Semitool (SMTL) 10-Q 2005 Q3 Quarterly report

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 June 30, 2005

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   

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES X   NO   

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date:

        Title
Common Stock Outstanding as of July 27, 2005
              28,729,177

Semitool, Inc.
Form 10-Q
Table of Contents

Part I.

  Item 1.
          
          

          
          

          
          

          
          

  Item 2.

          

          
          

          

          

          

          

          

          
  Item 3.

  Item 4.

Part II.

  Item 1.

  Item 6.
          
          
Signatures
          

Exhibits Financial Information

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2005 and September 30, 2004

Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2005 and June 30, 2004

Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2005 and June 30, 2004

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2005 and
  June 30, 2004

Notes to Condensed Consolidated Financial Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction - Forward-Looking Statements

Documents to Review in Connection with Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Key Performance Indicators

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

New Accounting Pronouncements

Quantitative and Qualitative Disclosures About Market Risk

Controls and Procedures

Other Information

Legal Proceedings

Exhibits

PART I — FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

SEMITOOL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in Thousands, Except Share Amounts)

	June 30, 2005		September 30, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	14,715	$	16,368
Marketable securities		1,506		5,986
Trade receivables, less allowance for doubtful accounts of $270 and $271
in 2005 and 2004		45,881		52,307
Inventories		63,159		55,432
Income tax refund receivable		4		1,261
Prepaid expenses and other current assets		3,322		2,564
Deferred income taxes		9,064		10,851
Total current assets		137,651		144,769
Property, plant and equipment, net		33,385		29,203
Intangibles, less accumulated amortization of $1,429 and $1,030 in 2005 and 2004		7,122		6,857
Other assets, net		686		471
Total assets	$	178,844	$	181,300

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	16,723		$	21,834
Accrued commissions		2,901			4,025
Accrued warranty		5,714			3,713
Accrued payroll and related benefits		6,728			5,147
Income taxes payable		--			2,984
Other accrued liabilities		3,413			1,808
Customer advances		2,150			2,277
Deferred profit		16,009			24,469
Long-term debt, due within one year		234			225
Total current liabilities		53,872			66,482
Long-term debt, due after one year		2,234			2,089
Deferred income taxes		3,276			2,886
Total liabilities		59,382			71,457
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
no shares issued and outstanding		--			--
Common stock, no par value, 75,000,000 shares authorized,
28,729,177 and 28,668,357 shares issued and outstanding in 2005 and 2004		49,746			49,222
Retained earnings		69,961			61,013
Accumulated other comprehensive loss		(245	)		(392	)
Total shareholders' equity		119,462			109,843
Total liabilities and shareholders' equity	$	178,844		$	181,300

The accompanying notes are an integral part of the condensed consolidated financial statements.

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Amounts)

	Three Months Ended June 30,					Nine Months Ended June 30,
	2005		2004			2005		2004
Revenue:
Product and service	$	47,405	$	26,609		$	142,563	$	82,350
License fees		--		--			--		7,500
Net revenue		47,405		26,609			142,563		89,850
Cost of goods sold		22,754		12,978			70,413		38,292
Gross profit		24,651		13,631			72,150		51,558
Operating expenses:
Selling, general and administrative		17,422		12,400			47,832		35,912
Research and development		5,364		3,751			14,632		10,812
Total operating expenses		22,786		16,151			62,464		46,724
Income (loss) from operations		1,865		(2,520	)		9,686		4,834
Other income (expense), net		135		(98	)		3,200		(216	)
Income (loss) before income taxes		2,000		(2,618	)		12,886		4,618
Income tax provision (benefit)		532		(864	)		3,938		1,524
Net income (loss)	$	1,468	$	(1,754	)	$	8,948	$	3,094
Earnings (loss) per share:
Basic	$	0.05	$	(0.06	)	$	0.31	$	0.11
Diluted	$	0.05	$	(0.06	)	$	0.31	$	0.11
Weighted average common shares outstanding:
Basic		28,719		28,615			28,702		28,544
Diluted		29,133		28,615			29,099		29,164

The accompanying notes are an integral part of the condensed consolidated financial statements.

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)

	Nine Months Ended June 30,
	2005			2004
Operating activities:
Net income	$	8,948		$	3,094
Adjustments to reconcile net income to net cash used in operating activities:
Loss on disposition of assets		111			308
Depreciation and amortization		5,143			4,086
Deferred income taxes		2,173			--
Compensation expense recognized under employee stock option plans		199			206
Change in:
Trade receivables		6,650			(23,760	)
Inventories		(13,093	)		(27,615	)
Income tax refund receivable		1,257			17,820
Prepaid expenses and other current assets		(761	)		(1,171	)
Other assets, net		(217	)		(63	)
Accounts payable		(5,212	)		13,047
Accrued commissions		(1,124	)		1,206
Accrued warranty		2,002			(1,690	)
Accrued payroll and related benefits		1,585			917
Income taxes payable		(2,984	)		--
Other accrued liabilities		1,608			917
Customer advances		(122	)		(1,233	)
Deferred profit		(8,412	)		12,379
Net cash used in operating activities		(2,249	)		(1,552	)
Investing activities:
Purchases of marketable securities		(2,460	)		(11,601	)
Proceeds from sale and maturities of marketable securities		6,944			7,402
Purchases of property, plant and equipment		(3,854	)		(5,396	)
Increases in intangible assets		(1,031	)		(1,075	)
Proceeds from sale of property, plant and equipment		538			183
Net cash provided by (used in) investing activities		137			(10,487	)
Financing activities:
Proceeds from exercise of stock options		325			1,026
Proceeds from long-term debt		321			--
Repayments of long-term debt and capital leases		(167	)		(181	)
Net cash provided by financing activities		479			845
Effect of exchange rate changes on cash and cash equivalents		(20	)		19
Net decrease in cash and cash equivalents		(1,653	)		(11,175	)
Cash and cash equivalents at beginning of period		16,368			23,018
Cash and cash equivalents at end of period	$	14,715		$	11,843

The accompanying notes are an integral part of the condensed consolidated financial statements.

SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Amounts in Thousands)

	Three Months Ended June 30,						Nine Months Ended June 30,
	2005			2004			2005			2004
Net income (loss)	$	1,468		$	(1,754	)	$	8,948		$	3,094
Net gain (loss) on cash flow hedges		168			213			352			(169	)
Unrealized gain (loss) on available-for-sale securities		1			(9	)		4			(7	)
Foreign currency translation adjustments		(205	)		(76	)		(209	)		117
Total comprehensive income (loss)	$	1,432		$	(1,626	)	$	9,095		$	3,035

The accompanying notes are an integral part of the condensed consolidated financial statements.

SEMITOOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

Semitool, Inc. (the Company) prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as permitted by such rules and regulations. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2004 previously filed with the SEC on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly the Company’s consolidated financial position as of June 30, 2005, the consolidated results of operations for the three and nine month periods ended June 30, 2005 and 2004, and the consolidated cash flows for the nine month periods ended June 30, 2005 and 2004. The results of operations for the periods presented may not be indicative of the results that may be expected for the entire fiscal year.

The discussion and analysis of the Company’s financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. Routinely, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, investments, intangible assets, income taxes, financing operations, warranty obligations, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s condensed consolidated financial statements include the accounts of Semitool, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Semitool has only one reportable segment.

New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. The Company does not expect the adoption of EITF 03-1 to have a material effect on its results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This Statement revises FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) generally requires companies to recognize in the statement of income the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. In March 2005, the U.S. Securities and Exchange Commission (SEC) issued SAB 107 which expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. On April 21, 2005, the SEC issued the final rule “Amendment to Rule 4-01(A) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment” which revised the effective date of SFAS No. 123(R) to the beginning of the Company’s next fiscal year that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 123(R) in its first quarter of fiscal 2006. The Company is currently evaluating the provisions of SFAS No.123(R) including the assessment of allowable option valuation methodologies and methods of transition. Were the Company to continue to value options using the Black Scholes option pricing model, the impact of the adoption of this standard would result in approximately $300,000 of pretax stock compensation expense per quarter or $1.2 million per year.

In November 2004, the FASB issued SFAS Statement No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (SFAS No. 151). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Accordingly, the Company will adopt SFAS No. 151 in its first quarter of fiscal 2006. The Company does not expect the adoption of SFAS No. 151 to have a material effect on its results of operations or financial condition.

In December 2004, the FASB issued SFAS Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (SFAS No. 153). SFAS No. 153 requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. Further, it expands the exception for nonmonetary exchanges of similar productive assets to nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in the first reporting period that begins after June 15, 2005. Accordingly, the Company will adopt SFAS No. 153 in its fourth quarter of fiscal 2005. The Company does not expect the adoption of SFAS No. 153 to have a material effect on its results of operations or financial condition.

In May 2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior period financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects of the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Accordingly, the Company will adopt SFAS No. 154 in the first quarter of fiscal 2007. The Company will only be impacted by the adoption of SFAS No. 154 if it implements changes in accounting principle that are addressed by the standard or corrects accounting errors in future periods.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143,” (FIN 47) which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement and that the fair value of the liability should be recognized when incurred. The provisions of this Interpretation are effective no later than the end of fiscal years ending after December 15, 2005. Accordingly, the Company will adopt FIN 47 by the end of fiscal 2006. The Company does not expect the adoption of FIN 47 to have a material effect on its results of operations or financial condition.

Stock-Based Compensation

The Company accounts for stock-based employee compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25 (APB No. 25), “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123) “Accounting for Stock-Based Compensation” as amended by SFAS No. 148 (SFAS No. 148) “Accounting for Stock-Based Compensation Transition and Disclosure.” APB No. 25 provides that compensation expense relative to employee stock options is measured based on the intrinsic value of the stock options granted. Compensation expense is recognized in the statement of income in the case where the stock options are granted at exercise prices below fair market value on the date of grant. If the stock options are granted at market value, no compensation expense is recorded. SFAS No. 123 provides for a fair value based method of accounting for an employee stock option. For stock options, fair value is determined using an option pricing model that takes into account the stock price at the grant date, the exercise price, the expected life of the option, the volatility of the underlying stock, expected dividends, and the risk-free rate over the expected life of the option. SFAS No. 123 requires entities continuing to use an intrinsic value based method of accounting prescribed by APB No. 25 to provide pro forma disclosures of net income and earnings per share as if the fair value method of accounting had been used.

For options granted at market value, the Company does not recognize an expense. However, for options granted at exercise prices below fair market value on the date of grant, the Company recognizes compensation expense and amortizes deferred stock-based compensation on the accelerated vesting method described in FASB Interpretation Number 28 over the vesting periods of the applicable stock options (normally five years). The Company estimates the fair value of its stock-based awards to employees using a Black-Scholes option pricing model. Had compensation cost for the Option Plan been determined based on the fair value consistent with the provisions of SFAS No. 123, the Company’s net income (loss) and earnings (loss) per share would have been changed to the pro forma amounts shown below (in thousands, except for per share amounts):

	Three Months Ended June 30,						Nine Months Ende June 30,
	2005			2004			2005			2004
Net income (loss), as reported	$	1,468		$	(1,754	)	$	8,948		$	3,094
Add: Compensation expense recorded
under APB No. 25, net of tax related effects		43			63			138			138
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax related effects		(187	)		(184	)		(580	)		(570	)
Pro forma net income (loss)	$	1,324		$	(1,875	)	$	8,506		$	2,662
Basic earnings (loss) per share:
As reported	$	0.05		$	(0.06	)	$	0.31		$	0.11
Pro forma	$	0.05		$	(0.07	)	$	0.30		$	0.09
Diluted earnings (loss) per share:
As reported	$	0.05		$	(0.06	)	$	0.31		$	0.11
Pro forma	$	0.04		$	(0.07	)	$	0.29		$	0.09

Computation of Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share is based on the following (in thousands):

	Three Months Ended June 30,					Nine Months Ended June 30,
	2005		2004			2005		2004
Numerator:
Net income (loss) used for basic and
diluted earnings (loss) per share	$	1,468	$	(1,754	)	$	8,948	$	3,094
Denominator:
Weighted average common shares used for
basic earnings (loss) per share		28,719		28,615			28,702		28,544
Effect of dilutive stock options		414		--			397		620
Denominator for diluted earnings (loss) per share		29,133		28,615			29,099		29,164

Diluted earnings (loss) per share excludes the effects of antidilutive stock options of 261,900 and 1,511,375 for the three months ended June 30, 2005 and 2004, and 312,450 and 58,250 for the nine months ended June 30, 2005 and 2004, respectively.

Note 2.  Inventories

The Company’s inventories are summarized as follows (in thousands):

	June 30, 2005		September 30, 2004
Parts and raw materials	$	34,264	$	29,498
Work-in-process		24,715		19,368
Finished goods		4,180		6,566
	$	63,159	$	55,432

For the three and nine months ended June 30, 2005, $1.9 million and $5.4 million, respectively, of inventory was transferred to property, plant and equipment for testing and laboratory use.

Note 3.  Warranty Obligations

Obligations for warranty are accrued concurrently with the revenue recognized on the related equipment. Provisions for warranty obligations are made based upon historical costs incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs and specifications, the ultimate amount incurred for warranty costs could change in the near term from the Company’s current estimate.

Changes in the Company’s accrued warranty liability were as follows (in thousands):

	Nine Months Ended June 30,
	2005			2004
Accrued warranty balance, beginning of period	$	3,713		$	4,634
Accruals for new warranties issued during the period		7,212			3,107
Expirations and changes in estimates to pre-existing warranties		(975	)		(1,834	)
Warranty labor and materials provided during the period		(4,236	)		(2,963	)
Accrued warranty balance, end of period	$	5,714		$	2,944

With the exception of product warranties the Company has not issued any guarantees or any indirect guarantee for the indebtedness of others.

Note 4.  Contingencies

The Company occasionally is involved in legal proceedings that arise in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of 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 its business, financial condition, results of operations or cash flows.

Periodically, but not less than quarterly, the Company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Due to the uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to its pending litigation and claims and may revise its estimates. Although the Company has not made such revisions, any future revisions could have a material impact on its results of operations and financial condition.

Note 5.  Other Income (Expense), Net

Other income (expense), net for the first nine months of fiscal 2005 includes a $2.9 million seed layer enhancement litigation settlement payment received from Novellus Systems, Inc. in October 2004.

Note 6.  Income Taxes

The Company’s estimated effective tax rate is 32% for fiscal 2005. The Company’s recorded tax rate for the first quarter of fiscal 2005 was approximately 30% due to the recognition of approximately $186,000 of Research and Experimentation Credit (Credit), which was generated in the fourth quarter of fiscal 2004. Legislation to extend the Credit was signed into law after September 30, 2004; therefore, the Company was unable to recognize the Credit in fiscal 2004. The effective tax rate for fiscal 2004 was 33%.

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction – Forward–Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s estimates, projections and assumptions that underlie such statements at the time they are made. Forward-looking statements may contain words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this Quarterly Report on Form 10-Q include statements regarding:

• key trends in the semiconductor industry that are driving growth;
• the industry trend toward stronger Asian markets;
• the expectation of lower warranty expenses on the Raider platform as compared to
  our prior automated plating and cleaning tools;
• the sufficiency of funds and sources of liquidity;
• estimates of capital expenditures;
• estimates of tax rates for fiscal 2005;
• estimates of pretax stock compensation expense under SFAS No. 123(R);
• the level of research and development expenditures;
• the ability to finance activities;
• accounting policies and estimates; and
• effects of new accounting standards.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. The risks, uncertainties and other important factors that may cause our results to differ materially from those projected in such forward-looking statements include the cyclicality in the semiconductor industry and the strength of the Asian markets, rapid technological change, the introduction of competing products and technologies, market non-acceptance of Semitool’s new products and technologies, including our Raider tool, cancellations or rescheduling of orders, the potential loss of sales or incurrence of liabilities due to manufacturing defects, and litigation. Further, bookings, backlog and shipments are not necessarily an indication of revenue in any future period or future sales of any specific tool. Other risks and uncertainties are detailed under the heading “Factors That Might Affect Our Future Financial Results and Stock Price” and elsewhere in our Annual Report on Form 10-K for our fiscal year ended September 30, 2004. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

Documents to Review in Connection with Management’s Discussion and Analysis of Financial Condition and Results Of Operations

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Form 10-Q and the financial statements and notes in our last filed Annual Report on Form 10-K for a full understanding of our financial position and results of operations for the three and nine month periods ended June 30, 2005.

Overview

We design, manufacture, install and service highly-engineered equipment for use in the fabrication of semiconductor devices. Our products are focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and include systems for wafer surface preparation and electrochemical deposition, or ECD, applications. Our surface preparation systems are designed for wet cleaning, stripping and etching processes, including photoresist and polymer removal, and metal etching. Our ECD systems are used for copper and gold plating for the IC’s internal wiring, or interconnects; solder and gold bumps for wafer level packaging applications; and other metals for various semiconductor and related applications. Our products address critical applications within the semiconductor manufacturing process, and help enable our customers to manufacture more advanced semiconductor devices that feature higher levels of performance. The fabrication of semiconductor devices typically requires several hundred manufacturing steps, with the number of steps continuing to increase for advanced devices. Due to the breadth of our product portfolio and advanced technology capabilities, our solutions address over 100 of these manufacturing steps.

There are several key trends in the semiconductor manufacturing industry driving growth in demand for wafer surface preparation, ECD and other advanced semiconductor equipment:

• smaller device features for lower cost and higher performance;
• new materials to build more advanced semiconductor devices;
• increased use of 300mm wafers to reduce manufacturing costs;
• move to spray processing and single-wafer processing technologies for enhanced surface preparation; and
• wafer level and other advanced packaging enabling smaller portable products.

As the semiconductor manufacturing process increases in complexity and production parameters become more stringent, semiconductor manufacturers have increasingly relied upon providers of semiconductor equipment that features improved process control, smaller footprint and a lower cost of ownership of their manufacturing processes. We provide a broad suite of advanced, highly-engineered, innovative processing systems that include surface preparation and ECD equipment. Our batch and single-wafer processing systems for wet cleaning, stripping and etching feature our proprietary spray technology, as well as our unique process chamber designs. Our ECD equipment leverages our advanced computational techniques and Capsule technology for a variety of applications including copper interconnect, seed layer enhancement and gold and solder bumps for advanced packaging.

Key Performance Indicators

Our management focuses on revenues, gross margin, operating expenses, profitability and deferred profit in managing our business. In addition to these financial measures found in our financial statements, we also use bookings, backlog, deferred revenue and shipments as key performance indicators. Bookings are firm orders for which we have received written customer authorization in the fiscal period. Backlog is the balance of undelivered orders at the end of a fiscal period. In order to be included in bookings or backlog, an order must be scheduled to ship within the next 12 months. Backlog and forecasted orders drive our production schedule. Deferred revenue represents tools that have shipped to customer sites that have not been accepted or installation revenue related to tools that have not been accepted. Shipments measure how well we have met our production plan and are viewed as a primary measure of factory output.

A summary of key factors which impacted our financial performance during the third quarter includes:

• Net income was $1.5 million on revenues of $47.4 million during the third quarter of
  fiscal 2005 compared to a net loss of $1.8 million on revenues of $26.6 million in the
  third quarter of fiscal 2004.

• Third quarter fiscal 2005 bookings were $40.6 million.

• Shipments in the third quarter of fiscal 2005 were $49.6 million.

• Deferred revenue at June 30, 2005 was $31.0 million.

• Our gross margin was 52.0%, up from the 51.2% gross margin we reported in the
  third quarter of fiscal 2004.

• Cash, cash equivalents and marketable securities were $16.2 million at June 30, 2005, a
  decrease of $7.8 million from $24.0 million at March 31, 2005 due primarily to cash flows
  from operations.

Results of Operations

The following table sets forth our consolidated results of operations for the periods indicated as a percentage of net revenue:

	Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Product and service revenue		100.0	%		100.0	%		100.0	%		91.7	%
License fees		--			--			--			8.3
Net revenue		100.0			100.0			100.0			100.0
Cost of sales-product and service revenue		48.0			48.8			49.4			42.6
Cost of sales-license fees		--			--			--			--
Gross profit		52.0			51.2			50.6			57.4
Operating expenses:
Selling, general and administrative		36.8			46.6			33.6			40.0
Research and development		11.3			14.1			10.2			12.0
Total operating expenses		48.1			60.7			43.8			52.0
Income (loss) from operations		3.9			(9.5	)		6.8			5.4
Other income (expense), net		0.3			(0.3	)		2.2			(0.3	)
Income (loss) before income taxes		4.2			(9.8	)		9.0			5.1
Income tax provision (benefit)		1.1			(3.2	)		2.7			1.7
Net income (loss)		3.1	%		(6.6	)%		6.3	%		3.4	%

Third Quarter and First Nine Months of Fiscal 2005 Compared with Third Quarter and First Nine Months of Fiscal 2004

Net Revenue

	Three Months Ended				Nine Months Ended
	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004
	(In thousands)
Product and service revenue	$	47,405	$	26,609	$	142,563	$	82,350
License fees		--		--		--		7,500
Net revenue	$	47,405	$	26,609	$	142,563	$	89,850

Product and service revenue consists of revenues from sales of semiconductor equipment, spare parts and service. Our revenue recognition policy provides that revenue from sales of semiconductor equipment may be recognizable upon shipment if the product is an existing tool to a customer environment in which we have already successfully installed or gained acceptance of our products. Alternatively, revenue will be deferred and only recognized upon final customer acceptance for tools that are new products or where an existing tool is sold into a new customer environment. Revenue for elements other than equipment, such as installation revenue, is included in tool acceptance revenue. License fee revenue represents fees from licensing certain of our patents.

Net revenue increased $20.8 million for the three months ended June 30, 2005 as compared to the three months ended June 30, 2004 and $52.7 million in the first nine months of fiscal 2005 as compared to the first nine months of fiscal 2004. In general, business activity levels have increased in fiscal 2005 as compared to fiscal 2004. Revenue from shipments increased almost 200% in the third quarter of fiscal 2005 while revenue from tool acceptances during the quarter increased approximately 80% over the comparable period in fiscal 2004. In the first nine months of fiscal 2005 shipment revenue increased 97% and acceptance revenue increased 182% as compared to the same period of fiscal 2004. Revenue from both shipments and acceptances was weighted toward our Raider platform. Additionally, the first nine months of fiscal 2004 revenue included a $7.5 million license initiation fee received for our seed layer enhancement patents.

Geographically, our revenue mix changed to being weighted toward Asia, including Japan, from being weighted toward North America in fiscal 2004. We obtained acceptance for several tools at multiple customer sites in Asia and Japan during the first nine months of fiscal 2005. This corresponds to the overall industry trend toward stronger Asian markets.

Gross Profit

	Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(Dollars in thousands)
Gross Profit
Product and service revenue	$	24,651		$	13,631		$	72,150		$	44,058
License fees		--			--			--			7,500
Total gross profit	$	24,651		$	13,631		$	72,150		$	51,558
Percentage of net revenue		52.0	%		51.2	%		50.6	%		57.4	%

Gross profit increased $11.0 million in the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004. In the first nine months of fiscal 2005, gross profit increased $20.6 million as compared to the same period of fiscal 2004. As a percentage of net revenue, gross profit increased 0.8 percentage points to 52.0% in the third quarter of fiscal 2005 from 51.2% in fiscal 2004‘s third fiscal quarter. Year-to-date, gross margin declined 6.8 percentage points to 50.6% from 57.4% for the same period in fiscal 2004.

Gross profit increased in both comparative periods in absolute dollar terms because of higher sales volumes. Additionally, the year-to-date fiscal 2004 gross profit benefited from the receipt of a $7.5 million license initiation fee. Exclusive of the license initiation fee, gross margin for the nine month period of fiscal 2004 was 53.5%. The gross margin percentage in the fiscal 2005 year-do-date comparison was negatively impacted by increased warranty and installation expense that added approximately three percentage points to our cost of goods sold. The product mix in fiscal 2005 is weighted toward our Raider platform tools. While we expect warranty expense on the Raider platform to be lower than the prior platform for our automated plating and cleaning tools, warranty rates are higher on the more advanced tool lines than on our less complex batch tools. The fiscal 2004 gross margin percentage was favorably impacted by expirations and changes in estimates of pre-existing warranties.

Selling, General and Administrative

	Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(Dollars in thousands)
Selling, general and administrative	$	17,422		$	12,400		$	47,832		$	35,912
Percentage of net revenue		36.8	%		46.6	%		33.6	%		40.0	%

Selling, general and administrative (SG&A) expenses include employment costs for sales, marketing, customer support and administrative personnel as well as travel, communications, professional fees and expenses related to sales and service offices at our global locations. SG&A expenses increased $5.0 million in absolute dollars in the third quarter of fiscal 2005 as compared to the third quarter for fiscal 2004 but declined 9.8 percentage points to 36.8% of net revenue. SG&A expenses increased $11.9 million in the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004 and declined 6.4 percentage points to 33.6% of net revenue, demonstrating our ability to leverage our support costs.

Employment costs increased approximately 19% in the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004 and 27% in the year-to-date period of fiscal 2005 as compared with fiscal 2004 as we restored wages from previously imposed pay reductions, increased staff to support expanded business activity and accrued for profit sharing bonuses. Commission expense, primarily related to increased sales activity in Asia, increased almost $3 million in the quarterly comparison and more than $4 million in the year-to-date comparison. Travel and other expenses related to expanded business activity and customer support increased in both comparative periods. These increases were partially offset by decreased legal costs. Legal costs declined more than 65% in the third quarter of fiscal 2005 compared to fiscal 2004 and by 74% in the year-to-date comparison as a result of the settlement of the seed layer enhancement litigation.

Research and Development

	Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(Dollars in thousands)
Research and development	$	5,364		$	3,751		$	14,632		$	10,812
Percentage of net revenue		11.3	%		14.1	%		10.2	%		12.0	%

Research and Development (R&D) expense consists of employment costs, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. R&D expense increased $1.6 million in absolute dollars in the third quarter of fiscal 2005 as compared with the third quarter of fiscal 2004 and declined 2.8 percentage points as a percentage of net revenue. In the first nine months of fiscal 2005, R&D expense increased $3.8 million as compared to the first nine months of fiscal 2004 and declined to 10.2% of net revenue.

In the third quarter of fiscal 2005, prototype expense increased almost 600% when compared to the third quarter of fiscal 2004. Beginning in fiscal 2004, most of our research and development efforts have been focused on meeting new customer requirements for the Raider platform. Additionally, the ongoing development of our wafer thinning technology is reflected in increasing prototype costs in the third quarter of fiscal 2005. Employment costs increased 12% in the third quarter of fiscal 2005 compared with the same period in fiscal 2004 primarily related to increases in staffing levels and due to accruals related to profit sharing bonuses. R&D depreciation expense increased 42% in the third quarter of fiscal 2005 compared with the third quarter of fiscal 2004 related to additions of Raider platform tools to our demonstration laboratories.

Increasing employment and prototype costs were the primary drivers in the $3.8 million increase in R&D expense in the first nine months of fiscal 2005. Employment costs increased 23% over the comparable period as a result of the reversal of a wage reduction in effect in fiscal 2004 staffing level increases and profit sharing accruals. Prototype expense increased almost 400% as discussed in the quarterly comparison. R&D depreciation expense has also increased in the first nine months of fiscal 2005 as compared with the first nine months of fiscal 2004.

Our research and development expense has fluctuated from quarter to quarter in the past. We expect such fluctuations to continue in the future, both in absolute dollars and as a percentage of net revenue, primarily due to the timing of expenditures and fluctuations in the level of net revenue in a given quarter. We expect to continue to fund research and development expenditures with a multi-year perspective and are committed to technology leadership in our sector of the semiconductor equipment industry.

Other Income (Expense), Net

	Three Months Ended						Nine Months Ended
	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
	(In thousands)
Interest income	$	75		$	61		$	215		$	242
Interest expense		(29	)		(35	)		(89	)		(113	)
Foreign exchange gain (loss)		19			(120	)		(232	)		(395	)
Other		70			(4	)		3,306			50
Total other income (expense), net	$	135		$	(98	)	$	3,200		$	(216	)

Net other income (expense) improved to net income of $135,000 in fiscal 2005 as compared to a net expense of $98,000 in the third quarter of fiscal 2004 primarily related to a foreign exchange gain in the third quarter of fiscal 2005 as compared to a foreign exchange loss in the third quarter of fiscal 2004. The foreign exchange gain and loss both reflect the fluctuating value of the Yen.

Net other income (expense) increased in the first nine months of fiscal 2005 as compared to the same period in fiscal 2004. In October 2004, we received a seed layer enhancement litigation settlement payment of $2.9 million from Novellus Systems, Inc.

Income Taxes

	Three Months Ended					Nine Months Ended
	June 30, 2005		June 30, 2004			June 30, 2005		June 30, 2004
	(In thousands)
Income tax provision (benefit)	$	532	$	(864	)	$	3,938	$	1,524

Our estimated effective tax rate is 32% for fiscal 2005. Our recorded tax rate for the first quarter of fiscal 2005 was approximately 30% due to the recognition of approximately $186,000 of Research and Experimentation Credit (Credit), which was generated in the fourth quarter of fiscal 2004. Legislation to extend the Credit was signed into law after September 30, 2004; therefore, we were unable to recognize the Credit in fiscal 2004. The effective tax rate for fiscal 2004 was 33%.

Backlog and Deferred Revenue

	June 30, 2005			June 30, 2004
	(Dollars in millions)
Backlog	$	36.7		$	55.2
Percentage change in backlog from
prior year-to-date period end		(33.5	)%		134.9	%
Deferred revenue	$	31.0		$	34.2
Percentage change in deferred revenue
from prior year-to-date period end		(9.4	)%		161.1	%

Approximately 61% of our current backlog is for tools on the Raider platform. Deferred revenue decreased $3.2 million at June 30, 2005 as compared with June 30, 2004 primarily because of increased shipments of Raiders into existing customer environments where Raiders have been previously installed or accepted, in accordance with our revenue recognition policy. Current deferrals include all or a part of 22 Raiders at June 30, 2005 as compared with 14 Raiders at June 30, 2004; however the fiscal year 2004 figures include a higher percentage of Raiders that represented new tools shipped into new customer environments, requiring full deferral of revenue on those tools.

We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next 12 months. Orders are generally subject to cancellation or rescheduling by customers with limited or no cancellation fees. As the result of systems ordered and shipped in the same quarter, possible changes in customer delivery dates, cancellations and shipment delays, the backlog at any particular date and the bookings for any particular period are not necessarily indicative of actual revenue for any succeeding period. In particular, during periods of downturns in the semiconductor industry we have experienced cancellations and significant shipment delays.

Deferred profit included in our current liabilities is derived from deferred revenue, which relates to equipment shipped to customers that has not been accepted by the customer, less the deferred cost of goods sold, including warranty and installation, and commission expenses. Deferred revenue is not included in orders backlog.

Liquidity and Capital Resources

In the first nine months of fiscal 2005, cash used by operating activities was $2.2 million. We used cash as inventories grew $13.1 million. Work-in-Process and Finished Goods inventories contained five tools, totaling approximately $3.8 million, which were in transit to customers at June 30, 2005 or were substantially complete and which shipped in early July. Net of that $3.8 million, inventories, primarily Work-in-Process and Raw Materials, have increased to support the shipment volume in fiscal 2005. In addition to the growth in inventories, we also reduced our accounts payable balance by $5.2 million. Deferred profit decreased by $8.4 million from year-end fiscal 2004 levels because acceptances of Raider and other high value tools have exceeded deferrals of revenue, and associated cost deferrals thus far in the fiscal 2005 period. The primary source of cash during the period was the collection of trade receivables in the normal course of business. Trade receivables declined by $6.7 million from September 30, 2004. We also received a $1.3 million income tax refund. Other sources of cash during the first nine months of fiscal 2005 included net income of almost $8.9 million and changes in non-cash components of net income, including depreciation, amortization and deferred income taxes.

Investing activities in the first nine months of fiscal 2005 included $3.9 million in purchases of factory equipment and net cash proceeds of $4.5 million from the sale of marketable securities.

Financing activities consisted primarily of cash received from stock option exercises of $325,000 and proceeds from long-term debt of $321,000 for a new facility currently being constructed in Austria. We expect long-term debt for the facility to increase to approximately $3 million with a fixed interest rate of 3.5% for 5 years. Cash proceeds were offset by long-term debt repayments of $167,000 during the first nine months of fiscal 2005.

In the first nine months of fiscal 2004, the primary sources of cash from operating activities were the receipt of the $7.5 million license initiation fee included in income from operations and the receipt of over $16.0 million in income tax refunds. Inventory and accounts payable increased as a result of our effort to reduce manufacturing cycle times and provide faster deliveries to our customers by stocking components that will help shorten our lead times. Trade receivables increased due to the shipment of several Raiders in the latter half of the third quarter. The increase in deferred profit is the result of revenue and expenses deferred on our new Raider products pending final customer acceptance. In fiscal 2003, our deferred profit pool was being relieved as we received customer acceptances on new tools deferred in prior periods.  In fiscal 2004, we are shipping new tools to new customers which, under our revenue recognition policy guided by SAB 104, requires that revenue and the associated expenses be deferred.

In the first nine months of fiscal 2004, investing activities included $5.4 million in purchases of factory equipment and other property and net cash used for the purchase of marketable securities of $4.2 million. Financing activities consisted primarily of cash received from stock option exercises of $1.0 million offset by long-term debt repayments of $181,000 during the first nine months of fiscal 2004.

The following commitments as of June 30, 2005, incurred in the normal course of business, have been included in the condensed consolidated financial statements with the exception of purchase order commitments and operating lease obligations, which are properly excluded under accounting principles generally accepted in the United States of America. They are disclosed in the following table in order to provide additional information related to our consolidated financial position and liquidity. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to the types of financing, liquidity, market or credit risks that could arise if we had engaged in such relationships.

	Payments Due by Period
	Total		Less Than 1 Year		1 - 3 Years		4 - 5 Years		After 5 Years
	(In thousands)
Long-term debt	$	2,468	$	234	$	827	$	449	$	958
Operating leases		1,633		823		636		115		59
Purchase order commitments		6,661		6,640		21		--		--
Total commitments	$	10,762	$	7,697	$	1,484	$	564	$	1,017

We have agreements with limited liability companies wholly-owned by Mr. Raymon F. Thompson, our Chairman and Chief Executive Officer, to lease aircraft and an aircraft hangar. The current rental rate is approximately $274,000 per month for both the aircraft and the hangar; the lease terms are month-to-month and therefore are not included in the above table.

As of June 30, 2005, our principal sources of liquidity consisted of approximately $14.7 million of cash and cash equivalents, $1.5 million in marketable securities, a $15.0 million line of credit with a commercial bank, a 2.5 million Euro term loan facility for the building construction in Austria, with approximately 2.2 million Euros remaining available, and incoming cash generated from operations. We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations to meet operating expenses and planned capital expenditures through fiscal 2005 and for at least the next 12 months. We estimate capital expenditures will be between $10.0 million and $12.0 million during the next 12 months.

We currently have an effective shelf registration statement, which registers the offer and sale of up to an aggregate $75 million of our securities. If additional financial resources are required in the future, we expect either to issue securities from the shelf registration statement or to issue other financial instruments, whichever management deems advisable. Of course, there can be no assurance that in the future we will be able to issue additional common stock or other financial instruments on acceptable terms.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United Sates of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, inventories, warranty obligations, bad debts, investments, intangible assets, income taxes, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies and estimates affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.

Revenue Recognition.  Revenue recognition is significant because revenue is a key component of our results of operations. We recognize revenue under the guidance for Staff Accounting Bulletin No. 104 (SAB 104), “Revenue Recognition.” Under this method, revenue is recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable and collectibility is reasonably assured. Our product sales generally contain substantive customer acceptance provisions. Sales of new products to new or existing customers are not recognized until customer acceptance. Likewise, sales of existing products to new customer environments are not recognized until customer acceptance. If multiple elements exist, sales of existing products into existing customer environments are treated as such in accordance with Emerging Issues Task Force Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” The amount of revenue recognized in multiple element arrangements is the lesser of the fair value of the equipment or the contracted amount that was due or payable upon title transfer. The revenue for elements other than equipment is recorded in deferred profit and is recognized when the remaining goods and/or services are delivered or performed. Revenue related to service is recognized upon completion of performance of the service or ratably over the life of the related service contract. Spare parts sales are recognized upon shipment when title and risk of loss pass to the customer. Unearned revenue from service contract agreements is included in Customer Advances in the current liability section of the balance sheet.

In addition, the timing of certain expenses, such as cost of goods sold, including installation and warranty, and commission expenses coincides with the recognition of the related revenues. We follow specific guidelines in measuring revenue; however, certain judgments such as the definition of a new customer environment and new acceptance criteria or if installation is perfunctory may be required in the application of our revenue policy.

Inventories.  Inventories are valued at the lower of cost or market on a first-in, first-out basis. Accordingly, we write down the carrying value of inventories for estimated obsolescence and future marketability. On a quarterly basis, we compare historical and projected sales and usage of raw materials and parts and our assumptions about future use of raw materials, parts and finished goods with our forecast, market demand and industry conditions to determine potential obsolescence or whether the inventory on hand represents excess quantities. As a result of our analysis, we record reserves impacting Cost of Goods Sold, if appropriate. If actual future use, demand or market conditions are less favorable than those projected by us, additional inventory valuation write-downs may be required.

Warranty Obligations.  We provide for the estimated cost of equipment warranties when the related revenue is recognized. We track individual warranties on a tool-by-tool basis and develop estimated rates by equipment class. The rates are used to estimate the warranty accrual for a given specific piece of equipment. These rates are revised periodically to reflect current cost trends due to the current life cycle of that product class. The warranty accrual is reduced by actual costs of providing the warranty or if a balance is remaining at the end of the warranty period, then that amount is also written off. Warranty accrual expense impacts primarily Cost of Goods Sold. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our component suppliers, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.

Allowance for Doubtful Accounts.  We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record expense as a component of selling, general and administrative within the Statements of Operations. If the financial condition of our customers were to deteriorate, due to the cyclicality of the industries we serve or for other reasons, resulting in an impairment of their ability to make payments, additional allowances and expense may be required. Likewise, if we are successfully able to collect on an amount presumed to be uncollectible, the allowance for doubtful accounts and the related expense may be reduced. In general, it takes longer to collect payment in the capital equipment industry than in certain other industries. Days Sales Outstanding (DSO) of our peer companies, ranges between approximately 50 and 105 days in our industry.

Impairment of Investments in Marketable Securities.  We record an investment impairment charge when we believe an investment has experienced a decline in value that is other than temporary. Future adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future. Any investment impairment would be recorded in the financial statements as Other Expense.

Deferred Tax Assets.  We make estimates to determine the amount of our deferred tax assets that we believe is more likely than not to be realized. We consider future taxable income and ongoing prudent tax planning strategies in assessing the need for a valuation allowance; however, should we determine that we will not be able to realize all or part of our net deferred tax asset in the future, a decrease in the deferred tax asset would negatively impact our results of operations, particularly the income tax provision, in the period such determination was made.

New Accounting Pronouncements

In March 2004, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” EITF 03-1 provides guidance on other-than-temporary impairment models for marketable debt and equity securities accounted for under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and SFAS No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and non-marketable equity securities accounted for under the cost method. The EITF developed a basic three-step model to evaluate whether an investment is other-than-temporarily impaired. On September 30, 2004, the FASB approved the issuance of FASB Staff Position (FSP) EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. We do not expect the adoption of EITF 03-1 to have a material effect on our results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”. This Statement revises FASB Statement No. 123, “Accounting for Stock-Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123(R) focuses primarily on the accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS No. 123(R) generally requires companies to recognize in the statement of income the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. In March 2005, the U.S. Securities and Exchange Commission (SEC) issued SAB 107 which expresses views of the SEC staff regarding the application of SFAS No. 123(R). Among other things, SAB 107 provides interpretive guidance related to the interaction between SFAS No. 123(R) and certain SEC rules and regulations, as well as provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. On April 21, 2005, the SEC issued the final rule “Amendment to Rule 4-01(A) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment” which revised the effective date of SFAS No. 123(R) to the beginning of our next fiscal year that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 123(R) in our first quarter of fiscal 2006. We are currently evaluating the provisions of SFAS No.123(R) including the assessment of allowable option valuation methodologies and methods of transition. Were we to continue to value options using the Black Scholes option pricing model, the impact of the adoption of this standard would result in approximately $300,000 of pretax stock compensation expense per quarter or $1.2 million per year.

In November 2004, the FASB issued SFAS Statement No. 151, “Inventory Costs — an Amendment of ARB No. 43, Chapter 4” (SFAS No. 151). SFAS No. 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Accordingly, we will adopt SFAS No. 151 in our first quarter of fiscal 2006. We do not expect the adoption of SFAS No. 151 to have a material effect on our results of operations or financial condition.

In December 2004, the FASB issued SFAS Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (SFAS No. 153). SFAS No. 153 requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. Further, it expands the exception for nonmonetary exchanges of similar productive assets to nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in the first reporting period that begins after June 15, 2005. Accordingly, we will adopt SFAS No. 153 in our fourth quarter of fiscal 2005. We do not expect the adoption of SFAS No. 153 to have a material effect on our results of operations or financial condition.

In May 2005, the FASB issued SFAS Statement No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 requires retrospective application to prior period financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects of the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-lived, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Accordingly, the Company will adopt SFAS No. 154 in the first quarter of fiscal 2007. The Company will only be impacted by the adoption of SFAS No. 154 if it implements changes in accounting principle that are addressed by the standard or corrects accounting errors in future periods.

In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations an interpretation of FASB Statement No. 143,” (FIN 47) which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated even though uncertainty exists about the timing and/or method of settlement and that the fair value of the liability should be recognized when incurred. The provisions of this Interpretation are effective no later than the end of fiscal years ending after December 15, 2005. Accordingly, the Company will adopt FIN 47 by the end of fiscal 2006. The Company does not expect the adoption of FIN 47 to have a material effect on its results of operations or financial condition.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market Risks

Market risks relating to our operations result primarily from changes in interest rate and changes in foreign currency exchange rates.

As of June 30, 2005, we had approximately $2.5 million in long-term debt and no short-term debt. Our long-term debt bears interest at a fixed rate. As a result, changes in the fixed rate interest market would change the estimated fair value of the fixed rate long-term debt. However, we believe that a 10% change in the long-term interest rate 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. To a degree, we manage these risks and attempt to reduce such exposure through economic hedges using short-term forward exchange contracts. At June 30, 2005, we held forward contracts to sell Japanese Yen with a total face value of $6.1 million, a total market value of $5.8 million and an unrealized gain of $300,000. The impact of movements in currency exchange rates on forward contracts is offset to the extent of receivables denominated in Japanese Yen. The effect of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange contracts and the underlying transactions would not be material to our financial condition, results of operations or cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes.

Item 4.  Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that material information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

(b) Changes in Internal Control. There were no significant changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.

We are in the process of implementing the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires our management to assess the effectiveness of our internal control over financial reporting and include an assertion in our annual report as to the effectiveness of our controls. Subsequently, our independent registered public accounting firm will be required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of September 30, 2005. We are in the process of performing the system and process documentation, evaluation and testing required for management to make this assessment and for the independent registered public accounting firm to provide their attestation report. We have not completed this process or its assessment, and this process will require significant amounts of management time and resources. In the course of evaluation and testing, management may identify deficiencies that will need to be addressed and remediated.

PART II — OTHER INFORMATION

Item 1.  Legal Proceedings

The Company occasionally is involved in legal proceedings that arise in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of 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 its business, financial condition, results of operations or cash flows.

Item 6.  Exhibits

     Exhibits

     31.1
     31.2

     32.1
        
     32.2
        

     10.46

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
     Section 906 of the Sarbanes-Oxley Act of 2002

Loan Agreement, dated May 17, 2005, between Raiffeisenbank Hallein and Semitool Austria, GmbH

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 8, 2005 SEMITOOL, INC.
   (Registrant)


By:/s/Larry A. Viano
——————————————
Larry A. Viano
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)