOE is determined based on the price charged for the same deliverable when sold separately and TPE is established based on the price charged by our competitors or third parties for the same deliverable. If we are unable to determine the selling price because VSOE or TPE does not exist, we determine ESP for the purposes of allocating total arrangement consideration among the elements by considering several internal and external factors such as, but not limited to, historical sales of similar products, costs incurred to manufacture the product and normal profit margins from the sale of similar products, geographical considerations and overall pricing practices.

These factors are subject to change as we modify our pricing practices and such changes could result in changes to determination of VSOE, TPE and ESP, which could result in our future revenue recognition from multiple-element arrangements being materially different than our results in the current period.

Generally, revenue from all elements in a multiple-element arrangement is recognized within 18 months of the shipment of the first item in the arrangement.

We provide maintenance and support services under renewable, term maintenance agreements. Maintenance and support fee revenue is recognized ratably over the contractual term, which is generally 12 months, and commences from the start date.

Revenue from time and materials-based service arrangements is recognized as the service is performed. Spare parts revenue is generally recognized upon shipment.

Deferred Revenue

Deferred revenue represents customer deposits on equipment orders, orders awaiting customer acceptance and prepaid service contract revenue. Deferred revenue is recognized in accordance with our revenue recognition policies described above.

Warranty Liabilities

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.

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, 2011 and 2010 periods, we received subsidies of $7.3 million, $5.3 million and $5.4 million, respectively, from European governments for technological developments for semiconductor and life sciences equipment.

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Advertising Costs

Advertising costs are expensed as incurred and are included as a component of selling, general and administrative costs on our consolidated statements of operations. Advertising expense totaled $3.9 million, $3.2 million and $2.4 million in 2012, 2011 and 2010, respectively.

Restructuring, Reorganization, Relocation and Severance Costs

Restructuring, reorganization, relocation and severance costs are recognized and recorded at fair value as incurred. Such costs include severance and other costs related to employee terminations as well as facility costs related to future abandonment of various leased office and manufacturing sites. Also included are certain period costs to move our existing supply chain, as well as migration of certain IT systems to new platforms. Changes in our estimates could occur, and have occurred, due to fluctuations in exchange rates, the sublease of unused space, unanticipated voluntary departures before severance was required and unanticipated redeployment of employees to vacant positions. See Note 14 of the Notes to the Consolidated Financial Statements for additional information.

Stock-Based Compensation

We measure and recognize compensation expense for all stock-based payment awards granted to our employees and directors, including employee stock options, non-vested stock and stock purchases related to our employee share purchase plan based on the estimated fair value of the award on the grant date. We utilize the Black-Scholes valuation model for valuing our stock option awards.

The use of the Black-Scholes valuation model to estimate the fair value of stock option awards requires us to make judgments on assumptions regarding the risk-free interest rate, expected dividend yield, expected term and expected volatility over the expected term of the award. The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates at the time they are made, but these estimates involve inherent uncertainties and the determination of expense could be materially different in the future.

We amortize stock-based compensation expense on a straight-line basis over the vesting period of the individual award with estimated forfeitures considered. Vesting periods are generallyfouryears. The exercise price of issued options equals the grant date fair value of the underlying shares and the options generally have a legal life ofseven years.

Compensation expense is only recognized on awards that ultimately vest. Therefore, we have reduced the compensation expense to be recognized over the vesting period for anticipated future forfeitures. Forfeiture estimates are based on historical forfeiture patterns. We update our forfeiture estimates quarterly and recognize any changes to accumulated compensation expense in the period of change. If actual forfeitures differ significantly from our estimates, our results of operations could be materially impacted.

Foreign Currency Translation

A large portion of our business is conducted outside of the U.S. through a number of foreign subsidiaries. Each of the foreign subsidiaries keeps its accounting records in its respective local currency. These local-currency-denominated accounting records are translated at exchange rates that fluctuate up or down from period to period and consequently affect our consolidated results of operations and financial position.

Assets and liabilities of foreign subsidiaries are denominated in a foreign currency, where the local currency is the functional currency, are translated to U.S. dollars at the exchange rate in effect on the respective balance sheet date. Gains and losses resulting from the translation of assets, liabilities and equity are included in accumulated other comprehensive income on the consolidated balance sheet. Transactions representing revenues, costs and expenses are translated using an average rate of exchange for the period, and the related gains and losses are reported as other income (expense) on our consolidated statement of operations.

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NOTE 2. 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 was adopted in 2012 and all required disclosures are included in Note 22 of the Notes to the Consolidated Financial Statements.

ASU 2011-05,ASU 2011-12 and ASU 2013-02

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.

In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. ASU No. 2013-02 effectively replaces the requirements previously outlined in ASU 2011-05 and ASU 2011-12.

The requirements of ASU 2013-02 should be applied prospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. As ASU 2013-02 relates to disclosure requirements only, we do not expect the adoption of this guidance to have an impact on our financial position, results of operations or cash flows.

ASU 2011-11 and ASU 2013-01

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. In January 2013, the FASB issued ASU No. 2013-01, "Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities" which limits the scope of the offsetting disclosures required by ASU No. 2011-11.

ASU No. 2011-11 and ASU 2013-01 require retrospective application, and are effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013. As the requirements of these ASUs 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.

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NOTE 3. EARNINGS PER SHARE

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

	Year Ended December 31,
	2012						2011						2010
	Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount			Net Income		Shares	Per Share Amount
Basic EPS	$	114,920	38,065	$	3.02		$	103,637	38,384	$	2.70		$	53,548	38,083	$	1.41
Dilutive effect of 2.875% convertible debt	1,819		3,033	(0.18		)	1,808		3,033	(0.15		)	2,270		3,223	(0.05		)
Dilutive effect of stock options, restricted stock units, and shares issuable to Philips	—		630	(0.04		)	—		630	(0.04		)	—		431	(0.02		)
Diluted EPS	$	116,739	41,728	$	2.80		$	105,445	42,047	$	2.51		$	55,818	41,737	$	1.34

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

	Year Ended December 31,
	2012	2011	2010
Stock options	279	358	953
Restricted stock units	59	322	477

NOTE 4. FACTORING OF ACCOUNTS RECEIVABLE

In 2011, we entered into agreements under which we sold a total of $0.1 million of our accounts receivable at a discount to unrelated third party financiers without recourse. The transfers qualified for sales treatment and, accordingly, discounts related to the sale of the receivables, which were immaterial, were recorded on our Consolidated Statements of Operations as other expense. We sold no accounts receivable under these agreements during 2012.

NOTE 5. INVENTORIES

Inventories consisted of the following (in thousands):

	December 31,
	2012		2011
Raw materials and assembled parts	$	67,985	$	68,105
Service inventories, estimated current requirements	15,898		13,978
Work-in-process	81,104		66,275
Finished goods	27,553		33,652
Total current inventories	$	192,540	$	182,010
Non-current inventories	$	65,116	$	57,575

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NOTE 6. INVESTMENTS

Investments held consisted of the following (in thousands):

	December 31, 2012
	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value
Available for sale marketable securities:
U.S. treasury notes	$	60,785	$	4	$	(3	)	$	60,786
Agency bonds(1)	31,153		4		—			31,157
Commercial paper	5,000		—		—			5,000
Certificates of deposit	5,494		—		—			5,494
Municipal bonds	3,227		1		—			3,228
Total available for sale marketable securities	105,659		9		(3		)	105,665
Trading Securities:
Equity securities - mutual funds	3,046		—		—			3,046
Cost Method Investments(2)	608		—		—			608
Total Investments	$	109,313	$	9	$	(3	)	$	109,319

	December 31, 2011
	Amortized cost		Unrealized gains		Unrealized losses			Estimated fair value
Available for sale marketable securities:
Agency bonds(1)	$	58,508	$	27	$	(2	)	$	58,533
Commercial paper	5,000		—		—			5,000
Certificates of deposit	3,207		4		—			3,211
Total available for sale marketable securities	66,715		31		(2		)	66,744
Trading Securities:
Equity securities - mutual funds	2,810		—		—			2,810
Cost Method Investments(2)	608		—		—			608
Total Investments	$	70,133	$	31	$	(2	)	$	70,162

⁽¹⁾  Agency bonds are securities backed by U.S. government-sponsored entities.

⁽²⁾  Investments for which it is not practical to estimate fair value are included at cost and primarily consist of investments in privately-held companies.

Realized gains and losses on sales of marketable debt securities were insignificant in 2012, 2011 and 2010.

We review available for sale investments in debt and equity securities for other than temporary impairment whenever the fair value of an investment is less than amortized cost and evidence indicates that an investment’s carrying amount is not recoverable within a reasonable period of time. In the evaluation of whether an impairment is “other-than-temporary,” we consider our ability and intent to hold the investment until the market price recovers, the reasons for the impairment, compliance with our investment policy, the severity and duration of the impairment and expected future performance. Unrealized losses on our corporate notes and bonds and government-backed securities are mainly due to interest rate movements, and no unrealized losses of any significance existed for a period in excess of 12 months. Our investments classified as trading securities, such as assets related to our deferred compensation plan, are carried on the balance sheet at fair value. All unrealized gains or losses are recorded in other income (expense), net in the period incurred.

For investments in small privately-held companies, which are recorded at cost, it is often not practical to estimate fair value. In order to assess whether impairments exist that are “other-than-temporary,” we reviewed recent interim financial statements and held discussions with these entities’ management about their current financial conditions and future economic outlooks. We also considered our willingness to support future funding requirements as well as our intention and/or ability to hold these investments long-term. At December 31, 2012 and 2011, we had $0.6 million in cost-method investments on our balance sheet. Refer to Note 22 the Notes to the Consolidated Financial Statements for additional information.

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Investments were included in the following captions on the balance sheet as follows (in thousands):

	December 31, 2012								December 31, 2011
	Short-term investments		Long-term investments		Other assets		Total		Short-term investments		Long-term investments		Other assets		Total
Available for sale marketable securities:
U.S. treasury notes	$	60,786	$	—	$	—	$	60,786	$	—	$	—	$	—	$	—
Agency bonds	10,148		21,009		—		31,157		8,002		50,531		—		58,533
Commercial paper	5,000		—		—		5,000		5,000		—		—		5,000
Certificates of deposit	3,598		1,896		—		5,494		3,211		—		—		3,211
Municipal bonds	—		3,228		—		3,228		—		—		—		—
Total fixed maturity securities	79,532		26,133		—		105,665		16,213		50,531		—		66,744
Equity Securities:
Mutual funds	—		3,046		—		3,046		—		2,810		—		2,810
Cost Method Investments	—		—		608		608		—		—		608		608
Total Investments	$	79,532	$	29,179	$	608	$	109,319	$	16,213	$	53,341	$	608	$	70,162

Contractual maturities or expected liquidation dates of available-for-sale fixed maturity securities at December 31, 2012 were as follows (in thousands):

	Amortized Cost		Fair Value
Due in 1 year or less	$	79,532	$	79,532
Due in 1-5 years	26,127		26,133
Total	$	105,659	$	105,665

NOTE 7. AUCTION RATE SECURITIES CALL AND REDEMPTION, SETTLEMENT OF THE PUT RIGHT AND UBS CREDIT FACILITY REPAYMENT

During 2010, $37.2 million of our auction rate securities (“ARS”) were called at par. The remaining total of $61.7 million of our ARS were put to UBS AG (together with its affiliates, “UBS”) on June 30, 2010 in accordance with our put right (the “Put Right”). As of December 31, 2010 we no longer held any investments in ARS. Additionally, in conjunction with the redemption of the ARS, we no longer have a value assigned to the UBS Put Right. We recorded a gain on the settlement of the ARS of $11.7 million in 2010 as a component of other income, net. Offsetting this gain in other income, net in 2010 were charges due to the write off of our Put Right of $11.7 million.

The cash proceeds from the calls and redemption of the ARS were first used to repay the amount outstanding under the UBS Credit Facility in accordance with the settlement agreement. Following these calls and redemption, and as of December 31, 2010, there was no longer a balance outstanding on the UBS Credit Facility. The UBS Credit Facility was terminated in connection with the full repayment of amounts outstanding.

The net amount recorded as a component of other income (expense), net related to the ARS and the Put Right was zero in 2012 and 2011 and totaled $26,000 in 2010.

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NOTE 8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consisted of the following (in thousands):

	December 31,
	2012			2011
Land	$	7,806		$	7,780
Buildings and improvements	21,645			21,478
Leasehold improvements	16,503			11,296
Machinery and equipment	108,982			81,046
Demonstration systems	29,986			29,899
Other fixed assets	46,510			40,343
Gross property, plant and equipment	231,432			191,842
Accumulated depreciation	(121,560		)	(106,760		)
Total property, plant and equipment, net	$	109,872		$	85,082

NOTE 9. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

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

	Year Ended December 31,
	2012		2011
Balance, beginning of period	$	58,053	$	44,800
Additions	69,398		13,272
Goodwill adjustments	3,869		(19		)
Balance, end of period	$	131,320	$	58,053

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.

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 year endedDecember 31, 2012, ASPEX Corporation contributed $12.3 million of revenue and net income of $0.6 million, 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.

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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 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 year endedDecember 31, 2012, AP Tech contributed $3.9 million of revenue and a net loss of $0.7 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 year endedDecember 31, 2012, VSG contributed $6.9 million of revenue and a net loss 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.

Other Intangible Assets

Patents, trademarks and other are amortized under the straight-line method over their estimated useful lives of2 to 15 years. Customer relationships are amortized under the straight-line method over their estimated useful lives of5 to 10 years. Developed technology is amortized under the straight-line method over the estimated useful life of the related technology, which ranges from5.5 to 10 years. Note issuance costs are amortized over the life of the related debt, which is7 years.

Asset Impairment Charges

As part of our annual impairment test of long-lived intangible assets performed in the fourth quarter of 2011, we determined that the carrying value of certain intellectual property was not recoverable as we no longer intend to use the associated technology. As a result, we recorded an impairment charge of $1.4 million to write-off the remaining net book value of the intellectual property. The impairment loss is recorded within the selling, general and administrative expense line of our Consolidated Statements of Operations and is reported under the Materials Science market segment. There were no impairment charges recorded during 2012 or 2010.

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

	December 31,
	2012			2011
Patents, trademarks and other	$	22,047		$	7,744
Accumulated amortization	(5,743		)	(3,698		)
Net patents, trademarks and other	16,304			4,046
Customer relationships	20,305			152
Accumulated amortization	(1,171		)	(3		)
Net customer relationships	19,134			149
Developed technology	17,686			2,303
Accumulated amortization	(1,771		)	(55		)
Net developed technology	15,915			2,248
Note issuance costs	2,445			2,445
Accumulated amortization	(2,299		)	(1,950		)
Net note issuance costs	146			495
Total intangible assets included in other long-term assets	$	51,499		$	6,938

Amortization expense was as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
Purchased technology	$	—	$	—	$	358
Patents, trademarks and other	1,993		1,342		1,167
Customer relationships	1,168		3		—
Developed technology	1,716		55		—
Note issuance costs	350		350		497
Total amortization expense	$	5,227	$	1,750	$	2,022

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
2013	$	3,110	$	2,213	$	2,236	$	146	$	7,705
2014	2,769		2,213		2,236		—		7,218
2015	2,655		2,213		2,236		—		7,104
2016	2,470		2,213		2,236		—		6,919
2017	1,921		1,866		1,966		—		5,753
Thereafter	3,379		8,416		5,005		—		16,800
Total future amortization expense	$	16,304	$	19,134	$	15,915	$	146	$	51,499

NOTE 10. 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 millionwith 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. In connection with this loan agreement, we incurred loan origination fees which are being amortized as additional interest expense over the term of the loan.

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The Credit Agreement contains quarterly commitment fees that vary based on borrowings outstanding.

The revolving loans under the Credit Agreement will generally bear interest, at our option, at either (i) the alternate base rate, which is defined as a rate per annum equal to the higher of (a) the Prime Rate in effect on such day, (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%, and (c) the LIBO Rate for an Interest Period of one month plus 1.50%, or (ii) a floating per annum rate based on LIBOR (based on one, two, three or six-month interest periods) plus a margin equal to between 1.00% and 2.00%, depending on our leverage ratio as of the fiscal quarter most recently ended. A default interest rate shall apply on all obligations during an event of default under the Credit Agreement, at a rate per annum equal to 2.00% above the applicable interest rate.Revolving loans may be borrowed, repaid and reborrowed and voluntarily prepaid at any time without premium or penalty.

The obligations under the Credit Agreement are guaranteed by our present and future material domestic subsidiaries. In addition, obligations outstanding under the Credit Agreement are secured by substantially all of our assets and the assets of our material domestic subsidiaries.

The Credit Agreement contains customary covenants for a credit facility of this size and type, that include, among others, covenants that limit our ability to incur indebtedness, create liens, merge or consolidate, dispose of assets, make investments, enter into swap agreements, pay dividends or make distributions, enter into transactions with affiliates, enter into restrictive agreements and enter into sale and leaseback transactions. The Credit Agreement provides for financial covenants that require us to maintain a minimum interest coverage ratio and limit the maximum leverage that we can maintain at any one time.

The Credit Agreement contains customary events of default for a credit facility of this size and type that include, among others, non-payment defaults, inaccuracy of representations and warranties, covenant defaults, cross-defaults to certain other material indebtedness, bankruptcy and insolvency defaults, material judgments defaults, defaults for the occurrence of certain ERISA events and change of control defaults. The occurrence of an event of default could result in an acceleration of the obligations under the Credit Agreement.

As of December 31, 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.

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):

	December 31, 2012
Guarantees and letters of credit outstanding	$	41,965
Amount secured by restricted cash deposits:
Current	$	14,522
Long-term	27,425
Total secured by restricted cash	$	41,947

NOTE 11. WARRANTY RESERVES

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

	Year Ended December 31,
	2012			2011			2010
Balance, beginning of period	$	11,683		$	8,648		$	7,477
Reductions for warranty costs incurred	(11,958		)	(8,991		)	(7,958		)
Warranties issued	12,302			12,229			9,137
Translation and changes in estimates	22			(203		)	(8		)
Balance, end of period	$	12,049		$	11,683		$	8,648

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NOTE 12. CONVERTIBLE NOTES

2.875% Convertible Subordinated Notes

On May 19, 2006, we issued $115.0 million aggregate principal amount of convertible subordinated notes. The interest rate on the notes is 2.875%, payable semi-annually. The notes are due on June 1, 2013, are subordinated to all previously existing and future senior indebtedness, and are effectively subordinated to all indebtedness and other liabilities of our subsidiaries. The cost of this transaction, including underwriting discounts and commissions and offering expenses, totaled $3.1 million and is recorded on our balance sheet in other long-term assets and is being amortized over the life of the notes. The amortization of these costs totals $0.1 million per quarter and is reflected as additional interest expense in our Consolidated Statements of Operations.

We redeemed the following amounts of our 2.875% Convertible Subordinated Notes:

Date	Amount Redeemed		Redemption Price		Redemption Discount		Related Note Issuance Costs Written Off
February 2009	$	15,000,000	86.50	%	$	2,025,000	$	250,154
June 24, 2010	7,940,000		98.90		89,325		90,904
June 29, 2010	1,200,000		99.00		12,000		13,703
July 8, 2010	1,848,000		99.25		13,860		20,546
Total for 2010	10,988,000				115,185		125,153
Total	$	25,988,000			$	2,140,185	$	375,307

During 2012, one of our note holders converted a $1,000 note into 34 shares of FEI common stock and in 2011, 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 December 31, 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 13. INCOME TAXES

Income before income taxes included the following components (in thousands):

	Year Ended December 31,
	2012		2011		2010
U.S.	$	26,640	$	14,189	$	6,930
Foreign	113,908		108,676		45,292
Total	$	140,548	$	122,865	$	52,222

Income tax expense (benefit) consisted of the following (in thousands):

	Year Ended December 31,
	2012			2011			2010
Current:
Federal	$	8,173		$	7,767		$	5,303
State	475			395			551
Foreign	13,870			18,559			2,415
Total current income tax expense	22,518			26,721			8,269
U.S. deferred expense (benefit)	4,285			(6,266		)	(9,001		)
Foreign deferred benefit	(1,175		)	(1,227		)	(594		)
Income tax expense (benefit)	$	25,628		$	19,228		$	(1,326	)

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The effective income tax rate applied to net income varied from the U.S. federal statutory rate due to the following (in thousands):

	Year Ended December 31,
	2012			2011			2010
Tax expense at U.S. federal statutory rates	$	49,192		$	43,003		$	18,278
Increase (decrease) resulting from:
State income taxes, net of federal benefit	1,126			723			551
Foreign tax benefit	(26,181		)	(20,515		)	(3,859		)
Research and experimentation benefit	(758		)	(2,908		)	(1,065		)
Foreign tax credit benefit	(2,738		)	(4,465		)	—
Tax audit settlements and lapses of statutes of limitations	(439		)	(509		)	1,097
Stock compensation	2,134			1,683			1,565
Non-deductible items	3,100			1,597			2,788
Release of valuation allowance	—			—			(20,400		)
Other	192			619			(281		)
Income tax expense (benefit)	$	25,628		$	19,228		$	(1,326	)

Our 2012 tax expense reflected lower tax rates in foreign jurisdictions where we earn a majority of our profits. The benefit of lower tax rates was partially offset by an increase in unrecognized tax benefits for positions taken on current and prior year returns.

Our 2011 tax expense reflected taxes accrued in the U.S. and foreign jurisdictions, and included a $12.4 millionbenefit relating to an agreement with The Netherlands to tax profits from intellectual property at a reduced rate. This benefit was partially offset by an increase of unrecognized tax benefits for positions taken on current and prior year returns.

Our income tax benefit of approximately $1.3 million in 2010 primarily resulted from benefits related to the release of valuation allowance recorded against U.S. deferred tax assets and liabilities for unrecognized tax benefits, offset by taxes accrued in both the U.S. and foreign tax jurisdictions. As a result of a mutual agreement between the U.S. and The Netherlands taxing authorities regarding various transfer pricing issues related to our operations, during the second quarter of 2010, we released valuation allowance and tax reserves of $47.9 million, of which $12.5 million was recorded as a benefit to shareholder’s equity. The remaining $35.4 million of tax benefit was offset by tax expense of $18.1 million to recognize the impact of our new transfer pricing methodology in prior periods.

Current taxes payable were reduced for excess tax benefits recorded to common stock and related to stock compensation of $3.1 million, $2.9 million and $12.1 million, respectively, in 2012, 2011 and 2010.

Deferred Income Taxes

Net deferred tax (liabilities) assetswere classified on the balance sheet as follows (in thousands):

	December 31,
	2012			2011
Deferred tax assets – current	$	12,245		$	18,899
Deferred tax assets – non-current	5,092			934
Deferred tax liabilities – current	(93		)	(18		)
Deferred tax liabilities – non-current	(17,588		)	(6,607		)
Net deferred tax (liabilities) assets	$	(344	)	$	13,208
Valuation allowance	$	2,081		$	2,216

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The tax effects of temporary differences that gave rise to significant portions of deferred tax assets and deferred tax liabilities were as follows (in thousands):

	December 31,
	2012			2011
Deferred tax assets:
Accrued liabilities and reserves	$	13,239		$	16,254
Revenue recognition	3,707			4,284
Tax credit and loss carryforwards	8,497			3,295
Fixed assets and intangibles	765			392
Unrealized investment	2,538			4,618
Stock compensation	1,815			1,718
Other assets	665			1,635
Gross deferred tax assets	31,226			32,196
Valuation allowance	(2,081		)	(2,216		)
Net deferred tax assets	29,145			29,980
Deferred tax liabilities:
Fixed assets and intangibles	(20,697		)	(8,245		)
Revenue recognition	(4,991		)	(4,882		)
Other liabilities	(3,801		)	(3,645		)
Total deferred tax liabilities	(29,489		)	(16,772		)
Net deferred tax (liabilities) assets	$	(344	)	$	13,208

Deferred tax (benefit) expense of ($3.0) million, ($3.0) million and $0.4 million was recorded in other comprehensive income in 2012, 2011 and 2010, respectively.

As of December 31, 2012 and 2011, our valuation allowance on deferred tax assets totaled $2.1 million and $2.2 million, respectively. In assessing the realizability of deferred tax assets, we utilize a more likely than not standard. If it is determined that it is “more likely than not” that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, historical operating performance, projected future taxable income and tax planning strategies in making this assessment.

Foreign net operating loss carryforwards as of December 31, 2012 were $11.1 million and do not expire.

Research and development tax credit carryforwards as of December 31, 2012 were $4.2 million and expire between 2013 and 2031. Alternative minimum tax credit carryforwards as of December 31, 2012 were $0.7 million and do not expire.

As of December 31, 2012, U.S. income taxes have not been provided for approximately $284.6 million of cumulative undistributed earnings of several non-U.S. subsidiaries, as our current intention is to reinvest these earnings indefinitely outside the U.S. Foreign tax provisions have been provided for these cumulative undistributed earnings. Upon distribution of those earnings in the form of dividends or otherwise, we would be subject to both U.S. income taxes (subject to an adjustment for foreign tax credits) and withholding taxes payable to the various foreign countries. Similarly, we have not provided deferred taxes on the cumulative translation adjustment related to those non-U.S. subsidiaries.

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Unrecognized Tax Benefits and Other Tax Contingencies

A rollforward of our unrecognized tax benefits was as follows (in thousands):

	Year Ended December 31,
	2012			2011			2010
Unrecognized tax benefits, beginning of period	$	16,041		$	7,156		$	20,150
Increases for tax positions taken in current period	—			542			4,461
Increases for tax positions taken in prior periods	9,965			10,502			663
Decreases for tax positions taken in prior periods	(620		)	(1,723		)	—
Decreases for lapses in statutes of limitations	(251		)	(436		)	(1,548		)
Decreases for settlements with taxing authorities	—			—			(16,570		)
Unrecognized tax benefits, end of period	$	25,135		$	16,041		$	7,156

The increases in unrecognized tax benefits in 2012 and 2011 were primarily due to uncertainty surrounding various tax credits.

Current and non-current liability components of unrecognized tax benefits were classified on the balance sheet as follows (in thousands):

	December 31,
	2012		2011
Other current liabilities	$	—	$	258
Other liabilities	15,693		8,335
Unrecognized tax benefits recorded in liabilities	$	15,693	$	8,593

The entire balance of unrecognized tax benefits, if recognized, would reduce our effective tax rate. We believe it is reasonably possible that our unrecognized tax benefits could decrease, in the next 12 months, between zero and $6.3 million due to lapses of statutes of limitations and as the result of settlements with taxing authorities.

We recognize interest and penalties related to unrecognized tax benefits in income tax expense. The liability for unrecognized tax benefits included accruals for interest and penalties of $2.0 million and $1.4 million as of December 31, 2012 and 2011, respectively.

Tax expense included the following relating to interest and penalties (in thousands):

	Year Ended December 31,
	2012			2011			2010
Benefit for lapses of statutes of limitations and settlement with taxing authorities	$	(88	)	$	(124	)	$	(1,583	)
Accruals for current and prior periods	652			293			626
Total interest and penalties	$	564		$	169		$	(957	)

For our major tax jurisdictions, the following years were open for examination by the tax authorities as ofDecember 31, 2012:

Jurisdiction	Open Tax Years
U.S.	2007 and forward
The Netherlands	2011 and forward
Czech Republic	2010 and forward

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

NOTE 14. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

Group Structure Reorganization

In January 2013, we announced our intention to reorganize the company into a group structure in order to enable us to efficiently execute our growth strategy. The reorganization will be effective beginning in the first quarter of 2013 and is expected to be implemented over the next six months. The costs associated with the reorganization will include primarily severance costs and we anticipate that it will result in the termination of certain positions throughout the company. In anticipation of this reorganization, we incurred$2.9 millionof severance costs during the fourth quarter of 2012 and as the reorganization continues, we expect to incur approximately$1.9 millionin additional restructuring charges. All of the costs related to this plan are expected to result in cash expenditures and we currently expect the total cost of the reorganization to be approximately$4.8 million.

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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.Noadditional costs were incurred in 2012 and we do not expect to incur any significant additional costs associated with the termination of this arrangement.

April 2010 Restructuring

On April 12, 2010, we announced a restructuring program to consolidate the manufacturing of our small DualBeam product line by relocating manufacturing activities currently performed at our facility in Eindhoven, The Netherlands to our facility in Brno, Czech Republic. The balance of our small DualBeam product line is already based in Brno. The move, which has been substantially completed, resulted in severance costs, costs to transfer the product line, costs to train Brno employees and costs to build-out the existing Brno facility to add capacity for the additional small DualBeam production. In addition to the product line move, the April 2010 restructuring plan involved organizational changes designed to improve the efficiency of our finance, research and development and other corporate programs and improve our market focus. Costs incurred in connection with this plan were related to the consolidation of the manufacturing of our small DualBeam product line in Brno.

Information for costs related to the April 2010 restructuring plan is as follows (in thousands):

	Year Ended December 31,
Costs Incurred	2012		2011		2010		Life of Plan
Severance costs related to work force reduction and reorganization	$	—	$	184	$	6,433	$	6,617
Product line transfer, training of Brno employees and facility build-out in Brno	—		963		872		1,835
Total costs incurred	$	—	$	1,147	$	7,305	$	8,452

All of the costs incurred resulted in cash expenditures. We do not expect to incur significant additional costs associated with this plan.

April 2008 Restructuring

Our April 2008 restructuring plan was related to improving the efficiency of our operations and improving the currency balance in our supply chain so that more of our costs are denominated in dollar or dollar-linked currencies. Also included in these costs were amounts related to IT system upgrades, which were expected to increase the efficiency of our manufacturing operations. These activities reduced operating expenses, improved our factory utilization and helped to offset the effect of currency fluctuations on our cost of goods sold. The main activities and related costs are described in the table below.

The April 2008 restructuring plan was completed in 2010. Total costs incurred related to this plan were$11.6 million. In 2010 we incurred $3.8 millionunder the April 2008 restructuring plan and incurred noadditional costs related to this plan in2011 or 2012. All of the costs resulted in cash expenditures and we do not expect to incur any additional costs under this plan.

A summary of the expenses related to our April 2008 restructuring plan is as follows (in millions):

Costs Incurred	Life of Plan
Severance costs related to work force reduction	$	3.3
Transfer of manufacturing and other activities	0.3
Shift of supply chain	5.9
IT system upgrades	2.1

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Restructuring, Reorganization, Relocation and Severance Accrual

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

Year Ended December 31, 2012	Severance, outplacement and related benefits for terminated employees			Manufacturing transfer			Group Structure Reorganization			Total
Beginning accrued liability	$	113		$	2,100		$	—		$	2,213
Charged to expense, net	—			—			2,859			2,859
Expenditures	—			(2,100		)	(254		)	(2,354		)
Write-offs and adjustments	(113		)	—			87			(26		)
Ending accrued liability	$	—		$	—		$	2,692		$	2,692

Year Ended December 31, 2011	Product line transfer and training of Brno employees			Severance, outplacement and related benefits for terminated employees			IT system upgrades			Abandoned leases, leasehold improvements and facilities			Manufacturing Transfer		Total
Beginning accrued liability	$	—		$	4,832		$	20		$	32		$	—	$	4,884
Charged to expense, net	963			184			—			(32		)	2,100		3,215
Expenditures	(963		)	(5,083		)	—			—			—		(6,046		)
Write-offs and adjustments	—			180			(20		)	—			—		160
Ending accrued liability	$	—		$	113		$	—		$	—		$	2,100	$	2,213

Year Ended December 31, 2010	Product line transfer and training of Brno employees			Severance, outplacement and related benefits for terminated employees			Transfer of manufacturing and related activities and shift of supply chain			IT system upgrades			Abandoned leases, leasehold improvements and facilities		Total
Beginning accrued liability	$	—		$	—		$	—		$	—		$	32	$	32
Charged to expense, net	872			6,777			1,312			2,106			—		11,067
Expenditures	(872		)	(2,342		)	(1,312		)	(2,086		)	—		(6,612		)
Write-offs and adjustments	—			397			—			—			—		397
Ending accrued liability	$	—		$	4,832		$	—		$	20		$	32	$	4,884

NOTE 15. 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 millionto Hitachi covering past damages and future rights to the licensed technology. Of that amount,$5.4 millionis 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 millionis attributed to future technology license rights, was recorded as prepaid royalties and will be amortized over an economic life of8 years.

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Purchase Obligations

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling$63.2 million at December 31, 2012. These commitments expire at various times through the fourth quarter of 2015.

NOTE 16. LEASE OBLIGATIONS

We have operating leases for certain of our manufacturing and administrative facilities that extend through 2024. The lease agreements generally provide for payment of base rental amounts plus our share of property taxes and common area costs as well as renewal options at current market rates.

Rent expense is recognized on a straight-line basis over the term of the lease. Rent expense was $8.5 million in 2012, $7.5 million in 2011 and $7.2 million in 2010.

The approximate future minimum rental payments due under these agreements as of December 31, 2012, were as follows (in thousands):

	Minimum Rental Payment
2013	$	8,453
2014	9,290
2015	8,667
2016	7,462
2017	7,500
Thereafter	22,652
Total	$	64,024

In June 2012, we entered into a lease agreement for two new buildings for a manufacturing, warehouse and multi-storage office facility located in Brno, Czech Republic. The payment term of the lease agreement will be from April 1, 2014 through April 1, 2024, with the option to extend for two five year periods. The lease commencement date will be during the second quarter of 2013 at which time we will start to expense the lease costs. The table above includes estimated lease payments for the minimum lease commitment of 10 years.

NOTE 17. SHAREHOLDERS’ EQUITY

Preferred Stock Rights Plan

On July 21, 2005, the Board of Directors adopted a Preferred Stock Rights Plan. Pursuant to the Preferred Stock Rights Plan, we distributed Rights as a dividend at the rate of one Right for each share of our common stock held by shareholders of record as of the close of business on August 12, 2005. The Rights expire on August 12, 2015, unless redeemed or exchanged.

The Rights are not exercisable until the earlier of: (1) 10 days (or such later date as may be determined by the Board of Directors) following an announcement that a person or group has acquired beneficial ownership of 20% of our common stock or (2) 10 days (or such later date as may be determined by the Board of Directors) following the announcement of a tender offer which would result in a person or group obtaining beneficial ownership of 20% or more of our outstanding common stock, subject to certain exceptions (the earlier of such dates being called the Distribution Date). The Rights are initially exercisable for one-thousandth of a share of our Series A Preferred Stock at a price of $120 per one-thousandth share, subject to adjustment. However, if: (1) after the Distribution Date we are acquired in certain types of transactions, or (2) any person or group (with limited exceptions) acquires beneficial ownership of 20% of our common stock, then holders of Rights (other than the 20% holder) will be entitled to receive, upon exercise of the Right, common stock (or in case we are completely acquired, common stock of the acquirer) having a market value of two times the exercise price of the Right. Philips Business Electronics International B.V., or any of its affiliates, shall not be considered for the 20% calculation so long as it does not acquire 30% or more of our common shares.

We are entitled to redeem the Rights, for $0.001 per Right, at the discretion of the Board of Directors, until certain specified times. We may also require the exchange of Rights, at a rate of one share of common stock for each Right, under certain circumstances. We also have the ability to amend the Rights, subject to certain limitations.

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PEO Combination

On February 21, 1997, we acquired substantially all of the assets and liabilities of the electron optics business of Koninklijke Philips Electronics N.V. (the “PEO Combination”), in a transaction accounted for as a reverse acquisition. As part of the PEO Combination, we agreed to issue to Philips additional shares of our common stock whenever stock options that were outstanding on the date of the closing of the PEO Combination are exercised. Any such additional shares are issued at a rate of approximately 1.22 shares to Philips for each share issued on exercise of these options. We receive no additional consideration for these shares issued to Philips under this agreement. We did not issue any shares in 2012, 2011 or 2010to Philips under this agreement. As ofDecember 31, 2012, 165,000shares of our common stock are potentially issuable and reserved for issuance as a result of this agreement.

Share Repurchases

A plan to repurchase up to a total of4.0 millionshares 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.

During 2012 we repurchased 20,500 shares for a total of $0.9 million, or an average of $43.41 per share and during 2011 we repurchased 1,654,400 shares for a total of $50.0 million or an average of $30.19 per share. As of December 31, 2012, 2,119,800shares 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.Our Board of Directors declared dividends of $0.08 per share of common stock, or approximately$3.0 million, for the second, third and forth quarters of 2012. Our total dividend payments during 2012 was$6.1 million. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors.

NOTE 18. STOCK-BASED COMPENSATION

Employee Share Purchase Plan

In 1998, we implemented an Employee Share Purchase Plan (“ESPP”). 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 from3,450,000 to 3,700,000.

Under the ESPP, employees may elect to have compensation withheld and placed in a designated stock subscription account for purchase of FEI common stock. Each ESPP offering period consists of one six-month purchase period. The purchase price in a purchase period is set at a 15% discount to the lower of the market price on either the first day of the applicable offering period or the purchase date. The ESPP allows a maximum purchase of 1,000 shares by each employee during any two consecutive offering periods.

A total of 194,885 shares were purchased pursuant to the ESPP during 2012 at a weighted average purchase price of $35.96 per share, which represented a weighted average discount of $14.29 per share compared to the fair market value of our common stock on the dates of purchase. At December 31, 2012, 824,711 shares of our common stock remained available for purchase and were reserved for issuance under the ESPP.

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Also at our 2012Annual 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 from10,500,000 to 10,750,000shares of our common stock. Our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of500,000 shares of our common stock.

We maintain stock incentive plans for selected directors, officers, employees and certain other parties that allow the Board of Directors to grant options (incentive and nonqualified), stock and cash bonuses, stock appreciation rights, restricted stock units (“RSUs”), performance RSUs and restricted shares. The Board of Directors’ ability to grant options under either the 1995 Plan or the 1995 Supplemental Plan will terminate, if the plans are not amended, when all shares reserved for issuance have been issued and all restrictions on such shares have lapsed, or earlier, at the discretion of the Board of Directors.

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

	December 31, 2012
Shares available for grant	2,070,954
Shares of common stock reserved for issuance	3,812,222

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

	December 31, 2012
	Options Outstanding		Options Exercisable
Number	869,779		267,464
Weighted average exercise price	$	35.81	$	25.28
Aggregate intrinsic value	$ 17.1 million		$ 8.1 million
Weighted average remaining contractual term	5.0 years		3.3 years

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

	December 31, 2012
	RSUs Nonvested		RSUs Expected to Vest
Number	871,491		746,958
Weighted average grant date per share fair value	$	41.67	$	41.22
Aggregate intrinsic value	$ 48.3 million		$ 41.4 million
Weighted average remaining term to vest	1.8 years		1.8 years

As of December 31, 2012, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $41.9 million, which will be recognized over the weighted average remaining vesting period of 2.1 years.

Activity under these plans was as follows (share amounts in thousands):

	Year Ended December 31, 2012
	Shares Subject to Options		Weighted Average Exercise Price
Balance, beginning of period	924		$	28.13
Granted	229		53.64
Forfeited	(47	)	27.86
Expired	(3	)	27.62
Exercised	(233	)	24.57
Balance, end of period	870		35.81

	Year Ended December 31, 2012
	Restricted Stock Units		Weighted Average Grant Date Per Share Fair Value
Balance, beginning of period	858		$	31.00
Granted	384		53.28
Forfeited	(53	)	30.89
Vested	(318	)	28.69
Balance, end of period	871		41.67

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Stock-Based Compensation Expense

Certain information regarding our stock-based compensation was as follows (in thousands):

	Year Ended December 31,
	2012		2011		2010
Weighted average grant-date fair value of stock options granted	$	12,279	$	11,703	$	6,516
Weighted average grant-date fair value of restricted stock units	20,461		15,499		7,830
Total intrinsic value of stock options exercised	6,293		10,550		554
Fair value of restricted stock units vested	9,113		8,120		7,587
Cash received from stock options exercised and shares purchased under all stock-based arrangements	13,131		24,382		7,983
Tax benefit realized for stock options	3,137		2,918		12,084

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

	Year Ended December 31,
	2012		2011		2010
Cost of sales	$	1,858	$	1,511	$	1,211
Research and development	1,903		1,873		1,538
Selling, general and administrative	10,393		7,727		7,733
Total stock-based compensation	$	14,154	$	11,111	$	10,482

Stock-based compensation costs related to inventory or fixed assets were not significant in the years ended December 31, 2012, 2011 and 2010.

Stock-Based Compensation Assumptions

The following weighted average assumptions were used in determining fair value pursuant to the Black-Scholes option pricing model:

	Year Ended December 31,
	2012		2011		2010
Risk-free interest rate	0.13% - 0.81%		0.06% - 2.02%		0.14% - 2.27%
Dividend yield	0.00% - 0.72%		—	%	—	%
Expected term:
Option plans	5.3 - 5.5 years		5.5 - 5.7 years		5.6 - 5.9 years
Employee share purchase plan	6 months		6 months		6 months
Volatility	36% - 55%		36% - 55%		31% - 51%
Discount for post vesting restrictions	—	%	—	%	—	%

The risk-free rate used is based on the U.S. Treasury yield over the expected term of the options granted. The expected term for options is estimated based on historical exercise data and for the ESPP, it is based on the life of the purchase period. The expected volatility is calculated based on the historical volatility of our common stock.

NOTE 19. EMPLOYEE BENEFIT PLANS

Pension Plans

Employee retirement plans have been established in some foreign countries in accordance with the legal requirements and customs in the countries involved. The majority of employees in Europe and Asia are covered by defined benefit, multi-employer or defined contribution pension plans. The benefits provided by these plans are based primarily on years of service and employees’ compensation near retirement. Employees in the U.S. are covered by a profit sharing 401(k) plan, which is a defined contribution plan.

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Employees in The Netherlands participate with other companies in making collectively-bargained payments to the Metal-Electro Industry pension fund. We are responsible for the employer contributions to this fund, but are not obligated to make additional payments to cover any underfunded portions. Pension costs relating to this multi-employer plan were $5.6 million, $4.7 million and $6.0 million in 2012, 2011 and 2010, respectively.

Outside the U.S. and The Netherlands, employees are covered under various defined contribution and defined benefit plans as required by local law.

Plan costs for our defined contribution plans outside the U.S. and The Netherlands totaled $3.6 million in 2012, $2.2 million in 2011 and $1.4 million in 2010.

Plan costs for our defined benefit pension plans were $0.1 million in 2012, $0.1 million in 2011 and $0.1 million in 2010. Obligations under the defined benefit pension plans are not funded. A liability for the projected benefit obligations of these plans of $3.9 million and $1.7 million was included in other non-current liabilities as of December 31, 2012 and 2011, respectively. During 2012 we recognized losses of $0.8 million in other comprehensive income related to the additional minimum pension liability for these plans. We did not record any unrealized gains or losses related to the additional minimum pension liability for these plans in 2011 or 2010. Due to the immateriality of these defined benefit pension plan costs, we have not included all required disclosures.

Profit Share and Variable Compensation Programs

We maintain an Employee Profit Share Plan and a Management Variable Compensation Plan for management-level employees to reward achievement of corporate and individual objectives. The Compensation Committee of the Board of Directors generally determines the structure of the overall incentive program at the beginning of each year. In setting the structure and the amount of the overall target incentive pool, the Compensation Committee considers potential size of the pool in relation to our earnings and other financial estimates, the achievability of the corporate targets under the plan, historical payouts under the plan and other factors. The total cost of these plans was $13.2 million in 2012, $24.7 million in 2011 and $12.5 million in 2010.

Profit Sharing 401(k) Plan

We maintain a profit sharing 401(k) plan that covers substantially all U.S. employees. Employees may elect to defer a portion of their compensation, and we may contribute an amount approved by the Board of Directors. We match 100% of employee contributions to the 401(k) plan up to 3% of each employee’s eligible compensation. Employees must meet certain requirements to be eligible for the matching contribution. We contributed $1.8 million in 2012, $1.5 million in 2011 and $1.5 million in 2010 to this plan. Our 401(k) plan does not allow for the investment in shares of our common stock.

Deferred Compensation Plan

We maintain a deferred compensation plan (the “Plan”), which permits certain employees to defer payment of a portion of their annual compensation. We do not match deferrals or make any additional contributions to the Plan. Distributions from the Plan are generally payable as a lump sum payment or in multi-year installments as directed by the participant according to the Plan provisions. Undistributed amounts under the Plan are subject to the claims of our creditors. As of December 31, 2012 and 2011, the invested amounts under the Plan totaled $3.0 million and $2.8 million, respectively, and were recorded on our balance sheets as non-current investments in marketable securities and as a long-term liability to recognize undistributed amounts due to employees.

NOTE 20. RELATED-PARTY ACTIVITY

Related parties with which we had transactions during 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.

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

	Year Ended December 31,
Sales to Related Parties	2012		2011		2010
Product sales:
Applied Materials, Inc.	$	981	$	3,594	$	343
Lattice Semiconductor Corporation	—		122		—
Cascade Microtech, Inc.	4		—		—
Total product sales to related parties	985		3,716		343
Service sales:
Applied Materials, Inc.	554		459		390
Cascade Microtech, Inc.	33		39		31
Total service sales to related parties	587		498		421
Total sales to related parties	$	1,572	$	4,214	$	764
Purchases from Related Parties
TMC BV	$	127	$	109	$	77
Cascade Microtech, Inc.	—		1		—
Total purchases from related parties	$	127	$	110	$	77

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

	December 31, 2012
Applied Materials, Inc.	$	948
Cascade Microtech, Inc.	8
TMC BV	(144		)
Due from related parties, net	$	812

NOTE 21. SEGMENT AND GEOGRAPHIC INFORMATION

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.

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

	Year Ended December 31,
	2012		2011		2010
Sales to External Customers:
Electronics	$	293,132	$	259,730	$	222,795
Materials Science	315,502		292,092		182,430
Life Sciences	82,862		102,777		74,555
Service and Components	200,242		171,827		154,442
Total	$	891,738	$	826,426	$	634,222
Gross Profit:
Electronics	$	158,674	$	137,032	$	111,925
Materials Science	150,080		125,891		74,718
Life Sciences	35,519		47,101		30,566
Service and Components	71,357		57,342		52,055
Total	$	415,630	$	367,366	$	269,264

	December 31, 2012		December 31, 2011
Goodwill:
Electronics	$	18,119	$	18,115
Materials Science	85,125		17,991
Life Sciences	17,196		16,895
Service and Components	10,880		5,052
Total	$	131,320	$	58,053
Total Assets:
Electronics	$	129,058	$	121,311
Materials Science	312,018		180,607
Life Sciences	67,603		67,445
Service and Components	186,230		158,542
Corporate and Eliminations	539,314		562,004
Total	$	1,234,223	$	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.

None of our customers represented 10% or more of our total sales during 2012, 2011 or 2010.

Geographical Information

A significant portion of our net sales has been derived from customers outside of the U.S., which we expect to continue. We evaluate geographical performance for three regions: U.S. and Canada, Europe and the Asia-Pacific Region and Rest of World. Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia.

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The following table summarizes sales by geographic region (in thousands):

	Year Ended December 31,
	2012						2011						2010
	Product Sales		Service Sales		Total		Product Sales		Service Sales		Total		Product Sales		Service Sales		Total
U.S. and Canada	$	200,778	$	90,942	$	291,720	$	179,126	$	78,118	$	257,244	$	131,283	$	72,719	$	204,002
Europe	185,598		59,124		244,722		206,994		54,319		261,313		160,927		46,467		207,394
Asia-Pacific Region and Rest of World	305,120		50,176		355,296		268,479		39,390		307,869		187,570		35,256		222,826
Consolidated net sales	$	691,496	$	200,242	$	891,738	$	654,599	$	171,827	$	826,426	$	479,780	$	154,442	$	634,222

Our long-lived assets were geographically located as follows (in thousands):

	December 31, 2012		December 31, 2011
United States	$	74,319	$	49,284
The Netherlands	32,679		21,674
Other	58,277		23,825
Total	$	165,275	$	94,783

NOTE 22. 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):

December 31, 2012	Level 1		Level 2		Level 3		Total
Available for sale marketable securities:
U.S. treasury notes	$	60,786	$	—	$	—	$	60,786
Agency bonds	—		31,157		—		31,157
Commercial paper	—		5,000		—		5,000
Certificates of deposit	—		5,494		—		5,494
Municipal bonds	—		3,228		—		3,228
Trading securities:
Equity securities – mutual funds	3,046		—		—		3,046
Derivative contracts, net	—		1,655		—		1,655
Total	$	63,832	$	46,534	$	—	$	110,366

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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 transfers between fair value categories or changes to our valuation techniques during theyear endedDecember 31, 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):

	December 31, 2012
Fixed rate convertible debt on balance sheet	$	89,010
Fair value of fixed rate convertible debt	168,550

The fair value of our fixed rate convertible debt is based on open market trades and is classified as Level 2 in the fair value hierarchy.

NOTE 23. 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):

	December 31, 2012		December 31, 2011
Cash flow hedges	$	165,000	$	193,000
Balance sheet hedges	225,924		131,391
Total outstanding derivative contracts	$	390,924	$	324,391

The outstanding contracts at December 31, 2012 have varying maturities through the second 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 atDecember 31, 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):

	Year Ended December 31,
	2012			2011			2010
Foreign currency loss, inclusive of the impact of derivatives	$	(5,675	)	$	(2,222	)	$	(1,185	)

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
	December 31, 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	$	1,527	$	—	$	—	$	—
Foreign exchange contracts in liability position	—		—		—		7,252
Derivatives Not Designated as Hedging Instruments
Foreign exchange contracts in asset position	$	1,136	$	—	$	1,668	$	—
Foreign exchange contracts in liability position	—		1,008		—		8,383

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

	Year Ended December 31,
Foreign Exchange Contracts in Cash Flow Hedging Relationships	2012			2011			2010
Amount of gain/(loss):
Recognized in OCI (effective portion)	$	8,032		$	108		$	(1,278	)
Reclassified from accumulated OCI into cost of sales (effective portion)	(2,511		)	3,558			(1,939		)
Recognized in other, net (ineffective portion and amount excluded from effectiveness testing)	9			83			(117		)
Foreign Exchange Contracts Not in Cash Flow Hedging Relationships
Amount of gain/(loss):
Recognized in other, net	$	(4,882	)	$	(6,181	)	$	(2,482	)

The unrealized gains at December 31, 2012are 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 24. SUBSEQUENT EVENT

As previously disclosed in an 8-K filed with the SEC on January 14, 2013, beginning in the first quarter of 2013, the Company will be reorganized from its current structure to a group structure, consisting of an Industry Group and a Science Group. The Industry Group will include the Electronics and natural resources businesses. The Science Group will include the Company's Materials Science and Life Sciences businesses. Both of the new Groups include the revenue and costs associated with service provided to their customers.

In accordance with SEC guidelines, the Company is reporting its operating segment information for the fourth quarter and full year of 2012 in line with its prior segment reporting, which included segments for Materials Science, Electronics, Life Sciences and Service and Components. Beginning with the first quarter of 2013, the Company will report segments based on the new structure of two segments-the Industry Group and the Science Group.

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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.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 thisAnnual Report on Form 10-K. 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 year that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting includes policies and procedures that provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, we used the criteria set forth in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our assessment using those criteria, our management concluded that, as of December 31, 2012, our internal control over financial reporting was effective.

KPMG LLP has audited this assessment of our internal control over financial reporting and their report is included below.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

FEI Company:

We have audited FEI Company's internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). FEI Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, FEI Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of FEI Company and subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2012, and our report dated February 20, 2013 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP

Portland, Oregon

February 20, 2013

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Item 9B.Other Information

None.

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PART III

Item 10.Directors, Executive Officers of the Registrant and Corporate Governance Matters

Information required by this item will be included under the captions Governance, Code of Ethics, Proposal No. 1 Election of Directors, Meetings and Committees of the Board of Directors, Executive Officers, Membership of the Audit Committee and Section 16(a) Beneficial Ownership Reporting Compliance in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

On September 9, 2003, we adopted a code of business conduct and ethics that applies to all directors, officers and employees. We posted our code of business conduct and ethics on our website at www.fei.com. We intend to disclose any amendment to the provisions of the code of business conduct and ethics that apply specifically to directors or executive officers by posting such information on our website. We intend to disclose any waiver to the provisions of the code of business conduct and ethics that apply specifically to directors or executive officers by filing such information on a Current Report on Form 8-K with the SEC, to the extent such filing is required by the NASDAQ Global Market’s listing requirements; otherwise, we will disclose such waiver by posting such information on our website.

Item 11.Executive Compensation

Information required by this item will be included under the captions Director Compensation, Executive Compensation, Compensation Discussion and Analysis for Named Executive Officers, Compensation Committee Report, Summary Compensation Table, Grants of Plan-Based Awards for Fiscal Year Ended 2012, Outstanding Equity Awards at Fiscal Year End for Fiscal Year Ended 2012, Option Exercises and Stock Vested for Fiscal Year Ended 2012, Nonqualified Deferred Compensation for Fiscal Year Ended 2012, Potential Payments Upon Termination of Employment and Compensation Committee Interlocks and Insider Participation in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information required by this item will be included under the captions Security Ownership of Certain Beneficial Owners and Management and Securities Authorized for Issuance Under Equity Compensation Plans in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 13.Certain Relationships and Related Transactions and Director Independence

Information required by this item will be included under the captions Certain Relationships and Related Transactions and Director Independence in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

Item 14.Principal Accounting Fees and Services

Information required by this item will be included under the caption Proposal No. 4 Advisory Approval on the Appointment of Public Accounting Firm in our Proxy Statement for our 2013 Annual Meeting of Shareholders and is incorporated by reference herein.

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PART IV

Item 15.Financial Statement Schedules and Exhibits

Financial Statements and Schedules

The Consolidated Financial Statements, together with the report thereon of our independent registered public accounting firm, are included on the pages indicated below:

	Page
Report of KPMG LLP, Independent Registered Public Accounting Firm	43
Consolidated Balance Sheets as of December 31, 2012 and 2011	44
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010	45
Consolidated Statements of Comprehensive Income for the years ended December 31, 2012, 2011 and 2010	46
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2012, 2011 and 2010	47
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010	48
Notes to the Consolidated Financial Statements	49

There are no schedules required to be filed herewith.

Exhibits

The following exhibits are filed herewith and this list is intended to constitute the exhibit index. A plus sign (+) beside the exhibit number indicates the exhibits containing a management contract, compensatory plan or arrangement, which are required to be identified in this report.

Exhibit No.	Description
3.1 (6)	Third Amended and Restated Articles of Incorporation
3.2 (8)	Articles of Amendment to the Third Amended and Restated Articles of Incorporation
3.3 (12)	Amended and Restated Bylaws, as amended on November 14, 2012
4.1 (9)	Indenture, dated as of May 19, 2006, between the Company and The Bank of New York Trust Company, as trustee
4.2 (21)	Form of 2.875% Convertible Subordinated Note due 2013 (incorporated by reference to Annex A of Exhibit 4.1)
4.3 (9)	Registration Rights Agreement, dated as of May 19, 2006, among FEI Company, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Needham & Company, LLC, Thomas Weisel Partners LLC, D.A. Davidson & Co. and Merriman Curhan Ford & Co.
4.4 (8)	Preferred Stock Rights Agreement dated July 21, 2005, between FEI and Mellon Investor Services, LLC
10.1+ (17)	1995 Stock Incentive Plan, as amended
10.2+ (2)	1995 Supplemental Stock Incentive Plan
10.3+ (1)	Form of Incentive Stock Option Agreement
10.4+ (18)	Form of Nonstatutory Stock Option Agreement
10.5+ (17)	Employee Share Purchase Plan, as amended
10.6+ (21)	Amended and Restated Executive Change of Control and Severance Agreement by and between Dr. Don Kania and FEI Company
10.7+ (10)	Stand-alone Non-statutory Stock Option Agreement (for grant of 100,000 option shares outside of 1995 Stock Incentive Plan as a material inducement for Dr. Kania to accept employment)
10.8+ (10)	Stand-alone Restricted Stock Unit Agreement (for grant of 25,000 units outside the 1995 Stock Incentive Plan as a material inducement for Dr. Kania to accept employment)
10.9+ (10)	Form of Restricted Stock Unit grant (for grant of 75,000 units to Dr. Kania within the 1995 Stock Incentive Plan)
10.10+ (3)	FEI Company Nonqualified Deferred Compensation Plan

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10.11 (4)	Lease Agreement, dated December 11, 2002, by and among FEI, Technologicky Park Brno, a.s. and FEI Czech Republic, s.r.o.
10.12 (5)	Master Agreement for the Acht facility, dated January 14, 2003
10.13+ (7)	Form of Indemnity Agreement for Directors and Executive Officers of FEI
10.14+	Description of Compensation of Non-Employee Directors
10.15+ (16)	2011 and 2012 FEI Management Variable Compensation Plan Program Summary Description
10.16+ (13)	Amendment to Offer Letter of Employment to Benjamin Loh, dated December 19, 2008
10.17 (11)	Credit Agreement, dated as of June 4, 2008, by and among FEI Company, the Guarantors party thereto from time to time, JPMorgan Chase Bank, N.A., as Administrative Agent, J.P. Morgan Europe Limited, as Alternative Currency Agent, and each of the Lenders party thereto from time to time
10.18 (11)	Security and Pledge Agreement, dated as of June 4, 2008, by and among FEI Company, the Guarantors party thereto from time to time and JPMorgan Chase Bank, N.A., as Administrative Agent
10.19 (14)	First Amendment to Credit Agreement, Security and Pledge Agreement and Disclosure Letter, dated as of March 3, 2009, by and among FEI Company, the Guarantors identified on the signature pages thereto, the Lenders identified on the signature pages thereto and JPMorgan Chase Bank, N.A., as Administrative Agent
10.20+ (21)	Amended and Restated Form of Executive Change of Control and Severance Agreement
10.21+ (13)	Amendment to Offer Letter of Employment to Ray Link, dated December 10, 2008
10.22 (15)	Form of Credit Line Account Application and Agreement, dated as of March 25, 2009, by and between UBS Bank USA and FEI Company
10.23 (15)	Form of First Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009 by and among UBS Bank USA, FEI Company and UBS Financial Services, Inc.
10.24 (15)	Form of Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, executed by FEI Company
10.25 (15)	Form of Second Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, by and among UBS Bank USA, FEI Company and UBS Financial Services Inc.
10.26 (15)	Form of Important Notice on Interest Rates and Payments, dated as of March 25, 2009, executed by FEI Company
10.27 (19)	Second Amendment to Credit Agreement, Security and Pledge Agreement and Disclosure Letter, dated as of April 26, 2011, by and among FEI Company, the Guarantors identified on the signature pages thereto, the Lenders identified on the signature pages thereto and JPMorgan Chase Bank, N.A., as Administrative Agent
10.28 (22)	Agreement on Future Lease Agreement and on Rights and Duties in Connection with Acquisition and Development
10.29 (22)	Lease Agreement
14 (20)	Code of Business Conduct and Ethics
21	Subsidiaries
23.1	Consent of KPMG LLP
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

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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 Registration Statement of Form S-1, as amended, effective May 31, 1995 (Commission Registration No. 33-71146).

(2) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 1995.

(3) Incorporated by reference to our Registration Statement on Form S-3, filed on April 23, 2001.

(4) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2002.

(5) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended March 30, 2003.

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

(7) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2003.

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

(9) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 23, 2006.

(10) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended July 2, 2006.

(11) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 10, 2008.

(12) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on November 14, 2012.

(13) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2008.

(14) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 5, 2009.

(15) Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended April 5, 2009.

(16) Incorporated by reference to our Current Reports on Form 8-K filed with the Securities and Exchange Commission on December 20, 2010 and December 16, 2011.

(17) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on May 14, 2012.

(18) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2009.

(19) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on April 27, 2011.

(20) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on March 2, 2010.

(21) Incorporated by reference to our Annual Report on Form 10-K for the year ended December 31, 2011.

(22) Incorporated by reference to our Current Report on Form 8-K filed with the Securities and Exchange Commission on June 6, 2012.

The certifications attached as Exhibits 32.1 and 32.2 that accompany this Annual Report on Form 10-K are not deemed filed with the Securities and Exchange Commission and are not to be incorporated by reference into any filing of FEI Company under the Securities Act,or the Securities Exchange Act of 1934, whether made before or after the date of this Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: February 20, 2013	FEI COMPANY
	By	/s/ DON R. KANIA
	Don R. Kania
	Director, President and
	Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 20, 2013:

Signature	Title
/s/ DON R. KANIA
Don R. Kania	Director, President and Chief Executive Officer (Principal Executive Officer)
/s/ RAYMOND A. LINK
Raymond A. Link	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
/s/ HOMA BAHRAMI
Homa Bahrami	Director
/s/ ARIE HUIJSER
Arie Huijser	Director
/s/ THOMAS F. KELLY
Thomas F. Kelly	Director
/s/ JAN C. LOBBEZOO
Jan C. Lobbezoo	Director
/s/ JAMI K. NACHTSHEIM
Jami K. Nachtsheim	Director
/s/ GERHARD H. PARKER
Gerhard H. Parker	Director
/s/ JAMES T. RICHARDSON
James T. Richardson	Director
/s/ RICHARD H. WILLS
Richard H. Wills	Director

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