Note 3. Significant Accounting Policies

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller's price is fixed or determinable, and collection of the receivable is reasonably assured. It is common for us to ship equipment and transfer title at the point of delivery to the buyer under the terms of our contractual relationship. When uncertainty exists as to customer acceptance due to customer-specific equipment performance conditions, we defer revenue recognition until acceptance and record the deferred revenue and associated costs of sales in Deferred profit on our Consolidated Balance Sheet. Our sales arrangements do not include a general right of return.

Our equipment sales generally have two elements: the equipment and its installation. While installation is not essential to the functionality of the delivered equipment, final payment is generally not billable for many of our sales contracts until we have fulfilled our system installation obligations and received customer acceptance. Provided that we have historically met defined levels of customer acceptance with both the specific customer and the specific type of equipment, we recognize revenue for the equipment element upon shipment and transfer of title. We recognize revenue for the installation element when installation is complete. Revenue recognized for delivered elements is limited to the amount not contingent on future performance obligations. Revenue related to sales of spare parts is recognized upon shipment. Revenue related to maintenance and service contracts is recognized ratably over the duration of the contracts.

In the first quarter of 2011, we adopted, on a prospective basis, an amended accounting standard issued by the Financial Accounting Standards Board (FASB) for multiple deliverable revenue arrangements applicable to transactions originating or materially modified on or after January 1, 2011. The new standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the selling price hierarchy described below. Implementation of this new authoritative guidance had an insignificant impact on reported revenue as compared to revenue under previous guidance, as the new guidance did not change the units of accounting within our sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an inconsequential impact on the amount and timing of our reported revenue. We do not expect that the new guidance will have a significant impact on the timing of future revenue recognition in comparison to our historical practice.

For multiple element arrangements entered into before January 1, 2011, revenue was allocated among the separate elements based on their relative fair values, provided the elements had value on a stand-alone basis and there was objective and reliable evidence of fair value. In the limited cases where there was objective and reliable evidence of the fair value of the undelivered item(s) in an arrangement but no such evidence for the delivered item(s), the residual method was used to allocate the arrangement consideration. For multiple element arrangements entered into or materially modified on or after January 1, 2011, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (VSOE), if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. We generally use VSOE for our products and services. Until we establish VSOE, we determine our estimate of the relative selling price by considering our production costs and margins of similar products or services. We regularly review the method used to determine our relative selling price and update any estimates accordingly.

Cash and Cash Equivalents

We consider all highly liquid debt instruments with insignificant interest rate risk and original maturities of 90 days or less to be cash equivalents.

Investments

Our investments are designated as available-for-sale securities and are reported at fair value. Investments with original maturities greater than 90 days which are available for use in current operations are considered to be short-term investments, except for our investments in auction-rate-securities. Our auction-rate securities with scheduled maturities in excess of one-year from the balance sheet date are considered long-term as there is no active market to sell these securities. Auction rate securities that have been called are classified as short-term based on their expected redemption dates. In valuing our investments, we predominantly use market data or data derived from market sources. When markets are not considered to be active we may use (i) observable market prices in less active markets, (ii) non-binding market prices that are corroborated by observable market data, or (iii) quoted market prices for similar instruments. When market data is not available, we employ a cash-flow-based modeling technique to arrive at the recorded fair value. This process involves incorporating our assumptions about the anticipated term and yield that a market participant would require to purchase the security in the marketplace. Temporary unrealized gains and losses, net of tax, are recorded within other comprehensive income (loss) (OCI). Changes in the fair value of our investments affect our net income only when such investments are sold or when an other than temporary impairment is recognized. Realized gains and losses on the sale of securities are determined by using the amortized cost of the specific security sold.

Restricted Cash and Cash Equivalents

We maintain certain amounts of cash and cash equivalents on deposit which are restricted from general use. These amounts are used primarily to secure our Euro-based credit facility and are reported at fair value (see Note 6). The fair value of restricted cash and cash equivalents is determined in the same manner as cash and short-term investments.

Accounts Receivable and Allowance for Doubtful Accounts

Trade accounts receivable are recorded at the invoiced amount and are not interest bearing. We evaluate our allowance for doubtful accounts based on a combination of factors. In circumstances where specific invoices are deemed to be uncollectible, we provide a specific allowance for bad debt against the amount due to reduce the net recognized receivable to the amount we reasonably believe will be collected. We also provide allowances based on our write-off history. We charge accounts receivable balances against our allowance for doubtful accounts once we have concluded our collection efforts are unsuccessful. Accounts receivable is considered past due when not paid in accordance with the contractual terms of the related arrangement. Our provision for bad debt was insignificant for the year ended December 31, 2011. For the years ended December 31, 2010 and 2009, we recognized a net recovery of previously recorded bad debt expense of $0.2 million and $0.8 million, respectively, due to the collection of amounts previously reserved.

For the years ended December 31, 2011, 2010, and 2009, we entered into factoring arrangements in which we sold a total of $70.7 million, $36.5 million, and $21.8 million, respectively, of our accounts receivable at a discount of $0.3 million, $0.2 million, and $0.1 million, respectively, to unrelated third party financiers without recourse. Discounts related to the sale of these receivables were recorded on our Consolidated Statements of Operations as Selling, general, and administrative expenses.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market. We periodically assess the recoverability of all inventories, including purchased and spare parts, work-in-process, finished goods and evaluation systems, to determine whether adjustments are required to record inventory at the lower of cost or market. Inventory that we determine to be obsolete or in excess of our forecasted usage is written down to its estimated realizable value if less than cost based on our assumptions about future demand and market conditions. If actual demand is lower than our forecast, additional inventory write-downs may be required.

Income Taxes

We recognize deferred tax assets and liabilities using statutory tax rates for temporary differences between the book and tax basis of recorded assets and liabilities, net operating losses and tax credit carryforwards. As of December 31, 2011, we had deferred tax assets of $95.3 million, net of our valuation allowance of $25.1 million. As of December 31, 2011, our deferred tax liabilities of $173.2 million primarily related to the difference between the book and tax basis of our Senior Convertible Notes. We have considered all sources of taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance and believe that our remaining net deferred tax assets will be realized. If, in the future, we determine that we would not be able to realize all or part of our net deferred tax assets, an additional valuation allowance would increase tax expense in the period in which such determination is made.

We evaluate uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Any change in measurement of these liabilities would result in the recognition of an additional charge or benefit to our income tax provision. We include interest and penalties related to unrecognized tax benefits within the provision for income taxes.

Property and Equipment

Property and equipment are stated at cost. Depreciation and amortization are computed on the straight-line method over the following estimated useful lives:


Manufacturing and engineering equipment			3 –10 years
Office furniture, fixtures and equipment			3– 7 years
Buildings and leasehold improvements			3–39 years

Additions and improvements are capitalized, while maintenance and repairs are expensed as incurred. When depreciable assets are retired, or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any related gains or losses are included in the consolidated statement of operations.

Goodwill and Other Intangible Assets

We review our long-lived assets, including goodwill and other intangible assets, for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Intangible assets with definite lives are amortized on a straight-line basis over their estimated useful lives. We perform our annual goodwill impairment test separately for each of our reporting units in the fourth quarter of each fiscal year. We define reporting units as the individual segments in which we operate. The first step of the test identifies whether potential impairment may have occurred, and the second step measures the amount of the impairment, if any. Impairment is present when the carrying amount of net assets exceeds the fair value estimated during the first step of our impairment test. The estimation of the fair value of each reporting unit is determined based upon data generated from a discounted cash flow model, known as the income approach, and a comparable market price model, known as the market approach. The income approach requires us to make a number of assumptions, including future growth rates, expense trends and working capital turnover ratios for each reporting unit over an extended period of time. Although the assumptions we utilize are consistent with the assumptions used to generate our annual strategic plan, there is significant judgment in the timing and level of future cash flows attributable to each reporting unit. If our future operating results do not meet current forecasts or if we have a sustained decline in our market capitalization that is determined to be indicative of a reduction in fair value of one or both of our reporting units, future impairment charges related to goodwill or long-lived assets may be required.

Warranty Obligations

We generally provide warranty coverage for a predetermined amount of time on systems, modules, and spares for material and labor to repair and service the equipment. We record the estimated cost of warranty coverage to Cost of sales when revenue is recognized. The estimated cost of warranty is determined by the warranty term and the historical labor and material costs for a specific product. We review the actual product failure and material usage rates on a quarterly basis and adjust our warranty liability as necessary. Product warranty obligations that extend for more than 12 months from our balance sheet date are included in Other non-current liabilities.

Restructuring

We record a liability for costs associated with an exit or disposal activity when the liability is incurred, rather than when the exit or disposal plan is approved. Accordingly, restructuring accruals are recorded when management initiates an exit plan that will cause us to incur costs that have no future economic benefit. The restructuring accrual related to vacant facilities is calculated net of estimated sublease income. Sublease income is estimated based on expected occupancy rates and current market rates for similar properties. If we are unable to sublet the vacated properties on a timely basis or if we are forced to sublet them at lower rates due to changes in market conditions, we adjust the accruals accordingly.

Contingencies and Litigation

We are currently involved in certain legal proceedings and claims arising in the ordinary course of business. The outcomes of these legal proceedings and claims brought against us are subject to significant uncertainty. We accrue the cost of an adverse judgment if, in our estimation, the adverse outcome is probable and we can reasonably estimate the ultimate cost. We disclose a range of losses of an adverse judgment if, in our estimation, the outcome is reasonably possible and we can reasonably estimate that range. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of strategies including settlement or litigation. Due to the inherent uncertainty of litigation, there can be no assurance that the ultimate resolution of any particular claim or proceeding would not have a material adverse effect on our results of operations and financial position.

Foreign Currency Translation

We translate assets and liabilities of non-U.S. dollar functional currency subsidiaries into dollars at the rates of exchange in effect at the balance sheet date. Revenue and expenses are translated using rates that approximate those in effect during the period. Translation gains or losses related to these foreign subsidiaries are included as a component of OCI.

Derivatives

We enter into foreign currency forward exchange contracts with maturities of less than 12 months to mitigate the effect of currency exchange fluctuations on (i) probable anticipated system sales denominated in Japanese yen (ii) our net investment in certain foreign subsidiaries and (iii) existing monetary asset and liability balances denominated in foreign currencies. All derivatives are recorded at fair value in either Other current assets or Other current liabilities. We report cash flows from derivative instruments in cash flows from operating activities. We used the income approach to value our derivative instruments using observable inputs other than quoted prices, including interest rates and credit risk.

Shipping and Handling Costs

Shipping and handling costs are included as a component of Cost of sales.

Advertising Expense

We expense advertising costs as incurred. Advertising expense was $1.5 million for the year ended December 31, 2011, and was $1.1 million for each of the years ended December 31, 2010 and 2009.

Concentrations and Other Risks

We use financial instruments that potentially subject us to concentrations of credit risk. Such instruments include cash equivalents, investments, accounts receivable, and financial instruments used in hedging activities. We invest our cash in cash deposits, money market funds, commercial paper, certificates of deposit, or readily marketable debt securities. We place our investments with high-credit quality financial institutions, which limits the credit exposure from any one financial institution or instrument. Excluding impairment charges relating to auction-rate securities, we have not historically recognized significant losses on our short-term investments. As of December 31, 2011, we had $40.2 million time-based deposits in excess of federally insured amounts.

We sell a significant portion of our systems to a limited number of customers. Net sales to our ten largest customers in 2011, 2010, and 2009 accounted for 74%, 77%, and 71% of our total net sales, respectively. Three customers each separately accounted for 24%, 11%, and 11% of trade receivables as of December 31, 2011. Three customers each separately accounted for 17%, 11%, and 10% of trade receivables as of December 31, 2010. We expect sales of our products to relatively few customers will continue to account for a high percentage of our net sales and trade receivables in the foreseeable future. None of our customers have entered into long-term purchase agreements that would require them to purchase our products.

We perform ongoing credit evaluations of our customers' financial condition and generally require no collateral. Based on a customer's financial strength we may require prepayment or an irrevocable letter of credit. We have an exposure to non-performance by counterparties on the foreign exchange contracts we use in hedging activities. These counterparties are large international financial institutions, and to date no such counterparty has failed to meet its financial obligations to us. We do not believe there is a significant risk of non-performance by these counterparties because we continuously monitor our positions, the credit ratings of such counterparties, and the amount of contracts we enter into with any one party.

Certain raw materials we use in the manufacturing of our products are available from a limited number of suppliers. Shortages could occur in these essential materials due to an interruption of supply or solvency of our suppliers.

We have off-balance sheet credit exposure related to guarantee arrangements of operating leases, line of credit borrowings, and to financial institutions for loans to non-executive employees. Historical experience and current information available on these arrangements has shown it is not probable any amounts will be required to be paid for these arrangements. Accordingly, we have not recorded any liability for these arrangements. See Note 13.

Stock-Based Compensation Expense

Stock-based compensation expense is estimated at the grant date based on the fair value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair value model and calculating the fair value of stock-based awards, which includes estimates of stock price volatility, forfeiture rates and expected lives, requires judgment that could materially affect our operating results. For our performance-based awards, we accrue compensation cost when it is probable that the performance condition will be achieved. We assess probability of achievement on a quarterly basis. See Note 18 for the significant estimates used to calculate our stock-based compensation expense.

Recently Adopted Accounting Pronouncements

Recently Issued Accounting Pronouncements

In May 2011, the FASB issued new authoritative guidance that results in common principles and requirements for measuring and disclosing fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards. We will adopt this authoritative guidance prospectively in the first quarter of our fiscal year 2012 and we do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.

In June 2011, the FASB issued new authoritative guidance that increases the prominence of items reported in other comprehensive income (OCI) by eliminating the option to present components of OCI as part of the statement of changes in stockholders' equity. The amendments in this standard require that all non-owner changes in stockholders' equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This guidance does not affect the underlying accounting for components of OCI, but will change the presentation of our financial statements. We will adopt this authoritative guidance retrospectively in the first quarter of our fiscal year 2012.

In September 2011, the FASB issued new authoritative guidance that simplified how entities test goodwill for impairment. Entities are permitted to initially assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We will adopt this authoritative guidance in the first quarter of our fiscal year 2012. We do not expect the adoption of this guidance to have a material effect on our Consolidated Financial Statements.