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FEI Company 10-Q 2009
Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended April 5, 2009

OR

 

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

For the transition period from                      to                     

Commission File No. 000-22780

FEI COMPANY

(Exact name of registrant as specified in its charter)

 

Oregon   93-0621989

(State or other jurisdiction of incorporation

or organization)

 

(I.R.S. Employer

Identification No.)

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

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

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

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 (§ 229.405 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  ¨    No  ¨

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

 

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨
     

(Do not check if a smaller

reporting company)

  

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

The number of shares of common stock outstanding as of May 5, 2009 was 37,380,531.

 

 

 


Table of Contents

FEI COMPANY

INDEX TO FORM 10-Q

 

          Page
PART I - FINANCIAL INFORMATION   
Item 1.   

Financial Statements (unaudited)

  
  

Consolidated Balance Sheets – April 5, 2009 and December 31, 2008

   2
  

Consolidated Statements of Operations – Thirteen Weeks Ended April 5, 2009 and March 30, 2008

   3
  

Consolidated Statements of Comprehensive (Loss) Income – Thirteen Weeks Ended April 5, 2009 and March 30, 2008

   4
  

Consolidated Statements of Cash Flows – Thirteen Weeks Ended April 5, 2009 and March 30, 2008

   5
  

Condensed Notes to the Consolidated Financial Statements

   6
Item 2.   

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

   20
Item 3.   

Quantitative and Qualitative Disclosures About Market Risk

   30
Item 4.   

Controls and Procedures

   30
PART II - OTHER INFORMATION   
Item 1A.   

Risk Factors

   31
Item 6.   

Exhibits

   44
Signatures    45

 

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Table of Contents

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

FEI Company and Subsidiaries

Consolidated Balance Sheets

(In thousands)

(Unaudited)

 

     April 5,
2009
   December 31,
2008(1)
 

Assets

     

Current Assets:

     

Cash and cash equivalents

   $ 209,172    $ 146,521  

Short-term investments in marketable securities

     16,988      32,901  

Short-term restricted cash

     9,626      10,994  

Receivables, net of allowances for doubtful accounts of $3,657 and $3,139

     153,855      139,733  

Inventories

     141,394      141,609  

Deferred tax assets

     3,148      2,884  

Other current assets

     35,346      32,926  
               

Total Current Assets

     569,529      507,568  

Non-current investments in marketable securities

     97,880      94,098  

Long-term restricted cash

     39,271      34,833  

Property, plant and equipment, net of accumulated depreciation of $83,847 and $85,391

     74,975      76,991  

Goodwill

     40,943      40,964  

Deferred tax assets

     1,998      2,188  

Non-current inventories

     40,893      41,072  

Other assets, net

     29,254      34,458  
               

Total Assets

   $ 894,743    $ 832,172  
               

Liabilities and Shareholders’ Equity

     

Current Liabilities:

     

Accounts payable

   $ 38,669    $ 34,964  

Accrued payroll liabilities

     18,454      19,219  

Accrued warranty reserves

     6,657      6,439  

Accrued agent commissions

     9,297      9,882  

Deferred revenue

     55,327      44,135  

Income taxes payable

     4,376      3,040  

Accrued restructuring, reorganization, relocation and severance

     111      240  

Short-term line of credit

     70,800      —    

Other current liabilities

     39,374      33,732  
               

Total Current Liabilities

     243,065      151,651  

Convertible debt

     100,000      115,000  

Deferred tax liabilities

     3,691      4,164  

Other liabilities

     27,088      42,268  

Commitments and contingencies

     

Shareholders’ Equity:

     

Preferred stock - 500 shares authorized; none issued and outstanding

     —        —    

Common stock - 70,000 shares authorized; 37,349 and 37,286 shares issued and outstanding, no par value

     472,762      469,893  

Retained earnings (deficit)

     5,171      (1,168 )

Accumulated other comprehensive income

     42,966      50,364  
               

Total Shareholders’ Equity

     520,899      519,089  
               

Total Liabilities and Shareholders’ Equity

   $ 894,743    $ 832,172  
               

 

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to the Consolidated Financial Statements.

 

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Table of Contents

FEI Company and Subsidiaries

Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

 

     For the Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008(1)
 

Net Sales:

    

Products

   $ 108,235     $ 116,982  

Products - related party

     327       232  

Service and components

     33,236       34,328  

Service and components - related party

     35       104  
                

Total net sales

     141,833       151,646  

Cost of Sales:

    

Products

     59,887       66,983  

Service and components

     23,254       25,438  
                

Total cost of sales

     83,141       92,421  
                

Gross Profit

     58,692       59,225  

Operating Expenses:

    

Research and development

     16,780       17,807  

Selling, general and administrative

     32,826       32,612  

Restructuring, reorganization, relocation and severance

     962       —    
                

Total operating expenses

     50,568       50,419  
                

Operating Income

     8,124       8,806  

Other Income (Expense):

    

Interest income

     1,133       4,999  

Interest expense

     (1,912 )     (5,352 )

Other, net

     459       (867 )
                

Total other income (expense), net

     (320 )     (1,220 )
                

Income before income taxes

     7,804       7,586  

Income tax expense

     1,466       2,553  
                

Net income

   $ 6,338     $ 5,033  
                

Basic net income per share

   $ 0.17     $ 0.14  
                

Diluted net income per share

   $ 0.17     $ 0.14  
                

Shares used in per share calculations:

    

Basic

     37,322       36,435  
                

Diluted

     37,616       36,841  
                

 

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to the Consolidated Financial Statements.

 

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Table of Contents

FEI Company and Subsidiaries

Consolidated Statements of Comprehensive (Loss) Income

(In thousands)

(Unaudited)

 

     For the Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008(1)
 

Net income

   $ 6,338     $ 5,033  

Other comprehensive income:

    

Change in cumulative translation adjustment, zero taxes provided

     (8,508 )     20,254  

Change in unrealized loss on available-for-sale securities

     (63 )     (6,785 )

Change in minimum pension liability, net of taxes

     (2 )     (21 )

Changes due to cash flow hedging instruments:

    

Net (loss) gain on hedge instruments

     (301 )     4,952  

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

     1,476       (3,480 )
                

Comprehensive (loss) income

   $ (1,060 )   $ 19,953  
                

 

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to the Consolidated Financial Statements.

 

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Table of Contents

FEI Company and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

 

     For the Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008(1)
 

Cash flows from operating activities:

    

Net income

   $ 6,338     $ 5,033  

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

    

Depreciation

     4,039       4,053  

Amortization

     1,080       4,189  

Stock-based compensation

     2,903       2,035  

Gain on trading securities and UBS Put Right

     (108 )     —    

Loss on disposal of investments, property, plant and equipment and intangible assets

     9       26  

Write-off of deferred note issuance costs on redemption

     250       146  

Gain on redemption of 2.875% convertible note

     (2,025 )     —    

Income taxes (receivable) payable, net

     648       4,342  

Deferred income taxes

     1,651       270  

(Increase) decrease in:

    

Receivables

     (17,174 )     (19,304 )

Inventories

     (4,454 )     (3,808 )

Other assets

     175       (1,183 )

Increase (decrease) in:

    

Accounts payable

     5,263       6,605  

Accrued payroll liabilities

     (147 )     (6,562 )

Accrued warranty reserves

     340       50  

Deferred revenue

     11,992       (2,643 )

Accrued restructuring, reorganization, relocation and severance costs

     (119 )     (101 )

Other liabilities

     (9,502 )     4,634  
                

Net cash provided by (used in) operating activities

     1,159       (2,218 )

Cash flows from investing activities:

    

(Increase) decrease in restricted cash

     (4,476 )     3,599  

Acquisition of property, plant and equipment

     (3,045 )     (5,311 )

Proceeds from disposal of property, plant and equipment

     3       —    

Purchase of investments in marketable securities

     —         (93,857 )

Redemption of investments in marketable securities

     15,784       75,628  

Other

     (142 )     (198 )
                

Net cash provided by (used in) investing activities

     8,124       (20,139 )

Cash flows from financing activities:

    

Redemption of 5.5% convertible note

     —         (45,882 )

Redemption of 2.875% convertible note

     (13,077 )     —    

Witholding taxes paid on issuance of vested restricted stock units

     (370 )     (738 )

Proceeds from line of credit

     70,800       —    

Proceeds from exercise of stock options and employee stock purchases

     301       274  
                

Net cash provided by (used in) financing activities

     57,654       (46,346 )

Effect of exchange rate changes

     (4,286 )     3,453  
                

Increase (decrease) in cash and cash equivalents

     62,651       (65,250 )

Cash and cash equivalents:

    

Beginning of period

     146,521       280,593  
                

End of period

   $ 209,172     $ 215,343  
                

Supplemental Cash Flow Information:

    

Cash (refunded) paid for income taxes, net

   $ 963     $ (2,564 )

Cash paid for interest

     808       1,940  

Inventories transferred to fixed assets

     (64 )     1,290  

 

(1) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

See accompanying Condensed Notes to the Consolidated Financial Statements.

 

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Table of Contents

FEI COMPANY AND SUBSIDIARIES

CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. NATURE OF BUSINESS

We are a leading supplier of 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, the Research and Industry market, the Life Sciences market and the Service and Components market.

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

Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor and data storage 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, development and manufacturing operations in Hillsboro, Oregon; Eindhoven, the Netherlands; and Brno, Czech Republic. Our sales 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.

 

2. BASIS OF PRESENTATION

The consolidated financial statements include the accounts of FEI Company and our majority-controlled 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 U.S. for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the thirteen weeks ended April 5, 2009 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, 2008, which was filed with the Securities and Exchange Commission (“SEC”) on February 20, 2009.

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. 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, unrecognized tax benefits, tax valuation allowances, the valuation of businesses acquired and related in-process research and development and other intangibles, the valuation of minority debt and equity investments in non-public companies, the valuation of investments in auction rate securities, the valuation of the UBS AG (together with its affiliates, “UBS”) put right, the lives and recoverability of equipment and other long-lived assets such as existing technology intangibles and goodwill and the timing of revenue recognition and the timing and valuation of stock-based compensation.

 

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3. STOCK-BASED COMPENSATION

1995 Stock Incentive Plan and 1995 Supplemental Stock Incentive Plan

Our 1995 Stock Incentive Plan, as amended (the “1995 Plan”) allows for the issuance of a maximum of 9,750,000 shares of our common stock and our 1995 Supplemental Stock Incentive Plan (the “1995 Supplemental Plan”) allows for the issuance of a maximum of 500,000 shares of our common stock. At April 5, 2009, there were 3,001,557 shares available for grant under these plans and 5,296,068 shares of our common stock were reserved for issuance.

Certain information regarding all options outstanding as of April 5, 2009 was as follows:

 

     Options
Outstanding
   Options
Exercisable

Number

     1,522,891      1,364,766

Weighted average exercise price

   $ 23.37    $ 23.83

Aggregate intrinsic value

   $ 0.1 million    $ 0.1 million

Weighted average remaining contractual term

     3.4 years      3.3 years

Restricted shares and restricted stock units (“RSUs”) outstanding, including awards issued within and outside of the 1995 Plan, totaled 771,620 at April 5, 2009.

Our stock-based compensation expense was included in our statements of operations as follows (in thousands):

 

     Thirteen Weeks Ended
     April 5,
2009
   March 30,
2008

Cost of sales

   $ 347    $ 291

Research and development

     335      234

Selling, general and administrative

     2,221      1,510
             
   $ 2,903    $ 2,035
             

As of April 5, 2009, unrecognized stock-based compensation related to outstanding, but unvested stock options, restricted shares and RSUs was $18.2 million, which will be recognized over the weighted average remaining vesting period of 1.7 years.

 

4. EARNINGS PER SHARE

Basic earnings per share (“EPS”) and diluted EPS are computed using the methods prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share.” Following is a reconciliation of basic EPS and diluted EPS (in thousands, except per share amounts):

 

     Thirteen Weeks Ended
April 5, 2009
   Thirteen Weeks Ended
March 30, 2008(1)
     Net
Income
   Shares    Per Share
Amount
   Net
Income
   Shares    Per Share
Amount

Basic EPS

   $ 6,338    37,322    $ 0.17    $ 5,033    36,435    $ 0.14

Dilutive effect of stock options calculated using the treasury stock method

     —      47      —        —      162      —  

Dilutive effect of restricted shares

     —      62      —        —      59      —  

Dilutive effect of shares issuable to Philips

     —      185      —        —      185      —  
                                     

Diluted EPS

   $ 6,338    37,616    $ 0.17    $ 5,033    36,841    $ 0.14
                                     

 

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     Thirteen Weeks Ended
April 5, 2009
   Thirteen Weeks Ended
March 30, 2008

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

     

Stock options, restricted shares and restricted stock units

   1,790    1,499
         

Convertible debt

   3,407    9,447
         

 

(1) Restated for the effects of the adoption of FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 for additional information.

 

5. CREDIT FACILITY AND RESTRICTED CASH

We have a multibank credit agreement (the “Credit Agreement”), which provides for a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. We may, upon notice to JPMorgan Chase Bank, N.A. (the “Agent”), request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. As of April 5, 2009, there were no revolving loans or letters of credit outstanding under the Credit Agreement, we were in compliance with all covenants and we were not in default under the Credit Agreement.

We also have a 50.0 million yen 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 April 5, 2009.

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. At April 5, 2009, we had $49.5 million of these guarantees and letters of credit outstanding, of which approximately $48.9 million were secured by restricted cash deposits. 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 sheet.

See also Note 6.

 

6. AUCTION RATE SECURITIES, PUT RIGHT AND RELATED LINE OF CREDIT

On November 6, 2008, we accepted an offer by UBS of certain auction rate securities Rights (the “Put Right”). The Put Right permits us to cause UBS to repurchase, at par value, our auction rate securities (the “ARS”) during the period beginning on June 30, 2010 and ending on July 2, 2012. The fair value of the ARS and the Put Right was approximately $95.4 million and $14.3 million, respectively, as of April 5, 2009, as discussed in more detail below. The par value of the ARS was $110.1 million at April 5, 2009. The Put Right was offered in connection with UBS’s obligations under settlement agreements with the U.S. SEC and other federal and state regulatory authorities.

In addition, UBS offered us the ability to borrow no-net cost loans secured by the ARS. On March 25, 2009, we entered into an uncommitted secured demand revolving credit facility (the “UBS Credit Facility”) with UBS Bank USA (the “Lender”), providing for a line of credit in an amount of up to $70.8 million, or approximately 75% of the market value of the ARS. The obligations under the UBS Credit Facility are secured by substantially all of our collateral accounts, money, investment property and other property maintained with UBS, including the ARS (the “UBS Collateral”), subject to certain exceptions. In connection with entering into the UBS Credit Facility agreement, we amended our $100.0 million secured revolving credit facility with JPMorgan Chase Bank, N.A. to permit the incurrence of indebtedness

 

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secured by the UBS Collateral and the transactions contemplated under the UBS Credit Facility.

As of April 5, 2009, we drew down $70.8 million, the full amount available under the UBS Credit Facility. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility.

The UBS Credit Facility contains affirmative and negative covenants, including, among other things, (i) a covenant that, if at any time there are amounts owing under the UBS Credit Facility and the ARS can be sold or otherwise conveyed by us for gross proceeds that are at least equal to the par value of the ARS, then we will sell or convey the ARS to the extent necessary to pay off any amounts owing under the UBS Credit Facility and will use the proceeds to pay those amounts, and (ii) a covenant that limits our ability to grant liens on the collateral.

The UBS Credit Facility includes customary events of default that include, among other things, non-payment defaults, the failure to maintain sufficient collateral, covenant defaults, inaccuracy of representations and warranties, the failure to provide financial and other information in a timely manner, bankruptcy and insolvency defaults, cross-defaults to other indebtedness and judgment defaults. The occurrence of an event of default will result in the acceleration of the obligations under the UBS Credit Facility and any amounts due and not paid following an event of default will bear interest at a rate per annum equal to 2.00% above the applicable interest rate. As of April 5, 2009, we were in compliance with all of the terms of the UBS Credit Facility.

We estimate the fair value of our ARS quarterly using a discounted cash flow model, comparing the expected rate of interest to be received on the ARS to similar securities. We then discount the securities over a three to ten year term, depending on the collateral underlying each ARS. The amounts derived through the discounted cash flow model were generally consistent with the quoted price indicated by the bank which holds our ARS at April 5, 2009. The increase in the fair value of the ARS in the first quarter of 2009 totaled $3.7 million and was recorded as a component of other income, net.

We also calculate the fair value of the Put Right on a quarterly basis based on the net present value of the difference between the par value and the fair market value of the ARS at the end of each quarter, using a fifteen month option period through the settlement date discounted by the credit default rate of UBS, the issuer. We also consider several other factors, including continued failure of auctions, failure of investments to be redeemed, deterioration of credit ratings of investments, overall market risk and other factors. The decrease in the fair value of the Put Right in the first quarter of 2009 totaled $3.6 million and was recorded as a component of other income, net.

 

7. INVENTORIES

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

Inventories consisted of the following (in thousands):

 

     April 5,
2009
   December 31,
2008

Raw materials and assembled parts

   $ 41,807    $ 44,458

Service inventories, estimated current requirements

     18,860      18,588

Work-in-process

     56,641      56,777

Finished goods

     24,086      21,786
             

Total inventories

   $ 141,394    $ 141,609
             

Non-current inventories

   $ 40,893    $ 41,072
             

Non-service inventory valuation adjustments totaled $1.2 million and $0.4 million, respectively, in the

 

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thirteen weeks ended April 5, 2009 and March 30, 2008. Service inventory valuation adjustments totaled $1.2 million and $0.7 million, respectively, during the thirteen weeks ended April 5, 2009 and March 30, 2008.

 

8. GOODWILL, PURCHASED TECHNOLOGY AND OTHER INTANGIBLE ASSETS

Goodwill

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

 

     Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008
 

Balance, beginning of period

   $ 40,964     $ 40,864  

Adjustments to goodwill

     (21 )     (26 )
                

Balance, end of period

   $ 40,943     $ 40,838  
                

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

Other Intangible Assets

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

 

     Amortization
Period
   April 5,
2009
    December 31,
2008
 

Purchased technology

   5 to 12 years    $ 46,110     $ 46,492  

Accumulated amortization

        (45,453 )     (45,197 )
                   
        657       1,295  

Patents, trademarks and other

   2 to 15 years      7,951       7,569  

Accumulated amortization

        (3,682 )     (3,612 )
                   
        4,269       3,957  

Note issuance costs

   5 to 7 years      2,747       3,159  

Accumulated amortization

        (1,111 )     (1,165 )
                   
        1,636       1,994  
                   

Total intangible assets included in other long-term assets

      $ 6,562     $ 7,246  
                   

Amortization expense was as follows (in thousands):

 

     Thirteen Weeks Ended
     April 5,
2009
   March 30,
2008

Purchased technology

   $ 325    $ 453

Patents, trademarks and other

     291      274

Note issuance costs

     358      355
             
   $ 974    $ 1,082
             

 

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Expected amortization is as follows over the next five years and thereafter (in thousands):

 

     Purchased
Technology
   Patents,
Trademarks
and Other
   Note
Issuance
Costs

Remainder of 2009

   $ 296    $ 652    $ 295

2010

     361      864      393

2011

     —        804      393

2012

     —        760      393

2013

     —        702      162

Thereafter

     —        487      —  
                    
   $ 657    $ 4,269    $ 1,636
                    

 

9. 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.

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

 

     Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008
 

Balance, beginning of period

   $ 6,439     $ 6,585  

Reductions for warranty costs incurred

     (2,556 )     (3,206 )

Warranties issued

     2,882       3,346  

Translation and changes in estimates

     (108 )     163  
                

Balance, end of period

   $ 6,657     $ 6,888  
                

 

10. INCOME TAXES

We recorded a tax provision of approximately $1.5 million for the thirteen week period ended April 5, 2009. The provision consisted primarily of taxes accrued in foreign jurisdictions reduced by a tax benefit for valuation allowance released against deferred tax assets utilized to offset income earned in the U.S. We continue to record a valuation allowance against remaining U.S. deferred tax assets as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.

Deferred Taxes

Deferred tax assets, net of valuation allowances of $42.8 million as of both April 5, 2009 and December 31, 2008 were classified on the balance sheet as follows (in thousands):

 

     April 5,
2009
    March 30,
2008
 

Deferred tax assets – current

   $ 3,148     $ 5,242  

Deferred tax assets – non-current

     1,998       3,314  

Other current liabilities

     (259 )     (281 )

Deferred tax liabilities – non-current

     (3,691 )     (5,270 )
                

Net deferred tax assets

   $ 1,196     $ 3,005  
                

Unrecognized Tax Benefits

During the thirteen week period ended April 5, 2009, unrecognized tax benefits increased $1.2 million, net of a reduction of $0.4 million resulting from a lapse of applicable statutes of limitations. There were no increases or decreases in prior unrecognized tax benefits resulting from settlements with taxing

 

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authorities during the quarter. We classify interest and penalties associated with unrecognized tax benefits as a component of tax expense in the statement of operations.

Current and non-current liability components of unrecognized tax benefits at April 5, 2009 and December 31, 2008 were classified on the balance sheet as follows (in thousands):

 

     April 5,
2009
   December 31,
2008

Other current liabilities

   $ 16,905    $ 445

Other liabilities

     2,650      17,922
             

Unrecognized tax benefits

   $ 19,555    $ 18,367
             

During the thirteen week period ended April 5, 2009, we reclassified $15.4 million of unrecognized tax benefits to current based on the estimated timing of settlement.

For our major tax jurisdictions, the following years were open for examination by the tax authorities as of April 5, 2009:

 

Jurisdiction

   Open Tax Years

U.S.

   2004 and forward

The Netherlands

   2006 and forward

Czech Republic

   2006 and forward

 

11. RELATED PARTY AND OTHER ACTIVITY

During the first quarter of fiscal 2009 and 2008, we sold products and services to Applied Materials, Inc. A director of Applied Materials is a member of our Board of Directors. We also sold services to Cascade Microtech, Inc. Our Chief Financial Officer is on the Board of Directors of Cascade Microtech, Inc. Sales to Applied Materials, Inc. and Cascade Microtech, Inc. were as follows (in thousands):

 

     Thirteen Weeks Ended
     April 5,
2009
   March 30,
2008

Product sales:

     

Applied Materials

   $ 327    $ 232
             
   $ 327    $ 232

Service sales:

     

Applied Materials

   $ 34    $ 104

Cascade Microtech

     1      —  
             
   $ 35    $ 104
             

Total sales to related parties

   $ 362    $ 336
             

As of April 5, 2009, Applied Materials owed us $411,000 related to its purchases.

During the thirteen week periods ended April 5, 2009 and March 30, 2008, we purchased $12,000 and $0, respectively, worth of goods from Cascade Microtech, Inc. and, as of April 5, 2009, we did not owe Cascade Microtech, Inc. any amounts for these purchases.

During the thirteen week periods ended April 5, 2009 and March 30, 2008, we purchased $1.8 million and $252,000, respectively, worth of goods from Schneeberger, Inc. One of our executive officers serves on the Board of Directors of Schneeberger, Inc. As of April 5, 2009, we owed Schneeberger, Inc. $63,000 for these purchases.

During the thirteen week periods ended April 5, 2009 and March 30, 2008, we purchased $24,000 and $0, respectively, worth of services from Fidelity Investments. FMR LLC, the parent company of Fidelity Investments, is a greater than 5% shareholder of our common stock. At April 5, 2009, we did not owe Fidelity Investments any amounts for these purchases.

 

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During the thirteen week periods ended April 5, 2009 and March 30, 2008, we purchased $82,000 and $130,000, respectively, worth of services from TMC BV. One of the members of our Board of Directors also serves on the Supervisory Board of TMC BV. At April 5, 2009, we did not owe TMC BV any amounts for these purchases.

During the thirteen week periods ended April 5, 2009 and March 30, 2008, we purchased $46,000 and $27,000, respectively, worth of services from EasyStreet Online Services. One of the members of our Board of Directors also serves on the Board of Directors of EasyStreet Online Services. As of April 5, 2009, we did not owe EasyStreet Online Services any amounts for these purchased services.

 

12. REDEMPTION OF 2.875% CONVERTIBLE SUBORDINATED NOTES

We redeemed the following amounts of our 2.875% Convertible Subordinated Notes in the thirteen week period ended April 5, 2009:

 

Date

   Amount
Redeemed
   Redemption
Price
    Redemption
Discount
   Related Note
Issuance Costs
Written Off

February 2009

   $ 15.0 million    86.5 %   $ 2.0 million    $ 0.3 million
                          

 

13. 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 have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $40.8 million at April 5, 2009. These commitments expire at various times through the fourth quarter of 2009.

 

14. SEGMENT INFORMATION

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

We report our segments based on a market-focused organization. Our segments are: Electronics, Research and Industry, Life Sciences and Service and Components. The following table summarizes various financial amounts for each of our business segments (in thousands):

 

     Electronics    Research
and

Industry
   Life
Sciences
   Service and
Components
   Corporate
and

Eliminations
    Total

Thirteen Weeks Ended

April 5, 2009

                

Sales to external customers

   $ 29,359    $ 58,338    $ 20,865    $ 33,271    $ —       $ 141,833

Gross profit

     14,629      26,400      7,646      10,017      —         58,692

Thirteen Weeks Ended

March 30, 2008

                

Sales to external customers

   $ 46,521    $ 61,097    $ 9,596    $ 34,432    $ —       $ 151,646

Gross profit

     20,247      26,819      3,165      8,994      —         59,225
April 5, 2009                 

Total assets

   $ 91,955    $ 142,638    $ 46,124    $ 139,446    $ 474,580     $ 894,743

Goodwill

     18,123      14,141      3,625      5,056      (2 )     40,943
December 31, 2008                 

Total assets

   $ 90,100    $ 142,390    $ 35,560    $ 137,186    $ 426,936     $ 832,172

Goodwill

     18,132      14,148      3,626      5,061      (3 )     40,964

 

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

One customer accounted for 10.8% of our total sales during the thirteen week period ended April 5, 2009. None of our customers represented 10% or more of our total sales in the thirteen week period ended March 30, 2008.

 

15. RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE

In the thirteen week period ended April 5, 2009, we incurred $1.0 million of costs related to our April 2008 restructuring plan 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. We incurred $4.3 million of costs in 2008 related to this plan and expect to incur between approximately $1.5 million and $2.7 million in the remainder of 2009 related to the implementation of this plan. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of a weakened dollar on our cost of goods sold. The main activities, approximate range of associated costs and expected timing are described in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the approximate total cost of the restructuring to range from $6.8 million to $8.0 million.

A summary of the anticipated restructuring expenses is as follows:

 

Type of Expense

  

Approximate

Range of

Expected Costs

  

Amount Incurred and

Expected Timing for

Remainder of Charges

Severance costs related to work force reduction of 3% (approximately 60 employees)

   $3.0 million - $3.5 million   

$2.9 million incurred.

Remainder in the

first half of 2009.

Transfer of manufacturing and other activities

   $1.8 million - $2.0 million   

$0.2 million incurred.

Remainder in 2009.

Shift of supply chain

   $2.0 million - $2.5 million   

$2.2 million incurred.

Remainder in 2009.

The following table summarizes the charges, expenditures and write-offs and adjustments in the thirteen week period ended April 5, 2009 related to our restructuring, reorganization, relocation and severance accruals (in thousands):

 

     Beginning
Accrued
Liability
   Charged to
Expense,
Net
    Expenditures     Write-Offs
and
Adjustments
    Ending
Accrued
Liability
Thirteen Weeks Ended April 5, 2009            

Severance, outplacement and related benefits for terminated employees

   $ 221    $ 94     $ (186 )   $ (18 )   $ 111

Transfer of manufacturing and related activities and shift of supply chain

     —        888       (888 )     —         —  

Abandoned leases, leasehold improvements and facilities

     19      (20 )     —         1       —  
                                     
   $ 240    $ 962     $ (1,074 )   $ (17 )   $ 111
                                     

 

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16. FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES

Effective January 1, 2009, we adopted the provisions of SFAS No. 157, “Fair Value Measurements,” for our non-financial assets and liabilities. The adoption of these provisions of SFAS No. 157 did not have any effect on our results of operations, financial position or cash flows.

Pursuant to SFAS No. 157, factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:

 

   

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

 

   

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

 

   

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

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

Following are the disclosures related to our financial assets as of April 5, 2009 pursuant to SFAS No. 157 (in thousands):

 

Assets

   Level 1    Level 2    Level 3

Auction rate marketable securities

   $ —      $ —      $ 95,366

Put right

     —        —        14,340

Available for sale marketable securities

     19,502      —        —  

Derivative contracts, net

     —        135      —  
                    
   $ 19,502    $ 135    $ 109,706
                    

A roll-forward of our Level 3 securities was as follows (in thousands):

 

     Auction Rate
Securities
   Put
Right
 

Balance, December 31, 2008

   $ 91,680    $ 17,917  

Increase in fair value of ARS included as a component of other income, net

     3,686      —    

Decrease in fair value of put right included as a component of other income, net

     —        (3,577 )
               

Balance, April 5, 2009

   $ 95,366    $ 14,340  
               

 

17. DERIVATIVE INSTRUMENTS

In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from fluctuations in foreign currency exchange rates. As of April 5, 2009 and December 31, 2008, the aggregate notional amount of our outstanding derivative contracts designated as cash flow hedges was $24.0 million and $34.5 million, respectively. As of April 5, 2009 and December 31, 2008, the aggregate notional amount of our outstanding derivative contracts for our balance sheet positions was $94.1 million and $80.4 million, respectively. The outstanding contracts at April 5, 2009 have varying maturities through December 2009. We do not enter into derivative financial instruments for speculative purposes.

We mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and nonperformance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at April 5, 2009. In addition, there are no contingent features in our derivative instruments.

Balance Sheet Related

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

 

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entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other income (expense) currently together with the transaction gain or loss from the respective balance sheet position.

Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives, totaled $1.4 million and $1.5 million, respectively, in the thirteen week periods ended April 5, 2009 and March 30, 2008.

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 twelve-month time horizon. The hedging transactions we undertake primarily limit our exposure to changes in the U.S. dollar/euro and the U.S. dollar/Czech koruna exchange rate. The zero cost collar contract hedges are designed to protect us as the U.S. dollar weakens, but also provide us with some flexibility if the dollar strengthens.

These derivatives meet the criteria to be designated as hedges and, accordingly, we record the change in fair value of the effective portion of these hedge contracts relating to anticipated transactions in other comprehensive income rather than net income until the underlying hedged transaction affects net income. Gains and losses resulting from the ineffective portion of the hedge contracts are recognized currently in net income.

Summary

The following tables provide summary disclosure information pursuant to SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which was adopted January 1, 2009.

At April 5, 2009 and December 31, 2008 the fair value carrying amount of our derivative instruments were included in our balance sheet as follows:

 

     Location in Balance Sheet

Derivatives Designated as Hedging Instruments

  

Foreign Exchange Contracts in Asset Position

   Other Current Assets

Foreign Exchange Contracts in Liability Position

   Other Current Liabilities

Derivatives Not Designated as Hedging Instruments

  

Foreign Exchange Contracts in Asset Position

   Other Current Assets

Foreign Exchange Contracts in Liability Position

   Other Current Liabilities

 

Balance Sheet Information (in thousands)

   Fair Value of Asset Derivatives    Fair Value of Liability Derivatives
   April 5,
2009
   December 31,
2008
   April 5,
2009
   December 31,
2008

Derivatives Designated as Hedging Instruments

           

Foreign Exchange Contracts

   $ —      $ —      $ 734    $ 2,015
                           

Derivatives Not Designated as Hedging Instruments

           

Foreign Exchange Contracts

   $ 1,797    $ 1,938    $ 928    $ 5,775
                           

 

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The effect of derivative instruments on our Consolidated Statements of Operations for the thirteen-week periods ended April 5, 2009 and March 30, 2008 were as follows (in thousands):

 

Derivatives in SFAS No. 133 Cash Flow Hedging
Relationships

   Amount of
Gain/(Loss)
Recognized
in OCI
(Effective
Portion)
    Location of
Gain/(Loss)
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
   Amount of
Gain/(Loss)
Reclassified
from
Accumulated
OCI into Income
(Effective
Portion)
    Location of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Thirteen Weeks Ended

April 5, 2009

            

Foreign Exchange Contracts

   $ (301 )   Cost of Goods Sold    $ (250 )   Other, net    $ (1,226 )
                              

Thirteen Weeks Ended

March 30, 2008

            

Foreign Exchange Contracts

   $ 5,504     Cost of Goods Sold    $ 3,480     —      $ —    
                              

 

Derivatives Not Designated as Hedging Instruments under SFAS No. 133

   Location of
Gain/(Loss)
Recognized

in Income
on Derivative
   Amount of
Gain/(Loss)
Recognized
in Income
on Derivative
 

Thirteen Weeks Ended

        April 5, 2009

     

Foreign Exchange Contracts

   Other, net    $ 84  
           

Thirteen Weeks Ended

        March 30, 2008

     

Foreign Exchange Contracts

   Other, net    $ (344 )
           

The unrealized losses at April 5, 2009 are expected to be reclassified to net income during the next 12 months as a result of the underlying hedged transactions also being recorded in net income.

 

18. ADOPTION OF FSP NO. APB 14-1

Effective January 1, 2009, we adopted FASB Staff Position (“FSP”) No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” This FSP specifies that such instruments should separately account for the liability and equity components in a manner that reflects the entity’s non-convertible debt borrowing rate when interest cost is recognized in subsequent periods. Upon adoption, this FSP was retrospectively applied to our $150.0 million principal amount of zero coupon subordinated convertible notes. In accordance with the FSP, we recognized both the liability and equity component of our notes at fair value. The liability component is recognized as the fair value of a similar instrument that does not have a conversion feature at issuance. The equity component, which is the conversion feature at issuance, is recognized as the difference between the proceeds from the issuance of the notes and the fair value of the liability component. We recognize an effective interest rate of 8.874% on the carrying value of the debt.

 

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The effect of adoption of this FSP increased interest expense and reduced net income and earnings per share in the thirteen week period ended March 30, 2008 as indicated in the following table (in thousands, except per share amounts).

 

     Thirteen Weeks Ended March 30, 2008  
     Interest
Expense
   Net
Income
    Basic Net
Income Per
Share
    Diluted Net
Income Per
Share
 

Reported

   $ 2,231    $ 8,154     $ 0.22     $ 0.20  

Adjustment

     3,121      (3,121 )     (0.08 )     (0.06 )
                               

Revised

   $ 5,352    $ 5,033     $ 0.14     $ 0.14  
                               

Amortization of the debt discount during the thirteen weeks ended March 30, 2008 was $3.2 million.

In addition, adoption of this FSP increased interest expense and reduced net income, or increased the net loss, in all of 2008, 2007, 2006 and 2005 as indicated in the following tables (in thousands, except per share amounts)

 

     Year Ended December 31, 2008  
     Interest
Expense
   Net
Income
    Basic Net
Income Per
Share
    Diluted Net
Income Per
Share
 

Reported

   $ 7,906    $ 24,302     $ 0.66     $ 0.61  

Adjustment

     6,314      (6,314 )     (0.17 )     (0.13 )
                               

Revised

   $ 14,220    $ 17,988     $ 0.49     $ 0.48  
                               
     Year Ended December 31, 2007  
     Interest
Expense
   Net
Income
    Basic Net
Income Per
Share
    Diluted Net
Income Per
Share
 

Reported

   $ 8,735    $ 58,338     $ 1.63     $ 1.36  

Adjustment

     11,798      (11,798 )     (0.33 )     (0.12 )
                               

Revised

   $ 20,533    $ 46,540     $ 1.30     $ 1.24  
                               
     Year Ended December 31, 2006  
     Interest
Expense
   Net
Income
    Basic Net
Income Per
Share
    Diluted Net
Income Per
Share
 

Reported

   $ 7,355    $ 20,040     $ 0.59     $ 0.53  

Adjustment

     10,771      (10,771 )     (0.32 )     (0.26 )
                               

Revised

   $ 18,126    $ 9,269     $ 0.27     $ 0.27  
                               
     Year Ended December 31, 2005  
     Interest
Expense
   Net Loss     Basic Net
Loss Per
Share
    Diluted Net
Loss Per
Share
 

Reported

   $ 9,342    $ (78,158 )   $ (2.33 )   $ (2.33 )

Adjustment

     9,831      (9,831 )     (0.29 )     (0.29 )
                               

Revised

   $ 19,173    $ (87,989 )   $ (2.62 )   $ (2.62 )
                               

Given that these notes were repaid in 2008, there will be no impact of this pronouncement in 2009 or future years.

 

19. RECLASSIFICATIONS

Certain immaterial reclassifications were made to the prior period financial statements to conform with the current period presentation.

 

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20. NEW ACCOUNTING PRONOUNCEMENTS

FSP No. FAS 107-1 and APB 28-1

In April 2009, the FASB issued FSP No. FAS107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods as well as in annual financial statements. This FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim and annual reporting periods ending after June 15, 2009. Since this FSP only pertains to footnote disclosures, we do not believe that the adoption of this FSP will have a material impact on our financial position, results of operations or cash flows.

FSP No. FAS 157-4

In April 2009, the FASB issued FSP No. FAS157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” and emphasizes that, even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation techniques used, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This FSP amends SFAS No. 157 to require disclosure in interim and annual periods regarding the inputs and valuation techniques used to measure fair value and a discussion of changes in valuation techniques and related inputs, if any, during the period. It also requires that entities define major categories for equity and debt securities in accordance with paragraph 19 of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” This FSP is effective for interim and annual reporting periods ending after June 15, 2009. While we are still analyzing the effects of adopting this FSP and given that it pertains primarily to footnote disclosures, we do not believe that the adoption of this FSP will have a material impact on our financial position, results of operations or cash flows.

FSP No. 142-3

In April 2008, the FASB issued FSP No. 142-3, “Determination of the Useful Life of Intangible Assets,” which amends the factors that should be considered in developing the renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” This FSP also adds certain disclosure requirements for intangible assets with definite useful lives. The adoption of this FSP on January 1, 2009 did not have any effect on our financial position, cash flows and results of operations.

SFAS No. 161

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which requires certain disclosures related to derivative instruments. We adopted SFAS No. 161 effective January 1, 2009. Given that SFAS No. 161 pertains primarily to footnote disclosures, the adoption of this standard did not have a material impact on our financial position, results of operations or cash flows. See Note 17 for the disclosure required pursuant to SFAS No. 161.

SFAS No. 141R and SFAS No. 160

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” and SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.” SFAS Nos. 141R and 160 require most identifiable assets, liabilities, noncontrolling interests and goodwill acquired in a business combination to be recorded at “full fair value” and require noncontrolling interests (previously referred to as minority interests) to be reported as a component of equity, which changes the accounting for transactions with noncontrolling interest holders. We adopted both statements effective January 1, 2009. The adoption of SFAS Nos. 141R and 160 did not have a material effect on our financial position, results of operations or cash flows.

 

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

Forward Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our results to differ materially from those expressed or implied by such forward-looking statements. Such forward-looking statements include any expectations of earnings, revenues, gross margins, non-operating expense, tax rates, net income, inventory turnover rates or other financial items, as well as backlog, order levels and activity of our company as a whole or our particular markets; any statements of the plans, strategies and objectives of management for future operations, restructuring and outsourcing initiatives; factors that may affect our 2009 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 future capital expenditures; any statements related to the needs or expected growth of our target markets; any statement related to our ability to recognize value from the auction rate securities we hold; any statements relating to the credit worthiness of our derivative counterparties; any statements regarding future economic conditions or performance; statements of belief; and any statement of assumptions underlying any of the foregoing; and statements made under the heading “Outlook for the Remainder of 2009.” 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” and other words and terms of similar meaning. From time to time, we also may provide oral or written forward-looking statements in other materials we release to the public. The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed here and the risks discussed from time to time in our other public filings. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on information available to us as of the date of this report, and we assume no obligation to update these forward-looking statements. You are advised, however, to consult any further disclosures we make on related subjects in our Forms 10-K, 10-Q and 8-K filed with, or furnished to, the SEC. You also should read Item 1A. “Risk Factors” included in Part II of this report for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors also could adversely affect us.

Summary of Products and Segments

We are a leading supplier of 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, the Research and Industry market, the Life Sciences market and the Service and Components market.

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

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

The Electronics market consists of customers in the semiconductor, data storage and related industries such as printers and microelectromechanical systems (“MEMs”). For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 65 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. In the data storage market, our products offer 3D metrology for thin film head processing and root cause failure analysis. Factors affecting our business include the transition from longitudinal to perpendicular recording heads, rapidly increasing storage densities that require smaller

 

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recording heads, thinner geometries and materials that increase the complexity of device structures.

The Research and Industry market includes universities, public and private research laboratories and customers in a wide range of industries, including automobiles, aerospace, forensics, metals, mining and petrochemicals. 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 also used in root cause failure analysis and quality control applications.

The Life Sciences market includes universities 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 cell 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.

Overview

Net sales decreased to $141.8 million in the first quarter of 2009 compared to $151.7 million in the fourth quarter of 2008 and $151.6 million in the first quarter of 2008. Net sales decreased $1.0 million and $7.2 million, respectively, compared to the fourth quarter of 2008 and the first quarter of 2008 as a result of the strengthening of the U.S. dollar against foreign currencies, primarily the euro. Declines in the first quarter of 2009 compared to the fourth quarter of 2008 also resulted from lower sales in each of our market segments as the global economy continued to struggle.

At April 5, 2009, our total backlog was $319.3 million, compared to $330.5 million at December 31, 2008. At April 5, 2009, our backlog consisted of product and service and components unfilled orders of $256.8 million and $62.5 million, respectively, compared to $273.5 million and $57.0 million, respectively, at December 31, 2008. 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.

Of our total backlog at April 5, 2009, approximately 90% is expected to be shippable within 12 months and approximately 10% requires some incremental development. 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 minor. However, the global markets are in a period of extraordinary financial uncertainty and historic cancellation rates may increase in the future. During 2008, we experienced cancellations of $7.6 million. 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 delayed 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 fluctuations. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.

 

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Outlook for the Remainder of 2009

The ongoing difficult global economic environment, including unprecedented volatility in foreign exchange markets, makes forecasting for the remainder of 2009 particularly challenging. We continue to expect a decline in total revenue for full fiscal year 2009 compared too full fiscal year 2008, as a decline in Electronics revenue is not likely to be offset by growth in our other markets.

Our backlog of unfilled orders remains at near-record levels, and, historically we have not experienced significant volumes of order cancellations. As a result of the backlog and our near-term outlook for new bookings, we expect revenues in the second quarter of 2009 to likely be flat to slightly down from the first quarter of 2009. For the second half of 2009, there is potential for normal seasonal patterns in revenue, and we may also experience some increase in bookings and revenue as a result of economic stimulus programs being implemented in the U.S. and worldwide.

A larger percentage of our expenses are denominated in euros or Czech koruna (which tends to move generally in line with the euro on foreign exchange markets) than in euro- and koruna-denominated revenue. As a result, when the U.S. dollar strengthens in foreign exchange markets, our reported revenue declines or grows more slowly, while our expenses decline even more rapidly, improving operating income. Conversely, if the euro and the koruna strengthen against the U.S. dollar, revenue increases and expenses increase more rapidly, reducing operating income. We are taking steps to create more naturally hedged positions, but, for the remainder 2009, the impact of currency movements is expected to generally be as described above.

Historically, our Research and Industry business has generally remained stable in economic downturns, resulting in flat revenue or even modest growth, as governments, institutions and corporations globally invest in research and product development. While the current economic downturn may limit the R&D and capital spending budgets of some corporations and government entities, the long lead-times of many of our customers’ projects and the potential positive impact of government economic stimulus spending will likely provide offsetting growth opportunities.

Presently, we expect continued growth in our Life Sciences business in 2009, although it will vary from quarter to quarter. This is an emerging, research-oriented market for us, and we expect our revenue to continue to be positively affected by increased penetration of electron microscopy into this market.

The Electronics segment, which includes semiconductor and data storage customers, is in the midst of a severe industry-wide downturn. Revenue for this segment declined in the first quarter and is expected to remain at fairly low levels for the remainder of 2009, although there could be significant variation from quarter to quarter. Despite the difficult environment, we believe that we have the potential to demonstrate better performance than the semiconductor capital equipment industry as a whole, because of increased demand for our higher-resolution images as manufacturers move to smaller line widths and new processes, among other factors.

Demand for service of our products is expected to remain approximately flat as growth in our installed base of products is offset by some customers’ decisions to reduce or not renew service contracts due to the current economic environment.

We believe we hold leadership positions, both technologically and competitively in the markets in which we compete. We plan to maintain that leadership, even as competitors introduce new products that attempt to match our earlier advances.

Our gross margins improved in the first quarter of 2009 compared to the same period of 2008, and our goal is to maintain and improve on those levels for the remainder of 2009. Factors that are expected to affect gross margins are product mix, relative foreign currency rates and the beneficial impact of the restructuring program begun in 2008. That includes lower costs from our suppliers, new outsourcing initiatives, more natural currency exposures, headcount reductions and improved systems.

 

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Operating expenses are expected to remain generally flat compared with the first quarter of 2009 for the remainder of fiscal year 2009 compared with the first quarter of 2009. We plan to continue to limit discretionary spending and hiring in light of the overall revenue outlook.

Non-operating expense is expected to increase in the second quarter 2009 due to significantly lower market interest rates and expected losses on ineffective cash flow hedges. While net interest income will remain negative in the latter half of the year, foreign exchange losses are expected to decrease in the second half of the year compared with the first half.

Our tax rate is expected to return to approximately 25% to 28% for the remaining quarters of 2009 from the unusually low level in the first quarter of 2009.

Critical Accounting Policies and the Use of Estimates

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

Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2008 Annual Report on Form
10-K describe the significant accounting estimates and policies used in preparation of the Consolidated Financial Statements. Actual results in these areas could differ from management’s estimates. During the first quarter of 2009, there were no significant changes in our critical accounting policies or estimates from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on February 20, 2009.

Results of Operations

The following table sets forth our statement of operations data, both in absolute dollars and as a percentage of net sales (dollars in thousands).

 

     Thirteen Weeks Ended(1)
April 5, 2009
    Thirteen Weeks Ended(1)(2)
March 30, 2008
 

Net sales

   $ 141,833     100.0 %   $ 151,646     100.0 %

Cost of sales

     83,141     58.6       92,421     60.9  
                            

Gross profit

     58,692     41.4       59,225     39.1  

Research and development

     16,780     11.8       17,807     11.7  

Selling, general and administrative

     32,826     23.1       32,612     21.5  

Restructuring, reorganization, relocation and severance costs

     962     0.7       —       —    
                            

Operating income

     8,124     5.7       8,806     5.8  

Other income (expense), net

     (320 )   (0.2 )     (1,220 )   (0.8 )
                            

Income before income taxes

     7,804     5.5       7,586     5.0  

Income tax expense

     1,466     1.0       2,553     1.7  
                            

Net income

   $ 6,338     4.5 %   $ 5,033     3.3 %
                            

 

(1) Percentages may not add due to rounding.

 

(2) Restated for the effects of the adoption of FSP No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement).” See Note 18 of the Condensed Notes to the Consolidated Financial Statements.

Net Sales

Net sales decreased $9.8 million, or 6.5%, to $141.8 million in the thirteen weeks ended April 5, 2009 (the first quarter of 2009) compared to $151.6 million in the thirteen weeks ended March 30, 2008 (the first quarter of 2008). This decrease reflects decreases in Electronics, Research and Industry and Service and Components, partially offset by an increase in Life Sciences as described more fully below.

Exchange rate fluctuations decreased net sales by approximately $7.2 million during the first quarter of 2009 as approximately 34.5% of our net sales were denominated in foreign currencies that declined in

 

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strength against the U.S. dollar during the period. A significant portion of our revenue is denominated in foreign currencies, especially the euro. As the U.S. dollar strengthens against the euro, this generally has the effect of reducing net sales and backlog.

Net Sales by Segment

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

 

     Thirteen Weeks Ended  
     April 5, 2009     March 30, 2008  

Electronics

   $ 29,359    20.7 %   $ 46,521    30.7 %

Research and Industry

     58,338    41.1 %     61,097    40.3 %

Life Sciences

     20,865    14.7 %     9,596    6.3 %

Service and Components

     33,271    23.5 %     34,432    22.7 %
                          
   $ 141,833    100.0 %   $ 151,646    100.0 %
                          

Electronics

The $17.2 million, or 36.9%, decrease in Electronics sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to the continuing cyclical downturn in the semiconductor industry, which has negatively affected semiconductor related capital expenditures. In addition currency fluctuations decreased Electronics net sales by $0.7 million in the first quarter of 2009 compared to the first quarter of 2008.

Research and Industry

The $2.8 million, or 4.5%, decrease in Research and Industry sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a $3.7 million decrease related to currency fluctuations.

Life Sciences

The $11.3 million, or 117.4%, increase in Life Sciences sales in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to the sale of more high-end TEMs as we grow our customer base and our tools gain greater acceptance in this segment, partially offset by a $1.5 million decrease related to currency fluctuations.

Service and Components

The $1.2 million, or 3.4%, decrease in Service and Component sales in the first quarter of 2009 compared to the first quarter of 2008 was due primarily to a $1.3 million decrease related to currency fluctuations and decreased sales of our components as a result of industry-wide reductions in semiconductor capital equipment spending. These factors were partially offset by an increase in service due to a larger install base.

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 location (dollars in thousands):

 

     Thirteen Weeks Ended  
     April 5, 2009     March 30, 2008  

U.S. and Canada

   $ 55,482    39.1 %   $ 54,183    35.7 %

Europe

     48,924    34.5 %     39,797    26.3 %

Asia-Pacific Region and Rest of World

     37,427    26.4 %     57,666    38.0 %
                          
   $ 141,833    100.0 %   $ 151,646    100.0 %
                          

U.S. and Canada

The $1.3 million, or 2.4%, increase in sales to the U.S. and Canada in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to increased Life Sciences and Research and Industry sales, partially offset by lower Electronics sales.

 

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Europe

Europe also includes Central America, South America, Africa (excluding South Africa), the middle east, eastern Europe and Russia. The $9.1 million, or 22.9%, increase in sales to Europe in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a large sale to a middle eastern university customer.

Asia-Pacific Region and Rest of World

The $20.2 million, or 35.1%, decrease in sales to the Asia-Pacific region and the rest of the world in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to decreased sales from our Electronics segment as semiconductor capital spending has declined.

Cost of Sales and Gross Margin

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

 

     Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008
 

Electronics

   49.8 %   43.5 %

Research and Industry

   45.3 %   43.9 %

Life Sciences

   36.6 %   33.0 %

Service and Components

   30.1 %   26.1 %

Overall

   41.4 %   39.1 %

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. We see five primary drivers affecting gross margin: product mix (including the effect of price competition), volume, cost reduction efforts, competitive pricing pressure and currency fluctuations.

Cost of sales decreased $9.3 million, or 10.0%, to $83.1 million in the first quarter of 2009 compared to $92.4 million in the first quarter of 2008, primarily due to a $10.9 million decrease related to currency fluctuations and lower sales, partially offset by an increase in costs due to increased sales of our higher-end TEM products.

The net effect on our gross margin from the change in currency exchange rates during the first quarter of 2009 on our net sales and cost of sales was an approximately $3.7 million increase, or a 2.6 percentage point increase. Offsetting the currency effects were approximately $0.3 million of cash flow hedge losses recorded in cost of sales.

Electronics

The increase in Electronics gross margin in the first quarter of 2009 compared to the first quarter of 2008 was due primarily to significant pricing pressure on certain transactions in the first quarter of 2008. The gross margin achieved in the first quarter of 2009 is more in line with our historical gross margin levels.

Research and Industry

The increase in Research and Industry gross margin in the first quarter of the 2009 compared to the first quarter of 2008 was primarily due to favorable currency fluctuations and a shift in product mix to more higher-end TEM sales.

Life Sciences

The increase in Life Sciences gross margin in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to favorable currency fluctuations, a shift to more higher-end TEMs during the first quarter of 2009 and pricing pressures on our low-end TEMs in the first quarter of 2008.

Service and Components

The increase in the Service and Components gross margin in the first quarter of 2009 compared to the

 

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first quarter of 2008 was primarily due to improvement in part usage and lower repair and distribution costs.

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. These costs are presented net of subsidies received for such efforts. During the 2009 and 2008 periods, we received subsidies from European governments for technology developments specifically in the areas of semiconductor and life science equipment.

R&D costs decreased $1.0 million to $16.8 million (11.8% of net sales) in the first quarter of 2009 compared to $17.8 million (11.7% of net sales) in the first quarter of 2008.

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

 

     Thirteen Weeks Ended  
     April 5,
2009
    March 30,
2008
 

Gross spending

   $ 17,953     $ 18,579  

Less subsidies

     (1,173 )     (772 )
                

Net expense

   $ 16,780     $ 17,807  
                

The decrease in R&D costs was primarily due to a $1.0 million decrease related to lower labor and related costs as a result of favorable currency movements.

We anticipate that we will continue to invest in R&D at a similar percentage of revenue for the foreseeable future. Accordingly, as revenues increase, we currently anticipate that R&D expenditures also will increase. Actual future spending, however, will depend on market conditions.

Selling, General and Administrative Costs

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

SG&A costs increased $0.2 million to $32.8 million (23.1% of net sales) in the first quarter of 2009 compared to $32.6 million (21.5% of net sales) in the first quarter of 2008.

The increase in SG&A costs in the first quarter of 2009 compared to the first quarter of 2008 was primarily due to a $0.3 million increase in bad debt expense, partially offset by lower travel and entertainment costs.

Restructuring, Reorganization, Relocation and Severance

In the thirteen week period ended April 5, 2009, we incurred $1.0 million of costs related to our April 2008 restructuring plan 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. We incurred $4.3 million of costs in 2008 related to this plan and expect to incur between approximately $1.5 million and $2.7 million in the remainder of 2009 related to the implementation of this plan. These actions are expected to reduce operating expenses, improve our factory utilization and help offset the effect of a weakened dollar on our cost of goods sold. The main activities, approximate range of associated costs and expected timing are described in the table below. Presently, all of the costs described are expected to result in cash expenditures and we currently expect the approximate total cost of the restructuring to range from $6.8 million to $8.0 million.

 

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A summary of the anticipated restructuring expenses is as follows:

 

Type of Expense

  

Approximate

Range of

Expected Costs

  

Amount Incurred and

Expected Timing for

Remainder of Charges

Severance costs related to work force reduction of 3% (approximately 60 employees)

   $3.0 million - $3.5 million   

$2.9 million incurred.

Remainder in the first half of 2009.

Transfer of manufacturing and other activities

   $1.8 million - $2.0 million   

$0.2 million incurred.

Remainder in 2009.

Shift of supply chain

   $2.0 million - $2.5 million   

$2.2 million incurred.

Remainder in 2009.

The following table summarizes the charges, expenditures and write-offs and adjustments in the thirteen week period ended April 5, 2009 related to our restructuring, reorganization, relocation and severance accruals (in thousands):

 

     Beginning
Accrued
Liability
   Charged to
Expense,
Net
    Expenditures     Write-Offs
and
Adjustments
    Ending
Accrued
Liability
Thirteen Weeks Ended April 5, 2009            

Severance, outplacement and related benefits for terminated employees

   $ 221    $ 94     $ (186 )   $ (18 )   $ 111

Transfer of manufacturing and related activities and shift of supply chain

     —        888       (888 )     —         —  

Abandoned leases, leasehold improvements and facilities

     19      (20 )     —         1       —  
                                     
   $ 240    $ 962     $ (1,074 )   $ (17 )   $ 111
                                     

Other Income (Expense), Net

Other income (expense) items include 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. Interest income was $1.1 million in the first quarter of 2009 and $5.0 million in the first quarter of 2008. The decrease was primarily due to lower interest rates and a decrease in our invested balances, primarily due to the repayment of debt.

Interest expense was $1.9 million in the first quarter of 2009 and $5.4 million in the first quarter of 2008. Interest expense for both the 2009 and 2008 periods included interest expense related to our 2.875% convertible notes. Interest expense in the first quarter of 2008 also included some interest related to our 5.5% convertible notes, which were repaid in full in January 2008 and $3.1 million of non-cash interest related to the effects of the adoption of FSP No. APB 14-1. See Note 18 of the Condensed Notes to the Consolidated Financial Statements. 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 the first quarter of 2009 included a $0.3 million expense related to the write-off of note issuance costs in connection with the early redemption of $15.0 million of our 2.875% convertible notes. Interest expense in the first quarter of 2008 included $0.2 million of premiums and commissions paid on the repurchase of the remaining $45.9 million of our 5.5% convertible notes as well as the write-off of $0.1 million of related deferred note issuance costs.

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.

For the first quarter of 2009, Other, net included a $2.0 million gain on the early redemption of our 2.875% notes, a $1.2 million charge for cash flow hedge ineffectiveness and foreign currency gains and losses on transaction and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions.

 

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For the first quarter of 2008, Other, net primarily consisted of foreign currency gains and losses on transaction 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 18.8% in the first quarter of 2009 reflected taxes accrued in foreign jurisdictions, reduced by a tax benefit for valuation allowances released against deferred tax assets utilized to offset income earned in the U.S.

Our effective income tax rate of 33.7% in the first quarter of 2008 reflected taxes on foreign earnings and the effects of the non-deductible, non-cash interest expense recorded upon adoption of FSP No. APB 14-1, offset by valuation allowance released against deferred tax assets utilized to offset income earned in the U.S. See Note 18 of the Condensed Notes to the Consolidated Financial Statements for more information regarding the adoption of FSP No. APB 14-1.

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 experimentation 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.

Liquidity and Capital Resources

Auction Rate Securities and UBS Credit Facility

On November 6, 2008, we accepted an offer by UBS AG (together with its affiliates, “UBS”) of certain auction rate securities Rights (the “Put Right”). The Put Right permits us to cause UBS to repurchase, at par value, our ARS during the period beginning on June 30, 2010 and ending on July 2, 2012. The fair value of the ARS and the Put Right was approximately $95.4 million and $14.3 million, respectively, as of April 5, 2009, as discussed in more detail below. The par value of the ARS was $110.1 million at April 5, 2009. The Put Right was offered in connection with settlement agreements entered into by UBS with the U.S. SEC and other federal and state regulatory authorities.

In addition, UBS offered us the ability to borrow no-net cost loans secured by the ARS. On March 25, 2009, we entered into an uncommitted secured demand revolving credit facility with UBS Bank USA, providing for a line of credit in an amount of up to $70.8 million, or approximately 75% of the market value of the ARS. The obligations under the UBS Credit Facility are secured by substantially all of our collateral accounts, money, investment property and other property maintained with UBS, including the ARS, subject to certain exceptions.

As of April 5, 2009, we drew down $70.8 million, the full amount available under the UBS Credit Facility. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility.

The UBS Credit Facility includes customary events of default that include, among other things, non-payment defaults, the failure to maintain sufficient collateral, covenant defaults, inaccuracy of representations and warranties, the failure to provide financial and other information in a timely manner, bankruptcy and insolvency defaults, cross-defaults to other indebtedness and judgment defaults. The occurrence of an event of default will result in the acceleration of the obligations under the UBS Credit Facility and any amounts due and not paid following an event of default will bear interest at a rate per annum equal to 2.00% above the applicable interest rate. As of April 5, 2009, we were in compliance with all of the terms of the UBS Credit Facility.

See Note 6 of the Condensed Notes to the Consolidated Financial Statements for additional information.

 

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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. We may, upon notice to JPMorgan Chase Bank, N.A., 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. We also have a 50.0 million yen unsecured and uncommitted bank borrowing facility in Japan and various limited facilities in select foreign countries. 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. No amounts were outstanding under any of these facilities as of April 5, 2009.

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. At April 5, 2009, we had $49.5 million of these guarantees and letters of credit outstanding, of which approximately $48.9 million were secured by restricted cash deposits. 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 sheet.

Sources of Liquidity and Capital Resources

Our sources of liquidity and capital resources as of April 5, 2009 consisted of $235.8 million of cash, cash equivalents, short-term restricted cash and short-term investments, $97.9 million in non-current investments, $39.3 million of long-term restricted cash, $100.0 million available under revolving credit facilities (including the UBS Credit Facility), as well as potential future cash flows from operations. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2013.

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 April 5, 2009.

In the first quarter of fiscal 2009, cash and cash equivalents and short-term restricted cash increased $61.3 million to $218.8 million as of April 5, 2009 from $157.5 million as of December 31, 2008 primarily as a result of $1.2 million provided by operations, the net redemption of $15.8 million of marketable securities, $70.8 million of proceeds from our UBS line of credit and $0.3 million of proceeds from the exercise of employee stock options. These proceeds were partially offset by $13.1 million used for the repayment of $15.0 million face amount of our 2.875% convertible notes, $3.0 million used for the purchase of property, plant and equipment and a $4.3 million unfavorable effect of exchange rate changes.

Accounts receivable increased $14.2 million to $153.9 million as of April 5, 2009 from $139.7 million as of December 31, 2008, primarily due to seasonal fluctuations in collections, as well as due to increased frequency of extended payment terms. The April 5, 2009 balance also included a $3.1 million decrease related to changes in currency exchange rates. Our days sales outstanding, calculated on a quarterly basis, was 99 days at April 5, 2009 compared to 84 days at December 31, 2008. While days sales outstanding has increased from December 31, 2008, the April 5, 2009 value is below our historical averages.

Inventories decreased $0.2 million to $141.4 million as of April 5, 2009 compared to $141.6 million as of December 31, 2008. Our annualized inventory turnover rate, calculated on a quarterly basis, was 2.4 times for the quarter ended April 5, 2009 and 2.5 times for the quarter ended March 30, 2008.

Expenditures for property, plant and equipment of $3.0 million in the first quarter of 2009 primarily consisted of expenditures for machinery and equipment, including instruments used for demonstration as part of our marketing programs. 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

 

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2009 to be approximately $20 to $25 million, primarily for the development and introduction of new products, demonstration equipment and upgrades and incremental improvements to our enterprise resource planning (“ERP”) system.

Other assets, net decreased $5.2 million to $29.3 million as of April 5, 2009 compared to $34.5 million as of December 31, 2008, primarily due to a $3.6 million decrease in the value of our put right and a decrease in other intangible assets. Other assets, net at April 5, 2009 included $14.3 million for the value of a put right related to our ARS.

Accounts payable increased $3.7 million to $38.7 million as of April 5, 2009 compared to $35.0 million as of December 31, 2008. The increase resulted primarily from the timing of payments related to inventory purchases.

Other current liabilities increased $5.7 million to $39.4 million as of April 5, 2009 compared to $33.7 million as of December 31, 2008. The increase resulted primarily from a reclassification of $15.4 million of unrecognized tax benefits from long-term to current, partially offset by a decrease in our value added tax liability and our derivative liabilities.

Other liabilities decreased $15.2 million to $27.1 million as of April 5, 2009 compared to $42.3 million as of December 31, 2008. The decrease resulted primarily from the reclassification of $15.4 million of unrecognized tax benefits from long-term to current.

New Accounting Pronouncements

See Note 20 of the Condensed Notes to the Consolidated Financial Statements for a discussion of new accounting pronouncements.

Off-Balance Sheet Arrangements

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

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in our reported market risks and risk management policies since the filing of our 2008 Annual Report on Form 10-K, which was filed with the SEC on February 20, 2009.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

 

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Changes in Internal Control Over Financial Reporting

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

Part II - Other Information

 

Item 1A. Risk Factors

A restated description of the risk factors associated with our business is set forth below. This description includes any material changes to and supersedes the description of the risk factors included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008. The risks and uncertainties described below are not the only ones facing us. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations and financial condition.

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. Our significant competitors include, among others: JEOL Ltd., Hitachi Ltd. and Carl Zeiss SMT A.G. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other.

A substantial investment by customers is required for them 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 movements.

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 75% of our products in the last month of each quarter. As any one shipment may be significant to meeting our quarterly sales projection, any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.

 

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

Since a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. Approximately 61% and 66%, respectively, of our revenues in the first quarter of 2009 and the year ended December 31, 2008 came from outside of the U.S. We have manufacturing facilities in Brno, Czech Republic and Eindhoven, the Netherlands 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., SARS and avian 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 of China Restrictions on Hazardous Substances (“RoHS”) regulations could lead to delays in the importation of products into China;

 

   

political and economic instability; and

 

   

risk of failure of internal controls and failure to detect unauthorized transactions.

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, Research and Industry and Life Sciences market segments, which, along with Service and Components sales, accounted for the following amounts (in thousands) and percentages of our net sales for the periods indicated:

 

     Thirteen Weeks Ended  
     April 5, 2009     March 30, 2008  

Electronics

   $ 29,359    20.7 %   $ 46,521    30.7 %

Research and Industry

     58,338    41.1 %     61,097    40.3 %

Life Sciences

     20,865    14.7 %     9,596    6.3 %

Service and Components

     33,271    23.5 %     34,432    22.7 %
                          
   $ 141,833    100.0 %   $ 151,646    100.0 %
                          

The largest sub-parts of the Electronics market 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,

 

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prospects, financial condition and results of operations. Since the second half of 2007, we have experienced a significant decline in bookings and revenue in our Electronics segment due to a general decline in semiconductor and data storage capital equipment spending. Global economic conditions continue to be volatile and appear to be weakening and continued economic weakness is expected to reduce demand for our customers’ products and causes our business to suffer as a result. During downturns, our sales and gross profit margins generally decline.

The Research and Industry market is also affected by overall economic conditions, but is not as cyclical as the Electronics market. However, Research and Industry customer spending is highly dependent on governmental and private funding levels and timing, which can vary depending on budgetary or economic constraints and changes in administration. The current global financial crisis may result in cutbacks in funding by various governments and institutions, which could eventually result in reduced orders of our products. In addition, institutional endowments and philanthropy, which are a source of funding of some customer purchases, are threatened by the recent significant declines in capital markets world-wide. Recently, both philanthropic giving and endowments have declined.

The Life Sciences market is a smaller and still emerging market, and the tools we sell into that market often have average selling prices of over $1.0 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.

As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who often 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 history shows that our revenues and bookings normally peak in the fourth quarter. Bookings are normally the lowest in the second quarter and revenues are normally lowest in the third quarter.

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 the 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

 

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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. For the first quarter of 2009 and the year ended December 31, 2008, approximately 35% to 45% of our revenue was denominated in euros, while more than half of our expenses were denominated in euros or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, especially the euro, 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.

We use option contracts and zero cost collars in an effort to reduce the exposure of our cash flows to exchange rate fluctuations. These contracts are considered derivatives. We are required to carry all open derivative contracts on our balance sheet at fair value. When specific accounting criteria have been met, derivative contracts can be designated as hedging instruments and changes in fair value related to these derivative contracts are recorded in other comprehensive income, rather than net income, until the underlying hedged transaction affects net income, which is at the time the gains or losses related to the derivatives are recorded in cost of goods sold. We are required to record changes in fair value for derivatives not designated as hedges in net income in the current period. Our ability to designate derivative contracts as hedges significantly reduces the volatility in our operating results due to changes in the fair value of the derivative contracts.

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. Based on our evaluations, we did not record any charges related to hedge dedesignations in the first quarter of 2009 or in the year ended December 31, 2008. However, we recorded a $1.2 million and a $1.3 million charge, respectively, for hedge ineffectiveness related to our cash flow hedges in the first quarter of 2009 and in all of 2008 as a result of currency fluctuations. 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. Foreign currency losses recorded in other income (expense), inclusive of the impact of derivatives which are not designated as hedges, totaled $1.4 million in the first quarter of 2009 and $4.9 million in the year ended December 31, 2008.

We seek to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and non-performance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at April 5, 2009.

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.

In addition, the significant recent improvement of the value of the dollar from the end of the third quarter

 

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of 2008 will result in lower expected revenue and bookings for us, which could affect the comparability of our period over period financial results.

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

The global economy is undergoing a period of slowdown and the future economic climate may continue to be less favorable than that of recent years. 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 severe economic distress, hardship, bankruptcy and insolvency among our customers will increase. This may make it more difficult to collect on receivables.

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

If a higher portion of our net sales in any given period have lower gross margins, our overall gross margins and earnings would be negatively affected. For example, during 2008, our net sales contained a smaller portion of sales from our relatively higher margin products within the Electronics segment, which contributed to a decrease in our overall gross margins in 2008 compared to 2007. Our Electronics business, which ultimately depends on consumers who buy electronic devices, has been particularly hard hit by the downturn. To the extent that this market segment continues to suffer, our overall margins will continue to be under pressure.

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 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 and may not provide their intended long-term benefits. Failure to achieve these benefits would have a material adverse impact on our financial position, results of operations or cash flow.

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.

At various times, we have restructured our business. In 2006, we undertook a restructuring that caused us to record restructuring, reorganization, relocation and severance charges of approximately $12.6 million.

In 2008, we announced a restructuring that will involve estimated cash charges ranging from $6.8 million to $8.0 million, $5.3 million of which has been spent through April 5, 2009. The plan includes relocating part of our supply chain and relocating and outsourcing some manufacturing to reduce cost of goods sold and improve imbalances in our foreign currency exposures. In addition, we will be severing some employees and aiming to lower operating expenses. The expense of the restructuring adversely affected our financial performance for 2008 and the first quarter of 2009. Moreover, the cash charges for the 2008 restructuring is only an estimate and actual results may differ. If we have additional activities beyond what is currently planned, we may incur additional restructuring and related expenses.

Restructuring could 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

 

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unintended employee attrition. Loss of sales, service and engineering talent, in particular, could damage our business. The restructuring will require substantial management time and attention and may 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.

It is also the case that our 2008 restructuring plan may fail to achieve the stated aims for reasons similar to those described in the prior paragraph.

During the course of executing the 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.

A portion of our manufacturing operations are going to be relocated between existing facilities or outsourced to third-parties, which will involve significant costs and the risk of operational interruption.

In the second quarter of 2008, we began implementing a plan to shift manufacturing for certain products to other of our factories and third parties in Asia and the U.S. Moving product manufacturing includes, among others, the following risks:

 

   

failing to transfer product knowledge from one site to another or to a third party;

 

   

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

 

   

potential vendor problems.

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. Dependence on outsourced information technology and other administrative functions may impair our ability to operate effectively.

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 continue to evaluate additional outsourcing. If our contract manufacturers or other outsourcers fail to perform their obligations in a timely manner or at satisfactory quality levels, our ability to bring products to market and our reputation could suffer. For example, during a market upturn, our contract manufacturers may be unable to meet our demand requirements, and replacement manufacturers may be unavailable, which may preclude us from fulfilling our customer orders on a timely basis. The ability of these manufacturers to perform is largely outside of our control. Moreover, delays could cause us to suffer penalties with our customers, which could also impact our profitability. In addition, we are moving towards outsourcing significant portions of our information technology (“IT”) function and other administrative functions. Since IT is critical to our operations, any failure to perform on the part of the IT providers could impair our ability to operate effectively. Beyond the risks outlined above, problems with manufacturing or IT outsourcing could result in lower revenues and otherwise negatively impact our results of operations and our stock price.

 

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A significant percentage of our non-current investments in marketable securities consist of auction rate securities. If a liquid market for these securities is not maintained, we may be unable to dispose of these securities, which could negatively impact our liquidity, cash on hand and results of operations.

At April 5, 2009, we held auction rate securities (“ARS”) having a fair value of $95.4 million, which have long-term stated maturities for which the interest rates are reset through a Dutch auction, which generally occurs every 28 days. The auctions have historically provided a liquid market for these securities as investors could readily sell their investments at auction. With the liquidity issues experienced in global credit and capital markets, the ARS held by us have experienced multiple failed auctions, beginning on February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders. We expect that the market for these securities will remain illiquid until the securities are either redeemed or mature. During the fourth quarter of 2008, we entered into a settlement agreement with UBS Financial Services Inc. (“UBS”), the issuer of the ARS, pursuant to which UBS would repurchase all of our ARS at par on or before June 30, 2010. As a result of this settlement, we reclassified our ARS from available for sale securities and into trading securities. In connection with the reclassification into trading securities, we reclassified the temporary impairment related to these securities of $18.4 million from accumulated other comprehensive income and into other income, net during 2008. Offsetting this loss within other income, net was a $17.9 million gain related to the put right we obtained pursuant to the agreement. Our inability to dispose of our ARS prior to June 30, 2010 could negatively impact our liquidity and cash on hand, which, in turn, could cause us to forego potentially beneficial operational and strategic transactions or to incur additional indebtedness. During the first quarter of 2009, we pledged our ARS as collateral against the UBS Credit Facility and drew down $70.8 million, or approximately 75% of the value of the ARS. The proceeds derived from any sales of the ARS we hold in accounts with UBS will be applied to repay any outstanding obligations under the UBS Credit Facility. We expect to exercise our right in June 2010. Additionally, we could be adversely impacted if UBS is unable to meet its obligations under the repurchase agreement in 2010. Changes in the fair value of the ARS and the put right, which were an increase of $3.7 million and a decrease of $3.6 million, respectively, in the first quarter of 2009, are recognized currently as a component of other income, net.

We rely on a limited number of parts, components and equipment manufacturers. 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. We currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products. Some key parts, however, may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, or ETG, AP Tech, Frencken Mechatronics B.V. and AZD Praha STR 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. 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, world-wide restrictions governing the use of certain hazardous substances in electrical and electronic equipment (RoHS regulations) may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, because we only have a few equipment suppliers, we may be more exposed to future cost increases for this equipment.

 

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Our 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 also may seek to acquire new technologies or operations from external sources. 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.

During the fourth quarter of 2006, we sold one such investment, Knights Technology. During the third quarter of 2006, we sold a cost-method investment for a gain of $5.2 million and wrote-off the remaining such investments, incurring an aggregate charge of $3.9 million.

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.

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

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

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

A relatively small number of customers account for a large percentage of our net revenues, although no customer has accounted for more than 10% of total 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 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.

We have significant indebtedness. As of April 5, 2009, we had total convertible long-term debt of $100.0 million due in 2013. We also had $70.8 million outstanding under our short-term line of credit facility with UBS. In addition, we have a secured credit line for $100.0 million and also have access to a $50.0 million yen unsecured uncommitted bank borrowing facility in Japan. However, no amounts were outstanding on these credit facilities at April 5, 2009. The degree to which we are leveraged could have important consequences, including but not limited to the following:

 

   

our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, general corporate or other purposes may be limited;

 

   

our credit line, which was established in June 2008, contains numerous restrictive covenants, which, if not adhered to, could result in the cancellation of the entire line;

 

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our shareholders may be diluted if holders of all or a portion of our outstanding 2.875% subordinated convertible notes elect to convert their notes, up to a maximum aggregate of 3,407,155 shares of our common stock. These shares were not included in our diluted share count for the quarter ended April 5, 2009 or the year ended December 31, 2008, because they were antidilutive; and

 

   

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.

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 assure you 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.

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 existing customers, our results of operations will be negatively impacted.

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

 

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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 coupled with the U.S. government’s commitment to military related expenditures 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 and could negatively impact our stock price.

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 factors that could affect the length of time it takes us to complete a sale depend on many elements, including:

 

   

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

 

   

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

 

   

the history of previous sales to a customer;

 

   

the complexity of the customer’s manufacturing processes;

 

   

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

 

   

the economic environment;

 

   

the internal technical capabilities and sophistication of the customer; and

 

   

the capital expenditure budget cycle of the customer.

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

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

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

Our customers experience rapid technological changes, with which we must keep pace, but we may be unable to introduce new products on a timely and cost-effective basis to meet such changes.

Customers in each of our market segments experience rapid technological change and new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to

 

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develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices and to accurately predict technology transitions. 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 development has 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. For example, we have invested substantial resources in our new Phenom desktop imaging tool and the Titan scanning transmission electron microscope (“S/TEM”), and further development may be required to take full advantage of these products. If the completion of further development is delayed, potential revenue growth could be deferred or may not happen at all.

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.

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 used by our customers, may be infringing one or more of these patents. To date, none of these allegations has resulted in litigation. Our competitors or other entities may, however, 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 infringement claims, we will evaluate our position and consider the available

 

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

We 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. We derived approximately 61% and 66%, respectively, of our sales from foreign countries in the first quarter of 2009 and the year ended December 31, 2008. 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.

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

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

 

   

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

 

   

our ability to utilize recorded deferred tax assets;

 

   

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

 

   

changes in tax laws or the interpretation of such laws.

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

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

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

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

 

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

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.

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.

Terrorist acts, acts of war and natural disasters may seriously harm our business and revenues, costs and expenses and financial condition.

Terrorist acts, acts of war and natural disasters, wherever located around the world, may cause damage or disruption to us or our employees, facilities, partners, suppliers, distributors and customers, any and all of which could significantly impact our revenues, expenses and financial condition. This impact could be disproportionately greater on us than on other companies as a result of our significant international presence. The potential for future terrorist attacks, the national and international responses to terrorist attacks and other acts of war or hostility have created many economic and political uncertainties that could adversely affect our business and results of operations in ways that cannot presently be predicted. We are largely uninsured for losses and interruptions caused by terrorist acts, acts of war and natural disasters, including at our headquarters located in Oregon, which is in a region subject to earthquakes.

Some of our systems use hazardous gases and 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 or x-ray leak or extreme pressure release, could result in substantial liability and could also significantly damage customer relationships 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.

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.

 

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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 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. 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.

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 shareholders.

 

Item 6. Exhibits

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

 

    3.1

   Third Amended and Restated Articles of Incorporation.(1)

    3.2

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

    3.3

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

  10.1

   Form of Credit Line Account Application and Agreement, dated as of March 25, 2009, by and between UBS Bank USA and FEI Company.

  10.2

   Form of First Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009 by and among UBS Bank USA, FEI Company and UBS Financial Services, Inc.

  10.3

   Form of Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, executed by FEI Company.

  10.4

   Form of Second Addendum to Credit Line Account Application and Agreement, dated as of March 25, 2009, by and among UBS Bank USA, FEI Company and UBS Financial Services Inc.

  10.5

   Form of Important Notice on Interest Rates and Payments, dated as of March 25, 2009, executed by FEI Company.

  10.6

   First Amendment to Credit Agreement, Security and Pledge Agreement and Disclosure Letter, dated as of March 3, 2009, by and among FEI Company, the Guarantors identified on the signature pages thereto, the Lenders identified on the signature pages thereto and JPMorgan Chase Bank, N.A., as Administrative Agent.(4)

  31.1

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

  31.2

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

  32.1

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

  32.2

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

 

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

 

(2) Incorporated by reference to Exhibit A to Exhibit 4.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission on July 27, 2005.

 

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

 

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

 

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SIGNATURES

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

 

    FEI COMPANY
Dated: May 7, 2009     /s/ DON R. KANIA
    Don R. Kania
    President and Chief Executive Officer
    (Principal Executive Officer)
      /s/ RAYMOND A. LINK
    Raymond A. Link
    Executive Vice President and Chief Financial Officer
    (Principal Financial Officer)

 

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