e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2006


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

Commission File Number 0-11250

DIONEX CORPORATION

(Exact name of registrant as specified in its charter)


Delaware		94-2647429

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1228 Titan Way, Sunnyvale, California		94085

(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code (408) 737-0700

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o Accelerated filer þ Non-accelerated filer o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of May 9, 2006:


CLASS		NUMBER OF SHARES

Common Stock		19,991,771

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

DIONEX CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
(Unaudited)


	March 31,		June 30,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	47,888	$	42,679
Short-term investments		16,679		11,102
Accounts receivable (net of allowance for doubtful accounts of $910 at March 31, 2006 and $953 at June 30, 2005)		57,645		55,450
Inventories		27,346		26,510
Deferred taxes		7,907		9,978
Prepaid expenses and other		7,532		6,364

Total current assets		164,997		152,083
Property, plant and equipment, net		57,349		53,914
Goodwill		24,648		24,638
Intangible assets, net		4,826		2,917
Other assets		4,583		4,601

	$	256,403	$	238,153

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	10,083		10,031
Accrued liabilities		37,373		34,939
Income taxes payable		3,770		1,593
Accrued product warranty		3,386		3,514

Total current liabilities		54,612		50,077
Deferred taxes		4,215		4,196
Other long-term liabilities		1,195		831
Stockholders’ equity:
Preferred stock (par value $.001 per share; 1,000,000 shares authorized; none outstanding)		—		—
Common stock (par value $.001 per share; 80,000,000 shares authorized; issued and outstanding:
19,990,671 shares at March 31, 2006 and 20,161,092 shares at June 30, 2005)		147,667		120,359
Retained earnings		43,912		57,451
Accumulated other comprehensive income		4,802		5,239

Total stockholders’ equity		196,381		183,049

	$	256,403	$	238,153

See notes to condensed consolidated financial statements.

DIONEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED MARCH 31, 2006 AND 2005
(In thousands)
(Unaudited)


	Nine Months Ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income	$	30,279		$	34,351
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		4,810			4,528
Stock based compensation		4,397			—
Gain on sale of marketable securities		—			(644	)
Loss on disposal of fixed assets		399			—
Tax benefit related to stock option plans		—			5,177
Deferred taxes		4,184			(120	)
Changes in assets and liabilities:
Accounts receivable		(2,835	)		(1,788	)
Inventories		(966	)		(1,074	)
Prepaid expenses and other assets		(1,288	)		(1,045	)
Accounts payable		67			122
Accrued liabilities		2,976			1,450
Income taxes payable		2,154			(2,500	)
Accrued product warranty		(105	)		107

Net cash provided by operating activities		44,072			38,564

Cash flows from investing activities:
Earnout provision of LC Packings		—			(3,500	)
Proceeds from sale of marketable securities		23,346			39,522
Purchase of marketable securities		(28,800	)		(50,475	)
Purchase of property, plant and equipment		(8,037	)		(5,175	)
Purchase of intangible assets		(3,005	)		—
Other		—			68

Net cash used for investing activities		(16,496	)		(19,560	)

Cash flows from financing activities:
Net change in revolving line of credit		—			(942	)
Principal payments on debt		—			(423	)
Sale of common stock		23,023			17,365
Tax benefit related to stock option plans		5,752			—
Repurchase of common stock		(49,722	)		(40,520	)

Net cash used for financing activities		(20,947	)		(24,520	)

Effect of exchange rate changes on cash		(1,420	)		1,770

Net increase (decrease) in cash and equivalents		5,209			(3,746	)
Cash and equivalents, beginning of period		42,679			46,673

Cash and equivalents, end of period	$	47,888		$	42,927

Supplemental disclosures of cash flow information:
Income taxes paid	$	7,310		$	13,470
Interest paid	$	41		$	93

See notes to condensed consolidated financial statements.

DIONEX CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements included herein have been prepared by Dionex Corporation (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. It is suggested that these condensed consolidated financial statements be read in conjunction with the condensed consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2005.

The unaudited condensed consolidated financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) that are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for such periods are not necessarily indicative of the results to be expected for the entire fiscal year ending June 30, 2006.

2. New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154 “Accounting Changes and Error Corrections”, which replaces Accounting Principles Board (APB Opinion No. 20 “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement shall be effective for accounting changes and corrections of errors made in fiscal year beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement was issued. At the present time, the Company does not believe that adoption of SFAS 154 will have a material effect on its financial position, results of operations or cash flows.

3. Stock-Based Compensation

On July 1, 2005, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) SFAS No. 123R, “Share-Based Payment” which requires companies to measure the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. The Company has elected to use the Modified Prospective Transition method such that SFAS No. 123R applies to new awards and to awards modified, repurchased or canceled after the effective date. The Company has a stock-based employee compensation plan (Option Plan) and an employee stock purchase plan (ESPP). Generally, stock options granted to employees fully vest four years from the grant date and have a term of ten years. The Company recognizes stock-based compensation expense over the requisite service period of the individual grants, generally, equal to the vesting period.

Prior to July 1, 2005, the Company accounted for these plans under the intrinsic value method described in APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related interpretation. The Company, applying the intrinsic value method, did not record stock-based compensation cost in net income because the exercise price of its stock options equaled the market price of the underlying stock at the date of grant. Compensation costs for the portion of awards for which the required service period has not been rendered (such as unvested options) that were outstanding as of July 1, 2005 shall be recognized as the remaining required services are rendered. The compensation costs relating to unvested awards is based on the grant date fair value of those awards as calculated under SFAS No. 123 “Accounting for Stock-Based Compensation” (SFAS No. 123), adjusted for forfeitures as required by SFAS No. 123R.

The following table shows total stock-based compensation expense included in the Condensed Consolidated Statements of Income for the three months and nine months ended March 31, 2006 (in thousands):


	Three Months Ended			Nine Months Ended
	March 31, 2006			March 31, 2006
Cost of sales	$	106		$	278
Selling, general and administrative expenses		852			3,024
Research and development expenses		309			1,096
Tax benefit		(428	)		(1,167	)

	$	839		$	3,231

SFAS 123R requires the Company to present the effect of the change from applying the original provisions of APB 25 in the period of adoption. Had compensation costs under the Company’s stock-based compensation been recorded under the APB 25, the effect on income from continuing operations, income before income taxes, net income, cash flows from operations, cash flows from financing activities, and basic and diluted earnings per share for the three months and nine months ended March 31, 2006, would have been as follows:

	a)		Income from continuing operations would have been $1.3 million and $4.4 million higher for the three and nine months ended March 31, 2006, respectively.

	b)		Net income would have been $839,000 and $3.2 million higher for the three and nine months ended March 31, 2006, respectively.

	c)		Cash flows from operations would have been $2.2 million and $5.8 million higher for the three and nine months ended March 31, 2006, respectively.

	d)		Cash flows from financing activities would have been $2.2 million and $5.8 million lower for the three and nine months ended March 31, 2006, respectively.

	e)		Basic and diluted earnings per share would have been $0.04 and $0.05 higher for the three months ended March 31, 2006, respectively.

	f)		Basic and diluted earnings per share would have been $0.16 higher for the nine months ended March 31, 2006, respectively.

SFAS No. 123R requires the Company to present proforma information for periods prior to the adoption as if the Company had accounted for all stock-based compensation under the fair value method. Had compensation costs under the Company’s stock-based compensation plans been recorded last year, the effect on the Company’s net income and earnings per share would have been as follows (in thousands, except per share amounts):

For proforma disclosures, the estimated fair value of the options at the date of grant is amortized to expense over the service period, which generally equals the vesting period.


	Three Months Ended			Nine Months Ended
	March 31,			March 31,
	2005			2005
Net income, as reported	$	11,960		$	34,351
Less: Total stock-based employee compensation expense determined under fair value method for all awards, net of taxes		1,988			6,612
Tax benefit (reduction)		(723	)		(2,272	)

Pro forma net income	$	10,695		$	30,011

Earnings per share:
Basic — as reported	$	0.58		$	1.66

Basic — pro forma	$	0.52		$	1.45

Diluted — as reported	$	0.56		$	1.59

Diluted — pro forma	$	0.50		$	1.39

The fair value of each option on the date of grant is estimated using the Black-Scholes option-pricing model using a single option approach for options granted after June 30, 2005, with the following weighted-average assumptions:


	Nine Months
	Ended March 31,
	2006			2005
Volatility for options		40	%		47	%
Volatility for employee stock purchase plan		30	%		28	%
Risk-free interest rate for options		4 – 4.5	%		3.56	%
Risk-free interest rate for employee stock purchase plan		3.6 – 4.4	%		1.74 – 2.71	%
Expected life of options	4.75 years			5.6 years
Expected life of employee stock purchase plan	6 months			6 months
Expected dividend	$	0.00		$	0.00

Expected volatilities utilized in the model are based mainly on the historical volatility of the Company’s stock price and other factors. The risk-free interest rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The model incorporates exercise and post-vesting forfeiture assumptions based on analysis of historical dates. The expected life of the grants issued during the first nine months of fiscal 2006 is derived from historical and other factors.

Determining Fair Value

Valuation and amortization method – We estimate the fair value of stock options granted using the Black-Scholes-Merton option –pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.

Expected Term – The expected term represents the period that our stock-based awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.

Expected Volatility – Our computation of expected volatility for the nine months ended March 31, 2006 is based on a combination of historical and market-based implied volatility.

Risk-Free Interest Rate – The risk-free interest rate used in the Black-Scholes-Merton valuation method is based on the implied yield currently available on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend – The expected dividend assumption is based on our current expectations about our anticipated dividend policy.

Stock option activity under the Company plans as of March 31, 2006 and changes during the three months ended March 31, 2006 were as follows:


						Weighted
				Weighted		Average
				Average		Remaining		Aggregate
	Number of			Exercise Price		Contractual		Intrinsic Value
	Options			Per Share		Term (years)		(in 000’s)

Outstanding July 1, 2005		2,261,542		$	32.65
Granted		314,650			48.05
Exercised		(238,265	)		25.29
Forfeited or expired		(6,338	)		41.11

Outstanding at October 1, 2005		2,331,589			35.45		6.80		43,834

Granted		37,000			49.74
Exercised		(210,325	)		27.33
Forfeited or expired		(14,878	)		45.64

Outstanding at January 1, 2006		2,143,386			36.43		6.75		27,114

Granted		5,000			48.19
Exercised		(318,867	)		30.09
Forfeited or expired		(23,136	)		43.03

Outstanding March 31, 2006		1,806,383			37.49		6.86		43,335


Exercisable at September 30, 2005		1,404,823			30.54		5.69		33,308

Exercisable at December 31, 2005		1,309,368			31.36		5.62		23,202

Exercisable at January 31, 2006		1,054,969			32.17		5.76		30,921

The aggregate intrinsic values in the table above represents the total pretax intrinsic values based on the Company’s closing stock price of $61.48, $49.08, and $54.25 at March 31, 2006, December 31, 2005, and September 30, 2005, respectively. Which would have been received by the option holders had all option holders exercised their options as of that date.

The total intrinsic value of options exercised were $6.9 million and $10.0 million during the three months ended March 31, 2006, December 31, 2005 and September 30, 2005, respectively.

As of March 31, 2006, there was $15.1 million of total unrecognized compensation cost related to nonvested stock options. That cost is expected to be recognized over a weighted average period of 1.75 years. The total fair value of shares vested during the nine months ended March 31, 2006 was $6.1 million.

4. Inventories

Inventories consist of (in thousands):


	March 31,		June 30,
	2006		2005
Finished goods	$	14,520	$	14,032
Work in process		1,826		2,257
Raw materials		11,000		10,221

	$	27,346	$	26,510

5. Short-term Investments

The Company holds highly liquid debts instruments with maturities of more than one year. These securities are currently classified as “available-for-sale” securities and recorded at their fair value. The difference between the fair value and the amortized cost of the securities was recorded in other comprehensive income, net of deferred taxes. At March 31, 2006, the fair value of the securities was $643,000 with $429,000 reported in short-term investments and $214,000 reported in other assets.

The aggregate market value, cost basis, and gross unrealized gains and losses of short-term investments by major security type are as follows (in thousands):


										Fair
										Value of
					Gross		Gross			Investments
	Market		Cost		Unrealized		Unrealized			with Unrealized
	Value		Basis		Gains		Losses			Losses
	(In thousands)
March 31, 2006
Available for Sale:
Corporate Bonds and Notes(1)	$	429	$	458		—	$	(29	)	$	429
Held to Maturity:
Auction Rate Securities		16,250		16,250		—		—			—

	$	16,679	$	16,708	$	—	$	(29	)	$	429


June 30, 2005
Available for sale:
Corporate Bonds and notes	$	977	$	1,013	$	—	$	(36	)	$	977
Held to Maturity:
Auction Rate Securities		10,125		10,125		—		—			—

	$	11,102	$	11,138	$	—	$	(36	)	$	977


(1)		These short-term investments have been in a loss position for greater than 12 months.

6. Comprehensive Income

Comprehensive income is the change in stockholders’ equity arising from transactions other than investments by owners and distributions to owners. For the Company, the significant components of comprehensive income, other than net income, are foreign currency translation adjustments and net unrealized gains or losses on securities available for sale. The components of accumulated other comprehensive income is summarized as follows (in thousands):


	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2006			2005			2006			2005
Net income, as reported	$	10,365		$	11,960		$	30,279		$	34,351
Foreign currency translation adjustments		1,518			(4,147	)		(446	)		4,731
Unrealized gain/(loss) on securities available for sale, net		(6	)		(32	)		9			(249	)

Comprehensive income	$	11,877		$	7,781		$	29,842		$	38,833

7. Common Stock Repurchases

During the three months ended March 31, 2006, the Company repurchased 394,672 shares of its common stock on the open market for approximately $21.3 million (at an average repurchase price of $53.98 per share), compared with 246,300 shares repurchased for approximately $14.3 million (at an average repurchase price of $58.19 per share) in the same period in the prior fiscal year.

During the nine months ended March 31, 2006, the Company repurchased 979,855 shares of its common stock on the open market for approximately $49.7 million (at an average repurchase price of $50.74 per share) compared with 767,500 shares repurchased for approximately $40.5 million (at an average repurchase price of $52.80 per share) in the same period in the prior year.

During the year ended June 30, 2005, the Company repurchased a total of 1,355,900 shares of its common stock on the open market for approximately $66.7 million (at an average repurchase price of $49.17 per share).

8. Earnings Per Share

Basic earnings per share is determined by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is determined by dividing net income by the weighted average number of common shares used in the basic earnings per share calculation, plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding under the treasury stock method.

The following table is a reconciliation of the numerators and denominators used in computing basic and diluted earnings per share (in thousands, except per share data):


	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2006		2005		2006		2005
Numerator:
Net income	$	10,365	$	11,960	$	30,279	$	34,351
Denominator:
Weighted average shares used to compute net income per common share — basic		20,049		20,763		20,067		20,755
Effect of dilutive stock options		493		780		528		806

Weighted average shares used to compute net income per common share — diluted		20,542		21,543		20,595		21,561

Basic earnings per share	$	0.52	$	0.58	$	1.51	$	1.66

Diluted earnings per share	$	0.50	$	0.56	$	1.47	$	1.59

Antidilutive common equivalent shares related to stock options are excluded from the calculation of diluted shares. At March 31, 2006 approximately 634,920 were excluded from the computation because they were anti-dilutive, however at, March 31, 2005 all stock options were included in the diluted earnings per share calculation.

9. Goodwill and Other Intangible Assets

Information regarding the Company’s goodwill and other intangible assets reflects current foreign exchange rates.

Change in the carrying amount of goodwill for the nine months ended March 31, 2006 is as follows (in thousands):


	Total
Balance as of July 1, 2005	$	24,638
Translation adjustments		10

Balance as of March 31, 2006	$	24,648

The Company performed an annual impairment test of goodwill in April 2005 and determined that goodwill was not impaired.

Information regarding the Company’s other intangible assets follows (in thousands):


	As of March 31, 2006							As of June 30, 2005
	Carrying		Accumulated					Carrying		Accumulated
	Amount		Amortization			Net		Amount		Amortization			Net
Patents and Trademarks	$	3,384	$	(670	)	$	2,714	$	379	$	(379	)	$	—
Developed technology		9,725		(8,623	)		1,102		9,718		(7,889	)		1,829
Other		1,373		(363	)		1,010		1,325		(237	)		1,088

Total		14,482	$	(9,656	)	$	4,826	$	11,422	$	(8,505	)	$	2,917

The Company amortizes patents and trademarks over a period of seven years and the remaining weighted average amortization period for this category is approximately six years.

In the first quarter of fiscal 2006, the Company pursued its strategic initiative of strengthening its base in the separations chemistry with the acquisition of the polymer based monolith technology from Teledyne-Isco, a subsidiary of Teledyne Technologies Incorporated, for a cash payment of $3.1 million. The Company believes that this technology will allow it to offer new separation solutions for its customers across the markets that it serves. Monolith technology can provide faster separation times with better resolution at lower back-pressures.

The Company amortizes developed technology over a period of three to seven years and the remaining weighted average amortization period for this category is approximated one year. The Company amortizes other intangibles over a period of 5-10 years and the remaining weighted average amortization period for this category is approximately 7 years.

Amortization expense related to intangible assets was $288,000 and $1.1 million, respectively, for the three and nine months ended March 31, 2006 as compared to $354,000 and $1.2 million, respectively, for the three and nine months ended March 31, 2005. The estimated amortization for each of the five fiscal years subsequent to June 30, 2005 is as follows:


	Remaining
Year Ending	Amortization
June 30,	Expense
2006	$	342
2007		1,245
2008		739
2009		531
2010		531
Thereafter		1,438

Total	$	4,826

10. Warranty

Product warranties are recorded at the time revenue is recognized for certain product shipments. Warranty expense is affected by product failure rates, material usage and service costs incurred in correcting a product failure. Should actual product failure rates, material usage or service costs differ from the Company’s estimates, revisions to the warranty liability would be required.

Details of the change in accrued product warranty for the nine months ended March 31, 2006 and 2005 are as follows (in thousands):


	Balance		Provision					Actual			Balance
	Beginning		for					Warranty			End of
	of Period		Warranties(2)		Other(1)			Costs Incurred(3)			Period
Accrued Product Warranty Nine Months Ended:
March 31, 2006	$	3,514	$	2,555	$	(22	)	$	(2,661	)	$	3,386

March, 31, 2005	$	3,584	$	1,705	$	134		$	(1,603	)	$	3,820


(1)		Provision for warranties related to products sold during the period

(2)		Effects of exchange rate changes

(3)		Costs of warranty claims processed during the period

11. Commitments

One of the Company’s foreign subsidiaries discounts trade notes receivable with banks. The uncollected balances of notes receivable due to the discounting banks at March 31, 2006 and June 30, 2005 were $2.1 million and $2.7 million, respectively. The Company is contingently liable for these unpaid balances to the extent the amounts are not paid to the bank by the end customer. The Company has determined that the carrying amount of its contingent liability under this guarantee was insignificant at March 31, 2006 and June 30, 2005 based on its past experience of discounting trade notes receivable.

Revenue generated from international operations is generally denominated in foreign currencies. The Company enters into forward foreign exchange contracts to hedge against fluctuations of intercompany account balances. Market values gains and losses on these hedge contracts are substantially offset by fluctuations in the underlying balances being hedged, and the net financial impact is not expected to be material in future periods. The Company had forward exchange contracts to sell foreign currencies totaling $16.4 million and $19.1 million at March 31, 2006 and 2005, respectively.

The Company enters into standard indemnification agreements with many of its customers and certain other business partners in the ordinary course of business. These agreements include provisions for indemnifying the customer against any claim brought by a third party to the extent any such claim alleges that the Company product infringes a patent, copyright or trademark, or violates any other proprietary rights of that third party. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is not estimable however, the Company has not incurred any costs to defend lawsuits or settle claims related to these indemnification agreements. To date, no material claims for such indemnifications are outstanding as of March 31, 2006. The Company has not recorded any liabilities for these indemnification agreements at March 31, 2006 and June 30, 2005.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward-Looking Statements

Except for historical information contained herein, the discussion below and in the footnotes to the Company’s financial statements contained in this Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the Private Securities Litigation Reform Act of 1995, and are made under the safe harbor provisions thereof. Such statements are subject to certain risks, uncertainties and other factors that may cause actual results, performance or achievements, or industry results, to be materially different from any future results, performance or achievements, or industry results, expressed or implied by such forward-looking statements. Such risks and uncertainties include, among other things: general economic conditions, foreign currency fluctuations, fluctuations in worldwide demand for analytical instrumentation, fluctuations in quarterly operating results, competition from other products, existing product obsolescence, new product development, including market receptiveness, the ability to manufacture products on an efficient and timely basis and at a reasonable cost and in sufficient volume, the ability to attract and retain talented employees and other risks as described in more detail below under the heading “Risks and Uncertainties.” Readers are cautioned not to place undue reliance on these forward-looking statements that reflect management’s analysis only as of the date hereof. The Company undertakes no obligation to update these forward-looking statements.

The Company

Dionex Corporation (the “Company”) is a leading manufacturer and marketer of chromatography systems for chemical analysis. The Company’s systems are used in environmental analysis and by the pharmaceutical, life sciences, chemical, petrochemical, power generation, food and electronic industries in a variety of applications. The Company sells into six markets which are Life Sciences Chemicals, Food Beverage, Electronics, Power and Environmental. In the nine months ended March 31, 2006, approximately 70% of the sales were from IC/ASE products and 30% were from HPLC/Nano products. The Company is recognized as an innovation leader in the global LC market.

Results of Operations – Three Months Ended March 31, 2006 and 2005

Net sales for the third quarter of fiscal 2006 were $73.7 million, compared with $70.8 million reported for the same period in the prior year. The Company is subject to the effects of foreign currency fluctuations that have an impact on net sales and gross profit and operating expense. Overall, currency fluctuations reduced reported net sales by approximately 6% for the three months ended March 31, 2006 compared to an increase of 2% for the same period in the prior year.

Percentage change in net sales over the prior year as indicated in the table below:


	Three Months
	Ended
	March 31, 2006
Percentage change in net sales
Total:		4	%
By geographic region:
North America		3	%
Europe		6	%
Asia/Pacific		3	%

Percentage of change in net sales excluding currency fluctuations


	Three Months
	Ended
	March 31, 2006
Percentage change in net sales excluding currency fluctuations
Total:		10	%
By geographic region:
North America		2	%
Europe		17	%
Asia/Pacific		10	%

Net sales in North America increased primarily due to stronger demand from Environmental and Pharmaceutical customers. Net sales in Europe increased primarily due to good sales growth in all countries and in the Company’s Environmental and Life Science markets. Net sales in the Asia/Pacific region continued to increase primarily due to strong growth in Australia, Indian and Korea partially offset by lower net sales in Japan.

Gross margin for the third quarter ended March 31, 2006 was 65.9% compared to 67.6% in the third quarter last year. Gross margin was lower in fiscal 2006 partially due to currency fluctuations and to a lesser extent by stock-based compensation and changes in product mix. Stock–based compensation expense in cost of sales were $106,000 during the third quarter of fiscal year 2006. There was no stock-based compensation expense included in cost of sales during the same period in the previous fiscal year.

Operating expenses of $33.4 million for the third quarter of fiscal 2006 increased $2.6 million, or 8%, from the $30.9 million reported in the same quarter last year. As a percentage of net sales described above, operating expenses increased to 45% for the three months ended March 31, 2006 compared to 44% for the same quarter last year. Currency fluctuations decreased operating expenses by 6% for the quarter as compared to the same quarter last year. Stock-based compensation expense included in operating expenses was $1.2 million during the third quarter of fiscal 2006. There was no stock-based compensation expense included in operating expenses during the same period in the previous fiscal year.

Selling, general and administrative (SG&A) expenses increased $1.7 million or 6%, to $27.7 million in the three months ended March 31, 2006 compared to $26.1 million for the same quarter last year. As a percentage of net sales, SG&A expenses increased to 38% for the third quarter of fiscal 2006 compared to 37% for the same quarter last year. The increase in SG&A expenses was due primarily to stock based compensation charges of approximately $852,000, expenses of approximately $822,000 due to the Company’s expansion in the Asia/Pacific region, higher marketing costs of $600,000 and higher salaries partially offset by currency fluctuations. There was no stock-based compensation expense included in SG&A expenses during the same period in the previous fiscal year.

Research and product development (R&D) expenses of $5.7 million for the three months ended March 31, 2006 increased $874,000 or 18%, from the $4.8 million reported in the same period last year. The increase in the three months ended March 31, 2006 is primarily due to stock based compensation charges of $309,000, R&D expenses of $272,000 related to chemistry developments and amortization of licenses from technology acquisition and higher salaries. There was no stock-based compensation expense included in R&D expense during the same period in the previous fiscal year.

Other expense was $73,000 in the three months ended March 31, 2006 compared to income of $67,000 for the same period in the prior year. The expense and income resulted primarily from foreign currency transactions.

The effective tax rate for the three months ended March 31, 2006 was 33.2%, compared to 31.3% reflected in the same period last year. The increase in the Company’s tax rate was due to SFAS No. 123R related expenses that are not deductible for tax purposes and due to the expiration of research tax credits for federal income tax purposes. If, as expected, legislation extending the research tax credits is passed by congress and signed into law, the Company will recognize the benefits in its tax rate. The Company anticipates its tax rate will be in the range of 34.0-35.0% for the rest of fiscal year 2006 including the effects of stock-based compensation.

Net income in the three months ended March 31, 2006 decreased 13% to $10.4 million compared with $12.0 million reported for the same period last year. Diluted earnings per share for the three months ended March 31, 2006 was $0.50 a decrease of 11% over the $0.56, reported for the same period last year. The decrease in earnings per share was mainly due to the effect of SFAS No. 123R, which added expenses of $839,000, net of taxes and the negative effect of currency fluctuations.

Results of Operations – Nine Months Ended March 31, 2006 and 2005

Net sales for the nine months ended March 31, 2006 were $216.1 million, an increase of 4% over the $208.2 million reported for the same period last year. The Company is subject to the effects of foreign currency fluctuations that have an impact on net sales and gross profit and operating expense. Overall, currency fluctuations decreased net sales by approximately 3% for the first nine months of fiscal 2006 and by approximately 4% for the same period last year.

Net sales for the first nine months of fiscal 2006 increased over the same period last year as indicated in the table below:


	Nine Months Ended
	March 31, 2006
Percentage change in net sales
Total:		4	%
By geographic region:
North America		2	%
Europe		3	%
Asia/Pacific		7	%


	Nine Months Ended
	March 31, 2006
Percentage change in net sales excluding current fluctuations
Total:		7	%
By geographic region:
North America		2	%
Europe		9	%
Asia/Pacific		10	%

Net sales in North America increased primarily due to higher sales to the Company’s Life Sciences customers. Net sales in Europe increased primarily due to strong growth throughout the region. Net sales in the Asia/Pacific region increased primarily due to strong growth in Australia, China, India and Korea offset by lower sales in Japan.

Gross margin for the first nine months of fiscal 2006 was 66.0%, compared to 66.8% reported for the same period last year. Gross margin was lower due to the impact of currency fluctuations and stock-based compensation. Stock-based compensation expense included in cost of sales was $278,000 during the nine months ended March 31, 2006. There was no stock-based compensation expense included in cost of sales during the same period in the previous fiscal year.

Operating expenses of $98.9 million for the first nine months of fiscal 2006 increased $9.8 million, or 11%, from the $89.0 million reported for the same period last year. As a percentage of sales, operating expenses in the first nine of fiscal year 2006 were 46%, compared with 43% in the same period last year. Stock-based compensation expense included in operating expenses was $4.1 million during the nine months ended March 31, 2006. There was no stock-based compensation expense included in operating expenses during the same period in the previous fiscal year.

SG&A expenses were $82.2 million for the first nine months of fiscal 2006, an increase of 11% compared with the $73.9 million reported in the same period last year. The increase in SG&A expenses was due primarily to stock-based compensation charges of $3.0 million following the adoption of SFAS No. 123R, higher selling and marketing costs of $636,000 and higher international selling and marketing costs of $2.7 million related to the Company’s operations in the Asia/Pacific region. There was no stock-based compensation expense included in SG&A expenses during the same period in the previous fiscal year.

R&D costs for the first nine months of fiscal 2006 were $16.6 million, an increase of 10% compared with the $15.1million reported in the same period last year. The increase in R&D expenses was due primarily to stock-based compensation charges of $1.1 million and higher expenses resulting from new product development and amortization of licenses from the technology acquisition. The level of R&D spending varies depending on both the breadth of the Company’s R&D efforts and the stage of specific product development. There was no stock-based compensation expense included in R&D expenses during the same period in the previous fiscal year.

Other income was $1.5 million for the first nine months of fiscal 2006 primarily due to a gain on a settlement of a patent litigation of $1.8 million partially offset by losses on foreign exchange. Other income was $380,000 for the first nine months of fiscal 2005, resulting from gain on the sale of marketable equity securities partially offset by losses on the Company’s currency hedging activities.

The effective tax rate for the first nine months of fiscal 2006 was 34.6%, up from 32.8% for the same period last year. The increase in the Company’s tax rate was due to SFAS No. 123R related expenses that are not deductible for tax purposes and due to the expiration of research tax credits for federal income tax purposes. When the legislation extending the research tax credits is passed by Congress and signed into law, the Company expects to recognize the benefits in its tax rate. The Company anticipates its tax rate is subject to fluctuation due to changes in tax regulations in the jurisdictions in which the Company does business.

Net income for the first nine months of fiscal 2006 was $30.3 million, a decrease of 12% compared with $34.4 million reported for the same period last year. Diluted earnings per share for the first nine months of fiscal 2006 were $1.47, a decrease of 8% over the $1.59 reported for the same period last year.

Liquidity and Capital Resources

At March 31, 2006, the Company had cash and cash equivalents and short-term investments of $64.6 million. The Company’s working capital was $110.4 million, an increase of $8.4 million from the $102 million reported at June 30, 2005. Cash generated by operating activities for the nine months ended March 31, 2006 was $43.7 million compared with $38.6 million for the same period last year. The increase in operating cash flow was primarily due to increases in deferred taxes, accrued liability and income taxes payable and partially offset by an increase in accounts receivable due to higher sales.

Cash used for investing activities was $16.1 million and $19.6 million in the nine months ended March 31, 2006 and 2005, respectively. Capital expenditures for the nine months of fiscal 2006 were $8.0 million which included, $4.1 million related to the expansion of the Company’s HPLC manufacturing and development facility in Germany and $3.7 million to implement several information technology and business-related strategic initiatives. The Company spent $3.0 million for the acquisition of the polymer based monolithic technology from Teledyne-Isco, a subsidiary of Teledyne Technologies, Inc.

Cash used for financing activities was $20.9 million and $24.5 million in the first nine months of fiscal 2006 and 2005, respectively. The decrease is primarily attributable to the repurchase of 979,855 shares of the Company’s common stock for $49.7 million in fiscal 2006 (at an average repurchase price of $50.74 per share) compared with 767,500 shares for $40.6 million in fiscal 2005 (at an average repurchase price of $52.86 per share), partially offset by $3.5 million tax benefit related to stock option plans. The Company is still authorized to repurchase 872,039 shares of its common stock.

At March 31, 2006, the Company had not utilized any of its $32.3 million in committed bank lines of credit. The Company believes that its cash flow from operations, current cash and cash investments and the remainder of its bank lines of credit will be adequate to meet its cash requirements for fiscal 2006 and the foreseeable future, and at least the next twelve months.

The following table summarizes the Company’s contractual obligations at June 30, 2005, and the effect such obligations are expected to have on its liquidity and cash flows in future periods (in thousands):


	Payments Due by Period
			Less
			Than 1		1-3		4-5		After 5
Contractual Obligations	Total		Year		Years		Years		Years
Operating Lease Obligations	$	17,895	$	4,193	$	6,299	$	3,996	$	3,407

There have been no material changes to the Company’s contractual obligations outside ordinary business activities since June 30, 2005, except those changes described above related to earn-out payments and outstanding borrowings.

New Accounting Pronouncements

In May 2005, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 154 “Accounting Changes and Error Corrections”, which replaces Accounting Principles Board (APB Opinion No. 20 “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”), and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This statement shall be effective for accounting changes and corrections of errors made in fiscal year beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement is issued. At the present time, the Company does not believe that adoption of SFAS 154 will have a material effect on its financial position, results of operations or cash flows.

Critical Accounting Policies and Estimates

Summary

The preparation of consolidated financial statements requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates its estimates on an ongoing basis, including those related to product returns and allowances, bad debts, inventory valuation, goodwill and intangible assets, income taxes, warranty provisions, and contingencies.

The Company bases its estimates on historical experience and on various other assumptions 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. The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Revenue Recognition Policy

The Company derives revenues from the sale of products and from services rendered to its customers including installation, training and maintenance. Generally, the Company’s products contain embedded software that is essential to their functionality.

The Company recognizes revenues in accordance with Staff Accounting Bulletin No. 104 “Revenue Recognition” and Statement of Position 97-2, “Software Revenue Recognition,” when persuasive evidence of an arrangement exists, the product or service has been delivered, the price is fixed or determinable, collection is probable and vendor specific objective evidence exists to allocate revenue to the various elements of the arrangement. Vendor specific objective evidence is based on the price charged when an element is sold separately or, if not yet sold separately, when the price is established by authorized management. Delivery is generally considered to have occurred when shipped.

The Company sells its equipment through its direct sales force and through distributors and resellers. Sales through distributors and resellers are recognized as revenue upon sale to the distributor or reseller as these sales are considered to be final and no right of return or price protection exists. When the distributor is the primary obligor in the arrangement, has latitude in establishing prices and has credit risk, the Company records revenue based on amounts invoiced to the distributor (rather than the amount invoiced by the distributor to the end users). When the Company is the primary obligor in the arrangement, has latitude in establishing price and has credit risk, the Company records revenue based on amounts invoiced to the end customer (with the related commissions paid to the distributors reported as sales and marketing expense). Customer acceptance is generally limited to performance under the Company’s published product specifications. When additional customer acceptance conditions apply, all revenue related to the sale is deferred until acceptance is obtained. The Company’s equipment typically includes a one-year warranty. The estimated cost of product warranty claims is accrued at the time the sale is recognized, based on historical experience.

Installation and training services are not considered to be essential to the functionality of the Company’s products, and revenue related to these items is recognized when the services are completed. The Company recognizes maintenance fees ratably over the period of the related maintenance contract. Maintenance consists of product repair services, unspecified software upgrades and telephone support.

Loss Provisions on Accounts Receivable and Inventory

The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company assesses collectibility based on a number of factors including, but not limited to, past transaction history with the customer, the credit-worthiness of the customer, independent credit reports, industry trends and the macro-economic environment. Sales returns and allowances are estimates of future product returns related to current period revenue. Material differences may result in the amount and timing of the Company’s revenue for any period. Historically, the Company has not experienced significant bad debt losses.

The Company values all of its inventories at the lower of standard cost (which approximates cost on a first-in, first-out basis) or market. The Company estimates revisions to its inventory valuations based on technical obsolescence, historical demand, projections of future demand, and industry and market conditions. If actual future demand or market conditions are less favorable than those projected by management, additional valuation provisions may be required. If demand or market conditions are more favorable, then higher margins could be realized to the extent inventory is sold which had previously been written down.

Long-Lived Assets, Intangible Assets with Finite Lives and Goodwill

The Company assesses the impairment of long-lived assets, intangible assets with finite lives and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In addition, the Company assesses goodwill for impairment at least annually. Factors the Company considers important that could trigger an impairment review include but are not limited to the following:

	•		significant underperformance relative to historical or projected future operating results;

	•		significant negative industry or economic trends; and

	•		significant changes or developments in strategic technology.

When the Company determines that the carrying value of long-lived assets or intangible assets with finite lives may not be recoverable based upon the existence of one or more of the above or other indicators, it measures any impairment based on a projected discounted cash flow method using a discount rate determined by the Company’s management to be commensurate with the risk inherent in the Company’s current business model. Goodwill is tested for impairment by comparing the fair values of related reporting units to their carrying values. The Company completed its annual review in April 2005 and no impairment was necessary.

Warranty

Product warranties are recorded at the time revenue is recognized for certain product shipments based on historical experience. While the Company engages in extensive product quality programs and processes, its warranty obligation is affected by product failure rates, material usage and service costs incurred in correcting a product failure. Should actual product failure rates, material usage or service costs differ from the Company’s previous estimates, revisions to the estimated warranty liability would be required.

Income Taxes

As part of the process of preparing the consolidated financial statements, the Company is required to estimate its income taxes in each of the jurisdictions in which it operates. This process involves the Company’s estimate of its actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as depreciation, amortization and inventory reserves for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company’s consolidated balance sheets.

The Company must then assess the likelihood that its deferred tax assets will be recovered from future taxable income and to the extent the Company believes that recovery is not likely, it must establish a valuation allowance. In the event that actual results differ from these estimates, the Company may need to establish a valuation allowance that could materially impact its financial position and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

The Company is exposed to financial market risks, including changes in foreign currency rates, interest rates and marketable equity securities, as well as debt and interest expense.

Foreign Currency Exchange Revenues generated from international operations are generally denominated in foreign currencies. The Company enters into forward foreign exchange contracts to hedge against fluctuations of intercompany account balances. Market value gains and losses on these hedge contracts are substantially offset by fluctuations in the underlying balances being hedged, and the net financial impact is not expected to be material in future periods. At March 31, 2006, the Company had forward exchange contracts to sell foreign currencies totaling $16.4 million, including approximately $8.5 million in Euros, $6.8 million in Japanese yen and $1.1 million in Canadian dollars. The foreign exchange contracts at the end of each fiscal quarter mature within the following quarter. Additionally, contract values and fair market values are the same. A sensitivity analysis assuming a hypothetical 10% movement in foreign currency exchange rates applied to hedging contracts and underlying balances being hedged at March 31, 2006 indicated that these market movements would not have a material effect on the Company’s business, operating results or financial condition.

Foreign currency rate fluctuations can impact the U.S. dollar translation of the Company’s foreign operations in its consolidated financial statements. Currency fluctuations decreased reported sales by 6% for the quarter and decreased reported sales by 3% for the nine months ended March 31, 2006 compared to increases in reported net sales of 2% for the quarter and 4% for the nine ended March 31, 2005.

Interest and Investment Income The Company’s interest and investment income is subject to changes in the general level of interest rates. Changes in interest rates affect the interest earned on the Company’s cash equivalents and short-term investments. A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to the Company’s investment balances at December 31 2005, indicated that such market movement would not have a material effect on the business, operating results or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending upon actual balances and changes in the timing and amount of interest rate movements.

Debt and Interest Expense A sensitivity analysis assuming a hypothetical 10% movement in interest rates applied to the Company’s outstanding debt balance at December 31, 2005, indicated that such market movement would not have a material effect on its business, operating results or financial condition. Actual gains or losses in the future may differ materially from this analysis, depending on the level of the Company’s outstanding debt and changes in the timing and amount of interest rate movements.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s “disclosure controls and procedures” (as defined in rules promulgated under the Exchange Act). Based on that evaluation, due to the material weakness in the Company’s internal control over financial reporting existing as of June 30, 2005, the Company’s fiscal year end, the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures as of March 31, 2006 were not effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission.

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2006 covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Planned Remediation Steps to address the Material Weakness. In the Company’s annual report on Form 10-K, the Company determined there was a lack of segregation of duties in certain of the Company’s foreign subsidiaries represented by a lack of independence review and approval of manual journal entries and insufficient control over access to accounting systems. Since the material weakness was disclosed, the Company, in part to remediate this weakness, is planning to implement the following changes in its internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Starting in October 2005, the Company:

	•		reviewed with senior management and the audit committee of its board of directors the issues which led to the material weakness;

	•		is making enhancements to provide more accurate account in variance analysis

	•		is establishing clear responsibilities among the Company’s world-wide accounting personnel and increased their formal interaction and coordination to reflect better segregation of duties

	•		is implementing the use of monthly checklists and journal entry logs at the Company’s subsidiaries

	•		has set up a steering committee that meets weekly to discuss progress of remediation plans relating to deficiencies which led to material weakness, and to monitor the Company’s FY06 internal control plans and status;

We believe that the corrective steps being taken above will sufficiently remediate the material weakness.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

An investment in the Common Stock of the Company involves risks and uncertainties including the risks and uncertainties described below. These risks and uncertainties have not changed in any material respect from those reported in the Company’s Annual Report on Form 10-K for the year ended June 30, 2005.

The continuation or expansion of the current economic uncertainty in key markets would likely harm the Company’s operating results.

The Company sells products in many geographical regions throughout the world. If economic conditions in any of these regions decline or continue to decline, the demand for the Company’s products is likely to be reduced and will likely harm the Company’s results of operations.

Foreign currency fluctuations and other risks related to international operations may adversely affect the Company’s operating results.

The Company derived approximately 70% of its net sales from outside North America in the nine months ended March 31, 2006 and expects to continue to derive the majority of net sales from outside North America for the foreseeable future. Most of the Company’s sales outside North America are denominated in the local currency of its customers. As a result, the U.S. dollar value of the Company’s net sales varies with currency rate fluctuations. Significant changes in the value of the U.S. dollar relative to certain foreign currencies could have a material adverse effect on the Company’s results of operations. Tariffs and other trade barriers, difficulties in staffing and managing foreign operations, changes in political environments, interruptions in overseas shipments and changes in tax laws may also impact international sales negatively.

Fluctuation in worldwide demand for analytical instrumentation could affect the Company’s operating results.

The demand for analytical instrumentation products can fluctuate depending upon capital expenditure and/or R&D expenditure cycles. Most companies consider the Company’s instrumentation products to be capital equipment and customers may be unable to secure the necessary capital expenditure approvals due to general economic or customer specific conditions. Significant fluctuations in demand could harm the Company’s results of operations.

Fluctuations in the Company’s quarterly operating results may cause the Company’s stock price to decline.

A high proportion of the Company’s costs are fixed due in part to its significant sales, R&D and manufacturing costs. Small declines in revenue caused by fluctuations in currency rates, worldwide demand for analytical instrumentation or other factors could disproportionately affect the Company’s quarterly operating results, which may in turn cause its stock price to decline.

If the Company does not introduce new products that are attractive to its customers on a timely basis, the Company’s products may become obsolete.

The Company’s products are highly technical in nature. As a result, many of the Company’s products must be developed months or even years in advance of the potential need by a customer. If the Company fails to introduce new products and enhancements as demand arises or in advance of the competition, the Company’s products are likely to become obsolete over time, which would harm operating results. Also, if the market is not receptive to newly developed products, the Company may be unable to recover costs of R&D and marketing, and may fail to achieve material components of its business plan.

The Company’s revenues depend on successfully competing for market share in a highly competitive market.

The analytical instrumentation market is highly competitive and the Company competes with many competitors on a local and international level that are significantly larger than the Company and have greater resources, including larger sales forces and technical staff.

Competitors may introduce more effective and less costly products and, in doing so, may make it difficult to acquire and retain customers. If this occurs, the Company’s market share may decline and operating results could suffer.

The Company’s ability to maintain inventories and meet customer demand for its products is critical to its operating results.

Most raw materials, components and supplies purchased by the Company are available from a number of suppliers. However, certain items are purchased from limited or sole source suppliers and a disruption of these sources could adversely affect the Company’s ability to ship products as needed. A prolonged inability to obtain certain materials or components would likely reduce product inventory, hinder sales and harm the Company’s reputation with customers.

The Company manufactures products in three sites in Germany, the Netherlands and the United States. Any prolonged disruption to the operations at these facilities, whether due to labor unrest, supplier issues, damage to the physical plants or equipments or other reasons, could also adversely affect the Company’s results of operations.

The Company’s executive officers and other key employees are critical to its business, they may not remain with the Company in the future and finding talented replacements would be difficult.

The operations of the Company require managerial and technical expertise. Each of the executive officers and key employees located in the United States is employed “at will” and may leave the employment of the Company at any time. In addition, the Company’s headquarters are located in Sunnyvale, California, where the demand for qualified personnel is high and is likely to remain so for the foreseeable future. As a result, competition for personnel is intense and the turnover rate for qualified personnel is comparatively high. The loss of any of the Company’s executive officers or key employees could cause the Company to incur increased operating expenses and divert senior management resources in searching for replacements. An inability to hire, train and retain sufficient numbers of qualified employees would seriously affect the Company’s ability to conduct its business.

The success of the Company’s business is dependent in part on protecting its proprietary information and inventions. Obtaining and protecting the Company’s proprietary products, processes and technologies can be difficult and expensive.

Patent and trade secret protection is important to the Company because developing new technologies and products is time-consuming and expensive. The Company owns many U.S. and foreign patents and intends to apply for additional patents to cover its technology and products. The Company may be unable to obtain issued patents from any pending or future patent applications that it owns. The claims allowed under any issued patents may not be sufficiently broad to protect its technology. Third parties may seek to challenge, circumvent or invalidate issued patents that the Company owns.

In addition to its patents, the Company has a vast number of unpatented proprietary products and know-how. The measures employed by the Company to protect this technology, such as maintaining the confidentiality of proprietary information and relying on trade secret laws, may be inadequate.

The Company may incur significant expense in any legal proceedings to protect its proprietary rights.

The Company’s failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 could have a material adverse effect on its stock price.

The Company is in the process of documenting and testing its internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of the Company’s internal control over financial reporting and a report by the Company’s independent registered public accountants attesting to and reporting these assessments. During the course of the Company’s testing, the Company may identify deficiencies that cannot be remediated in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if the Company fails to maintain the adequacy of its internal control over financial reporting, as such standards are modified, supplemented or amended from time to time, it may not be able to ensure that it can conclude in future periods that it has effective internal control over financial reporting in accordance with Section 404. If the Company cannot favorably assess, or its independent registered accountants are unable to provide an unqualified attestation report on the Company’s assessment of, the effectiveness of its internal control over financial reporting, investor confidence in the reliability of the Company’s financial reports may be adversely affected, which could have a material adverse effect on the Company’s stock price.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The Company repurchases shares of its common stock under a systematic program to manage the dilution created by shares issued under employee stock plans and for other purposes. This program authorizes repurchases in the open market or in private transactions. The Company started a series of repurchase programs in 1989 with the Board of Directors authorizing future repurchases of an aggregate of 1.5 million shares of common stock in April 2002 as well as authorizing the repurchase of additional shares of common stock equal to the number of shares of common stock issued pursuant to the Company’s employee stock plans.

The following table indicates common shares repurchased and additional shares added to the repurchase program during the three months ended March 31, 2006:

ISSUER PURCHASES OF EQUITY SECURITIES

Total

Maximum

Shares

Number of

Purchased

Additional

Shares that

Total

as Part of

Shares

May Yet Be

Number

Avg.

Publicly

Authorized

Purchased

of Shares

Price Paid

Announced

for

Under the

Period

Purchased

per Share

Program(1)

Purchase (1)

Program (1)

January 1 — 31, 2006

—

4,084,833

13,402

940,422

February 1 – 28, 2006

257,325

53.62

4,342,208

295,654

978,751

March 1 – 31, 2006

137,347

54.66

4,479,555

30,635

872,039


(1)		The current repurchase of 1.5 million shares of common stock plus that number of shares of common stock equal to the number of shares issued pursuant to employee stock plans subsequent to that date.

Item 6. EXHIBITS


Exhibit
Number		Description	Reference
	3.1	Restated Certificate of Incorporation, filed November 6, 1996		(2	)

	3.2	Bylaws, as amended on July 29, 2002		(5	)

	4.1	Shareholder Rights Agreement dated January 21, 1999, between the Registrant and BankBoston N.A.		(3	)

	10.1	Agreement, effective as of January 1, 1975, between The Dow Chemical Company and International Plasma Corporation		(1	)

	10.2	Agreement, dated March 6, 1975, between International Plasma Corporation and the former Dionex Corporation		(1	)

	10.3	Memorandum agreement, dated March 14, 1975, between The Dow Chemical Company and International Plasma		(1	)

	10.4	Consent to Assignment executed as of March 26, 1980, between the Dow Chemical Company and the former Dionex Corporation		(1	)

	10.5	Amendatory Agreement, effective as of November 1, 1981,between The Dow Chemical Company and the Registrant (with certain confidential information deleted)		(1	)

	10.6	Amendatory Agreement, effective as of July 1, 1982, between The Dow Chemical Company and the Registrant (with certain confidential information deleted)		(1	)

	10.7	Registrant’s Medical Care Reimbursement Plan (Exhibit 10.17)		(1	)

	10.8	Credit Agreement dated November 13, 2000 between Wells Fargo Bank and the Registrant (Exhibit 10.15)		(4	)

	10.9	First amendment to Credit Agreement dated November 13, 2000 between Wells Fargo Bank and the Registrant		(6	)

	10.10	Registrant’s Employee Stock Participation Plan (Exhibit 10.13)		(7	)

	10.10	Registrant’s 2004 Equity Incentive Plan (Exhibit 99.1)		(8	)

	10.11	Registrant’s Form of Stock Option Agreement for non-employee directors (Exhibit 99.2)		(8	)

	10.12	Registrant’s Form of Stock Option Agreement for other than non-employee directors (Exhibit 99.3)		(8	)

	10.14	Second amendment to Credit Agreement dated November 13, 2000 between Wells Fargo Bank and the Registrant (Exhibit 10.1)		(9	)

	10.15	Change in Control Severance Benefit Plan		(10	)

	10.16	Summary of severance bonus arrangement with A. Blaine Bowman		(11	)

	10.17	Summary of compensation arrangements with Registrant’s executive officers		(12	)

	31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	32.1	Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	32.2	Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002


(1)		Incorporated by reference to the indicated exhibit in Amendment No. 1 of the Registrant’s Registration Statement on Form S-1 filed December 7, 1982.

(2)		Incorporated by reference to the corresponding exhibit in the Registrant’s Annual Report on Form 10-Q filed February 13, 1997.

(3)		Incorporated by reference to the corresponding exhibit in the Registrant’s Quarterly Report on Form 10-Q filed February 16, 1999.

(4)		Incorporated by reference to the indicated exhibit in the Registrant’s Quarterly Report on Form 10-Q filed February 14, 2001.


	Three Months Ended
	March 31,
	2006			2005
Net sales	$	73,674		$	70,801
Cost of sales		25,126			22,941

Gross profit		48,548			47,860

Operating expenses:
Selling, general and administrative		27,739			26,060
Research and product development		5,675			4,801

Total operating expenses		33,414			30,861

Operating income		15,134			16,999
Interest income		495			351
Interest expense		(36	)		(4	)
Other income (expense), net		(73	)		67

Income before taxes		15,520			17,413
Taxes on income		5,155			5,453

Net income	$	10,365		$	11,960

Basic earnings per share	$	0.52		$	0.58

Diluted earnings per share	$	0.50		$	0.56

Shares used in computing per share amounts:
Basic		20,049			20,763

Diluted		20,542			21,543


	Nine Months Ended
	March 31,
	2006			2005
Net sales	$	216,115		$	208,161
Cost of sales		73,425			69,190

Gross profit		142,690			138,971

Operating expenses:
Selling, general and administrative		82,219			73,895
Research and product development		16,649			15,127

Total operating expenses		98,868			89,022

Operating income		43,822			49,949
Interest income		1,134			890
Interest expense		(122	)		(136	)
Other income, net		1,465			380

Income before taxes		46,299			51,083
Taxes on income		16,020			16,732

Net income	$	30,279		$	34,351

Basic earnings per share	$	1.51		$	1.66

Diluted earnings per share	$	1.47		$	1.59

Shares used in computing per share amounts:
Basic		20,067			20,755

Diluted		20,595			21,561


(5)		Incorporated by reference to the indicated exhibit in the Registrant’s Annual Report on Form 10-K filed August 28, 2002.

(6)		Incorporated by reference to the indicated exhibit in the Registrant’s Annual Report on Form 10-K filed September 24, 2003.

(7)		Incorporated by reference to the indicated exhibit in the Registrant’s Annual Report on Form 10-K filed September 10, 2004.

(8)		Incorporated by reference to the Registrant’s Registration Statement on Form S-8 filed December 8, 2004.

(9)		Incorporated by reference to the indicated exhibit in the Registrant’s Current Report on Form 8-K filed December 22, 2004.

(10)		Incorporated by reference to the indicated exhibit in the Registrant’s Quarterly Report on Form 10Q filed May 10, 2005.

(11)		Incorporated by reference to the Registrant’s Current Report on Form 8-K filed January 31, 2006

(12)		Incorporated by reference to the Registrant’s Current Report on Form 8-K filed August 3, 2005.


	DIONEX CORPORATION
	(Registrant)

Date: May 10, 2006	By:	/s/ Lukas Braunschweiler
		Lukas Braunschweiler
		President, Chief Executive Officer And Director

	By:	/s/ Craig A. McCollam
		Craig A. McCollam
		Vice President, and Chief Financial Officer

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		Page
	PART I. FINANCIAL INFORMATION

ITEM 1.	FINANCIAL STATEMENTS

	CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2006 and June 30, 2005	2

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 2006 and 2005	3

	CONDENSED CONSOLIDATED STATEMENTS OF INCOME Nine Months Ended March 31, 2006 and 2005	4

	CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended March 31, 2006 and 2005	5

	NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS	6-12

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	13-18

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS	19

ITEM 4.	CONTROLS AND PROCEDURES	19

	PART II. OTHER INFORMATION		20

ITEM 1A.	RISK FACTORS	20-22

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22

ITEM 6.	EXHIBITS	23-24

SIGNATURES		25

EXHIBITS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2