MKS INSTRUMENTS INC - 10-K - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) Overview We are a global provider of instruments, subsystems and process control solutions that measure, control, power, monitor and analyze critical parameters of advanced manufacturing processes to improve process performance and productivity. We also provide services relating to the maintenance and repair of our products, software maintenance, installation services and training.

Our products are derived from our core competencies in pressure measurement and control, materials delivery, gas composition analysis, control and information technology, power and reactive gas generation and vacuum technology. Our products are used in diverse markets, applications and processes. Our primary service markets are manufacturers of capital equipment for semiconductor devices, and for other thin film applications including flat panel displays, solar cells and light emitting diodes ("LEDs"), data storage media and other advanced coatings. We also leverage our technology into other markets with advanced manufacturing applications including medical equipment, pharmaceutical manufacturing, energy generation and environmental monitoring.

We have a diverse base of customers that includes manufacturers of semiconductor capital equipment and semiconductor devices, thin film capital equipment used in the manufacture of flat panel displays, LEDs, solar cells, data storage media and other coating applications; and other industrial, medical, energy generation, environmental monitoring and manufacturing companies, and university, government and industrial research laboratories. During the years 2012, 2011 and 2010, approximately 62%, 61% and 64% of our net sales, respectively, were to semiconductor capital equipment manufacturers and semiconductor device manufacturers. We expect that sales to semiconductor capital equipment manufacturers and semiconductor device manufacturers will continue to account for a substantial portion of our sales.

Effective in the second quarter of fiscal 2012, we changed our reporting segments from one to four segments based upon the information that is provided to the Company's chief operating decision maker. The Company's new reportable segments are: Advanced Manufacturing Capital Equipment, Analytical Solutions Group, Europe Region Sales & Service, and Asia Region Sales & Service.

The Advanced Manufacturing Capital Equipment segment includes the development, manufacture, sales and servicing of instruments and control products, power and reactive gas products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes.

Sales in this segment include both external sales and intercompany sales (which are recorded at agreed upon transfer prices). External sales of these products made in Europe or Asia are reported as sales in the Europe Region Sales & Service or Asia Region Sales & Service segments. The Analytical Solutions Group includes, gas composition analysis, information technology products and custom fabrication services. The Europe and Asia region sales and service groups mainly resell and service the Advanced Manufacturing Capital Equipment and Analytical Solutions Group products sold into their respective regions.

We group our products into four groups of similar products based upon similarity of product function. These four groups of products are: Instruments and Control Products, Power and Reactive Gas Products, Vacuum Products and Analytical Solutions Group Products.

Since the second quarter of 2012, we have seen a weakening in our orders and sales in the semiconductor markets as worldwide economic uncertainty and slowing consumer spending resulted in lower electronics demand and a slowing of investments in semiconductor production capacity. Net revenues to semiconductor capital equipment manufacture and semiconductor device manufacture customers declined by 20% in 2012 compared to 2011 and declined by 8% in 2011 compared to 2010, after growing by 167% in 2010 compared to 2009. The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we are uncertain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry.

25-------------------------------------------------------------------------------- Table of Contents Our net revenues sold to other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, decreased 24% in 2012 compared to the prior year. This decline was primarily caused by decreases in the solar and LED markets, which in total declined by 63%, as manufacturers are absorbing existing inventories from 2010 and 2011. Our net revenues to all other non-semiconductor markets (excluding solar and LED) declined by 7% in 2012 compared to the prior year. These advanced markets include general industrial, medical, solar, thin films, pharmaceutical and other markets. Approximately 38% of our net sales for 2012 were to other advanced markets and we anticipate that these markets will grow and will represent a larger portion of our revenue.

A significant portion of our net sales is to operations in international markets. During the years 2012, 2011 and 2010, international net sales accounted for approximately 49%, 52% and 43% of our net sales, respectively. A significant portion of our international net sales were sales in Japan and Korea. We expect that international net sales will continue to represent a significant percentage of our total net sales.

On August 29, 2012, we completed our acquisition of Plasmart, Inc. located in Daejeon, Korea. Plasmart develops radio frequency (RF), plasma generation and monitoring systems for the semiconductor, flat panel display, active matrix organic light emitting diodes and solar photovoltaic industries. The purchase price was $22.6 million, net of $0.1 of cash acquired, after final working capital post close adjustments.

During 2010, we executed a plan to divest two product lines, as their growth potential no longer met our long-term strategic objectives. We completed the sale of Ion Systems, Inc. ("Ion") during the second quarter of 2010 and the sale of the assets of the Yield Dynamics, LLC ("YDI") business during the third quarter of 2010 and received total net proceeds of $15.6 million. The results of operations of the two product lines have been classified as discontinued operations in the consolidated statements of operations and comprehensive income for all periods presented.

Critical Accounting Policies and Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, inventory, warranty costs, stock-based compensation expense, intangible assets, goodwill and other long-lived assets, in-process research and development and income taxes. We base our estimates and judgments on historical experience and on various other factors that are believed 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.

We believe the following critical accounting policies affect the most significant judgments, assumptions and estimates we use in preparing our consolidated financial statements: Revenue Recognition and Allowance for Doubtful Accounts. Revenue from product sales is recorded upon transfer of title and risk of loss to the customer provided that there is evidence of an arrangement, the sales price is fixed or determinable, and collection of the related receivable is reasonably assured. In most transactions, we have no obligations to our customers after the date products are shipped other than pursuant to warranty obligations. For revenue arrangements with multiple deliverables, we allocate revenue to each element based upon their relative selling price using vendor-specific objective evidence ("VSOE"), or third-party evidence ("TPE") or based upon the relative selling price using estimated prices if VSOE or TPE does not exist. We then recognize revenue on each deliverable in accordance with our policies for product and service revenue 26 -------------------------------------------------------------------------------- Table of Contents recognition. We defer the fair value of any undelivered elements until the undelivered element is delivered. Fair value is the price charged when the element is sold separately. Shipping and handling fees billed to customers, if any, are recognized as revenue. The related shipping and handling costs are recognized in cost of sales.

We monitor and track the amount of product returns, provide for sales return allowances and reduce revenue at the time of shipment for the estimated amount of such future returns, based on historical experience. While product returns have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same return rates that we have in the past. Any significant increase in product return rates could have a material adverse impact on our operating results for the period or periods in which such returns materialize.

While we maintain a credit approval process, significant judgments are made by management in connection with assessing our customers' ability to pay at the time of shipment. Despite this assessment, from time to time, our customers are unable to meet their payment obligations. We continuously monitor our customers' credit worthiness, and use our judgment in establishing a provision for estimated credit losses based upon our historical experience and any specific customer collection issues that we have identified. While such credit losses have historically been within our expectations and the provisions established, there is no assurance that we will continue to experience the same credit loss rates that we have in the past. A significant change in the liquidity or financial position of our customers could have a material adverse impact on the collectability of accounts receivable and our future operating results.

Inventory. We value our inventory at the lower of cost (first-in, first-out method) or market. We regularly review inventory quantities on hand and record a provision to write-down excess and obsolete inventory to its estimated net realizable value, if less than cost, based primarily on our estimated forecast of product demand. Once our inventory value is written-down and a new cost basis has been established, the inventory value is not increased due to demand increases. Demand for our products can fluctuate significantly. A significant increase in the demand for our products could result in a short-term increase in the cost of inventory purchases as a result of supply shortages or a decrease in the cost of inventory purchases as a result of volume discounts, while a significant decrease in demand could result in an increase in the charges for excess inventory quantities on hand. In addition, our industry is subject to technological change, new product development and product technological obsolescence that could result in an increase in the amount of obsolete inventory quantities on hand. Therefore, any significant unanticipated changes in demand or technological developments could have a significant impact on the value of our inventory and our reported operating results. For 2012, 2011 and 2010, our total charges for excess and obsolete inventory totaled $15.0 million, $14.9 million and $13.2 million, respectively.

Warranty Costs. We provide for the estimated costs to fulfill customer warranty obligations upon the recognition of the related revenue. We provide warranty coverage for our products ranging from 12 to 36 months, with the majority of our products ranging from 12 to 24 months. We estimate the anticipated costs of repairing our products under such warranties based on the historical costs of the repairs and any known specific product issues. The assumptions we use to estimate warranty accruals are reevaluated periodically in light of actual experience and, when appropriate, the accruals are adjusted. Our determination of the appropriate level of warranty accrual is based upon estimates. Should product failure rates differ from our estimates, actual costs could vary significantly from our expectations.

Stock-Based Compensation Expense. We record compensation expense for all share-based payment awards to employees and directors based upon the estimated fair market value of the underlying instrument. Accordingly, share-based compensation cost is measured at the grant date, based upon the fair value of the award.

We typically issue restricted stock units ("RSUs") as stock-based compensation.

We also provide employees the opportunity to purchase shares through an Employee Stock Purchase Program ("ESPP"). For RSUs, the fair value is the stock price on the date of grant. For shares issued under our ESPP, we have estimated the fair value on the date of grant using the Black Scholes pricing model, which is affected by our stock price as well as 27-------------------------------------------------------------------------------- Table of Contents assumptions regarding a number of complex and subjective variables. These variables include our expected stock price volatility over the term of the awards, expected life, risk free interest rate and expected dividends.

Management determined that blended volatility, a combination of historical and implied volatility, is more reflective of market conditions and a better indicator of expected volatility than historical or implied volatility alone. We are also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates.

Certain RSUs involve stock to be issued upon the achievement of performance conditions (performance shares) under our stock incentive plans. Such performance shares become available subject to time-based vesting conditions if, and to the extent that, financial or operational performance criteria for the applicable period are achieved. Accordingly, the number of performance shares earned will vary based on the level of achievement of financial or operational performance objectives for the applicable period. Until such time that our performance can ultimately be determined, each quarter we estimate the number of performance shares more likely than not to be earned based on an evaluation of the probability of achieving the performance objectives. Such estimates are revised, if necessary, in subsequent periods when the underlying factors change our evaluation of the probability of achieving the performance objectives.

Accordingly, share-based compensation expense associated with performance shares may differ significantly from the amount recorded in the current period.

The assumptions used in calculating the fair value of share-based payment awards represents management's best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

Intangible Assets, Goodwill and Other Long-Lived Assets. As a result of our acquisitions, we have identified intangible assets and generated significant goodwill. Definite-lived intangible assets are valued based on estimates of future cash flows and amortized over their estimated useful life. Goodwill and indefinite-lived intangible assets are subject to annual impairment testing as well as testing upon the occurrence of any event that indicates a potential impairment. Intangible assets and other long-lived assets are also subject to an impairment test if there is an indicator of impairment. The carrying value and ultimate realization of these assets is dependent upon estimates of future earnings and benefits that we expect to generate from their use. If our expectations of future results and cash flows are significantly diminished, intangible assets and goodwill may be impaired and the resulting charge to operations may be material. When we determine that the carrying value of intangibles or other long-lived assets may not be recoverable based upon the existence of one or more indicators of impairment, we use the projected undiscounted cash flow method to determine whether an impairment exists, and then measure the impairment using discounted cash flows.

The estimation of useful lives and expected cash flows require us to make significant judgments regarding future periods that are subject to some factors outside of our control. Changes in these estimates can result in significant revisions to the carrying value of these assets and may result in material charges to the results of operations.

We have elected to perform our annual goodwill impairment test as of October 31 of each year, or more often if events or circumstances indicate that there may be impairment. Goodwill is the amount by which the cost of acquired net assets exceeded the fair value of those net assets on the date of acquisition. We allocate goodwill to reporting units at the time of acquisition or when there is a change in the reporting structure and bases that allocation on which reporting units will benefit from the acquired assets and liabilities. Reporting units are defined as operating segments or one level below an operating segment, referred to as a component.

We have the option of first assessing qualitative factors to determine whether it is necessary to perform the current two-step impairment test or we can perform the two-step impairment test without doing the qualitative assessment.

In the current fiscal year, we performed the quantitative two-step goodwill impairment analysis. In the first step, we compare the fair value of our reporting unit to its carrying value. If the carrying value of the net 28-------------------------------------------------------------------------------- Table of Contents assets assigned to the reporting unit exceeds the fair value of our reporting unit, then the second step of the impairment test is performed in order to determine the implied fair value of the reporting unit's goodwill. If the carrying value of our reporting unit's goodwill exceeds its implied fair value, then we record an impairment loss equal to the difference.

We determined the fair value of our reporting units using a discounted cash flow analysis, derived from internal earnings and internal and external market forecasts. Discount rates are based on a weighted average cost of capital ("WACC"), which represents the average rate a business must pay its providers of debt and equity. The WACC used to test goodwill was derived from a group of comparable companies. The cash flows employed in the DCF analysis were derived from internal earnings and forecasts and external market forecast. Assumptions in estimating future cash flows are subject to a high degree of judgment and complexity. We make every effort to forecast these future cash flows as accurately as possible with the information available at the time the forecast is developed.

As of October 31, 2012, we performed our annual impairment assessment of goodwill using the two-step analysis and determined that there was no impairment. We will continue to monitor and evaluate the carrying value of goodwill. If market and economic conditions or business performance deteriorate, this could increase the likelihood of us recording an impairment charge.

In-Process Research and Development. We value tangible and intangible assets acquired through our business acquisitions, including in-process research and development ("IPR&D"), at fair value. We determine IPR&D through established valuation techniques for various projects for the development of new products and technologies and capitalize IPR&D as an intangible asset. If the projects are completed, the intangible asset will be amortized to earnings over the expected life of the completed product. If the R&D projects are abandoned, we will write-off the related intangible asset.

The value of IPR&D is determined using the income approach, which discounts expected future cash flows from projects under development to their net present value. Each project is analyzed and estimates and judgments are made to determine the technological innovations included in the utilization of core technology, the complexity, cost, time to complete development, any alternative future use or current technological feasibility and the stage of completion.

Income Taxes. We evaluate the realizability of our net deferred tax assets and assess the need for a valuation allowance on a quarterly basis. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income to realize the assets. We record a valuation allowance to reduce our net deferred tax assets to the amount that may be more likely than not to be realized. To the extent we established a valuation allowance an expense is recorded within the provision for income taxes line in the consolidated statements of operations and comprehensive income. In future periods, if we were to determine that it was more likely than not that we would not be able to realize the recorded amount of our remaining net deferred tax assets, an adjustment to the valuation allowance would be recorded as an increase to income tax expense in the period such determination was made.

Accounting for income taxes requires a two-step approach to recognize and measure uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if, based on the technical merits, it is more likely than not that the position will be sustained upon audit, including resolutions of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. We re-evaluate these uncertain tax positions on a quarterly basis. This evaluation is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit and new audit activity. Any change in these factors could result in the recognition of a tax benefit or an additional charge to the tax provision.

29-------------------------------------------------------------------------------- Table of Contents Results of Operations The following table sets forth, for the periods indicated, the percentage of total net sales of certain line items included in our consolidated statements of operations and comprehensive income data: Years Ended December 31, 2012 2011 2010 Net revenues: Product 83.4 % 87.4 % 89.5 % Service 16.6 12.6 10.5 Total net revenues 100.0 % 100.0 % 100.0 % Cost of revenues: Product 48.2 47.1 49.4 Service 9.9 7.3 6.2 Total cost of revenues 58.1 % 54.4 % 55.6 % Gross profit 41.9 % 45.6 % 44.4 % Research and development 9.3 7.4 7.3 Selling, general and administrative 19.8 15.6 14.1 Litigation 0.8 - - Completed acquisition costs 0.2 - - Restructuring 0.1 - - Amortization of acquired intangible assets 0.1 0.1 0.2 Gain on sale of asset - - (0.1 ) Income from operations 11.6 % 22.5 % 22.9 % Interest income, net 0.1 0.1 0.1 Income from continuing operations before income taxes 11.7 % 22.6 % 23.0 % Provision for income taxes 4.2 6.8 7.4 Income from continuing operations 7.5 % 15.8 % 15.6 % Income from discontinued operations, net of taxes - - 1.1 Net income 7.5 % 15.8 % 16.7 % Year Ended 2012 Compared to 2011 and 2010 Net Revenues Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Product $ 536.8 $ 719.0 $ 763.4 (25.3 )% (5.8 )% Service 106.7 103.5 89.7 3.1 15.4 Total net revenues $ 643.5 $ 822.5 $ 853.1 (21.8 )% (3.6 )% Product revenues decreased $182.2 million during 2012 compared to the prior year. Product revenues related to our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers decreased by $101.3 million, or 23.3%, as we believe that slowing consumer spending resulted in lower electronics demand, rising chip inventories and a slowing of investment in semiconductor production capacity. Our product revenues for other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, decreased by $80.9 million, or 28.4%. We saw a significant decrease in the solar and LED markets, which in total decreased by 63.4%, as end market customers continued to utilize existing product shipments from 2010 and 2011.

30 -------------------------------------------------------------------------------- Table of Contents Product revenues decreased $44.4 million during 2011 compared to the prior year.

Product revenues related to our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers decreased by $51.6 million, or 10.6%, as we believe that slowing consumer spending has resulted in lower electronics demand, rising chip inventories and a slowing of investment in semiconductor production capacity. Our product revenues for other advanced markets, which exclude semiconductor capital equipment and semiconductor device product applications, increased by $7.2 million, or 2.6%. We saw an increase in our solar and general industrial markets, offset by decreases in film, LED, medical and other markets. Our domestic product revenues decreased by $93.2 million, or 20.7%, mainly due to a high concentration of sales to the semiconductor markets. Our international markets increased by $48.8 million, or 15.6%, mainly due to sales in China, which increased by $36.7 million. This increase was mainly due to product revenues from a thin film solar customer in China.

Service revenues consisted mainly of fees for services related to the maintenance and repair of our products, software maintenance, installation services and training. Service revenues increased $3.2 million during 2012 compared to the prior year. The increase related primarily to our foreign locations where we have made investments in our service organizations. Service revenues increased $13.8 million during 2011 compared to 2010 as a result of a larger installed base of products and due to our continued investment in 2011 to grow our worldwide service business.

Total international net revenues, including product and service, were $316.6 million for 2012 or 49.2% of net sales, compared to $431.4 million for 2011, or 52.5% of net sales, and $369.0 million, or 43.2% of net sales, for 2010.

The following table sets forth our net revenues by reportable segment: Net Revenues Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Advanced Manufacturing Capital Equipment $ 479.8 $ 647.9 $ 712.7 (26.0 )% (9.1 )% Analytical Solutions Group 62.8 61.3 52.9 2.4 15.9 Europe Region Sales & Service 51.4 75.3 70.2 (31.6 ) 7.3 Asia Region Sales & Service 229.7 305.4 274.9 (24.8 ) 11.1 Corporate, Eliminations and Other (180.2 ) (267.4 ) (257.6 ) 32.6 (3.8 ) Total net revenues $ 643.5 $ 822.5 $ 853.1 (21.8 )% (3.6 )% Net revenues for the Advanced Manufacturing Capital Equipment segment, the Europe Region Sales & Service segment and the Asia Region Sales & Service segment decreased by 26.0%, 31.6% and 24.8%, respectively, for 2012, compared to 2011. This was primarily caused by the decrease in our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers which decreased 23.3% in the same period as noted above. The majority of our sales in these three reportable segments are sold to the semiconductor capital equipment and semiconductor device manufacturers. In addition, the decrease in the Europe Region Sales & Service segment was also impacted by a decrease related to the solar market.

Net revenues for the Advanced Manufacturing Capital Equipment segment decreased by 9.1% for 2011, compared to 2010. This was also primarily caused by the decrease in sales to our semiconductor capital equipment manufacturer and semiconductor device manufacturer customers, which decreased 10.6% in the same period as noted above.

31 -------------------------------------------------------------------------------- Table of Contents Net revenues for the Europe Region Sales & Service segment and the Asia Region Sales & Service segment increased by 7.3% and 11.1%, respectively, for 2011 compared to 2010. The increase in the Europe Region Sales & Service segment was mainly due to an increase in our other advanced markets and primarily from one customer in our coating/thin film market. The increase in the Asia Region Sales & Service segment was mainly due to an increase in our other advanced markets, primarily in our solar market. Both of the increases in the Europe and Asia Region Sales & Service segments were partially offset by minor decreases in our semiconductor markets in these segments in 2011.

Net revenues for the Analytical Solutions Group segment increased by 2.4% and 15.9% in 2012 and 2011, respectively, compared to the same periods in the prior years. This segment sells more to our other advanced markets rather than to our semiconductor market, and therefore, was not impacted as directly by the decrease in the semiconductor market in 2012 and 2011 as the other segments were. While we have seen a decrease in other advanced markets in 2012 and an increase in other advanced markets in 2011, the overall increases in 2012 and 2011 are primarily attributed to increases in sales in our general and industrial markets, which increased by 7.3% in 2012 and 94.3% in 2011, compared to the same periods in the prior years.

The following is gross profit as a percentage of net revenues by product and service: Gross Profit Years Ended December 31, % Points % Points Change in Change in (As a percentage of net revenues) 2012 2011 2010 2012 2011 Product 42.2 % 46.1 % 44.8 % (3.9 ) 1.3 Service 40.5 42.0 41.2 (1.5 ) 0.8 Total gross profit percentage 41.9 % 45.6 % 44.4 % (3.7 ) 1.2 Gross profit on product revenues decreased by 3.9 percentage points during 2012 compared to the prior year. The decrease was mainly due to a decrease of 3.7 percentage points due to unfavorable product revenue volume and overhead absorption from lower production and 0.3 percentage points due to higher excess and obsolete inventory charges. These decreases were partially offset by an increase of 0.2 percentage points due to lower compensation related expenses.

Gross profit on product revenues increased by 1.3 percentage points during 2011 compared to the prior year. The increase was mainly due to favorable product mix, which accounted for 4.6 percentage points of the overall increase. In addition, 0.9 percentage points of the overall increase is due to favorable foreign exchange rate fluctuations and 0.4 percentage points was due to a duties refund received in late 2011 on duties that were paid in prior years. These increases were partially offset by 2.4 percentage points due to higher overhead, 1.1 percentage points due to higher excess and obsolete inventory net charges and 1.1 percentage points due to unfavorable product revenue volume.

Cost of service revenues consists primarily of costs for providing services for repair and training which includes salaries and related expenses and other overhead costs. Service gross profit for 2012 decreased by 1.5 percentage points compared to the prior year. The decrease was mainly attributed to a decrease of 3.6 percentage points due to higher overhead spending. This decrease was partially offset by an increase of 1.9 percentage points due to favorable product mix and an increase of 0.5 percentage points due to favorable revenue volume. Service gross profit for 2011 increased 0.8 percentage points compared to the same period for the prior year. Of this increase, 1.8 percentage points was due to favorable volume and 1.4 percentage points was due to favorable foreign exchange rate fluctuations. These increases were offset by 2.5 percentage points related to unfavorable mix.

32-------------------------------------------------------------------------------- Table of Contents The following is gross profit as a percentage of net revenues by reportable segment: Gross Profit Years Ended December 31, % Points % Points Change in Change in (As a percentage of net revenues) 2012 2011 2010 2012 2011 Advanced Manufacturing Capital Equipment 35.7 % 40.7 % 41.3 % (5.0 ) (0.6 ) Analytical Solutions Group 52.2 51.9 48.8 0.3 3.1 Europe Region Sales & Service 29.5 28.3 27.9 1.2 0.4 Asia Region Sales & Service 16.1 14.8 17.8 1.3 (3.0 ) Corporate, Eliminations and Other (7.4 ) (4.8 ) 4.0 (2.6 ) (8.8 ) Total net revenues 41.9 % 45.6 % 44.4 % (3.7 ) 1.2 Gross profit for the Advanced Manufacturing Capital Equipment segment decreased 5.0 percentage points and 0.6 percentage points in 2012 and 2011, respectively, compared to the same periods in the prior year. The decrease of 5.0 percentage points in 2012 is primarily due to a decline in revenue volume. The decrease of 0.6 percentage points in 2011 is primarily due to a decline in revenue volume and higher excess and obsolete inventory charges, partially offset by favorable product mix.

Gross profit for the Analytical Solutions Group increased 0.3 percentage points and 3.1 percentage points in 2012 and 2011, respectively, compared to the same periods in the prior year. The slight increase of 0.3 percentage points in 2012 is primarily attributed to product mix, favorable revenue volume and lower warranty charges, partially offset by lower overhead spending. The increase of 3.1 percentage points in 2011 is primarily attributed to favorable revenue volume and favorable product mix.

Gross profit for the Europe Region Sales & Service segment increased 1.2 percentage points and 0.4 percentage points in 2012 and 2011, respectively, compared to the same periods in the prior year. The increase of 1.2 percentage points in 2012 is primarily related to favorable product mix, partially offset by a decline in revenue volume. The increase of 0.4 percentage points is primarily related to lower excess and obsolete inventory charges and favorable product mix, partially offset by higher overhead spending.

Gross profit for the Asia Region Sales & Service segment increased 1.3 percentage points and decreased 3.0 percentage points in 2012 and 2011, respectively, compared to the same periods in the prior year. The increase of 1.3 percentage points in 2012 is primarily related to favorable product mix, partially offset by lower revenue volume. The decrease of 3.0 percentage points in 2011 was primarily due to unfavorable product mix.

Research and Development Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011Research and development expenses $ 60.1 $ 61.0 $ 62.7 (1.5 )% (2.6 )% Research and development expenses decreased $0.9 million during 2012 compared to the prior year. The decrease resulted from additional cost control measures including a decrease of $0.9 million in consulting costs and a $0.5 million decrease in project materials. These decreases are partially offset by a $0.4 million increase in patent related costs.

Research and development expenses decreased $1.7 million during 2011 compared to the prior year. The decrease consists mainly of a $1.1 million decrease in spending on project materials and a $0.6 million decrease in consulting costs, both of which were the result of cost control measures taken primarily in the second half of 2011.

33 -------------------------------------------------------------------------------- Table of Contents Our research and development is primarily focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity.

We have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products and new product development, none of which is individually material to us. Current projects typically have durations of 3 to 30 months depending upon whether the product is an enhancement of existing technology or a new product. Our current initiatives include projects to enhance the performance characteristics of older products, to develop new products and to integrate various technologies into subsystems.

These projects support in large part the transition in the semiconductor industry to smaller integrated circuit geometries and in the flat panel display and solar markets to larger substrate sizes, which require more advanced process control technology. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products as well as legal costs associated with maintaining and defending our intellectual property.

We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets, and expect to continue to make significant investment in research and development activities. We are subject to risks if products are not developed in a timely manner, due to rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment. If our products are not chosen to be designed into our customers' products, our net sales may be reduced during the lifespan of those products.

Selling, General and Administrative Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Selling, general and administrative expenses $ 127.2 $ 128.0 $ 119.8 (0.6 )% 6.8 % Selling, general and administrative expenses decreased $0.8 million during 2012 compared to the prior year. The decrease consists mainly of a $2.5 million favorable impact from foreign exchange fluctuations, a $0.5 million decrease in facilities related expenses, a $0.4 million decrease in recruiting and relocation expenses and a $0.3 million decrease in advertising and investor relations expenses. These decreases are partially offset by a $1.8 million increase in professional fees, primarily related to legal expenses, a $0.5 million increase in depreciation expense and a $0.5 million increase in bad debt expense.

Selling, general and administrative expenses increased $8.2 million during 2011 compared to the prior year. The increase consists primarily of a $4.6 million unfavorable impact from foreign exchange fluctuations, mainly related to changes in the Japanese Yen, and a $4.0 million increase in professional fees, primarily related to information technology projects.

Litigation Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Litigation $ 5.3 $ - $ - 100.0 % 0.0 % Litigation with shareholders of one of our former subsidiaries was settled for $5.3 million during the third quarter of 2012. The complaint alleged certain claims against us including breach of contract and implied 34-------------------------------------------------------------------------------- Table of Contents covenants, and statutory violations. The claims sought unspecified damages and equitable relief. This litigation was long standing and we made the decision to reach a settlement primarily to eliminate future legal expenses related to the suit.

Completed Acquisition Costs Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011Completed acquisition costs $ 1.3 $ - $ - 100.0 % 0.0 % We incurred $1.3 million of acquisition costs in 2012 related to our August 2012 acquisition of Plasmart. These costs consisted of investment banking fees, legal fees and due diligence costs.

Restructuring Years Ended December 31, %Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Restructuring $ 0.3 $ - $ - 100.0 % 0.0 % During the fourth quarter of 2012, we implemented a workforce reduction plan as a result of a continued slowdown in our business. We reduced our worldwide workforce by 84 people and recorded a restructuring charge of $0.3 million. This restructuring was substantially complete at December 31, 2012.

Amortization of Acquired Intangible Assets Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011Amortization of acquired intangible assets $ 1.0 $ 1.0 $ 1.3 2.1 % (20.9 )% Amortization expense remained relatively flat during 2012 compared to the prior year. Increased amortization expense from our August 2012 Plasmart acquisition was offset by intangible assets that became fully amortized during the year. The decrease of $0.3 million from 2011 to 2010 was due to acquired intangible assets becoming fully amortized during the year.

Gain on Sale of Asset Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Gain on sale of asset $ - $ - $ 0.7 0.0 % (100.0 )% During 2010, we sold two vacated facilities for proceeds of $2.1 million and recorded a net gain of $0.7 million on the sale.

Interest Income, Net Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Interest income, net $ 0.9 $ 1.1 $ 0.9 (18.9 )% 22.9 % 35 -------------------------------------------------------------------------------- Table of Contents Net interest income decreased $0.2 million during 2012 compared to the prior year, partially due to higher interest expense related to the acquisition of Plasmart, which had debt when we acquired them in August 2012. Net interest income increased $0.2 million during 2011 compared to the prior year due to an increase in investment balances and a change in the mix of the overall investment portfolio.

Provision for Income Taxes Years Ended December 31, % Change % Change (Dollars in millions) 2012 2011 2010 in 2012 in 2011 Provision for income taxes $ 27.1 $ 56.3 $ 63.5 (51.9 )% (11.3 )% The provision for income taxes in 2012, 2011 and 2010 are comprised of U.S.

federal, state and foreign income taxes.

Our effective tax rate for the years 2012, 2011 and 2010 was 36.1%, 30.3% and 32.3%, respectively. The effective tax rate in 2012 and related tax provision is higher than the U.S. statutory tax rate primarily due to the expiration of certain tax incentives under U.S. tax law, and non-deductible acquisition costs that were offset in part by geographic mix of income and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate. On January 2, 2013, the American Taxpayer Relief Act of 2012 reinstated certain tax incentives with retroactive application to January 1, 2012, the tax effect of which will be recognized as a discrete event in the first quarter of 2013. Had the extension been enacted prior to January 1, 2013, our effective tax rate would have been reduced by approximately 3%.

The effective tax rates in 2011 and 2010 and related tax provisions are lower than the U.S. statutory tax rate primarily due to geographic mix of income and profits earned by our international subsidiaries being taxed at rates lower than the U.S. statutory tax rate.

At December 31, 2012, our total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $40.7 million. At December 31, 2011, our total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately $36.5 million. The net increase at December 31, 2012 from December 31, 2011 was primarily attributable to an increase in reserves for uncertain tax positions in 2012. As of December 31, 2012, if these benefits were recognized in a future period, the timing of which is not estimable, the net unrecognized tax benefit of $19.8 million, excluding interest and penalties, would impact our effective tax rate.

We accrue interest expense and, if applicable, penalties, for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. At December 31, 2012, 2011 and 2010, we had accrued interest on unrecognized tax benefits of approximately $1.6 million, $1.0 million and $1.0 million, respectively.

Over the next 12 months it is reasonably possible that we may recognize $2.5 million to $3.1 million of previously unrecognized tax benefits related to various U.S. federal, state and foreign tax positions as a result of the conclusion of various audits and the expiration of statutes of limitations. We are subject to examination by federal, state and foreign tax authorities. During the quarter ended June 30, 2012, the Internal Revenue Service commenced an examination of our U.S. federal tax filings for tax years 2007 through 2009. The statute of limitations in our other tax jurisdictions remains open between fiscal years 2006 through present.

On a quarterly basis, we evaluate both positive and negative evidence that affect the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income to realize the assets. During 2012, we increased our valuation allowance by $1.0 million primarily related to an increase in state tax credit carryforwards because we determined it is more likely than not that the deferred tax assets related to these attributes will not be realized. In 2011, we increased our valuation allowance by $1.2 million primarily related to 36-------------------------------------------------------------------------------- Table of Contents capital losses incurred from our foreign affiliates because we determined it is more likely than not that the deferred tax assets related to these attributes will not be realized. In 2011, we recorded a net benefit to income tax expense of $2.1 million, excluding interest and penalties, due to discrete reserve releases primarily related to the effective settlement of a German tax audit for years 2001 through 2005.

During 2006, we received a notification letter from the Israeli Ministry of Industry Trade and Labor ("MITL") indicating that our Israeli operations were in compliance with requirements relating to the tax holiday granted to our manufacturing operations in Israel in 2001. This tax holiday expired at December 31, 2011 and was subject to meeting continued investment, employment and other requirements under the guidelines of the MITL. This tax holiday resulted in income tax savings of approximately $1.0 million and $2.7 million for the years 2011 and 2010, respectively. Upon expiration of its tax holiday, the Company elected to be treated under a new preferential Israeli tax regime under which a tax rate of 10% applies for 2012, and is reduced to 7% for 2013.

Our future effective income tax rate depends on various factors, such as tax legislation and the geographic composition of our pre-tax income. We monitor these factors and timely adjust our effective tax rate accordingly.

Additionally, the effective tax rate could be adversely affected by changes in the valuation of deferred tax assets and liabilities. In particular, the carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate sufficient future taxable income in the United States. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management and inherently includes subjectivity. Accordingly, we could record additional provisions due to U.S. federal, state, and foreign tax-related matters in the future as we revise estimates or settle or otherwise resolve the underlying matters.

Discontinued Operations Years Ended December 31, (Dollars in millions) 2012 2011 2010Income from discontinued operations, net of taxes $ - $ - $ 9.7 During 2010, we divested two product lines as their growth potential no longer met our long-term strategic objectives. We completed the sale of Ion on May 17, 2010 and the sale of the assets of our YDI business on August 11, 2010 for a total of $15.6 million of net cash proceeds, after expenses, and recorded a $4.4 million pre-tax gain on the combined sales.

The two product lines have been accounted for as discontinued operations.

Accordingly, their results of operations have been reclassified to discontinued operations in the consolidated statements of operations and comprehensive income for all periods presented. The assets and liabilities of these discontinued product lines have not been reclassified or segregated in the consolidated statements of cash flows due to their immaterial amounts.

Liquidity and Capital Resources Cash, cash equivalents and short-term marketable investments totaled $615.2 million at December 31, 2012, an increase of $49.7 million compared to $565.5 million at December 31, 2011. This increase was mainly due to net cash provided by operating activities as a result of our net income and decreases in working capital, partially offset by net purchases of investments, dividend payments to our common stockholders, capital expenditures, the acquisition of Plasmart and repurchases of Common Stock. The primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations, consisting mainly of our net income and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers 37 -------------------------------------------------------------------------------- Table of Contents will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations.

Net cash provided by operating activities was $137.2 million for 2012 and resulted mainly from net income of $48.0 million, which included non-cash net charges of $42.5 million and a decrease in working capital of $44.0 million. The decrease in working capital consisted primarily of a decrease in trade accounts receivable of $38.3 million, a decrease in other current assets of $7.7 million and a decrease in inventory of $5.3 million. These decreases are partially offset by a decrease in accounts payable of $8.3 million. The decrease in accounts payable and accounts receivable was caused by a slowdown in our business in the fourth quarter of 2012 compared to the fourth quarter of 2011.

Net cash provided by operating activities was $156.0 million for 2011 and resulted mainly from net income of $129.7 million, which included non-cash net charges of $39.1 million, partially offset by an increase in working capital of $15.5 million. The increase in working capital consisted primarily of an increase in inventory of $11.7 million, a decrease in accounts payable of $11.6 million, an increase in other operating assets of $7.7 million and an increase in income taxes of $5.3 million. These increases were offset by a decrease in accounts receivable of $17.9 million, and an increase in accrued expenses and other operating liabilities of $2.9 million. The increase in inventory relates to specific solar projects where shipment has been delayed by our customers. The decrease in accounts payable and accounts receivable is caused by a slowdown in our business in the fourth quarter of 2011 compared to the fourth quarter of 2010.

Net cash used in investing activities was $117.9 million for 2012 and resulted primarily from the net purchases of investments of $76.1 million, the acquisition of Plasmart of $22.6 million net of cash acquired and $17.7 million in purchases of production related equipment. Net cash used in investing activities was $6.1 million for 2011 and resulted primarily from the purchase of property and equipment of $15.6 million, partially offset by net maturities and sales of investments of $9.9 million. The $15.6 million increase in plant and equipment was primarily for the purchase of calibration and test equipment.

Net cash used in financing activities was $47.0 million for 2012 and consisted primarily of $32.7 million in dividend payments made to common stockholders, $11.5 million for the repurchase of Common Stock, and $6.5 million of net payments made on short-term borrowings. These decreases were partially offset by $2.1 million of excess tax benefit from stock-based compensation. Net cash provided by financing activities was $2.4 million for 2011 and consisted primarily of $28.5 million received in net proceeds related to employee stock awards, $5.3 million related to excess tax benefit from stock-based compensation and $1.9 million in net proceeds from short-term borrowings. These increases were partially offset by $31.4 million of dividend payments made to common stockholders and $2.0 million related to the repurchase of Common Stock.

Our Japanese subsidiary has lines of credit and short-term borrowing arrangements with two financial institutions, which generally expire and are renewed at three month intervals. These lines of credit provide for aggregate borrowings as of December 31, 2012 of up to an equivalent of $26.7 million U.S.

dollars, with interest rates ranging from 0.63% - 1.475%. There were no borrowings outstanding under these arrangements at December 31, 2012. There were $1.9 million total borrowings outstanding under these arrangements at December 31, 2011.

We acquired an available line of credit with a financial institution in the August 2012 Plasmart acquisition. The available line of credit, which expires in 2014, provides for aggregate borrowings as of December 31 2012 of up to an equivalent of $1.4 million U.S. dollars, at an average interest rate of 5.19%.

There were no borrowings outstanding under this arrangement at December 31, 2012.

We have provided financial guarantees for certain unsecured borrowings and have standby letters of credit, some of which do not have fixed expiration dates. At December 31, 2012, our maximum exposure as a result of these standby letters of credit and performance bonds was approximately $0.9 million.

38-------------------------------------------------------------------------------- Table of Contents On July 25, 2011, our board of directors approved a share repurchase program for the repurchase of up to an aggregate of $200 million of our Common Stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased will depend upon a variety of factors, including business conditions, stock market conditions and business development activities, including, but not limited to, merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice. During 2012, we repurchased approximately 434,000 shares of our Common Stock for $11.5 million at an average price of $26.46 per share. During 2011, we repurchased approximately 86,000 shares of our common stock for $2.0 million at an average price of $23.40 per share.

Holders of our Common Stock are entitled to receive dividends when they are declared by our board of directors. For the year ended December 31, 2012, we paid cash dividends of $32.7 million in aggregate, or $0.62 per share. Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our board of directors.

On February 11, 2013, our board of directors declared a quarterly cash dividend of $0.16 per share to be paid on March 15, 2013 to shareholders of record as of March 1, 2013.

Future payments due under debt, lease and purchase commitment obligations as of December 31, 2012 are as follows: Payment Due By Period Less than AfterContractual Obligations (In thousands) Total 1 Year 1-3 years 3-5 years 5 years Other(1) Operating lease obligations $ 26,461 $ 7,561 $ 9,722 $ 5,927 $ 3,251 $ - Purchase obligations(2) 125,378 116,398 8,977 3 - - Other long-term liabilities reflected on the Balance Sheet under U.S. GAAP(3) 43,375 - 39 - 19,703 23,633 Total $ 195,214 $ 123,959 $ 18,738 $ 5,930 $ 22,954 $ 23,633 (1) This balance relates to our reserve for uncertain tax positions.

(2) As of December 31, 2012, we have entered into purchase commitments for certain inventory components and other equipment and services used in our normal operations. The majority of these purchase commitments covered by these arrangements are for periods of less than one year and aggregate to approximately $125.4 million.

(3) The majority of this balance relates to reserve for uncertain tax positions and accrued compensation for certain executives related to supplemental retirement benefits.

We believe that our current cash and investments position and available borrowing capacity, together with the cash anticipated to be generated from operations, will be sufficient to satisfy our estimated working capital, planned capital expenditure requirements, and any future cash dividends declared by our board of directors or share repurchases through at least the next 12 months and the foreseeable future.

Derivatives We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. We operate internationally, and in the normal course of business, are exposed to fluctuations in interest rates and foreign exchange rates. These fluctuations can increase the costs of financing, investing and operating the business. We have used derivative instruments, such as forward contracts, to manage certain foreign currency exposure.

39-------------------------------------------------------------------------------- Table of Contents By nature, all financial instruments involve market and credit risks. We enter into derivative instruments with major investment grade financial institutions and no collateral is required. We have policies to monitor the credit risk of these counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

We hedge a portion of our forecasted foreign currency denominated intercompany sales of inventory, over a maximum period of eighteen months, using forward foreign exchange contracts accounted for as cash-flow hedges related to Japanese, South Korean, British and Euro currencies. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, and otherwise meet the hedge accounting criteria, changes in the derivatives' fair value are not included in current earnings but are included in accumulated other comprehensive income in stockholders' equity. These changes in fair value will subsequently be reclassified into earnings, as applicable, when the forecasted transaction occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded currently in earnings in the period it occurs. The cash flows resulting from forward exchange contracts are classified in the consolidated statements of cash flows as part of cash flows from operating activities. We do not enter into derivative instruments for trading or speculative purposes.

To the extent that hedge accounting criteria is not met, the foreign currency forward contracts are considered economic hedges and changes in the fair value of these contracts are recorded immediately in earnings in the period in which they occur. These include hedges that are used to reduce exchange rate risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (i.e., payables, receivables) and other economic hedges where the hedge accounting criteria were not met.

We had forward exchange contracts with notional amounts totaling $41.4 million outstanding at December 31, 2012 of which $19.4 million were outstanding to exchange Korean won to U.S. dollars. We had forward exchange contracts with notional amounts totaling $36.1 million outstanding at December 31, 2011 of which $18.7 million were outstanding to exchange Japanese yen for U.S. dollars.

As of December 31, 2012, the unrealized loss that will be reclassified from accumulated other comprehensive income to earnings over the next twelve months is immaterial. The ineffective portions of the derivatives are recorded in selling, general and administrative costs and were immaterial in 2012, 2011 and 2010.

We sometimes hedge certain intercompany and other payables with forward exchange contracts. Typically, as these derivatives hedge existing amounts that are denominated in foreign currencies, the derivatives do not qualify for hedge accounting. The foreign exchange gain or loss on these derivatives was $1.6 million in 2012, and was immaterial in 2011 and 2010.

Realized and unrealized gains and losses on forward exchange contracts that do not qualify for hedge accounting are recognized currently in earnings. The cash flows resulting from forward exchange contracts are classified in our consolidated statements of cash flows as part of cash flows from operating activities. We do not hold or issue derivative financial instruments for trading purposes.

Gains and losses on forward exchange contracts that qualify for hedge accounting are classified in selling, general and administrative expenses in 2012 and totaled a loss of $0.9 million. In 2011 and 2010, these gains and losses were classified in cost of products and totaled a gain of $4.0 million and loss of $1.0 million, respectively.

Off-Balance Sheet Arrangements We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance, special purpose entities or variable interest entities which are often established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had such relationships.

40-------------------------------------------------------------------------------- Table of Contents Recently Issued Accounting Pronouncements In June 2011, the Financial Accounting Standards Board ("FASB") issued an Accounting Standards Update ("ASU") which eliminates the option to present the components of other comprehensive income as part of the statement of equity and requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amendments were effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2011. The ASU required changes in presentation only. We adopted this new ASU in the first quarter of 2012, electing to present the components of other comprehensive income as one continuous statement. This new ASU did not have a material effect on our consolidated financial statements.

In May 2011, the FASB issued an ASU which applies to all reporting entities that are required or permitted to measure or disclose the fair value of an asset, a liability, or an instrument classified in a reporting entity's shareholders' equity in the financial statements. The amendments do not extend the use of fair value accounting, but provide guidance on how it should be applied where its use is already required or permitted by other standards within United States Generally Accepted Accounting Principles ("U.S. GAAP"). The amendments changed the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.

Additionally, the ASU clarifies the FASB's intent about the application of existing fair value measurements. The amendments in this ASU are to be applied prospectively. For public entities, the amendments were effective during interim and annual periods beginning after December 15, 2011. We adopted the new ASU in the first quarter of 2012. This new ASU did not have a material effect on our consolidated financial statements.

In December 2011, the FASB issued ASU No. 2011-11, "Disclosures about Offsetting Assets and Liabilities." This ASU is intended to enhance the understanding of the effects of netting arrangements on an entity's financial statements, including financial instruments and derivative instruments that are either offset or subject to a master netting arrangement. The scope of this ASU includes derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. In January 2013, the FASB issued ASU No. 2013-01 "Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." This standard provided additional guidance on the scope of ASU 2011-11. The provisions of this ASU are effective for interim and annual periods beginning on or after January 1, 2013.

This new ASU is not expected to have a material effect on our consolidated financial statements.

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