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 September 29, 2013
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 000-24838
MATTSON TECHNOLOGY, INC.
(Exact name of Registrant as Specified in its Charter)
Delaware | 77-0208119 |
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number) |
47131 Bayside Parkway
Fremont, California 94538
(Address of Principal Executive Offices including Zip Code)
(510) 657-5900
(Registrant's Telephone Number, Including Area Code)
____________________________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ¨ | Accelerated filer | x | Non-accelerated filer | ¨ | Smaller reporting company | ¨ |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
At November 1, 2013 there were 59,090,067 shares of common stock outstanding.
Note: PDF provided as a courtesy
MATTSON TECHNOLOGY, INC.
______________________________
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements (unaudited) |
MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per share amounts)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||
Net sales | $ | 33,840 | $ | 20,398 | $ | 78,651 | $ | 105,786 | |||||||
Cost of sales | 22,416 | 12,664 | 54,392 | 67,863 | |||||||||||
Gross profit | 11,424 | 7,734 | 24,259 | 37,923 | |||||||||||
Operating expenses: | |||||||||||||||
Research, development and engineering | 4,082 | 5,217 | 12,565 | 17,638 | |||||||||||
Selling, general and administrative | 6,572 | 8,205 | 21,074 | 28,777 | |||||||||||
Restructuring and other charges | 1,000 | 453 | 3,662 | 2,004 | |||||||||||
Total operating expenses | 11,654 | 13,875 | 37,301 | 48,419 | |||||||||||
Loss from operations | (230 | ) | (6,141 | ) | (13,042 | ) | (10,496 | ) | |||||||
Interest income (expense), net | (163 | ) | 36 | (284 | ) | 106 | |||||||||
Other income (expense), net | (35 | ) | (45 | ) | (111 | ) | 60 | ||||||||
Loss before income taxes | (428 | ) | (6,150 | ) | (13,437 | ) | (10,330 | ) | |||||||
Provision for (benefit from) income taxes | (16 | ) | (116 | ) | 50 | 169 | |||||||||
Net loss | $ | (412 | ) | $ | (6,034 | ) | $ | (13,487 | ) | $ | (10,499 | ) | |||
Net loss per share: | |||||||||||||||
Basic and diluted | $ | (0.01 | ) | $ | (0.10 | ) | $ | (0.23 | ) | $ | (0.18 | ) | |||
Shares used in computing net loss per share: | |||||||||||||||
Basic and diluted | 59,024 | 58,586 | 58,881 | 58,504 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited, in thousands)
Three Months Ended | Nine Months Ended | ||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||
Net loss | $ | (412 | ) | $ | (6,034 | ) | $ | (13,487 | ) | $ | (10,499 | ) | |||
Other comprehensive income (loss) | |||||||||||||||
Foreign currency translation adjustments | 368 | 428 | 235 | 343 | |||||||||||
Unrealized investment gain (loss) | — | 8 | (29 | ) | 23 | ||||||||||
Other comprehensive income (loss) | 368 | 436 | 206 | 366 | |||||||||||
Comprehensive loss | $ | (44 | ) | $ | (5,598 | ) | $ | (13,281 | ) | $ | (10,133 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except par value)
September 29, 2013 | December 31, 2012 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 11,629 | $ | 14,354 | |||
Restricted cash | 2,082 | 1,877 | |||||
Accounts receivable, net of allowance for doubtful accounts of $586 as of September 29, 2013 and $541 as of December 31, 2012 | 30,735 | 15,660 | |||||
Advance billings | 2,976 | 1,720 | |||||
Inventories | 31,215 | 33,309 | |||||
Prepaid expenses and other current assets | 2,726 | 4,561 | |||||
Total current assets | 81,363 | 71,481 | |||||
Property and equipment, net | 6,369 | 7,387 | |||||
Intangibles, net | 313 | 500 | |||||
Other assets | 838 | 701 | |||||
Total assets | $ | 88,883 | $ | 80,069 | |||
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 17,472 | $ | 11,767 | |||
Accrued compensation and benefits | 3,301 | 4,496 | |||||
Deferred revenues, current | 6,374 | 6,189 | |||||
Revolving credit facility | 20,000 | — | |||||
Other current liabilities | 4,345 | 7,518 | |||||
Total current liabilities | 51,492 | 29,970 | |||||
Deferred revenues, non-current | 2,399 | 3,059 | |||||
Other long-term liabilities | 3,627 | 3,748 | |||||
Total liabilities | 57,518 | 36,777 | |||||
Commitments and contingencies (Note 7) | |||||||
Stockholders' equity: | |||||||
Preferred stock, 2,000 shares authorized; none issued and outstanding | — | — | |||||
Common stock, par value $0.001, 120,000 shares authorized; 63,238 shares issued and 59,057 shares outstanding as of September 29, 2013; 62,908 shares issued and 58,727 shares outstanding as of December 31, 2012 | 63 | 63 | |||||
Additional paid-in capital | 653,395 | 652,041 | |||||
Accumulated other comprehensive income | 21,213 | 21,007 | |||||
Treasury stock, 4,181 shares as of September 29, 2013 and December 31, 2012 | (37,986 | ) | (37,986 | ) | |||
Accumulated deficit | (605,320 | ) | (591,833 | ) | |||
Total stockholders' equity | 31,365 | 43,292 | |||||
Total liabilities and stockholders' equity | $ | 88,883 | $ | 80,069 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MATTSON TECHNOLOGY, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended | |||||||
September 29, 2013 | September 30, 2012 | ||||||
Cash flows from operating activities: | |||||||
Net loss | $ | (13,487 | ) | $ | (10,499 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation and amortization | 3,146 | 2,760 | |||||
Stock-based compensation | 1,057 | 1,128 | |||||
Deferred income taxes | (478 | ) | 105 | ||||
Other non-cash items | 118 | (71 | ) | ||||
Changes in assets and liabilities: | |||||||
Accounts receivable | (15,079 | ) | 14,029 | ||||
Advance billings | (1,256 | ) | 4,247 | ||||
Inventories | 759 | (4,345 | ) | ||||
Prepaid expenses and other current assets | 1,957 | 3,476 | |||||
Other assets | 60 | 183 | |||||
Accounts payable | 5,665 | (6,065 | ) | ||||
Accrued compensation and benefits and other current liabilities | (3,761 | ) | (4,137 | ) | |||
Deferred revenue | (475 | ) | (6,501 | ) | |||
Other liabilities | 231 | (1,507 | ) | ||||
Net cash used in operating activities | (21,543 | ) | (7,197 | ) | |||
Cash flows from investing activities: | |||||||
Increase in restricted cash | (201 | ) | — | ||||
Purchases of property and equipment | (1,126 | ) | (1,249 | ) | |||
Net cash used in investing activities | (1,327 | ) | (1,249 | ) | |||
Cash flows from financing activities: | |||||||
Proceeds from revolving credit facility, net of borrowing costs | 19,610 | — | |||||
Proceeds from issuance of common stock, net | 296 | 267 | |||||
Net cash provided by financing activities | 19,906 | 267 | |||||
Effect of exchange rate changes on cash and cash equivalents | 239 | 223 | |||||
Net decrease in cash and cash equivalents | (2,725 | ) | (7,956 | ) | |||
Cash and cash equivalents, beginning of period | 14,354 | 31,073 | |||||
Cash and cash equivalents, end of period | $ | 11,629 | $ | 23,117 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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MATTSON TECHNOLOGY, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
Mattson Technology, Inc. (referred to in this Quarterly Report on Form 10-Q as "Mattson," "we," "us," or "our") was incorporated in California in 1988 and reincorporated in Delaware in 1997. We design, manufacture, market and globally support semiconductor wafer processing equipment used in the fabrication of integrated circuits.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by such accounting principles for complete financial statements. In the opinion of management, all adjustments (which include normal recurring adjustments) considered necessary to present fairly each of the statement of financial position as of September 29, 2013, the results of operations for the three and nine months ended September 29, 2013 and September 30, 2012, statements of comprehensive loss for the three and nine months ended September 29, 2013 and September 30, 2012, and the statements of cash flows for the nine months ended September 29, 2013 and September 30, 2012, as applicable, have been made. The condensed consolidated balance sheet as of December 31, 2012 has been derived from our audited financial statements as of such date, but does not include all disclosures required by U.S. GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2012, which are included in the Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2013.
The condensed consolidated financial statements include the accounts of Mattson Technology, Inc. and our wholly-owned subsidiaries. All inter-company balances and transactions have been eliminated.
The results of operations for the three and nine months ended September 29, 2013 are not necessarily indicative of results that may be expected for the entire year ending December 31, 2013.
Fiscal Year
Our fiscal year ends on December 31. We close our first fiscal quarter on the Sunday closest to March 31. Our second and third fiscal quarters are each 13 weeks long and our fourth quarter closes on December 31.
Use of Estimates
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. We evaluate our estimates on an ongoing basis, including those related to the useful lives and fair value of long-lived assets, estimates used to determine facility lease loss liabilities, measurement of warranty obligations, valuation allowances for deferred tax assets, the fair value of stock-based compensation, estimates for allowance for doubtful accounts, and valuation of excess and obsolete inventories. Our estimates and assumptions can be subjective and complex and consequently actual results could differ materially from those estimates.
Liquidity and Management Plans
As of September 29, 2013 we had cash, cash equivalents and restricted cash of $13.7 million and working capital of $29.9 million. On April 12, 2013, we entered into a three-year $25.0 million senior secured revolving credit facility (the "Credit Facility") with Silicon Valley Bank. Under the Credit Facility, advances are available based on (i) the achievement of certain quarterly EBITDA levels, and (ii) a borrowing base formula equal to the sum of up to (a) 80 percent of eligible accounts receivable and advance billings and (b) 30 percent of eligible inventory, minus any reserves established by the bank. As of September 29, 2013, we had $20 million outstanding under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represents the greater of the Federal Funds Effective Rate plus 0.5 percent or the prime rate plus 1.5 percent.
We believe our available financial resources are sufficient to fund our working capital and other capital requirements over the course of the next twelve months. Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our net sales, gross profits and operating
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expenses, as well as changes in our operating assets and liabilities. The cyclicality of the semiconductor industry makes it difficult to predict our future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of cash to fund inventory purchases. In addition, any ineffectiveness in our cost reduction efforts may cause us to incur additional losses in the future and lower our cash balances. Historically, we have relied on a combination of fundraising from the sale and issuance of equity securities (such as our common stock offering in May 2011), and cash generated from product, service and royalty revenues to provide funding for our operations.
We periodically review our liquidity position and expect to opportunistically raise additional funds to support our working capital requirements and operating expenses, or for other requirements. We may seek such funding from a combination of sources including, but not limited to, the issuance of equity or debt securities through public or private financings. These financing options may not be available on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders. The availability of additional financing will depend on a variety of factors, including among others, market conditions, the general availability of credit, our credit ratings, and our ability to maintain our listing on NASDAQ.
We will continue to review our operations and take further actions, as necessary, to minimize the cash used in operations and retain sufficient liquidity to fund our operating activities. However, there can be no guarantee that we will be able to raise additional funds on terms acceptable to us, or at all.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting Standards Board ("FASB") amended its existing guidance for goodwill and other intangible assets. This authoritative guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. To perform a qualitative assessment, a company must identify and evaluate changes in economic, industry and company-specific events and circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset. If a company determines that it is more likely than not that the fair value of such an asset exceeds its carrying amount, it would not need to calculate the fair value of the asset in that year. We adopted this update as of January 1, 2013, and this adoption did not have a material impact on our financial position.
In February 2013, the FASB issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income ("AOCI"). This standard requires reporting, in one place, information about reclassifications out of AOCI by component. An entity is required to present, either on the face of the financial statements or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income, but only if the amount is reclassified in its entirety in the same reporting period. For amounts that are not required to be reclassified to net income in their entirety, an entity is required to cross-reference to other currently required disclosures that provide additional detail about those amounts. The information required by this standard must be presented in one place, either parenthetically on the face of the financial statements by income statement line item or in a note. We adopted this accounting guidance in the first quarter of 2013 and this adoption did not have a material impact on our financial position or results of operations.
In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, which addresses the accounting for the cumulative translation adjustment when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. ASU 2013-05 will be effective prospectively in fiscal 2014. We are evaluating the potential impact of this adoption on our consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This update clarifies that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations where a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction or the tax law of the jurisdiction does not require, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. This accounting guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013. Retrospective application is permitted. We are evaluating the potential impact of this adoption on our consolidated financial statements.
There were no other recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 29, 2013 compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, that are of significance or potential significance to us.
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2. | BALANCE SHEET DETAILS |
We had restricted cash of $2.1 million and $1.9 million as of September 29, 2013 and December 31, 2012, respectively, which is related to secured standby letters of credit provided to certain landlords and vendors. See Note 7. Commitments and Contingencies of the Notes to condensed consolidated financial statements.
Components of inventories as of September 29, 2013 and December 31, 2012 are shown below (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Inventories: | |||||||
Purchased parts and raw materials | $ | 19,251 | $ | 20,820 | |||
Work-in-process | 4,756 | 3,186 | |||||
Finished goods | 7,208 | 9,303 | |||||
$ | 31,215 | $ | 33,309 |
Components of prepaid expenses and other current assets as of September 29, 2013 and December 31, 2012 are shown below (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Prepaid expenses and other current assets: | |||||||
Prepaid value-added tax | $ | 1,152 | $ | 1,133 | |||
Retirement insurance - foreign employees | 54 | 1,432 | |||||
Other current assets | 1,520 | 1,996 | |||||
$ | 2,726 | $ | 4,561 |
Components of property and equipment as of September 29, 2013 and December 31, 2012 are shown below (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Property and equipment, net: | |||||||
Machinery and equipment | $ | 43,614 | $ | 43,853 | |||
Furniture and fixtures | 9,976 | 9,985 | |||||
Leasehold improvements | 18,835 | 18,035 | |||||
72,425 | 71,873 | ||||||
Less: accumulated depreciation | (66,056 | ) | (64,486 | ) | |||
$ | 6,369 | $ | 7,387 |
Components of other current liabilities as of September 29, 2013 and December 31, 2012 are shown below (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Other current liabilities: | |||||||
Warranty | $ | 1,535 | $ | 1,691 | |||
Value-added tax | 128 | 435 | |||||
Restructuring - short-term | 1,036 | 3,437 | |||||
Other | 1,646 | 1,955 | |||||
$ | 4,345 | $ | 7,518 |
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3. | FAIR VALUE MEASUREMENT |
We measure certain assets and liabilities at fair value, which is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. The authoritative guidance on fair value measurements establishes a three-tier value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2. Include other inputs that are directly or indirectly observable in the marketplace.
Level 3. Unobservable inputs that are supported by little or no market activities.
Our money market funds are classified within Level 1 of the fair value hierarchy, as these instruments are valued using quoted market prices. Specifically, we value our investments in money market securities and certificates of deposit on quoted market prices in active markets. As of September 29, 2013 and December 31, 2012, we had no assets or liabilities classified within Level 2 or Level 3 and there were no transfers of instruments between Level 1, Level 2 and Level 3 regarding fair value measurement.
Cash and cash equivalents and restricted cash are carried at fair value. Accounts receivable and accounts payable are valued at their carrying amounts, which approximate fair value due to their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
Assets and liabilities measured at fair value on a recurring basis are shown in the table below by their corresponding balance sheet caption and consisted of the following types of instruments as of September 29, 2013 and December 31, 2012 (in thousands):
September 29, 2013 | December 31, 2012 | ||||||||||||||
Fair Value Measurements at Reporting Date Using | Fair Value Measurements at Reporting Date Using | ||||||||||||||
(Level 1) | Total | (Level 1) | Total | ||||||||||||
Assets measured at fair value: | |||||||||||||||
Cash equivalents and restricted cash: | |||||||||||||||
Money market funds | $ | 1,880 | $ | 1,880 | $ | 3,004 | $ | 3,004 | |||||||
Other assets: | |||||||||||||||
Equity instruments | — | — | 44 | 44 | |||||||||||
Total assets measured at fair value | $ | 1,880 | $ | 1,880 | $ | 3,048 | $ | 3,048 | |||||||
Liabilities measured at fair value: | |||||||||||||||
Other liabilities: | |||||||||||||||
Deferred compensation liabilities | $ | — | $ | — | $ | 44 | $ | 44 | |||||||
Total liabilities measured at fair value | $ | — | $ | — | $ | 44 | $ | 44 |
Equity instruments in the preceding table represent plan assets under our deferred compensation plan, which offset corresponding deferred compensation plan liabilities as of the dates presented.
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4. | INTANGIBLE ASSETS |
Identified intangible assets consisted of the following as of September 29, 2013 and December 31, 2012 (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Intangibles, net: | |||||||
Developed technology | $ | 1,250 | $ | 1,250 | |||
Accumulated amortization | (937 | ) | (750 | ) | |||
$ | 313 | $ | 500 |
Amortization expense for intangibles was $0.1 million for each of the three months ended September 29, 2013 and September 30, 2012. Amortization expense for intangibles was $0.2 million for each of the nine months ended September 29, 2013 and September 30, 2012.
Estimated future amortization expense of our intangible assets as of September 29, 2013 is as follows (in thousands):
Years ending December 31, | Amount | |||
Remainder of 2013 | $ | 63 | ||
2014 | 250 | |||
Total | $ | 313 |
5. | REVOLVING CREDIT FACILITY |
On April 12, 2013, we entered into a three-year $25.0 million senior secured revolving credit facility with Silicon Valley Bank. Under the Credit Facility, advances are available based on (i) the achievement of certain quarterly levels of our consolidated EBITDA, as defined in the Credit Facility, and (ii) a borrowing base formula equal to the sum of up to (a) 80 percent of eligible accounts receivable and advance billings and (b) 30 percent of eligible inventory, minus any reserves established by the bank. At September 29, 2013, we had $20.0 million outstanding under the Credit Facility.
In the absence of an event of default, any amounts outstanding under the Credit Facility may be repaid and re-borrowed anytime until the maturity date, which is April 12, 2016.
At our option, the borrowings under the Credit Facility can bear interest at an Alternate Base Rate (“ABR”) or Eurodollar Rate. ABR loans bear interest at a per annum rate equal to the greater of the Federal Funds Effective Rate plus 0.50 percent or the prime rate, plus an applicable margin that varies between 0.25 percent and 1.50 percent depending on our consolidated EBITDA for the four fiscal quarters most recently ended. Eurodollar loans bear interest at a margin over British Bankers' Association LIBOR Rate divided by 1 minus Eurocurrency Reserve Requirements. The applicable margin on Eurodollar loan varies between 3.25 percent and 4.50 percent depending on our consolidated EBITDA for the four fiscal quarters most recently ended. As of September 29, 2013, the effective interest rate on our outstanding borrowings was 4.75 percent, which is variable and represents the greater of the Federal Funds Effective Rate plus 0.50 percent or the prime rate, plus 1.5 percent. If an event of default occurs under the Credit Facility, the interest rate will increase by 2.0 percent per annum.
The obligations under the Credit Facility are guaranteed by Mattson International, Inc., our wholly-owned subsidiary (together with Mattson, collectively referred to as the “Loan Parties”), and are secured by substantially all of the assets of the Loan Parties, including a pledge of the capital stock holdings of the Loan Parties in certain of our direct subsidiaries.
The Credit Facility contains customary affirmative covenants and negative covenants including financial covenants requiring us and our subsidiaries to maintain a minimum level of consolidated EBITDA, for two consecutive quarters, and a minimum quick ratio, as well as restrictions on liens, investments, indebtedness, fundamental changes, sale leaseback transactions, swap agreements, accounting changes, dispositions of property, making certain restricted payments (including restrictions on dividends and stock repurchases), entering into new lines of business, and transactions with affiliates.
The obligations under the Credit Facility may be accelerated upon the occurrence of an event of default under the Credit Facility, which includes customary events of default, including payment defaults, defaults in the performance of affirmative and negative covenants, the material inaccuracy of representations or warranties, bankruptcy and insolvency related defaults, defaults relating to matters such as ERISA, judgments, and a change of control. Due to the potential for acceleration of
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obligations under the Credit Facility upon the occurrence of certain events, some of which are outside our control, borrowings under the Credit Facility are classified within current liabilities in the Condensed Consolidated Balance Sheets.
As of September 29, 2013, we were required to maintain a minimum consolidated quick ratio, as defined in the Credit Facility, of 0.75 to 1.0 and a minimum consolidated EBITDA of negative $3.0 million for the two consecutive quarters ended September 29, 2013. As of September 29, 2013, we were in compliance with our financial covenants.
We incurred $0.4 million debt issuance costs in connection with the Credit Facility, which will be amortized over the three-year term of the Credit Facility. In addition we pay monthly commitment fees, equal to 0.375 percent per annum, on the unused portion of the Credit Facility.
6. | RESTRUCTURING AND OTHER CHARGES |
In December 2011, our management approved and initiated a cost reduction plan ("2011 Restructuring Plan") as part of our broader cost reduction initiatives. During 2012, we completed the first three phases of our cost reduction plan, which included the consolidation of our manufacturing and research and development facilities, moving a portion of our outsourced spare parts logistics operations in-house, and workforce reductions. The fourth phase of our cost reduction plan included additional workforce reductions across all areas of the Company and was substantially completed during 2013.
As of September 29, 2013, we have incurred $10.5 million in restructuring and other charges under the 2011 Restructuring Plan, of which $3.7 million was recorded during the first nine months of 2013, including $0.8 million in contract termination costs related to future rent obligations associated with two vacated leased facilities net of sublease income.
The following table summarizes changes in the restructuring accrual for the three and nine months ended September 29, 2013 (in thousands):
Three Months Ended September 29, 2013 | Nine Months Ended September 29, 2013 | ||||||||||||||||||||||||||||||
Employee Severance Costs | Contract Termination Costs | Other Costs | Total | Employee Severance Costs | Contract Termination Costs | Other Costs | Total | ||||||||||||||||||||||||
Beginning balance | $ | 104 | $ | 730 | $ | 32 | $ | 866 | $ | 2,005 | $ | 1,600 | $ | — | $ | 3,605 | |||||||||||||||
Charges | 109 | 833 | 58 | 1,000 | 2,428 | 834 | 400 | 3,662 | |||||||||||||||||||||||
Payments | (122 | ) | (266 | ) | (90 | ) | (478 | ) | (4,326 | ) | (1,128 | ) | (376 | ) | (5,830 | ) | |||||||||||||||
Foreign currency changes | 4 | 3 | — | 7 | (12 | ) | (6 | ) | (24 | ) | (42 | ) | |||||||||||||||||||
Ending balance | $ | 95 | $ | 1,300 | $ | — | $ | 1,395 | $ | 95 | $ | 1,300 | $ | — | $ | 1,395 |
During the three months ended September 29, 2013, we incurred $0.8 million in contract termination costs related to future rent obligations associated with two vacated leased facilities, net of sublease income, and $0.2 million in employee severance and other costs. We paid $0.2 million in employee severance and other costs and $0.3 million of contract termination costs in the three months ended September 29, 2013.
During the nine months ended September 29, 2013, we incurred $2.8 million in employee severance and other costs, which included recruiting costs for our new chief executive officer as well as severance expense for our former chief executive officer totaling approximately $0.6 million. We also incurred $0.8 million in contract termination costs related to future rent obligations associated with two vacated leased facilities, net of sublease income. During the nine months ended September 29, 2013, we paid $4.7 million in employee severance and other costs and $1.1 million in contract termination costs.
As of September 29, 2013, $1.0 million of the restructuring accrual was classified as short-term and recorded within other current liabilities in the Condensed Consolidated Balance Sheets, and the remaining $0.4 million of the restructuring accrual was classified as long-term and recorded within other liabilities in the Condensed Consolidated Balance Sheets.
7. | COMMITMENTS AND CONTINGENCIES |
Warranty
The warranty offered by us on our system sales is generally twelve months, except where previous customer agreements state otherwise, and excludes certain consumable maintenance items. A provision for the estimated cost of warranty, based on historical costs, is recorded as cost of sales when the revenue is recognized. Our warranty obligations require us to repair or replace defective products or parts during the warranty period at no cost to the customer. The actual system performance and/or field warranty expense profiles may differ from historical experience, and in those cases, we adjust our warranty accruals accordingly.
The following table summarizes changes in our product warranty accrual for the three and nine months ended September 29, 2013 and September 30, 2012 (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||
Beginning balance | $ | 1,449 | $ | 2,915 | $ | 1,691 | $ | 3,419 | |||||||
Warranties issued in the period | 593 | 293 | 1,467 | 1,899 | |||||||||||
Costs to service warranties | (349 | ) | (961 | ) | (1,456 | ) | (3,396 | ) | |||||||
Warranty accrual adjustments | (158 | ) | (264 | ) | (167 | ) | 61 | ||||||||
Ending balance | $ | 1,535 | $ | 1,983 | $ | 1,535 | $ | 1,983 |
Guarantees
In the ordinary course of business, our bank provides standby letters of credit or other guarantee instruments on our behalf to certain parties as required. The standby letters of credit are secured by certificates of deposit, which are classified as restricted cash in the accompanying Condensed Consolidated Balance Sheets. We have never recorded any liability in connection with these guarantee arrangements beyond what is required to appropriately account for the underlying transaction being guaranteed. We do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under such guarantee arrangements. As of September 29, 2013, the maximum potential amount that we could be required to pay was $2.1 million, the total amount of outstanding standby letters of credit, which were secured by $2.1 million in money market collateral accounts. This amount was recorded as restricted cash as of September 29, 2013.
In connection with our acquisition of Vortek Industries, Ltd. ("Vortek") in 2004, we became party to an agreement between Vortek and the Canadian Minister of Industries (the "Minister") relating to an investment in Vortek by Technology Partnerships Canada. Under the agreement, as amended, we, or Vortek (renamed Mattson Technology, Canada, Inc. ("MTC")) agreed to various terms, including (i) payment by us of a royalty to the Minister of 1.4 percent of net sales from certain Flash RTP products, up to a total of C$14.3 million (approximately $13.8 million based on the applicable exchange rate as of September 29, 2013), (ii) MTC through October 27, 2009 maintaining a specified average workforce of employees in Canada, making certain investments and complying with certain manufacturing, and (iii) certain other covenants concerning protection of intellectual property rights. Under the provisions of this agreement, if MTC is dissolved, files for bankruptcy or we, or MTC, do not materially satisfy the obligations pursuant to any material terms or conditions, the Minister could demand payment of liquidated damages in the amount of C$14.3 million less any royalties paid to the Minister. As of October 27, 2009, we were no longer subject to covenant (ii), as discussed above but are still subject to the remaining terms and conditions until the earlier of payment of royalty of C$14.3 million (approximately $13.8 million based on the applicable exchange rate as of September 29, 2013) or through December 31, 2020. The movement of our Canadian operations to Germany will not result in the dissolution of MTC.
We are a party to a variety of agreements, pursuant to which we may be obligated to indemnify other parties with respect to certain matters. Typically, these obligations arise in the context of contracts under which we may agree to hold other parties harmless against losses arising from a breach of representations or with respect to certain intellectual property, operations or tax-related matters. Our obligations under these agreements may be limited in terms of time and/or amount, and in some instances, we may have defenses to asserted claims and/or recourse against third parties for payments made. It is not possible to predict the maximum potential amount of future payments under these or similar agreements due to the conditional nature of our obligations and the unique facts and circumstances involved in each particular agreement. Historically, our payments under these agreements have not had a material effect on our financial position, results of operations or cash flows. We believe if we
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were to incur a loss in any of these matters, such loss would not have a material effect on our financial position, results of operations or cash flows.
We indemnify our directors and certain employees as permitted by law, and have entered into indemnification agreements with our directors and certain senior officers. We have not recorded a liability associated with these indemnification agreements, as we historically have not incurred any material costs associated with such indemnification agreements. Costs associated with such indemnification agreements may be mitigated, in whole or only in part, by insurance coverage that we maintain.
Government Agencies
As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations ("ITAR") administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations ("EAR") administered by the Bureau of Industry and Security ("BIS"), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control ("OFAC"). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called "dual use" items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals.
As previously reported, in 2008 we self-disclosed to BIS certain inadvertent EAR violations. In April 2012, we entered into a settlement agreement with BIS that resolved in full all matters contained in our voluntary self-disclosure. Under the settlement agreement, we agreed to a civil penalty of $0.9 million of which we paid $0.3 million in May 2012. Payment of the remaining $0.6 million was suspended for a period of one year ended April 30, 2013 and was waived provided that no violations occurred during that period.
Litigation
In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe that it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain of this. The defense of claims or actions against us, even if without merit, could result in the expenditure of significant financial and managerial resources.
We record a legal liability when we believe it is both probable that a liability has been incurred, and the amount can be reasonably estimated. We monitor developments in our legal matters that could affect the estimate we have previously accrued. Significant judgment is required to determine both probability and the estimated amount.
8. | EMPLOYEE STOCK PLANS |
Stock Options
Options to purchase common stock granted under the 2012 Equity Incentive Plan (the "2012 Plan") generally have terms not exceeding seven years. Options to purchase stock under our equity incentive plans are generally granted at exercise prices that are at least 100 percent of the fair market value of our common stock on the date of grant. Generally, 25 percent of the options vest on the first anniversary of the vesting commencement date, and the remaining options vest 1/36th per month for the next 36 months thereafter.
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The following table summarizes the stock option activity under all of our equity incentive plans for the nine months ended September 29, 2013:
Number of Shares | Weighted- Average Exercise Price | Weighted Average Remaining Term | Aggregated Intrinsic Value | |||||||||
(thousands) | (years) | (thousands) | ||||||||||
Outstanding at December 31, 2012 | 7,614 | $ | 3.34 | |||||||||
Granted | 1,540 | $ | 1.36 | |||||||||
Exercised | (291 | ) | $ | 0.84 | ||||||||
Canceled or forfeited | (3,438 | ) | $ | 4.13 | ||||||||
Outstanding at September 29, 2013 | 5,425 | $ | 2.41 | 4.8 | $ | 4,104 | ||||||
Vested and expected to vest at September 29, 2013 | 4,954 | $ | 2.50 | 4.6 | $ | 3,668 | ||||||
Exercisable at September 29, 2013 | 2,107 | $ | 4.01 | 2.8 | $ | 683 | ||||||
The aggregate intrinsic value represents the pre-tax differences between the exercise price of stock options and the quoted market price of our stock on September 27, 2013 for all in-the-money options.
The following table provides information pertaining to our stock options for the nine months ended September 29, 2013 and September 30, 2012 (in thousands, except weighted-average fair values):
Nine Months Ended | |||||||
September 29, 2013 | September 30, 2012 | ||||||
Weighted-average fair value of options granted | $ | 0.86 | $ | 1.67 | |||
Intrinsic value of options exercised | $ | 273 | $ | 203 | |||
Cash received from options exercised | $ | 241 | $ | 175 |
Restricted Stock Units
The 2012 Plan provides for grants of time-based and performance-based restricted stock units ("RSUs"). At September 29, 2013, we only had time-based RSUs outstanding.
Time-Based Restricted Stock Units
Generally, 25 percent of the time-based RSUs vest on each anniversary of the vesting commencement date or date of grant. On occasion, we grant time-based RSUs for varying purposes with different vesting schedules. Time-based RSUs granted under the 2012 Plan are counted against the total number of shares of common stock available for grant under the plan at 1.75 shares of common stock for every one share of common stock subject thereto.
The associated stock-based compensation expense on time-based RSUs is determined based on the fair value of our common stock on the date of grant of the RSU and recognized over the vesting period.
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The following table summarizes RSU activity under all of our equity incentive plans for the nine months ended September 29, 2013:
Number of Shares | Weighted Average Grant Date Fair Value | |||||
(thousands) | ||||||
Outstanding at December 31, 2012 | 32 | $ | 1.28 | |||
Granted | 407 | 1.43 | ||||
Released | (8 | ) | 1.09 | |||
Canceled | (11 | ) | 1.60 | |||
Outstanding at September 29, 2013 | 420 | $ | 1.42 |
9. | STOCK-BASED COMPENSATION |
We account for stock-based compensation in accordance with the applicable authoritative guidance, which requires the measurement of stock-based compensation on the date of grant based on the fair value of the award, and the recognition of the expense over the requisite service period for the employee. Compensation related to RSUs is the intrinsic value on the date of grant, which is the closing price of our common stock less the employee exercise price, if any. Compensation related to stock options is determined using a stock option valuation model.
Valuation Assumptions
We use the Black-Scholes valuation model to determine the fair value of stock options. The Black-Scholes model requires the input of highly subjective assumptions, which are summarized in the table below for the three and nine months ended September 29, 2013 and September 30, 2012:
Three Months Ended | Nine Months Ended | ||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||
Expected dividend yield | — | — | — | — | |||
Expected stock price volatility | 84% | 81% | 84% | 81% | |||
Risk-free interest rate | 1.5% | 0.7% | 0.9% | 0.8% | |||
Expected life of options in years | 4.4 | 5.0 | 4.4 | 5.0 |
We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option. Expected volatility is based on the historical volatility of our common stock; and the risk-free interest rate is the rate on a U.S. Treasury Bill, with a maturity approximating the expected life of the option. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future. Accordingly, the expected dividend yield is zero.
Our stock-based compensation for the three and nine months ended September 29, 2013 and September 30, 2012 was as follows (in thousands):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||
Stock-based compensation by type of award: | |||||||||||||||
Stock options | $ | 293 | $ | 365 | $ | 959 | $ | 1,091 | |||||||
Restricted stock units | 36 | 1 | 83 | 22 | |||||||||||
Employee stock purchase plan | 5 | 5 | 15 | 15 | |||||||||||
$ | 334 | $ | 371 | $ | 1,057 | $ | 1,128 | ||||||||
Stock-based compensation by category of expense: | |||||||||||||||
Cost of sales | $ | 16 | $ | 17 | $ | 42 | $ | 49 | |||||||
Research, development and engineering | 53 | 68 | 198 | 215 | |||||||||||
Selling, general and administrative | 265 | 286 | 817 | 864 | |||||||||||
$ | 334 | $ | 371 | $ | 1,057 | $ | 1,128 |
We did not capitalize any stock-based compensation as inventory in the nine months ended September 29, 2013 and September 30, 2012, as such amounts were immaterial. As of September 29, 2013, we had $1.6 million in unrecognized stock-based compensation expense, net of estimated forfeitures, related to stock options which will be recognized over a weighted-average period of 2.0 years. As of September 29, 2013, we had $0.4 million in unrecognized stock-based compensation expense, net of estimated forfeitures, related to unvested RSUs which will be recognized over a weighted-average period of 3.4 years.
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10. | GEOGRAPHIC AND CUSTOMER CONCENTRATION INFORMATION |
We have one operating segment in which we design, manufacture and market advanced fabrication equipment for the semiconductor manufacturing industry. The authoritative guidance on segment reporting and disclosure defines operating segment as a component of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. As our business is completely focused on one industry segment, the design, manufacture and marketing of advanced fabrication equipment to the semiconductor manufacturing industry, management believes that we have one reportable segment. Our net sales and profits are generated from the sales of systems and services in this one segment. For the purposes of evaluating our reportable segments, our Chief Executive Officer is the chief operating decision maker, as defined in the applicable authoritative guidance.
The following table summarizes net sales by geographic areas based on the installation locations of the systems and the location of services rendered (in thousands, except percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||
Net sales: | |||||||||||||||||||||
United States | $ | 1,045 | 3 | $ | 2,034 | 10 | 7,380 | 9 | 14,279 | 13 | |||||||||||
South Korea | 9,998 | 30 | 3,234 | 16 | 12,273 | 16 | 46,290 | 44 | |||||||||||||
Taiwan | 15,753 | 46 | 5,972 | 29 | 42,477 | 54 | 18,002 | 17 | |||||||||||||
Other Asia | 4,827 | 14 | 7,972 | 39 | 12,146 | 15 | 18,192 | 17 | |||||||||||||
Europe and others | 2,217 | 7 | 1,186 | 6 | 4,375 | 6 | 9,023 | 9 | |||||||||||||
$ | 33,840 | 100 | $ | 20,398 | 100 | 78,651 | 100 | 105,786 | 100 |
For the three months ended September 29, 2013, two customers accounted for 10 percent or more of our total net sales. Sales to these customers represented approximately 38 percent and 29 percent of our total net sales, respectively. For the nine months ended September 29, 2013, two customers accounted for 10 percent or more of our total net sales. Sales to these customers represented approximately 44 percent and 17 percent of our total net sales, respectively.
For the three months ended September 30, 2012, four customers accounted for 10 percent or more of our total net sales. Sales to these customers represented approximately 23 percent, 13 percent, 12 percent and 11 percent of our total net sales, respectively. For the nine months ended September 30, 2012, one customer accounted for 10 percent or more of our total net sales, representing approximately 48 percent of our total net sales.
At September 29, 2013, two customers accounted for 10 percent or more of our total net accounts receivable, representing approximately 47 percent and 29 percent and of our total net accounts receivable, respectively. At December 31, 2012, two customers accounted for 10 percent or more of our net accounts receivable, representing approximately 35 percent and 29 percent of our total net accounts receivable, respectively.
Geographical information relating to our property and equipment, net, as of September 29, 2013 and December 31, 2012 was as follows (in thousands):
September 29, 2013 | December 31, 2012 | ||||||
Property and equipment, net: | |||||||
United States | $ | 3,521 | $ | 3,824 | |||
Germany | 2,733 | 3,131 | |||||
Others | 115 | 432 | |||||
$ | 6,369 | $ | 7,387 |
11. | INCOME TAXES |
On a quarterly basis, we record our income tax expense or benefit based on our year-to-date results and expected results for the remainder of the year.
We recorded minimal income tax provisions for the three and nine months ended September 29, 2013, which includes a $0.2 million tax benefit related to the release of uncertain tax benefits due to a lapse in the statue of limitations.
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We recorded an income tax benefit of $0.1 million and an income tax provision of $0.2 million for the three and nine months ended September 30, 2012, respectively. The net tax provision for three and nine months ended September 30, 2012 was the result of the mix of profits earned by us in tax jurisdictions with a broad range of income tax rates. The $0.2 million tax provision for the nine months ended September 30, 2012 includes a $0.2 million tax benefit related to the release of uncertain tax benefits due to a lapse of the statute of limitations.
12. | NET LOSS PER SHARE |
We present both basic and diluted net loss per share on the face of our condensed consolidated statements of operations in accordance with the authoritative guidance on earnings per share. Basic net loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the period. Since we had net losses in the three and nine months ended September 29, 2013 and September 30, 2012, none of the stock options and RSUs were included in the computation of diluted shares for these periods as inclusion of such shares would have been anti-dilutive.
The following table summarizes the incremental shares of common stock from potentially dilutive securities, calculated using the treasury stock method (in thousands except per share amounts):
Three Months Ended | Nine Months Ended | ||||||||||||||
September 29, 2013 | September 30, 2012 | September 29, 2013 | September 30, 2012 | ||||||||||||
Basic and diluted net income loss per share of common stock: | |||||||||||||||
Numerator: | |||||||||||||||
Net loss | $ | (412 | ) | $ | (6,034 | ) | $ | (13,487 | ) | $ | (10,499 | ) | |||
Denominator: | |||||||||||||||
Weighted-average shares outstanding - basic | 59,024 | 58,586 | 58,881 | 58,504 | |||||||||||
Effect of dilutive stock options and restricted stock units | — | — | — | — | |||||||||||
Weighted-average shares outstanding - diluted | 59,024 | 58,586 | 58,881 | 58,504 | |||||||||||
Net loss per share of common stock: | |||||||||||||||
Basic and diluted | $ | (0.01 | ) | $ | (0.10 | ) | $ | (0.23 | ) | $ | (0.18 | ) |
All outstanding options to purchase our common stock and RSUs are potentially dilutive securities. As of September 29, 2013 and September 30, 2012, the combined total of options to purchase common stock and RSUs outstanding were 5.8 million and 6.7 million, respectively. However, since we had net losses for three and nine months ended September 29, 2013 and September 30, 2012, no potentially dilutive securities were included in the computation of diluted shares for those years as inclusion of such shares would have been anti-dilutive. Accordingly, basic and diluted net loss per share were the same in each period reported.
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ITEM 2. | MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Our forward-looking statements may include statements that relate to our future revenue, earnings, cash flow and cash position; growth of the industry and the size of our served available market; market demand for our products; the timing of significant customer orders for our products; our ability to attract new customer; customer acceptance of delivered products and our ability to collect amounts due upon shipment and upon acceptance; end-user demand for semiconductors, including the growing mobile device industry; customer demand for semiconductor manufacturing equipment; our ability to timely manufacture, deliver and support ordered products; our ability to bring new products to market, to gain market share with such products and the overall mix of our products; our ability to generate significant sales; customer rate of adoption of new technologies; risks inherent in the development of complex technology; the timing and competitiveness of new product releases by our competitors; margins; product development plans and levels of research, development and engineering activity; our ability to align our cost structure with market conditions, including operating expenses, our quarterly breakeven point, and the expected effects, cost and timing of our restructuring plan; tax expenses; excess inventory reserves, including the level of our vendor commitments compared to our requirements; economic conditions in general and in our industry; our dependence on international sales and our expectation of growth in the international market; the impact of any litigation or investigation on our operating results or financial position; any offering and sale of securities pursuant to our shelf registration statement or otherwise; volatility in our stock price and any delisting of our stock from NASDAQ for the failure to maintain a minimum bid price; the sufficiency of our financial resources, including our revolving credit agreement to support future operations and capital expenditures; compliance with financial covenants related to our revolving credit facility; and the availability of financing. Forward-looking statements typically are identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes" and similar expressions, although some forward-looking statements are expressed differently. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include those set forth in Part II, Item 1A under "Risk Factors" and this Part I, Item 2 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future event, or for any other reason. This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our last filed Annual Report on Form 10-K for the year ended December 31, 2012.
Overview
We are a supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits ("ICs"). Our manufacturing equipment is primarily used for semiconductor manufacturing, utilizing innovative technology to deliver advanced processing capabilities and high productivity for the fabrication of current and next-generation ICs. We were incorporated in California in 1988 and reincorporated in Delaware in 1997.
Our business depends upon capital expenditures by the manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices which is dependent upon the consumer product industry. Since the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment also is highly cyclical. The semiconductor equipment industry is typically characterized by wide swings in operating results as the industry rotates between cycles.
Our strategic initiatives to position our products at our targeted customers include, but are not limited to, the following:
• | In Dry Strip, we are working with our foundry customers to enhance our SUPREMA product to address future demands of the 1x nanometer finFET technologies. More stringent defect reduction requirements and the need to minimize silicon loss on Fin-Shaped Field Effect Transistor ("finFET") structures is driving development of an improved plasma source to address these needs. We believe that the physical pattern damage induced by wet strip processing will require the continued use of Dry Strip for advanced technology nodes and our leadership in Dry Strip will continue to play an important role in the industry. |
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• | In Etch, our paradigmE XP etch system, with our new proprietary plasma source, has been qualified by key customers, expanding our potential market share. System orders for advanced 2x nanometer DRAM and 3D NAND memory production began shipping in the third quarter of 2013, and with shipping expected to continue into 2014. Our work on 3D finFET technologies with our foundry customers is showing equivalent and higher device yields than our competitors while offering significant productivity advantages. Our focus on the semi-critical process applications required for advanced device technologies is leading to enhanced positions with our Foundry and Logic customers. |
• | In Rapid Thermal Anneal, we shipped Helios XP systems into foundry customers during the first nine months of 2013. We believe that Helios XP’s pattern loading effect performance can provide advantages to our customers over our competitors’ offerings. The number of applications for which the Helios XP is used by our customers has increased since its introduction, and we believe that this trend can contribute to an increase in our market share. |
• | In Millisecond Anneal, our Millios system, which uses our proprietary arc lamp technology, has demonstrated strong on-wafer results at multiple customer sites. Millios, which processes the entire wafer surface in milliseconds, is designed to provides one of the highest throughputs for very critical applications. Using our wafer stress management technology, the Millios is designed to run optimized production processes with no, or limited, wafer breakage. |
We experienced industry weakness beginning in the second quarter of 2012 as our customers continued their cautious approach to capacity expansion in reaction to the global economic environment and their expectation of supply and demand for their products. We experienced improvements in market conditions and customer demand in the second and third quarters of 2013 and we expect such trends to continue for the remainder of 2013 and into 2014 primarily driven by a memory investment cycle and foundry spending at 20nm and below.
In December 2011, we initiated a broad-based cost reduction plan ("2011 Restructuring Plan"). During 2012, we completed the first three phases of our cost reduction plan, which included the consolidation of our manufacturing and research and development facilities, moving a portion of our outsourced spare parts logistics operations in-house, and workforce reductions. The fourth phase of the 2011 Restructuring Plan primarily consisted of further workforce reductions across all areas of the Company, and was substantially completed during 2013.
From the inception of our cost reduction initiatives included in the 2011 Restructuring Plan in the fourth quarter of 2011, our quarterly operating expense run rate, which consists of our total operating expenses, excluding restructuring expenses, has decreased 41 percent, representing approximately $29 million in reductions of annual operating expenses as measured against annualized operating expenses in the third quarter of 2011. We incurred $10.5 million in restructuring and other charges under the 2011 Restructuring Plan since its inception in the fourth quarter of 2011, of which $3.7 million was recorded in the first nine months of 2013.
In addition to expenses incurred under the 2011 Restructuring Plan, we also expect to incur up to $1.0 million in capital expenditures in 2013 related to the transfer of research, development and pilot-line production of our Millios systems to our facility in Dornstadt, Germany and the consolidation of global manufacturing in our facility in Fremont, California.
As of September 29, 2013, we had cash, cash equivalents and restricted cash of $13.7 million and working capital of $29.9 million. On April 12, 2013, we entered into a three-year $25.0 million senior secured revolving credit facility (the "Credit Facility") with Silicon Valley Bank. Under the Credit Facility, advances are available based on (i) the achievement of certain quarterly levels of our consolidated EBITDA, as defined in the Credit Facility, and (ii) a borrowing base formula equal to the sum of up to (a) 80 percent of eligible accounts receivable and advance billings and (b) 30 percent of eligible inventory, minus any reserves established by the bank. As September 29, 2013, we have $20.0 million outstanding borrowing under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represented the greater of the Federal Funds Effective Rate plus 0.50 percent and the prime rate, plus 1.5 percent. We believe our available financial resources are sufficient to fund our working capital and other capital requirements over the course of the next twelve months. We expect to opportunistically seek additional funds to support our working capital requirements and operating expenses or for other requirements.
Overall, the combination of our efforts under our 2011 Restructuring Plan, our gross margin improvement efforts to date and our reaction to improved market conditions and customer demand have resulted in our expected quarterly cash flow breakeven point of a quarterly net sales level of approximately $30.0 million. We will continue to review our operations and take further actions, as necessary, to minimize the cash used in operations and retain sufficient liquidity to fund our operating activities. However, improvements in our results of operations and resulting cash position are largely dependent upon the continuation of improvements in the semiconductor equipment industry.
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The future success of our business will depend on numerous factors, including, but not limited to, the market demand for semiconductors and semiconductor wafer processing equipment. Such factors also will include our ability to (a) enhance our competitiveness and profitability; (b) develop and bring to market new products that address our customers' needs; (c) grow customer loyalty through collaboration with and support of our customers; (d) maintain a cost structure that will enable us to operate effectively and profitably throughout changing industry cycles; and (e) generate the gross profits necessary to enable us to make the necessary investments in our business.
Critical Accounting Policies and Use of Estimates
Management's discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods.
On an on-going basis, we evaluate our estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty, bad debts, intangible assets, income taxes, restructuring costs, stock-based compensation, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These 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.
There were no significant changes to our critical accounting policies during the nine months ended September 29, 2013. For information about critical accounting policies, see Note 1. Basis of Presentation and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.
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Results of Operations
A summary of our results of operations for three and nine months ended September 29, 2013 and September 30, 2012 are as follows (in thousands except for percentages):
Three Months Ended | |||||||||||||||||||||
September 29, 2013 | September 30, 2012 | Increase (Decrease) | |||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||
Net sales | $ | 33,840 | 100.0 | $ | 20,398 | 100.0 | $ | 13,442 | 65.9 | ||||||||||||
Cost of sales | 22,416 | 66.2 | 12,664 | 62.1 | 9,752 | 77.0 | |||||||||||||||
Gross profit | 11,424 | 33.8 | 7,734 | 37.9 | 3,690 | 47.7 | |||||||||||||||
Operating expenses: | |||||||||||||||||||||
Research, development and engineering | 4,082 | 12.1 | 5,217 | 25.6 | (1,135 | ) | (21.8 | ) | |||||||||||||
Selling, general and administrative | 6,572 | 19.4 | 8,205 | 40.2 | (1,633 | ) | (19.9 | ) | |||||||||||||
Restructuring charges | 1,000 | 3.0 | 453 | 2.2 | 547 | n/m | (1) | ||||||||||||||
Total operating expenses | 11,654 | 34.4 | 13,875 | 68.0 | (2,221 | ) | (16.0 | ) | |||||||||||||
Loss from operations | (230 | ) | (0.7 | ) | (6,141 | ) | (30.1 | ) | 5,911 | (96.3 | ) | ||||||||||
Interest income (expense), net | (163 | ) | (0.5 | ) | 36 | 0.2 | (199 | ) | n/m | (1) | |||||||||||
Other income (expense), net | (35 | ) | (0.1 | ) | (45 | ) | (0.2 | ) | 10 | n/m | (1) | ||||||||||
Loss before income taxes | (428 | ) | (1.3 | ) | (6,150 | ) | (30.2 | ) | 5,722 | (93.0 | ) | ||||||||||
Benefits from income taxes | (16 | ) | — | (116 | ) | (0.6 | ) | 100 | n/m | (1) | |||||||||||
Net loss | $ | (412 | ) | (1.2 | ) | $ | (6,034 | ) | (29.6 | ) | $ | 5,622 | (93.2 | ) |
Nine Months Ended | |||||||||||||||||||||
September 29, 2013 | September 30, 2012 | Increase (Decrease) | |||||||||||||||||||
Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||
Net sales | $ | 78,651 | 100.0 | $ | 105,786 | 100.0 | $ | (27,135 | ) | (25.7 | ) | ||||||||||
Cost of sales | 54,392 | 69.2 | 67,863 | 64.2 | (13,471 | ) | (19.9 | ) | |||||||||||||
Gross profit | 24,259 | 30.8 | 37,923 | 35.8 | (13,664 | ) | (36.0 | ) | |||||||||||||
Operating expenses: | |||||||||||||||||||||
Research, development and engineering | 12,565 | 16.0 | 17,638 | 16.7 | (5,073 | ) | (28.8 | ) | |||||||||||||
Selling, general and administrative | 21,074 | 26.8 | 28,777 | 27.2 | (7,703 | ) | (26.8 | ) | |||||||||||||
Restructuring charges | 3,662 | 4.7 | 2,004 | 1.9 | 1,658 | n/m | (1) | ||||||||||||||
Total operating expenses | 37,301 | 47.5 | 48,419 | 45.8 | (11,118 | ) | (23.0 | ) | |||||||||||||
Loss from operations | (13,042 | ) | (16.6 | ) | (10,496 | ) | (10.0 | ) | (2,546 | ) | 24.3 | ||||||||||
Interest income (expense), net | (284 | ) | (0.4 | ) | 106 | 0.1 | (390 | ) | n/m | (1) | |||||||||||
Other income (expense), net | (111 | ) | (0.1 | ) | 60 | 0.1 | (171 | ) | n/m | (1) | |||||||||||
Loss before income taxes | (13,437 | ) | (17.1 | ) | (10,330 | ) | (9.8 | ) | (3,107 | ) | 30.1 | ||||||||||
Provision for income taxes | 50 | — | 169 | 0.2 | (119 | ) | n/m | (1) | |||||||||||||
Net loss | $ | (13,487 | ) | (17.1 | ) | $ | (10,499 | ) | (10.0 | ) | $ | (2,988 | ) | 28.5 | |||||||
(1)Not meaningful.
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Net Sales
A summary of our net sales for the three and nine months ended September 29, 2013 and September 30, 2012 are as follows (in thousands except for percentages):
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
September 29, | September 30, | Increase (Decrease) | September 29, | September 30, | Increase (Decrease) | ||||||||||||||||||||||||
2013 | 2012 | Amount | Percent | 2013 | 2012 | Amount | Percent | ||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||||||||
United States | $ | 1,045 | $ | 2,034 | $ | (989 | ) | (49 | ) | $ | 7,380 | $ | 14,279 | $ | (6,899 | ) | (48 | ) | |||||||||||
International: | |||||||||||||||||||||||||||||
Korea | 9,998 | 3,234 | 6,764 | 209 | 12,273 | 46,290 | (34,017 | ) | (73 | ) | |||||||||||||||||||
Taiwan | 15,753 | 5,972 | 9,781 | 164 | 42,477 | 18,002 | 24,475 | 136 | |||||||||||||||||||||
Other Asia | 4,827 | 7,972 | (3,145 | ) | (39 | ) | 12,146 | 18,192 | (6,046 | ) | (33 | ) | |||||||||||||||||
Europe and others | 2,217 | 1,186 | 1,031 | 87 | 4,375 | 9,023 | (4,648 | ) | (52 | ) | |||||||||||||||||||
32,795 | 18,364 | 14,431 | 79 | 71,271 | 91,507 | (20,236 | ) | (22 | ) | ||||||||||||||||||||
Total net sales | $ | 33,840 | $ | 20,398 | $ | 13,442 | 66 | $ | 78,651 | $ | 105,786 | $ | (27,135 | ) | (26 | ) |
Net sales were $33.8 million for the three months ended September 29, 2013, an increase of $13.4 million, or 66 percent, compared to $20.4 million for the three months ended September 30, 2012. Net sales were $78.7 million for the nine months ended September 29, 2013, a decrease of $27.1 million, or 26 percent, compared to $105.8 million for the nine months ended September 30, 2012. The increase in net sales in the three months ended September 29, 2013 compared to the three months ended September 30, 2012 was largely attributable to higher overall net sales of etch and rapid thermal processing ("RTP") systems into memory and foundry applications. The decreases in net sales in the nine months ended September 29, 2013 compared to the same periods in 2012 were primarily driven by lower overall net sales of etch and strip systems into memory and logic applications partially offset by higher strip and RTP sales to foundry applications.
We experienced industry weakness beginning in the second quarter of 2012 as our customers continued their cautious approach to capacity expansion in reaction to the global economic environment and their expectation of supply and demand for their products. We experienced improvements in market conditions and customer demand in the second and third quarters of 2013 and we expect such trends to continue for the remainder of 2013 and into 2014 primarily driven by a memory investment cycle and foundry spending for 20 nanometer processing technologies.
Cost of Sales and Gross Profit
A summary of our cost of sales and gross profit for the three and nine months ended September 29, 2013 and September 30, 2012 are as follows (in thousands except for percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 29, | September 30, | Increase (Decrease) | September 29, | September 30, | Increase (Decrease) | |||||||||||||||||||||||
2013 | 2012 | Amount | Percent | 2013 | 2012 | Amount | Percent | |||||||||||||||||||||
Cost of sales | $ | 22,416 | $ | 12,664 | $ | 9,752 | 77.0 | $ | 54,392 | $ | 67,863 | $ | (13,471 | ) | (19.9 | ) | ||||||||||||
Gross profit | $ | 11,424 | $ | 7,734 | $ | 3,690 | 47.7 | $ | 24,259 | $ | 37,923 | $ | (13,664 | ) | (36.0 | ) | ||||||||||||
Gross margin | 33.8 | % | 37.9 | % | 30.8 | % | 35.8 | % |
Our cost of sales consists of the costs associated with manufacturing our products, and includes the purchase of raw materials and related overhead, labor, warranty costs, charges for excess and obsolete inventory and costs incurred by our contract manufacturers in the production of our components and major sub-assemblies/modules.
Gross margin decreased from 37.9 percent during the three months ended September 30, 2012 to 33.8 percent during the three months ended September 29, 2013. This decrease was primarily attributable to the increase in the amount of net sales required to be deferred upon system shipment in accordance with our revenue recognition policy whereby we typically recognize 90 percent of the total invoice amount as net sales upon shipment while we recognize 100 percent of the system’s
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cost. In subsequent quarters when we recognize the remaining 10 percent of the total invoice amount upon installation and customer acceptance, we will experience a gross margin benefit as there will be no related system costs. In addition, in the third quarter of 2012 we experienced a benefit from the sale of an evaluation system for which the cost had previously been amortized, and we did not have any comparable benefit in the third quarter of 2013. We also experienced higher production costs in the third quarter of 2013, represented primarily by freight and labor charges resulting from an accelerated shipment schedule for our products.
Gross margin decreased from 35.8 percent during the nine months ended September 30, 2012 to 30.8 percent during the nine months ended September 29, 2013 predominately attributable to lower net sales, an unfavorable mix of system sales that were heavily weighted towards our lowest-margin strip systems in the first nine months of 2013 as compared to the same period in 2012, and an increase in net sales deferred upon system shipment partially offset by a decrease in manufacturing spending as a result of our cost reduction initiatives.
Our gross margin has varied over the years and will continue to be affected by many factors, including competitive pressures, product mix, inventory reserves, economies of scale, material and other costs, overhead absorption levels and the timing of revenue recognition.
Operating Expenses
In December 2011, we initiated the 2011 Restructuring Plan, which in addition to general cost reduction activities, included consolidation of our manufacturing and research and development facilities, moving a portion of our outsourced spare parts logistics operations in-house, and workforce reductions. Prior to the initiation of the 2011 Restructuring Plan in the fourth quarter of 2011, annualized operating expenses from the third quarter of 2011 were $71.8 million. As a result of our cost reduction initiatives included in the 2011 Restructuring Plan in the fourth quarter of 2011, our quarterly operating expense run rate has decreased 41 percent, representing approximately $29 million in reductions of annual operating expenses as measured against annualized operating expenses in the third quarter of 2011.
Our financial results for the three and nine months ended September 29, 2013 benefited from the favorable impact of our cost reduction initiatives. Our total operating expenses decreased $2.2 million and $11.1 million, respectively, during the three and nine months ended September 29, 2013, as compared to the same periods in 2012. Given our expectation of higher business levels in the remainder of 2013 and into 2014, we expect our operating expenses to increase modestly.
Research, Development and Engineering
A summary of our research, development and engineering expenses for the three and nine months ended September 29, 2013 and September 30, 2012 are as follows (in thousands except for percentages):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||
September 29, | September 30, | Increase (Decrease) | September 29, | September 30, | Increase (Decrease) | |||||||||||||||||||||||
2013 | 2012 | Amount | Percent | 2013 | 2012 | Amount | Percent | |||||||||||||||||||||
Research, development and engineering | $ | 4,082 | $ | 5,217 | $ | (1,135 | ) | (21.8 | ) | $ | 12,565 | 17,638 | $ | (5,073 | ) | (28.8 | ) | |||||||||||
Percentage of net sales | 12.1 | % | 25.6 | % | 16.0 | % | 16.7 | % |
Research, development and engineering expenses consist primarily of salaries and related costs of employees engaged in research, development and engineering activities, costs of product development and depreciation on equipment used in the course of research, development and engineering activities.
Research, development and engineering expenses decreased $1.1 million, or 22 percent, in the three months ended September 29, 2013 compared to the three months ended September 30, 2012 largely attributable to decreases in employee related expenses and engineering materials costs, both resulting from the cost reduction activities which have been on-going since the fourth quarter of 2011under the 2011 Restructuring Plan.
Research, development and engineering expenses decreased $5.1 million, or 29 percent, in the nine months ended September 29, 2013 compared to the nine months ended September 30, 2012 largely attributable to reductions in employee related expenses, engineering materials, outside services, depreciation expense and certain facilities costs. The decreases in employee related expenses, engineering material, outside services and certain facilities costs were primarily due to the cost reduction activities which have been on-going since the fourth quarter of 2011 under the 2011 Restructuring Plan. The decrease in depreciation expense was the result of several assets being fully depreciated as of the end of 2012.
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Selling, General and Administrative
A summary of our selling, general and administrative expenses for the three and nine months ended September 29, 2013 and September 30, 2012 are as follows:
Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||
September 29, | September 30, | Increase (Decrease) | September 29, | September 30, | Increase (Decrease) | ||||||||||||||||||||||
2013 | 2012 | Amount | Percent | 2013 | 2012 | Amount | Percent | ||||||||||||||||||||
Selling, general and administrative | $ | 6,572 | $ | 8,205 | $ | (1,633 | ) | (19.9 | ) | $ | 21,074 | 28,777 | (7,703 | ) | (26.8 | ) | |||||||||||
Percentage of net sales | 19.4 | % | 40.2 | % | 26.8 | % | 27.2 | % |
Selling, general and administrative expenses consist primarily of employee-related expenses, as well as legal and professional fees, insurance costs, amortization of evaluation systems and certain facilities and information technology costs.
Selling, general and administrative expenses decreased by $1.6 million, or 20 percent during the three months ended September 29, 2013 as compared with the three months ended September 30, 2012 primarily attributable to lower employee related expenses, outside services, travel and entertainment expenses and certain facilities costs, all resulting from cost reduction activities that have been on-going since the fourth quarter of 2011 under the 2011 Restructuring Plan.
Selling, general and administrative expenses decreased by $7.7 million, or 27 percent, during the nine months ended September 29, 2013 as compared with the nine months ended September 30, 2012. The decrease in selling, general and administrative expenses was primarily due to lower employee related expenses, outside services, travel and entertainment expenses, all resulting from cost reduction activities that have been on-going since the fourth quarter of 2011 under the 2011 Restructuring Plan, as well as reduction in sales commissions due to lower net sales in the first nine months of 2013 compared to the same period in 2012. This decrease was partially offset by an increase in amortization and other costs associated with supporting our evaluation tools at customer sites.
Restructuring and Other Charges
As of September 29, 2013, we incurred $10.5 million in restructuring charges under the 2011 Restructuring Plan, of which $3.7 million was recorded during the first half of 2013. We completed the first three phases of the 2011 Restructuring Plan in 2012 and substantially completed the fourth phase of the 2011 Restructuring Plan during 2013.
During the three months ended September 29, 2013, we incurred $0.8 million in contract termination costs related to future rent obligations associated with two vacated leased facilities net of sublease income and $0.2 million employee severance and other costs. We paid $0.2 million in employee severance and other costs and $0.3 million of contract termination costs during the three months ended September 29, 2013.
During the nine months ended September 29, 2013, we incurred $2.8 million in employee severance and other costs, which included recruiting costs for our new chief executive officer as well as severance expense for our former chief executive officer totaling approximately $0.6 million. We also incurred $0.8 million in contract termination costs related to future rent obligations associated with two vacated leased facilities net of sublease income. We paid $4.7 million in employee severance and other costs and $1.1 million contract termination costs during the nine months ended September 29, 2013.
In addition to expenses incurred under the 2011 Restructuring Plan, we also expect to incur up to $1.0 million in capital expenditures in 2013 related to the transfer of research, development and pilot-line production of our Millios systems to our facility in Dornstadt, Germany and the consolidation of global manufacturing to our facility in Fremont, California.
Interest Income (Expense), net
Interest income (expense), net were $0.2 million and $0.3 million net expense for the three and nine months ended September 29, 2013, respectively, and primarily resulted from interest charges on borrowings under our Credit Facility.
Other Income (Expense), net
Other income (expense), net was $35,000 and $0.1 million net expense for the three and nine months ended September 29, 2013, respectively, which primarily consisted of foreign exchange losses from foreign currency denominated inter-company balances.
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Provision for Income Taxes
On a quarterly basis, we record our income tax expense or benefit based on our year-to-date results and expected results for the remainder of the year.
We recorded minimal income tax provisions for the three and nine months ended September 29, 2013, which includes a $0.2 million tax benefit related to the release of uncertain tax benefits due to a lapse in the statue of limitations.
We recorded an income tax benefit of $0.1 million and an income tax provision of $0.2 million for the three and nine months ended September 30, 2012, respectively. The net tax provision for three and nine months ended September 30, 2012 was the result of the mix of profits earned by us, in tax jurisdictions with a broad range of income tax rates. The $0.2 million tax provision for the nine months ended September 30, 2012 includes a $0.2 million tax benefit related to the release of uncertain tax benefits due to a lapse of the statute of limitations.
Liquidity and Capital Resources
Our primary liquidity and capital resource needs are to support our working capital requirements and to support potential business growth. As of September 29, 2013, our primary sources of liquidity included $11.6 million of cash and cash equivalents, as well as amounts available to us under the Credit Facility. At September 29, 2013, our cash and cash equivalents included $1.5 million of cash held by our foreign subsidiaries. If we decide to distribute or use such cash and cash equivalents outside those foreign jurisdictions, including a distribution to the United States, we may be subject to additional taxes or costs.
Nine Months Ended | ||||||||
September 29, 2013 | September 30, 2012 | |||||||
Net cash used in operating activities | $ | (21,543 | ) | $ | (7,197 | ) | ||
Net cash used in investing activities | (1,327 | ) | (1,249 | ) | ||||
Net cash provided by financing activities | 19,906 | 267 | ||||||
Effect of exchange rate changes on cash and cash equivalents | 239 | 223 | ||||||
Net increase (decrease) in cash and cash equivalents | $ | (2,725 | ) | $ | (7,956 | ) |
Liquidity and Capital Resources Outlook
As of September 29, 2013, we had cash and cash equivalents of $11.6 million and working capital of $29.9 million. On April 12, 2013, we entered into a three-year $25 million Credit Facility with Silicon Valley Bank. Under the Credit Facility, advances are available based on (i) the achievement of certain quarterly levels of our consolidated EBITDA, as defined in the Credit Facility, and (ii) a borrowing base formula equal to the sum of up to (a) 80 percent of eligible accounts receivable and advance billings and (b) 30 percent of eligible inventory, minus any reserves established by the bank. As September 29, 2013, we had $20.0 million outstanding borrowing under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represented the greater of the Federal Funds Effective Rate plus 0.50 percent and the prime rate, plus 1.5 percent.
We are subject to customary affirmative and negative covenants and customary events of default under the Credit Facility. As of September 29, 2013, we were required to maintain a minimum consolidated quick ratio, as defined in the Credit Facility of 0.75 to 1.0 and a minimum consolidated EBITDA of negative $3.0 million for two consecutive quarters ended September 29, 2013, and we were in compliance with our financial covenants. We believe our available financial resources are sufficient to fund our working capital and other capital requirements over the course of the next twelve months.
Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our net sales, gross profits and operating expenses, as well as changes in our operating assets and liabilities. For example, our net sales for the nine months ended September 29, 2013 decreased 26 percent compared to the same period in 2012. The cyclicality of the semiconductor industry makes it difficult to predict our future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of cash to fund inventory purchases. In addition, our cost reduction efforts may prove ineffective and cause us to incur additional losses in the future and lower our cash balances. Historically, we have relied on a combination of fundraising from the sale and issuance of equity securities (such as our common stock offering in May 2011) and cash generated from product, service and royalty revenues to provide funding for our operations.
Improvements in our results of operations and resulting cash position are largely dependent upon an improvement in the semiconductor equipment industry. We periodically review our liquidity position and expect to opportunistically raise additional funds to support our working capital requirements and operating expenses, or for other requirements. We may seek such funding from a combination of sources including, but not limited to, the issuance of equity or debt securities through
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public or private financings. These financing options may not be available on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders. If adequate funds are not available on acceptable terms, our ability to achieve our intended long-term business objectives could be limited.
Operating Activities
Net cash used in operations was $21.5 million in the nine months ended September 29, 2013, comprised primarily of $13.5 million in net loss, partially offset by non-cash charges of $3.8 million and $11.9 million of cash decreases reflected in the net change in assets and liabilities. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of a $16.3 million increase in accounts receivable and advance billings and $0.5 million decrease in deferred revenue, partially offset by a $2.0 million decrease in prepaid expenses and other current assets, a $1.9 million increase in accounts payable, accrued compensation and benefits and other current liabilities and a $0.8 million decrease in inventory. The increase in accounts receivable and advance billings was primarily due to increased net sales and the timing of billing and collections during the third quarter of 2013, with our increased equipment sales back-end loaded during the quarter. The decrease in accounts payable, accrued compensation and benefits and other current liabilities were largely attributable a higher accounts payable balance resulting from the timing of purchases and payments to vendors and services providers, partially offset by decreases in accrued compensation and benefits attributable to lower headcount and a decrease in accrued restructuring costs. The decrease in prepaid expenses and other current assets is primarily due to a decrease in deferred costs following customer acceptance of a system for which both revenue and costs were deferred as well as a decrease in prepaid value-added-tax due to tax refund. Non-cash charges consisted primarily of $3.1 million of depreciation and amortization and $1.1 million of stock-based compensation partially offset by a $0.5 million decrease in deferred income taxes.
In the nine months ended September 30, 2012, net cash used in operations was $7.2 million, comprised primarily of $10.5 million in net loss, offset by non-cash charges of $3.9 million and $0.6 million of cash decreases reflected in the net change in assets and liabilities. Cash flow decreases resulting from the net change in assets and liabilities primarily consisted of a $10.2 million decrease in accounts payable, accrued compensation and benefits and other current liabilities, a $6.5 million decrease in deferred revenue and a $4.3 million increase in inventory, partially offset by a $18.3 million decrease in accounts receivable and advance billings and a $3.5 million decrease in prepaid expenses and other current assets. The decrease in accounts receivable and advance billings reflects the decrease in net sales and business activities in the first nine months of 2012 compared to the same period 2011. Non-cash charges consisted primarily of $2.8 million of depreciation and amortization and $1.1 million of stock-based compensation.
Cash provided by operations may fluctuate in future periods as a result of a number of factors, including fluctuations in our net sales and operating results, amount of revenue deferred, inventory purchases, collection of accounts receivable and timing of payments.
Investing Activities
Cash used in investing activities was $1.3 million in the nine months ended September 29, 2013, which consisted of $1.1 million capital spending and a $0.2 million increase in restricted cash.
In the nine months ended September 30, 2012, cash used in investing activities was $1.2 million, which represent our capital spending during the first nine months of 2012.
Financing Activities
Net cash provided by financing activities was $19.9 million for the nine months ended September 29, 2013, which consisted of $19.6 million in proceeds from our revolving credit facility, net of borrowing costs, and $0.3 million in proceeds from the issuance of common stock under our employee stock plans.
Net cash provided by financing activities was $0.3 million for the nine months ended September 30, 2012, which consisted of proceeds from issuance of common stock under our employee stock plans.
Off-Balance Sheet Arrangements
As of September 29, 2013, we did not have any significant "off-balance sheet" arrangements, as defined in Item 303 (a)(4)(ii) of Regulation S-K.
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Contractual Obligations
On April 12, 2013, we entered into a three-year $25 million senior secured revolving credit facility with Silicon Valley Bank. As of September 29, 2013, we had $20.0 million outstanding under the Credit Facility, which is reported as part of Current Liabilities in our Condensed Consolidated Balance Sheet. See Note 5. Revolving Credit Facility of the Notes to condensed consolidated financial statements.
Under U.S. GAAP, certain obligations and commitments are not required to be included in our Condensed Consolidated Balance Sheets. These obligations and commitments, while entered into in the normal course of business, may have a material impact on our liquidity. For further discussion of our contractual obligations, see our 2012 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Information with respect to recent accounting pronouncements may be found in Note 1 Basis of Presentation and Significant Accounting Policies in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS |
Interest Rate Risk
We are exposed to interest rate risk related to our borrowings. On April 12, 2013, we entered into a three-year $25 million senior secured revolving credit facility with Silicon Valley Bank. At our option, the borrowings under this credit facility can bear interest at an Alternate Base Rate (“ABR”) or Eurodollar Rate. ABR loans bear interest at a per annum rate equal to the greater of the Federal Funds Effective Rate plus 0.50 percent or the prime rate, plus an applicable margin that varies between 0.25 percent and 1.50 percent depending on our consolidated EBITDA for the four fiscal quarters most recently ended. Eurodollar loans bear interest at a margin over British Bankers' Association LIBOR Rate divided by 1 minus Eurocurrency Reserve Requirements. The applicable margin on Eurodollar loan varies between 3.25 percent and 4.50 percent depending on our consolidated EBITDA for the four fiscal quarters most recently ended.
As of September 29, 2013, we had $20.0 million outstanding under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represented the greater of the Federal Funds Effective Rate plus 0.50 percent and the prime rate, plus 1.5 percent. At September 29, 2013, a 100 basis point interest rate fluctuation would increase our interest expense by $0.2 million annually.
Foreign Currency Risk
The functional currency of our foreign subsidiaries is their local currencies. Accordingly, all assets and liabilities of these foreign operations are translated using exchange rates in effect at the end of the period, and net sales and costs are translated using average exchange rates for the period. Gains or losses from translation of foreign operations are included as a component of accumulated other comprehensive income in the accompanying Condensed Consolidated Balance Sheets. Foreign currency transaction gains and losses are recognized in the accompanying Condensed Consolidated Statements of Operations as they are incurred. Because much of our net sales and capital spending are transacted in U.S. dollars, we are subject to fluctuations in foreign currency exchange rates that could have a material adverse effect on our overall financial position, results of operations or cash flows, depending on the strength of the U.S. dollar relative to the currencies of other countries in which we operate. Exchange rate fluctuations of greater than ten percent, primarily for the U.S. dollar relative to the Euro or South Korean won, could have a material impact on our financial statements. Additionally, foreign currency transaction gains and losses fluctuate depending upon the mix of foreign currency denominated assets and liabilities and whether the local currency of an entity strengthens or weakens during a period. As of September 29, 2013, our U.S. operations had approximately $14.9 million, net, in foreign denominated operating inter-company payable. It is estimated that a ten percent fluctuation in the U.S. dollar relative to these foreign currencies would lead to a profit of $1.5 million (U.S. dollar strengthening), or a loss of $1.5 million (U.S. dollar weakening) on the translation of these inter-company payables, which would be recorded as other income (expense), net in our consolidated statement of operations.
We recorded $0.3 million foreign currency exchange loss and $0.1 million foreign currency exchange gain in the nine months ended September 29, 2013 and September 30, 2012, respectively, in other income (expense), net in the accompanying Condensed Consolidated Statements of Operations.
We included $0.2 million and $0.3 million foreign currency translation adjustment gains in the nine months ended September 29, 2013 and September 30, 2012, respectively, in the accompanying Condensed Consolidated Statement of Comprehensive Loss primarily due to the favorable impact of currency exchange rates on the net foreign currency assets used in our foreign operations and held in local currencies.
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of our disclosure controls and procedures, as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective as of September 29, 2013 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 29, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and Procedures
It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system will be met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
In the ordinary course of business, we are subject to claims and litigation, including claims that we infringe third party patents, trademarks and other intellectual property rights. Although we believe it is unlikely that any current claims or actions will have a material adverse impact on our operating results or our financial position, given the uncertainty of litigation, we cannot be certain of this. Moreover, the defense of claims or actions against us, even if not meritorious, could result in the expenditure of significant financial and managerial resources.
Our involvement in any patent dispute, other intellectual property dispute or action to protect trade secrets and know-how could result in a material adverse effect on our business. Adverse determinations in current litigation or any other litigation in which we may become involved and regulatory non-compliance, including with respect to export regulations, could subject us to significant liabilities to third parties or government agencies, require us to grant licenses to or seek licenses from third parties and prevent us from manufacturing and selling our products. Any of these situations could have a material adverse effect on our business.
ITEM 1A. RISK FACTORS
Because of the following factors, as well as other variables affecting our operating results, cash flows and financial condition, past financial performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. Other events that we do not currently anticipate or that we currently deem immaterial also may affect our results of operations, cash flows and financial condition.
We are dependent on our revenue and the success of our cost reduction measures to ensure adequate liquidity and capital resources during the next twelve months.
We have incurred operating losses and generated negative cash flows for the last four years. As of September 29, 2013, we had cash, cash equivalents and restricted cash of $13.7 million, which included $2.1 million of restricted cash and working capital of $29.9 million. Our operations require careful management of our cash and working capital balances. Our liquidity is affected by many factors including, among others, fluctuations in our revenue, gross profits and operating expenses, as well as changes in our operating assets and liabilities. The cyclicality of the semiconductor industry makes it difficult for us to predict our future liquidity needs with certainty. Any upturn in the semiconductor industry would result in short-term uses of our cash to fund inventory purchases. In addition, the ineffectiveness of our cost reduction efforts may cause us to incur additional losses in the future and lower our cash balances.
We may need additional funds to support our working capital requirements, and operating expenses, or for other requirements. Historically, we have relied on a combination of fundraising from the sale of equity securities and cash generated from product, service and royalty revenues to provide funding for our operations. On April 12, 2013, we entered into a three-year $25.0 million senior secured revolving credit facility with Silicon Valley Bank. As September 29, 2013, we had $20.0 million outstanding borrowing under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represented the greater of the Federal Funds Effective Rate plus 0.50% and the prime rate, plus 1.5 percent margin. If we do not comply with the affirmative and negative covenants contained in the Credit Facility, we may be in default under the Credit Facility, which may have a negative impact on our liquidity position. We will continue to review our expected cash requirements and take appropriate cost reduction measures to ensure that we have sufficient liquidity. Although we will pursue cost reduction measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our sales in order to improve our profitability and cash position. We periodically review our liquidity position and may opportunistically seek to raise additional funds from a combination of sources including issuance of equity or debt securities through public or private financings. In the event additional needs for cash arise, we also may seek to raise these funds externally through other means. The availability of additional financing will depend on a variety of factors, including among others, market conditions, the general availability of credit, our credit ratings, and our ability to maintain our listing on NASDAQ. As a consequence, these financing options may not be available to us on a timely basis, or on terms acceptable to us, and could be dilutive to our stockholders.
Our current liquidity position may result in risks and uncertainties affecting our operations and financial position, including the following:
• | we may be required to reduce planned expenditures or investments; |
• | we may be unable to compete in our newer or developing markets; |
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• | we may not be able to obtain and maintain normal terms with suppliers; |
• | suppliers may require standby letters of credit before delivering goods and services, which will result in additional demands on our cash; |
• | customers may delay or discontinue entering into contracts with us; and |
• | our ability to retain management and other key individuals may be negatively affected. |
Failure to generate sufficient cash flows from operations, raise additional capital or reduce spending could have a material adverse effect on our ability to achieve our intended long-term business objectives.
We are dependent on a highly concentrated customer base, and any delays, reduction or cancellation of purchases by these customers could harm our business. Additionally, we may not achieve anticipated revenue levels if we are not selected as “vendor of choice” for new or expanded customer fabrication facilities.
We derive most of our net sales from the sale of systems to a relatively small number of customers, which makes our relationship with each customer critical to our business. For example, in each of the years ended December 31, 2012 and 2011, our three largest customers accounted for approximately 60 percent of our net sales. We currently depend on a few customer for a significant portion of our net sales, and the delay, significant reduction in, or loss of, orders from this customer would significantly reduce our revenue and adversely impact our operating results. See Item 1. Business - Customers in our 2012 Annual Report on Form 10-K for a detailed description of our customer concentration.
Because semiconductor manufacturers must make a substantial investment to install and integrate capital equipment into a semiconductor fabrication facility, these manufacturers will tend to choose semiconductor equipment manufacturers based on product compatibility and proven performance. Changes in forecasts or the timing of orders from customers could expose us to the risks of inventory shortages, such as the shortages that resulted from the number of Helios XP system orders from foundry customers in the third quarter of 2013, or excess inventory, which occurred in the second quarter of 2012 as a result of the delay in orders for certain SUPREMA strip systems to a foundry. In addition, customer order cancellations, which are occurring more regularly in our business, could result in the loss of anticipated sales without allowing us sufficient time to reduce our inventory and operating expenses. Any such changes, delays and cancellations in orders in turn could cause our operating results to fluctuate. If customer relationships are disrupted due to an inability to deliver sufficient products or for any other reason, it could have a significant negative impact on our business.
Although we maintain a backlog of customer orders with expected shipment dates within the next 12 months, customers may request delivery delays or cancellations, as they have been doing more regularly in our business, including the delay in the second quarter of 2012 described below. Customers in some regions place orders a few weeks before the shipment. As a result, our backlog may not be a reliable indication of future net sales. If shipments of orders in backlog are canceled or delayed, net sales could fall below our expectations and the expectations of market analysts and investors.
Once a semiconductor manufacturer selects a particular vendor's capital equipment, the manufacturer generally relies upon equipment from this vendor of choice ("VOC") for the specific production line application. In addition, the semiconductor manufacturer frequently will attempt to consolidate other capital equipment requirements with the same vendors. Accordingly, we may face narrow windows of opportunity to be selected as the VOC by new customers with significant needs. It may be difficult for us to sell to a particular customer for a significant period of time once that customer selects a competitor's product. If we are unable to achieve broader market acceptance of our systems and technology, we may be unable to maintain and grow our business and our operating results and financial condition will be adversely affected.
We face stiff competition in the semiconductor equipment industry.
The semiconductor equipment industry is both highly competitive and subject to rapid technological change. Significant competitive factors include the following:
• | system performance; |
• | cost of ownership; |
• | size of the installed base; |
• | breadth of product line; |
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• | delivery speed; and |
• | customer support. |
Competitive pressure has been increasing in several areas. In addition to increased price competition, customers are waiting to make purchase commitments based on their end-user demand, which are then placed with requests for rapid delivery dates and increased product support. Most of our major competitors are larger than we are, have greater capital resources and may have a competitive advantage over us by virtue of having:
• | broader product lines; |
• | greater experience with handling manufacturing cycles; |
• | substantially larger customer bases; and |
• | substantially greater customer support, financial, technical and marketing resources. |
As we derive a substantial percentage of our revenues from a limited number of products, our business, operating results, financial condition, and cash flows could be adversely affected by a decline in demand for even a limited number of our products and a failure to achieve continued market acceptance of our key products.
Growth in the semiconductor equipment industry is increasingly concentrated in the largest companies, continuing the trend in increasing industry consolidation, such as the merger of Lam Research and Novellus Systems in 2012. Semiconductor companies are consolidating their vendor base and prefer to purchase from vendors with a strong, worldwide support infrastructure.
To expand our sales we must often displace the systems of our competitors or sell new systems to customers of our competitors. Our competitors may develop new or enhanced competitive products that offer price or performance features that are superior to our systems. Our competitors also may be able to respond more quickly to new or emerging technologies and changes in customer requirements or to devote greater resources to the development, promotion, sale and on-site customer support of their product lines. We may not be able to maintain or expand our sales if competition increases and we are unable to respond effectively.
The cyclical nature of the semiconductor industry has caused us to experience losses and reduced liquidity, and it may continue to negatively impact our financial performance.
The semiconductor equipment industry is highly cyclical and periodically has severe and prolonged downturns, which causes our operating results to fluctuate significantly. We are exposed to the risks associated with industry overcapacity, including decreased demand for our products and increased price competition.
The semiconductor industry has historically experienced periodic downturns due to sudden changes in customers’ requirements for new manufacturing capacity and advanced technology, which depend in part on customers’ capacity utilization, production volumes, access to affordable capital, end-use demand, consumer buying patterns, and inventory levels relative to demand, as well as the rate of technology transitions, and general economic conditions. Our business depends, in significant part, upon capital expenditures by manufacturers of semiconductor devices, including manufacturers that open new or expand existing facilities. Periods of overcapacity and reductions in capital expenditures by our customers cause decreases in demand for our products. This could result in significant under-utilization in our factories. If existing customer fabrication facilities are not expanded and new facilities are not built, we may be unable to generate significant new orders and sales for our systems. During periods of declining demand for semiconductor manufacturing equipment, our customers typically reduce purchases, delay delivery of ordered products and/or cancel orders, resulting in reduced net sales and backlog, delays in revenue recognition and excess inventory for us. For example, we experienced a delay in the shipment of SUPREMA strip systems in the second quarter of 2012 as a result of softness in the industry. As a result, we had a reduction in our net sales in the quarter and the year, and consequently, lower results of operations and cash from operations. Increased price competition may also result as we compete for the smaller demand in the market, causing pressure on our gross margin and net income.
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We must continually anticipate technology trends, improve our existing products and develop new products in order to be competitive. The development of new or enhanced products involves significant risks, additional costs and delays in revenue recognition. Technical and manufacturing difficulties experienced in the introduction of new products could be costly and could adversely affect our customer relationships.
The markets in which our customers and we compete are characterized by rapidly changing technology, evolving industry standards and continuous improvements in products and services. Consequently, our success depends upon our ability to anticipate future technology trends and customer needs, to develop new systems and processes that meet industry standards and customer requirements and that compete effectively on the basis of price and performance.
Our development of new products involves significant risk, since the products are very complex and the development cycle is long and expensive. The success of any new system we develop and introduce is dependent on a number of factors, including our ability to correctly predict customer requirements for new processes, to assess and select the potential technologies for research and development and to timely complete new system designs that are acceptable to the market. We may make substantial investments in new technologies before we can know whether they are technically or commercially feasible or advantageous, and without any assurance that revenue from future products or product enhancements will be sufficient to recover the associated development costs. Not all development activities result in commercially viable products. We may not be able to improve our existing systems or develop new technologies or systems in a timely manner. We may exceed the budgeted cost of reaching our research, development and engineering objectives, and planned product development schedules may require extension. Any delays or additional development costs could have a material adverse effect on our business and results of operations.
Our products are complex, and we may experience technical or manufacturing inefficiencies, delays or difficulties in the prototype introduction of new systems and enhancements, or in achieving volume production of new systems or enhancements that meet customer requirements. Our inability, or the inability of our supply chain partners, to overcome such difficulties, to meet the technical specifications of any new systems or enhancements or to manufacture and ship these systems or enhancements in the required volume and in a timely manner would materially adversely affect our business and results of operations, as well as our customer relationships.
Our revenue recognition policies require that during the initial evaluation phase of a new product, customer acceptance needs to be obtained before we can recognize revenue on the product. Customer acceptance may not be completed in a timely manner for a variety of reasons, whether or not related to the quality and performance of our products. Any delays in customer acceptance may result in revenue recognition delays and have an adverse impact on our results of operations.
We may from time to time incur unanticipated costs to ensure the functionality and reliability of our products early in their life cycles, and such costs can be substantial. If we encounter reliability or quality problems with our new products or enhancements, we could face a number of difficulties, including reduced orders, higher manufacturing costs, delays in collection of accounts receivable and additional service and warranty expenses, all of which could materially adversely affect our business and results of operations. The costs associated with our warranties may be significant, and in the event our projections and estimates of these costs are inaccurate, our financial performance could be seriously harmed. In addition, if we experience product failures at an unexpectedly high level, our reputation in the marketplace could be damaged, and our business would suffer.
Significant fluctuations in our operating results are difficult to predict due to our lengthy sales cycle, and our results may fall short of anticipated levels, which could cause our stock price to decline.
Sales of our systems depend upon the decision of a prospective customer to increase or replace manufacturing capacity, typically involving a significant capital commitment. Accordingly, the decision to purchase our systems requires time-consuming internal procedures associated with the evaluation, testing, implementation and introduction of new technologies into our customers' manufacturing facilities. Even after the customer determines that our systems meet their qualification criteria, we may experience delays finalizing system sales while the customer obtains approval for the purchase, constructs new facilities or expands its existing facilities. Consequently, the time between our first contact with a customer regarding a specific potential purchase and the customer's placing its first order may last from one to two years or longer. We may incur significant sales and marketing expenses during this evaluation period, in addition to tying up substantial inventory in customer product evaluations. The length of this period makes it difficult to accurately forecast future sales. Also, any unexpected delays in orders could impact our revenue and operating results. If sales forecast for a specific customer are not realized, we may experience an unplanned shortfall in net sales, and our quarterly and annual revenue and operating results may fluctuate significantly from period to period.
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Our quarterly and annual revenue and operating results have varied significantly in the past and are likely to vary significantly in the future, which makes it very difficult for us to predict our future operating results. We incurred significant net losses between 2001 and 2003, yet were profitable for each of the years 2004 to 2007. We incurred net losses again between 2008 and 2012, due to declining demand as a result of the weakness in the semiconductor equipment market and the global economy. We may not achieve profitability in future years. We will need to generate significant sales to achieve profitability, and we may not be able to do so. A substantial percentage of our operating expenses are fixed in the short term and we may continue to be unable to adjust spending to compensate for shortfalls in net sales. As a result, we may continue to incur losses, which could cause the price of our common stock to decline further or remain at a low level for an extended period of time.
We are highly dependent on international sales, and face significant international business risks.
International sales accounted for 91 percent of our net sales for the nine months ended September 29, 2013 and 86 percent of our net sales for the year ended December 31, 2012. We anticipate international sales will continue to account for the vast majority of our future net sales. Asia has been a particularly important region for our business, and we anticipate that it will continue to be important going forward. Our sales to customers located in Asia accounted for 85 percent of our net sales for the nine months ended September 29, 2013 and 78 percent of our net sales for the year ended December 31, 2012. Because of our continuing dependence upon international sales, we are subject to a number of risks associated with international business activities, including:
• | burdensome governmental controls, laws, regulations, tariffs, duties, taxes, restrictions, embargoes or export license requirements; |
• | unexpected changes in laws or regulations prompted by economic stress, such as protectionism, and other attempts to rectify real or perceived international trade imbalances; |
• | exchange rate volatility; |
• | the need to comply with a wide variety of foreign and U.S. customs and export laws; |
• | political and economic instability; |
• | government-sponsored competition; |
• | differing labor regulations; |
• | reduced protection for, and increased misappropriation of, intellectual property; |
• | difficulties in accounts receivable collections; |
• | increased costs for product shipments and potential difficulties from shipment delays; |
• | difficulties in managing distributors, representatives, contract manufacturers and suppliers; |
• | difficulties in staffing and managing foreign subsidiary operations; and |
• | natural disasters, acts of war, terrorism, widespread illness or other catastrophes affecting foreign countries. |
Our sales to date have been denominated primarily in U.S. dollars; however future sales to Asian customers may be denominated in the customer's local currency. Our sales in foreign currencies are subject to risks of currency fluctuation. For U.S. dollar sales in foreign countries, our products may become less price competitive when the local currency is declining in value compared to the dollar. This could cause us to lose sales or force us to lower our prices, which would reduce our gross margins.
The weakness in the global economy may continue to negatively impact our financial performance.
The recessionary conditions of 2008 and 2009 in the global economy and the slowdown in the semiconductor industry still continue to impact customer demand for our products and correspondingly, negatively impacted our financial performance. There remains high unemployment in developed countries, concerns regarding the availability of credit, uncertainty about a sustained economic recovery in the U.S. and fears of further economic deterioration in Europe, China, and the developing
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world, which in turn, may lead to a global downturn. Any of these factors could have a negative impact on our business, or our financial condition.
Demand for semiconductor equipment depends on consumer spending. Continued economic uncertainty may lead to a decrease in consumer spending and may cause certain of our customers to cancel or delay orders. In addition, if our customers have difficulties obtaining capital or financing, this could result in lower sales. Customers with liquidity issues could lead to charges to our bad debt expense, if we are unable to collect accounts receivables. These conditions could also affect our key suppliers, which could affect their ability to supply parts to us, and result in delays of the completion of our systems and the shipment of these systems to our customers.
Because of the economic downturn and the uncertainty of a full recovery, we are continuing to take, and may have to take additional, actions to reduce costs. These actions have reduced, and could further reduce, our ability to invest in research and development at levels we believe are desirable. If we are unable to effectively align our cost structure with prevailing market conditions, we will experience additional losses and additional reductions in our cash and cash equivalents. If we are not able to suitably adapt to these economic conditions in a timely manner or at all, our performance, cash flows, results of operations and ability to access capital could be materially and adversely impacted.
We are exposed to various risks relating to compliance with the regulatory environment, including export control laws material contracts provisions and conflict-mineral reporting, and non-compliance or non-performance with any of these items could result in adverse consequences and monetary fines or damages.
We are subject to various risks related to (1) disagreements and disputes between national and regional regulatory agencies related to international trade; (2) new, inconsistent and conflicting rules by regulatory agencies in the countries in which we operate; and (3) interpretation and application of different laws and regulations. If we are found by a court or regulatory agency to not be in compliance with the applicable laws and regulations, our business, financial condition and results of operations could be adversely affected.
As an exporter, we must comply with various laws and regulations relating to the export of products and technology from the U.S. and other countries having jurisdiction over our operations. In the U.S. these laws include the International Traffic in Arms Regulations (“ITAR”) administered by the State Department's Directorate of Defense Trade Controls, the Export Administration Regulations (“EAR”) administered by the Bureau of Industry and Security (“BIS”), and trade sanctions against embargoed countries and destinations administered by the U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”). The EAR governs products, parts, technology and software which present military or weapons proliferation concerns, so-called “dual use” items, and ITAR governs military items listed on the United States Munitions List. Prior to shipping certain items, we must obtain an export license or verify that license exemptions are available. In addition, we must comply with certain requirements related to documentation, record keeping, plant visits and hiring of foreign nationals. Any failures to comply with these laws and regulations could result in fines, adverse publicity and restrictions on our ability to export our products, and repeat failures could carry more significant penalties. In 2008, we self-disclosed to BIS certain inadvertent EAR violations, and in April 2012, we entered into a settlement agreement with BIS that resolved in full all matters contained in our voluntary self-disclosure and paid a civil penalty of $250,000.
We are a party to governmental contracts that provide for liquidated damages in the event that we fail to comply with their covenants or requirements. These liquidated damage payments could be significant and may adversely impact our financial condition or results of operations.
In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC established new disclosure and reporting requirements for those companies who use "conflict" minerals mined from the Democratic Republic of Congo and adjoining countries in their products, whether or not these products are manufactured by third parties. These new requirements could affect the sourcing and availability of minerals used in the manufacture of our products. We have to date incurred costs and expect to incur additional costs associated with complying with the disclosure requirements, including for due diligence in regard to the sources of any conflict minerals used in our products, in addition to the cost of remediation and other changes to products, processes, or sources of supply as a consequence of such verification activities. Additionally, we may face reputational challenges with our customers and other stakeholders if we are unable to sufficiently verify the origins of all minerals used in our products through the due diligence procedures that we implement. We may also face challenges with government regulators and our customers and suppliers if we are unable to sufficiently verify that the metals used in our products are conflict free. We expect that there may be material costs associated with complying with the disclosure requirements, such as costs related to determining the source of certain minerals used in our products, as well as costs
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Because of competition for qualified personnel, we may not be able to recruit or retain necessary personnel, which could impede development or sales of our products.
Our growth will depend on our ability to attract and retain qualified, experienced employees. Our ability to attract employees may be harmed by our recent financial losses, which have impacted our available cash and our ability to provide performance-based annual cash incentives. Also, part of our total compensation program includes share-based compensation. Share-based compensation is an important tool in attracting and retaining employees in our industry. If the market price of our common shares declines or remains low, it may adversely affect our ability to attract or retain employees.
During periods of growth in the semiconductor industry, there is substantial competition for experienced engineering, technical, financial, sales and marketing personnel in our industry. In particular, we must attract and retain highly skilled design and process engineers. If we are unable to retain existing key personnel, or attract and retain additional qualified personnel, we may from time to time experience inadequate levels of staffing to develop and market our products and perform services for our customers. As a result, our growth could be limited, we could fail to meet our delivery commitments or we could experience deterioration in service levels or decreases in customer satisfaction.
The price of our common stock has fluctuated in the past and may continue to fluctuate significantly in the future, which may lead to losses by investors, delisting, securities litigation or hostile or otherwise unfavorable takeover offers.
The market price of our common stock has been highly volatile in the past, and our stock price may decline in the future. For example, for the year ended December 31, 2012, the closing price range for our common stock was between $0.73 and $3.19 per share. Our stock may be subject to eventual delisting from NASDAQ if we do not maintain a minimum $1.00 per share trading price. In late 2012, we received a warning letter from NASDAQ as a result of our stock trading below $1.00 for a sustained period of time. While our stock price recovered to trade above $1.00 since January 7, 2013, any future decline below $1.00 per share may trigger a possible delisting by NASDAQ, and any delisting from NASDAQ would likely lead to less liquidity for our shareholders and increased volatility in our stock price.
The relatively low stock price makes us attractive to hedge funds and other short-term investors. This could result in substantial stock price volatility and cause fluctuations in trading volumes for our stock. Fluctuations in the trading price or liquidity of our common stock may harm the value of your investment in our common stock.
In addition, in recent years the stock market in general, and the market for shares of high technology stocks in particular, has experienced extreme price fluctuations. These fluctuations have frequently been unrelated to the operating performance of the affected companies. In the past, securities class action litigation often has been instituted against a company following periods of volatility in its stock price. This type of litigation, if filed against us, could result in substantial costs and divert our management's attention and resources.
Our stock price has been below the 2008 to 2012 five-year peak of $8.39 for several years, and if net sales do not return to the peak 2007 levels or we do not return to profitability in the near term, we could be an attractive target for acquisition or be impacted by mergers and acquisitions by our competitors or other consolidation in the industry. An acquisition or merger could be hostile or on terms unfavorable to us, and may result in substantial costs and potential disruption to our business.
Other factors that may have a significant impact on the market price and marketability of our securities include changes in securities analysts' recommendations, short selling, and halting or suspension of trading in our common stock by NASDAQ.
We are subject to significant risks related to our operations.
We may outsource select manufacturing activities to third-party service providers, which decreases our control over the performance of these functions and quality of our products.
From time to time, we may outsource product manufacturing to third-party service providers. Outsourcing has a number of risks and reduces our control over the performance of the outsourced functions. Significant performance problems by these third-party service providers could result in cost overruns, delayed deliveries, shortages, quality issues or other problems that could result in significant customer dissatisfaction and could materially and adversely affect our business, financial condition and results of operations. If for any reason one or more of these third-party service providers becomes unable or unwilling to continue to provide services of acceptable quality, at acceptable costs and in a timely manner, our ability to deliver our products to our customers could be severely impaired.
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We depend upon a limited number of suppliers for some components and sub-assemblies, and supply shortages or the loss of these suppliers could result in increased cost or delays in the manufacture and sale of our products.
We rely, to a substantial extent, on outside vendors to provide many of the components and sub-assemblies of our systems. We obtain some of these components and sub-assemblies from a sole source or a limited group of suppliers. We generally acquire these components on a purchase order basis and not under long-term supply contracts. Because of our reliance on these vendors and suppliers, we may be unable to obtain an adequate supply of required components. When demand for semiconductor equipment is strong, our suppliers may have difficulty providing components on a timely basis.
In addition, during periods of shortages of components, we may have reduced control over pricing and timely delivery of components. We often quote prices to our customers and accept customer orders for our products prior to purchasing components and sub-assemblies from our suppliers. If our suppliers increase the cost of components or sub-assemblies, we may not have alternative sources of supply and may no longer be able to increase the cost of the system being evaluated by our customers to cover all or part of the increased cost of components.
The manufacture of some of these components is an extremely complex process and requires long lead times. If we are unable to obtain adequate and timely deliveries of our required components, we may have to seek alternative sources of supply or manufacture such components internally. This could delay our ability to manufacture or ship our systems in a timely manner, causing us to lose sales, incur additional costs, delay new product introductions and harm our reputation. Historically, we have not experienced any significant delays in manufacturing due to an inability to obtain components, and we are not currently aware of any specific problems regarding the availability of components that might significantly delay the manufacturing of our systems in the future. Any inability to obtain adequate deliveries, or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally, could delay our ability to ship our systems and could have a material adverse effect on us.
Our gross margins may be impacted if we do not effectively manage our inventory and costs.
We need to manage our inventory of component parts, work-in-process and finished goods (principally comprised of products undergoing customer evaluations) effectively to meet customer delivery demands at an acceptable risk and cost. For both the inventories that support manufacture of our products and our spare parts inventories, if the anticipated customer demand does not materialize in a timely manner, we will incur increased carrying costs and some inventory could become excess or obsolete, resulting in write-offs, which would adversely affect our cash position and results of operations. The sale of this inventory during periods of increasing revenue could temporarily impact our gross margins favorably due to the adjusted carrying value of this inventory, and could result in future unpredictability in our gross margin estimates. In addition, we may be subject to higher production costs due to increasing freight, labor and other operating expenses in connection with the shipment of our products due to market factors, particularly heightened when we experience accelerated shipment schedules.
Our gross margins for sales of products that we manufacture in Germany may fluctuate due to changes in the value of the Euro.
We develop and manufacture our Millios product in Germany, where our costs for labor and materials are primarily denominated in Euros. Future increases in the value of the Euro, if any, could increase our development costs, our costs to manufacture systems, and our costs to purchase spare parts for products from our suppliers, which would make it more difficult for us to compete and could adversely affect our results of operations.
We primarily manufacture our products at one manufacturing facility and are thus subject to risk of disruption.
Although, from time to time, we outsource select core product manufacturing to third parties, we continue to produce our latest generation products at our principal manufacturing plant in Fremont, California and produce our Millios product at our research and pilot-line manufacturing facility in Dornstadt, Germany. We have limited ability to interchangeably produce our products at either facility, and in the event of a disruption of operations at one facility, our other facility may not be able to make up the capacity loss. Our operations could be subject to disruption for a variety of reasons, including, but not limited to, natural disasters, including earthquakes in California, work stoppages, operational facility constraints and terrorism. Such disruption could cause delays in shipments of products to our customers, result in cancellation of orders or loss of customers and seriously harm our business.
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We self-insure certain risks including earthquake risk. If one or more of the uninsured events occurs, we could suffer major financial losses.
We purchase insurance to help mitigate the economic impact of certain insurable risks; however, certain other risks are uninsurable or are insurable only at significant cost or cannot be mitigated with insurance. An earthquake could significantly disrupt our principal manufacturing operations in Fremont, California, an area highly susceptible to earthquakes. It could also significantly delay our research and development efforts on new products, a significant portion of which is conducted in California. We self-insure earthquake risks because we believe this is a prudent financial decision based on the high cost and limited coverage available in the earthquake insurance market. If a major earthquake were to occur, we could suffer a major financial loss and face significant disruption in our business.
If we are unable to protect our intellectual property, we may lose valuable assets and experience reduced market share. Efforts to protect our intellectual property may be costly to resolve, require costly litigation and could divert management attention. We also agree to indemnify customers for certain claims, and such obligations are more likely to increase during downturns.
We rely on a combination of patents, copyrights, trademark and trade secret laws, non-disclosure agreements, and other intellectual property protection methods to protect our proprietary technology. Despite our efforts to protect our intellectual property, we may from time to time be subject to claims of infringement of other parties' patents or other proprietary rights. If this occurs, we may not be able to prevent their use of such technology. Our means of protecting our proprietary rights may not be adequate and our patents may not be sufficiently broad to protect our technology. Any patents owned by us could be challenged, invalidated or circumvented and any rights granted under any patent may not provide adequate protection to us.
Furthermore, we may not have sufficient resources to protect our rights. When we outsource portions of our manufacturing, we are less able to protect our intellectual property, and rely more on our service providers to do so. Our service providers may not always be able to assure that their employees or former employees do not use our intellectual property for their own account to compete with us. Our competitors may independently develop similar technology, or design around patents that may be issued to us. In addition, the laws of some foreign countries may not protect our proprietary rights to as great an extent as do the laws of the United States and it may be more difficult to monitor the use of our intellectual property in such foreign countries. As a result of these threats to our proprietary technology, we may have to resort to costly litigation to enforce our intellectual property rights.
Customers may request that we indemnify them or otherwise compensate them because of claims of intellectual property infringement made against them by third parties. Our involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets, even if the claims are without merit, could be very expensive to defend and could divert the attention of our management. Adverse determinations in any litigation could subject us to significant liabilities to third parties, require us to seek costly licenses from third parties and prevent us from manufacturing and selling our products. Royalty or license agreements, if required, may not be available on terms acceptable to us, or at all. Any of these situations could have a material adverse effect on our business and operating results in one or more countries where we do business.
In the normal course of business, we indemnify customers with respect to certain matters, for example if our tool infringes the intellectual property rights of any third party or if we breach any promise in our contract with the customer. During downturns in general or adverse industry specific economic conditions, our customers may feel they have greater leverage in negotiating with us and may require that the extent and scope of our obligation to indemnify them be expanded. In the future, our financial performance could be materially adversely affected if we expend significant amounts in defending or settling any claims raised under customer indemnification provisions in our contract.
Our failure to comply with environmental or safety regulations could result in substantial liability.
We are subject to a variety of federal, state, local and foreign laws, rules, and regulations relating to environmental protection and workplace safety. These laws, rules and regulations govern the use, storage, discharge and disposal of hazardous chemicals during manufacturing, research and development and sales demonstrations, as well as governmental standards for workplace safety. If we fail to comply with present or future regulations, especially in our manufacturing facilities in the U.S. and Germany, we could be subject to substantial liability for cleanup efforts, personal injury, fines or suspension or cessation of our operations. We may be subject to liability if we have past violations. Restrictions on our ability to expand or continue to operate at our present locations could be imposed upon us as a result of such laws, rules and regulations, and we could be required to acquire costly remediation equipment or incur other significant expenses.
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Any future business divestitures or acquisitions may disrupt our business, diminish stockholder value or distract management attention.
We may seek to divest of certain assets or businesses from time to time, especially if we need additional liquidity or capital resources. When we make a decision to sell assets or a business, we may encounter difficulty completing the transaction as a result of a range of possible factors such as new or changed demands from the buyer. These circumstances may cause us to incur additional time or expense or to accept less favorable terms, which may adversely affect the overall benefits of the transaction.
As part of our ongoing business strategy, we may consider acquisitions of, or significant investments in, businesses that offer products, services and technologies complementary to our own. Such acquisitions could materially adversely affect our operating results and/or the price of our common stock. Acquisitions also entail numerous risks, including:
• | difficulty of assimilating the operations, products and personnel of the acquired businesses and possible impairments caused by this; |
• | potential disruption of our ongoing business; |
• | unanticipated costs associated with the acquisition; |
• | inability of management to manage the financial and strategic position of acquired or developed products, services and technologies; |
• | inability to maintain uniform standards, controls, policies and procedures; and |
• | impairment of relationships with employees and customers that may occur as a result of integration of the acquired business. |
To the extent that shares of our stock or other rights to purchase stock are issued in connection with any future acquisitions, dilution to our existing stockholders will result, and our earnings per share may suffer. We may be required to incur debt to pay for any future acquisitions, which could subject us to restrictive financial covenants and other leverage limitations. Any future acquisitions may not generate additional revenue or provide any benefit to our business, and we may not achieve a satisfactory return on our investment in any acquired businesses.
Divestitures, acquisitions and other transactions are inherently risky, and we cannot provide any assurance that our previous or future transactions will be successful. The inability to effectively manage the risks associated with these transactions could materially and adversely affect our business, financial condition or results of operations.
Our current transfer of operations and periodic restructuring plans may not produce anticipated benefits and may lead to charges that will adversely affect our results of operations.
We initiated a plan in the third quarter of 2012 to consolidate our global manufacturing operations, including the transfer of manufacturing operations from our Germany facility to our corporate headquarters in Fremont, California. This transfer plan may not be achieved in a timely and efficient manner, and may not fully realize the anticipated cost savings and synergies for a variety of reasons. Some of the risks related to this transfer include failure to obtain expected cost savings due to cost overruns in connection with the move or after operations commence; failure to consolidate our German manufacturing operations into our existing Fremont manufacturing operations; and employment and other law, rules, regulations or other limitations that could have an impact on timing, amounts or costs of achieving expected synergies.
In addition, we have from time to time enacted, and are currently implementing, restructuring and other cost reduction plans designed to reduce our manufacturing overhead and our operating expenses. These restructuring efforts resulted or may result in significant restructuring charges that have adversely affected, and may continue to adversely affect, our results of operations for the periods in which such charges occur. Additionally, actual costs related to such restructuring plans have in the past, and may in the future, exceed the amounts that we previously estimated, leading to additional charges as actual costs are incurred.
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We are leveraged financially, which could adversely affect our ability to adjust our business to respond to competitive pressures and to obtain sufficient funds to satisfy our future research and development needs, to protect and enforce our intellectual property and other needs.
We have indebtedness. In April 2013, we entered into a three-year $25.0 million senior secured revolving credit facility with Silicon Valley Bank. As of September 29, 2013, we had $20.0 million outstanding under the Credit Facility. The degree to which we are leveraged could have important consequences, including, but not limited to, the following:
• | our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, litigation, general corporate or other purposes may be limited; |
• | a substantial portion of our cash flows from operations in the future will be dedicated to the repayment of the Credit Facility; and |
• | we may be more vulnerable to economic downturns, less able to withstand competitive pressures and less flexible in responding to changing business and economic conditions. |
A failure to comply with the covenants and other provisions of the Credit Facility could result in events of default under such instruments, which could permit acceleration of repayment of all amounts due under the Credit Facility. Any required repayment of our Credit Facility as a result of a fundamental change or other acceleration would lower our current cash on hand such that we would not have those funds available for use in our business.
If we are at any time unable to generate sufficient cash flows from operations to service our indebtedness when payment is due, we may be required to attempt to renegotiate the terms of the instruments relating to the indebtedness, seek to refinance all or a portion of the indebtedness or obtain additional financing. There can be no assurance that we will be able to successfully renegotiate such terms, that any such refinancing would be possible or that any additional financing could be obtained on terms that are favorable or acceptable to us.
Changes in tax rates or tax liabilities could affect results.
We are subject to taxation in the U.S. and various other countries. Significant judgment is required to determine and estimate worldwide tax liabilities. Our future annual and quarterly tax rates could be affected by numerous factors, including changes in the applicable tax laws, composition of earnings in countries with differing tax rates or our valuation and utilization of deferred tax assets and liabilities. In addition, we are subject to regular examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of favorable or unfavorable outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. Although we believe our tax estimates are reasonable, there can be no assurance that any final determination will not be materially different from the treatment reflected in our historical income tax provisions and accruals, which could materially and adversely affect our results of operations.
Our restated certificate of incorporation and restated bylaws, our stockholder rights plan and Delaware law contain provisions that could discourage transactions resulting in a change in control, which may negatively affect the market price of our common stock.
Our restated certificate of incorporation, our restated bylaws, our stockholder rights plan and Delaware law contain provisions that might enable our management to discourage, delay or prevent a change in control. In addition, these provisions could limit the price that investors would be willing to pay in the future for shares of our common stock. Pursuant to such provisions:
• | our board of directors is authorized, without prior stockholder approval, to create and issue preferred stock, commonly referred to as “blank check” preferred stock, with rights senior to those of common stock; |
• | our board of directors is staggered into three classes, only one of which is elected at each annual meeting; |
• | stockholder action by written consent is prohibited; |
• | nominations for election to our board of directors and the submission of matters to be acted upon by stockholders at a meeting are subject to advance notice requirements; |
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• | certain provisions in our bylaws and certificate of incorporation such as notice to stockholders, the ability to call a stockholder meeting, advance notice requirements and action of stockholders by written consent may only be amended with the approval of stockholders holding 66 2/3 percent of our outstanding voting stock; |
• | the ability of our stockholders to call special meetings of stockholders is prohibited; and |
• | subject to certain exceptions requiring stockholder approval, our board of directors is expressly authorized to make, alter or repeal our bylaws. |
In addition, the provisions in our stockholder rights plan could make it more difficult for a potential acquiror to consummate an acquisition of our company. We are also subject to Section 203 of the Delaware General Corporation Law, which provides, subject to enumerated exceptions, that if a person acquires 15 percent or more of our outstanding voting stock, the person is an “interested stockholder” and may not engage in any “business combination” with us for a period of three years from the time the person acquired 15 percent or more of our outstanding voting stock.
ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5. | OTHER INFORMATION |
None.
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ITEM 6. | Exhibits |
Exhibit Number | Description |
3.1 (2) | Amended and Restated Certificate of Incorporation of the Company. |
3.2 (3) | Amended and Restated Bylaws of the Company. |
31.1 (1) | |
31.2 (1) | |
32.1 (1) | |
32.2 (1) | |
101.INS (6) | XBRL Instance Document |
101.SCH (6) | XBRL Taxonomy Extension Schema Document |
101.CAL (6) | XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF (6) | XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB (6) | XBRL Taxonomy Extension Label Linkbase Document |
101.PRE (6) | XBRL Taxonomy Extension Presentation Linkbase Document |
_________________
(1) | Filed herewith. |
(2) | Incorporated by reference from the Company's Current Report on Form 8-K/A filed on January 30, 2001. |
(3) | Incorporated by reference from the Company's Current Report on Form 8-K filed on December 22, 2010. |
(4) | XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections. |
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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 hereunto duly authorized.
MATTSON TECHNOLOGY, INC. | |
(Registrant) |
November 6, 2013
By: /s/ FUSEN E. CHEN | |
Fusen E. Chen President and Chief Executive Officer (Principal Executive Officer) |
November 6, 2013
By: /s/ J. MICHAEL DODSON | |
J. Michael Dodson Chief Operating Officer, Chief Financial Officer, Executive Vice President and Secretary (Principal Financial Officer) |
November 6, 2013
By: /s/ TYLER PURVIS | |
Tyler Purvis Chief Accounting Officer and Corporate Controller (Principal Accounting Officer) |
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