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 March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from _______________ to ______________
Commission file number 0-25424
Semitool, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Montana | 81-0384392 |
(State or other jurisdiction of
incorporation or organization) | I.R.S. Employer
Identification No.) |
655 West Reserve Drive
Kalispell, Montana 59901
(Address of principal executive offices, zip code)
Registrant's telephone number, including area code: (406)752-2107
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO __
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date:
| Title | Outstanding as of May 11, 2001 |
| Common Stock | 28,340,070 |
Part I. Financial Information
Item 1. Financial Statements
SEMITOOL, INC.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands, Except for Share Amounts)
March 31, September 30,
ASSETS 2001 2000
---------------- ----------------
Current assets:
Cash and cash equivalents $ 26,483 $ 6,711
Marketable securities 2,911 --
Trade receivables, less allowance for doubtful
accounts of $267 and $314 65,263 78,486
Inventories 67,744 72,467
Income tax refund receivable 1,055 1,055
Prepaid expenses and other current assets 4,871 2,237
Deferred income taxes 6,744 7,235
---------------- ----------------
Total current assets 175,071 168,191
Property, plant and equipment, net 30,563 29,915
Intangibles, less accumulated amortization of $550 and $4,605 3,942 3,843
Other assets, net 619 711
---------------- ----------------
Total assets $ 210,195 $ 202,660
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank and other short-term debt $ 264 $ 21,383
Accounts payable 13,961 28,246
Accrued commissions 3,037 2,523
Accrued warranty and installation 12,385 13,701
Accrued payroll and related benefits 6,511 8,154
Customer advances 1,144 2,938
Income taxes payable 19,715 8,722
Other liabilities 3,999 2,624
Long-term debt, due within one year 338 341
Payable to shareholder 16 61
---------------- ----------------
Total current liabilities 61,370 88,693
Long-term debt, due after one year 3,431 3,653
Deferred income taxes 1,503 1,682
---------------- ----------------
Total liabilities 66,304 94,028
---------------- ----------------
Contingency (Note 5)
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding -- --
Common stock, no par value, 75,000,000 shares authorized,
28,323,760 and 28,306,500 shares issued and outstanding 44,781 44,621
Retained earnings 99,581 63,435
Accumulated other comprehensive income (471) 576
---------------- ----------------
Total shareholders' equity 143,891 108,632
---------------- ----------------
Total liabilities and shareholders' equity $ 210,195 $ 202,660
================ ================
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Amounts in Thousands, Except for Per Share Amounts)
Three Months Ended Six Months Ended
March 31, March 31,
--------------------------- ---------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net sales $ 69,620 $ 54,308 $ 141,156 $ 103,863
Cost of sales 31,250 24,841 63,972 48,579
----------- ----------- ----------- -----------
Gross profit 38,370 29,467 77,184 55,284
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and administrative 18,959 15,978 37,557 30,933
Research and development 7,313 5,881 14,151 11,193
----------- ----------- ----------- -----------
Total operating expenses 26,272 21,859 51,708 42,126
----------- ----------- ----------- -----------
Income from operations 12,098 7,608 25,476 13,158
Gain on the sale of Semy Engineering, Inc. 30,948 -- 30,948 --
Other expense, net (203) (60) (627) (42)
----------- ----------- ----------- -----------
Income before income taxes 42,843 7,548 55,797 13,116
Income taxes 15,375 2,360 19,650 4,197
----------- ----------- ----------- -----------
Net income $ 27,468 $ 5,188 $ 36,147 $ 8,919
=========== =========== =========== ===========
Earnings per share:
Basic $ 0.97 $ 0.18 $ 1.28 $ 0.32
=========== =========== =========== ===========
Diluted $ 0.96 $ 0.18 $ 1.26 $ 0.31
=========== =========== =========== ===========
Weighted average common shares:
Basic 28,322 28,048 28,318 27,838
=========== =========== =========== ===========
Diluted 28,737 28,986 28,740 28,639
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)
Six Months Ended
March 31,
--------------------------------
2001 2000
--------------- ---------------
Operating activities:
Net income $ 36,147 $ 8,919
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,932 4,160
(Gain)/Loss on disposition of assets (30,931) 106
Change in:
Trade receivables 5,848 (14,020)
Inventories (644) (8,626)
Income tax refund receivable -- 1,539
Prepaid expenses and other current assets (2,786) 308
Other assets (156) (479)
Accounts payable (11,887) 8,300
Accrued commissions 1,021 908
Accrued warranty and installation (1,182) 2,410
Accrued payroll and related benefits (1,220) 1,384
Customer advances 378 (759)
Income taxes payable 11,130 2,049
Other accrued liabilities 1,529 (1,841)
Shareholder payable (45) 57
--------------- ---------------
Net cash provided by operating activities 11,134 4,415
--------------- ---------------
Investing activities:
Purchases of property, plant and equipment (2,846) (1,485)
Increase in intangible assets (769) (708)
Proceeds from sale of subsidiary, net of cash sold 33,227 --
Proceeds from sale of property 67 47
--------------- ---------------
Net cash provided by (used in) investing activities 29,679 (2,146)
--------------- ---------------
Financing activities:
Proceeds from exercise of stock options 160 3,014
Borrowings under line of credit and short-term debt 51,935 49,470
Repayments under line of credit and short-term debt (72,916) (51,633)
Repayments of long-term debt and capital leases (166) (217)
--------------- ---------------
Net cash provided by (used in) financing activities (20,987) 634
--------------- ---------------
Effect of exchange rate changes on cash and cash equivalents (54) 25
--------------- ---------------
Net increase in cash and cash equivalents 19,772 2,928
Cash and cash equivalents at beginning of period 6,711 4,789
--------------- ---------------
Cash and cash equivalents at end of period $ 26,483 $ 7,717
=============== ===============
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in Thousands)
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net income $ 27,468 $ 5,188 $ 36,147 $ 8,919
Net gain (loss) on derivative instruments,
net of tax (81) -- 202 --
Foreign currency translation adjustment (777) (75) (1,248) 167
----------- ----------- ----------- -----------
Comprehensive income $ 26,610 $ 5,113 $ 35,101 $ 9,086
=========== =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
SEMITOOL, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTSNote 1. Basis of Presentation
The Company prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. The Company believes the disclosures included herein are adequate; however, these consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2000 previously filed with the SEC on Form 10-K.
The financial information presented as of any date other than September 30, 2000 has been prepared from the books and records without audit. Financial information as of September 30, 2000 has been derived from the audited financial statements of our Company, but does not include all disclosures required by generally accepted accounting principles. In our opinion these unaudited financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly our consolidated financial position as of March 31, 2001, the consolidated results of operations for the three and six month periods ended March 31, 2001 and 2000 and the consolidated cash flows for the three and six month periods ended March 31, 2001 and 2000. The results of operations for the periods presented may not be indicative of those you may expect for the full year.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with insignificant interest rate risk and maturities of ninety days or less to be cash equivalents.
MARKETABLE SECURITIES
The Company classifies its marketable securities as available-for-sale in accordance with the provisions of the Statement of Financial Accounting Standard (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” Securities classified as available-for-sale are reported at fair market value with the related unrealized gains and losses included, net of tax, in accumulated other comprehensive income (loss). Realized gains and losses and declines in value of securities judged to be other than temporary are included in net income.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, we adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
We use derivative instruments to manage some of our exposures to foreign currency risks. Our objective for holding derivatives is to minimize the risks using the most effective methods to eliminate or reduce the impacts of these exposures. We use cash flow hedge accounting per SFAS 133 to account for our derivatives. At the inception of the hedge, we document the hedging relationship to a forecasted transaction, risk management objective and the strategy for undertaking the hedge. Quarterly, we use forward rates to evaluate our hedging effectiveness. If the derivative no longer meets hedge accounting criteria, or the terms of the hedged item change so the derivative no longer qualifies for hedge accounting, we mark to market the derivative. Any amounts in other comprehensive income on a derivative that no longer qualifies for hedge accounting are transferred to the income statement. At maturity or termination the gain loss on the derivative is calculated and reported in net income.
Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors its foreign currency exposures regularly to maximize the overall effectiveness of its foreign currency hedge positions. Currencies hedged include the Japanese yen. Forward contracts used to hedge forecasted international sales on credit for up to eighteen months in the future are designated as cash flow hedging instruments.
Hedge ineffectiveness, determined in accordance with SFAS 133, had no impact on earnings for the three and six months ended March 31, 2001. No fair value hedges or cash flow hedges were derecognized or discontinued for the three and six months ended March 31, 2001.
Derivative gains and losses included in OCI are reclassified into earnings each period during the duration of the related recognized foreign-currency denominated receivable. During the three and six months ended March 31, 2001, the amount transferred from OCI to Other income (expense), net, was not material. The Company estimates that $76,000 of net derivative gains included in other comprehensive income will be reclassified into earnings within the next twelve months.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. When the Company adopts SAB 101 in the fourth quarter of fiscal 2001, it will recognize revenue when it substantially completes the terms of the applicable sales arrangement. While the Company has not fully assessed the impact on it of the adoption of SAB 101, it believes that it may require a significant amount of its net sales to be deferred, which could be partially or totally offset by the recognition of net sales for products shipped in prior periods, as required by SAB 101. Any change in the Company’s revenue recognition policy resulting from the implementation of SAB 101 would be reported as a change in accounting principle in the year ending September 30, 2001 with a restatement of prior quarters in fiscal 2001 to reflect the effect of the change. In addition, the Company may need to renegotiate the financial covenants under its line of credit agreement. As a result, while SAB 101 would not affect the fundamental aspects of the Company’s operations as measured by its shipments and cash flows, implementation of SAB 101 could have an adverse effect on its reported results of operations.
Note 2. Principles of Consolidation
The Company’s consolidated financial statements include the accounts of Semitool, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation.
Note 3. Inventories
The Company's inventories are summarized as follows (in thousands):
March 31, 2001 September 30, 2000
------------------ ------------------
Parts and raw materials $ 35,552 $ 36,251
Work-in-process 25,532 31,203
Finished goods 6,660 5,013
--------------- ---------------
$ 67,744 $ 72,467
=============== ===============
During the six months ended March 31, 2001 and 2000, $3.4 million and $84,000, respectively, of finished goods inventory was transferred to property, plant and equipment.
Note 4. Income Taxes
The components of the Company's income tax provision are as follows, (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Federal $ 11,765 $ 1,659 $ 14,882 $ 2,562
State 3,149 318 3,706 505
Foreign 461 383 1,062 1,130
----------- ----------- ----------- -----------
Total $ 15,375 $ 2,360 $ 19,650 $ 4,197
=========== =========== =========== ===========
Note 5. Contingency
In August 1998, the Company filed suit against Novellus Systems, Inc. in the United States District Court for the Northern District of California (Case No. C-98-3089 DLJ), alleging infringement of two of our patents relating to single substrate processing tools used in electrochemical deposition of copper onto semiconductor wafers. The Company seeks damages for past infringement, a permanent injunction, treble damages for willful infringement, prejudgment interest and attorneys’ fees. Novellus answered the complaint by denying all of the allegations and counter-claiming for declaratory judgment of invalidity and noninfringement and attorneys’ fees. Novellus filed a motion for summary judgment of noninfringement, which motion was granted on March 17, 2000, and judgment was subsequently entered on May 12, 2000 dismissing the case. We filed an appeal to the United States Court of Appeals for the Federal Circuit on May 15, 2000 seeking review of the ruling on the motion for summary judgment. The appeal was heard at the Court of Appeals on April 2, 2001 and the parties are awaiting a decision of the Court.
The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of our management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flows.
Note 6. Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
-------------------------- --------------------------
2001 2000 2001 2000
----------- ---------- ----------- -----------
Numerator:
Net income for basic and diluted
earnings per share $ 27,468 $ 5,188 $ 36,147 $ 8,919
=========== ========== =========== ===========
Denominator:
Average common shares used for basic
earnings per share 28,322 28,048 28,318 27,838
Effect of dilutive stock options 415 938 422 801
----------- ---------- ----------- -----------
Denominator for diluted earnings per share 28,737 28,986 28,740 28,639
=========== ========== =========== ===========
Diluted earnings per share excludes the effects of antidilutive stock options of 138,425 and 11,000 at March 31, 2001 and 2000.
The authorized shares of the Company’s capital stock were increased from 30,000,000 to 75,000,000 at the February 8, 2000 Annual Meeting of Shareholders. The Company completed a two-for-one stock split in the form of a 100% stock dividend on March 28, 2000. All references in the financial statements to the number of shares, per share amounts and market prices of the Company’s common stock have been retroactively restated to reflect the increased number of common shares outstanding.
Note 7. Sale of Semy Engineering, Inc. Subsidiary:
On February 16, 2001, the Company sold its Semy Engineering, Inc. subsidiary to Brooks Automation, Inc. for approximately $38.9 million, subject to closing adjustments. The Company received cash of approximately $36.0 million and 73,243 shares of Brook's common stock valued at approximately $2.9 million on the date of the sale. This resulted in a gain of approximately $30.9 million ($19.5 million after tax). Semy Engineering, Inc., constituted our entire Software Control Systems segment.
Note 8. Operating Segment and Geographic Information:
The Company’s reportable segments have been determined based on the nature of its operations, products offered to customers and information used by the chief operating decision maker as defined by SFAS 131. The Company’s two reportable segments are Semiconductor Equipment and Software Control Systems. As mentioned in Note 7, the Company has sold Semy Engineering, Inc. and as it was the sole component of the Software Control Systems segment.
The Semiconductor Equipment segment’s primary products perform wafer cleaning, stripping and etching, and electroplating processes in the manufacturing of IC devices and for advanced packaging applications. The Software Control Systems segment’s primary products are designed to provide a communication interface to monitor and control most of the front-end process equipment in a fab. The Semiconductor Equipment segment’s current product offerings qualify for aggregation under SFAS 131 as the products are manufactured and distributed in the same manner, have similar economic characteristics and are sold to the same customer base.
The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies”. Segment operating results are measured based on income (loss) from operations. Intersegment sales are based on internal transfer prices. Intersegment sales reflect sales of products from the Software Control Systems segment to the Semiconductor Equipment segment.
Total
Equipment Software Software Elim-
(in thousands) Segment Segment Segment inations Consolidated
Net sales External External Internal
Second quarter fiscal 2001 $ 68,136 $1,484 $ 63 $1,547 $ (63) $ 69,620
Second quarter fiscal 2000 51,210 3,098 655 3,753 (655) 54,308
First half fiscal 2001 133,717 7,439 481 7,920 (481) 141,156
First half fiscal 2000 96,987 6,876 891 7,767 (891) 103,863
Income (loss) from operations
Second quarter fiscal 2001 12,704 (564) (42) 12,098
Second quarter fiscal 2000 7,843 232 (467) 7,608
First half fiscal 2001 24,522 1,333 (379) 25,476
First half fiscal 2000 12,909 891 (642) 13,158
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Caution - Forward Looking Statements
Statements contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q which are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact are forward-looking statements for purposes of those provisions, including without limitation, statements regarding demand for our products, use of sales, service and support organizations, the contribution of international sales to net sales, fiscal year 2001 sales, gross margins, research and development, the renewal of our revolving line of credit, costs of manufacturing, interest expense, future balances, the sufficiency of funds, effects of new accounting standards as well as statements regarding our expectations, beliefs, intentions and strategies regarding the future. In some cases, you can identify forward-looking statements by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “potential,” “believes,” “can impact” “continue,” or the negative thereof or other comparable terminology.
Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. These risks and uncertainties include, but are not limited to, the cyclical nature of the semiconductor industry in general, lack of market acceptance for new products, decreasing demand for our existing products, impact of competitive products and pricing, product development, commercialization and technological difficulties, capacity and supply constraint difficulties and other risks detailed herein.
Our future results will depend on our ability to continue to enhance our existing products and to develop and manufacture new products and to finance such activities. There can be no assurance that we will be successful in the introduction, marketing and cost-effective manufacture of any new products or that we will be able to develop and introduce in a timely manner new products or enhancements to our existing products and processes which satisfy customer needs or achieve widespread market acceptance. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.
RESULTS OF OPERATIONS
SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL 2001 COMPARED WITH SECOND QUARTER AND FIRST SIX MONTHS OF FISCAL 2000
Net Sales. Net sales consist of revenues from sales of equipment, spare parts, software and service contracts. Fiscal 2001 second quarter net sales increased 28.2% to $69.6 million from $54.3 million for the same period in fiscal 2000. Fiscal 2001 first half net sales increased 35.9% to $141.2 million from $103.9 million for the same period in fiscal 2000. With the exception of single wafer plating tools, semiconductor equipment sales in the second quarter and first half of fiscal 2001 were up in all product categories compared to the same periods in fiscal 2000. The year over year quarterly and half year increases are principally due to higher shipments for our automated and semi-automated cleaning, stripping and etching tools. Sales consisted of both capacity and technology purchases by our customers and for both integrated circuit manufacturing and advanced packaging applications. Software segment sales were down in the second quarter of fiscal 2001, but up for the first half of fiscal 2001 when compare to the same periods in fiscal 2000.
Our Semiconductor Equipment segment’s net sales were $68.1 million in the second quarter of fiscal 2001, up 33.0% from $51.2 million in net sales for the same period of fiscal 2000. Semiconductor Equipment segment net sales were $133.7 million in the first half of fiscal 2001, up 37.9% from $97.0 million in net sales for the same period of fiscal 2000. Net sales of cleaning, stripping and etching equipment were up 87.9% and 76.9% in the second quarter and first half of fiscal 2001 when compared to the same periods in fiscal 2000. Despite the fact that sales are up in fiscal 2001 periods, we are apparently in the beginning of an industry downturn, whereas sales in the fiscal year 2000 periods were in the early stages of an industry upturn. Electroplating tool sales were down 59.5% and 29.9% in the second quarter and first half of fiscal 2001 when compared to the same periods in fiscal 2000. This is a result of a combination of factors including the timing of technology purchases, the industry downturn and normal period to period fluctuations.
The Software Control Systems segment’s net sales were $1.5 million in the second quarter of fiscal 2001 which includes approximately $63,000 of intercompany sales, and is down 60.5% from $3.8 million in the second fiscal quarter of 2000. Sales were down in the second quarter of fiscal 2001 as compared to the same period in fiscal 2000 as Semy Engineering, Inc, the subsidiary that constituted this segment, was sold on February 16,2001. We reported net sales for the segment through that date. Net segment sales were $7.9 million in the first half of fiscal 2001, which includes approximately $481,000 of intercompany sales and are up slightly over fiscal 2000 sales of $7.8 million which includes intercompany sales of $891,000.
Gross Profit. Gross margin was 55.1% and 54.7% of net sales in the second quarter and first half of fiscal 2001 compared to 54.3% and 53.2% of net sales for the same periods in fiscal 2000. The increase in gross margin was primarily due to efficiencies caused by increased manufacturing activity and purchasing economies of scale. The effect of the settlement of Mitsubishi Silicon America Corporation's lawsuit against us is reflected in the gross margin for the first half of fiscal 2001. Our gross margin has been, and will continue to be, affected by a variety of factors, including the sales volume mix and average selling price of products sold, and the cost to manufacture, service and support new and enhanced products.
Selling, General and Administrative. Selling, general and administrative (SG&A) expenses were $19.0 million or 27.2% of net sales for the second quarter of fiscal 2001, compared to $16.0 million or 29.4% of net sales for the same period in fiscal 2000. SG&A expenses were $37.6 million or 26.6% of net sales for the first half of fiscal 2001, compared to $30.9 million or 29.8% of net sales for the same period in fiscal 2000. SG&A expenses increased on an absolute basis primarily due to increased sales staff expenses, field service staff expenses and commission expenses related to higher Asian sales. The decrease as a percentage of net sales is primarily due to sales volume increasing at a faster rate than that of SG&A expenses.
Research and Development. Research and development (R&D) expenses consist of salaries, project materials, laboratory costs, consulting fees and other costs associated with our research and development efforts. R&D expense was $7.3 million or 10.5% of net sales in the second quarter of fiscal 2001 as compared to $5.9 million or 10.8% of net sales for the same period in fiscal 2000. R&D expense was $14.2 million or 10.0% of net sales for the first half of fiscal 2001, compared to $11.2 million or 10.8% of net sales for the same period in fiscal 2000. The absolute dollar increase from fiscal 2000 to fiscal 2001 is primarily attributable to development of general product enhancements and work related to the development of 300mm wafer tools for all semiconductor equipment product lines. The decline as a percentage of sales in the first quarter of fiscal 2001 compared to the same period in fiscal 2000 is a result of increased sales volume.
We are committed to technology leadership in the semiconductor equipment industry and expect to continue to fund R&D expenditures with a multiyear perspective. Our research and development expenses have fluctuated from quarter to quarter in the past. We expect such fluctuation to continue in the future, both in absolute dollars and as a percentage of net sales, primarily due to the timing of expenditures and fluctuations in the level of net sales in a given quarter.
Our Semiconductor Equipment Segment’s income from operations was $12.7 million in the second quarter and $24.5 million in the second half of fiscal 2001, up $4.9 million and $11.6 million compared to the second quarter and first half of fiscal 2000. Income from operations is up in the second quarter and first half of fiscal 2001 as compared to the same periods in fiscal 2000 primarily due to increased sales activity, improved gross margins and an operating expense growth rate that was slower than the growth of net sales.
The Software Control Systems Segment’s loss from operations was approximately $564,000 in the second quarter and $1.3 million in income from operations for the first half of fiscal 2001. This is down $796,000 from the income from operations of approximately $232,000 for the second quarter of fiscal 2000 and up $442,000 from the income from operations of approximately $891,000 in the first half of 2000.
Other Income (Expense), Net. Other income (expense), net was a net other expense of approximately $203,000 in the second quarter of fiscal 2001, which includes, among others, interest expense of approximately $291,000 and a foreign exchange loss on unhedged foreign assets of approximately $311,000, net of interest income of $226,000. This compares to an other expense, net of $60,000 in the same period of fiscal 2000, which includes, among others, interest expense of approximately $249,000 and a foreign exchange gain of approximately $62,000, net of interest income. Other income (expense), net was a net other expense of approximately $627,000 for the first half of fiscal 2001, which includes, among others, interest expense of approximately $619,000, foreign exchange loss of $496,000 on unhedged foreign assets, net of interest income of $310,000. This compares to a net other expense of $43,000 during the same period in fiscal 2000 and includes, among others, interest expense of approximately $521,000, foreign exchange gain on unhedged foreign assets of approximately $176,000, net of interest income of approximately $47,000.
Income Taxes. The provision for income taxes for the second quarter and first half of fiscal 2001 was a $15.4 and $19.7 million tax provision compared to $2.4 and $4.2 million for the same periods of fiscal 2000. Income tax provisions and benefits are made based on the blended estimate of federal, state and foreign effective income tax rates which were estimated to be 35.9% and 35.2% in the second quarter and first half of fiscal 2001 compared to 31.3% and 32.0% for the same periods in fiscal 2000. The increased effective tax rates in the fiscal 2001 periods as compared to the same periods in fiscal 2000 are primarily the result of taxes related to the sale of Semy Engineering, Inc.
Backlog. We include in our backlog those customer orders for which we have written authorization and for which shipment is scheduled within the next twelve months. Orders are generally subject to cancellation or rescheduling by customers with limited or no penalty. We experienced order cancellations during the quarter. As the result of systems ordered and shipped in the same quarter, possible changes in customer delivery schedule, cancellations, and shipment delays, the backlog at any particular date and the new orders bookings for any particular period are not necessarily indicative of actual sales for any succeeding period. Order backlog was approximately $69.0 million at March 31, 2001, which represents a decrease of 25.1% from $92.1 million at March 31, 2000. Approximately $5.0 million or 21.6% of this reduction is the result of selling Semy Engineering, Inc.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $11.1 million during the first half of fiscal 2001, which was $6.7 million higher than in the same period of fiscal 2000. This was primarily the result of a $7.7 million increase in net income in the first half of fiscal 2001 compared to the same period of fiscal 2000, excluding the gain from the sale of Semy Engineering.
During the first half of fiscal 2001 investing activities included net cash from the sale of Semy of $33.2 million and cash used to purchase $2.8 million in fixed assets, which consisted mainly of equipment for our labs. Financing activities consist primarily of paying our line of credit down $21.0 million during the first half of fiscal 2001. No amounts were outstanding under this facility at March 31, 2001.
As of March 31, 2001, our principal sources of liquidity consisted of approximately $26.5 million of cash and cash equivalents, $2.9 million in marketable securities, and $40 million available under the Company’s $40 million revolving line of credit. The credit facility is with Bank of America and bears interest at the bank’s prime lending rate or, at our option for loan amounts of $500,000 or more, at LIBOR plus 1.5%. As of March 31, 2001, the prime interest rate was 8.0%. The credit agreement has various restrictive covenants, including a prohibition against pledging or encumbering current or operating assets during the term of the credit agreement and the maintenance of various financial ratios. The revolving line of credit expires July 1, 2001. We are in discussions for renewal of our revolving line of credit and we expect to have the new facility in place on or before July 1, 2001; however, there can be no assurance that we will be successful in securing this credit facility.
We believe that at our current operations, cash and cash equivalents, funds generated from operations, and funds available under the bank line of credit will be sufficient to meet our operating and planned capital requirements for at least the next twelve months including the spending of approximately $5.0 million to purchase property, plant and equipment. Since the semiconductor equipment industry is cyclical our liquidity requirements need to be sufficient to not only meet our needs during an industry downturn, but also to handle our working capital needs in an upturn. We believe that our present liquidity position is sufficient to take us through the current industry downturn cycle and into the next industry cycle. We believe that success in our industry requires substantial capital in order to maintain flexibility and to take advantage of opportunities as they arise. We may, from time to time, as market and business conditions warrant, invest in or acquire complementary businesses, products or technologies. We may sell additional equity or debt to fund such activities or to fund greater than anticipated growth and currently have a common stock shelf registration in place with an aggregate public offering price of $75 million. The sale of additional equity securities or the issuance of equity securities in a business combination could result in dilution to our shareholders.
NEW ACCOUNTING PRONOUNCEMENTS
Effective October 1, 2000, we adopted SFAS 133, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts for hedging activities. All derivatives, whether designated in hedging relationships or not, are required to be recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive income (OCI) and are recognized in the income statement when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings.
We use derivative instruments to manage some of our exposures to foreign currency risks. Our objective for holding derivatives is to minimize our risks using the most effective methods to eliminate or reduce the impacts of these exposures. We use cash flow hedge accounting per SFAS 133 to account for our derivatives. At the inception of the hedge, we document the hedging relationship to a forecasted transaction, risk management objective and the strategy for undertaking the hedge. Quarterly, we use forward rates to evaluate our hedging effectiveness. If the derivative no longer meets hedge accounting criteria, or the terms of the hedged item change so the derivative no longer qualifies for hedge accounting, we mark to market the derivative. Any amounts in other comprehensive income on a derivative that no longer qualifies for hedge accounting are transferred to the income statement. At maturity or termination the gain loss on the derivative is calculated and reported in net income.
Certain forecasted transactions and assets are exposed to foreign currency risk. The Company monitors its foreign currency exposures regularly to maximize the overall effectiveness of its foreign currency hedge positions. Currencies hedged include the Japanese yen. Forward contracts used to hedge forecasted international sales on credit for up to eighteen months in the future are designated as cash flow hedging instruments.
Hedge ineffectiveness, determined in accordance with SFAS 133, had no impact on earnings for the three and six months ended March 31, 2001. No fair value hedges or cash flow hedges were derecognized or discontinued for the three and six months ended March 31, 2001.
Derivative gains and losses included in OCI are reclassified into earnings each period during the duration of the related recognized foreign-currency denominated receivable. During the three and six months ended March 31, 2001, the amount transferred from OCI to Other income (expense), net, was not material. The Company estimates that $76,000 of net derivative gains included in other comprehensive income will be reclassified into earnings within the next twelve months.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, or SAB 101, “Revenue Recognition in Financial Statements.” SAB 101 provides guidance on applying generally accepted accounting principles to revenue recognition issues in financial statements. When the Company adopts SAB 101 in the fourth quarter of fiscal 2001, it will recognize revenue when it substantially completes the terms of the applicable sales arrangement. While the Company has not fully assessed the impact on it of the adoption of SAB 101, it believes that it may require a significant amount of its net sales to be deferred, which could be partially or totally offset by the recognition of net sales for products shipped in prior periods, as required by SAB 101. Any change in the Company’s revenue recognition policy resulting from the implementation of SAB 101 would be reported as a change in accounting principle in the year ending September 30, 2001 with a restatement of prior quarters in fiscal 2001 to reflect the effect of the change. In addition, the Company may need to renegotiate the financial covenants under its line of credit agreement. As a result, while SAB 101 would not affect the fundamental aspects of the Company’s operations as measured by its shipments and cash flows, implementation of SAB 101 could have an adverse effect on its reported results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risks
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates.
As of March 31, 2001, we had approximately $3.8 million in fixed-rate long-term debt and approximately $264,000 in variable-rate short-term debt. Changes in the fixed rate interest market would change the estimated fair value of our long-term debt. We believe that a 10% change in long-term interest rates would not have a material effect on our business, financial condition, results of operations or cash flows.
All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. We manage this risk and attempt to reduce such exposure through an economic hedge by entering into short-term forward exchange contracts. At March 31, 2001, we held forward contracts to sell Japanese Yen with a face value of $10.8 million, a market value of $11.7 million and an unrealized gain of $900,000. Additionally, the impact of movements in currency exchange rates on forward contracts are offset to the extent of intercompany receivables denominated in Japanese Yen. We believe the effect of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange contracts and the underlying transactions would not be material to our financial condition, results of operations or cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes.
SEMITOOL, INC.Part II. OTHER INFORMATIONItem 1. Legal Proceedings
In August 1998, the Company filed suit against Novellus Systems, Inc. in the United States District Court for the Northern District of California (Case No. C-98-3089 DLJ), alleging infringement of two of our patents relating to single substrate processing tools used in electrochemical deposition of copper onto semiconductor wafers. The Company seeks damages for past infringement, a permanent injunction, treble damages for willful infringement, prejudgment interest and attorneys’ fees. Novellus answered the complaint by denying all of the allegations and counter-claiming for declaratory judgment of invalidity and noninfringement and attorneys’ fees. Novellus filed a motion for summary judgment of noninfringement, which motion was granted on March 17, 2000, and judgment was subsequently entered on May 12, 2000 dismissing the case. We filed an appeal to the United States Court of Appeals for the Federal Circuit on May 15, 2000 seeking review of the ruling on the motion for summary judgment. The appeal was heard at the Court of Appeals on April 2, 2001 and the parties are awaiting a decision of the Court.
The Company is subject to other legal proceedings and claims which have arisen in the ordinary course of our business and have not been finally adjudicated. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of our management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our results of operations, financial condition or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.36 Loan Modification Agreement, dated March 29, 2001, between the Company and Bank of America
(b) Reports on Form 8-K:
A Report of Form 8-K was filed on March 2, 2001. This report contained information relating to the sale of Semy Engineering, Inc., a wholly-owned subsidiary, which was completed on February 16, 2001.
SIGNATUREPursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SEMITOOL, INC.
(Registrant)
Date: May 11, 2001 By /s/William A. Freeman
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William A. Freeman
Senior Vice President and Chief Financial Officer
By /s/Larry A. Viano
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Larry A. Viano
Principal Accounting Officer
Exhibit Index
Exhibit No. Description
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10.36 Loan Modification Agreement, dated March 29, 2001, between the Company and Bank of America
Exhibit 10.36
Loan Modification Agreement This agreement amends the Promissory Note dated July 5, 2000 (“Note”) and Business Loan Agreement dated July 5, 2000 (“Business Loan Agreement”), each executed by Semitool, Inc. (“Borrower”) in favor of Bank of America, N.A. (“Bank”), regarding a loan in the maximum principal amount of $40,000,000.00 (the “Loan”). For mutual consideration, Borrower and Bank agree to amend the above loan documents as follows:
1.Maturity Date. The maturity date of the Note is changed to July 1, 2001. Bank's commitment to make advances under its line of credit is also extended to July 1, 2001.
2.Other Terms. Except as specifically amended by this agreement or any prior amendment, all other terms, conditions, and definitions of the Note, Business Loan Agreement, and all other security agreements, guaranties, deeds of trust, mortgages, and other instruments or agreements entered into with regard to the Loan shall remain in full force and effect.
DATED March 29, 2001
Bank: Borrower:
Bank of America, N.A Semitool, Inc.
By: /s/Mark Crawford By: /s/Raymon F. Thompson
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Title Senior Vice President Title CEO, President
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