This discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes thereto appearing in Item 8 of this Form 10-K.

Company Overview

We believe we are among the leading suppliers of high performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. Our products consist of "front-end" semiconductor performance materials, sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases to semiconductor process equipment, high-purity materials packaging and dispensing systems that allow for the reliable introduction of low volatility liquids and solids to microelectronics and biopharmaceutical processes. ATMI targets both semiconductor and flat-panel display manufacturers, whose products form the foundation of microelectronics technology rapidly proliferating through the consumer products, information technology, automotive, and communications industries. The market for microelectronics devices is continually changing, which drives demand for new products and technologies at lower cost. ATMI's customers include many of the leading semiconductor and flat-panel display manufacturers in the world who target leading-edge technologies. ATMI also addresses an increasing number of critical materials handling needs for the life sciences markets. Our proprietary containment, mixing, and bioreactor technologies are sold to the biotechnology, laboratory and cell therapy markets, which we believe offer significant growth potential. ATMI's objective is to meet the demands of our microelectronics and life sciences customers with solutions that maximize the efficiency of their manufacturing processes, reduce capital or operating costs, and minimize the time to develop new products and integrate them into their processes.

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. Note 1 to the consolidated financial statements in Item 8 of this Form 10-K describes the significant accounting policies used in preparation of the consolidated financial statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management's estimates. These policies are determined by management and have been reviewed by ATMI's Audit Committee.

Revenue Recognition

We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Revenues from product sales are generally recognized upon delivery to a common carrier when terms are equivalent to free-on-board ("FOB") origin and upon receipt by a customer when terms are equivalent to FOB destination. In instances where final acceptance of equipment is specified by the purchase agreement, revenue is deferred until all acceptance criteria have been satisfied, except when reasonable reserves for returns can be effectively established due to substantial successful installation history for homogenous transactions. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We accrue for sales returns, warranty costs, and other allowances based on a current evaluation of our experience based on stated terms of the transactions. Should actual product failure rates or customer return experience differ from our estimates, revisions to the estimated accruals would be required.

Accounts Receivable Allowances

The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable balances. We estimate our allowance for doubtful accounts based on past due amounts and historical write-off experience, as well as trends and factors surrounding the credit risk of the markets we operate in and the financial viability of specific customers. In an effort to identify adverse trends, we assess the financial health of the markets we operate in and perform periodic credit evaluations of our customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. Actual write-offs and adjustments could differ from the allowance estimates because of unanticipated changes in the business environment as well as factors and risks surrounding specific customers.

As of December 31, 2012 and 2011 we had $0.9 million and $0.8 million of accounts receivable allowances recorded, respectively. Although management believes these reserves are adequate, any adverse changes in market conditions may require us to record additional reserves.

Inventory Valuation Reserves

Inventory valuation reserves are established in order to report inventories at the lower of cost or market value on our consolidated balance sheets. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventory cost. Other factors that management considers in determining these reserves include whether individual inventory parts or chemicals meet current specifications and cannot be substituted for or reworked into a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives.

As of December 31, 2012 and 2011, we had $3.4 million and $2.6 million, respectively, of inventory valuation reserves recorded. Although management believes these reserves are adequate, any adverse changes in market conditions may require us to record additional inventory valuation reserves.

Non-marketable Equity Securities

We selectively invest in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support an ATMI product or initiative. Our non-marketable equity investments are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. At December 31, 2012, the carrying value of our portfolio of strategic investments in non-marketable equity securities totaled $8.1 million ($8.0 million at December 31, 2011). In certain instances, we loan funds to early-stage investees at market interest rates to enable them to focus on product and technology development. Non-marketable equity and debt securities are included in the consolidated balance sheets under the caption "Other non-current assets." We receive regular financial information from our equity method investees typically on a one month lag.

Investments in non-marketable equity securities are inherently risky, and some of these companies are likely to fail. Their success (or lack thereof) is dependent on product development, market acceptance, operational efficiency, attracting and retaining talented professionals, and other key business success factors. In addition, depending on their future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments would likely become impaired.

We review our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis may require significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee's revenue and earnings trends relative to predefined milestones and overall business prospects, (b) the technological feasibility of the investee's products and technologies, (c) the general market conditions in the investee's industry or geographic area, including adverse regulatory or economic changes,
(d) factors related to the investee's ability to remain in business, such as the investee's liquidity, and the rate at which the investee is using its cash, and
(e) the investee's receipt of additional funding at a lower valuation.

Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case we write the investment down to its fair value, using the framework required by Accounting Standards Codification ("ASC") 820 "Fair Value Measurements and Disclosures." When an investee is not considered viable from a financial or technological point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other-than-temporarily impaired, unless specific facts and circumstances indicate otherwise. We recognized a $0.8 million impairment charge to our portfolio of non-marketable equity securities in 2011 (none in 2012 or 2010).

Income Taxes

The net deferred tax asset at December 31, 2012 was $19.4 million compared to $23.4 million at December 31, 2011. For our deferred future tax benefits, we believe that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.

In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and circumstances. A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have recorded an unrecognized benefit or are required to pay amounts in excess of what we have recorded, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. For a discussion of current tax matters, see Note 10 to the consolidated financial statements in Item 8 of this Form 10-K.

In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Changes in deferred tax asset valuation allowances recorded in a business combination and income tax uncertainties after the acquisition date generally will affect income tax expense.

Equity-Based Compensation

We account for awards of equity-based compensation under our employee stock plans using the fair value method. Accordingly, we estimate the grant date fair value of our equity-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.

To estimate the fair value of our stock option awards we currently use the Black-Scholes-Merton options-pricing model. The determination of the fair value of equity-based awards on the date of grant using an options-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. Management is required to make certain judgments for these variables which include the expected stock price volatility over the term of the awards, the expected term of options based on employee exercise behaviors, and the risk-free interest rate. For awards granted subsequent to January 1, 2006, expected stock price volatility is based on the historical volatility of ATMI common stock for a period shorter than the expected term of the options. We have excluded the historical stock price volatility prior to the public announcement regarding the sale of our non-core businesses in 2004, because those businesses that were sold represented a significant portion of ATMI's consolidated business and were subject to considerable cyclicality associated with the semiconductor equipment industry, which drove increased volatility in ATMI's stock price. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected term. We recognize expense only for those awards expected to vest. If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, in future periods, the stock option expense that the Company records for future grants may differ significantly from what the Company has recorded in the current period.

To estimate the fair value of our Total Shareholder Return Performance Restricted Stock Units ("TSR PRSUs"), we used a Monte-Carlo simulation of future stock prices for ATMI and the components of the Russell 2000 index. This method uses a risk-neutral framework to model future stock prices. The stock price projections are based upon estimates for the risk-free rate of return, the volatility of our stock and the others included in the Russell 2000 index, and the correlation of each stock within the Russell 2000 index. Management is required to make certain judgments for these estimates.

Equity-based compensation expense is recognized on a ratable basis over the estimated service period of the awards.

Fair Value Measurements

All of our financial assets and liabilities, measured on a recurring basis, are measured at fair value based upon Level 1 or Level 2 inputs, as defined under ASC 820. For Level 1 measurements, we use quoted prices in active markets for identical assets and liabilities. For Level 2 measurements, we use observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

On November 2, 2010, ATMI's Belgian subsidiary acquired the remaining 60 percent of the outstanding shares of Artelis S.A. As part of the acquisition, we recognized a liability for the fair value of contingent payments tied to future revenue performance for the fiscal years 2012 through 2014. The contingent payment tied to future revenue performance has a range of possible outcomes from zero to $23.3 million. The fair value measurements were calculated using unobservable inputs (primarily using discounted cash flow analyses, a discounted average rate of 6.9 percent, and reliance on the market and product knowledge of internal experts), classified as Level 3, requiring significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. There is no payout due relative to 2012 performance, because revenues were below the threshold required for a payout.

As of December 31, 2012 and 2011, the fair value of our Artelis acquisition contingent performance obligations associated with future revenue was $4.6 million and $7.2 million, respectively. See Notes 1, 5 and 7 for additional details regarding the Artelis acquisition.

Goodwill and Other Intangible Assets

The assets and liabilities of acquired businesses are recorded under the purchase method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.

Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing by completing an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. For reporting units where the qualitative determination does not indicate that it is more likely than not that the fair value of a reporting unit is more than its carrying value, the two-step test is performed. In order to perform the two-step test we estimate the fair value of a reporting unit based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in the global economy and local economies, changes in the microelectronics and biopharmaceutical industries, changes in technology, and the execution of management's plans. We concluded that goodwill was not impaired during 2012. Although no goodwill impairment has been recorded to date, there can be no assurances that future goodwill impairments will not occur.

Other Long-Lived Amortizable Assets

We evaluate the potential impairment of other long-lived assets when appropriate. If the carrying value of assets exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset is written down to fair value.

Related Party Transactions

The Company's related parties are primarily unconsolidated equity affiliates. The Company did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated with independent parties.

Results of Operations

This table shows the effect of pre-tax compensation cost arising from
equity-based payment arrangements on the consolidated statements of operations
(in thousands):



                                                           December 31,
                                                   2012        2011        2010
        Cost of revenues                          $   347     $   496     $   357
        Research and development                      776         900         866
        Selling, general, and administrative        7,298       6,143       6,470

        Total equity-based compensation expense   $ 8,421     $ 7,539     $ 7,693

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Results of Operations

The following is a summary of selected consolidated earnings information (in
thousands of dollars):



                                                 December 31,
                                             2012           2011          % Change
    Revenues                               $ 407,433      $ 390,087             4.4 %
    Cost of revenues                         206,543        205,957             0.3 %

    Gross profit                             200,890        184,130             9.1 %
    Gross profit margin                         49.3 %         47.2 %

    Operating expenses:
    Research and development                  55,152         53,708             2.7 %
    Selling, general and administrative       86,663         83,546             3.7 %
    Contract termination                          -          84,590

    Total operating expenses                 141,815        221,844           (36.1 %)

    Operating income (loss)                   59,075        (37,714 )         256.6 %
    Interest income                            1,291          1,205             7.1 %
    Other expense, net                          (240 )       (2,625 )          90.9 %

    Income (loss) before income taxes         60,126        (39,134 )         253.6 %
    Provision (benefit) for income taxes      17,796        (19,115 )         193.1 %

    Effective tax rate                          29.6 %         48.8 %

    Net income (loss)                      $  42,330      $ (20,019 )         311.4 %

Analysis of Consolidated Results

Overview

2012 was a year of progress and transition after the October 31, 2011 termination of agreements with Matheson Tri-Gas, Inc. ("Matheson"). Upon termination we assumed responsibility for manufacturing, marketing, selling, and distribution of our SDS ® products (the "SDS Direct" transaction). The results from these activities have met or exceeded our expectations, and we have improved interactions with our key customers as a result.

Revenues. Revenues increased 4.4 percent to $407.4 million in 2012 compared to 2011 revenues of $390.1 million. The 2011 revenues included a fourth quarter unfavorable impact of $6.9 million associated with the SDS Direct transaction. The growth in 2012 was driven by a 4.0 percent improvement in Microelectronics revenue, which was mostly the result of SDS growth while demand for other products in Microelectronics was down as lower wafer starts were coupled with our customers' efforts to improve material usage efficiency and to manage inventories in the second half of the year. LifeSciences growth of 8.7 percent resulted from increased consumables revenue and iCELLis® bioreactor sales.

Gross Profit. Our consolidated gross profit margin improved by 2.1 percentage points to 49.3 percent in 2012 compared to 47.2 in 2011 primarily due to the benefits of the SDS Direct transaction.

Research and Development Expenses. Research and development expenses ("R&D") increased 2.7 percent in 2012 compared to 2011. Principal components of the higher expenses were increases in outside support services of $1.4 million, consumables of $1.0 million, and depreciation of $0.4 million, partially offset by the successful conclusion of a collaborative development agreement resulting in increased expense reimbursements to us of $2.0 million.

Selling, General and Administrative Expenses. Sales, General and Administrative ("SG&A") expenses increased by 3.7 percent in 2012 from 2011 due to approximately $4.0 million of costs associated with SDS Direct activities, $1.4 million of severance, a capital based tax credit of $2.4 million recognized in 2011, partially offset by lower recruiting fees of $1.0 million and a $1.0 million increase in the year-over-year gain due to the change in fair value of the Artelis contingent consideration liability. SG&A as a percent of revenues was flat in 2012 compared to 2011.

Operating Income (Loss ). Operating income was $59.1 million in 2012 compared to an operating loss of $37.7 million in 2011. The operating loss in 2011 included an $84.6 million contract termination charge associated with the SDS Direct transaction.

Other income (expense), net. Other expense, net was $0.2 million in 2012. In 2011, other expense, net was $2.6 million; the major items were an $0.8 million impairment loss for a minority investment, $0.6 million of losses from equity method investees, and $1.2 million of losses from foreign exchange, partially offset by a $0.7 million gain from a previously reserved investment.

Provision for Income Taxes. In 2012, we had an effective income tax rate of 29.6 percent, compared to a 2011 effective income tax benefit rate of 48.8 percent. Excluding the $31.0 million benefit from the SDS Direct contract termination charge, the 2011 effective income tax rate would have been 26.2 percent. The 2012 effective income tax rate differs from the Federal statutory rate of 35.0 percent primarily due to lower income tax rates in foreign jurisdictions, an increase in certain valuation allowances, and state taxes. If certain 2012 retroactive provisions of The American Taxpayer Relief Act of 2012, including the US R&D credit, had been enacted into law in 2012 instead of 2013, the 2012 effective income tax rate would have been 27.8 percent.

ATMI has not provided for U.S. federal income and foreign withholding taxes on approximately $92.0 million of undistributed earnings from non-U.S. operations as of December 31, 2012, because such earnings are intended to be reinvested indefinitely outside of the United States. These earnings could become subject to additional tax if they are remitted as dividends, loaned to ATMI, or upon sale of subsidiary stock. It is not practicable to estimate the amount or timing of the additional tax, if any, that eventually might be paid on the foreign earnings.

South Korea has granted the Company an income tax exemption that expires in 2014, including the reduction from 100 percent to 50 percent of the exemption in . . .