UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______________ to ______________
Commission file number 0-25424
Semitool, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Montana 81-0384392
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
655 West Reserve Drive
Kalispell, Montana 59901
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (406) 752-2107
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES __X__ NO _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES _____ NO __X__
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practical date:
Title Outstanding as of February 6, 2004
Common Stock 28,546,627
1
Semitool, Inc.
Form 10-Q
Table of Contents
Part I. Financial Information
Item 1. Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2003 and September 30,
2003
Consolidated Statements of Operations for the three months ended
December 31, 2003 and December 31, 2002
Consolidated Statements of Cash Flows for the three months ended
December 31, 2003 and December 31, 2002
Consolidated Statements of Comprehensive Income (Loss) for the three
months ended December 31, 2003 and December 31, 2002
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction - Forward-Looking Statements
Documents to Review in Connection with Management's Discussion and
Analysis of Financial Condition and Results of Operations
Overview
Key Performance Indicators
Results of Operations
Liquidity and Capital Resources
Critical Accounting Policies and Estimates
New Accounting Pronouncements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibits
2
PART I -- FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
SEMITOOL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands, Except Share Amounts)
December 31, September 30,
2003 2003
---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,940 $ 23,018
Marketable securities 6,107 4,917
Trade receivables, less allowance for doubtful accounts of $319 in both periods 22,923 17,630
Inventories 40,628 32,263
Income tax refund receivable 20,172 21,043
Prepaid expenses and other current assets 3,424 1,433
Deferred income taxes 6,588 6,578
---------------- ---------------
Total current assets 112,782 106,882
Property, plant and equipment, net 24,201 24,923
Intangibles, less accumulated amortization of $706 and $612 6,684 6,522
Other assets, net 441 447
---------------- ---------------
Total assets $ 144,108 $ 138,774
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,071 $ 13,078
Accrued commissions 1,423 1,722
Accrued warranty 4,211 4,634
Accrued payroll and related benefits 4,184 3,925
Income taxes payable 363 --
Other accrued liabilities 1,534 1,554
Customer advances 2,798 3,355
Deferred profit 4,358 5,278
Long-term debt and capital leases, due within one year 232 228
---------------- ---------------
Total current liabilities 38,174 33,774
Long-term debt and capital leases, due after one year 2,264 2,322
Deferred income taxes 2,003 2,001
---------------- ---------------
Total liabilities 42,441 38,097
---------------- ---------------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value, 75,000,000 shares authorized,
28,483,327 and 28,455,777 shares issued and outstanding 47,591 47,445
Retained earnings 54,397 53,659
Accumulated other comprehensive loss (321) (427)
---------------- ---------------
Total shareholders' equity 101,667 100,677
---------------- ---------------
Total liabilities and shareholders' equity $ 144,108 $ 138,774
================ ===============
The accompanying notes are an integral part of the consolidated financial
statements.
3
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Amounts)
Three Months Ended
December 31,
2003 2002
--------------- ----------------
Net sales $ 28,635 $ 30,291
Cost of sales 13,029 17,217
--------------- ----------------
Gross profit 15,606 13,074
--------------- ----------------
Operating expenses:
Selling, general and administrative 11,132 12,425
Research and development 3,401 4,940
--------------- ----------------
Total operating expenses 14,533 17,365
--------------- ----------------
Income (loss) from operations 1,073 (4,291)
Other income, net 28 420
--------------- ----------------
Income (loss) before income taxes 1,101 (3,871)
Income tax provision (benefit) 363 (1,471)
--------------- ----------------
Net income (loss) $ 738 $ (2,400)
=============== ================
Earnings (loss) per share:
Basic $ 0.03 $ (0.08)
=============== ===============
Diluted $ 0.03 $ (0.08)
=============== ===============
Average common shares outstanding:
Basic 28,467 28,428
=============== ================
Diluted 28,974 28,428
=============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
4
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Three Months Ended
December 31,
2003 2002
--------------- ----------------
Operating activities:
Net income (loss) $ 738 $ (2,400)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 1,399 2,120
(Gain) loss on disposition of assets 62 (2)
Change in:
Trade receivables (5,207) 2,392
Inventories (8,313) (668)
Income tax refund receivable 871 (1,024)
Prepaid expenses and other current assets (1,988) 60
Other assets, net 9 (7)
Accounts payable 5,945 (3,206)
Accrued commissions (299) 34
Accrued warranty (424) (550)
Accrued payroll and related benefits 245 (1,096)
Income taxes payable 363 (179)
Other accrued liabilities (26) (43)
Customer advances (565) (351)
Deferred profit (936) (946)
--------------- ----------------
Net cash used in operating activities (8,126) (5,866)
--------------- ----------------
Investing activities:
Purchases of marketable securities (3,801) (9,981)
Proceeds from sale and maturities of marketable securities 2,611 8,415
Purchases of property, plant and equipment (589) (152)
Increases in intangible assets (317) (284)
Proceeds from sale of property, plant and equipment 3 41
--------------- ----------------
Net cash used in investing activities (2,093) (1,961)
--------------- ----------------
Financing activities:
Proceeds from exercise of stock options 146 --
Repayments under line of credit and short-term debt -- (24)
Repayments of long-term debt and capital leases (54) (428)
--------------- ----------------
Net cash used in financing activities 92 (452)
--------------- ----------------
Effect of exchange rate changes on cash and cash equivalents 49 85
--------------- ----------------
Net decrease in cash and cash equivalents (10,078) (8,194)
Cash and cash equivalents at beginning of period 23,018 34,265
--------------- ----------------
Cash and cash equivalents at end of period $ 12,940 $ 26,071
=============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
5
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Amounts in Thousands)
Three Months Ended
December 31,
2003 2002
--------------- ----------------
Net income (loss) $ 738 $ (2,400)
Net loss on cash flow hedges (34) (8)
Unrealized gain on available-for-sale securities, net of tax -- 2
Foreign currency translation adjustment 140 204
--------------- ----------------
Total comprehensive income (loss) $ 844 $ (2,202)
=============== ================
The accompanying notes are an integral part of the consolidated financial
statements.
6
SEMITOOL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The Company prepared the consolidated financial statements included herein,
without audit, pursuant to the rules and regulations of the United States
Securities and Exchange Commission ("SEC"). Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted as
permitted by such rules and regulations. These consolidated statements should be
read in conjunction with the consolidated financial statements and the notes
thereto for the year ended September 30, 2003 previously filed with the SEC on
Form 10-K.
In our opinion these unaudited financial statements contain all of the
adjustments (normal and recurring in nature) necessary to present fairly our
consolidated financial position as of December 31, 2003, the consolidated
results of operations for the three month periods ended December 31, 2003 and
2002, and the consolidated cash flows for the three month periods ended December
31, 2003 and 2002. The results of operations for the periods presented may not
be indicative of those you may expect for the full year.
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an on-going basis, we evaluate our estimates, including those
related to revenue recognition, bad debts, inventories, investments, intangible
assets, income taxes, financing operations, warranty obligations, contingencies
and litigation. We base our 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 under different
assumptions or conditions.
New Accounting Pronouncements
In December 2003, the FASB issued Interpretation Number 46R, "Consolidation of
Variable Interest Entities" (FIN 46R) which replaces Interpretation Number 46,
"Consolidation of Variable Interest Entities" (FIN 46). This interpretation
addresses consolidation by business enterprises of variable interest entities.
The Company will be required to adopt this statement on October 1, 2005. The
revised interpretation is not expected to have a material effect on our results
of operations, financial position or cashflows.
Note 2. Principles of Consolidation
The Company's consolidated financial statements include the accounts of
Semitool, Inc. and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions are eliminated in consolidation.
Note 3. Inventories
The Company's inventories are summarized as follows (in thousands):
December 31, 2003 September 30, 2003
Parts and raw materials $ 18,539 $ 14,324
Work-in-process 14,716 10,182
Finished goods 7,373 7,757
----------- -----------
$ 40,628 $ 32,263
=========== ===========
7
Note 4. Income Taxes
The components of the Company's income tax provision (benefit) are as follows,
(in thousands):
Three Months Ended
December 31,
2003 2002
----------- -----------
Federal $ 156 $ (1,533)
State 15 (131)
Foreign 192 193
----------- -----------
$ 363 $ (1,471)
=========== ===========
Our estimated effective tax rate changed from 38% in the first quarter of fiscal
2003 to 33% in the first quarter of fiscal 2004. The difference in the effective
tax rate compared to the prior year is primarily due to the benefit of research
and development tax credits in relation to a current year income versus prior
year loss.
Note 5. Contingencies
Seed Layer Enhancement Litigation: The Company is involved in three lawsuits
filed in June 2001 in the United States District Court for the District of
Oregon (the "Oregon District Court") against each of Ebara Corporation
("Ebara"), Novellus Systems, Inc. ("Novellus") and Applied Materials, Inc.
("Applied"). The lawsuits claim that each of these companies infringe upon a
patent owned by the Company which relates to the method by which "seed layers"
on copper plated wafers are enhanced through certain fabrication steps. The
method is embodied in our U.S. Patent 6,197,181 (the "`181 Patent"). In each
case the Company is seeking an injunction to stop Ebara, Novellus and Applied
from infringing the `181 Patent as well as damages for patent infringement,
punitive damages for willful infringement, and attorneys' fees. Each defendant
has denied any infringement and also alleges that the `181 patent is invalid. In
addition, Novellus has counterclaimed against the Company for an alleged
infringement of three of its patents. The status of each case is set forth
below:
Semitool, Inc. v. Ebara Corp. and Ebara Technologies, Inc.
(Case No. CV-01-873 BR)
- --------------------------------------------------------------------------------
The discovery process is completed and the Oregon District Court has scheduled a
trial date for November 2004. There were no material developments in this case
in the first quarter of fiscal 2004.
Semitool, Inc. v. Novellus Systems, Inc. (Case No. CV-01-874 KI)
- --------------------------------------------------------------------------------
After the Company initiated its suit against Novellus for infringement of the
Company's seed layer enhancement patent, or the `181 Patent, Novellus filed
counterclaims for infringement upon four of its patents: viz., U.S. Patent
6,179,983 "Method and Apparatus for Treating Surface Including Virtual Anode";
U.S. Patent 6,074,544 "Method of Electroplating Semiconductor Wafer Using
Variable Currents and Mass Transfer to Obtain Uniform Plated Layer"; U.S. Patent
6,110,346 "Method of Electroplating Semiconductor Wafer Using Variable Currents
and Mass Transfer to Obtain Uniform Plated Layer"; and U.S. Patent 6,162,344
"Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass
Transfer to Obtain Uniform Plated Layer". Novellus' counterclaim for
infringement of U.S. Patent 6,179,983 has been withdrawn with prejudice and
Novellus covenanted to not assert that patent against Semitool. Novellus'
remaining three counterclaims seek injunctive relief, damages for past
infringement, increased damages for willful infringement and attorneys' fees.
The Company believes that the counterclaims are without merit and is contesting
the action vigorously. The discovery process in this case is complete and the
Oregon District Court has scheduled the trial date for November 2004 for a
hearing of the Company's claims and Novellus' counterclaims. There were no
material developments in this case in the first quarter of fiscal 2004.
Given the inherent uncertainty of litigation, there can be no assurance that the
ultimate outcome of either of these seed layer enhancement patent lawsuits will
be in the Company's favor. It is the opinion of management, based on information
available at this time, that the loss of any or all of its claims for patent
infringement against these defendants would not have a material adverse effect
on its business, financial condition, results of operations or cash flows. If
Novellus were to prevail in its counterclaims against the Company, it could have
a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
Semitool, Inc. v. Applied Materials, Inc. (Case No. CV-01-1066 AS)
- --------------------------------------------------------------------------------
On February 12, 2004, Semitool and Applied entered into a Seed Layer Enhancement
Patent License Agreement (the "License Agreement") and a Confidential Settlement
Agreement. The Confidential Settlement Agreement provides for the joint
dismissal without prejudice of the seed layer enhancement litigation with
Applied discussed above. The License Agreement provides for the payment to
Semitool of (i) a license initiation fee of $7.5 million upon execution of the
agreement, (ii) a commercialization fee upon the satisfaction of certain
criteria and (iii) patent license royalties payable upon the satisfaction of
certain criteria. All other terms of the agreements are confidential. The
receipt of the license initiation fee will be reflected in our second quarter
fiscal 2004 financial results.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of our business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is the opinion of our management, based upon the information
available at this time, that the currently expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
8
Note 6. Warranty Obligations
Our obligations for warranty are accrued concurrently with the revenue
recognized. We make provisions for our warranty obligations based upon
historical costs incurred for such obligations adjusted, as necessary, for
current conditions and factors. Due to the significant uncertainties and
judgments involved in estimating our warranty obligations, including changing
product designs and specifications, the ultimate amount incurred for warranty
costs could change in the near term from our current estimate.
Changes in our accrued warranty liability were as follows (in thousands):
Three Months Ended
December 31,
2003 2002
----------- -----------
Accrued warranty balance, beginning of period $ 4,634 $ 6,186
Accruals for new warranties issued during
the quarter 1,249 1,754
Accruals related to pre-existing warranties
(including changes in estimates) (518) (206)
Warranty labor and materials provided during
the quarter (1,154) (2,093)
----------- -----------
Accrued warranty balance, end of period $ 4,211 $ 5,641
=========== ===========
With the exception of product warranties we have not issued any guarantees or
any indirect guarantee for the indebtedness of others.
Note 7. Earnings (Loss) Per Common Share
The following table sets forth the computation of basic and diluted earnings
(loss) per share (in thousands):
Three Months Ended
December 31,
2003 2002
----------- -----------
Numerator:
Net income (loss) used for basic and
diluted earnings (loss) per share $ 738 $ (2,400)
=========== ===========
Denominator:
Average common shares used for basic
earnings (loss) per share 28,467 28,428
Effect of dilutive stock options 507 --
----------- -----------
Denominator for diluted earnings (loss)
per share 28,974 28,428
=========== ===========
Diluted earnings (loss) per share excludes the effects of 66,100 and 1,328,535
antidilutive stock options at December 31, 2003 and 2002, respectively.
9
Note 8. Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 (SFAS No. 123) "Accounting for Stock-Based
Compensation" as amended by SFAS No. 148 "Accounting for Stock-Based
Compensation Transition and Disclosure." Had compensation cost for the Option
Plan been determined based on the fair value consistent with the provisions of
SFAS No. 123, the Company's net income (loss) and earnings (loss) per share
would have been changed to the pro forma amounts shown below (in thousands,
except for per share amounts):
Three Months Ended
December 31,
2003 2002
----------- -----------
Net income (loss), as reported $ 738 $ (2,400)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (180) (211)
----------- -----------
Pro forma net income (loss) $ 558 $ (2,611)
=========== ===========
Basic earnings (loss) per share:
As reported $ 0.03 $ (0.08)
Pro forma $ 0.02 $ (0.09)
Diluted earnings (loss) per share:
As reported $ 0.03 $ (0.08)
Pro forma $ 0.02 $ (0.09)
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Introduction - Forward-Looking Statements
Statements contained in this Quarterly Report on Form 10-Q which are not purely
historical facts are forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934. Forward-looking statements are included in the discussion
of our business, properties and legal matters and include, without limitation,
statements regarding:
-- the semiconductor industry showing signs of recovery,
-- the continued success of cost management measures,
-- litigation costs,
-- estimates of capital expenditures,
-- the impact of various factors on gross margins,
-- research and development expenditures,
-- the sufficiency of funds and sources of liquidity,
-- the ability to finance activities,
-- accounting policies and estimates, and
-- effects of new accounting standards.
Management cautions that forward-looking statements are subject to risks and
uncertainties that could cause our actual results to differ materially from
those projected in such forward-looking statements. These risks and
uncertainties are detailed under the heading "Factors That Might Affect Our
Future Financial Results and Stock Price" and elsewhere in our Annual Report on
Form 10-K for our fiscal year ended September 30, 2003. We undertake no
obligation to update forward-looking statements to reflect subsequent events,
changed circumstances, or the occurrence of unanticipated events.
Documents to Review in Connection with Management's Discussion and Analysis of
Financial Condition and Results Of Operations
This discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes presented in this Form 10-Q and the financial
statements and notes in our last filed Annual Report on Form 10-K for a full
understanding of our financial position and results of operations for the three
month period ended December 31, 2003.
Overview
We design, manufacture, install and service highly engineered equipment for use
in the fabrication of semiconductor devices. Our products are focused on the wet
chemical process steps in integrated circuit, or IC, manufacturing and include
systems for electrochemical deposition, wafer surface preparation and wafer
transport container cleaning. Our electrochemical deposition systems are used
for plating copper and gold for the IC's internal wiring, or interconnects;
solder and gold bumps for wafer level packaging applications; and other metals
for various semiconductor and related applications. Our surface preparation
systems are designed for wet cleaning, stripping and etching processes,
including photoresist and polymer removal and metal etching. Typically, there
are hundreds of manufacturing steps in fabricating semiconductor devices and
after many of these steps a wet cleaning, stripping or etching process is
required. Our customers include many of the major semiconductor device and wafer
level packaging manufacturers worldwide.
Key Performance Indicators
Our management focuses on revenues, gross margins, operating expenses and
profitability in managing our business. In addition to these financial measures
found in our financial statements, we also use bookings, backlog and shipments
as key non-financial indicators. Bookings, firm orders for which we have written
customer purchase orders, and backlog, written customer orders that will ship
within the next twelve months, drive our production schedule and consequently,
our revenue forecast. Shipments measure how well we have met our production plan
and have completed our revenue forecast. We view shipments as a primary measure
of factory output.
The two-year semiconductor industry downturn is showing signs of recovery. A
summary of key factors which impacted our financial performance during the first
quarter includes:
-- Our fiscal 2004 first quarter bookings were $40.4 million; almost
double bookings in the fourth quarter of fiscal 2003.
-- Shipments in the first quarter of fiscal 2004 were $26.6 million, up
$3 million from the fourth quarter of fiscal 2003.
-- After eight consecutive quarters of net losses, we reported net income
of $738,000 on revenues of $28.6 million in our first quarter, which
primarily reflects gross margin improvements and the success of the
cost management measures we put into place in response to the
downturn.
-- Our gross margins were 54.5% of net sales, up from 43.2% for the same
period in fiscal 2003. The improvement in gross margin reflects a
changing sales mix including strong spare parts sales. Among other
drivers, gross margin was improved due to the sale of a Millennium
tool that was included in the $19.1 million inventory write-down in
the fourth quarter of fiscal 2003.
-- Our legal costs were lower in the first quarter of fiscal 2004 because
discovery was closed in our seed layer enhancement litigation.
-- Cash, cash equivalents and marketable securities were $19 million at
December 31, 2003.
-- Days Sales Outstanding in Trade Receivables was 73 days compared to 95
days for the same period in fiscal 2003.
11
Results of Operations
First Quarter of Fiscal 2004 Compared with First Quarter of Fiscal 2003
Net Sales. Net sales consist of revenues from sales of semiconductor equipment,
spare parts and service. Fiscal 2004 first quarter net sales were $28.6 million
down 5.6% from $30.3 million in net sales for the same period of fiscal 2003.
Net sales were slightly lower because there was less revenue from tool
acceptances in absolute dollars in the first quarter of 2004 as compared to the
first quarter of 2003. On a percentage basis, however, tool acceptance revenue
increased 40.0% from 27.5% of the deferred revenue pool to 67.5%. Spare Parts
and Service sales increased $1.1 million from the comparable period in fiscal
2003. The semiconductor equipment industry has started to show signs of a
recovery as our first quarter bookings indicate, but we are still cautious as to
the timing and extent of an upturn in demand for our products.
Gross Profit. Fiscal 2004's first quarter gross margin was 54.5% of net sales,
compared to 43.2% for the same period in fiscal 2003. Gross margin was up period
over period primarily due to a changing sales mix, including strong spare part
sales and a higher percentage of installation revenues than in the first quarter
of fiscal 2003. Our gross margin was improved by 1.9% due to the sale of a
Millennium tool that was included in the $19.1 million inventory write-down in
the fourth quarter of fiscal 2003. Our margins would have been 52.6% had that
tool not been included in the inventory write-down. First quarter margins were
also positively impacted by the lack of a need for reserves against obsolete
inventory. Our gross margin has been, and will continue to be, affected by a
variety of factors, including sales volume, sales mix, average selling price of
products sold, and the cost of manufacturing, servicing and supporting new and
enhanced products. Our margins will also fluctuate based on the relative amount
of equipment revenue compared to installation revenue.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses were $11.1 million or 38.9% of net sales for the first quarter
of fiscal 2004 compared to $12.4 million or 41.0% of net sales for the same
period in fiscal 2003. SG&A expenses for fiscal 2004 first quarter were lower
compared to fiscal first quarter 2003 due to lower legal and employment costs.
Legal costs decreased in the first quarter of fiscal 2004 because discovery was
closed in our seed layer enhancement litigation. We expect legal costs to
increase in the second quarter of fiscal 2004 as a result of the trial
preparation and trial of the Applied patent infringement case. Employment costs
declined as a result of our efforts to manage costs in fiscal 2003, which
included layoffs and pay decreases.
Research and Development. Research and development ("R&D") expense consists of
salaries, project materials, laboratory costs, consulting fees, and other costs
associated with our product development efforts. R&D expense was $3.4 million or
11.9% of net sales compared to $4.9 million or 16.3% of net sales for the same
period in fiscal 2003. The decrease from fiscal 2003 to fiscal 2004 is primarily
attributable to lower prototype and depreciation expense.
Our research and development expense has fluctuated from quarter to quarter in
the past. We expect such fluctuations to continue in the future, both in
absolute dollars and as a percentage of net sales, primarily due to the timing
of expenditures and fluctuations in the level of net sales in a given quarter.
We expect to continue to fund R&D expenditures with a multi-year perspective and
are committed to technology leadership in our sector of the semiconductor
equipment industry.
Other Income (Expense), Net. Net other income was approximately $28,000 in the
first quarter of fiscal 2004 and included, among others, interest income of
approximately $130,000 offset by interest expense of $39,000 and a foreign
exchange loss of $80,000. This compares to net other income of $420,000 in the
same period of fiscal 2003, which included, among others, interest income of
approximately $155,000 and interest expense of approximately $45,000. Other
income in fiscal 2003 also included the proceeds we received from a settlement
in connection with a patent claim that we pursued against a German manufacturer,
Dynamic Micro Systems Semiconductor Equipment GmbH.
Income Taxes. The provision for income taxes for the first quarter of fiscal
2004 was $363,000 compared to an income tax benefit of $1.5 million for the same
period of fiscal 2003. Income tax provisions and benefits are made based on the
blended estimate of federal, state and foreign effective income tax rates which
were estimated to be 33.0% in the first quarter of fiscal 2004 and 38% in the
first quarter of fiscal 2003.
12
Backlog. Consolidated orders backlog increased 51.9% to $31.9 million at
December 31, 2003, from approximately $21.1 million at December 31, 2002.
We include in backlog those customer orders for which we have written customer
authorization and for which shipment is scheduled within the next twelve months.
Orders are generally subject to cancellation or rescheduling by customers with
limited or no cancellation fees. As the result of systems ordered and shipped in
the same quarter, possible changes in customer delivery dates, cancellations and
shipment delays, the backlog at any particular date and the new orders bookings
for any particular period are not necessarily indicative of actual revenue for
any succeeding period. In particular, during periods of downturns in the
semiconductor industry we have experienced cancellations and significant delays.
Deferred profit included in our current liabilities is derived from deferred
revenue, which relates to equipment shipped to customers, that has not been
accepted by the customer, less deferred cost of sales, warranty, installation
and commission expenses. December 31, 2003 deferred revenue was $8.6 million, a
decrease of 76.6% as compared to deferred revenue of $36.7 million at December
31, 2002. Deferred revenue is not included in orders backlog.
Liquidity and Capital Resources
Net cash used in operations was $8.1 million during the first three months of
fiscal 2004, which compares to $5.9 million cash used by operations in the same
period of fiscal 2003. In the first fiscal quarter of 2004, the primary uses of
cash for operating activities include a $5.2 million increase in trade
receivables and an $8.3 million increase in inventory which were partially
offset by a $5.9 million increase in accounts payable. Inventory increased
during the quarter as a result of our plan to reduce manufacturing cycle times
and provide faster deliveries to our customers. The increase in accounts payable
is directly related to the increase in inventory. Customer order shipment dates
late in December were the primary driver of the increase in trade receivables.
During the first three months of fiscal 2004 investing activities included
$589,000 in purchases of factory equipment and other property and net cash used
for marketable securities of $1.2 million. Financing activities consist
primarily of stock option exercises of $146,000 offset by long-term debt
repayments of $54,000 during the first three months of fiscal 2004.
The following commitments as of December 31, 2003, incurred in the normal course
of business, have been included in the consolidated financial statements with
the exception of purchase order commitments and operating lease obligations,
which are properly excluded under generally accepted accounting principles. They
are disclosed in the following table in order to provide a consolidated picture
of our financial position and liquidity. We do not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to the types of financing, liquidity, market or credit risks that could arise if
we had engaged in such relationships.
Payments Due by Period (amounts in thousands)
Less than 1 - 3 4 - 5 After
Total 1 year Years Years 5 Years
---------- --------- ----------- --------- ----------
Long-term debt $ 2,476 $ 217 $ 468 $ 519 $ 1,272
Capital lease obligations 20 16 4 -- --
Operating leases 1,039 600 432 7 --
Purchase order commitments 6,697 5,420 1,277 -- --
---------- --------- ----------- --------- ----------
Total commitments $ 10,232 $ 6,253 $ 2,181 $ 526 $ 1,272
========== ========= =========== ========= ==========
We have agreements with Mr. Raymon F. Thompson, our chairman, to lease aircraft
and an aircraft hangar. The current rental rate is approximately $175,000 per
month for both the aircraft and the hangar; the lease terms are month-to-month
and therefore are not included in the above table.
As of December 31, 2003, our principal sources of liquidity consisted of
approximately $12.9 million of cash and cash equivalents, $6.1 million in
marketable securities, a $20.2 million income tax refund receivable, the receipt
of a $7.5 million license initiation fee from a license agreement and incoming
cash generated from operations. We expect to receive the license initiation fee
in the second quarter of fiscal 2004; it is not reflected in the first quarter
financial statements. We also expect to receive most of the income tax refund
receivable by the end of the third quarter of fiscal 2004. We believe that we
have sufficient cash and cash equivalents, along with funds expected to be
generated from operations to meet operating expenses and planned capital
expenditures through fiscal 2004, and into the foreseeable future. We estimate
capital expenditures will be between $3.0 and $5.0 million during fiscal 2004.
We currently have an effective shelf registration statement, which registers the
offer and sale of up to an aggregate $75 million of our securities. If
additional financial resources are required in the future, we expect either to
issue securities from the shelf registration statement, to issue other financial
instruments or to obtain a suitable credit facility, whichever management deems
advisable. Of course, there can be no assurance that in the future we will be
able to issue additional common stock or other financial instruments or that we
will be able to obtain a credit facility on acceptable terms.
13
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those related to revenue
recognition, inventories, warranty obligations, bad debts, investments,
intangible assets, income taxes, financing operations, contingencies and
litigation. We base our 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 under different assumptions or
conditions.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Our revenue recognition policy is significant because revenue is a key component
of our results of operations. In addition, revenue recognition determines the
timing of certain expenses, such as cost of sales, installation, warranty and
commission expenses. We follow specific guidelines in measuring revenue;
however, certain judgments such as the definition of a new customer environment
and new acceptance criteria or if installation is perfunctory may be required in
the application of our revenue policy.
We write down the carrying value of inventories for estimated obsolescence and
marketability based upon assumptions about future use, demand and market
conditions. If actual future use, demand or market conditions are less favorable
than those projected by us, additional inventory valuation write-downs may be
required.
We provide for the estimated cost of product warranties at the time revenue is
recognized. While we engage in extensive product quality programs and processes,
including actively monitoring and evaluating the quality of our component
suppliers, our warranty obligation is affected by product failure rates,
material usage and service delivery costs incurred in correcting a product
failure. Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty liability
would be required.
We maintain allowances for doubtful accounts for estimated losses resulting from
the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, due to the cyclicality of the
industries we serve or for other reasons, resulting in an impairment of their
ability to make payments, additional allowances may be required.
We record an investment impairment charge when we believe an investment has
experienced a decline in value that is other than temporary. Future adverse
changes in market conditions or poor operating results of underlying investments
could result in losses or an inability to recover the carrying value of the
investments that may not be reflected in an investment's current carrying value,
thereby possibly requiring an impairment charge in the future.
We make estimates to determine the amount of our deferred tax assets that we
believe is more likely than not to be realized. We consider future taxable
income and ongoing prudent tax planning strategies in assessing the need for a
valuation allowance; however, should we determine that we will not be able to
realize all or part of our net deferred tax asset in the future, a decrease in
the deferred tax asset would negatively impact our results of operations in the
period such determination was made.
New Accounting Pronouncements
In December 2003, the FASB issued Interpretation Number 46R, "Consolidation of
Variable Interest Entities" (FIN 46R) which replaces Interpretation Number 46,
"Consolidation of Variable Interest Entities" (FIN 46). This interpretation
addresses consolidation by business enterprises of variable interest entities.
The Company will be required to adopt this statement on October 1, 2005. The
revised interpretation is not expected to have a material effect on our results
of operations, financial position or cashflows.
14
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
Market risks relating to our operations result primarily from changes in
interest rates and changes in foreign currency exchange rates.
As of December 31, 2003, we had approximately $2.5 million in fixed-rate
long-term debt. Changes in market interest rates would change the estimated fair
value of our long-term debt. We believe that a 10% change in long-term interest
rates would not have a material effect on our business, financial condition,
results of operations or cash flows.
All of our international operations are subject to inherent risks in conducting
business abroad, including fluctuation in the relative value of currencies. As
the Yen is our functional currency in Japan, we use short-term forward exchange
contracts to reduce our foreign currency exchange risk related to forecasted
sales. At December 31, 2003, we were obligated under forward contracts to sell
Japanese Yen with a face value of $800,000, a market value of $900,000 and an
unrealized loss of $100,000. Additionally, the impact of movements in currency
exchange rates on forward contracts are offset to the extent of intercompany
receivables denominated in Japanese Yen. We believe the effect of a 10% change
in foreign exchange rates on hedged transactions involving Japanese Yen forward
exchange contracts and the underlying transactions would not be material to our
financial condition, results of operations or cash flows. We do not hold or
issue derivative financial instruments for trading or speculative purposes.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation
of our disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of
the period covered by this Quarterly Report on Form 10-Q, our Chief
Executive Officer and Chief Financial Officer have concluded that our
disclosure controls and procedures were effective to ensure that material
information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
(b) Changes in Internal Control. There were no significant changes in our
internal control over financial reporting during the Company's most recent
fiscal quarter that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Seed Layer Enhancement Litigation: The Company is involved in three lawsuits
filed in June 2001 in the United States District Court for the District of
Oregon (the "Oregon District Court") against each of Ebara Corporation
("Ebara"), Novellus Systems, Inc. ("Novellus") and Applied Materials, Inc.
("Applied"). The lawsuits claim that each of these companies infringe upon a
patent owned by the Company which relates to the method by which "seed layers"
on copper plated wafers are enhanced through certain fabrication steps. The
method is embodied in our U.S. Patent 6,197,181 (the "`181 Patent"). In each
case the Company is seeking an injunction to stop Ebara, Novellus and Applied
from infringing the `181 Patent as well as damages for patent infringement,
punitive damages for willful infringement, and attorneys' fees. Each defendant
has denied any infringement and also alleges that the `181 patent is invalid. In
addition, Novellus has counterclaimed against the Company for an alleged
infringement of three of its patents. The status of each case is set forth
below:
Semitool, Inc. v. Ebara Corp. and Ebara Technologies, Inc.
(Case No. CV-01-873 BR)
- --------------------------------------------------------------------------------
The discovery process is completed and the Oregon District Court has scheduled a
trial date for November 2004. There were no material developments in this case
in the first quarter of fiscal 2004.
Semitool, Inc. v. Novellus Systems, Inc. (Case No. CV-01-874 KI)
- --------------------------------------------------------------------------------
After the Company initiated its suit against Novellus for infringement of the
Company's seed layer enhancement patent, or the `181 Patent, Novellus filed
counterclaims for infringement upon four of its patents: viz., U.S. Patent
6,179,983 "Method and Apparatus for Treating Surface Including Virtual Anode";
U.S. Patent 6,074,544 "Method of Electroplating Semiconductor Wafer Using
Variable Currents and Mass Transfer to Obtain Uniform Plated Layer"; U.S. Patent
6,110,346 "Method of Electroplating Semiconductor Wafer Using Variable Currents
and Mass Transfer to Obtain Uniform Plated Layer"; and U.S. Patent 6,162,344
"Method of Electroplating Semiconductor Wafer Using Variable Currents and Mass
Transfer to Obtain Uniform Plated Layer". Novellus' counterclaim for
infringement of U.S. Patent 6,179,983 has been withdrawn with prejudice and
Novellus covenanted to not assert that patent against Semitool. Novellus'
remaining three counterclaims seek injunctive relief, damages for past
infringement, increased damages for willful infringement and attorneys' fees.
The Company believes that the counterclaims are without merit and is contesting
the action vigorously. The discovery process in this case is complete and the
Oregon District Court has scheduled the trial date for November 2004 for a
hearing of the Company's claims and Novellus' counterclaims. There were no
material developments in this case in the first quarter of fiscal 2004.
Given the inherent uncertainty of litigation, there can be no assurance that the
ultimate outcome of either of these seed layer enhancement patent lawsuits will
be in the Company's favor. It is the opinion of management, based on information
available at this time, that the loss of any or all of its claims for patent
infringement against these defendants would not have a material adverse effect
on its business, financial condition, results of operations or cash flows. If
Novellus were to prevail in its counterclaims against the Company, it could have
a material adverse effect on the Company's business, financial condition,
results of operations or cash flows.
Semitool, Inc. v. Applied Materials, Inc. (Case No. CV-01-1066 AS)
- --------------------------------------------------------------------------------
On February 12, 2004, Semitool and Applied entered into a Seed Layer Enhancement
Patent License Agreement (the "License Agreement") and a Confidential Settlement
Agreement. The Confidential Settlement Agreement provides for the joint
dismissal without prejudice of the seed layer enhancement litigation with
Applied discussed above. The License Agreement provides for the payment to
Semitool of (i) a license initiation fee of $7.5 million upon execution of the
agreement, (ii) a commercialization fee upon the satisfaction of certain
criteria and (iii) patent license royalties payable upon the satisfaction of
certain criteria. All other terms of the agreements are confidential. The
receipt of the license initiation fee will be reflected in our second quarter
fiscal 2004 financial results.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of our business and have not been finally adjudicated.
Although there can be no assurance as to the ultimate disposition of these
matters, it is the opinion of our management, based upon the information
available at this time, that the currently expected outcome of these matters,
individually or in the aggregate, will not have a material adverse effect on the
Company's business, financial condition, results of operations or cash flows.
16
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Certification of the Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 7, 2003, announcing
appointment of Charles P. Grenier to the Board of Directors of
Semitool, Inc.
Current Report on Form 8-K dated October 21, 2003, announcing settlement
of patent litigation with Tokyo Electron, Ltd.
Current Report on Form 8-K dated November 4, 2003, announcing fiscal
2003 fourth quarter and year-end results.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SEMITOOL, INC.
(Registrant)
Date: February 12, 2004 By: /s/Larry A. Viano
-------------------------------------------
Larry A. Viano
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)
18