10-K 1 feic-123111x10k.htm FORM 10-K FEIC-12.31.11-10K
 
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, 2011
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.  ¨
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 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 definition 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 equity held by non-affiliates, computed by reference to the last sales price ($38.86) 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 3, 2011), was $1,518,272,557.
The number of shares outstanding of the registrant’s Common Stock as of February 13, 2012 was 37,877,286 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 2012 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A.
 





FEI COMPANY
2011 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 
 
 
Page
 
PART I
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 1B.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
PART II
 
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
Item 7.
 
 
 
Item 7A.
 
 
 
Item 8.
 
 
 
Item 9.
 
 
 
Item 9A.
 
 
 
Item 9B.
 
 
 
 
PART III
 
 
 
 
Item 10.
 
 
 
Item 11.
 
 
 
Item 12.
 
 
 
Item 13.
 
 
 
Item 14.
 
 
 
 
PART IV
 
 
 
 
Item 15.
 
 
 

1


PART I
Item 1. Business
Overview
We were founded in 1971 and our shares began trading on The NASDAQ Stock Market in 1995. We are a leading supplier of scientific instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market segment, the Materials Science market segment (formerly Research and Industry), 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 systems which combine a SEM and a focused ion beam system, or FIB, on a single platform; and stand-alone FIBs.
Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small-stage DualBeam systems”).
We have research and development and manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; and Munich, Germany. Our sales and service operations are conducted in the United States (U.S.) and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.
The Electronics market segment consists of customers in the semiconductor equipment and related industries such as manufacturers of data storage equipment, solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures.
The Materials Science market segment includes universities, public and private research laboratories and customers in a wide range of industries, including natural resources (mining and oil and gas), petrochemicals, metals, automobiles, aerospace, and forensics. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration. Our products are also used in root cause failure analysis and quality control applications across a range of industries.
The Life Sciences market segment includes universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products’ ultra-high resolution imaging allows structural and cellular biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.
The Service and Components market segment provides support for products and customers for the entire life cycle of a tool from installation through the warranty period, and after warranty period through contract coverage or on a time and materials basis. We believe strong technical support is an important part of the value proposition that we offer customers when a tool is sold. Our Service and Components market segment provides support across all markets and all regions.
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; and
high-end digital light microscopy for the Life Science market.

2


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; Munich, Germany; and Brisbane, Australia.
Our research and development staff at December 31, 2011 consisted of 398 employees, including scientists, engineers, designer draftsmen, technicians and software developers.
In the last year, we introduced several new and improved products, including:
the Vion plasma focused ion beam ("PFIB") system that is much faster than existing FIB technologies;
the Versa 3D DualBeam system which provides high-resolution 3D imaging and analysis on a wide range of sample types;
the Titan G2 80-200 with ChemiSTEM Technology, a new member of the Titan G2 series of scanning/transmission electron microscopes; and
the QEMSCAN WellSite analysis solution that enhances the quality of mudlogging services for the oil and gas industry.
Additionally, 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.
We also completed the acquisition of TILL Photonics of Munich, Germany in 2011, giving the Company a high-end digital light microscope for Life Science application. On January 9, 2012, we completed the acquisition of ASPEX Corporation of Delmont, Pennsylvania, which gives us a durable SEM for industrial applications.

3


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 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 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.
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 $78.3 million in 2011, $66.3 million in 2010 and $67.7 million in 2009.
Manufacturing
We have manufacturing operations located in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; and Munich, Germany. Our manufacturing staff at December 31, 2011 consisted of 570 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, AP Tech, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. A portion of the subcomponents that make up the components and sub-assemblies supplied to us are proprietary in nature and are provided to our suppliers only from single sources. We monitor those parts subject to single or a limited source supply to seek to minimize factory down time due to unavailability of such parts, which could impact our ability to meet manufacturing schedules.
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.

4


Our sales and marketing staff at December 31, 2011 consisted of 326 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, 2011 consisted of 577 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 12 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.
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.
Our service business faces little significant third-party competition. Because of the highly specialized nature of our products and technology, and because of the critical mass necessary to support a worldwide field service capability, few competitors have emerged to 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.
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 206 patents in the U.S. and approximately 371 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 2012 to 2030.
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 also depend on trade secrets used in the development and manufacture of our products. We endeavor to protect these trade secrets but the measures we have taken to protect these trade secrets may be inadequate or ineffective.
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.

5


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, 2011, we had 2,006 full-time equivalent, permanent employees and 68 temporary employees worldwide. Some of the 1,465 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, 2011, our total backlog was $430.7 million, compared to $471.9 million at December 31, 2010. At December 31, 2011, our backlog consisted of $343.3 million of products and $87.4 million related to Service and Components compared to product backlog of $390.6 million and Service and Components backlog of $81.3 million at December 31, 2010.
Customers may cancel or delay delivery on previously placed orders, although our standard terms and conditions include penalties for cancellations made close to the scheduled delivery date. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been low. However, in the last two years, this long-standing trend changed somewhat and, as a result, our cancellation rates may increase in the future. During 2011 and 2010, we experienced cancellations or de-bookings of $3.5 million and $2.7 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, 2011
 
U.S. and Canada
 
Europe
 
Asia-Pacific Region and Rest of World
 
Total
Product sales
$
179,126

 
$
206,994

 
$
268,479

 
$
654,599

Service and Component sales
78,118

 
54,319

 
39,390

 
171,827

Total sales
$
257,244

 
$
261,313

 
$
307,869

 
$
826,426

Our long-lived assets were geographically located as follows (in thousands):
 
December 31, 2011
United States
$
49,284

The Netherlands
21,674

Other
23,825

Total
$
94,783

See also Note 21 of 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.

6


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 special 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. 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.
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;
cost of ownership;
global technical service and support;
success in developing or otherwise introducing new products; and
foreign currency fluctuations.

7


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 shipment may be significant to meeting our quarterly sales projection (as our average selling price for a tool is approximately $1 million), any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.
Because we have significant operations outside of the U.S., we are subject to political, economic and other international conditions that could result in increased operating expenses and regulation of our products and increased difficulty in maintaining operating and financial controls.
Because a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. In the year of 2011 and in each of the last three years, more than 66% of our sales came from outside of the U.S. We have manufacturing facilities in Brno, Czech Republic, Eindhoven, The Netherlands and Munich, Germany and sales offices in many other countries.
Moreover, we operate in over 50 countries, 23 with a direct presence. Some of our global operations are geographically isolated, are distant from corporate headquarters and/or have little infrastructure support. Therefore, maintaining and enforcing operating and financial controls can be difficult. Failure to maintain or enforce controls could have a material adverse effect on our control over service inventories, quality of service, customer relationships and financial reporting.
Our exposure to the business risks presented by foreign economies will increase to the extent we continue to expand our global operations. International operations will continue to subject us to a number of risks, including:
longer sales cycles;
multiple, conflicting and changing governmental laws and regulations;
protectionist laws and business practices that favor local companies;
price and currency exchange rates and controls;
taxes and tariffs;
export restrictions;
difficulties in collecting accounts receivable;
travel and transportation difficulties resulting from actual or perceived health risks (e.g., avian or swine influenza);
changes in the regulatory environment in countries where we do business could lead to delays in the importation of products into those countries;
the implementation and administration of the Control of Electronic Information Products (often referred to as China RoHS) regulations could lead to delays in the importation of products into China;
political and economic instability (e.g. Thai riots, Mexican crimewave, unrest in Egypt);
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.

8


The largest sub-parts of the Electronics market segment are the semiconductor and data storage industries. These industries are cyclical and have experienced significant economic downturns at various times in the last decade. Such downturns have been characterized by diminished product demand, accelerated erosion of average selling prices and production overcapacity. A downturn in one or both of these industries, or the businesses of one or more of our customers, could have a material adverse effect on our business, prospects, financial condition and results of operations. Beginning with the second half of 2007, we experienced significant variability in bookings and revenue in our Electronics segment due to the downturn in the spending cycle in the semiconductor and data storage industry. The semiconductor capital equipment market recovered in 2010, but the duration of the recovery is uncertain. General global economic conditions may be beginning to stabilize, but economic recovery is tentative and its strength is unknown. During downturns, our sales and gross profit margins generally decline.
The Materials Science market segment is also affected by overall economic conditions, but is not as cyclical as the Electronics market segment.
The Life Sciences market segment is a smaller and still emerging market, and the tools we sell into that market often have average selling prices ranging from $0.5 million to over $5.0 million. Consequently, loss of demand among a relatively small group of potential customers can have a material impact on the overall demand for our products. As a result, movement of a small number of sales from one quarter to the next could cause significant variability in quarter-to-quarter growth rates, even as we believe that this market has the potential for long-term growth.
A significant portion of our Materials Science and Life Sciences revenue is dependent on government investments in research and development of new technology. To the extent that governments, especially in Europe or the U.S., reduce their spending in response to budget deficits and debt limitations, demand for our products could be affected. To date, we have not seen an impact from such actions, although the U.S. government has indicated that it plans to reduce funding for research. The funding cycles for our customers tend to extend over multiple quarters and several countries have reaffirmed their commitment to scientific research, but the longer-term impact of potential government fiscal austerity measures on our growth rate cannot be determined at this time. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are threatened by the recent volatility in capital markets worldwide.
As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who could delay expenditures or cancel orders in reaction to variations in their businesses or general economic conditions. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses quickly in response to revenue shortfalls. In a prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as manufacturing overhead, capital equipment or research and development costs, which may cause our gross margins to erode and our net loss to increase or earnings to decline.
Our acquisition and investment strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
In addition to our efforts to develop new technologies from internal sources, we may also seek to acquire new technologies or operations from external sources. On November 14, 2011, we acquired TILL Photonics of Munich, Germany to expand our Life Sciences business and on January 9, 2012 we acquired ASPEX Corporation of Delmont, Pennsylvania to expand our Materials Science and Natural Resources footprint. As part of this effort, we may make acquisitions of, or make significant debt and equity investments in, businesses with complementary products, services and/or technologies. Acquisitions can involve numerous risks, including management issues and costs in connection with the integration of the operations and personnel, technologies and products of the acquired companies, the possible write-downs of impaired assets and the potential loss of key employees of the acquired companies. The inability to effectively manage any of these risks could seriously harm our business. Additionally, difficulties in integrating any potential acquisitions into our internal control structure could result in a failure of our internal control over financial reporting, which, in turn, could create a material weakness.
To the extent we make investments in entities that we control, or have significant influence in, our financial results will reflect our proportionate share of the financial results of the entity.
We may suffer manufacturing capacity limitations on occasion.
Recently, demand for our product has accelerated an 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.

9


If our customers cancel or reschedule orders or if an anticipated order for even one of our systems is not received in time to permit shipping during a certain fiscal period, our operating results for that fiscal period may fluctuate and our business and financial results for such period could be materially and adversely affected. Cancellation risks rise in periods of economic downturn.
Our customers are able to cancel or reschedule orders, generally with limited or no penalties, depending on the product’s stage of completion. The amount of purchase orders at any particular date, therefore, is not necessarily indicative of sales to be made in any given period. Our build cycle, or the time it takes us to build a product to customer specifications, typically ranges from one to six months. During this period, the customer may cancel the order, although generally we will be entitled to receive a cancellation fee based on the agreed-upon shipment schedule. The risks of cancellation are higher during times of economic downturn, such as the U.S. and global economies are presently experiencing. In addition, we derive a substantial portion of our net sales in any fiscal period from the sale of a relatively small number of high-priced systems, with a large portion in the last month of the quarter. Further, in some cases, our customers have to make changes to their facilities to accommodate the site requirements for our systems and may reschedule their orders because of the time required to complete these facility changes. This is particularly true of our high-performance TEMs. As a result, the timing of revenue recognition for a single transaction could have a material effect on our revenue and results of operations for a particular fiscal period.
Due to these and other factors, our net revenues and results of operations have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and annual basis. It is possible that in some future quarter or quarters our results of operations will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly.
Due to our extensive international operations and sales, we are exposed to foreign currency exchange rate risks that could adversely affect our revenues, gross margins and results of operations.
A significant portion of our sales and expenses are denominated in currencies other than the U.S. dollar, principally the euro and Czech Koruna. For the year of 2011 and for all of 2010 and 2009, approximately 30% to 40% 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 has also made 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, especially in developed countries, 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.

10


Gross margins on our products vary between product lines and markets and, accordingly, changes in product mix will affect our results of operations.
If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. Our Electronics business, which ultimately depends on consumers who buy electronic devices, began to experience recovery in 2010, but the duration of the recovery is uncertain. To the extent that the recovery in this market segment slows or stalls, our overall margins may be negatively affected.
Our business is complex, and changes to the business may not achieve their desired benefits.
Our business is based on a myriad of technologies, encompassed in multiple different product lines, addressing various customers in a range of markets in different regions of the world. A business of our breadth and complexity requires significant management time, attention and resources. In addition, significant changes to our business, such as changes in manufacturing, operations, product lines, market focus or organizational structure or focus, can be distracting, time-consuming and expensive. These changes can have short-term adverse effects on our financial results. In addition, the complexity of product lines and diversity of our customer base creates manufacturing planning and control challenges that may lead to higher costs of materials and labor, increased service costs, delayed shipments and excessive inventory. Failure to effectively manage these manufacturing issues may materially impact our financial position, results of operations or cash flow.
A portion of our manufacturing operations were relocated between existing facilities which involved significant costs and risks of operational interruption and product quality.
We executed a plan during 2010 and 2011 to shift manufacturing for certain products to other of our factories. Moving product manufacturing includes, among others, the following risks:
unanticipated additional costs connected to such moves;
delay or failure in being able to build the transferred product at the new sites;
unanticipated additional labor and materials costs related to such moves;
logistical issues arising from the moves; and
product quality falling short of the product standard when manufactured at the prior location.
Any of these factors could cause us to miss product orders, cause a decline in product quality and completeness, damage our reputation, increase costs of goods sold or decrease revenue and gross margins.
Dependence on contract manufacturing and outsourcing other portions of our supply chain may adversely affect our ability to bring products to market and damage our reputation.
As part of our efforts to streamline operations and cut costs, we have been outsourcing aspects of our manufacturing processes and other functions and we evaluate additional outsourcing at times. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, and replacement manufacturers may be unavailable, which may preclude us from fulfilling our customer orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Moreover, delays could cause us to suffer penalties with our customers, which could also impact our profitability.
During the fourth quarter of 2011, we signed a contract with our largest contract manufacturer, accounting for approximately 10% of our revenue, to terminate the arrangement and to take over the manufacturing process which we did ourselves as late as 2008. As with any process transfer, some unforeseen costs or issues could arise. We expect to complete the transition in the first quarter of 2012.

11


We rely on a limited number of suppliers to provide parts and components. Failure of any of these suppliers to provide us with quality products in a timely manner could negatively affect our revenues and results of operations.
Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business, including our ability to convert backlog into revenue. Although we currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, AP Tech, Frencken Mechatronics B.V., Keller Technology and AZD Praha SRO for our supply of mechanical parts and subassemblies; Gatan, Inc. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. A portion of the subcomponents that make up the components and sub-assemblies supplied to us are proprietary in nature and are provided to our suppliers only from single sources. We monitor those parts subject to single or a limited source supply to seek to minimize factory down time due to unavailability of such parts, which could impact our ability to meet manufacturing schedules. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. If our suppliers are not able to meet our supply requirements, constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, restrictions regulating the use of certain hazardous substances in electrical and electronic equipment in various jurisdictions may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.
Our service business depends on our ability to reliably supply replacement parts and consumables to our customers and failure to deliver high quality parts and consumables in a timely manner could cause our service business to suffer.
Our service business addresses a large and diverse install base of over 8,200 tools involving diverse products of varying ages, configurations, use cases, condition, and customer requirements that are dispersed in approximately 50 countries around the globe. Providing logistical support for delivery of spare parts and consumables to these tools, particularly the older tools, can be difficult. We have attempted to address the complexity of our service requirements, in part, through a remote diagnostics system that allows us to remotely access tools through a virtual private network. If we are unable to effectively manage and support the supply and delivery of spare parts and consumables to our customers we may damage our reputation and service business.
We rely on the security and integrity of our electronic data systems and our business could be damaged by a security breach or other compromise of these systems.
If we are unable to safeguard our electronic data, our intellectual property could be compromised which may harm our reputation and damage customer relationships. Moreover, if we suffer an unauthorized intrusion into our own systems or the virtual private network providing for remote tool diagnostics at customer sites, we, or our customers, may suffer a loss of proprietary information that could create liability for us and undermine our business. Additionally, if our systems are inaccessible for a period of time, it may compromise our ability to perform business functions in a timely manner.
We depend on certain business processes for order entry and failure to adhere to those processes could impair our ability to properly book and fulfill orders.
We use business processes, including automated systems, to enter and track customer orders. Failure to adhere to these processes could result in errors in bookings and discounts on tool sales. Further, inaccurate booking information could lead to delays in shipping and having to rework orders. These problems could, in turn, cause reduced margins and delayed revenue.
Our sales contracts often require delivery of multiple elements with complex terms and conditions that may cause our quarterly results to fluctuate.
Our system sales contracts are complex and often include multiple elements such as delivery of more than one system, installation obligations (sometimes for multiple tools), accessories and/or service contracts, as well as provisions for customer acceptance. Typically, we recognize revenue as the various elements are delivered to the customer or the related services are provided. However, certain of these contracts have complex terms and conditions or technical specifications that require us to deliver most, or sometimes all, elements under the contract before revenue can be recognized. This could result in a significant delay between production and delivery of products and when revenue is recognized, which may cause volatility in, or adversely impact, our quarterly results of operations and cash flows.

12


The loss of one or more of our key customers would result in the loss of significant net revenues.
A relatively small number of customers account for a large percentage of our net revenues, although no customer has accounted for more than 10% of total annual net revenues in the recent past. Our business will be seriously harmed if we do not generate as much revenue as we expect from these key customers, if we experience a loss of any of our key customers or if we suffer a substantial reduction in orders from these customers. Our ability to continue to generate revenues from our key customers will depend on our ability to introduce new products that are desirable to these customers.
We may not be able to enforce our intellectual property rights, especially in foreign countries, which could have a material adverse affect on our business.
Our success depends in large part on the protection of our proprietary rights. We incur significant costs to obtain and maintain patents and defend our intellectual property. We also rely on the laws of the U.S. and other countries where we develop, manufacture or sell products to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect or other parties may challenge, invalidate or circumvent these rights.
Further, our efforts to protect our intellectual property may be less effective in some countries where intellectual property rights are not as well protected as they are in the U.S. Many U.S. companies have encountered substantial problems in protecting their proprietary rights against infringement in foreign countries. For the year of 2011 and each of the last three years, we derived more than 66% of our sales from countries outside of the U.S. If we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.
Infringement of our proprietary rights could result in weakened capacity to compete for sales and increased litigation costs, both of which could have a material adverse effect on our business, prospects, financial condition and results of operations.
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.
As described in more detail in the section entitled “Legal Proceedings” included in Part I, Item 3 of this Annual Report on Form 10-K, one of our competitors, Hitachi, has filed multiple actions against our subsidiary, FEI Japan, in Japanese courts and with Japanese customs and a complaint against us in Korea with the Korea Trade Commission. Based on information available to us, we believe that we have meritorious defenses against these actions and we intend to vigorously defend our interests in these matters. However, litigation is subject to inherent uncertainties, and unfavorable rulings could occur. An unfavorable ruling could prohibit us from selling one or more products in Japan or Korea, and could include monetary damages. If we were to receive an unfavorable ruling, or if we are unable to negotiate a satisfactory settlement in this matter, our business and results of operations could be materially harmed.
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.

13


We have fixed debt obligations, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future manufacturing capacity and research and development needs.
The degree to which we are leveraged could have important consequences, including our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited. In addition our shareholders may be further diluted if holders of all or a portion of our outstanding 2.875% subordinated convertible notes elect to convert their notes. Our ability to pay interest and principal on our debt securities, to satisfy our other debt obligations and to make planned expenditures will be dependent on our future operating performance, which could be affected by changes in economic conditions and other factors, some of which are beyond our control. A failure to comply with the covenants and other provisions of our debt instruments could result in events of default under such instruments, which could permit acceleration of the debt under such instruments and in some cases acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. If we are at any time unable to generate sufficient cash flow from operations to service our indebtedness, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. We cannot guarantee that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us. As a result, we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions.
Restructuring activities may be disruptive to our business and financial performance. Any delay or failure by us to execute planned cost reductions could also be disruptive and could result in total costs and expenses that are greater than expected.
We have historically engaged in various corporate wide restructuring and infrastructure improvement programs in order to increase operational efficiency, reduce costs and balance the effects of currency fluctuations on our financial results. These actions have previously included reductions of work-force as well as the costs to migrate portions of our supply chain to dollar-linked contracts.
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.

14


Many of our projects are funded under federal, state and local 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 federal, state and local government contracts worldwide. Government contracts are subject to specific procurement regulations, contract provisions and requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated, we could be suspended or debarred from government contracting or subcontracting, including federally funded projects at the state level. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer the loss of the contracts, which could have a material adverse effect on our business and results of operations.
Changes and fluctuations in government spending priorities could adversely affect our revenue.
Because a significant part of our overall business is generated either directly or indirectly as a result of worldwide federal and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions or government administration, which are often unpredictable, may affect our revenues.
Political instability in key regions around the world, the U.S. government’s commitment to military related expenditures and current uncertainty around global sovereign debt put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. Also, changes in U.S. Congressional appropriations practices could result in decreased funding for some of our customers. At the state and local levels, the need to compensate for reductions in federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. A potential reduction of federal funding may adversely affect our business. Moreover, due to the world-wide economic downturn, many state and national governments are seeing significant declines in tax revenue, while also seeing increased demand for services. This could reduce the money available to our potential customers from government funding sources that could be used to purchase our products and services.
We have long sales cycles for our systems, which may cause our results of operations to fluctuate.
Our sales cycle can be 12 months or longer and is unpredictable. Variations in the length of our sales cycle could cause our net sales and, therefore, our business, financial condition, results of operations, operating margins and cash flows, to fluctuate widely from period to period. These variations could be based on factors partially or completely outside of our control.
The length of time it takes us to complete a sale depends on many factors, including:
the efforts of our sales force and our independent sales representatives;
changes in the composition of our sales force, including the departure of senior sales personnel;
the history of previous sales to a customer;
the complexity of the customer’s manufacturing processes;
the introduction, or announced introduction, of new products by our competitors;
the economic environment;
the internal technical capabilities and sophistication of the customer; and
the capital expenditure budget cycle of the customer.
Our sales cycle also extends in situations where the sale involves developing new applications for a system or technology. As a result of these and a number of other factors that could influence sales cycles with particular customers, the period between initial contact with a potential customer and the time when we recognize revenue from that customer, if we ever do, may vary widely.

15


The loss of key management or our inability to attract and retain managerial, engineering and other technical personnel could have a material adverse effect on our business, financial condition and results of operations.
Attracting qualified personnel is difficult, and our recruiting efforts may not be successful. Specifically, our product generation efforts depend on hiring and retaining qualified engineers. The market for qualified engineers is very competitive. In addition, experienced management and technical, marketing and support personnel in the technology industry are in high demand, and competition for such talent is intense. The loss of key personnel, or our inability to attract key personnel, could have an adverse effect on our business, financial condition or results of operations.
Our customers experience rapid technological changes, with which we must keep pace. We may be unable to properly ascertain new market needs, or introduce new products responsive to those needs, on a timely and cost-effective basis.
Customers in each of our market segments experience rapid technological change that requires new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to understand these changes and develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices that respond to, and accurately predict, new market requirements. We may fail to ascertain and respond to the needs of our customers or fail to develop and introduce new and enhanced products that meet their needs, which could adversely affect our financial position. In addition, new product introductions or enhancements by competitors could cause a decline in our sales or a loss of market acceptance of our existing products. Increased competitive pressure also could lead to intensified price competition, resulting in lower margins, which could materially adversely affect our business, prospects, financial condition and results of operations.
Our success in developing, introducing and selling new and enhanced systems depends on a variety of factors, including:
selection and development of product offerings;
timely and efficient completion of product design and development;
timely and efficient implementation of manufacturing processes;
effective sales, service and marketing functions; and
product performance.
Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for products under development and the equipment required to produce such products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. On occasion, certain product and application developments have taken longer than expected. These delays can have an adverse affect on product shipments and results of operations.
The process of developing new high technology capital equipment products and services is complex and uncertain, and failure to accurately anticipate customers’ changing needs and emerging technological trends, to complete engineering and development projects in a timely manner and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will result in products that the market will accept.
To the extent that a market does not develop for a new product, we may decide to discontinue or modify the product. These actions could involve significant costs and/or require us to take charges in future periods. If these products are accepted by the marketplace, sales of our new products may cannibalize sales of our existing products. Further, after a product is developed, we must be able to manufacture sufficient volume quickly and at low cost. To accomplish this objective, we must accurately forecast production volumes, mix of products and configurations that meet customer requirements. If we are not successful in making accurate forecasts, our business and results of operations could be significantly harmed.
In addition, new product launches are costly and may not always prove to be successful. For example, in the fourth quarter of 2009, we sold our Phenom product line as it did not deliver the level of revenues we had originally forecast.
We may have exposure to income tax rate fluctuations as well as to additional tax liabilities, which would impact our financial position.
As a corporation with operations both in the U.S. and abroad, we are subject to income taxes in both the U.S. and various foreign jurisdictions. Our effective tax rate is subject to significant fluctuation from one period to the next as the income tax rates for each year are a function of the following factors, among others:
the effects of a mix of profits or losses earned by us and our subsidiaries in numerous foreign tax jurisdictions with a broad range of income tax rates;
our ability to utilize recorded deferred tax assets;

16


changes in uncertain tax positions, interest or penalties resulting from tax audits; and
changes in tax rates and laws or the interpretation of such laws.
Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial results.
We are also subject to non-income taxes, such as payroll, sales, use, value-added, net worth, property and goods and services taxes, in both the U.S. and various foreign jurisdictions.
We are regularly under audit by tax authorities with respect to both income and non-income taxes and may have exposure to additional tax liabilities as a result of these audits.
Significant judgment is required in determining our provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot assure you that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals.
Many of our current and planned products are highly complex and may contain defects or errors that can only be detected after installation, which may harm our reputation and damage our business.
Our products are highly complex, and our extensive product development, manufacturing and testing processes may not be adequate to detect all defects, errors, failures and quality issues that could impact customer satisfaction or result in claims against us. As a result, we could have to replace certain components and/or provide remediation in response to the discovery of defects in products after they are shipped. The occurrence of any defects, errors, failures or quality issues could result in cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or to our customers. These occurrences could also result in the loss of, or delay in, market acceptance of our products and loss of sales, which would harm our business and adversely affect our revenues and profitability.
Some of our systems use hazardous gases and high voltage power supplies as well as emit x-rays, which, if not properly contained, could result in property damage, bodily injury and death.
A product safety failure, such as a hazardous gas, high voltage power supply, x-ray leak or extreme pressure release, could result in substantial liability and could also significantly damage customer relationships and our reputation and disrupt future sales. Moreover, remediation could require redesign of the tools involved, creating additional expense, increasing tool costs and damaging sales. In addition, the matter could involve significant litigation that would divert management time and resources and cause unanticipated legal expense. Further, if such a leak or release involved violation of health and safety laws, we may suffer substantial fines and penalties in addition to the other damage suffered.
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.

17


We may not be successful in obtaining the necessary export licenses to conduct operations abroad, and the U.S. Congress may prevent proposed sales to foreign customers.
We are subject to export control laws that limit which products we sell and where and to whom we sell our products. Moreover, export licenses are required from government agencies for some of our products in accordance with various statutory authorities, including U.S. statutes such as the Export Administration Act of 1979, the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act of 1917 and the Arms Export Control Act of 1976. Depending on the shipment, we are also subject to Dutch or Czech law regarding export controls and licensing requirements. We may not be successful in obtaining these necessary licenses in order to conduct business abroad. Failure to comply with applicable export controls or the termination or significant limitation on our ability to export certain of our products would have an adverse effect on our business, results of operations and financial condition.
Changes in accounting pronouncements or taxation rules or practices may affect how we conduct our business.
Changes in accounting pronouncements or taxation rules or practices can have a significant effect on our reported results. Other new accounting pronouncements or taxation rules and varying interpretations of accounting pronouncements or taxation practices have occurred and may occur in the future. New rules, changes to existing rules, if any, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.
Provisions of our charter documents, our shareholder rights plan and Oregon law could make it more difficult for a third party to acquire us, even if the offer may be considered beneficial by our shareholders.
Our articles of incorporation and bylaws contain provisions that could make it harder for a third party to acquire us without the consent of our Board of Directors. Our Board of Directors has also adopted a shareholder rights plan, or “poison pill,” which would significantly dilute the ownership of a hostile acquirer. In addition, the Oregon Control Share Act and the Oregon Business Combination Act limit the ability of parties who acquire a significant amount of voting stock to exercise control over us. These provisions may have the effect of lengthening the time required for a person to acquire control of us through a proxy contest or the election of a majority of our Board of Directors, may deter efforts to obtain control of us and may make it more difficult for a third party to acquire us without negotiation. These provisions may apply even if the offer may be considered beneficial by our shareholder.
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.
We also maintain a major facility in Eindhoven, The Netherlands, consisting of 263,285 square feet of space. 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.
We maintain a manufacturing and development facility in Brno, Czech Republic, which consists of a total of 143,838 square feet of space, and is leased for approximately $150,000 per month. The lease has various expiration dates extending through 2018.
We 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, The Netherlands, Australia, 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.


18


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.
In November 2009, Hitachi High-Technologies Corporation (“Hitachi”) filed a complaint against our subsidiary, FEI Company Japan Ltd. (“FEI Japan”) in the District Court in Tokyo alleging infringement of five patents. Hitachi's complaint seeks a permanent injunction requiring FEI Japan to cease the sale of our allegedly infringing products in Japan. Three of the patents in the infringement case expired in June 2010, September 2010 and August 2011, respectively, and, as a consequence, Hitachi dropped those patents from the permanent injunction case. FEI Japan has filed actions with the Japanese Patent Office to invalidate three of the five patents from that case. The Japanese Patent Office upheld one of the patents and FEI Japan has filed an appeal of such decision with the Intellectual Property High Court ("IP High Court"). The other two invalidation proceedings remain pending.
Hitachi filed three complaints in the District Court of Tokyo for past damages on the three expired patents from the permanent injunction case in the amounts of ¥2.5 billion, ¥1.3 billion and ¥2.8 billion in July 2010, September 2010 and August 2011, respectively (this includes damages claimed but not yet asserted in the litigation). Hitachi has also filed a complaint seeking a preliminary injunction relating to one of the five patents that were the subject of the permanent injunction case. Although the District Court ruled in favor of the preliminary injunction in June 2011, such ruling did not have a material effect on our business because FEI Japan was able to resume sales of the enjoined products in September 2011 when Hitachi withdrew the preliminary injunction due to the expiration of the patent upon which the injunction was based.
Hitachi has also brought three ancillary claims with the Tokyo Customs Office to bar the importation of certain of our products into Japan. FEI Japan has successfully invalidated the two patents that were the subject of the first customs proceeding, and Hitachi has withdrawn its request for customs seizure in that proceeding. Hitachi has appealed these decisions to the IP High Court and such appeals are currently pending. In the second customs proceeding, the Tokyo Customs Office accepted Hitachi's request for border seizure of certain configurations of three of our product lines, however to date no products have been seized. The Tokyo Customs Office has stayed the third customs proceeding pending final determination in an action filed by FEI Japan with the Japanese Patent Office to invalidate the patent that is the subject of that proceeding.
In July 2011, we were notified by the Korea Trade Commission (“KTC”) that, in response to a request by Hitachi, the KTC had initiated an investigation of two products we import and sell in Korea that allegedly infringe a Hitachi South Korean patent. Such investigation remains on-going.
We believe that we have meritorious defenses to Hitachi's claims, and intend to vigorously defend our interests in these matters. In management's opinion, the resolution of the Hitachi cases, as well as other matters, is not expected to have a material adverse effect on our financial condition, but it could be material to the net income or cash flows of a particular period. We are currently in discussions with Hitachi to settle these matters. Based on the information available to us at this time and our current analysis of this information, we have recorded a contingent accrual of $5.3 million related to these matters. This charge is reflected in our financial results for 2011. By its nature, this reserve is based on estimates and may increase or decrease in the future as these matters develop further and new information or analysis becomes available. Further, the actual costs associated with settling these matters, and any judgments that could result from litigation on these matters, may be greater or less than the amount of any reserve we record. Legal fees associated with this claim are expensed as incurred.
Item 4. Mine Safety Disclosures
Not applicable.


19


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 for the past two years were as follows:
2010
High
 
Low
Quarter 1
$
24.59

 
$
18.80

Quarter 2
23.32

 
18.91

Quarter 3
21.59

 
16.51

Quarter 4
26.79

 
18.98

2011
High
 
Low
Quarter 1
$
35.47

 
$
25.75

Quarter 2
41.56

 
30.20

Quarter 3
40.78

 
28.05

Quarter 4
43.00

 
26.61

The approximate number of beneficial shareholders and shareholders of record at February 8, 2012 was 15,166 and 78, respectively.
We did not pay or declare any cash dividends in 2011 or 2010. We intend to retain any earnings for use in our business and, therefore, do not anticipate paying any cash dividends in the foreseeable future.
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 2011, 2010 or 2009 to Philips under this agreement. As of December 31, 2011, 165,000 shares 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 of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010 and does not have an expiration date. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice. No repurchases were made in the fourth quarter of 2011.
During 2011 we repurchased 1,654,400 shares for a total of $50.0 million, or an average of $30.19 per share and during 2010 we repurchased 205,300 shares for a total of $4.9 million or an average of $23.66 per share. As of December 31, 2011, 2,140,300 shares 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 2012 Annual Meeting of Shareholders and is incorporated by reference herein.

20


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
12/31/2006
 
12/31/2007
 
12/31/2008
 
12/31/2009
 
12/31/2010
 
12/31/2011
FEI Company
$
100.00

 
$
94.15

 
$
71.52

 
$
88.58

 
$
100.16

 
$
154.66

NASDAQ Composite
100.00

 
110.65

 
66.42

 
96.54

 
114.07

 
113.17

NASDAQ Non-Financial
100.00

 
113.44

 
66.67

 
100.55

 
119.34

 
119.20

SIC 3826
100.00

 
131.94

 
73.86

 
106.91

 
146.81

 
122.39



21


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
2011
 
2010
 
2009
 
2008
 
2007
Net sales
$
826,426

 
$
634,222

 
$
577,344

 
$
599,179

 
$
592,510

Cost of sales
459,060

 
364,958

 
347,840

 
364,638

 
346,090

Gross profit
367,366

 
269,264

 
229,504

 
234,541

 
246,420

Total operating expenses(1)
240,315

 
213,806

 
197,882

 
203,413

 
191,707

Operating income
127,051

 
55,458

 
31,622

 
31,128

 
54,713

Other expense, net(2)
(4,186
)
 
(3,236
)
 
(3,961
)
 
(4,528
)
 
(486
)
Income from continuing operations before income taxes
122,865

 
52,222

 
27,661

 
26,600

 
54,227

Income tax expense (benefit)(3)
19,228

 
(1,326
)
 
5,017

 
8,612

 
8,077

Income from continuing operations
103,637

 
53,548

 
22,644

 
17,988

 
46,150

Gain on disposal of discontinued operations, net of tax(4)

 

 

 

 
390

Net income
$
103,637

 
$
53,548

 
$
22,644

 
$
17,988

 
$
46,540

Basic net income per share from continuing operations
$
2.70

 
$
1.41

 
$
0.60

 
$
0.49

 
$
1.29

Basic net income per share from discontinued operations

 

 

 

 
0.01

Basic net income per share
$
2.70

 
$
1.41

 
$
0.60

 
$
0.49

 
$
1.30

Diluted net income per share from continuing operations
$
2.51

 
$
1.34

 
$
0.60

 
$
0.48

 
$
1.23

Diluted net income per share from discontinued operations

 

 

 

 
0.01

Diluted net income per share
$
2.51

 
$
1.34

 
$
0.60

 
$
0.48

 
$
1.24

Shares used in basic per share calculations
38,384

 
38,083

 
37,537

 
36,766

 
35,709

Shares used in diluted per share calculations
42,047

 
41,737

 
37,905

 
37,158

 
40,725

In thousands
December 31,
Balance Sheet Data
2011
 
2010
 
2009
 
2008
 
2007
Cash and cash equivalents
$
320,361

 
$
277,617

 
$
124,199

 
$
146,521

 
$
280,593

Working capital
519,284

 
493,518

 
435,034

 
355,917

 
434,558

Total assets
1,089,909

 
984,422

 
953,969

 
832,172

 
1,007,836

Short-term line of credit

 

 
59,600

 

 

Current portion of convertible debt

 

 

 

 
189,395

Convertible debt, net of current portion
89,011

 
89,012

 
100,000

 
115,000

 
115,000

Shareholders’ equity
696,814

 
633,174

 
567,524

 
519,089

 
493,708

1.
Included in operating expenses was $3.2 million, $11.1 million, $3.5 million and $4.3 million, respectively, of restructuring, reorganization, relocation and severance in 2011, 2010, 2009 and 2008. 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

22


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;
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.
Included in other income (expense), net in 2007 were the following:
a $0.5 million gain related to the disposal of one of our cost-method investments;
a $0.5 million gain on the sale of a minority interest in a small technology company; and
$11.8 million of non-cash interest expense related to our $150 million zero coupon convertible notes.
3.
Our 2011 tax provision reflected taxes on earnings in the U.S. and foreign jurisdictions, and included a $12.4 million benefit 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.
Our 2007 tax provision reflected taxes on foreign earnings offset by a $4.7 million release of unrecognized tax benefits, including interest and penalties, as a result of settlements with foreign taxing authorities and lapses of statutes of limitations and a tax benefit of $5.3 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.
4.
Represents the gain on the sale of our Knights Technology assets.


23


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-K contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts and use words such as “anticipate,” “estimate,” “expect,” “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, funding opportunities or other financial items, as well as backlog, order levels and activity of our company as a whole or in particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing or insourcing initiatives; any statements of factors that may affect our 2012 operating results; any statements concerning proposed new products, services, developments, changes to our restructuring reserves, our competitive position, hiring levels, sales and bookings or anticipated performance of products or services; any statements related to acquisitions of other companies; any statements related to future capital expenditures; any statements related to the needs or expected growth or spending of our target markets; any statements concerning the effects of litigation, including our litigation with Hitachi, on our financial condition or otherwise; any statements concerning the resolution of any tax positions or use of tax assets; any statements concerning the effect of new accounting pronouncements on our financial position, results of operations or cash flows; any statements regarding future economic conditions or performance; any statements of belief; any statements of assumptions underlying any of the foregoing; and any statements made under the heading “Outlook for 2012.”
From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Annual Report on Form 10-K are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-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-K for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors could also adversely affect us.
SUMMARY OF PRODUCTS AND SEGMENTS
We are a leading supplier of scientific instruments for nanoscale imaging, analysis and prototyping to enable research, development and manufacturing in a range of industrial, academic and research institutional applications. We report our revenue based on a market-focused organization: the Electronics market segment, the Materials Science market segment (formerly Research and Industry), 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 systems which combine a SEM and a focused ion beam system, or FIB, on a single platform; and stand-alone FIBs.
Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small-stage DualBeam systems”).
We have research and development and manufacturing operations in Hillsboro, Oregon; Eindhoven, The Netherlands; Brno, Czech Republic; and Munich, Germany. Our sales and service operations are conducted in the United States (U.S.) and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.
The Electronics market segment consists of customers in the semiconductor equipment and related industries such as manufacturers of data storage equipment, solar panels and light-emitting diodes (“LEDs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 45 nanometers and smaller, the use of multiple layers of new materials such as copper and low-k dielectrics and increasing device complexity. Our products are used primarily in laboratories to speed new product development and increase yields by enabling 3D wafer metrology, defect analysis, root cause failure analysis and circuit edit for modifying device structures.

24


The Materials Science market segment includes universities, public and private research laboratories and customers in a wide range of industries, including natural resources (mining and oil and gas), petrochemicals, metals, automobiles, aerospace, and forensics. Growth in these markets is driven by global corporate and government funding for research and development in materials science and by development of new products and processes based on innovations in materials at the nanoscale. Our solutions provide researchers and manufacturers with atomic-level resolution images and permit development, analysis and production of advanced products. Our products are used in mining for automated mineralogy and we have opportunities in oil and gas exploration. Our products are also used in root cause failure analysis and quality control applications across a range of industries.
The Life Sciences market segment includes universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical, biotech and medical device companies and hospitals. Our products’ ultra-high resolution imaging allows structural and cellular biologists and drug researchers to create detailed 3D reconstructions of complex biological structures. Our products are also used in particle analysis and a range of pathology and quality control applications.
The Service and Components market segment provides support for products and customers for the entire life cycle of a tool from installation through the warranty period, and after warranty period through contract coverage or on a time and materials basis. We believe strong technical support is an important part of the value proposition that we offer customers when a tool is sold. Our Service and Components market segment provides support across all markets and all regions.
SALES AND BACKLOG
Net sales increased to $826.4 million in 2011 compared to $634.2 million in 2010. This increase reflects increases in all of our market segments as described more fully below.
At December 31, 2011, our total backlog was $430.7 million compared to $471.9 million at December 31, 2010. 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 2012
We begin 2012 coming off a record year for FEI. During 2011, we experienced revenue growth of 30% and nearly doubled net income from 2010. This was driven primarily by strong demand for our products and a large backlog at the end 2010, which grew by over 20% from 2009. Looking forward to 2012, we expect growth to moderate as our backlog at the end of 2011 is lower than at the end of 2010, but still represents approximately six months of revenue at the current run rate.
Electronics revenue was up in 2011, despite the uncertainty in demand for some end user products made by semiconductor and data storage producers. We do not have a clear view of the semiconductor industry's prospects for all of 2012. Based on our current view, demand for the first half of 2012 is consistent with the levels achieved in 2011. We are attaining an increased share of overall spending by semiconductor customers as they invest in more advanced processes, which require more of our TEMs and DualBeams in particular.
We expect developing countries including China to drive 2012 sales growth in our Materials Science segment as these economies continue to invest in education infrastructure but at a slower pace than seen in 2011, offsetting potential weakness in Europe and the United States. We also expect the Materials Science segment to benefit from an increasing demand for our evolving line of Natural Resources product offerings.
As the use of electron microscopy in Life Sciences applications continues to grow, we expect continued growth in our Life Sciences segment in 2012, though at a somewhat slower pace than the growth experienced in 2011. In the second half of 2011, we signed collaborative agreements with the Oregon Health Sciences University and the National Institutes of Health. Both of those agreements are expected to contribute to the long-run growth of our Life Sciences business.
Our Service and Components business grows with the expansion of our installed base and is expected to continue that growth in 2012.
The acquisitions of TILL Photonics and ASPEX Corporation were strategic in nature and are not expected to have a significant impact on our earnings in 2012, although we estimate they will add approximately $25 million in revenue.
Our goal is to continue to increase our gross margin during 2012. In addition to increasing our proportion of higher margin products, we expect lower costs from increased production volume in the Czech Republic and continued sourcing improvements including the termination of a manufacturing services agreement in Hillsboro. The insourcing of these manufacturing operations is expected to reduce manufacturing costs by approximately $2 million to $3 million per year when fully implemented.

25


Operating expenses are expected to increase in 2012 due to the increase in staff in customer-facing parts of the company to manage our growth in 2011 and increased spend in 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. We expect our overall effective tax rate to stabilize and we are estimating that it will be around 22% for 2012.
Please see the risk factors listed in 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 2012.
RESULTS OF OPERATIONS
The following table sets forth our statement of operations data (in thousands):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Net sales
$
826,426

 
$
634,222

 
$
577,344

Cost of sales
459,060

 
364,958

 
347,840

Gross profit
367,366

 
269,264

 
229,504

Research and development
78,318

 
66,274

 
67,698

Selling, general and administrative
158,782

 
136,465

 
126,728

Restructuring, reorganization, relocation and severance costs
3,215

 
11,067

 
3,456

Operating income
127,051

 
55,458

 
31,622

Other expense, net
(4,186
)
 
(3,236
)
 
(3,961
)
Income from continuing operations before income taxes
122,865

 
52,222

 
27,661

Income tax expense (benefit)
19,228

 
(1,326
)
 
5,017

Net income
$
103,637

 
$
53,548

 
$
22,644

The following table sets forth our statement of operations data as a percentage(1) of net sales:
 
Year Ended December 31,
 
2011
 
2010
 
2009
Net sales
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
55.5

 
57.5

 
60.2

Gross profit
44.5

 
42.5

 
39.8

Research and development
9.5

 
10.5

 
11.7

Selling, general and administrative
19.2

 
21.5

 
22.0

Restructuring, reorganization, relocation and severance costs
0.4

 
1.7

 
0.6

Operating income
15.4

 
8.7

 
5.5

Other expense, net
(0.5
)
 
(0.5
)
 
(0.7
)
Income from continuing operations before income taxes
14.9

 
8.2

 
4.8

Income tax expense (benefit)
2.3

 
(0.2
)
 
0.9

Net income
12.5
 %
 
8.4
 %
 
3.9
 %
(1) 
Percentages may not add due to rounding.
Net sales increased $192.2 million, or 30.3%, to $826.4 million in 2011 compared to $634.2 million in 2010 and increased $56.9 million, or 9.9%, in 2010 compared to $577.3 million in 2009. The factors affecting net sales are discussed in more detail in the Net Sales by Segment discussion below.
Currency fluctuations increased net sales by $22.4 million in 2011 compared to 2010 and decreased net sales by approximately $6.6 million in 2010 compared to 2009 as approximately 69% of our net sales were denominated in foreign currencies that fluctuated against the U.S. dollar. Weakening of the U.S. dollar against these foreign currencies generally has the effect of increasing 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.

26


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,
 
2011
 
2010
 
2009
Electronics
$
259,730

 
31.4
%
 
$
222,795

 
35.1
%
 
$
126,417

 
21.9
%
Materials Science
292,092

 
35.4

 
182,430

 
28.8

 
231,462

 
40.1

Life Sciences
102,777

 
12.4

 
74,555

 
11.8

 
81,824

 
14.2

Service and Components
171,827

 
20.8

 
154,442

 
24.3

 
137,641

 
23.8

Consolidated net sales
$
826,426

 
100.0
%
 
$
634,222

 
100.0
%
 
$
577,344

 
100.0
%
Electronics
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 increased Electronics sales by $5.4 million as compared to the prior year.
The $96.4 million, or 76.2%, increase in Electronics sales in 2010 compared to 2009 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 increased Electronics sales by $0.7 million as compared to the prior year.
Materials Science
The $109.7 million, or 60.1%, increase in Materials Science (formerly Research and Industry) 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 increased Materials Science sales by $7.7 million in 2011 compared to 2010.
The $49.0 million, or 21.2%, decrease in Materials Science sales in 2010 compared to 2009 was due primarily to decreased volumes of our small DualBeam and higher-priced TEM systems, partially due to the timing of customer order requirements and sluggish U.S. and world economies. In addition, 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010. Also contributing was a $4.3 million decrease related to currency fluctuations.
Life Sciences
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 increased Life Sciences sales by $4.1 million in 2011 compared to 2010.
The $7.3 million, or 8.9%, decrease in Life Sciences sales in 2010 compared to 2009 was due primarily to the timing of unit sales of our higher-priced TEM products, which can fluctuate with customer readiness and facility requirements and a decrease of $2.3 million related to currency fluctuations. These factors were partially offset by the increasing adoption of electron microscopy technology for Life Sciences applications.
Service and Components
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 increased Service and Components sales by $5.2 million in 2011 compared to 2010.
The $16.8 million, or 12.2%, increase in Service and Components sales in 2010 compared to 2009 was due primarily to a larger install base and increased proportion of service to the semiconductor industry, which contributed to increases in service contracts. Currency fluctuations decreased Service and Components sales by $0.7 million in 2010 compared to 2009.

27


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,
 
2011
 
2010
 
2009
U.S. and Canada
$
257,244

 
31.1
%
 
$
204,002

 
32.2
%
 
$
198,637

 
34.4
%
Europe
261,313

 
31.6

 
207,394

 
32.7

 
211,807

 
36.7

Asia-Pacific Region and Rest of World
307,869

 
37.3

 
222,826

 
35.1

 
166,900

 
28.9

Consolidated net sales
$
826,426

 
100.0
%
 
$
634,222

 
100.0
%
 
$
577,344

 
100.0
%
U.S. and Canada
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.
The $5.4 million, or 2.7%, increase in sales to the U.S. and Canada in 2010 compared to 2009 was primarily due to an increase in Electronics segment sales, partially offset by a decline in Materials Science segment sales. The weak condition of the U.S. economy had a negative effect on Materials Science spending.
Europe
Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia.
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 $10.4 million in 2011 compared to 2010.
The $4.4 million, or 2.1%, decrease in sales to Europe in 2010 compared to 2009 was primarily due to a decrease in Materials Science spending as discussed above and a $13.5 million decrease related to currency fluctuations. These decreases were partially offset by an increase in sales of our small DualBeams, mainly to the Electronics segment. In addition, 2009 included a large sale to a middle eastern university customer with no comparable sale in 2010.
Asia-Pacific Region and Rest of World
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.
The $55.9 million, or 33.5%, increase in sales to the Asia-Pacific Region and Rest of World in 2010 compared to 2009 was primarily due to increased Electronics segment sales, principally to semiconductor and data storage customers, as well as to our investment in sales and service infrastructure in the Asia-Pacific Region. In addition, we benefited from an increase in purchases from universities and research institutions within Asia. Currency fluctuations increased sales to the Asia-Pacific Region and Rest of World by $6.9 million in 2010 compared to 2009.
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,
 
2011
 
2010
 
2009
Electronics
52.8
%
 
50.2
%
 
48.8
%
Materials Science
43.1

 
41.0

 
42.0

Life Sciences
45.8

 
41.0

 
34.7

Service and Components
33.4

 
33.7

 
30.6

Overall
44.5

 
42.5

 
39.8


28


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 $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 of $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.
Cost of sales increased $17.2 million, or 4.9%, to $365.0 million in 2010 compared to $347.8 million in 2009 primarily due to increased sales. Currency fluctuations decreased cost of sales by $13.2 million in 2010 compared to 2009. Gross margins were positively affected in 2010 due to purchasing and operational improvements, a lower level of competitive pricing pressure in 2010 and improved product mix with increased Electronics segment sales and increased high-end TEM and small DualBeam systems being sold. The net effect on our gross margin from currency fluctuations during 2010 was an approximately $6.6 million, or a 1.5 percentage point, increase.
Electronics
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 period 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 improved Electronics gross margin in 2011 compared to 2010 by 1.3 percentage points.
The increase in Electronics gross margin in 2010 compared to 2009 was primarily due to currency fluctuations, which increased the gross margin by 2.4 percentage points. In addition, we sold more of our higher-margin small DualBeam systems in 2010 compared to 2009 and faced less pricing pressure in 2010 compared to 2009. These factors were partially offset by the shipment of orders in the first quarter of 2010 that were priced during the cyclical downturn in 2009, which was a more competitive pricing environment. Later quarters of 2010 realized improved pricing as compared to 2009 as the sales priced during the more competitive environment of 2009 were shipped in previous quarters. Also offsetting the improvements in 2010 was a decrease in gross margin related to inventory adjustments to write down certain older inventory. These adjustments reduced gross margin by $1.0 million, or 0.5 percentage points.
Materials Science
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.
Gross margins for Materials Science declined in 2010 compared to 2009 primarily due to a shift in product mix away from small DualBeam and higher-end TEM units. The decline in Materials Science gross margins was partially offset by the positive impact of currency fluctuations in 2010 compared to 2009, which increased gross margins by 0.9 percentage points.
Life Sciences
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 increased Life Sciences gross margin in 2011 compared to 2010 by 0.8 percentage points.
Gross margins for Life Sciences improved in 2010 compared to 2009 due to increased sales of our higher-margin TEM products. Additionally, currency fluctuations increased Life Sciences gross margins by 1.1 percentage points in 2010 compared to 2009.
Service and Components
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.
The increase in the Service and Components gross margin in 2010 compared to 2009 was primarily due to incremental contract revenue, as well as increased time and material sales as customers, primarily in the Electronics segment, prepare for increased demand and capacity improvements. In addition, a flat cost structure and operating efficiencies also contributed to the margin increase.

29


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 2011, 2010 and 2009 periods, we received subsidies from European governments for technological developments for semiconductor and life science equipment.
R&D costs are reported net of subsidies and were as follows (in thousands):
 
Year Ended December 31,
 
2011
 
2010
 
2009
Gross spending
$
83,612

 
$
71,682

 
$
74,401

Less subsidies
(5,294
)
 
(5,408
)
 
(6,703
)
Net expense
$
78,318

 
$
66,274

 
$
67,698

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.
R&D costs decreased in 2010 compared to 2009 primarily due to currency fluctuations and expense controls. Currency fluctuations decreased R&D costs by $1.2 million in 2010 compared to 2009.
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 were $158.8 million (19.2% of net sales) in 2011, $136.5 million (21.5% of net sales) in 2010 and $126.7 million (22.0% of net sales) in 2009.
SG&A costs increased 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.
The increase in SG&A costs in 2010 compared to 2009 was primarily due to increased internal and agent sales commissions, primarily in Asia, as revenue from Asia increased and the proportion of agent sales is larger in Asia than any other region. In addition, SG&A costs in 2010 included a $1.9 million increase in bad debt expense compared to 2009 for receivables owed to us by Cambridge Global Services. These factors were partially offset by lower legal and accounting costs and decreases in amortization of purchased intangible assets. Currency fluctuations decreased SG&A costs by $1.0 million in 2010 compared to 2009.
Restructuring, Reorganization, Relocation and Severance
Manufacturing Transfer
In 2008 we entered into an arrangement to outsource aspects of our manufacturing processes. In 2011, we notified our largest contract manufacturer, accounting for approximately 10% of our revenue, that we plan to terminate the arrangement and to take over the manufacturing process. The termination contract was signed during the fourth quarter of 2011 and will be executed during the first quarter of 2012. We incurred $2.1 million of costs associated with the termination of the outsourcing 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.

30


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
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.
The April 2008 restructuring plan was completed in 2010. Total costs incurred related to this plan were $11.6 million. In 2010 and 2009, we incurred $3.8 million and $3.5 million, respectively, under the April 2008 restructuring plan and incurred no additional costs related to this plan in 2011. 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:
Type of Expense
Total Costs
Severance costs related to work force reduction of 3% (approximately 60 employees)
$ 3.3 million
Transfer of manufacturing and other activities
        0.3 million
Shift of supply chain
        5.9 million
IT system upgrades
        2.1 million
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, net includes interest income, interest expense, foreign currency gains and losses and other miscellaneous items.
Interest income represents interest earned on cash and cash equivalents and investments in marketable securities and totaled $2.4 million in 2011, $2.6 million in 2010 and $2.9 million in 2009. The decrease in 2011 compared to 2010 was primarily due to lower market interest rates. The decrease in 2010 compared to 2009 was primarily due to the use of $10.9 million of cash for the repayment of debt in 2010 and lower market interest rates.
Interest expense for 2011, 2010 and 2009 included interest expense related to our 2.875% convertible notes.

31


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 and 2009 included $0.1 million and $0.3 million, respectively, related to the write-off of note issuance costs in connection with the early redemption of a total of $11.0 million and $15.0 million, respectively, 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 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.
Other, net in 2009 included a $2.0 million gain on the early redemption of our 2.875% notes 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.
Income Tax Expense
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 million benefit 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.
Our effective income tax rate of 18.1% for 2009 reflected taxes accrued in foreign jurisdictions, reduced by a tax benefit of $3.9 million related to the release of valuation allowance recorded against net operating loss deferred tax assets utilized to offset income earned in the U.S. The tax rate 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 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, 2011, total unrecognized tax benefits were $16.0 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 assets totaled $13.2 million and $8.4 million, respectively, at December 31, 2011 and 2010. Valuation allowances on deferred tax assets totaled $2.2 million and $2.1 million as of December 31, 2011 and 2010, 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, 2011 consisted of $359.1 million of cash, cash equivalents, short-term restricted cash and short-term investments, $53.3 million in non-current investments, $43.7 million of long-term restricted cash, $100.0 million available under revolving credit facilities, as well as potential future cash flows from operations. $191.9 million of our $456.1 million in total cash, cash equivalents, restricted cash and investments, are held outside of the United States. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2016.
We believe that we have sufficient cash resources and available credit lines to meet our expected operational and capital needs for at least the next twelve months from December 31, 2011.

32


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 million provided 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 million unfavorable effect of exchange rate changes.
In 2010, cash and cash equivalents and short-term restricted cash increased $158.4 million to $299.7 million as of December 31, 2010 from $141.3 million as of December 31, 2009 primarily as a result of $75.0 million provided by operations, $98.9 million from the redemption of auction rate securities, $8.0 million of proceeds from the exercise of employee stock options and the net redemption of $81.5 million of marketable securities. These factors were partially offset by $8.9 million used for the purchase of property, plant and equipment, $59.6 million of repayments on our UBS line of credit, $10.9 million used for the early redemption of $11.0 million par value of our 2.875% convertible subordinated notes and a $9.6 million unfavorable effect of exchange rate changes.
Accounts receivable increased $2.7 million to $186.0 million as of December 31, 2011 from $183.3 million as of December 31, 2010. This increase was primarily driven by a corresponding increase in sales and was partially offset by an increase in collection activity. The December 31, 2011 balance included a $2.0 million decrease related to fluctuations in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 80 days at December 31, 2011 and 90 days at December 31, 2010.
Inventories increased $26.0 million to $182.0 million as of December 31, 2011 compared to $156.0 million as of December 31, 2010, to support our planned ramp up of shipments in 2012. The December 31, 2011 balance included an $8.6 million decrease related to fluctuations in currency exchange rates. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.5 times for the quarter ended December 31, 2011 and 2.6 times for the quarter ended December 31, 2010.
Deferred tax assets, current and long term, net of deferred tax liabilities increased $4.8 million to $13.2 million as of December 31, 2011 compared to $8.4 million as of December 31, 2010 primarily due to an increase in the U.S. deferred tax assets for contingent litigation settlements and unrealized cash flow hedging losses.
Other current assets increased $4.9 million to $28.0 million as of December 31, 2011 compared to $23.1 million as of December 31, 2010, primarily due to an increase in our current income taxes receivable.
Expenditures for property, plant and equipment of $13.8 million in 2011 primarily consisted of expenditures for software and upgrades to our enterprise resource planning (“ERP”) system, and we expect to continue to invest in capital equipment, demonstration systems and R&D equipment for applications development. We estimate our total capital expenditures in 2012 will increase significantly and we expect to spend over $30 million primarily for facilities improvements at our manufacturing sites, the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our ERP system.
Accrued payroll liabilities increased $14.9 million to $46.7 million as of December 31, 2011 compared to $31.8 million as of December 31, 2010, primarily due to accruals of employee incentive compensation.
Income taxes payable increased $7.6 million to $11.3 million as of December 31, 2011 compared to $3.7 million as of December 31, 2010 primarily due to accruals for U.S. and foreign taxes on current period income. Our receivable for income taxes of $3.9 million at December 31, 2011 is included as a component of other current assets.
Other Credit Facilities and Letters of Credit
We have a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. The credit agreement expires in April 2016. We may, upon notice to JPMorgan Chase Bank, N.A. (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million There were no amounts outstanding under this facility as of December 31, 2011.
We also have a ¥50.0 million unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. No amounts were outstanding under any of these facilities as of December 31, 2011.
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.

33


The following table sets forth information related to guarantees and letters of credit (in thousands):
 
December 31,
2011
Guarantees and letters of credit outstanding
$
66,777

Amount secured by restricted cash deposits:
 
Current
$
22,564

Long-term
43,669

Total secured by restricted cash
$
66,233

Share Repurchase Plan
A plan to repurchase up to a total of 4.0 million shares of our common stock was approved by our Board of Directors in September 2010 and does not have an expiration date. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The purchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice.
During 2011 we repurchased 1,654,400 shares for a total of $50.0 million, or an average of $30.19 per share and during 2010 we repurchased 205,300 shares for a total of $4.9 million or an average of $23.66 per share. As of December 31, 2011, 2,140,300 shares remained available for purchase pursuant to this plan.
CONTRACTUAL PAYMENT OBLIGATIONS
A summary of our contractual commitments and obligations as of December 31, 2011 was as follows (in thousands):
 
2012
 
2013 and
2014
 
2015 and
2016
 
2017 and
beyond
 
Total
Convertible Debt
$

 
$
89,011

 
$

 
$

 
$
89,011

Convertible Debt Interest
2,559

 
1,066

 

 

 
3,625

Letters of Credit and Bank Guarantees
23,705

 
41,845

 
1,227

 

 
66,777

Purchase Order Commitments
79,055

 
339

 

 

 
79,394

Pension Related Obligations
36

 
124

 
124

 
1,091

 
1,375

Deferred Compensation Liability

 

 

 
2,810

 
2,810

Capital Leases
1,378

 
1,524

 
247

 

 
3,149

Operating Leases
7,747

 
13,144

 
8,322

 
8,677

 
37,890

Total
$
114,480

 
$
147,053

 
$
9,920

 
$
12,578

 
$
284,031

We also have other liabilities of $8.3 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.


34


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;
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.
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 generally 4% 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.

35


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 zero, $2.5 million and $0.6 million, respectively, in 2011, 2010 and 2009. Our allowance for doubtful accounts totaled $5.6 million and $5.7 million, respectively, at December 31, 2011 and 2010.
Valuation of Excess and Obsolete Inventory
Inventory is 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 on the consolidated balance sheet to account for the excess that builds over the service life. The post-production service life of our systems is generally seven years and, at the end of the service life, the carrying value for these parts in our consolidated balance sheet 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 $4.2 million, $3.6 million and $4.1 million, respectively, in 2011, 2010 and 2009. Provision for service spare parts inventory valuation adjustments totaled $6.6 million, $6.2 million and $7.0 million, respectively, in 2011, 2010 and 2009.

36


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.
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 2010 and 2009.
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 the fourth quarter of 2011, 2010 and 2009.
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 2011, 2010 and 2009, we released zero, $32.9 million and $3.9 million, respectively, in valuation allowances relating to U.S. deferred tax assets utilized to offset U.S. taxable income generated during the respective periods. 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 assets totaled $13.2 million and $8.4 million, respectively, at December 31, 2011 and 2010 and our valuation allowance totaled $2.2 million and $2.1 million in the same periods, respectively.

37


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, 2011 and 2010, total unrecognized tax benefits were $16.0 million and $7.2 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 $1.4 million and $1.2 million, respectively. Unrecognized tax benefits relate mainly to uncertainty surrounding various tax credits and permanent establishment matters 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.
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 generally four years. The exercise price of issued options equals the grant date fair value of the underlying shares and the options generally have a legal life of seven 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.

38



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 decreased shareholders’ equity and comprehensive income in 2011 by $20.0 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 $41.4 million as of December 31, 2011. Holding other variables constant, if the U.S. dollar strengthened by 10% against all currencies that we translate, shareholders’ equity would decrease by approximately $33.8 million as of December 31, 2011.
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, 2011, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $193.0 million. These contracts have varying maturities through the fourth quarter of 2013. The aggregate notional amount of our outstanding balance sheet-related derivative contracts at December 31, 2011 was $131.4 million, which contracts have varying maturities through the first quarter of 2012. 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, 2011 would increase by approximately $32.4 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 $2.2 million, $1.2 million and $3.6 million, respectively, in 2011, 2010 and 2009.

39


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 gains of $3.6 million in 2011 in cost of sales related to hedge results, compared to realized losses of $1.9 million in 2010 and gains of $0.4 million in 2009. As of December 31, 2011, $7.3 million of deferred unrealized net losses 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 a gain of $0.1 million in 2011, compared to charges of $0.1 million in 2010 and $1.3 million in 2009 for hedge ineffectiveness 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, 2011, 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, 2011, we held cash and cash equivalents of $320.4 million and short-term restricted cash of $22.6 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 $3.2 million assuming our cash and cash equivalent balances at December 31, 2011 remained constant and were earning at least 1% per annum, which, at December 31, 2011, 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, 2011, we held short-term fixed rate investments of $16.2 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 $0.2 million assuming our investment balances at December 31, 2011 remained constant and were earning at least 1% per annum, which, at December 31, 2011, 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, 2011, 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 $130.9 million at December 31, 2011.

40



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, 2011 is as follows:
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(1)
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)(2)
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

2010 (In thousands, except per share data)
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Net sales
$
149,099

 
$
146,048

 
$
153,005

 
$
186,070

Cost of sales
89,894

 
86,240

 
86,476

 
102,348

Gross profit
59,205

 
59,808

 
66,529

 
83,722

Total operating expenses(3)
53,621

 
56,275

 
48,913

 
54,997

Operating income
5,584

 
3,533

 
17,616

 
28,725

Other expense, net
(636
)
 
(900
)
 
(1,057
)
 
(643
)
Income before income taxes
4,948

 
2,633

 
16,559

 
28,082

Income tax expense (benefit)(4)
844

 
(13,547
)
 
4,639

 
6,738

Net income
$
4,104

 
$
16,180

 
$
11,920

 
$
21,344

Basic net income per share
$
0.11

 
$
0.43

 
$
0.31

 
$
0.56

Diluted net income per share
$
0.11

 
$
0.40

 
$
0.30

 
$
0.52

Shares used in basic per share calculation
37,891

 
38,046

 
38,186

 
38,083

Shares used in diluted per share calculation
38,308

 
41,813

 
41,536

 
41,737

(1)
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 contingent litigation accrual matter and a $1.4 million impairment of certain intellectual property.
(2)
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.
(3)
Operating expenses in the first, second, third and fourth quarters of 2010 included $0.9 million, $9.1 million, $0.5 million and $0.6 million, respectively, of restructuring, reorganization, relocation and severance expense.
(4)
Income tax benefit in the second quarter of 2010 included a net benefit of $17.3 million related to an agreement between U.S. and The Netherlands taxing authorities regarding various transfer pricing issues and a reduction in our valuation allowance against U.S. deferred tax assets. 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.



41


Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
FEI Company:
We have audited the accompanying consolidated balance sheets of FEI Company and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows for each of the years in the two‑year period ended December 31, 2011. 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 audit.
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, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the two‑year period ended December 31, 2011, 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), FEI Company's internal control over financial reporting as of December 31, 2011, 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 17, 2012 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
/s/ KPMG LLP
Portland, Oregon
February 17, 2012



42


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
FEI Company
Hillsboro, Oregon
We have audited the accompanying consolidated statements of operations, comprehensive income, shareholders' equity, and cash flows of FEI Company and subsidiaries (the “Company”) for the year ended December 31, 2009. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our 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 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of FEI Company and subsidiaries for the year ended December 31, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP
February 19, 2010
Portland, Oregon




43


FEI Company and Subsidiaries
Consolidated Balance Sheets
(In thousands)

 
December 31,
 
2011
 
2010
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
320,361

 
$
277,617

Short-term investments in marketable securities
16,213

 
44,026

Short-term restricted cash
22,564

 
22,114

Receivables, net of allowances for doubtful accounts of $5,553 and $5,685
185,955

 
183,254

Inventories
182,010

 
155,964

Deferred tax assets
18,899

 
11,505

Other current assets
27,964

 
23,126

Total current assets
773,966

 
717,606

Non-current investments in marketable securities
53,341

 
38,662

Long-term restricted cash
43,669

 
41,377

Property, plant and equipment, net of accumulated depreciation of $106,760 and $95,720
85,082

 
80,681

Goodwill
58,053

 
44,800

Deferred tax assets
934

 
1,072

Non-current inventories
57,575

 
47,976

Other assets, net
17,289

 
12,248

Total Assets
$
1,089,909

 
$
984,422

Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
52,470

 
$
51,529

Accrued payroll liabilities
46,698

 
31,765

Accrued warranty reserves
11,683

 
8,648

Accrued agent commissions
9,005

 
10,796

Short-term deferred revenue
72,730

 
81,445

Income taxes payable
11,260

 
3,715

Accrued restructuring, reorganization, relocation and severance
2,213

 
4,884

Other current liabilities
48,623

 
31,306

Total current liabilities
254,682

 
224,088

Convertible debt
89,011

 
89,012

Long-term deferred revenue
23,423

 
19,855

Deferred tax liabilities
6,607

 
4,106

Other liabilities
19,372

 
14,187

Commitments and contingencies

 

Shareholders’ Equity:
 
 
 
Preferred stock - 500 shares authorized; none issued and outstanding

 

Common stock - 70,000 shares authorized; 37,866 and 38,280 shares issued and outstanding, no par value
493,698

 
509,145

Retained earnings
178,661

 
75,024

Accumulated other comprehensive income
24,455

 
49,005

Total Shareholders’ Equity
696,814

 
633,174

Total Liabilities and Shareholders’ Equity
$
1,089,909

 
$
984,422


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,
 
2011
 
2010
 
2009
Net sales:
 
 
 
 
 
Products
$
650,883

 
$
479,437

 
$
439,125

Products - related party
3,716

 
343

 
578

Service and components
171,329

 
154,021

 
137,361

Service and components - related party
498

 
421

 
280

Total net sales
826,426

 
634,222

 
577,344

Cost of sales:
 
 
 
 
 
Products
344,575

 
262,571

 
252,307

Service and components
114,485

 
102,387

 
95,533

Total cost of sales
459,060

 
364,958

 
347,840

Gross profit
367,366

 
269,264

 
229,504

Operating expenses:
 
 
 
 
 
Research and development
78,318

 
66,274

 
67,698

Selling, general and administrative
158,782

 
136,465

 
126,728

Restructuring, reorganization, relocation and severance
3,215

 
11,067

 
3,456

Total operating expenses
240,315

 
213,806

 
197,882

Operating income
127,051

 
55,458

 
31,622

Other expense:
 
 
 
 
 
Interest income
2,361

 
2,632

 
2,880

Interest expense
(4,037
)
 
(4,504
)
 
(5,441
)
Other, net
(2,510
)
 
(1,364
)
 
(1,400
)
Total other expense, net
(4,186
)
 
(3,236
)
 
(3,961
)
Income before income taxes
122,865

 
52,222

 
27,661

Income tax expense (benefit)