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FEI Company 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-32
  4. Ex-32

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended October 2, 2005

 

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. 0-22780

 

FEI COMPANY

(Exact name of registrant as specified in its charter)

 

Oregon

 

93-0621989

(State or other jurisdiction of incorporation
or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

5350 NE Dawson Creek Drive, Hillsboro, Oregon

 

97124-5793

(Address of principal executive offices)

 

(Zip Code)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ý  No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o  No  ý

 

The number of shares of common stock outstanding as of November 7, 2005 was 33,679,330.

 

 



 

FEI COMPANY

INDEX TO FORM 10-Q

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements (Unaudited)

 

 

 

 

 

Consolidated Balance Sheets – October 2, 2005 and December 31, 2004

 

 

 

 

 

Consolidated Statements of Operations – Thirteen and Thirty-Nine Weeks Ended October 2, 2005 and October 3, 2004

 

 

 

 

 

Consolidated Statements of Comprehensive (Loss) Income – Thirteen and Thirty-Nine Weeks Ended October 2, 2005 and October 3, 2004

 

 

 

 

 

Consolidated Statements of Cash Flows – Thirty-Nine Weeks Ended October 2, 2005 and October 3, 2004

 

 

 

 

 

Condensed Notes to Consolidated Financial Statements

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

Item 4.

Controls and Procedures

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 5.

Other Information

 

 

 

 

Item 6.

Exhibits

 

 

 

 

Signatures

 

 

1



 

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

 

 

October 2,

 

December 31,

 

 

 

2005

 

2004

 

 

 

 

 

 

 

Assets

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

60,561

 

$

114,326

 

Short-term investments in marketable securities

 

146,368

 

173,681

 

Short-term restricted cash

 

16,973

 

16,356

 

Receivables, net of allowances for doubtful accounts of $3,266 and $3,257

 

108,544

 

159,011

 

Current receivable from Accurel

 

 

515

 

Inventories

 

97,900

 

87,783

 

Deferred tax assets

 

3,823

 

8,365

 

Other current assets

 

24,475

 

29,804

 

Total Current Assets

 

458,644

 

589,841

 

 

 

 

 

 

 

Non-current investments in marketable securities

 

43,769

 

33,850

 

Long-term restricted cash

 

323

 

4,177

 

Long-term receivable from Accurel

 

 

883

 

Property, plant and equipment, net of accumulated depreciation of $67,387 and $60,882

 

64,241

 

71,550

 

Purchased technology, net of accumulated amortization of $39,803 and $26,871

 

8,821

 

22,080

 

Goodwill

 

41,459

 

41,486

 

Deferred tax assets

 

2,214

 

18,555

 

Other assets, net

 

51,922

 

58,622

 

Total Assets

 

$

671,393

 

$

841,044

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

30,450

 

$

36,618

 

Current account with Philips

 

1,795

 

4,240

 

Accrued payroll liabilities

 

12,014

 

15,070

 

Accrued warranty reserves

 

6,229

 

10,052

 

Deferred revenue

 

42,468

 

42,599

 

Income taxes payable

 

2,916

 

7,962

 

Accrued restructuring, reorganization and relocation

 

2,614

 

1,020

 

Other current liabilities

 

30,781

 

37,128

 

Total Current Liabilities

 

129,267

 

154,689

 

 

 

 

 

 

 

Convertible debt

 

225,000

 

295,000

 

Deferred tax liabilities

 

648

 

6,412

 

Other liabilities

 

4,952

 

5,373

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

Shareholders’ Equity:

 

 

 

 

 

Preferred stock - 500 shares authorized; none issued and outstanding

 

 

 

Common stock - 70,000 shares authorized; 33,675 and 33,413 shares issued and outstanding, no par value

 

319,067

 

315,632

 

Retained (deficit) earnings

 

(25,388

)

22,077

 

Accumulated other comprehensive income

 

17,847

 

41,861

 

Total Shareholders’ Equity

 

311,526

 

379,570

 

Total Liabilities and Shareholders’ Equity

 

$

671,393

 

$

841,044

 

 

See accompanying Condensed Notes to Consolidated Financial Statements.

 

2



 

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

 

October 2, 2005

 

October 3, 2004

 

October 2, 2005

 

October 3, 2004

 

 

 

 

 

 

 

 

 

 

 

Net Sales:

 

 

 

 

 

 

 

 

 

Products

 

$

68,744

 

$

83,291

 

$

246,138

 

$

254,247

 

Products - related party

 

2,145

 

736

 

2,816

 

937

 

Service

 

25,881

 

22,791

 

75,786

 

64,656

 

Service - related party

 

352

 

151

 

868

 

691

 

Total net sales

 

97,122

 

106,969

 

325,608

 

320,531

 

 

 

 

 

 

 

 

 

 

 

Cost of Sales:

 

 

 

 

 

 

 

 

 

Products

 

42,704

 

45,458

 

149,018

 

144,427

 

Services

 

17,984

 

16,302

 

54,558

 

45,103

 

Total cost of sales

 

60,688

 

61,760

 

203,576

 

189,530

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

36,434

 

45,209

 

122,032

 

131,001

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

Research and development

 

13,429

 

13,583

 

45,483

 

40,281

 

Selling, general and administrative

 

25,251

 

23,601

 

75,738

 

66,479

 

Amortization of purchased technology

 

720

 

1,413

 

3,579

 

4,239

 

Asset impairment

 

801

 

 

16,745

 

 

Restructuring, reorganization and relocation

 

2,804

 

 

3,928

 

707

 

Total operating expenses

 

43,005

 

38,597

 

145,473

 

111,706

 

 

 

 

 

 

 

 

 

 

 

Operating (Loss) Income

 

(6,571

)

6,612

 

(23,441

)

19,295

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

Interest income

 

1,866

 

1,353

 

5,585

 

3,704

 

Interest expense

 

(1,392

)

(2,578

)

(7,881

)

(7,657

)

Other, net

 

(399

)

(358

)

(1,608

)

(2,713

)

Total other income (expense), net

 

75

 

(1,583

)

(3,904

)

(6,666

)

 

 

 

 

 

 

 

 

 

 

(Loss) income before income taxes

 

(6,496

)

5,029

 

(27,345

)

12,629

 

Income tax (benefit) expense

 

(1,393

)

1,760

 

20,120

 

4,420

 

Net (loss) income

 

$

(5,103

)

$

3,269

 

$

(47,465

)

$

8,209

 

 

 

 

 

 

 

 

 

 

 

Basic net (loss) income per share

 

$

(0.15

)

$

0.10

 

$

(1.41

)

$

0.25

 

 

 

 

 

 

 

 

 

 

 

Diluted net (loss) income per share

 

$

(0.15

)

$

0.08

 

$

(1.41

)

$

0.21

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

Basic

 

33,644

 

33,262

 

33,555

 

33,229

 

Diluted

 

33,644

 

39,562

 

33,555

 

39,670

 

 

See accompanying Condensed Notes to Consolidated Financial Statements.

 

3



 

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

 

 

For the Thirteen Weeks Ended

 

For the Thirty-Nine Weeks Ended

 

 

 

October 2, 2005

 

October 3, 2004

 

October 2, 2005

 

October 3, 2004

 

 

 

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(5,103

)

$

3,269

 

$

(47,465

)

$

8,209

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

Change in cumulative translation adjustment, zero taxes provided

 

1,476

 

1,811

 

(19,081

)

545

 

Change in unrealized loss on available-for-sale securities

 

(1,067

)

 

(1,658

)

 

Changes due to cash flow hedging instruments:

 

 

 

 

 

 

 

 

 

Net gain (loss) on hedge instruments

 

65

 

827

 

(5,165

)

841

 

Reclassification to net income of previously deferred (gains) losses related to hedge derivatives instruments

 

1,004

 

(275

)

1,890

 

(39

)

Comprehensive (loss) income

 

$

(3,625

)

$

5,632

 

$

(71,479

)

$

9,556

 

 

See accompanying Condensed Notes to Consolidated Financial Statements.

 

4



 

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

 

 

For the Thirty-Nine Weeks Ended

 

 

 

October 2, 2005

 

October 3, 2004

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Net (loss) income

 

$

(47,465

)

$

8,209

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

Depreciation

 

11,655

 

11,172

 

Amortization

 

7,837

 

9,242

 

Asset Impairments and write-offs

 

25,596

 

 

(Gain) loss on asset disposals

 

(837

)

168

 

Gain on non-monetary transaction

 

 

(636

)

Non-cash interest income from shareholder note receivable

 

 

(65

)

Premium on bond redemption

 

1,108

 

 

Deferred income taxes

 

16,121

 

(2,007

)

Tax (reversal) benefit for non-qualified stock options exercised

 

(400

)

315

 

(Increase) decrease in:

 

 

 

 

 

Receivables

 

44,694

 

(24,764

)

Current account with Accurel

 

515

 

(85

)

Inventories

 

(32,330

)

3,292

 

Income taxes receivable

 

2,721

 

 

Other assets

 

7,727

 

(6,809

)

Increase (decrease) in:

 

 

 

 

 

Accounts payable

 

(2,970

)

(3,666

)

Current account with Philips

 

(1,550

)

(1,814

)

Accrued payroll liabilities

 

(1,926

)

4,048

 

Accrued warranty reserves

 

(2,837

)

44

 

Deferred revenue

 

2,396

 

2,467

 

Income taxes payable

 

(10,837

)

1,149

 

Accrued restructuring and reorganization costs

 

1,587

 

(829

)

Other liabilities

 

(6,090

)

2,109

 

Net cash provided by operating activities

 

14,715

 

1,540

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Decrease in restricted cash

 

1,468

 

3,959

 

Acquisition of property, plant and equipment

 

(11,649

)

(10,485

)

Proceeds from disposal of property, plant and equipment

 

3,021

 

 

Investment in software development

 

 

(577

)

Purchase of investments in marketable securities

 

(98,344

)

(49,040

)

Redemption of investments in marketable securities

 

113,432

 

50,247

 

Purchase of cost method investment

 

(2,558

)

(2,256

)

Other

 

(34

)

(314

)

Net cash provided by (used by) investing activities

 

5,336

 

(8,466

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Redemption of 5.5% convertible notes

 

(70,000

)

 

Proceeds from exercise of stock options and employee stock purchases

 

3,835

 

1,342

 

Net cash (used by) provided by financing activities

 

(66,165

)

1,342

 

 

 

 

 

 

 

Effect of exchange rate changes

 

(7,651

)

3,172

 

Decrease in cash and cash equivalents

 

(53,765

)

(2,412

)

 

 

 

 

 

 

Cash and cash equivalents:

 

 

 

 

 

Beginning of period

 

114,326

 

97,430

 

End of period

 

$

60,561

 

$

95,018

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Cash paid for taxes

 

$

8,216

 

$

3,566

 

Cash paid for interest

 

8,679

 

7,975

 

 

See accompanying Condensed Notes to Consolidated Financial Statements.

 

5



 

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      NATURE OF BUSINESS

 

We design, manufacture, market and service products and systems that are used in research, development and manufacturing of very small objects, primarily by providing an understanding of their three-dimensional shape. The majority of our customers work in fields that are classified as nanotechnology, which can be described as the science of characterizing, analyzing and fabricating things smaller than 100 nanometers (a nanometer is one billionth of a meter).

 

Our products are based largely on focused charged particle beam technology. Our products include transmission electron microscopes (“TEMs”), scanning electron microscopes (“SEMs”), focused ion-beam systems (“FIBs”), DualBeam systems that combine a FIB column and a SEM column on a single platform and software systems for computer aided design (“CAD”) navigation and yield management. Our DualBeam systems include models that have wafer handling capability that are purchased by semiconductor manufacturers (“wafer-level DualBeams”) and models that have small stages and are sold to customers in several markets (“small stage DualBeams”). We also design, manufacture and sell some of the components of electron microscopes and FIBs to other manufacturers and provide service and support on our equipment. Our products are sold to a geographically diverse base of semiconductor manufacturers, thin film head manufacturers in the data storage industry and to industrial, institutional and research organizations in the life sciences and material sciences fields.

 

We have research, development and manufacturing operations in Hillsboro, Oregon; Sunnyvale, California; Peabody, Massachusetts, which is currently in the process of being closed (see Note 7); Mumbai, India; Eindhoven, the Netherlands; and Brno, Czech Republic.

 

Sales and service operations are conducted in the United States of America and approximately 50 other countries around the world.  We also sell our products through independent agents and representatives in various additional countries.

 

2.                                      BASIS OF PRESENTATION

 

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

 

The accompanying consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included.  The results of operations for the thirteen and thirty-nine weeks ended October 2, 2005 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004, which was filed with the Securities and Exchange Commission (“SEC”) on March 14, 2005.

 

The preparation of financial statements in conformity with United States generally accepted accounting principles 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.  It is reasonably possible that the estimates we have made may change in the near future. Significant estimates underlying the accompanying consolidated financial statements include the allowance for doubtful accounts, reserves for excess or obsolete inventory, restructuring and reorganization costs, warranty liabilities, income tax related contingencies, tax valuation allowances, the valuation of businesses acquired and related

 

6



 

in-process research and development and other intangibles, the lives and recoverability of equipment and other long-lived assets such as existing technology intangibles, software development costs and goodwill and the timing of revenue recognition and stock-based compensation.

 

3.                                      STOCK-BASED COMPENSATION

 

We measure compensation expense for our stock-based employee compensation plans using the method prescribed by Accounting Principles Board Opinion No. 25 and its related interpretations, “Accounting for Stock Issued to Employees.” We provide disclosures of net (loss) income and net (loss) income per share as if the method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” had been applied in measuring compensation expense.

 

No compensation expense has been recognized for stock options granted at fair value on the date of grant or Employee Share Purchase Plan (“ESPP”) shares issued at a fifteen percent discount to the lower of the market price on either the first day of the applicable offering period or the purchase date.  Had compensation expense for our stock option plan and ESPP been determined based on the estimated fair value of the options or shares at the date of grant or issuance, our net (loss) income and net (loss) income per share would have been reduced to the amounts shown as follows (in thousands, except per share amounts):

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

 

 

October 2,
2005

 

October 3,
2004

 

October 2,
2005

 

October 3,
2004

 

Net (loss) income, as reported

 

$

(5,103

)

$

3,269

 

$

(47,465

)

$

8,209

 

Deduct - total stock-based employee compensation expense determined under the fair value based method for all awards, net of related tax effects

 

(4,264

)

(3,211

)

(12,238

)

(8,305

)

Net (loss) income, pro forma

 

$

(9,367

)

$

58

 

$

(59,703

)

$

(96

)

Basic net (loss) income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.15

)

$

0.10

 

$

(1.41

)

$

0.25

 

Pro forma

 

$

(0.28

)

$

 

$

(1.78

)

$

 

Diluted net (loss) income per share:

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.15

)

$

0.08

 

$

(1.41

)

$

0.21

 

Pro forma

 

$

(0.28

)

$

 

$

(1.78

)

$

 

 

As discussed in Note 15, we did not record any tax benefit for United States losses generated in the thirteen and thirty-nine week periods ended October 2, 2005.  Accordingly, the only tax benefit reflected in the pro forma stock-based employee compensation expense for such periods is for non-United States based awards.

 

As discussed in Note 22, we accelerated the vesting of certain stock options on October 19, 2005.  This action will result in an estimated additional $16.5 million of stock-based compensation in our stock-based compensation expense footnote disclosure pursuant to SFAS No. 123 in the fourth quarter of 2005.

 

The pro forma effects of applying SFAS No. 123 may not be representative of the effects on reported net (loss) income and net (loss) income per share for future periods since options vest over several years and additional awards are made each year.

 

To determine the fair value of stock-based awards granted, we used the Black-Scholes option pricing model and the following weighted average assumptions:

 

 

 

Thirteen and Thirty-Nine Weeks Ended

 

 

 

October 2, 2005

 

October 3, 2004

 

Risk-free interest rate

 

2.8% - 4.3%

 

1.20% - 3.60%

 

Expected dividend yield

 

0%

 

0%

 

Expected lives - option plans

 

5.5 years

 

5.73 – 5.81 years

 

- ESPP

 

6 months

 

6 months

 

Expected volatility

 

71% - 74%

 

75% - 77%

 

 

7



 

4.                                      RECLASSIFICATIONS

 

The following reclassifications have been made to the prior year financial statements to conform to the current year presentation: certain marketable securities recorded in cash and cash equivalents in the prior year, due to our ability to liquidate them within 90 days of purchase, have been reclassified to short-term investments due to our intent to liquidate these available-for-sale securities to meet short-term liquidity needs since their stated maturity is in excess of 90 days; restricted cash movements have been reclassified out of cash flows from operating activities to cash flows from investing activities; and certain receivables relating to pre-billed service contracts have been offset against the corresponding deferred revenue liabilities.

 

5.                                      EARNINGS PER SHARE

 

Basic earnings per share (EPS) and diluted EPS are computed using the methods prescribed by SFAS No. 128, “Earnings per Share.”  Following is a reconciliation of the shares used for basic EPS and diluted EPS (in thousands):

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

 

 

Oct. 2, 2005

 

Oct. 3, 2004

 

Oct. 2, 2005

 

Oct. 3, 2004

 

Shares used for basic EPS

 

33,664

 

33,262

 

33,555

 

33,229

 

Dilutive effect of stock options calculated using the treasury stock method

 

 

771

 

 

912

 

Dilutive effect of convertible debt

 

 

5,529

 

 

5,529

 

Shares used for diluted EPS

 

33,664

 

39,562

 

33,555

 

39,670

 

 

 

 

 

 

 

 

 

 

 

Potential common shares excluded from diluted EPS since their effect would be antidilutive:

 

 

 

 

 

 

 

 

 

Stock options

 

3,386

 

2,779

 

3,378

 

2,284

 

Convertible debt

 

7,043

 

2,928

 

7,043

 

2,928

 

 

6.                                      ASSET IMPAIRMENT CHARGES

 

We initiated restructuring actions in the second quarter of 2005, which continued into the third quarter of 2005, to align our cost structure with the current prevailing market conditions, primarily in the semiconductor markets.  The actions taken to date, which were necessary as a result of reduced business volumes, have resulted in decreases in our global workforce and also required us to evaluate our goodwill and long-lived assets for impairment in components of our microelectronics segment.

 

We recorded asset impairment charges and write-downs totaling $3.2 million and $25.6 million in the thirteen and thirty-nine week periods ended October 2, 2005 as either components of asset impairment or cost of sales on our consolidated statements of operations.  These charges are summarized as follows (in thousands):

 

 

 

Asset
Impairment

 

Cost of
Sales

 

Total

 

Thirteen Weeks Ended October 2, 2005

 

 

 

 

 

 

 

Inventory

 

$

 

$

2,435

 

$

2,435

 

Property, plant and equipment

 

801

 

 

801

 

 

 

$

801

 

$

2,435

 

$

3,236

 

 

 

 

 

 

 

 

 

Thirty-Nine Weeks Ended October 2, 2005

 

 

 

 

 

 

 

Inventory

 

$

 

$

5,628

 

$

5,628

 

Purchased technology

 

9,328

 

 

9,328

 

Capitalized software

 

 

3,223

 

3,223

 

Property, plant and equipment

 

6,506

 

 

6,506

 

Patents and other intangibles

 

911

 

 

911

 

 

 

$

16,745

 

$

8,851

 

$

25,596

 

 

8



 

Inventory

Write-downs of inventory pertain to lower of cost or market adjustments primarily for work in process and finished goods that, given the revisions to our forecasts, currently have no demand.  These items have been written down to their estimated net realizable value.

 

Goodwill

We test goodwill annually in the fourth quarter, however, in the second quarter of 2005, based on our current and projected operating results, we concluded that there were sufficient indicators to require us to assess whether a portion of our recorded goodwill balance within our microelectronics segment was impaired at this interim date. The impairment review was performed in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.”  Based on this analysis, we concluded that the goodwill allocated to this segment was not impaired.  No additional analysis was considered necessary in the third quarter of 2005.

 

Long-Lived Assets

As a result of the initiation of our restructuring actions and due to the weakness in the semiconductor market, our projected future revenues and cash flows for certain asset groupings were revised downward in the second quarter of 2005. These factors led to indications that the carrying value of our long-lived assets, including purchased intangibles recorded in various acquisitions and property, plant and equipment, may not be recoverable and we performed impairment reviews as of July 3, 2005. The impairment reviews were performed in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.”  We evaluated the recoverability of the long-lived assets and concluded that impairments existed. Accordingly, we recorded impairment charges based on the amounts by which the carrying amounts of these assets exceeded their fair value.  Fair value was determined based on discounted cash flows for the operating entities that had separately identifiable cash flows. Impairment charges for long-lived assets totaled $16.6 million in the second quarter of 2005.  In addition, $0.8 million and $3.4 million, respectively, of capitalized software, patents and property, plant and equipment were written off as abandoned assets in the thirteen and thirty-nine week periods ended October 2, 2005.

 

7.                                      RESTRUCTURING, REORGANIZATION AND RELOCATION

 

As discussed in Note 6, we have initiated global restructuring activities to realign our cost structure with current prevailing market conditions.  These actions include reductions in workforce, reorganization and relocation of employees as well as closure of facilities.  Some of these actions were initiated in the second quarter of 2005 with the remainder continuing through the first quarter of 2006.  These costs are accounted for in accordance with SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.”  Under SFAS No. 146, liabilities for costs associated with exit or disposal activities are recognized and measured at fair value in the period the liability is incurred.

 

In the second quarter of 2005, we expensed and paid $0.9 million in severance and relocation costs related to workforce reductions and reallocation of personnel geographically, which is included as a component of restructuring, reorganization and relocation expense. In the third quarter of 2005, we incurred an additional $2.8 million of restructuring expense, $0.9 million of which was paid during the third quarter, largely for severance, relocation and lease terminations related to the closure of our Peabody, Massachusetts facility. The expected remaining costs are estimated to be approximately $8.5 million, of which $4.8 million is expected to be cash expenditures for severance, relocation and other employee related costs and will be paid through the remainder of 2005 and $3.7 million in facility closure charges are expected to be incurred in the fourth quarter of 2005 and the first quarter of 2006 with cash expenditures expected to continue through the lease expiration dates ending in 2010.

 

Of our restructuring accruals as of October 2, 2005, accruals of $0.5 million are for prior year restructuring activities and include $0.2 million related to our fourth quarter 2002 restructuring activities and $0.3 million related to the abandonment of a lease in the second quarter of 2004.  Our abandoned lease accruals were increased in the second quarter of 2005 by $0.2 million based on revisions in our estimated sublease benefits and are included as a component of restructuring, reorganization and relocation expense. The current estimate accrued for cash to be paid related to abandoned leases of $0.5 million is net of estimated sublease

 

9



 

payments to be received and will be paid over the respective lease terms through 2006.

 

The following table summarizes the charges, expenditures and write-offs and adjustments in the thirty-nine weeks ended October 2, 2005 related to our restructuring, reorganization and relocation accruals (in thousands):

 

Thirty-Nine Weeks Ended
October 2, 2005

 

Beginning
Accrued
Liability

 

Charged
to
Expense

 

Expenditures

 

Write-Offs
and Adjustments

 

Ending
Accrued
Liability

 

Severance, outplacement and related benefits for terminated employees

 

$

150

 

$

2,797

 

$

(1,670

)

$

(20

)

$

1,257

 

Abandoned leases, leasehold improvements and facilities

 

870

 

1,131

 

(644

)

 

1,357

 

 

 

$

1,020

 

$

3,928

 

$

(2,314

)

$

(20

)

$

2,614

 

 

The restructuring charges are based on estimates that are subject to change.  Workforce related charges could change because of shifts in timing, redeployment or changes in amounts of severance and outplacement benefits.  Facilities charges could change due to changes in sublease income. Our ability to generate sublease income is dependent upon lease market conditions at the time we negotiate the sublease arrangements. Variances from these estimates could alter our ability to achieve anticipated expense reductions in the planned timeframe and modify our expected cash outflows and working capital.

 

8.                                      DISPOSAL OF THE SIMS PRODUCT LINE

 

In the second quarter of 2005, we sold the net assets of our secondary ion mass spectrometer (“SIMS”) product line, which was part of our electron optics segment, for a net gain of $0.8 million, which was recorded as a component of selling, general and administrative expenses.  Proceeds from the sale totaled $2.5 million in cash and $2.5 million in a note receivable due in January 2006, which is secured by a bank guarantee. The purchase price is subject to adjustment based on a final net asset audit, and, accordingly, we have deferred recognizing a portion of the gain, totaling $0.3 million, until the contingency is resolved.  Net assets disposed and the related selling costs totaled $4.0 million.  Revenues for this product line totaled $3.0 million and $6.7 million, respectively, for the thirty-nine weeks ended October 2, 2005 and October 3, 2004.

 

9.                                      BANK GUARANTEES AND RESTRICTED CASH

 

At October 2, 2005 and December 31, 2004, we had outstanding standby letters of credit and bank guarantees totaling approximately $26.8 million and $24.7 million, respectively.  Restricted cash related to these letters of credit and bank guarantees totaled $17.3 million and $20.5 million at October 2, 2005 and December 31, 2004, respectively. For guarantees that expire within twelve months of the balance sheet dates, the associated restricted cash is recorded as a current asset.

 

10.                               INVENTORIES

 

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

 

Inventories consisted of the following (in thousands):

 

 

 

October 2,

 

December

 

 

 

2005

 

31, 2004

 

Raw materials and assembled parts

 

$

28,795

 

$

26,687

 

Service inventories, estimated current requirements

 

12,321

 

11,763

 

Work-in-process

 

43,340

 

31,140

 

Finished goods

 

13,444

 

18,193

 

Total inventories

 

$

97,900

 

$

87,783

 

 

 

 

 

 

 

Service inventories included in other long-term assets

 

$

34,040

 

$

33,748

 

 

10



 

We periodically review inventory for obsolete or slow moving items and make adjustments, as required.   Production inventory charges for the thirteen and thirty-nine weeks ended October 2, 2005 totaled $2.1 million and $5.6 million, respectively, related to the restructuring activities discussed in Note 6.  Ongoing charges for the periods were insignificant.  Service inventory charges were $0.6 million and $1.6 million, respectively, for the thirteen and thirty-nine weeks ended October 2, 2005, and were recorded as a component of cost of sales.

 

11.                               GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

 

 

Thirty-Nine Weeks Ended

 

(In thousands)

 

October 2, 2005

 

October 3, 2004

 

Balance, beginning of period

 

$

41,486

 

$

41,423

 

Adjustments to goodwill

 

(27

)

6

 

Balance, end of period

 

$

41,459

 

$

41,429

 

 

See Note 6 above for a discussion of the goodwill analysis performed in the second quarter of 2005.

 

Adjustments to goodwill primarily consist of translation adjustments resulting from a portion of our goodwill being recorded on the books of our foreign subsidiaries.

 

Purchased Technology and Other Intangible Assets

At October 2, 2005 and December 31, 2004, our other intangible assets included purchased technology, capitalized software, patents, trademarks and other intangible assets and note issuance costs.  The gross amount of our other intangible assets and the related accumulated amortization were as follows (in thousands):

 

 

 

Amortization

 

October 2,

 

December

 

 

 

Period

 

2005

 

31, 2004

 

Purchased technology

 

5 to 12 years

 

$

48,624

 

$

48,951

 

Accumulated amortization

 

 

 

(39,803

)

(26,871

)

 

 

 

 

$

8,821

 

$

22,080

 

 

 

 

 

 

 

 

 

Capitalized software

 

3 years

 

$

11,544

 

$

15,395

 

Accumulated amortization

 

 

 

(11,267

)

(9,745

)

 

 

 

 

277

 

5,650

 

 

 

 

 

 

 

 

 

Patents, trademarks and other

 

2 to 15 years

 

4,556

 

5,308

 

Accumulated amortization

 

 

 

(1,883

)

(1,340

)

 

 

 

 

2,673

 

3,968

 

 

 

 

 

 

 

 

 

Note issuance costs

 

5 to 7 years

 

10,732

 

10,732

 

Accumulated amortization

 

 

 

(7,022

)

(4,799

)

 

 

 

 

3,710

 

5,933

 

Total intangible assets included in other long-term assets

 

 

 

$

6,660

 

$

15,551

 

 

See Note 6 above for a discussion of impairment charges and write-offs related to purchased software, capitalized software and patents recognized during the second quarter of 2005.

 

See also Note 13 for a discussion of note issuance cost write-offs totaling $1.1 million related to the convertible note redemptions in the second quarter of 2005.

 

11



 

Amortization expense, excluding impairment charges and note issuance cost write-offs, was as follows (in thousands):

 

 

 

Thirty-Nine Weeks Ended

 

 

 

October 2,
2005

 

October 3,
2004

 

Purchased technology

 

$

3,579

 

$

4,239

 

Capitalized software

 

1,952

 

3,154

 

Patents, trademarks and other

 

518

 

610

 

Bond issuance costs

 

1,123

 

1,239

 

 

 

$

7,172

 

$

9,242

 

 

Amortization of our current intangible assets is expected to be as follows over the next five years and thereafter (in thousands):

 

 

 

Purchased
Technology

 

Capitalized
Software

 

Patents,
Trademarks
and Other

 

Note
Issuance
Costs

 

Remainder of 2005

 

$

641

 

$

23

 

$

199

 

$

332

 

2006

 

2,419

 

92

 

605

 

1,328

 

2007

 

2,128

 

92

 

518

 

1,328

 

2008

 

2,128

 

70

 

225

 

722

 

2009

 

982

 

 

174

 

 

Thereafter

 

523

 

 

952

 

 

 

 

$

8,821

 

$

277

 

$

2,673

 

$

3,710

 

 

12.                               INVESTMENTS

 

On May 6, 2005, we purchased an additional $0.6 million of convertible notes maturing on April 7, 2007 from a company in which we held a 19.9% equity interest, totaling $1.0 million, and convertible notes totaling $2.5 million, prior to the $0.6 million purchase. In July 2005, we purchased an additional $0.6 million of convertible notes. These investments are accounted for using the cost method. We have also committed to purchase up to an additional $1.6 million of convertible notes from this company over the next several months, contingent on this company meeting certain product development milestones.

 

Also in July 2005, we purchased $1.4 million of preferred shares from a company in which we held debt and equity interests totaling $2.5 million prior to the July 2005 investment. Our equity interest in this company is 17.8% after the purchase of the preferred shares. These investments are accounted for using the cost method. Pursuant to this agreement, we, as part of a consortium of investors, have also agreed to acquire an additional $0.7 million of preferred shares and convertible debt in the event the company cannot obtain outside financing on or before December 31, 2005.

 

In the second quarter of 2005, we recorded a charge of $0.8 million as a component of other income (expense) related to the write-down of one of our cost method investments for which we concluded an other-than-temporary impairment existed.  No additional charges were recorded in the third quarter of 2005.

 

13.                               5.5% CONVERTIBLE SUBORDINATED NOTE REDEMPTION

 

In the second quarter of 2005, we redeemed $70.0 million of our 5.5% convertible subordinated notes at a redemption price of 101%. The premium and commissions paid on the redemption totaled $0.7 million and were expensed in the second quarter of 2005 as a component of interest expense. Additionally, related deferred note issuance costs of $1.1 million were expensed in the second quarter of 2005 as a component of interest expense.

 

12



 

14.                               WARRANTY RESERVES

 

Our products generally carry a one-year warranty. A reserve is established at the time of sale to cover estimated warranty costs as a component of cost of sales on our consolidated statements of operations. Our estimate of warranty cost is based on our history of warranty repairs and maintenance. 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. Historically, we have not made significant adjustments to our estimates; however, in the third quarter of 2005, we reduced our warranty reserve by $1.0 million as a result of our review of the actual warranty repair and maintenance activity, which was below our initial reserve estimates.

 

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

 

 

 

Thirty-Nine Weeks Ended

 

 

 

October 2,
2005

 

October 3,
2004

 

Balance, beginning of period

 

$

10,052

 

$

10,500

 

Reductions for warranty costs incurred

 

(8,221

)

(7,520

)

Warranties issued

 

6,210

 

7,586

 

Release of warranty reserves

 

(1,000

)

 

Translation and other items

 

(812

)

(85

)

Balance, end of period

 

$

6,229

 

$

10,481

 

 

15.                               INCOME TAXES

 

Net deferred tax assets are as follows (in thousands):

 

 

 

October 2,

 

December

 

 

 

2005

 

31, 2004

 

Deferred tax assets:

 

 

 

 

 

Current

 

$

10,849

 

$

8,365

 

Non-current

 

36,668

 

23,411

 

Gross deferred tax assets

 

47,517

 

31,776

 

Valuation allowance

 

(41,480

)

(4,856

)

Deferred tax assets, net of valuation allowance

 

6,037

 

26,920

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

Current

 

(1,735

)

(1,493

)

Non-current

 

(648

)

(6,412

)

Total deferred tax liabilities

 

(2,383

)

(7,905

)

Net deferred tax assets

 

$

3,654

 

$

19,015

 

 

We recorded a tax benefit of approximately $1.4 million and a tax provision of approximately $20.1 million, respectively, for the thirteen and thirty-nine week periods ended October 2, 2005.  The $1.4 million tax benefit reflects the tax benefit of foreign losses incurred in the thirteen weeks ended October 2, 2005.  The amounts do not reflect a benefit for current period losses in the United States as we have recorded a full valuation allowance against the United States deferred tax assets generated from the current period losses. Of the $20.1 million tax provision in the thirty-nine weeks ended October 2, 2005, $14.3 million was to record a valuation allowance for our existing United States deferred tax assets recorded as of December 31, 2004.  Valuation allowances on deferred tax assets totaled $41.5 million and $4.9 million as of October 2, 2005 and December 31, 2004, respectively.

 

In assessing the realizability of deferred tax assets, SFAS No. 109, “Accounting for Income Taxes,” establishes a more likely than not standard. If it is determined that it is more likely than not that deferred tax assets will not be realized, a valuation allowance must be established against the deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the associated temporary differences become deductible. Management considers the

 

13



 

scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment.

 

SFAS No. 109 requires that recent historical operating performance and income projections be considered in assessing the realizability of the deferred tax assets. The more likely than not assessment was principally based upon our historical losses, the impact of the restructuring activities discussed in Notes 6 and 7 and our forecast of future profitability in certain tax jurisdictions.

 

At October 2, 2005, we had approximately $54.9 million of net operating loss carryforwards to offset future United States taxable income, expiring from 2023 through 2025 and $29.2 million for Oregon state tax purposes, expiring through 2020. We placed a full valuation allowance against the tax effect of all United States federal and state net operating and capital loss carryforwards.

 

16.                               RELATED PARTY ACTIVITY

 

Philips

Philips Business Electronics International B.V. (“Philips”), a subsidiary of Koninklijke Philips Electronics NV, currently owns approximately 25% of our common stock.  For sales to Philips, see “Sales to Related Parties” below.  The following table summarizes our other transactions with Philips (in thousands):

 

 

 

Thirteen Weeks
Ended

 

Thirty-Nine Weeks
Ended

 

 

 

Oct. 2,
2005

 

Oct. 3,
2004

 

Oct. 2,
2005

 

Oct. 3,
2004

 

Amounts Paid to Philips

 

 

 

 

 

 

 

 

 

Subassemblies and other materials purchased from Philips

 

$

4,813

 

$

4,516

 

$

14,266

 

$

10,996

 

Facilities leased from Philips

 

50

 

83

 

191

 

173

 

Various administrative, accounting, customs, export, human resources, import, information technology, logistics and other services provided by Philips

 

185

 

145

 

601

 

386

 

Research and development services provided by Philips

 

1,130

 

876

 

2,894

 

3,209

 

 

 

$

6,178

 

$

5,620

 

$

17,952

 

$

14,764

 

 

Current accounts with Philips represent accounts receivable and accounts payable between us and other Philips units. Most of the current account transactions relate to deliveries of goods, materials and services.  Current accounts with Philips consisted of the following (in thousands):

 

 

 

October 2,
2005

 

December 
31, 2004

 

Current accounts receivable

 

$

255

 

$

276

 

Current accounts payable

 

(2,050

)

(4,516

)

Net current accounts with Philips

 

$

(1,795

)

$

(4,240

)

 

Accurel

Mr. Sarkissian, our Chief Executive Officer, President and Chairman of our Board of Directors, owned a 50% interest in Accurel Systems International Corp. (“Accurel”), an analytical services provider to the semiconductor and data storage markets. We have sold equipment and related services and have provided certain other services to Accurel. In March 2005, Accurel was sold to Implant Sciences Corporation, an unrelated third party.  Following the sale, Mr. Sarkissian owns less than 5% of the outstanding stock of Implant Sciences Corporation.

 

In March 2005, Implant Sciences Corporation paid us the $1.2 million that Accurel owed us for a system they purchased in 2002. Subsequent to the acquisition date, neither Implant Sciences Corporation nor Accurel is considered a related party.

 

14



 

Sales to Related Parties

In addition to Philips, we have sold products and services to LSI Logic Corporation, Applied Materials and Nanosys. A director of Applied Materials, the Chairman and Chief Executive Officer of LSI Logic and the Executive Chairman of Nanosys are all members of our Board of Directors.  Related party sales to Philips, Accurel (prior to being acquired), Applied Materials, LSI Logic and Nanosys, were as follows (in thousands):

 

 

 

Thirteen Weeks Ended

 

Thirty-Nine Weeks Ended

 

 

 

October 2,
2005

 

October 3,
2004

 

October 2,
2005

 

October 3,
2004

 

Product sales:

 

 

 

 

 

 

 

 

 

Philips

 

$

1,870

 

$

 

$

2,098

 

$

201

 

Applied Materials

 

 

 

439

 

 

LSI Logic

 

 

736

 

4

 

736

 

Nanosys

 

275

 

 

 

275

 

 

 

Total product sales

 

2,145

 

736

 

2,816

 

937

 

 

 

 

 

 

 

 

 

 

 

Service sales:

 

 

 

 

 

 

 

 

 

Philips

 

$

205

 

$

 

$

391

 

$

(5

)

Accurel

 

 

145

 

151

 

483

 

Applied Materials

 

88

 

 

196

 

 

LSI Logic

 

54

 

6

 

118

 

213

 

Nanosys

 

5

 

 

12

 

 

Total service sales

 

352

 

151

 

868

 

691

 

Total sales to related parties

 

$

2,497

 

$

887

 

$

3,684

 

$

1,628

 

 

17.                                                                               COMMITMENTS AND CONTINGENCIES

 

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

 

We participate in third party equipment lease financing programs with U.S. financial institutions for a small portion of products sold. In these circumstances, the financial institution purchases our equipment and then leases it to a third party. Under these arrangements, the financial institutions have limited recourse against us on a portion of the outstanding lease portfolio if the lessee defaults on the lease.  We did not add to such guarantees during the thirteen weeks ended October 2, 2005, and, as of October 2, 2005, we had outstanding guarantees totaling $1.5 million related to these lease transactions. Under certain circumstances, we are obligated to exercise best efforts to re-market the equipment should the financial institutions reacquire it.  As of October 2, 2005, we did not have any guarantees that require us to re-market the equipment.

 

We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $28.3 million at October 2, 2005.  These commitments expire at various times through June 2006.

 

As discussed in Note 12, we have committed to invest an additional $1.6 million and $0.7 million, respectively, in two non-public companies in which we have equity interests, subject to certain contingencies being met.

 

18.                               SEGMENT INFORMATION

 

Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker, or decision making group, in deciding how to allocate resources and in assessing performance. Our chief operating decision maker is our Operating Review Board, which consists of our Chief Operating Officer, our Chief Financial Officer, our Senior Vice Presidents and other senior management. We operate in four business segments: microelectronics, electron optics, components and service. The microelectronics segment manufactures and markets FIBs and DualBeam systems. Microelectronics segment products are sold primarily to the semiconductor and data storage markets, with additional sales to the industry and institute market. The electron optics segment manufactures and markets SEMs and TEMs. Electron optics products are sold to materials and life sciences customers in the industry and institute markets, as well as in the semiconductor and data storage markets.

 

15



 

The components segment manufactures and markets electron and ion emitters, focusing columns and components thereof. These components are used in our FIB, DualBeam, SEM and TEM systems and also are sold to other equipment manufacturers. The service segment supports our worldwide installed base of products, generally under service contracts.

 

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

 

Thirteen Weeks Ended
October 2, 2005

 

Micro-
electronics

 

Electron
Optics

 

Components

 

Service

 

Corporate
 and
Eliminations

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

29,023

 

$

39,884

 

$

1,982

 

$

26,233

 

$

 

$

97,122

 

Inter-segment sales

 

159

 

1,118

 

961

 

883

 

(3,121

)

 

Total sales

 

29,182

 

41,002

 

2,943

 

27,116

 

(3,121

)

97,122

 

Operating (loss) income

 

(6,059

)

1,800

 

(265

)

4,164

 

(6,211

)

(6,571

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Thirteen Weeks Ended
October 3, 2004

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales to external customers

 

$

49,944

 

$

32,209

 

$

1,874

 

$

22,942

 

$

 

$

106,969

 

Inter-segment sales

 

465

 

3,355

 

1,641

 

1,032

 

(6,493

)

 

Total sales

 

50,409

 

35,564

 

3,515

 

23,974

 

(6,493

)

106,969

 

Operating income (loss)

 

5,477

 

69

 

(34

)

3,013

 

(1,913

)

6,612

 

 

Thirty-Nine Weeks Ended
October 2, 2005

 

Micro-
electronics

 

Electron
Optics

 

Components

 

Service

 

Corporate
 and
Eliminations

 

Total

 

Sales to external customers

 

$

132,657

 

$

110,668

 

$

5,629

 

$

76,654

 

$

 

$

325,608

 

Inter-segment sales

 

820

 

8,770

 

3,880

 

2,501

 

(15,971

)

 

Total sales

 

133,477

 

119,438

 

9,509

 

79,155

 

(15,971

)

325,608

 

Operating (loss) income