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 September 27, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File No. 000-22780
 _____________________________________________
FEI COMPANY
(Exact name of registrant as specified in its charter)
 _____________________________________________
Oregon
 
93-0621989
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5350 NE Dawson Creek Drive, Hillsboro, Oregon
 
97124-5793
(Address of principal executive offices)
 
(Zip Code)
 
 
 
503-726-7500
(Registrant’s telephone number, including area code)
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  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
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
o
 
 
 
 
 
Non-accelerated filer
o
(Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x
The number of shares of common stock outstanding as of October 26, 2015 was 40,855,777.
 


FEI COMPANY
FORM 10-Q QUARTERLY REPORT
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 6.
 
 


1

PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
FEI Company and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)
 
September 27,
2015
 
December 31,
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
381,858

 
$
300,507

Short-term investments in marketable securities
36,015

 
61,688

Short-term restricted cash
23,444

 
15,698

Receivables, net of allowances for doubtful accounts of $2,977 and $2,990
208,909

 
227,354

Inventories
191,648

 
176,440

Deferred tax assets
8,652

 
8,225

Other current assets
31,050

 
35,503

Total current assets
881,576

 
825,415

Non-current investments in marketable securities
34,016

 
85,865

Long-term restricted cash
24,758

 
38,369

Property, plant and equipment, net of accumulated depreciation of $129,070 and $132,807
152,919

 
163,794

Intangible assets, net of accumulated amortization of $34,572 and $28,930
37,815

 
54,111

Goodwill
145,639

 
170,773

Deferred tax assets
8,129

 
6,605

Non-current inventories
47,401

 
50,731

Other assets, net
19,001

 
22,155

Total Assets
$
1,351,254

 
$
1,417,818

 
 
 
 
Liabilities and Shareholders’ Equity
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
67,788

 
$
78,308

Accrued payroll liabilities
37,304

 
38,599

Accrued warranty reserves
13,159

 
13,005

Short-term deferred revenue
107,485

 
96,924

Income taxes payable
4,896

 
5,299

Accrued restructuring, reorganization, relocation and severance
858

 
9,161

Other current liabilities
58,289

 
56,146

Total current liabilities
289,779

 
297,442

Long-term deferred revenue
39,765

 
34,021

Deferred tax liabilities
4,694

 
9,576

Other liabilities
31,752

 
35,454

Commitments and contingencies

 

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

 
—

Common stock - 70,000 shares authorized; 41,065 and 41,797 shares issued and outstanding, no par value
556,452

 
607,250

Retained earnings
501,944

 
461,586

Accumulated other comprehensive loss
(73,132
)
 
(27,511
)
Total Shareholders’ Equity
985,264

 
1,041,325

Total Liabilities and Shareholders’ Equity
$
1,351,254

 
$
1,417,818


See accompanying Condensed Notes to the Consolidated Financial Statements.

2

FEI Company and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Net sales:
 
 
 
 
 
 
 
Products
$
151,843

 
$
169,131

 
$
479,487

 
$
517,459

Service
60,718

 
58,625

 
178,079

 
173,517

Total net sales
212,561

 
227,756

 
657,566

 
690,976

Cost of sales:
 
 
 
 
 
 
 
Products
74,639

 
83,653

 
234,965

 
262,327

Service
33,645

 
35,522

 
100,948

 
103,893

Total cost of sales
108,284

 
119,175

 
335,913

 
366,220

Gross profit
104,277

 
108,581

 
321,653

 
324,756

Operating expenses:
 
 
 
 
 
 
 
Research and development
23,825

 
25,312

 
70,275

 
77,178

Selling, general and administrative
43,467

 
49,463

 
132,382

 
148,513

Impairment of goodwill and long-lived assets
26,596

 
—

 
26,596

 
—

Restructuring, reorganization, relocation and severance
(423
)
 
7,699

 
(565
)
 
11,259

Total operating expenses
93,465

 
82,474

 
228,688

 
236,950

Operating income
10,812

 
26,107

 
92,965

 
87,806

Other expense:
 
 
 
 
 
 
 
Interest income
300

 
226

 
765

 
599

Interest expense
(191
)
 
(155
)
 
(425
)
 
(427
)
Other, net
(1,481
)
 
(902
)
 
(3,269
)
 
(2,079
)
Total other expense, net
(1,372
)
 
(831
)
 
(2,929
)
 
(1,907
)
Income before income taxes
9,440

 
25,276

 
90,036

 
85,899

Income tax (benefit) expense
(978
)
 
3,629

 
14,274

 
14,228

Net income
$
10,418

 
$
21,647

 
$
75,762

 
$
71,671

 
 
 
 
 
 
 
 
Basic net income per share
$
0.25

 
$
0.52

 
$
1.82

 
$
1.70

Diluted net income per share
$
0.25

 
$
0.51

 
$
1.80

 
$
1.68

Cash dividends declared per share
$
0.30

 
$
0.25

 
$
0.85

 
$
0.62

 
 
 
 
 
 
 
 
Shares used in per share calculations:
 
 
 
 
 
 
 
Basic
41,404

 
41,891

 
41,624

 
42,053

Diluted
41,820

 
42,465

 
42,050

 
42,624


See accompanying Condensed Notes to the Consolidated Financial Statements.

3

FEI Company and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
(Unaudited)

 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Net income
$
10,418

 
$
21,647

 
$
75,762

 
$
71,671

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
Change in cumulative translation adjustment
(8,818
)
 
(37,778
)
 
(47,842
)
 
(39,534
)
Change in unrealized (loss) gain on available-for-sale securities
(8
)
 
(52
)
 
40

 
(12
)
Change in minimum pension liability
8

 
45

 
79

 
78

Changes due to cash flow hedging instruments:
 
 
 
 
 
 
 
Net loss on hedge instruments
(1,151
)
 
(5,475
)
 
(6,259
)
 
(7,250
)
Reclassification to net income of previously deferred losses related to hedge derivatives instruments
2,494

 
2,534

 
8,361

 
4,163

Comprehensive income (loss)
$
2,943

 
$
(19,079
)
 
$
30,141

 
$
29,116


See accompanying Condensed Notes to the Consolidated Financial Statements.

4

FEI Company and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited) 
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
Cash flows from operating activities:
 
 
 
Net income
$
75,762

 
$
71,671

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
18,364

 
22,379

Amortization
8,480

 
10,478

Stock-based compensation
16,615

 
17,456

Impairment of goodwill and long-lived assets
26,596

 
322

Other
(65
)
 
—

Income taxes receivable, net
(4,702
)
 
(4,010
)
Deferred income taxes
(6,756
)
 
(2,275
)
Decrease (increase), net of acquisitions, in:
 
 
 
Receivables, net
11,542

 
(27,840
)
Inventories
(31,618
)
 
(26,772
)
Other assets
8,393

 
(4,882
)
Increase (decrease), net of acquisitions, in:
 
 
 
Accounts payable
(7,278
)
 
9,655

Accrued payroll liabilities
(1,625
)
 
(9,872
)
Accrued warranty reserves
477

 
(288
)
Deferred revenue
21,931

 
11,534

Accrued restructuring, reorganization, relocation and severance
(7,689
)
 
6,709

Other liabilities
6,306

 
(1,667
)
Net cash provided by operating activities
134,733

 
72,598

Cash flows from investing activities:
 
 
 
Decrease (increase) in restricted cash
1,616

 
(3,034
)
Acquisition of property, plant and equipment
(10,109
)
 
(35,429
)
Payments for acquisitions, net of cash acquired
(5,377
)
 
(65,049
)
Purchase of investments in marketable securities
(48,240
)
 
(189,621
)
Redemption of investments in marketable securities
125,902

 
175,424

Purchase of patents
(2,436
)
 
(736
)
Net cash provided by (used in) investing activities
61,356

 
(118,445
)
Cash flows from financing activities:
 
 
 
Dividends paid on common stock
(33,340
)
 
(20,619
)
Withholding taxes paid on issuance of vested restricted stock units
(3,115
)
 
(1,784
)
Proceeds from exercise of stock options and employee stock purchases
10,856

 
10,628

Excess tax benefit for share based payment arrangements
934

 
2,096

Repurchases of common stock
(72,575
)
 
(40,315
)
Net cash used in financing activities
(97,240
)
 
(49,994
)
Effect of exchange rate changes
(17,498
)
 
(15,888
)
Increase (decrease) in cash and cash equivalents
81,351

 
(111,729
)
Cash and cash equivalents:
 
 
 
Beginning of period
300,507

 
384,170

End of period
$
381,858

 
$
272,441

Supplemental Cash Flow Information:
 
 
 
Cash paid for income taxes, net
$
22,422

 
$
14,458

Cash paid for interest
279

 
261

Increase in fixed assets related to transfers from inventories
4,932

 
4,345

Dividends declared but not paid
12,453

 
10,461

Accrued purchases of plant and equipment
1,675

 
986

Accrued repurchases of common stock
1,095

 
—

See accompanying Condensed Notes to the Consolidated Financial Statements.

5

FEI COMPANY AND SUBSIDIARIES
CONDENSED NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1.
ORGANIZATION AND BASIS OF PRESENTATION
Nature of Business
We are a leading supplier of scientific instruments and related services for nanoscale applications and solutions for industry and science. We report our revenue based on a group structure organization, which we categorize as the Industry Group and the Science Group.
Our products include transmission electron microscopes (“TEMs”); scanning electron microscopes (“SEMs”); DualBeamTM systems which combine a SEM and a focused ion beam system (“FIB”) on a single platform; stand-alone FIBs; high-performance optical microscopes, pore-scale micro computed tomography (“microCT”) equipment, three-dimensional modeling software, and service and components to support these products. TEMs provide the highest resolution images of samples and their internal structure, down to the atomic level. SEMs provide detailed images of the surface and shape of samples. Optical microscopes provide a wider field of view than SEMs and TEMs. DualBeams and FIBs image, manipulate, mill and deposit material for a variety of purposes, including preparation of samples for TEMs. Substantially all of these product categories are sold into all of our markets. Individual models of our products are increasingly designed to provide specific solutions and applications in each of our markets.
Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small-stage DualBeam systems”).
Our significant research and development and manufacturing operations are located in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech Republic; and our software development is managed principally from Bordeaux, France. Our sales and service operations are conducted in the United States (U.S.) and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.
Basis of Presentation
The consolidated financial statements include the accounts of FEI Company and our wholly-owned subsidiaries (collectively, “FEI”). All significant intercompany balances and transactions have been eliminated in consolidation.
The accompanying consolidated financial statements and condensed footnotes have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. The results of operations for the thirteen and thirty-nine week periods ended September 27, 2015 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, 2014, which was filed with the Securities and Exchange Commission (“SEC”) on February 23, 2015.
Use of Estimates in Financial Reporting
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
Significant accounting policies and estimates underlying the accompanying consolidated financial statements include:
•
the timing of revenue recognition;
•
valuations of excess and obsolete inventory;
•
the lives and recoverability of equipment and other long-lived assets;
•
the valuation of goodwill;
•
restructuring, reorganization, relocation and severance costs;
•
tax valuation allowances and unrecognized tax benefits;

6

•
stock-based compensation; and
•
accounting for derivatives.
It is reasonably possible that management's estimates may change in the future.
Reclassifications
Certain reclassifications to prior year consolidated financial statements have been made to conform to current period presentation. These reclassifications had no effect on our consolidated statements of operations.
NOTE 2.
EARNINGS PER SHARE
Following is a reconciliation of basic earnings per share (“EPS”) and diluted EPS (in thousands, except per share amounts):
 
Thirteen Weeks Ended
 
Thirteen Weeks Ended
 
September 27, 2015
 
September 28, 2014
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic EPS
$
10,418

 
41,404

 
$
0.25

 
$
21,647

 
41,891

 
$
0.52

Dilutive effect of stock options, restricted stock units, and shares issuable to Philips
—

 
416

 
—

 
—

 
574

 
(0.01
)
Diluted EPS
$
10,418

 
41,820

 
$
0.25

 
$
21,647

 
42,465

 
$
0.51

 
Thirty-Nine Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27, 2015
 
September 28, 2014
 
Net
Income
 
Shares
 
Per Share
Amount
 
Net
Income
 
Shares
 
Per Share
Amount
Basic EPS
$
75,762

 
41,624

 
$
1.82

 
$
71,671

 
42,053

 
$
1.70

Dilutive effect of stock options, restricted stock units, and shares issuable to Philips
—

 
426

 
(0.02
)
 
—

 
571

 
(0.02
)
Diluted EPS
$
75,762

 
42,050

 
$
1.80

 
$
71,671

 
42,624

 
$
1.68


The following table sets forth the schedule of anti-dilutive securities excluded from the computation of diluted EPS (number of shares, in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Stock options
659

 
361

 
498

 
246

Restricted stock units
10

 
10

 
12

 
8

NOTE 3.
STOCK-BASED COMPENSATION
Employee Share Purchase Plan
At our 2015 Annual Meeting of Shareholders, which was held on May 7, 2015, our shareholders approved an amendment to our Employee Share Purchase Plan to increase the number of shares of our common stock reserved for issuance under the plan from 4,200,000 to 4,450,000.
1995 Stock Incentive Plan
Also at our 2015 Annual Meeting of Shareholders, our shareholders approved an amendment to our 1995 Stock Incentive Plan (the “1995 Plan”) to increase the number of shares of our common stock reserved for issuance under the plan from 11,250,000 to 11,500,000.

7

The following table sets forth certain information regarding the 1995 Plan:
 
September 27,
2015
Shares available for grant
1,722,912

Shares of common stock reserved for issuance pursuant to outstanding exercisable securities
3,370,188

The following table sets forth certain information regarding all options outstanding and exercisable:
 
September 27, 2015
 
Options
Outstanding
 
Options
Exercisable
Number
999,468

 
302,460

Weighted average exercise price
$
69.15

 
$
52.62

Aggregate intrinsic value
$
9.7
 million
 
$
7.0
 million
Weighted average remaining contractual term
5.1 years

 
3.5 years

The following table sets forth certain information regarding all RSUs nonvested and expected to vest:
 
September 27, 2015
 
RSUs Nonvested
 
RSUs Expected
to Vest
Number
647,808

 
575,941

Weighted average grant date per share fair value
$
74.36

 
$
73.64

Aggregate intrinsic value
$
46.8
 million
 
$
41.6
 million
Weighted average remaining term to vest
1.4 years

 
1.3 years

As of September 27, 2015, unrecognized stock-based compensation related to outstanding, but unvested stock options and RSUs was $45.1 million, which will be recognized over the weighted average remaining vesting period of 1.9 years.
Stock-Based Compensation Expense
Our stock-based compensation expense was included in our consolidated statements of operations as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Cost of sales
$
925

 
$
912

 
$
2,514

 
$
2,495

Research and development
742

 
762

 
2,031

 
2,092

Selling, general and administrative
4,454

 
4,820

 
12,070

 
12,869

Total stock-based compensation
$
6,121

 
$
6,494

 
$
16,615

 
$
17,456

NOTE 4.
CREDIT FACILITIES AND RESTRICTED CASH
Multibank Credit Agreement
We have a multibank credit agreement (the “Credit Agreement”), which provides for a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. The Credit Agreement expires in April 2016. We may, upon notice to JPMorgan Chase Bank, N.A., the Administrative 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 September 27, 2015, 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.

8

Credit Facility
In July 2015, we entered into a credit facility agreement (the “Credit Facility”) with HSBC Bank plc (“HSBC”), whereby HSBC has provided us with a revocable, uncommitted credit facility up to an amount of 25.0 million euro. The purpose of this facility is to provide a more efficient means of issuing guarantees to our customers when required by contractual terms. Under the terms of the Credit Facility, when requested, HSBC will issue bank guarantees on behalf of the company and our affiliates. Issuance of the guarantee does not create a liability to the company unless it is called by the customer, at which point we would record a liability for the amount that is due under the guarantee to the bank. As of September 27, 2015, HSBC has issued $4.5 million in guarantees under the Credit Facility and we have no liabilities outstanding under the Credit Facility.
Restricted Cash
As part of our contracts with certain customers, we are required to provide letters of credit or bank guarantees which these customers can draw against in the event we do not perform in accordance with our contractual obligations. Bank guarantees and letters of credit outstanding as of September 27, 2015 were approximately $53.9 million. Restricted cash balances securing bank guarantees that expire within 12 months of the balance sheet date are recorded as a current asset on our consolidated balance sheets. Restricted cash balances securing bank guarantees that expire beyond 12 months from the balance sheet date are recorded as long-term restricted cash on our consolidated balance sheets.
NOTE 5.
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 a long-term asset. 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):
 
September 27,
2015
 
December 31,
2014
Raw materials and assembled parts
$
59,728

 
$
61,644

Service inventories, estimated current requirements
11,655

 
12,398

Work-in-process
83,061

 
76,402

Finished goods
37,204

 
25,996

Total current inventories
$
191,648

 
$
176,440

Non-current inventories
$
47,401

 
$
50,731

NOTE 6.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The roll-forward of activity related to our goodwill was as follows (in thousands):
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
Balance, beginning of period
$
170,773

 
$
136,152

Goodwill additions
4,100

 
46,880

Goodwill impairment
(18,156
)
 
—

Goodwill adjustments
(11,078
)
 
(5,212
)
Balance, end of period
$
145,639

 
$
177,820

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets acquired in connection with our acquisitions. Additions to goodwill represent goodwill from acquisitions made during the period. See further discussion of goodwill impairment below. Adjustments to goodwill include translation adjustments resulting from fluctuations in the value of goodwill held in currencies other than U.S. dollars, as well as adjustments made for the finalization of the purchase price allocations.

9

Acquisition of Eisenberg Bros Ltd.
On January 9, 2015 we acquired certain assets and liabilities of Eisenberg Bros Ltd. (“EB”), which previously operated as our exclusive agent in Israel of FEI products and services.
The total purchase price of the acquisition was $5.4 million. We paid $0.2 million in transaction costs, which were expensed as incurred and are recorded in selling, general and administrative costs in our consolidated statements of operations. The total purchase price was allocated to the net tangible and intangible assets acquired based on their preliminary fair values as of January 9, 2015. The fair value of net tangible liabilities assumed was $0.1 million and the fair value of net intangible assets acquired was $1.4 million, which consisted solely of customer relationships that are being amortized over a period of 5 years. The excess of the purchase price over the fair value of the net assets acquired was $4.1 million, which was recorded as goodwill in the Industry Group and is primarily related to expected future cash flows from synergies arising from the establishment of a sales and service workforce in Israel.
No pro forma financial information has been provided for this acquisition as it is not material.
Impairment of Goodwill and Long-Lived Assets
In accordance with Accounting Standards Codification 350 (“ASC 350”), Intangibles - Goodwill and Other, we perform an impairment analysis of goodwill and other indefinite lived intangible assets on an annual basis and whenever events or changes in circumstances indicate that it is more likely than not that these assets may be impaired. The continued decline in oil prices has adversely affected our oil and gas business within our Industry Group segment, resulting in lower expected future revenue, operating income, and cash flow. In the thirteen weeks ended September 27, 2015, we updated our strategic plan for the oil and gas business and as a result reduced our forecasted cash flows. This change was deemed to be a triggering event for impairment testing of both oil and gas long-lived assets and goodwill within our Industry Group. Accordingly, we performed a goodwill impairment test following the two step process defined in ASC 350. We have recognized preliminary impairment charges of $8.4 million on developed technology intangible assets and $18.2 million on goodwill. The total preliminary impairment charge of $26.6 million is included in impairment of goodwill and long-lived assets on our consolidated statements of operations within operating expenses for the thirteen and thirty-nine week periods ended September 27, 2015.
In performing step one of the two step impairment test, we first assessed the long-lived assets within the reporting unit for impairment. This assessment was done at the lowest level for which identifiable cash flows are available. In order to determine the fair value of the reporting unit, we first assessed the fair value of the existing intangible assets using discounted cash flow models based on estimated future revenue, operating income, and cash flow, as well as the relief from royalty method. The preliminary impairment charges on the developed technology assets were also based on revised lower expectations about future revenues from certain product and service offerings to oil and gas customers.
To calculate the fair value of the reporting unit we used several different methods, including discounted cash flow models and multiples of revenue based on comparable industry participants and transactions. Our determination of the fair value of the reporting unit incorporates multiple assumptions, including future business growth, earnings projections, and the weighted average cost of capital used for purposes of discounting. The result of the analysis showed that the carrying value was in excess of the fair value of the reporting unit. This was due to revised lower short-term expectations about future revenue, operating income, cash flows for the oil and gas business.
In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. This allocation is similar to a purchase price allocation performed in purchase accounting. If the carrying amount of the reporting unit goodwill exceeds the implied goodwill value, an impairment loss should be recognized in an amount equal to that excess. The excess of the carrying value of the reporting unit goodwill exceeded the fair value of goodwill by $18.2 million.
Due to the complexities inherent in the required fair value analysis, we were not able to finalize the impairment calculations prior to reporting on Form 10-Q for the thirteen weeks ended September 27, 2015; however, we determined that an impairment loss could be reasonably estimated. As a result, the impairment charges that have been recognized in the thirteen week period ended September 27, 2015 are preliminary. We are in the process of finalizing the calculation of reporting unit fair value and the carrying value of intangible assets, and expect to finalize the impairment charges in the fourth quarter of 2015. It is reasonably possible the final impairment charges will differ materially from the amounts recorded in the thirteen weeks ended September 27, 2015.
Other Intangible Assets
Patents, trademarks and other acquired intangible assets are amortized using the straight-line method over their estimated useful lives of 2 to 10 years. Customer relationships are amortized using the straight-line method over their estimated useful lives of 5 to 10 years. Developed technology is amortized using the straight-line method over the estimated useful life of the related technology, which ranges from 5.5 to 10 years.

10

The gross amount of our other acquired intangible assets and the related accumulated amortization was as follows (in thousands):
 
September 27,
2015
 
December 31,
2014
Patents, trademarks and other
$
26,687

 
$
25,333

Accumulated amortization
(14,803
)
 
(12,805
)
Net patents, trademarks and other
11,884

 
12,528

Customer relationships
21,358

 
21,739

Accumulated amortization
(7,445
)
 
(5,863
)
Net customer relationships
13,913

 
15,876

Developed technology
21,898

 
33,525

Accumulated amortization
(9,880
)
 
(7,818
)
Net developed technology
12,018

 
25,707

Total intangible assets included in other long-term assets
$
37,815

 
$
54,111

Amortization expense was as follows (in thousands):
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
Patents, trademarks and other
$
3,166

 
$
3,850

Customer relationships
2,002

 
1,882

Developed technology
2,573

 
2,906

Total amortization expense
$
7,741

 
$
8,638

Expected amortization, without consideration for foreign currency effects, is as follows over the next five years and thereafter (in thousands):
 
Patents,
Trademarks
and Other
 
Customer Relationships
 
Developed Technology
 
Total
Remainder of 2015
$
804

 
$
671

 
$
642

 
$
2,117

2016
3,317

 
2,687

 
2,566

 
8,570

2017
2,873

 
2,340

 
2,034

 
7,247

2018
2,081

 
2,274

 
1,492

 
5,847

2019
1,789

 
1,897

 
1,492

 
5,178

Thereafter
1,020

 
4,044

 
3,792

 
8,856

  Total future amortization expense
$
11,884

 
$
13,913

 
$
12,018

 
$
37,815

NOTE 7.
WARRANTY RESERVES
Our products generally carry a one-year warranty. A reserve is established at the time of sale to cover estimated warranty costs and certain commitments for product upgrades as a component of cost of sales on our consolidated statements of operations. Our estimate of warranty cost is primarily based on our history of warranty repairs and maintenance, as applied to systems currently under warranty. For our new products without a history of known warranty costs, we estimate the expected costs based on our experience with similar product lines and technology. While most new products are extensions of existing technology, the estimate could change if new products require a significantly different level of repair and maintenance than similar products have required in the past. Our estimated warranty costs are reviewed and updated on a quarterly basis. Changes to the reserve occur as volume, product mix and warranty costs fluctuate.

11

The following is a summary of warranty reserve activity (in thousands):
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
Balance, beginning of period
$
13,005

 
$
12,705

Reductions for warranty costs incurred
(11,224
)
 
(10,132
)
Warranties issued
11,691

 
9,826

Translation and changes in estimates
(313
)
 
(271
)
Balance, end of period
$
13,159

 
$
12,128

NOTE 8.
INCOME TAXES
Our tax provision for the thirteen and thirty-nine week periods ended September 27, 2015 consisted primarily of taxes accrued in the U.S. and foreign jurisdictions, offset by a decrease in unrecognized tax benefits, interest and penalties of $6.1 million and $8.4 million, respectively, for tax credit positions taken on returns which were either effectively settled or closed for further examination due to the lapse of a statute of limitation. We continue to record a valuation allowance against a portion of our U.S. and foreign deferred tax assets as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.
Deferred Income Taxes
Net deferred tax assets were classified on the balance sheet as follows (in thousands):
 
September 27,
2015
 
December 31,
2014
Deferred tax assets – current
$
8,652

 
$
8,225

Deferred tax assets – non-current
8,129

 
6,605

Deferred tax liabilities – current
(420
)
 
(218
)
Deferred tax liabilities – non-current
(4,694
)
 
(9,576
)
Net deferred tax assets
$
11,667

 
$
5,036

Valuation allowance
$
3,646

 
$
4,350

Unrecognized Tax Benefits
During the thirteen and thirty-nine week periods ended September 27, 2015, unrecognized tax benefits, interest and penalties decreased by $3.8 million and $4.3 million, respectively, primarily due to the recognition of tax credit positions taken on returns which were either effectively settled or closed for further examination due to the lapse of a statute of limitation, offset by accruals for interest and penalties and uncertainty surrounding deferral of foreign income, domestic manufacturing deductions and foreign net operating losses.
We recognize interest and penalties related to unrecognized tax benefits in tax expense.
For our major tax jurisdictions, the following years were open for examination by the tax authorities as of September 27, 2015:
Jurisdiction
 
Open Tax Years
U.S.
 
2012 and forward
The Netherlands
 
2011 and forward
Czech Republic
 
2012 and forward

12

NOTE 9.
RELATED-PARTY ACTIVITY
Related parties with which we had transactions during the thirteen and thirty-nine week periods ended September 27, 2015 were as follows:
•
one of the members of our Board of Directors served on the Board of Directors of Applied Materials, Inc.;
•
one of the members of our Board of Directors serves on the Board of Directors of Electro Scientific Industries, Inc.;
•
one of the members of our Board of Directors serves on the Supervisory Board of TMC BV; and
•
our Chief Executive Officer is on the Board of Trustees for the Oregon Health and Science University Foundation.
Transactions with these related parties were as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Sales to Related Parties
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Product sales:
 
 
 
 
 
 
 
Applied Materials, Inc.
$
—

 
$
230

 
$
161

 
$
2,572

Oregon Health and Science University
1

 
77

 
20

 
326

Electro Scientific Industries, Inc.
4

 
—

 
23

 
—

Total product sales to related parties
5

 
307

 
204

 
2,898

Service sales:
 
 
 
 
 
 
 
Applied Materials, Inc.
—

 
256

 
526

 
611

Oregon Health and Science University
82

 
83

 
241

 
258

Total service sales to related parties
82

 
339

 
767

 
869

Total sales to related parties
$
87

 
$
646

 
$
971

 
$
3,767

Purchases from Related Parties
 
 
 
 
 
 
 
TMC BV
$
142

 
$
395

 
$
1,489

 
$
1,685

Oregon Health and Science University
—

 
41

 
11

 
119

Electro Scientific Industries, Inc.
$
19

 
$
—

 
$
19

 
$
—

Total purchases from related parties
$
161

 
$
436

 
$
1,519

 
$
1,804

Amounts due from (to) related parties were as follows (in thousands):
 
September 27,
2015
TMC BV
$
(230
)
Oregon Health and Science University
73

Electro Scientific Industries, Inc.
(19
)
Due to related parties, net
$
(176
)
NOTE 10.
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.
Purchase Obligations
We have commitments under non-cancelable purchase orders, primarily relating to inventory, totaling $66.0 million at September 27, 2015. These commitments expire at various times through the fourth quarter of 2019.

13

NOTE 11.
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 currently report our segments based on a group structure organization. Our segments are Industry Group and Science Group.
The following tables summarize various financial amounts for each of our business segments (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Sales to External Customers:
 
 
 
 
 
 
 
Industry Group
$
105,280

 
$
107,058

 
$
336,760

 
$
340,722

Science Group
107,281

 
120,698

 
320,806

 
350,254

Total
$
212,561

 
$
227,756

 
$
657,566

 
$
690,976

Gross Profit:
 
 
 
 
 
 
 
Industry Group
$
55,184

 
$
55,101

 
$
176,541

 
$
175,321

Science Group
49,093

 
53,480

 
145,112

 
149,435

Total
$
104,277

 
$
108,581

 
$
321,653

 
$
324,756

 
September 27,
2015
 
December 31,
2014
Goodwill:
 
 
 
Industry Group
$
59,648

 
$
76,858

Science Group
85,991

 
93,915

Total
$
145,639

 
$
170,773

Total Assets:
 
 
 
Industry Group
$
428,561

 
$
444,168

Science Group
438,145

 
470,899

Corporate and Eliminations
484,548

 
502,751

Total
$
1,351,254

 
$
1,417,818

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, because these costs are not directly tied to any individual market segment, they have not been allocated to the market segments. See the 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.
In the thirteen week periods ended September 27, 2015 and September 28, 2014, our top 10 customers accounted for approximately 32.0% and 31.8% of our total annual net revenue, respectively. In the thirty-nine week periods ended September 27, 2015 and September 28, 2014, our top 10 customers accounted for approximately 29.9% and 29.2% of our total annual net revenue, respectively. No single customer accounted for more than 10% of net revenues during the thirteen and thirty-nine week periods ended September 27, 2015 and September 28, 2014.
NOTE 12.
RESTRUCTURING, REORGANIZATION, RELOCATION AND SEVERANCE
Second Quarter 2014 Realignment
During the second quarter of 2014, we implemented a resource realignment plan aimed at improving our operational efficiency by eliminating redundancies in sites and personnel resulting from recent acquisitions and expansion activities. We also shifted our resources to growing regions, such as Asia, and potential growth markets, such as structural biology, oil and gas, near-line semiconductor processing and metals research, in order to better position us to pursue our growth strategy. The realignment plan activities included the consolidation of our three Australia sites in Canberra; the closure of our facility in Delmont, Pennsylvania and relocation of those operations to our new facility in the Czech Republic; relocation of our Japan demonstration facility to our Shanghai facility; selective reductions in staffing, relocations and compensation adjustments related to the foregoing activities and other realignment of management resources. This plan was completed at the end of 2014 and we do not expect to incur any additional costs under this plan.

14

The following table summarizes the costs incurred under our second quarter realignment plan:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Realignment Costs
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Inventory write-offs
$
—

 
$
230

 
$
—

 
$
985

Acceleration of acquisition-related earn-out
—

 
—

 
—

 
2,500

Impairment and other asset write-offs
—

 
1,831

 
—

 
2,297

Restructuring activities
(423
)
 
7,699

 
(565
)
 
9,927

Total
$
(423
)
 
$
9,760

 
$
(565
)
 
$
15,709

These costs have been recorded in our consolidated statements of operations as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Statement of Operations Classification
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Cost of sales
$
—

 
$
230

 
$
—

 
$
985

Selling, general and administrative
—

 
1,831

 
—

 
4,797

Restructuring, reorganization, relocation and severance
(423
)
 
7,699

 
(565
)
 
9,927

Total
$
(423
)
 
$
9,760

 
$
(565
)
 
$
15,709

First Quarter 2014 Restructuring
During the first quarter of 2014, we engaged in a restructuring plan principally aimed at consolidating our sales force in Europe. The $1.3 million cost incurred in implementing the restructuring plan primarily consisted of severance and other employee termination related costs, and was incurred during the first quarter of 2014. We do not expect to incur any additional costs under this plan.
Restructuring, Reorganization, Relocation and Severance Accrual
The following table summarizes the charges, expenditures, write-offs and adjustments related to our restructuring, reorganization, relocation and severance accrual (in thousands):
Thirty-Nine Weeks Ended September 27, 2015
Second Quarter 2014 Realignment
 
Total
Beginning accrued liability
$
9,161

 
$
9,161

Adjustments to expense
(565
)
 
(565
)
Expenditures
(7,113
)
 
(7,113
)
Foreign currency impact
(625
)
 
(625
)
Ending accrued liability
$
858

 
$
858

Thirty-Nine Weeks Ended September 28, 2014
Second Quarter 2014 Realignment
 
First Quarter 2014 Restructuring
 
Group Structure Reorganization
 
Total
Beginning accrued liability
$
—

 
$
—

 
$
50

 
$
50

Charged to expense, net
9,928

 
1,331

 
—

 
11,259

Expenditures
(3,466
)
 
(1,331
)
 
(50
)
 
(4,847
)
Ending accrued liability
$
6,462

 
$
—

 
$
—

 
$
6,462


15

NOTE 13.
FAIR VALUE MEASUREMENTS OF ASSETS AND LIABILITIES
Factors used in determining the fair value of our financial assets and liabilities are summarized into three broad categories:
•
Level 1 – quoted prices in active markets for identical securities as of the reporting date;
•
Level 2 – other significant directly or indirectly observable inputs, including quoted prices for similar securities, interest rates, prepayment speeds and credit risk; and
•
Level 3 – significant inputs that are generally less observable than objective sources, including our own assumptions in determining fair value.
The factors or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities.
Following are the disclosures related to the fair value of our financial assets and (liabilities) (in thousands):
September 27, 2015
Level 1
Level 2
Level 3
Total
Available for sale marketable securities:
 
 
 
 
Agency bonds (1)
$
—

$
34,054

$
—

$
34,054

Certificates of deposit
—

18,477

—

18,477

Municipal bonds
—

721

—

721

Corporate bonds
—

8,715

—

8,715

Trading securities:
 
 
 
 
Equity securities – mutual funds
8,064

—

—

8,064

Derivative contracts, net
—

1,264

—

1,264

Total
$
8,064

$
63,231

$
—

$
71,295

December 31, 2014
Level 1
Level 2
Level 3
Total
Available for sale marketable securities:
 
 
 
 
U.S. treasury notes
$
17,608

$
—

$
—

$
17,608

Agency bonds (1)
—

51,951

—

51,951

Commercial paper
—

13,500

—

13,500

Certificates of deposit
—

19,122

—

19,122

Municipal bonds
—

27,119

—

27,119

Corporate bonds
—

10,902

—

10,902

Trading securities:
 
 
 
 
Equity securities – mutual funds
7,351

—

—

7,351

Derivative contracts, net
—

(2,739
)
—

(2,739
)
Total
$
24,959

$
119,855

$
—

$
144,814

(1) Agency bonds are securities backed by U.S. government-sponsored entities.
We use an income approach to value the assets and liabilities for outstanding derivative contracts using current market information as of the reporting date, such as spot rates, interest rate differentials and implied volatility.
There were no transfers between fair value categories or changes to our valuation techniques during the thirty-nine week period ended September 27, 2015.
We believe the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and other current liabilities are a reasonable approximation of the fair value of those financial instruments because of the nature of the underlying transactions and the short-term maturities involved.

16

NOTE 14.
DERIVATIVE INSTRUMENTS
In the normal course of business, we are exposed to foreign currency risk and we use derivatives to mitigate financial exposure from movements in foreign currency exchange rates.
The aggregate notional amount of outstanding derivative contracts were as follows (in thousands):
 
September 27,
2015
 
December 31,
2014
Cash flow hedges
$
148,000

 
$
222,000

Balance sheet hedges
152,945

 
153,499

Total outstanding derivative contracts
$
300,945

 
$
375,499

The outstanding contracts at September 27, 2015 have varying maturities through the third quarter of 2016. We do not enter into derivative financial instruments for speculative purposes.
We attempt to mitigate derivative credit risk by transacting with highly rated counterparties. We have evaluated the credit and nonperformance risks associated with our derivative counterparties and believe them to be insignificant and not warranting a credit adjustment at September 27, 2015. In addition, there are no credit contingent features in our derivative instruments.
Balance Sheet Related
In countries outside of the U.S., we transact business in U.S. dollars and in various other currencies. We attempt to mitigate our currency exposures for recorded transactions by using forward exchange contracts to reduce the risk that our future cash flows will be adversely affected by changes in exchange rates. We enter into forward sale or purchase contracts for foreign currencies to economically hedge specific cash, receivables or payables positions denominated in foreign currencies.
Changes in fair value of derivatives entered into to mitigate the foreign exchange risks related to these balance sheet items are recorded in other income (expense) together with the transaction gain or loss from the respective balance sheet position as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Foreign currency loss, inclusive of the impact of derivatives
$
(1,309
)
 
$
(644
)
 
$
(1,915
)
 
$
(1,597
)
Cash Flow Hedges
We use zero cost and net purchased collar contracts and option contracts to hedge certain anticipated foreign currency exchange transactions. The foreign exchange hedging structure may extend, generally, up to a twenty-four 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 rates. The hedges are designed to protect us as the U.S. dollar weakens, but also provide us with some flexibility if the dollar strengthens.
These derivatives meet the criteria to be designated as hedges and, accordingly, we record the change in fair value of the effective portion of these hedge contracts relating to anticipated transactions in other comprehensive income rather than net income until the underlying hedged transaction affects net income. Gains and losses resulting from the ineffective portion of the hedge contracts, if any, are recognized as a component of net income. Gains and losses related to cash flow derivative contracts not designated as hedging instruments are recorded as a component of net income.

17

Summary
Our derivative instruments are subject to master netting arrangements and are presented net in our balance sheet. We do not have any financial collateral related to these netting arrangements. The effect of these netting arrangements on our balance sheet is as follows (in thousands):
 
Offsetting of Derivative Assets
 
Offsetting of Derivative Liabilities
September 27, 2015
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in Other Current Assets
 
Gross Amounts of Recognized Liabilities
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in Other Current Liabilities
Foreign exchange contracts designated as hedging instruments
$
2,681

$
(654
)
$
2,027

 
$
—

$
—

$
—

Foreign exchange contracts not designated as hedging instruments
788

(12
)
776

 
1,768

(229
)
1,539

Total
$
3,469

$
(666
)
$
2,803

 
$
1,768

$
(229
)
$
1,539

 
Offsetting of Derivative Assets
 
Offsetting of Derivative Liabilities
December 31, 2014
Gross Amounts of Recognized Assets
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in Other Current Assets
 
Gross Amounts of Recognized Liabilities
Gross Amounts Offset in the Balance Sheet
Net Amounts Presented in Other Current Liabilities
Foreign exchange contracts designated as hedging instruments
$
—

$
—

$
—

 
$
3,283

$
(865
)
$
2,418

Foreign exchange contracts not designated as hedging instruments
2,456

(670
)
1,786

 
4,729

(2,622
)
2,107

Total
$
2,456

$
(670
)
$
1,786

 
$
8,012

$
(3,487
)
$
4,525

The effect of derivative instruments was as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Foreign Exchange Contracts in Cash Flow Hedging Relationships
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Amount of gain/(loss):
 
 
 
 
 
 
 
Recognized in AOCI (effective portion)
$
(3,253
)
 
$
(6,757
)
 
$
(16,977
)
 
$
(11,016
)
Reclassified from AOCI into revenue (effective portion)
—

 
1

 
(112
)
 
47

Reclassified from AOCI into cost of sales (effective portion)
(2,475
)
 
(2,486
)
 
(8,122
)
 
(4,152
)
Recognized in Other, net (ineffective portion and amount excluded from effectiveness testing)
(19
)
 
(49
)
 
(127
)
 
(58
)
Foreign Exchange Contracts Not in Cash Flow Hedging Relationships
 
 
 
 
 
 
 
Amount of gain/(loss):
 
 
 
 
 
 
 
Recognized in Other, net
$
(2,500
)
 
$
(2,018
)
 
$
(8,185
)
 
$
(5,763
)
The unrealized losses at September 27, 2015 are expected to be reclassified to net income during the next twelve months as a result of the underlying hedged transactions also being recorded in net income.

18

NOTE 15.
CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME BY COMPONENT
The following tables illustrate the disclosure of changes in the balances of each component of accumulated other comprehensive income (“AOCI”), as well as details the effect of reclassifications out of AOCI on the line items in our consolidated statements of operations by component (net of tax, in thousands):
 
Thirteen Weeks Ended September 27, 2015
 
Foreign Currency Items
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Gains and Losses on Cash Flow Hedges
 
Total
Beginning Balance
$
(61,565
)
 
$
10

 
$
(727
)
 
$
(3,375
)
 
$
(65,657
)
Other comprehensive income before reclassifications
(8,818
)
 
(8
)
 
8

 
(1,151
)
 
(9,969
)
Amounts reclassified from AOCI to:
 
 
 
 
 
 
 
 
 
Cost of goods sold
—

 
—

 
—

 
2,475

 
2,475

Other, net
—

 
—

 
—

 
19

 
19

Total reclassifications out of AOCI
—

 
—

 
—

 
2,494

 
2,494

Net current period other comprehensive income
(8,818
)
 
(8
)
 
8

 
1,343

 
(7,475
)
Ending balance
$
(70,383
)
 
$
2

 
$
(719
)
 
$
(2,032
)
 
$
(73,132
)
 
Thirty-Nine Weeks Ended September 27, 2015
 
Foreign Currency Items
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Gains and Losses on Cash Flow Hedges
 
Total
Beginning Balance
$
(22,541
)
 
$
(38
)
 
$
(798
)
 
$
(4,134
)
 
$
(27,511
)
Other comprehensive income before reclassifications
(47,842
)
 
40

 
79

 
(6,259
)
 
(53,982
)
Amounts reclassified from AOCI to:
 
 
 
 
 
 
 
 
 
Revenue
—

 
—

 
—

 
112

 
112

Cost of goods sold
—

 
—

 
—

 
8,122

 
8,122

Other, net
—

 
—

 
—

 
127

 
127

Total reclassifications out of AOCI
—

 
—

 
—

 
8,361

 
8,361

Net current period other comprehensive income
(47,842
)
 
40

 
79

 
2,102

 
(45,621
)
Ending balance
$
(70,383
)
 
$
2

 
$
(719
)
 
$
(2,032
)
 
$
(73,132
)

19

 
Thirteen Weeks Ended September 28, 2014
 
Foreign Currency Items
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Gains and Losses on Cash Flow Hedges
 
Total
Beginning Balance
$
47,109

 
$
29

 
$
(519
)
 
$
(1,320
)
 
$
45,299

Other comprehensive income before reclassifications
(37,778
)
 
(52
)
 
45

 
(5,475
)
 
(43,260
)
Amounts reclassified from AOCI to:
 
 
 
 
 
 
 
 
 
Revenue
—

 
—

 
—

 
(1
)
 
(1
)
Cost of goods sold
—

 
—

 
—

 
2,486

 
2,486

Other, net
—

 
—

 
—

 
49

 
49

Total reclassifications out of AOCI
—

 
—

 
—

 
2,534

 
2,534

Net current period other comprehensive income
(37,778
)
 
(52
)
 
45

 
(2,941
)
 
(40,726
)
Ending balance
$
9,331

 
$
(23
)
 
$
(474
)
 
$
(4,261
)
 
$
4,573

 
Thirty-Nine Weeks Ended September 28, 2014
 
Foreign Currency Items
 
Unrealized Gains and Losses on Available-for-Sale Securities
 
Defined Benefit Pension Items
 
Gains and Losses on Cash Flow Hedges
 
Total
Beginning Balance
$
48,865

 
$
(11
)
 
$
(552
)
 
$
(1,174
)
 
$
47,128

Other comprehensive income before reclassifications
(39,534
)
 
(12
)
 
78

 
(7,250
)
 
(46,718
)
Amounts reclassified from AOCI to:
 
 
 
 
 
 
 
 
 
Revenue
—

 
—

 
—

 
(47
)
 
(47
)
Cost of goods sold
—

 
—

 
—

 
4,152

 
4,152

Other, net
—

 
—

 
—

 
58

 
58

Total reclassifications out of AOCI
—

 
—

 
—

 
4,163

 
4,163

Net current period other comprehensive income
(39,534
)
 
(12
)
 
78

 
(3,087
)
 
(42,555
)
Ending balance
$
9,331

 
$
(23
)
 
$
(474
)
 
$
(4,261
)
 
$
4,573

NOTE 16.    NEW ACCOUNTING PRONOUNCEMENTS
ASU 2015-11
In July 2015, the FASB issued ASU No. 2015-11, Inventory: Simplifying the Measurement of Inventory. An entity using an inventory method other than last-in, first out (“LIFO”) or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Early application is permitted for periods beginning after December 15, 2016, including interim reporting periods within that reporting period, and the new standard will become effective for us on January 1, 2017. We are evaluating the effect that this standard will have on our consolidated financial statements and related disclosures.

20

ASU 2014-09
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date. Early application is permitted for periods beginning after December 15, 2016, including interim reporting periods within that reporting period, and the new standard will become effective for us on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that this standard will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
NOTE 17.    SUBSEQUENT EVENTS
Proposed Acquisition
On October 20, 2015, we entered into an agreement to purchase DCG Systems, Inc. (“DCG”) for $160.0 million in cash. DCG, with 220 employees and headquarters in Fremont, California, is a leading supplier of electrical fault characterization, localization and editing tools, providing process development, yield ramp and failure analysis applications for a wide range of semiconductor and electronics manufacturers. The transaction is subject to customary closing conditions, regulatory approval and is expected to close prior to December 31, 2015.

21

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 include statements of our expectations regarding revenue, gross margin, operating expenses, net income and other financial items for the fourth quarter of 2015, revenue expectations for the fourth quarter of 2015 and full year 2015, the impact of certain items on our results for these periods, including statements regarding our sources of revenue, our investments and expenditures, our effective tax rate, the location of our cash and cash equivalents, the level of profitability at which we expect to operate and the allocation of our resources and expenditures. Forward-looking statements may also be identified by words and phrases that refer to future expectations, such as “guidance”, “guiding”, “forecast”, “toward”, “plan”, “expect”, “are expected”, “is expected”, “believe”, “anticipate”, “will”, “projecting”, “look forward”, and other similar words and phrases. Factors that could affect such forward-looking statements include, but are not limited to: the global economic environment, in particular continued slower growth in China and emerging markets; lower than expected customer orders, including for recently-introduced products; potential weakness of the Science and Industry market segments, including continued weakness in the oil and gas sector of the Industry segment resulting from declining oil prices; fluctuations in foreign exchange rates, which can affect revenues, margins and the competitive pricing of our products; cyclical and other changes and increased volatility in the semiconductor industry, which is a major component of Industry market segment revenue; changes in backlog and the timing of shipments from backlog, which may create forecasting challenges; failure of the company to achieve anticipated benefits of acquisitions and collaborations, including failure to achieve financial goals and integrate acquisitions successfully; potential delayed or reduced governmental spending to support expected orders; potential disruption in the company's operations due to organizational changes; the relative mix of higher-margin and lower-margin products; potential for increased volatility and challenges in forecasting resulting from larger sales transactions, cancellations and rescheduling of orders by customers; risks associated with a high percentage of the company's revenue coming from book and ship business, when the order for a product is placed by the customer in the same quarter as the planned shipment, and risks associated with building and shipping a high percentage of the company’s quarterly revenue in the last month of the quarter; delays in meeting all accounting requirements for revenue recognition; the ongoing determination of the effectiveness of foreign exchange hedge transactions; the relative mix of U.S. and non-U.S. sales; additional costs related to future merger and acquisition activity; reduced profitability due to failure to achieve or sustain margin improvement in service or product manufacturing; potential disruption in manufacturing or unexpected additional costs due to the transition from older to newer products; failure to achieve improved operational efficiency and other benefits from infrastructure investments and restructuring activities; potential additional restructurings, realignments and reorganizations; inability to deploy products as expected or delays in shipping products due to technical problems or barriers, especially with regard to recently introduced TEM products; bankruptcy or insolvency of customers or suppliers; changes in U.S. and foreign tax rates and laws, accounting rules regarding taxes or agreements with tax authorities; and potential shipment or supply chain disruptions.
The risks, uncertainties and assumptions referred to above include, but are not limited to, those discussed in this Quarterly Report on Form 10-Q and 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 the section titled “Risk Factors” included in Part II, Item 1A of this Quarterly Report on Form 10-Q for factors that we believe could cause our actual results to differ materially from expected and historical results. Other factors could also adversely affect us.

22

Summary of Products and Segments
We are a leading supplier of scientific instruments and related services for nanoscale applications and solutions for industry and science. We report our revenue based on a group structure organization, which we categorize as the Industry Group and the Science Group.
Our products include transmission electron microscopes (“TEMs”); scanning electron microscopes (“SEMs”); DualBeamTM systems which combine a SEM and a focused ion beam system (“FIB”) on a single platform; stand-alone FIBs; high-performance optical microscopes, pore-scale micro computed tomography (“microCT”) equipment, three-dimensional modeling software, and service and components to support these products. TEMs provide the highest resolution images of samples and their internal structure, down to the atomic level. SEMs provide detailed images of the surface and shape of samples. Optical microscopes provide a wider field of view than SEMs and TEMs. DualBeams and FIBs image, manipulate, mill and deposit material for a variety of purposes, including preparation of samples for TEMs. A combination of TEMs and DualBeams represent the near-line solution that is purchased by our semiconductor customers. Substantially all of these product categories are sold into all of our markets. Individual models of our products are increasingly designed to provide specific solutions and applications in each of our markets.
Our DualBeam systems include models that have wafer handling capability and are purchased by semiconductor equipment manufacturers (“wafer-level DualBeam systems”) and models that have small stages and are sold to customers in several markets (“small-stage DualBeam systems”).
Our significant research and development and manufacturing operations are located in Hillsboro, Oregon; Eindhoven, The Netherlands; and Brno, Czech Republic; and our software development is managed principally from Bordeaux, France. Our sales and service operations are conducted in the United States (U.S.) and approximately 50 other countries around the world. We also sell our products through independent agents, distributors and representatives in additional countries.
The Industry Group consists of customers in semiconductor integrated circuit manufacturing and related industries such as manufacturers of data storage equipment and other technologies, as well as customers in the oil and gas industry. The tools we develop for our Industry Group customers are generally aimed at improving their processes to increase overall yields, whether in a semiconductor factory or at an oil and gas reservoir. For the semiconductor market, our growth is driven by shrinking line widths and process nodes of 16/14 nanometers and smaller, increasing complexity in their materials such as high-k metal gates and low-k dielectrics and increasing device complexity such as 3D transistor architectures. Such products are used primarily in laboratories, near the fabrication line to speed new product development and increase yields by enabling 3D metrology for advanced process control, defect analysis, and root cause failure analysis. For the natural resources market, our products are used to increase yields in oil and gas exploration and for laboratory analysis. We also provide support for products and customers within this group for the entire life cycle of a tool from installation through the warranty period, and after the warranty period through contract coverage or on a time and materials basis.
The Science Group includes universities, public and private research laboratories and customers in a wide range of industries, including metals, automobiles, aerospace, geosciences and forensics. The tools we develop for our customers in the Science Group are generally aimed at the exploration and discovery of new materials and chemistries or solving for causes and cures of diseases. The tools are used in a laboratory and are generally not used in industrial applications. The Science Group also includes customers at universities, government laboratories and research institutes engaged in biotech and life sciences applications, as well as pharmaceutical and biotech companies. Growth in these markets is driven by global corporate and government funding for research and development and by development of new products and processes based on innovations at the nanoscale. Our solutions enable scientific discovery and advancement for researchers and help manufacturers develop, analyze and produce advanced products. Our products are also used in root cause failure analysis and quality control applications across a range of industries. Our products’ ultra-high resolution imaging allows structural biologists to create detailed 3D reconstructions of complex biological structures such as proteins and viruses. Cellular biologists use our tools to correlate wide-field, lower resolution optical images with higher resolution electron microscope imaging. Our products are also used by drug researchers and in particle analysis and a range of pathology and quality control applications. We also provide support for products and customers within this group for the entire life cycle of a tool from installation through the warranty period, and after the warranty period through contract coverage or on a time and materials basis.

23

Overview - Orders and Backlog
Orders received in a particular period that are not scheduled to 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. Purchase commitments may include letters of intent. Product backlog consists of all open orders meeting these criteria. Service backlog consists of open orders for service, unearned revenue on service contracts and open orders for spare parts. U.S. government backlog is limited to contracted amounts. In addition, some of the U.S. government backlog represents uncommitted funds. At September 27, 2015, our total backlog was $562.2 million, compared to $535.6 million in total backlog at December 31, 2014.
At September 27, 2015, our backlog consisted of $396.5 million of product backlog and $165.7 million of service backlog, compared to product backlog of $364.8 million and service backlog of $170.8 million at December 31, 2014. We estimate that, currently, 85% to 90% of our backlog is billable within one year. Our orders can have lead times of six to twelve months resulting in more orders scheduled for delivery of goods or services beyond 12 months. In addition, the size of individual orders has increased due to our customers ordering higher priced tools and multiple tool orders as well as multi-year service contracts. These factors may increase the volatility of our future revenue.
Customers may cancel or delay delivery on previously placed orders. As a result, the timing of the receipt of orders or the shipment of products could have a significant impact on our backlog at any date. Historically, cancellations have been low. During the thirty-nine weeks of 2015 and 2014, we experienced cancellations of $6.5 million and $3.9 million, respectively. From time to time, we have experienced difficulty in shipping our product from backlog due to sourcing issues, including securing electronic components from certain vendors. In addition, product shipments have been extended due to delays in completing certain application development, by our customers pushing out shipments because their facilities are not ready to install our systems and by our own manufacturing delays due to the technical complexity of our products and supply chain issues. A significant portion of our backlog is denominated in currencies other than the U.S. dollar and, therefore, our reported backlog fluctuates, to an extent, as a result of foreign currency exchange rate movements. For these reasons, the amount of backlog at any date is not necessarily indicative of revenue to be recognized in future periods.
Outlook for the Remainder of 2015
Based on our current backlog of unfilled orders, our pipeline of potential orders and conditions in each of our markets, we expect revenue in the fourth quarter to be down to slightly up compared with the same period in 2014. This reflects the strengthening of the U.S. dollar against the euro and other currencies that impact our reported revenue. For all of 2015, we expect revenue to decline compared with 2014, driven by the stronger U.S. dollar and lower Science Group revenue.
We anticipate gross margin for the fourth quarter of 2015 to be up compared with the same period in 2014. This reflects strengthening of the U.S. dollar against the euro and other currencies and a more favorable mix of Industry Group versus Science Group revenue. Operating expenses are expected to be down in 2015 as a result of savings from our 2014 realignment program and the favorable impact of foreign exchange rates on our expenses. We expect growth in net income for 2015 compared with 2014, which will be dependent on our ability to achieve the revenue, gross margin and operating expense performance described above.
Please see the risk factors listed in Part II, Item 1A of this Quarterly Report on Form 10-Q for the risk factors that could cause our results to vary from this outlook for the remainder of 2015.
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. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management’s Discussion and Analysis and Note 1 to the Consolidated Financial Statements in our 2014 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 thirty-nine weeks of 2015, 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, 2014, which was filed with the Securities and Exchange Commission on February 23, 2015.

24

Results of Operations
The following tables set forth our statement of operations data, in absolute dollars and as a percentage(1) of consolidated net sales (dollars in thousands):
 
Thirteen Weeks Ended
 
September 27, 2015
 
September 28, 2014
Net sales
$
212,561

 
100.0
 %
 
$
227,756

 
100.0
 %
Cost of sales
108,284

 
50.9

 
119,175

 
52.3

Gross profit
104,277

 
49.1

 
108,581

 
47.7

Research and development
23,825

 
11.2

 
25,312

 
11.1

Selling, general and administrative
43,467

 
20.4

 
49,463

 
21.7

Impairment of goodwill and long-lived assets
26,596

 
12.5

 
—

 
—

Restructuring, reorganization, relocation and severance
(423
)
 
(0.2
)
 
7,699

 
3.4

Operating income
10,812

 
5.1

 
26,107

 
11.5

Other expense, net
(1,372
)
 
(0.6
)
 
(831
)
 
(0.4
)
Income before income taxes
9,440

 
4.4

 
25,276

 
11.1

Income tax (benefit) expense
(978
)
 
(0.5
)
 
3,629

 
1.6

Net income
$
10,418

 
4.9
 %
 
$
21,647

 
9.5
 %
 
Thirty-Nine Weeks Ended
 
September 27, 2015
 
September 28, 2014
Net sales
$
657,566

 
100.0
 %
 
$
690,976

 
100.0
 %
Cost of sales
335,913

 
51.1

 
366,220

 
53.0

Gross profit
321,653

 
48.9

 
324,756

 
47.0

Research and development
70,275

 
10.7

 
77,178

 
11.2

Selling, general and administrative
132,382

 
20.1

 
148,513

 
21.5

Impairment of goodwill and long-lived assets
26,596

 
4.0

 
—

 
—

Restructuring, reorganization, relocation and severance
(565
)
 
(0.1
)
 
11,259

 
1.6

Operating income
92,965

 
14.1

 
87,806

 
12.7

Other expense, net
(2,929
)
 
(0.4
)
 
(1,907
)
 
(0.3
)
Income before income taxes
90,036

 
13.7

 
85,899

 
12.4

Income tax expense
14,274

 
2.2

 
14,228

 
2.1

Net income
$
75,762

 
11.5
 %
 
$
71,671

 
10.4
 %

(1) 
Percentages may not add due to rounding.
Net Sales Overview
Net sales decreased $15.2 million, or 6.7%, to $212.6 million in the thirteen week period ended September 27, 2015 (the third quarter of 2015) compared to $227.8 million in the thirteen week period ended September 28, 2014 (the third quarter of 2014). Revenue from our recently acquired businesses increased net sales by $0.8 million, or 0.4%, in the thirteen week period ended September 27, 2015 compared to the same period of 2014.
Net sales decreased $33.4 million, or 4.8%, to $657.6 million in the thirty-nine week period ended September 27, 2015 compared to $691.0 million in the thirty-nine week period ended September 28, 2014. Revenue from our recently acquired businesses increased net sales by $2.4 million, or 0.4%, in the thirty-nine week period ended September 27, 2015 compared to the same period of 2014.
Net sales, at consistent currency rates, decreased by $4.7 million, or 2.1%, and increased by $5.8 million, or 0.8%, in the thirteen and thirty-nine week periods ended September 27, 2015 compared to the same periods of 2014, respectively. Consistent currency rates are defined as the quarterly average currency exchange rates of the comparable periods. All discussion of changes between the current and comparable periods is based on consistent currency rates.

25

Strengthening of the U.S. dollar against foreign currencies generally has the effect of decreasing net sales and backlog. See also “Foreign Currency Exchange Rate Risk” included in Part II, Item 1A of this Quarterly Report on Form 10-Q for further discussion of currency impacts on our results of operations.
Other factors affecting net sales are discussed in more detail in the Net Sales by Segment discussion below.
Net Sales by Segment
Net sales by market segment (in thousands) and as a percentage of net sales were as follows:
 
Thirteen Weeks Ended
 
September 27, 2015
 
September 28, 2014
Industry Group
$
105,280

 
49.5
%
 
$
107,058

 
47.0
%
Science Group
107,281

 
50.5

 
120,698

 
53.0

Consolidated net sales
$
212,561

 
100.0
%
 
$
227,756

 
100.0
%
 
Thirty-Nine Weeks Ended
 
September 27, 2015
 
September 28, 2014
Industry Group
$
336,760

 
51.2
%
 
$
340,722

 
49.3
%
Science Group
320,806

 
48.8

 
350,254

 
50.7

Consolidated net sales
$
657,566

 
100.0
%
 
$
690,976

 
100.0
%
Industry Group
Industry Group sales decreased $1.8 million, or 1.7%, and $4.0 million, or 1.2%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, Industry Group sales increased $0.4 million, or 0.4%, and $3.1 million, or 0.9%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The increase in the thirty-nine week period was primarily due to growth in sales of high resolution lab-based products to semiconductor customers and higher service revenue from our installed base, partially offset by reduced demand for our oil and gas solutions.
Revenue from acquired businesses increased Industry Group sales $0.5 million, or 0.5%, and $1.7 million, or 0.5%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014.
Science Group
Science Group sales decreased $13.4 million, or 11.1%, and $29.4 million, or 8.4%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods in 2014. At consistent currency rates, Science Group sales decreased $5.1 million, or 4.2%, and increased $2.7 million, or 0.8%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The decrease in the thirteen week period was due to a decrease in high resolution systems sold. The increase in the thirty-nine week period was due to higher service revenue from our installed base.
Revenue from acquired businesses increased Science Group sales $0.3 million, or 0.3%, and $0.7 million, or 0.2%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods ended 2014.
Net Sales by Geographic Region
A majority of our net sales are derived from customers outside of the U.S., which we expect to continue. The following tables show our net sales by geographic region (dollars in thousands):
 
Thirteen Weeks Ended
 
September 27, 2015
 
September 28, 2014
U.S. and Canada
$
76,288

 
35.9
%
 
$
76,987

 
33.8
%
Europe
48,608

 
22.9

 
56,554

 
24.8

Asia-Pacific Region and Rest of World
87,665

 
41.2

 
94,215

 
41.4

Consolidated net sales
$
212,561

 
100.0
%
 
$
227,756

 
100.0
%

26

 
Thirty-Nine Weeks Ended
 
September 27, 2015
 
September 28, 2014
U.S. and Canada
$
217,652

 
33.1
%
 
$
229,716

 
33.2
%
Europe
159,920

 
24.3

 
187,158

 
27.1

Asia-Pacific Region and Rest of World
279,994

 
42.6

 
274,102

 
39.7

Consolidated net sales
$
657,566

 
100.0
%
 
$
690,976

 
100.0
%
U.S. and Canada
Sales to U.S. and Canada decreased $0.7 million, or 0.9%, and $12.1 million, or 5.3%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. The decline in the thirteen week period was primarily due to fewer high resolution systems sold to our structural and cell biology customers and customers engaged in materials research. The decline in the thirty-nine week period was primarily due to fewer sales of higher resolution systems to semiconductor customers. Higher service revenue from our installed base partially offset the decreases in both periods.
Europe
Our European region also includes Central America, South America, Africa (excluding South Africa), the Middle East and Russia.
Sales to Europe decreased $7.9 million, or 14.1%, and $27.2 million, or 14.6%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, sales to Europe increased $0.2 million, or 0.4%, and $4.3 million, or 2.3%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The growth in both periods was due to an increase in sales to our semiconductor customers and increased purchases of high resolution products by our structural and cell biology customers.
Asia-Pacific Region and Rest of World
Sales to the Asia-Pacific Region and Rest of World decreased $6.6 million, or 7.0%, and increased $5.9 million, or 2.1%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, sales to the Asia-Pacific Region and Rest of World decreased $4.4 million, or 4.6%, and increased $13.2 million, or 4.8%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The decrease in the thirteen week period was primarily due to lower sales to our structural and cell biology customers and customers engaged in materials research. The increase in the thirty-nine week period was primarily due to an increase in sales of near-line products to our semiconductor customers. This increase was partially offset by a decline in sales to customers engaged in scientific research activities.
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
 
Thirty-Nine Weeks Ended
 
September 27, 2015
 
September 28, 2014
 
September 27, 2015
 
September 28, 2014
Industry Group
52.4
%
 
51.5
%
 
52.4
%
 
51.5
%
Science Group
45.8

 
44.3

 
45.2

 
42.7

Overall
49.1

 
47.7

 
48.9

 
47.0

Cost of Sales
Cost of sales includes manufacturing costs, such as materials, labor (both direct and indirect) and factory overhead, as well as all of the costs of our customer service function such as labor, materials, travel and overhead. The four primary drivers affecting gross margin include: product mix, operational efficiencies, competitive pricing pressure and currency movements.
Cost of sales decreased $10.9 million, or 9.1%, to $108.3 million in the thirteen week period ended September 27, 2015 compared to $119.2 million in the same period of 2014. At consistent currency rates, cost of sales increased $2.0 million, or 1.7%, in the thirteen week period ended September 27, 2015, compared to the same period of 2014.
Cost of sales decreased $30.3 million, or 8.3%, to $335.9 million in the thirty-nine week period ended September 27, 2015 compared to $366.2 million in the same period of 2014. At consistent currency rates, cost of sales increased $10.3 million, or 2.8%, in the thirty-nine week period ended September 27, 2015, due to increased sales volume to semiconductor customers and a change in product mix of systems sold.

27

Gross Profit and Gross Margin
Gross profit decreased $4.3 million, or 4.0%, and $3.1 million, or 1.0%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, gross profit decreased $6.7 million, or 6.2%, and $4.5 million, or 1.4%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. Gross margin, at consistent currency rates, decreased by 2.0 and 1.0 percentage points in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014.
Industry Group
The Industry Group gross margin increased by 0.9 percentage points during the thirteen and thirty-nine week periods ended September 27, 2015, compared to the same periods of 2014. At consistent currency rates, Industry Group gross margin decreased by 2.8 and 2.2 percentage points during the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The decrease during the thirteen week period was primarily due to a change in mix of products sold, partially offset by higher margins on service revenue from our installed base due to lower parts and labor costs. The decrease in the thirty-nine week period was primarily due to reduced sales to oil and gas customers and higher costs to support those customers.
Science Group
The Science Group gross margin increased by 1.5 and 2.5 percentage points in the thirteen and thirty-nine week periods ended
September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, Science Group gross margin decreased by 1.4 and 0.1 percentage points during the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The decrease in the thirteen week period was primarily a result of lower average selling prices on products delivered to structural and cell biology customers and customers engaged in materials science research. This decrease was partially offset by higher margins on service revenue from our installed base.
Research and Development Costs
Research and Development (“R&D”) costs include labor, materials, overhead and payments to third parties for research and development of new products and new software or enhancements to existing products and software and are expensed as incurred. We periodically receive funds from various organizations to subsidize our research and development activities. These funds are reported as an offset to research and development expense. During the thirteen and thirty-nine week periods ended September 27, 2015, and for the comparable periods in 2014, we received subsidies from European governments for technological developments primarily for semiconductor and life sciences products.
R&D costs, net of subsidies, were as follows (in thousands):
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Gross spending
$
24,643

 
$
26,381

 
$
72,661

 
$
80,552

Less subsidies
(818
)
 
(1,069
)
 
(2,386
)
 
(3,374
)
Net expense
$
23,825

 
$
25,312

 
$
70,275

 
$
77,178

R&D costs decreased $1.5 million, or 5.9%, and $6.9 million, or 8.9%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, R&D costs increased $1.5 million and $2.9 million in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The increase in both periods was due to higher external project spending, higher labor costs, and lower subsidies from European governments.
We anticipate investing between 10% and 11% of revenue in R&D for the foreseeable future. Accordingly, as revenues increase, we expect R&D expenditures will also increase. Actual future spending, however, will depend on market conditions, currency fluctuations and other factors.
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 decreased $6.0 million, or 12.1%, and $16.1 million, or 10.9%, in the thirteen and thirty-nine week periods ended September 27, 2015, respectively, compared to the same periods of 2014. At consistent currency rates, SG&A costs decreased $2.5 million and $5.1 million in the thirteen and thirty-nine week periods ended September 27, 2015, respectively. The decreases

28

are primarily due to lower labor costs, depreciation, and facility-related costs resulting from our second quarter 2014 realignment plan. Stock compensation expense was also lower due to increased forfeitures related to employee terminations.
Impairment of Goodwill and Long-Lived Assets
The continued decline in oil prices has adversely affected our oil and gas reporting unit, resulting in lower expected future revenue, operating income, and cash flow. We believed these indicators warranted an assessment of certain goodwill and long-lived assets included within the Industry Group. Accordingly, we performed a goodwill impairment test following the two step process defined in ASC 350. As a result of the goodwill impairment test we have recognized preliminary impairment charges of $8.4 million on developed technology intangible assets and $18.2 million on goodwill. The total impairment charge of $26.6 million is included in impairment of goodwill and long-lived assets on our consolidated statement of operations within operating expenses for the thirteen and thirty-nine week periods ended September 27, 2015.
For further information on the impairment charges, see Note 6 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Restructuring, Reorganization, Relocation and Severance
Second Quarter 2014 Realignment
During the second quarter of 2014, we implemented a resource realignment plan aimed at improving our operational efficiency by eliminating redundancies in sites and personnel resulting from recent acquisitions and expansion activities. We also shifted our resources to growing regions, such as Asia, and potential growth markets, such as structural biology, oil and gas, near-line semiconductor processing and metals research, in order to better position us to pursue our growth strategy. The realignment plan activities included the consolidation of our three Australia sites in Canberra; the closure of our facility in Delmont, Pennsylvania and relocation of those operations to our new facility in the Czech Republic; relocation of our Japan demonstration facility to our Shanghai facility; selective reductions in staffing, relocations and compensation adjustments related to the foregoing activities and other realignment of management resources. This plan was completed at the end of 2014 and we do not expect to incur any additional costs under this plan.
The following table summarizes the costs incurred under our second quarter realignment plan:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Realignment Costs
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Inventory write-offs
$
—

 
$
230

 
$
—

 
$
985

Acceleration of acquisition-related earn-out
—

 
—

 
—

 
2,500

Impairment and other asset write-offs
—

 
1,831

 
—

 
2,297

Restructuring activities
(423
)
 
7,699

 
(565
)
 
9,927

Total
$
(423
)
 
$
9,760

 
$
(565
)
 
$
15,709

These costs have been recorded in our consolidated statements of operations as follows:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
Statement of Operations Classification
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Cost of sales
$
—

 
$
230

 
$
—

 
$
985

Selling, general and administrative
—

 
1,831

 
—

 
4,797

Restructuring, reorganization, relocation and severance
(423
)
 
7,699

 
(565
)
 
9,927

Total
$
(423
)
 
$
9,760

 
$
(565
)
 
$
15,709

First Quarter 2014 Restructuring
During the first quarter of 2014, we engaged in a restructuring plan principally aimed at consolidating our sales force in Europe. The $1.3 million cost incurred in implementing the restructuring plan primarily consisted of severance and other employee termination related costs, and was incurred during the first quarter of 2014. We do not expect to incur any additional costs under this plan.
For information regarding the related accrued liability, see Note 12 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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Other Expense, Net
Other expense, net includes interest income, interest expense, foreign currency transaction gains and losses, bank fees and other miscellaneous items.
Other, net primarily consists of foreign currency gains and losses on transactions and realized and unrealized gains and losses on the changes in fair value of derivative contracts entered into to hedge these transactions. Other, net totaled $1.5 million and $0.9 million in the thirteen week periods ended September 27, 2015 and September 28, 2014, respectively, and totaled $3.3 million and $2.1 million in the thirty-nine week periods ended September 27, 2015 and September 28, 2014, respectively.
Income Tax Expense
We recorded income tax benefit of $1.0 million and expense of $3.6 million for the thirteen week periods ended September 27, 2015 and September 28, 2014, respectively, which reflected taxes accrued in the U.S. and foreign jurisdictions, offset by decreases of $6.1 million and $2.9 million, respectively, in unrecognized tax benefits, interest and penalties for tax credit positions taken on returns which were either effectively settled or closed for further examination due to the lapse of a statute of limitation.
Our tax expense was $14.3 million and $14.2 million for the thirty-nine week periods ended September 27, 2015 and September 28, 2014, respectively, and reflected taxes accrued in the U.S. and foreign jurisdictions, offset by decreases of $8.4 million and $2.9 million, respectively, in unrecognized tax benefits, interest and penalties for tax credit positions taken on returns which were either effectively settled or closed for further examination due to the lapse of a statute of limitation.
Our effective tax rate may differ from the U.S. federal statutory tax rate primarily as a result of the effects of state and foreign income taxes, research and development tax credits earned in the U.S. and foreign jurisdictions, adjustments to our unrecognized tax benefits and our ability or inability to utilize various carry forward tax items. In addition, our effective tax rate may be affected by changes in statutory tax rates and laws in the U.S. and foreign jurisdictions and other factors.
As of September 27, 2015, total unrecognized tax benefits were $17.5 million and related primarily to uncertainty surrounding transfer pricing, tax credits and permanent establishment. All unrecognized tax benefits would decrease the effective tax rate if recognized.
Our net deferred tax assets totaled $11.7 million and $5.0 million, respectively, at September 27, 2015 and December 31, 2014. Valuation allowances on deferred tax assets totaled $3.6 million and $4.4 million as of September 27, 2015 and December 31, 2014, respectively. We continue to record a valuation allowance against a portion of U.S. and foreign deferred tax assets, as we do not believe it is more likely than not that we will be able to utilize the deferred tax assets in future periods.
Liquidity and Capital Resources
Sources of Liquidity and Capital Resources
Our sources of liquidity and capital resources consisted of the following (in thousands):
 
September 27,
 
December 31,
 
2015
 
2014
Cash and cash equivalents
$
381,858

 
$
300,507

Short-term investments in marketable securities
36,015

 
61,688

Short-term restricted cash
23,444

 
15,698

Total short-term balances
441,317

 
377,893

Non-current investments in marketable securities
34,016

 
85,865

Long-term restricted cash
24,758

 
38,369

Total long-term balances
58,774

 
124,234

 
 
 
 
Availability under revolving credit facilities and letters of credit
$
123,384

 
$
100,000

At September 27, 2015, $248.9 million of our $500.1 million in total cash, cash equivalents, restricted cash and investments, were located outside of the United States. We believe our U.S. sources of cash and liquidity are sufficient to meet our business needs in the U.S. and do not expect that we will need to repatriate the funds we have designated as indefinitely reinvested outside the U.S. Under current tax laws, should our plans change and we were to choose to repatriate some or all of the funds we have designated as indefinitely reinvested outside the U.S., such amounts would be subject to U.S. income taxes and applicable non-U.S. income and withholding taxes. Restricted cash relates to deposits to secure bank guarantees for customer prepayments that expire through 2019.

30

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.
In the thirty-nine week period ended September 27, 2015, cash and cash equivalents increased $81.4 million to $381.9 million from $300.5 million as of December 31, 2014 primarily as a result of cash provided by operations of $134.7 million, net redemption of investments in marketable securities of $77.7 million, and proceeds from the exercise of employee stock options and employee stock purchases of $10.9 million. These factors were partially offset by repurchases of common stock for $72.6 million, dividends paid on common stock of $33.3 million, purchases of property, plant and equipment for $10.1 million, and the acquisition of a former agent for $5.4 million. Currency fluctuations decreased cash and cash equivalents by $17.5 million.
In the thirty-nine week period ended September 28, 2014, cash and cash equivalents decreased $111.7 million to $272.4 million from $384.2 million as of December 31, 2013 primarily as a result of the purchase of Lithicon for $65.0 million, repurchases of common stock for $40.3 million, purchases of property, plant and equipment for $35.4 million, dividends paid on common stock of $20.6 million, the net purchase of marketable securities of $14.2 million, and an increase in restricted cash of $3.0 million. These factors were partially offset by $72.6 million of cash provided by operations and $10.6 million of proceeds from the exercise of employee stock options and employee stock purchases. Currency fluctuations decreased cash and cash equivalents by $15.9 million.
Accounts receivable decreased $18.4 million to $208.9 million as of September 27, 2015 from $227.4 million as of December 31, 2014. At consistent currency rates, accounts receivable decreased $11.5 million from December 31, 2014. This decrease was primarily due to the timing of shipments and an increase in collections on orders recorded as revenue in the last quarter of 2014. Our days sales outstanding, calculated on a quarterly basis, was 90 days at September 27, 2015 and 88 days at September 28, 2014.
Inventories increased $15.2 million to $191.6 million as of September 27, 2015 compared to $176.4 million as of December 31, 2014. At consistent currency rates, inventories increased $26.7 million from December 31, 2014 mainly due to inventory purchases to support our 2015 build plan. Our annualized inventory turnover rate, calculated on a quarterly basis, was 1.8 times for the quarter ended September 27, 2015 and 1.9 times for the quarter ended September 28, 2014.
Deferred tax assets, current and long term, net of deferred tax liabilities, increased $6.6 million to $11.7 million as of September 27, 2015 compared to $5.0 million as of December 31, 2014 primarily from reduced deferred tax liabilities associated with fixed assets, intangible assets and revenue recognition.
Property, plant, and equipment decreased $10.9 million to $152.9 million as of September 27, 2015 compared to $163.8 million as of December 31, 2014. At consistent currency rates, property, plant, and equipment decreased $3.4 million from December 31, 2014. Expenditures for property, plant and equipment of $10.1 million and transfers from inventories to fixed assets of $4.9 million in the thirty-nine week period ended September 27, 2015 primarily consisted of payments for demonstration equipment and other machinery and equipment, offset by depreciation in the period.
Accounts payable decreased $10.5 million to $67.8 million as of September 27, 2015 compared to $78.3 million as of December 31, 2014. At consistent currency rates, accounts payable decreased $6.3 million from December 31, 2014.
Accrued payroll liabilities decreased $1.3 million to $37.3 million as of September 27, 2015 compared to $38.6 million as of December 31, 2014. At consistent currency rates, accrued payroll liabilities increased $0.7 million from December 31, 2014 primarily due to increased accruals for employee wages and payroll taxes.
Credit Facilities and Letters of Credit
We have a $100.0 million secured revolving credit facility, including a $50.0 million subfacility for the issuance of letters of credit. The Credit Agreement expires in April 2016. We may, upon notice to JPMorgan Chase Bank, N.A., the Administrative Agent, request to increase the revolving loan commitments by an aggregate amount of up to $50.0 million with new or additional commitments subject only to the consent of the lender(s) providing the new or additional commitments, for a total secured credit facility of up to $150.0 million. There were no amounts outstanding under this facility as of September 27, 2015.
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. Bank guarantees and letters of credit outstanding as of September 27, 2015 were approximately $53.9 million.
In July 2015, we entered into a Credit Facility with HSBC, whereby HSBC has provided us with a revocable, uncommitted credit facility up to an amount of 25.0 million euro. The purpose of this facility is to provide a more efficient means of issuing guarantees to our customers when required by contractual terms. Under the terms of the Credit Facility, when requested, HSBC will issue bank guarantees on behalf of the company and our affiliates. Issuance of the guarantee does not create a liability to the company unless it is called by the customer, at which point we would record a liability for the amount that is due under the guarantee to the

31

bank. As of September 27, 2015, HSBC has issued $4.5 million in guarantees under the Credit Facility and we have no liabilities outstanding under the Credit Facility.
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.
Share Repurchase Plan
In May 2015, our Board of Directors reauthorized our share repurchase program. Under the reauthorization, which expires May 29, 2017, we may repurchase up to an additional 2.0 million shares of our common stock. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The repurchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice.
The following table sets forth share repurchase information for the periods indicated:
 
Thirteen Weeks Ended
 
Thirty-Nine Weeks Ended
 
September 27,
2015
 
September 28,
2014
 
September 27,
2015
 
September 28,
2014
Total number of shares repurchased
544,853

 
126,062

 
953,641

 
500,000

Average price paid per share
$
77.41

 
$
78.02

 
$
77.25

 
$
80.63

Total value of shares repurchased
$
42,175,024

 
$
9,835,854

 
$
73,670,255

 
$
40,315,245

As of September 27, 2015, 1,377,655 shares remained available for repurchase pursuant to our share repurchase program.
Subsequent to the end of the quarter, we repurchased an additional 300,000 shares for a total of $22.5 million, or an average of $74.96 per share.
See the section titled “Unregistered Sales of Equity Securities and Use of Proceeds” in Part II, Item 2 of this Quarterly Report on Form 10-Q for further information on our share repurchase program.
Dividends to Shareholders
In June 2012 we announced our plan to initiate a quarterly dividend and our Board of Directors has declared dividends each quarter since the plan's inception. During the third quarter of 2015, our Board of Directors declared a dividend of $0.30 per share of common stock. Dividend payments during the thirty-nine weeks of 2015 totaled $33.3 million. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors.
New Accounting Pronouncements
See Note 16 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for a discussion of new accounting pronouncements.
Off-Balance Sheet Arrangements
In July 2015, we entered into a Credit Facility with HSBC, whereby HSBC has provided us with a revocable, uncommitted credit facility up to an amount of 25.0 million euro. The purpose of this facility is to provide a more efficient means of issuing guarantees to our customers when required by contractual terms. Under the terms of the Credit Facility, when requested, HSBC will issue bank guarantees on behalf of the company and our affiliates. Issuance of the guarantee does not create a liability to the company unless it is called by the customer, at which point we would record a liability for the amount that is due under the guarantee to the bank. As of September 27, 2015, HSBC has issued $4.5 million in guarantees under the Credit Facility and we have no liabilities outstanding under the Credit Facility.

32

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 2014 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on February 23, 2015.
We undertake hedging transactions and enter into foreign forward exchange contracts to mitigate the impact of changes in various currency exchange rates. See Note 14 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
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 Securities and Exchange Commission rules and forms.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

33

PART II – OTHER INFORMATION
Item 1.
Legal Proceedings
We are involved in various legal proceedings and receive claims from time to time, arising in the normal course of our business activities, including claims for alleged infringement or violation of intellectual property rights. We are not a party to any litigation that is expected to have a significant effect on our operations or business.
Item 1A. Risk Factors
A description of the risks and uncertainties associated with our business is set forth below. You should carefully consider such risks and uncertainties, together with the other information contained in this Quarterly Report on Form 10-Q and in our other public filings. If any of such risks and uncertainties actually occurs, our business, financial condition or operating results could differ materially from the plans, projections and other forward-looking statements included in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Part I, Item 2 of this Quarterly Report on Form 10-Q and elsewhere in this Quarterly Report on Form 10-Q and in our other public filings and public disclosures. In addition, if any of the following risks and uncertainties, or if any other risks and uncertainties, actually occurs, our business, financial condition or operating results could be harmed substantially, which could cause the market price of our stock to decline, perhaps significantly.
We operate in highly competitive industries, and we cannot be certain that we will be able to compete successfully in such industries.
The industries in which we operate are intensely competitive. Established companies, both domestic and foreign, compete with us in each of our product lines. Some of our competitors have greater financial, engineering, manufacturing and marketing resources than we do and may price their products very aggressively. In addition, these competitors may be willing to operate at a less profitable level than at which we would expect to operate. Our significant competitors include, among others: JEOL Ltd., Carl Zeiss SMT A.G., Hitachi High Technologies Corporation and Tescan, a.s. In addition, some of our competitors have formed collaborative relationships and otherwise may cooperate with each other.
To compete successfully, we must succeed in our R&D efforts, develop new products and production processes, and improve our existing products and processes ahead of competitors. Our R&D efforts are critical to our success and are aimed at solving complex problems, and we do not expect all of our projects to be successful. We may be unable to develop and market new products successfully, and the products we invest in and develop may not be well received by customers. Our R&D investments may not generate significant operating income or contribute to our future operating results for several years and such contributions may not meet our expectations or even cover the costs of such investments. Additionally, the products and technologies offered by others may affect demand for or pricing of our products. These types of events could negatively affect our competitive position and may reduce revenue, increase costs, lower gross margin percentages, or require us to impair our assets.
The identity and composition of our competitors may change as we increase our focus on application-specific workflows and new market opportunities, such as the oil and gas services sector. As we expand into new markets, we will face competition not only from our existing competitors, but also from other established competitors with stronger technological, marketing and sales positions in those markets.
Our customers must make a substantial investment to install and integrate capital equipment into their laboratories and process applications. For example, once a manufacturer has selected a particular vendor’s capital equipment, the manufacturer generally relies on that equipment for a specific production line or process control application and frequently will attempt to consolidate its other capital equipment requirements with the same vendor. Accordingly, if a particular customer selects a competitor’s capital equipment, we expect to experience difficulty selling to that customer for a significant period of time.
Our ability to compete successfully depends on a number of factors both within and outside of our control, including:
•
price;
•
product quality;
•
breadth of product line;
•
system performance;
•
ease of use;
•
type and breadth of product applications;
•
cost of ownership;
•
global technical service and support;

34

•
success in developing or otherwise introducing new products; and
•
foreign currency fluctuations.
We cannot be certain that we will be able to compete successfully based on these or other factors, which could negatively impact our revenues, gross margins and net income in the future.
Because most of our product shipments occur in the last month of a quarter, we are at risk of one or more transactions not being delivered according to forecast.
We have historically shipped approximately 70% of our products in the last month of each quarter. In addition, we rely on a significant amount of book and ship business (revenue from tools booked and sold in the same quarter) in any given quarter. Because any one sale may be significant in meeting our quarterly sales projection (as our average selling price for a tool is over $1 million), any slippage of shipments into a subsequent quarter may result in our not meeting our quarterly sales projection, which may adversely impact our results of operations for the quarter.
Because we have significant operations outside of the U.S., we are subject to political, economic and other international conditions that could result in increased operating expenses and regulation of our products and increased difficulty in maintaining operating and financial controls.
Because a significant portion of our operations occur outside of the U.S., our revenues and expenses are impacted by foreign economic and regulatory conditions. Approximately 67%, 67% and 70% of our sales came from outside the U.S. in the thirty-nine weeks of 2015, 2014 and 2013, respectively. We have manufacturing facilities in Brno, Czech Republic, Eindhoven, The Netherlands and Munich, Germany and sales offices in many other countries. Over 80% of our products are manufactured in Europe.
Moreover, we operate in over 50 countries, including in 25 where we have a direct presence, and we are seeking to establish a direct presence in additional countries. 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;
•
protectionist laws and business practices that favor local companies;
•
price and currency exchange rates and controls;
•
taxes and tariffs;
•
difficulties in collecting accounts receivable;
•
travel and transportation difficulties resulting from actual or perceived health risks;
•
security concerns, such as armed conflict and civil or military unrest, political and economic instability and terrorist activity;
•
risk of failure of internal controls and failure to detect unauthorized transactions; and
•
changing and differing laws and regulations worldwide affecting our operations in areas including, but not limited to, intellectual property ownership and infringement, anti-corruption, import and export requirements, taxes, data privacy, competition, employment and environmental health and safety.
The industries in which we sell our products are cyclical, which may cause our results of operations to fluctuate and changes in product demands from our customers may increase volatility and adversely impact our ability to forecast revenues.
Our business depends in large part on the capital expenditures of customers within our Industry Group and Science Group. See “Net Sales by Segment” included in Part I, Item 2 of this Quarterly Report on Form 10-Q for additional information.
The largest part of our Industry Group is revenue derived from the semiconductor industry. This industry is cyclical and has experienced significant economic downturns at various times in the last decade. Such downturns have been characterized by diminished product demand, accelerated erosion of average product selling prices and production overcapacity. A downturn in this industry, or the businesses of one or more of our customers, could have a material adverse effect on our business, prospects, financial condition and results of operations. During downturns, our sales and gross profit margins generally decline. In addition, the continued adoption of our near-line product solutions, which involves the sale of higher priced tools and longer lead times, has increased the volatility of our sales to this industry and our ability to accurately forecast revenues.

35

A significant portion of our Science Group revenue is dependent on government investments in research and development of new technology. To the extent that governments, especially in Europe or the U.S., reduce their spending in response to budget deficits and debt limitations, demand for our products could be affected. The funding cycles for our customers tend to extend over multiple quarters and several countries have reaffirmed their commitment to scientific research, but the longer-term impact of potential government fiscal austerity measures on our growth rate cannot be determined at this time. We have also seen a slowing of orders in China as their government continues implementation and enforcement of anti-corruption rules which has extended the time for institutions to place new orders, impacting our Science Group.
As a capital equipment provider, our revenues depend in large part on the spending patterns of our customers, who could delay expenditures or cancel orders in reaction to variations in their businesses or general economic conditions. Because a high proportion of our costs are fixed, we have a limited ability to reduce expenses quickly in response to revenue shortfalls. In a prolonged economic downturn, we may not be able to reduce our significant fixed costs, such as manufacturing overhead, capital equipment or research and development costs, which may cause our gross margins to erode and our earnings to decline.
Our acquisition and investment strategy subjects us to risks associated with evaluating and pursuing these opportunities and integrating these businesses.
In addition to our efforts to develop new technologies from internal sources, we may also seek to acquire new technologies or operations from external sources. On January 9, 2015 we acquired certain assets and liabilities of Eisenberg Bros. Ltd., which previously operated as our exclusive agent in Israel for sales of FEI products and services.
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, legal and intellectual property issues, failure to properly integrate acquisitions, the possible write-downs of impaired assets and the potential loss of key employees of the acquired companies. The inability to effectively manage any of these risks could seriously harm our business. Additionally, difficulties in integrating our acquisitions into our internal control structure could result in a failure of our internal controls over financial reporting, which, in turn, could create a material weakness.
To the extent we make investments in entities that we control, or have significant influence in, our financial results will reflect our proportionate share of the financial results of the entity.
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 uncertainty.
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. 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. 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.
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 we may be entitled to receive a cancellation fee depending on the stage of completion. During the thirty-nine weeks of 2015 and 2014, we experienced cancellations of $6.5 million and $3.9 million, respectively.
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 and for other reasons. This is particularly true of our high-performance TEMs which often have specialized site requirements.
Our orders can have lead times of six to twelve months resulting in more orders scheduled for delivery of goods or services beyond 12 months. Individual orders can include many elements due to our customers ordering higher priced tools, placing multiple tool orders, and purchasing multi-year service contracts. Each of these factors may increase the volatility of our future revenue.
Due to these and other factors, our net revenues and results of operations have fluctuated in the past and are likely to fluctuate significantly in the future on a quarterly and annual basis. It is possible that in some future quarter or quarters our results of operations will be below the expectations of public market analysts or investors. In such event, the market price of our common stock may decline significantly.

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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, results of operations and cash flows.
A significant portion of our sales and expenses are denominated in currencies other than the U.S. dollar, principally the euro and Czech koruna. For the thirty-nine weeks of 2015, 2014 and 2013, approximately 24%, 27% and 30% of our revenue was denominated in euros, respectively, while more than half of our expenses were denominated in euros, Czech koruna, or other foreign currencies. Particularly as a result of this imbalance, changes in the exchange rate between the U.S. dollar and foreign currencies, principally the euro and Czech koruna, can impact our revenues, gross margins, results of operations and cash flows. We undertake hedging transactions primarily to limit our exposure to changes in the dollar/euro and dollar/Czech koruna exchange rates. The hedges are designed to protect us as the dollar weakens but also provide us with some flexibility if the dollar strengthens. In addition, fluctuations in currency rates may negatively impact the demand for our products by making our products more expensive for our customers.
Achieving hedge designation is based on evaluating the effectiveness of the derivative contracts’ ability to mitigate the foreign currency exposure of the linked transaction. We are required to monitor the effectiveness of all new and open derivative contracts designated as hedges on a quarterly basis. Failure to meet the hedge accounting requirements could result in the requirement to record unrealized gains and losses into net income in the current period. This failure could result in significant fluctuations in operating results. In addition, we will continue to recognize unrealized gains and losses related to the changes in fair value of derivative contracts not designated as hedges in the current period net income. Accordingly, the related impact to operating results may be recognized in a different period than the foreign currency impact of the hedged transaction.
We also enter into foreign forward exchange contracts that are designed to partially mitigate the impact of specific cash, receivables or payables positions denominated in foreign currencies. See Note 14 of the Condensed Notes to the Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional information.
The volatility of dollar/euro and dollar/Czech koruna exchange rates can make it more difficult for us to deploy our hedging program and create effective hedges or to achieve the desired outcome.
Global economic conditions may adversely affect our industry, business and results of operations.
The future economic climate may be less favorable than that of the past. Any slowdown in global economic conditions has led, and could lead, to reduced consumer and business spending in the future, including by our customers and the purchasers of their products and services. If such spending slows down or decreases, our industry, business and results of operations may be adversely impacted. Also, in times of economic distress, hardship, bankruptcy and insolvency among our customers could increase. This may make it more difficult to collect on receivables.
Our gross margins are dependent on many factors, some of which are not directly controlled by the company.
These factors are:
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significant variation in our gross margin among products. Any substantial change in product mix could change our gross margin;
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sales to our Industry Group customers contribute, on average, a higher proportion of our gross margin than do sales to our Science Group customers. Any significant downturn affecting these customers would have a negative impact on our gross margin;
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pricing and acceptance of higher-margin new products;
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realization of manufacturing efficiencies from our new facilities;
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realization of material cost savings through migration of the supply chain to lower cost suppliers and re-engineering of existing products;
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continued improvement in gross margins from our installed base; and
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movements in foreign currency exchange rates and impact of hedging.
Our inability to control any one of these factors could negatively impact our gross margins and operating results.
Our business is complex, and changes to the business may not achieve their desired benefits. In addition, many of our current and planned products are highly complex, creating manufacturing, planning and control challenges that may lead to higher costs, and our products may contain defects or errors that can only be detected after installation, which may harm our reputation and damage our business.
Our business is based on a myriad of technologies, encompassed in multiple different product lines, addressing various customers in a range of markets in different regions of the world. A business of our breadth and complexity requires significant management time, attention and resources. In addition, significant changes to our business, such as changes in manufacturing, operations,

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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. Moreover, we operate through various foreign subsidiaries that are subject to local corporate, labor and other laws. Specifically, the requirements that certain actions of our subsidiaries are subject to approval by local workers councils and supervisory boards could impair the company's ability to take various actions and could result in unanticipated additional expense and delays. 
In addition, the complexity of product lines and diversity of our customer base creates manufacturing planning and control challenges that may lead to higher costs of materials and labor, increased service costs, delayed shipments and excessive inventory. Our products incorporate leading-edge technology, including both hardware and software components, for which software components may contain bugs that unexpectedly interfere with expected operations. There can be no assurance that our extensive product development, manufacturing and pre-shipment testing processes will be adequate to detect all defects, errors, failures and quality issues, which may interfere with customer satisfaction, reduce sales opportunities, affect gross margins or result in claims against us. Failure to effectively manage these manufacturing and product testing issues may result in the loss of, or delay in, market acceptance of our products, loss of sales, cancellation of orders, product returns, diversion of our resources, legal actions by our customers and other losses to us or our customers, which would harm our business and adversely affect our revenues and profitability. In addition, we could have to replace certain components and/or provide remediation in response to the discovery of defects in products after they are shipped. Also, our ability to recognize revenue that has been deferred on sales of new products could be negatively impacted if all conditions for revenue recognition are not met. These factors could materially impact our financial position, results of operations or cash flow.
We rely on a limited number of suppliers to provide certain key parts and components. Failure of any of these suppliers to provide us with quality products in a timely manner could negatively affect our revenues and results of operations.
Failure of critical suppliers of parts, components and manufacturing equipment to deliver sufficient quantities to us in a timely and cost-effective manner could negatively affect our business, including our ability to convert backlog into revenue. Although we currently use numerous vendors to supply parts, components and subassemblies for the manufacture and support of our products, some key parts may only be obtained from a single supplier or a limited group of suppliers. In particular, we rely on: VDL Enabling Technologies Group, NTS Group, Frencken Mechatronics B.V., Keller Technology, Schneeberger AG, Prodrive Technologies and AZD Praha s.r.o. for our supply of mechanical parts and subassemblies; Gatan, Inc., Edax Inc. and Bruker Corp. for critical accessory products; and Neways Electronics, N.V. for some of our electronic subassemblies. A portion of the subcomponents that make up the components and sub-assemblies supplied to us are proprietary in nature and are provided to our suppliers only from single sources. We monitor those parts subject to single or a limited source supply to seek to minimize factory down time due to unavailability of such parts, which could impact our ability to meet manufacturing schedules. In addition, some of our suppliers rely on sole suppliers. As a result of this concentration of key suppliers, our results of operations may be materially and adversely affected if we do not timely and cost-effectively receive a sufficient quantity of quality parts to meet our production requirements or if we are required to find alternative suppliers for these supplies. We may not be able to expand our supplier group or to reduce our dependence on single suppliers. If our suppliers are not able to meet our supply requirements, constraints may affect our ability to deliver products to customers in a timely manner, which could have an adverse effect on our results of operations. In addition, restrictions regulating the use of certain hazardous substances in electrical and electronic equipment in various jurisdictions may impact parts and component availability or our electronics suppliers’ ability to source parts and components in a timely and cost-effective manner. Overall, our reliance on a limited group of suppliers for some parts, components, and subassemblies, creates exposure to potential future cost increases for this equipment.
Our maintenance and repair revenue depends on our ability to reliably diagnose maintenance and repair requirements and supply replacement parts and consumables to our customers. Failure to deliver high quality parts and consumables in a timely manner could cause our business to suffer.
Our installed base of approximately 10,300 tools includes diverse products of varying ages, configurations, use cases, condition, and customer requirements and is dispersed in approximately 50 countries around the world. Providing logistical support for delivery of spare parts and consumables to these tools, particularly the older tools, can be difficult. We have attempted to address the complexity of our maintenance and repair requirements, in part, through a remote diagnostics system that allows us to remotely access tools through a virtual private network. If we are unable to effectively manage and support the supply and delivery of spare parts and consumables to our customers we may damage our reputation and business.
Our business relies on various electronic data systems and their functioning is important to our business. Our business could be damaged if those systems fail or suffer a security breach or compromise.
Global privacy legislation, enforcement, and policy activity are rapidly expanding, changing and creating a complex compliance environment. We use a number of electronic data systems to help operate our business. If we are unable to maintain and safeguard our electronic data, our operating activities, financial reporting and intellectual property could be compromised, which may disrupt operations, harm our reputation and damage customer relationships. Further, we maintain personal information of our employees and a data breach that leads to the misuse or misappropriation of this information could cause the company to incur liability and

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damage our relationship with our employees and our reputation. Moreover, if we suffer an unauthorized intrusion into our own systems or the virtual private network providing for remote tool diagnostics at customer sites, we, or our customers, may suffer a loss of proprietary information that could create liability for us and undermine our business. Further, if our systems are inaccessible for a period of time, it may compromise our ability to perform business functions in a timely manner. Costs to comply with and implement privacy-related and data protection measures could be significant. Our failure to comply with federal, state, or international privacy-related or data protection laws and regulations could result in proceedings against us by governmental entities or others.
We depend on certain business processes for order entry and failure to adhere to those processes could impair our ability to properly book and fulfill orders.
We use business processes, including automated systems, to enter and track customer orders. Failure to adhere to these processes could result in errors in bookings, discounts on tool sales and failure to meet our global export compliance obligations. Further, inaccurate bookings information could lead to delays in shipping and having to rework orders. Such failures or inaccuracies could, in turn, cause us to suffer reduced margins, delayed revenue and governmental fines and penalties.
Our sales contracts often require delivery of multiple elements with complex terms and conditions that may cause our quarterly results to fluctuate.
Our system sales contracts 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.
In the thirty-nine weeks of 2015, 2014 and 2013, our top 10 customers accounted for approximately 30%, 29%, and 22% of our total annual net revenue, respectively. One customer accounted for just over 10% of total annual net revenue during 2013 and no customers accounted for 10% or more of total annual net revenue in 2014 or the thirty-nine weeks of 2015. 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.
Certain of our significant customers have adopted policies relating to sustainability, supply chain management, disaster recovery and other initiatives that may result in significant additional costs depending on the actions we must take in order to comply. Our failure to comply with such policies and initiatives could result in loss of customer contracts or relationships, resulting in significant harm to our business.
We may not be able to enforce our intellectual property rights, especially in foreign countries, which could have a material adverse effect on our business.
Our success depends in large part on the protection of our proprietary rights. We generally rely on patents, copyrights, trademarks and trade secret laws to establish and maintain proprietary rights in our technology, products and services. We incur significant costs to obtain and maintain patents and other intellectual property rights and to defend our intellectual property. We also rely on the laws of the U.S. and other countries where we develop, manufacture or sell products and services to protect our proprietary rights. We may not be successful in protecting these proprietary rights, these rights may not provide the competitive advantages that we expect or other parties may challenge, invalidate or circumvent these rights. More specifically, we depend on trade secrets used in the development and manufacture of our products and delivery of our services. We endeavor to protect these trade secrets, but the measures taken to protect them may be inadequate or ineffective. These risks may increase as we focus on application-specific workflows and certain market opportunities, such as those in the oil and gas services sector, where key aspects of our technology may be made publicly available to competitors and new market entrants.
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. Approximately 67%, 67% and 70% of our sales came from outside the U.S. in the thirty-nine weeks of 2015, 2014 and 2013, respectively, and if we fail to adequately protect our intellectual property rights in these countries, our business may be materially adversely affected.
Infringement of our proprietary rights could result in weakened capacity to compete for sales and increased litigation costs, both of which could have a material adverse effect on our business, product gross margins, prospects, financial condition and results of operations.

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If third parties assert that we violate their intellectual property rights, our business and results of operations may be materially adversely affected.
Some of our competitors hold patents or other intellectual property rights covering a variety of technologies that may be included in some of our products and services. In addition, some of our customers may use our products for applications that are similar to those covered by these patents or other intellectual property rights. From time to time, we, and our respective customers, have received correspondence from our competitors claiming that some of our products, as sold by us or used by our customers, may infringe one or more of these patents or other intellectual property rights. Any claim of infringement from a third party, even one without merit, could cause us to incur substantial costs defending against the claim, and could distract our management from running the business.
In addition, our competitors or other entities, including non-practicing entities, may assert infringement claims against us or our customers in the future with respect to current or future products or uses, and these assertions, even those without merit, may result in costly litigation or require us to obtain a license to use intellectual property rights of others. Additionally, if claims of infringement are asserted against our customers, those customers may seek indemnification from us for damages or expenses they incur.
If we become subject to additional infringement claims, we will evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question, developing non-infringing technology 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, develop non-infringing technology 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.
Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions due to our lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risk.
If we are unable to pay quarterly dividends or repurchase our stock at intended levels, our reputation and stock price may be harmed.
In May 2015, our Board of Directors reauthorized our share repurchase program. Under the reauthorization, which expires in May 2017, we may repurchase up to an additional 2.0 million shares of our common stock. As of September 27, 2015, 1.4 million shares of our common stock remained available for repurchase pursuant to our share repurchase program. In June 2012, our Board of Directors approved the initiation of quarterly cash dividends to holders of our common stock. The declaration and payment of dividends to shareholders in the future is subject to the discretion of our Board of Directors and capital availability. Dividends have been paid under this program each quarter since its inception in June 2012. The dividend and stock repurchase program may require the use of a significant portion of our cash earnings. As a result, we may not retain a sufficient amount of cash to fund our operations or finance future growth opportunities, new product development initiatives and unanticipated capital expenditures. Further, our Board of Directors may, at its discretion, decrease the intended level of dividends or entirely discontinue the payment of dividends at any time. The stock repurchase program may be limited at any time. Our ability to pay dividends and repurchase stock will depend on our ability to generate sufficient cash flows from operations in the future. This ability may be subject to certain economic, financial, competitive and other factors that are beyond our control. Any failure to pay dividends or repurchase stock after we have announced our intention to do so may negatively impact our reputation and investor confidence in us and may negatively impact our stock price.
Restructuring activities may be disruptive to our business and financial performance. Any delay or failure by us to execute planned cost reductions could also be disruptive and could result in total costs and expenses that are greater than expected.
From time to time, we have engaged in various restructuring and infrastructure improvement programs in order to increase operational efficiency, consolidate sites, reduce costs and balance the effects of currency fluctuations on our financial results. These actions have included reductions of work-force, site consolidations, and migrating portions of our supply chain to dollar-linked contracts.
Restructuring has the potential to adversely affect our business, financial condition and results of operations due to potential disruption of manufacturing operations, our supply chain and other aspects of our business. Employee morale and productivity could also suffer and result in unintended employee attrition. Loss of sales, service and engineering talent, in particular, could damage our business. Restructuring requires substantial management time and attention and has the potential to divert management from other important work. Moreover, we could encounter delays in executing our plans, which could cause further disruption and additional unanticipated expense. Some of our employees work in areas, such as Europe and Asia, where workforce reductions are highly regulated, and this could slow the implementation of planned workforce reductions. Restructuring plans may also fail to achieve the stated aims for reasons similar to those described in this paragraph.

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During the course of executing a restructuring, we could incur material non-cash charges such as write-downs of inventories or other tangible assets. We test our goodwill and other intangible assets for impairment annually or when an event occurs indicating the potential for impairment. If we record an impairment charge as a result of this analysis, it could have a material impact on our results of operations.
Because we do not have long-term contracts with our customers, our customers may stop purchasing our products at any time, which makes it difficult to forecast our results of operations and to plan expenditures accordingly.
We do not have long-term contracts with our customers. Accordingly:
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customers can stop purchasing our products at any time without penalty;
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customers may cancel orders that they previously placed;
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customers may purchase products from our competitors;
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we are exposed to competitive pricing pressure on each order; and
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customers are not required to make minimum purchases.
If we do not succeed in obtaining new sales orders from new and existing customers, our results of operations will be negatively impacted.
Many of our projects are funded under various government contracts and if we are found to have violated the terms of the government contracts or applicable statutes and regulations, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse effect on our business and results of operations.
Many of our projects are funded under various government contracts worldwide. Government contracts are subject to specific procurement regulations, contract provisions and requirements relating to the formation, administration, performance and accounting of these contracts. Many of these contracts include express or implied certifications of compliance with applicable laws and contract provisions. As a result of our government contracting, claims for civil or criminal fraud may be brought by the government for violations of these regulations, requirements or statutes. Further, if we fail to comply with any of these regulations, requirements or statutes, our existing government contracts could be terminated, we could be suspended or debarred from government contracting or subcontracting, including federally funded projects at the state level. If one or more of our government contracts are terminated for any reason, or if we are suspended from government work, we could suffer the loss of future contracts, which could have a material adverse effect on our business and results of operations.
Changes and fluctuations in government spending priorities and procurement practices could adversely affect our revenue.
Because a significant part of our overall business is generated either directly or indirectly as a result of international, national and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions or government administration, which are often unpredictable, may affect our revenues.
Political instability in key regions around the world, the U.S. government’s commitment to military-related expenditures and current uncertainty around global sovereign debt put at risk federal discretionary spending, including spending on nanotechnology research programs and projects that are of particular importance to our business. Also, changes in U.S. Congressional appropriations practices could result in decreased funding for some of our customers. At the state and local levels, the need to compensate for reductions in federal matching funds, as well as financing of federal unfunded mandates, creates strong pressures to cut back on research expenditures as well. A potential reduction of federal funding may adversely affect our business.
In addition, procurement practices and procedures vary widely in the various jurisdictions where we conduct business and changes in these practices and procedures could cause delay in obtaining orders and revenue. The anti-corruption measures undertaken by the Chinese government in its procurement practices have caused some delay in orders and revenue from Chinese government-controlled or related entities and these orders and revenue may continue to be delayed to the extent that these anti-corruption measures continue to be undertaken by the Chinese government.   
We have long sales cycles for our systems, which may cause our results of operations to fluctuate.
Our sales cycle can be 18 months or longer and is unpredictable. Variations in the length of our sales cycle could cause our net sales and, therefore, our business, financial condition, results of operations, operating margins and cash flows, to fluctuate widely from period to period. These variations could be based on factors partially or completely outside of our control.
The length of time it takes us to complete a sale depends on many factors, including:
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the efforts of our sales force and our independent sales representatives;
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changes in the composition of our sales force, including the departure of senior sales personnel;
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the history of previous sales to a customer;

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the complexity of the customer’s manufacturing processes;
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the introduction, or announced introduction, of new products by our competitors;
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the economic environment;
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the internal technical capabilities and sophistication of the customer; and
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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 which is very competitive. In addition, experienced management and technical, sales, marketing and service personnel in the technology industry are in high demand, and competition for such talent is intense. The loss of key personnel, or our inability to attract key personnel, could have an adverse effect on our business, financial condition or results of operations.
Our customers experience rapid technological changes, with which we must keep pace. We may be unable to properly ascertain new market needs, or introduce new products responsive to those needs, on a timely and cost-effective basis.
Customers in each of our Groups experience rapid technological change that requires new product introductions and enhancements. Our ability to remain competitive depends in large part on our ability to understand these changes and develop, in a timely and cost-effective manner, new and enhanced systems at competitive prices that respond to, and accurately predict, new market requirements. We may fail to ascertain and respond to the needs of our customers or fail to develop and introduce new and enhanced products that meet their needs, which could adversely affect our financial position. In addition, new product introductions or enhancements by competitors could cause a decline in our sales or a loss of market acceptance of our existing products. Increased competitive pressure also could lead to intensified price competition, resulting in lower margins, which could materially adversely affect our business, prospects, financial condition and results of operations.
Our success in developing, introducing and selling new and enhanced systems depends on a variety of factors, including:
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selection and development of product offerings;
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timely and efficient completion of product design and development;
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timely and efficient implementation of manufacturing processes;
•
effective sales, service and marketing functions; and
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product performance.
Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both the future demand for products under development and the equipment required to produce such products. We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new products or in enhancing existing products. On occasion, certain product and application developments have taken longer than expected. These delays can have an adverse effect on product shipments and results of operations.
The process of developing new high technology capital equipment products and services is complex and uncertain, and failure to accurately anticipate customers’ changing needs and emerging technological trends, to complete engineering and development projects in a timely manner and to develop or obtain appropriate intellectual property could significantly harm our results of operations. We must make long-term investments and commit significant resources before knowing whether our predictions will result in products that the market will accept.
To the extent that a market does not develop for a new product, we may decide to discontinue or modify the product. These actions could involve significant costs and/or require us to take charges in future periods. If these products are accepted by the marketplace, sales of our new products may cannibalize sales of our existing products. Further, after a product is developed, we must be able to manufacture sufficient volume quickly and at low cost. To accomplish this objective, we must accurately forecast production volumes, mix of products and configurations that meet customer requirements. If we are not successful in making accurate forecasts, our business and results of operations could be significantly harmed.

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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:
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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;
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our ability to utilize recorded deferred tax assets;
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changes in uncertain tax positions, interest or penalties resulting from tax audits; and
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changes in tax rates and laws or the interpretation of such laws.
Changes in the mix of these items and other items may cause our effective tax rate to fluctuate between periods, which could have a material adverse effect on our financial results.
Recently, the Organisation for Economic Co-operation and Development (“OECD”) released a series of reports in support of the Base Erosion and Profit Shifting (“BEPS”) Project, which provides governments with solutions for international tax reforms.   Changes to tax laws, regulations, and reporting requirements as a result of the BEPS Project could adversely impact our effective tax rate and cash flows, and have a negative 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.
Some of our systems use hazardous gases and high voltage power supplies as well as emit x-rays, which, if not properly contained, could result in property damage, bodily injury and death.
A product safety failure, such as a hazardous gas release, high voltage power supply problem, x-ray leak or extreme pressure release, could result in substantial liability and could also significantly damage customer relationships and our reputation and disrupt future sales. Moreover, remediation could require redesign of the tools involved, creating additional expense, increasing tool costs and damaging sales. In addition, a product safety failure could involve significant litigation that would divert management time and resources and cause unanticipated legal expense. Further, if such a failure involved violation of health and safety laws, we may suffer substantial fines and penalties in addition to the other damage suffered. Finally, failure to properly manage the regulatory requirements for shipment of dangerous products could cause delays in clearing customs and thereby cause delay or loss of revenue in any particular quarter.
Natural disasters, catastrophic events, terrorist acts and acts of war may seriously harm our business and revenues, costs and expenses and financial condition.
Our worldwide operations could be subject to earthquakes, volcanic eruptions, telecommunications failures, power interruptions, water shortages, closure of transport routes, tsunamis, floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics or pandemics, terrorist acts, acts of war and other natural or manmade disasters or business interruptions. For many of these events we carry no insurance. The occurrence of any of these business disruptions could seriously harm our revenue and financial condition and increase our costs and expenses. The impact of such events could be disproportionately greater on us than on other companies as a result of our significant international presence. Our corporate headquarters, and a portion of our research and development activities, are located on the Pacific coast, and other critical business operations and some of our suppliers are located in Asia, near major earthquake faults. We rely on major logistics hubs, primarily in Europe, Asia and the U.S. to manufacture and distribute our products and to move products to customers in various regions. Our operations could be adversely affected if manufacturing, logistics or other operations in these locations are disrupted for any reason, including those described above. The ultimate impact of our consolidation in certain geographical areas on us, our significant suppliers and our general infrastructure is unknown, but our revenue, profitability and financial condition could suffer in the event of a catastrophic event.

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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.
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. 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, or the questioning of current practices may adversely affect our reported financial results or change the way we conduct our business.
Provisions of our charter documents 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. 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 2.
Unregistered Sales of Equity Securities and Use of Proceeds
In May 2015, our Board of Directors reauthorized our share repurchase program. Under the reauthorization, which expires May 29, 2017, we may repurchase up to an additional 2.0 million shares of our common stock. The reauthorization was announced on June 4, 2015 and replaces our share repurchase program to repurchase up to a total of 4.0 million shares of our common stock approved by our Board of Directors in September 2010 and reauthorized in December 2012. The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. The repurchases are funded from existing cash resources and may be suspended or discontinued at any time at our discretion without prior notice.
The following table sets forth share repurchase information for the periods indicated:
 
Total Number of Shares Purchased
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum Number of Shares that May Yet Be Purchased Under the Plans
Period:
 
 
 
 
June 29 - July 26, 2015
94,853

$
82.11

94,853

1,827,655

July 27 - August 23, 2015
75,000

83.09

75,000

1,752,655

August 24 - September 27, 2015
375,000

75.08

375,000

1,377,655

Total third quarter
544,853

$
77.41

544,853

1,377,655

Subsequent to the end of the quarter, we repurchased an additional 300,000 shares for a total of $22.5 million, or an average of $74.96 per share.

44

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 September 15, 2014.(3)
 
 
 
31.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
 
31.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of The Sarbanes-Oxley Act of 2002.
 
 
 
32.1
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
 
32.2
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of The Sarbanes-Oxley Act of 2002.
 
 
 
101.INS
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

(1)
Incorporated by reference to our Quarterly Report on Form 10-Q for the quarter ended September 28, 2003.
(2)
Incorporated by reference 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 September 16, 2014.

45

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:
November 2, 2015
/s/ DON R. KANIA
 
 
 
Don R. Kania
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
 
Dated:
November 2, 2015
/s/ ANTHONY L. TRUNZO
 
 
 
Anthony L. Trunzo
 
 
 
Executive Vice President and
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)
 

46




Exhibit 31.1

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, Don R. Kania, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of FEI Company;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 2, 2015
 
 
By: /s/ DON R. KANIA
Don R. Kania
President and Chief Executive Officer
(Principal Executive Officer)






Exhibit 31.2

CERTIFICATION PURSUANT TO RULE 13a-14(a) OR RULE 15d-14(a)
OF THE SECURITIES EXCHANGE ACT OF 1934

I, Anthony L. Trunzo, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of FEI Company;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b.
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c.
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d.
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b.
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:
November 2, 2015
 
 
By: /s/ ANTHONY L. TRUNZO
Anthony L. Trunzo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)






Exhibit 32.1

CERTIFICATION 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

I, Don R. Kania, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report of FEI Company on Form 10-Q for the quarterly period ended September 27, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of FEI Company.
 
By: /s/ DON R. KANIA
Don R. Kania
President and Chief Executive Officer
(Principal Executive Officer)
 
November 2, 2015






Exhibit 32.2

CERTIFICATION 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

I, Anthony L. Trunzo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the quarterly report of FEI Company on Form 10-Q for the quarterly period ended September 27, 2015 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such quarterly report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of FEI Company.
 
By: /s/ ANTHONY L. TRUNZO
Anthony L. Trunzo
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
 
November 2, 2015


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