Semitool (SMTL) 10-Q 2006 Q2 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 March 31, 2006

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

Large accelerated filer [   ] Accelerated filer [ X ] Non-accelerated filer [   ]

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

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

       Title
Common Stock Outstanding as of April 30, 2006
                31,899,356

Semitool, Inc.
Form 10-Q
Table of Contents

Part I.

  Item 1.
          
          

          
          

          
          

          
          

          

  Item 2.

          

          
          

          

          

          

          

          

          

  Item 3.

  Item 4.

Part II.

  Item 1.

  Item 1A.

  Item 4.

  Item 6.
          
          
Signatures
          

Exhibits Financial Information

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of March 31, 2006 and September 30, 2005

Condensed Consolidated Statements of Income for the three and six months ended March 31, 2006 and
    March 31, 2005

Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2006 and
    March 31, 2005

Condensed Consolidated Statements of Comprehensive Income for the three and six months ended
    March 31, 2006 and March 31, 2005

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

Risk Factors

Submission of Matters to a Vote of Security Holders

Exhibits

2

PART I — FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

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

	March 31, 2006		September 30, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	22,539	$	6,557
Marketable securities		--		475
Trade receivables, less allowance for doubtful accounts of $270 in both periods		62,087		42,165
Inventories		83,419		72,294
Prepaid expenses and other current assets		2,677		4,114
Deferred income taxes		10,424		9,655
Total current assets		181,146		135,260
Property, plant and equipment, net		40,357		35,558
Intangibles, less accumulated amortization of $1,892 and $1,579 in 2006 and 2005		8,379		7,146
Other assets, net		1,304		716
Total assets	$	231,186	$	178,680

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank	$	12,520		$	--
Accounts payable		20,002			19,153
Accrued commissions		2,018			2,814
Accrued warranty		6,701			5,521
Accrued payroll and related benefits		7,412			7,469
Income taxes payable		733			750
Other accrued liabilities		3,267			3,663
Customer advances		4,658			995
Deferred profit		12,487			10,983
Long-term debt, due within one year		469			292
Total current liabilities		70,267			51,640
Long-term debt, due after one year		4,179			3,111
Deferred income taxes		3,208			3,508
Total liabilities		77,654			58,259
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,
31,898,956 and 28,732,777 shares issued and outstanding in 2006 and 2005		79,623			49,853
Retained earnings		74,684			71,063
Accumulated other comprehensive loss		(775	)		(495	)
Total shareholders' equity		153,532			120,421
Total liabilities and shareholders' equity	$	231,186		$	178,680

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

3

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

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Net sales	$	63,824		$	46,336		$	119,113		$	95,158
Cost of sales		33,515			22,269			64,796			47,659
Gross profit		30,309			24,067			54,317			47,499
Operating expenses:
Selling, general and administrative		17,997			15,067			36,076			30,410
Research and development		6,295			5,021			12,062			9,268
Total operating expenses		24,292			20,088			48,138			39,678
Income from operations		6,017			3,979			6,179			7,821
Other income (expense), net		(458	)		(265	)		(522	)		3,065
Income before income taxes		5,559			3,714			5,657			10,886
Income tax provision		2,001			1,225			2,036			3,406
Net income	$	3,558		$	2,489		$	3,621		$	7,480
Earnings per share:
Basic	$	0.11		$	0.09		$	0.12		$	0.26
Diluted	$	0.11		$	0.09		$	0.12		$	0.26
Weighted average common shares outstanding:
Basic		31,849			28,706			30,433			28,694
Diluted		32,338			29,157			30,810			29,082

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

4

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

	Six Months Ended March 31,
	2006			2005
Operating activities:
Net income	$	3,621		$	7,480
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on disposition of assets		5			38
Depreciation and amortization		4,584			3,375
Deferred income taxes		(1,083	)		407
Compensation expense recognized under employee stock option plans		659			139
Change in:
Trade receivables		(21,201	)		10,728
Inventories		(12,972	)		(6,032	)
Prepaid expenses and other current assets		1,424			1,597
Other assets, net		(592	)		(60	)
Accounts payable		1,050			(2,889	)
Accrued commissions		(794	)		(2,110	)
Accrued warranty		1,188			1,730
Accrued payroll and related benefits		(28	)		1,109
Income taxes payable		(11	)		(1,221	)
Other accrued liabilities		(376	)		1,180
Customer advances		3,666			(1,616	)
Deferred profit		1,593			(10,041	)
Net cash provided by (used in) operating activities		(19,267	)		3,814
Investing activities:
Purchases of marketable securities		--			(2,420	)
Proceeds from sale and maturities of marketable securities		475			4,663
Purchases of property, plant and equipment		(7,455	)		(2,249	)
Increases in intangible assets		(642	)		(667	)
Proceeds from sale of property, plant and equipment		86			516
Net cash used in investing activities		(7,536	)		(157	)
Financing activities:
Net proceeds from stock offering		27,974			--
Proceeds from exercise of stock options		1,137			211
Borrowings under line of credit and short-term debt		61,646			--
Repayments of line of credit and short-term debt		(49,126	)		--
Borrowings under long-term debt		1,362			--
Repayments of long-term debt		(117	)		(110	)
Net cash provided by financing activities		42,876			101
Effect of exchange rate changes on cash and cash equivalents		(91	)		115
Net increase in cash and cash equivalents		15,982			3,873
Cash and cash equivalents at beginning of period		6,557			16,368
Cash and cash equivalents at end of period	$	22,539		$	20,241

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

5

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

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Net income	$	3,558		$	2,489		$	3,621		$	7,480
Net gain (loss) on cash flow hedges		(171	)		303			(140	)		184
Unrealized gain on available-for-sale securities		--			--			--			3
Foreign currency translation adjustments		13			(282	)		(140	)		(4	)
Total comprehensive income	$	3,400		$	2,510		$	3,341		$	7,663

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

6

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, 2005 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 condensed consolidated financial position as of March 31, 2006, the condensed consolidated results of operations for the three and six month periods ended March 31, 2006 and 2005, and the condensed consolidated cash flows for the six month periods ended March 31, 2006 and 2005. 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, stock-based compensation, 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.

Certain prior period balances have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on previously reported results of operations or shareholders’ equity.

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 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 or 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.

7

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 in 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 delayed the effective date until additional guidance was issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. In November 2005, the FASB Staff issued FSP FASB Statement 115-1, which amends FASB Statement No. 115 and addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The Company adopted these standards as of January 1, 2006 and their adoption has not had a significant impact on the Company’s results of operations or financial position.

Stock-Based Compensation

The 2004 Stock Option Plan
In February 2004, the Board of Directors adopted and the shareholders approved the 2004 Stock Option Plan (the Option Plan), replacing the Semitool, Inc. 1994 Stock Option Plan. The total shares reserved for issuance under the Option Plan are 3,300,000 at March 31, 2006. Options granted under the Option Plan generally become exercisable at a rate of 5% per quarter commencing three months after the grant date, and have a requisite service period of five years. The Company may grant options that qualify as incentive stock options to employees and nonqualified stock options to employees, officers and directors, independent contractors and consultants. Options generally have a ten-year term. Option exercises are settled with newly issued common shares.

Effective October 1, 2005, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123(R) establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award and is recognized as expense, amortized on a straight-line basis, over the requisite service period of the individual grants, which generally equals the vesting period.

Prior to the adoption of SFAS No. 123(R)
Prior to the adoption of SFAS No. 123(R), the Company accounted 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 had 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 provided that compensation expense relative to employee stock options be measured based on the intrinsic value of the stock options granted. Compensation expense was recognized in the statement of income in the case where the stock options were granted at exercise prices below fair market value on the date of grant. The Company amortized deferred stock-based compensation cost on the accelerated vesting method described in FASB Interpretation Number 28 over the vesting periods of the applicable stock options (normally five years). If the stock options were granted at market value, no compensation expense was recorded. SFAS No. 123 provided 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 and the expected dividends on it, and the risk-free rate over the expected life of the option. SFAS No. 123 required entities that continued to use the 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. The pro forma information for the three and six months ended March 31, 2005 was as follows:

8

	Three Months Ended March 31, 2005			Six Months Ended March 31, 2005
Net income, as reported	$	2,489		$	7,480
Add: Compensation expense recorded
under APB No. 25, net of tax related effects		50			95
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax related effects		(183	)		(393	)
Pro forma net income	$	2,356		$	7,182
Basic earnings per share:
As reported	$	0.09		$	0.26
Pro forma	$	0.08		$	0.25
Diluted earnings per share:
As reported	$	0.09		$	0.26
Pro forma	$	0.08		$	0.25

Impact of the adoption of SFAS No. 123(R)
The Company elected to adopt the modified prospective application method as provided by SFAS No. 123(R). As a result, the Company’s statements of income as of March 31, 2006 reflect compensation cost for new stock options granted under the Option Plan during the second quarter and first half of fiscal 2006 and the unvested portion of previous stock option grants which vested during the second quarter and first six months of fiscal 2006. Total compensation cost recorded in the second quarter of fiscal 2006 was $313,000 pre-tax, or $200,000 after tax, an impact of approximately $0.01 per basic and diluted share. Total compensation cost recorded in the first six months of fiscal 2006 was $659,000 pre-tax, or $421,000 after tax, an impact of approximately $0.01 per basic and diluted share. As of March 31, 2006, $3.2 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of 1.9 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on a blended rate of historical and implied volatilities from the traded options on the Company’s stock. The expected term of options granted is based on analyses of historical employee termination rates, option exercises and other factors. The risk-free rates are based on the U.S. Treasury yield in effect at the time of the grant. The assumptions used in the Black-Scholes model are presented below:

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Expected stock price volatility		59.6	%		80.0	%		59.6	%		80.0	%
Risk-free interest rate		4.3	%		3.9	%		4.3	%		3.6	%
Dividend yield		--			--			--			--
Expected life of options (in years)		5.2			4.8			5.2			5.0

9

A summary of our option activity for the first half of fiscal 2006 is as follows:

	Number of Shares			Weighted- average Exercise Price Per Share		Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)					(In years)		(In thousands)
Outstanding at September 30, 2005		1,983			$ 7.36
Options granted		68			8.79
Options exercised		(166	)		6.84
Options forfeited		(1	)		9.31
Outstanding at March 31, 2006		1,884			$ 7.45		6.4		$ 7,385
Exercisable at March 31, 2006		1,058			$ 7.45		4.8		$ 4,147

The weighted average grant date fair values based on the Black-Scholes option pricing model for options granted in the second quarter and first half of fiscal 2006 were $7.19 and $4.89 per share, respectively, and for options granted in the second quarter and first half of fiscal 2005 were $6.77 and $5.53 per share, respectively. The total intrinsic value of options exercised during the second quarter and first six months of fiscal 2006 was $837,000 and $906,000, and during the second quarter and first six months of fiscal 2005 was $48,000 and $149,000.

Computation of Earnings Per Share

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

	Three Months Ended March 31,				Six Months Ended March 31,
	2006		2005		2006		2005
Numerator:
Net income used for basic and
diluted earnings per share	$	3,558	$	2,489	$	3,621	$	7,480
Denominator:
Weighted average common shares used for
basic earnings per share		31,849		28,706		30,433		28,694
Effect of dilutive stock options		489		451		377		388
Denominator for diluted earnings per share		32,338		29,157		30,810		29,082

Diluted earnings per share excludes the effects of antidilutive stock options of 46,150 and 207,250 for the three months ended March 31, 2006 and 2005, and 104,925 and 286,650 for the six months ended March 31, 2006 and 2005, respectively.

Shareholders’ Equity

In conjunction with an equity offering of common stock in December 2005, the Company issued three million shares of common stock resulting in approximately $28.0 million in net cash proceeds, after deducting underwriters’ fees and other offering costs of approximately $1.6 million.

10

Note 2.  Inventories

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

	March 31, 2006		September 30, 2005
Parts and raw materials	$	42,386	$	37,165
Work-in-process		33,514		26,057
Finished goods		7,519		9,072
	$	83,419	$	72,294

For the three and six months ended March 31, 2006, a net $1,129,000 and $1,699,000, respectively, of inventory was transferred to property, plant and equipment for testing and laboratory use.

Note 3.  Note Payable to Bank

The Company currently has a $30 million Credit Agreement with Wells Fargo that bears interest at the bank’s prime lending rate or, at the Company’s option, LIBOR plus 2.25%. As of March 31, 2006, the prime lending rate was 7.75% and the Company had $12.5 million in advances outstanding under the agreement. The Credit Agreement expires on March 31, 2008 and includes financial and non-financial covenants with which the Company was in compliance as of March 31, 2006. Subsequent to quarter-end, the outstanding advances were repaid in full as the Company collected on outstanding receivables.

Note 4.  Guarantees

The Company, in its Articles of Incorporation, has indemnified its officers and the members of its Board of Directors to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred in such capacity as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the officers or directors are named.

The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. The Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification 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):

	Six Months Ended March 31,
	2006			2005
Accrued warranty balance, beginning of period	$	5,521		$	3,713
Accruals for new warranties issued during the period		6,566			5,018
Expirations and changes in estimates to pre-existing warranties		(163	)		(623	)
Warranty labor and materials provided during the period		(5,223	)		(2,660	)
Accrued warranty balance, end of period	$	6,701		$	5,448

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

11

Note 5.  Contingencies

The Company 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 6.  Other Income (Expense), Net

Other, net for fiscal 2006 includes $500,000 in expense related to a patent infringement lawsuit involving a product representing less than 2% of the Company’s net sales.

Other, net for fiscal 2005 includes a $2.9 million seed layer enhancement litigation settlement payment received from Novellus Systems, Inc. in October 2004.

Note 7.  Income Taxes

The Company’s effective tax rate was approximately 36% for the three and six months ended March 31, 2006. The effective tax rate in fiscal 2006 is higher compared to the rate used for fiscal 2005 because the Research Credit (Credit) expired in December 2005. Congress is currently discussing the extension and/or revision of the Credit. As of March 31, 2006, no law has been passed. 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 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 Company’s estimated effective full-year tax rate for fiscal 2006 is approximately 36%. The effective full-year tax rate for fiscal 2005 was approximately 31%. The Company’s fiscal year 2006 tax rate is higher due to the aforementioned expiration of the federal research credit as well as the expensing of stock-based awards in accordance with SFAS No. 123(R) and the limited deductibility of those awards in some jurisdictions which have the effect of increasing the Company’s effective tax rate for fiscal year 2006. The effective tax rate reflects the underlying profitability of the Company, the regions where income and expenses are recorded and the respective tax rates imposed. The Company’s effective tax rate is based on current profitability outlook, including the Company’s continued and substantial investments in research and development programs qualifying for the Credit (through the expiration in December 2005), and the Company’s expectations of earnings from operations in lower-tax jurisdictions throughout the world.

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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 and our expectation that future sales will be weighted toward that region;
• the expectation of lower warranty expense on the Raider platform;
• the level of transition costs in Taiwan and China related to establishing a direct sales and service presence in those markets;
• the sufficiency of funds and sources of liquidity;
• estimates of capital expenditures;
• the level of research and development expenditures;
• the ability to finance activities;
• our expected effective tax rate;
• 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 are detailed under the heading “Risk Factors” and elsewhere in our Annual Report on Form 10-K for our fiscal year ended September 30, 2005. 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 six month periods ended March 31, 2006.

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 to plate copper and gold which is used for the IC’s internal wiring, or interconnects; to plate solder and gold bumps for wafer level packaging applications; and to plate 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 150 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 fabricate more advanced semiconductor devices;
• increased use of 300mm wafers to reduce manufacturing costs;
• move to single-wafer spray and immersion processing technologies for enhanced surface preparation;
• wafer level and other advanced packaging to enable smaller portable products; and
• emerging need for thinner wafers driven by the demand for smaller portable devices.

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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. Our solutions address critical applications within the semiconductor manufacturing process, and enable our customers to manufacture more advanced semiconductor devices that feature higher levels of performance. Key elements of our solution include technological leadership, a comprehensive product portfolio, including our Raider platform and vertically-integrated manufacturing and design capabilities.

Key Performance Indicators

Our management focuses on revenues, gross margin, operating expenses and profitability in managing our business. In addition to these financial measures found in our condensed consolidated financial statements, we also use bookings, backlog, shipments and deferred revenue 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. Shipments measure how well we have met our production plan and are viewed as a primary measure of factory output. Deferred revenue primarily represents tool shipments for which we are awaiting final customer acceptance.

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

• Second quarter fiscal 2006 gross bookings were $56.8 million with net bookings of $50.9 million. A multiple-tool order booking was cancelled during the quarter because of the announced closure of a fab. Year-to-date net bookings are $116.4 million.
  
  
• Shipments in the second quarter of fiscal 2006 were $63.1 million. Year-to-date shipments are $115.0 million.
  
  
• Deferred revenue at March 31, 2006 was $18.2 million.
  
  
• Net income was $3.6 million on revenues of $63.8 million during the second quarter of fiscal 2006 compared to net income of $2.5 million on revenues of $46.3 million in the second quarter of fiscal 2005.
  
  
• Our gross margin was 47.5% of net sales, down from the 51.9% gross margin we reported in the second quarter of fiscal 2005. The fiscal 2006 margin was adversely impacted by up-front investments, including higher than expected costs, on selected tool installations with first-time customers for new applications.
  
  
• Cash, cash equivalents and marketable securities were $22.5 million at March 31, 2006, a decrease of $6.2 million from $28.7 million at December 31, 2005.

Results of Operations

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

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of sales		52.5			48.1			54.4			50.1
Gross profit		47.5			51.9			45.6			49.9
Operating expenses:
Selling, general and administrative		28.2			32.5			30.3			32.0
Research and development		9.9			10.8			10.1			9.7
Total operating expenses		38.1			43.3			40.4			41.7
Income from operations		9.4			8.6			5.2			8.2
Other income (expense), net		(0.7	)		(0.6	)		(0.5	)		3.2
Income before income taxes		8.7			8.0			4.7			11.4
Income tax provision		3.1			2.6			1.7			3.5
Net income		5.6	%		5.4	%		3.0	%		7.9	%

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Second Quarter and First Half of Fiscal 2006 Compared with Second Quarter and First Half of Fiscal 2005

Net Sales

	Three Months Ended March 31,				Six Months Ended March 31,
	2006		2005		2006		2005
	(In thousands)
Net sales	$	63,824	$	46,336	$	119,113	$	95,158

Net sales consist 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 and gained acceptance of our products and the revenue recognition criteria in SAB 104 have been met. 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.

Net sales increased $17.5 million for the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005. In general, business activity levels have increased in fiscal 2006 as compared to fiscal 2005. Revenue from shipments increased approximately 72% in the second quarter of fiscal 2006 while revenue from tool acceptances during the quarter declined approximately 22% over the comparable period of fiscal 2005 as our Raider tool base continues to expand allowing us to recognize more equipment revenue upon shipment of our tools while continuing to defer revenue related to installation until final customer acceptance. Shipment levels increased 29% from $48.9 million in the second quarter of fiscal 2005 to $63.1 million in the second quarter of fiscal 2006 with a greater number of Raiders being shipped into customer environments in which we have already successfully installed and gained acceptance of our tools. Additionally revenues from spare parts and service increased 24% from second quarter fiscal 2005 levels.

Net sales increased $24.0 million in the first six months of fiscal 2006 as compared to the first six months of fiscal 2005 for the same reasons as discussed in the quarterly results analysis. Revenues from shipments increased approximately 84% while revenues from acceptances decreased 32%. Shipments increased approximately 48% to $115.0 million in fiscal 2006 year-to-date from $80.0 million in the comparable period in fiscal 2005. Revenues from spare parts and service sales have increased approximately 26% in the year-to-date comparison.

Geographically, our sales mix year-to-date has been weighted toward North America and Europe, primarily because second quarter revenues were heavily weighted toward North America, as we made up-front tool investments with certain North American customers. We expect our future geographic sales mix to be weighted toward Asia, corresponding with our past trend and the overall industry trend toward stronger Asian markets.

Gross Profit

	Three Months Ended March 31,							Six Months Ended March 31,
	2006			2005			2006			2005
	(Dollars in thousands)
Gross profit	$	30,309		$	24,067		$	54,317		$	47,499
Percentage of net sales		47.5	%		51.9	%		45.6	%		49.9	%

Gross profit increased $6.2 million or 25.9% in the second quarter of fiscal 2006 compared to the second quarter of fiscal 2005 and $6.8 million or 14.4% in the first half of fiscal 2006 as compared with fiscal 2005. As a percentage of net sales, gross profit declined 4.4 percentage points to 47.5% in the second quarter of fiscal 2006 from 51.9% in the same period of fiscal 2005 and declined 4.3 percentage points to 45.6% in the first six months of fiscal 2006 from 49.9% in the first six months of fiscal 2005.

Gross profit increased in both the quarterly and year-to-date comparative periods in absolute dollar terms because of higher sales volumes. The gross margin percentage in both comparative periods was negatively impacted due to up-front investments on selected tool installations for first-time customer use of new applications. One-time pricing concessions coupled, in certain instances, with increased manufacturing costs related to customer-driven needs, impacted the gross margin by approximately six percentage points in the second quarter of fiscal 2006 and by approximately five percentage points in the first six months of fiscal 2006. This was partially offset by approximately one percentage point in both periods by a one-time order cancellation fee. Increased warranty and installation costs also slightly reduced the gross margin percentage in the year-to-date comparison. Our product mix continues to be 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.

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Selling, General and Administrative

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
	(Dollars in thousands)
Selling, general and administrative$		17,997		$	15,067		$	36,076		$	30,410
Percentage of net sales		28.2	%		32.5	%		30.3	%		32.0	%

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 North American and international locations. SG&A expenses increased $2.9 million in absolute dollars in the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005 but decreased over four percentage points to 28.2% of net sales in the second quarter of fiscal 2006 from 32.5% of net sales in the second quarter of fiscal 2005. Year-to-date, SG&A expenses increased $5.7 million as compared to the same period in fiscal 2005 but decreased almost two percentage points to 30.3% of net sales.

Employment costs increased approximately $1.5 million in the second quarter of fiscal 2006 as compared to the second quarter of fiscal 2005 and $3.4 million in the year-to-date period of fiscal 2006 as compared with fiscal 2005 as we increased staff to support expanded business activity, including our transition to a direct sales and customer service presence in Taiwan and China. Commission expense increased $785,000 in the quarterly comparison and $1.2 million in the year-to-date comparison reflecting increased sales activity and the geographic sales mix for our products. The combination of commission expense and direct expenses associated with our transition to a direct sales and service presence in Taiwan and China has resulted in some doubling of expenses. We expect this to continue over the next one or two quarters. Professional Fees increased 56% and 60%, respectively, in both comparative periods reflecting increased audit fees related to compliance with the Sarbanes-Oxley Act of 2002. 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 in both periods.

Research and Development

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
	(Dollars in thousands)
Research and development	$	6,295		$	5,021		$	12,062		$	9,268
Percentage of net sales		9.9	%		10.8	%		10.1	%		9.7	%

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. R&D expense increased $1.3 million in absolute dollars in the second quarter of fiscal 2006 as compared with the second quarter of fiscal 2005 but decreased to 9.9% of net sales from 10.8% of net sales in the second quarter of fiscal 2005. R&D expense increased $2.8 million in the first half of fiscal 2006 as compared to fiscal 2005 and increased to 10.1% of net sales.

In the second quarter of fiscal 2006, depreciation expense increased by more than $400,000 as we replaced older technology tools in our demonstration laboratories with Raider platform tools. Employment costs also increased over $400,000 related to increased staffing levels and merit adjustments in the first quarter of fiscal 2006. Other expenses have increased as a result of increased business activity.

Increased depreciation expense was also the primary driver in the $2.8 million increase in R&D expense year-to-date, accounting for almost one-third of the increase in expense. Prototype expenses increased almost $800,000 from the comparable period in fiscal 2005 as we expanded our research and development efforts to more historical levels than in fiscal 2005. In early fiscal 2005, our research and development focus was directed toward meeting new customer requirements for the Raider platform. As in the quarterly comparison, employment and general operating expenses increased reflecting expanded business activity.

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

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Other Income (Expense), Net

	Three Months Ended March 31,						Six Months Ended March 31,
	2006			2005			2006			2005
	(In thousands)
Interest income	$	137		$	69		$	178		$	140
Interest expense		(196	)		(27	)		(304	)		(60	)
Foreign exchange loss		(95	)		(511	)		(146	)		(251	)
Other		(304	)		204			(250	)		3,236
Total other income (expense), net	$	(458	)	$	(265	)	$	(522	)	$	3,065

Net other income (expense) decreased by approximately $200,000 in the second quarter of fiscal 2006 to a net expense of $458,000 as compared to a net expense of $265,000 in the same period in fiscal 2005 primarily because of a $500,000 expense related to a patent infringement lawsuit involving a product representing less than 2% of our net sales. Net other income (expense) decreased approximately $3.6 million in the first six months of fiscal 2006 as compared to the first six months of fiscal 2005 primarily because the first half fiscal 2005 results included a seed layer enhancement litigation settlement payment of $2.9 million from Novellus Systems, Inc. in October 2004. We began utilizing our bank line of credit in the first quarter of fiscal 2006, increasing our interest expense by approximately $170,000.

Income Taxes

	Three Months Ended March 31,				Six Months Ended March 31,
	2006		2005		2006		2005
	(In thousands)
Income tax provision	$	2,001	$	1,225	$	2,036	$	3,406

Our effective tax rate was approximately 36% for the three and six months ended March 31, 2006. The effective tax rate in fiscal 2006 is higher compared to the rate used for fiscal 2005 because the Research Credit (Credit) expired in December 2005. Congress is currently discussing the extension and/or revision of the Credit. As of March 31, 2006, no law has been passed. Our recorded tax rate for the first quarter of fiscal 2005 was approximately 30% due to the recognition of approximately $186,000 of 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. Our estimated effective full-year tax rate for fiscal 2006 is approximately 36%. The effective full-year tax rate for fiscal 2005 was approximately 31%. Our fiscal year 2006 tax rate is higher due to the aforementioned expiration of the federal research credit as well as the expensing of stock-based awards in accordance with SFAS No. 123(R) and the limited deductibility of those awards in some jurisdictions which have the effect of increasing our effective tax rate for fiscal year 2006. Our effective tax rate reflects the underlying profitability of the Company, the regions where income and expenses are recorded and the respective tax rates imposed. Our effective tax rate is based on our current profitability outlook, including our continued and substantial investments in research and development programs qualifying for the Credit (through the expiration in December 2005), and our expectations of earnings from operations in lower-tax jurisdictions throughout the world.

Backlog and Deferred Revenue

	March 31, 2006			March 31, 2005
	(Dollars in millions)
Backlog	$	62.6		$	45.7
Percentage change in backlog year-over-year		37.0	%		(11.1	)%
Deferred revenue	$	18.2		$	28.9
Percentage change in deferred revenue year-over-year		37.0	%		51.3	%

Approximately 73% of our current backlog is for tools on the Raider platform. Deferred revenue decreased $10.7 million at March 31, 2006 as compared with March 31, 2005 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 30 Raiders at March 31, 2006 as compared with17 Raiders at March 31, 2005; however, the fiscal year 2005 figure includes a higher percentage of Raiders that represented new tools shipped into new customer environments, requiring full deferral of revenue on those tools.

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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 primarily relates to equipment shipped to customers that has not been accepted by the customer, less the deferred cost of sales, including warranty and installation, and commission expenses. Deferred revenue is not included in orders backlog.

Stock-Based Compensation

Through fiscal 2005, we accounted for our stock option plans using the intrinsic value method. Effective the beginning of fiscal 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected to adopt the modified prospective application method. SFAS No. 123(R) requires us to use a fair-value based method to account for stock-based compensation. Accordingly, stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employees’ requisite service period. Total compensation cost for our stock plans in the second quarter and first six months of fiscal 2006 was approximately $313,000 and $659,000, respectively.

Liquidity and Capital Resources

In the first half of fiscal 2006, cash used by operating activities was $19.3 million. The primary use of cash in fiscal 2006 was a $21.2 million increase in Trade Receivables related to the timing of tool shipments. Inventories increased $13.0 million. Work-in-Process contained five substantially complete tools totaling $5.3 million, two of which were shipped in April 2006. Net of the $5.3 million, inventories, primarily Work-in-Process and Raw Materials, have grown to support current and expected shipment volumes. The primary sources of cash from operations in fiscal 2006 were a $3.7 million increase in Customer Advances, a $1.6 million increase in Deferred Profit and net operating income and other non-cash operating activities of $7.8 million.

Investing activities in the first half of fiscal 2006 included $7.5 million in purchases of factory equipment and other property, the construction of a new facility in Austria and the acquisition of an additional manufacturing facility near our headquarters. Investing activities also included net cash proceeds of $475,000 from the sale of marketable securities. We invested an additional net $1.1 millionin our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net $642,000 in our patent portfolio, including the acquisition of intellectual property for a component of one of our ancillary products.

Financing activities in the first half of fiscal 2006 consisted primarily of approximately $28.0 million in cash proceeds from an equity offering of three million shares of common stock in December, net borrowings on our bank line of credit of $12.5 million, borrowings under long-term debt of $1.4 million for a new facility being constructed in Austria and $1.1 million from the exercise of stock options.

In the first half of fiscal 2005, cash provided by operating activities was $3.8 million. We used cash as inventories grew $6.0 million, primarily in work-in-process inventory, as we prepared to meet customer delivery dates. In addition to the growth in inventories, we also reduced our accounts payable balance by $2.9 million. Deferred profit decreased by $10.0 million from year-end fiscal 2004 levels because acceptances of Raider and other high value tools had exceeded deferrals of revenue and associated cost, 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 $10.7 million from September 30, 2004. We also received a $1.2 million income tax refund. Other sources of cash during the first half of fiscal 2005 included net income of almost $7.5 million and an increase in various accrued liabilities of $4.0 million. These liabilities relate to estimates of customer support obligations for tools on which we have recognized revenue during the fiscal year, as well as to increased employment-related costs.

Investing activities in the first half of fiscal 2005 included $2.2 million in purchases of factory equipment, primarily tools built in-house for our own laboratories, and net cash proceeds of $2.2 million from the sale of marketable securities.

Financing activities in the first half of fiscal 2005 consisted primarily of cash received from stock option exercises of $211,000 offset by long-term debt repayments of $110,000 during the first half of fiscal 2005.

As of March 31, 2006, our principal sources of liquidity consisted of approximately $22.5 million of cash and cash equivalents and $17.5 million available under our $30 million revolving line of credit. The credit facility is with Wells Fargo and bears interest at the bank’s prime lending rate or, at our option, LIBOR plus 2.25%. As of March 31, 2006, the prime lending rate was 7.75%. The revolving credit line expires on March 1, 2008. The credit agreement has various restrictive covenants including a prohibition against pledging real, fixed or intangible assets during the term of the agreement and the maintenance of various financial ratios. We are in compliance with our debt covenants. We are currently in negotiations with the bank for a long-term loan to finance the acquisition of additional manufacturing facilities in the Kalispell area.

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As a result of growing our business, we used cash in operating activities of $19.3 million in the first half of fiscal 2006 and of $9.6 million for the year ended September 30, 2005. We have been able to fulfill our working capital and capital expenditure needs through issuances of equity securities and debt financing arrangements.

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 2006 and into the foreseeable future. However, continued growth in shipments of product may require additional funding. We estimate capital expenditures will be between $10.0 million and $12.0 million during fiscal 2006. We currently have an effective shelf registration statement, which registers the offer and sale of up to an aggregate$47 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 States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent 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, stock-based compensation, 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.

During the first quarter of fiscal 2006, we adopted the following new critical accounting policy.

Stock-Based Compensation. In fiscal 2006, we adopted SFAS No. 123(R) using the modified prospective application method and began accounting for stock-based compensation using a fair-value based recognition method. Under the provisions of SFAS No. 123(R), stock-based compensation cost is estimated at the grant date based on the fair-value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can have a relatively large change in the estimated valuation.

We use the Black-Scholes option valuation model to value employee stock options, consistent with the provisions of SFAS No. 123(R), SEC SAB No. 107 and our prior period pro forma disclosures of net earnings, including stock-based compensation (determined under a fair value method as prescribed by SFAS No. 123). We estimate stock price volatility based on a blended rate of historical volatility and the implied volatility derived from traded options on our stock. Estimated option life and forfeiture rate assumptions are derived from historical data. For stock-based compensation awards with graded vesting that were granted after fiscal 2005, we recognize compensation expense using the straight-line amortization method.

For further information about other critical accounting policies, please refer to the discussion of critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2005.

New Accounting Pronouncements

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 or 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, we will adopt SFAS No. 154 in the first quarter of fiscal 2007. We will only be impacted by the adoption of SFAS No. 154 if we implement changes in accounting principle that are addressed by the standard or correct 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, we will adopt FIN 47 by the end of fiscal 2006. We do not expect the adoption of FIN 47 to have a material effect on our results of operations or financial condition.

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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 in 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 delayed the effective date until additional guidance was issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. In November 2005, the FASB Staff issued FSP FASB Statement 115-1, which amends FASB Statement No. 115 and addresses the determination as to when an investment is considered impaired, whether that impairment is other-than-temporary, and the measurement of an impairment loss. It also includes accounting considerations subsequent to the recognition of an other than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. We adopted these standards as of January 1, 2006 and their adoption has not had a significant impact on our results of operations or financial position.

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, 2006, we had approximately $4.6 million in long-term debt and $12.5 million in variable rate 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. We manage this risk and attempt to reduce such exposure through an economic hedge using short-term forward exchange contracts. At March 31, 2006, we held forward contracts to sell Japanese Yen with a total face value of $3.0 million and a total market value of $2.9 million and an unrealized gain of approximately $100,000. 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. As of the end of the period covered by this report, Semitool conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting during our most recently completed fiscal quarter which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

We are involved in legal proceedings that arise in the ordinary course of our 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 our business, financial condition, results of operations or cash flows.

Item 1A.   Risk Factors

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended September 30, 2005.

Item 4.   Submission of Matters to a Vote of Security Holders

At the Company’s Annual Meeting of Shareholders held on February 3, 2006, the following proposals were adopted:

1. To elect eight directors of the Company to serve until the 2007 Annual Meeting of Shareholders or until their successors are elected and qualified. All director nominees received votes, which exceeded the minimum number of votes to be elected. The table below summarizes voting results:

	Votes For		Authority Withheld
Raymon F. Thompson		17,735,722		4,075,413
Howard E. Bateman		21,224,579		586,556
Donald P. Baumann		17,577,981		4,233,154
C. Richard Deininger		21,721,571		89,564
Timothy C. Dodkin		18,200,131		3,611,004
Daniel J. Eigeman		21,224,579		586,556
Charles P. Grenier		21,721,771		89,364
Steven C. Stahlberg		21,721,771		89,364

2. To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accountants for the fiscal year ending September 30, 2006.

Votes For	Votes Against		Votes Abstain
21,268,244		508,084		34,807

Item 6.   Exhibits

      Exhibits

      31.1
      31.2
      32.1
    
      32.2
    
      10.5 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
Supplemental Executive Health Plan, dated February 15, 2006. (1)

(1)    Incorporated herein by reference to Exhibit 10.5 to the Company’s Report on Form 8-K, date of report February 15, 2006.

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SIGNATURES

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

Date: May 9, 2006 SEMITOOL, INC.
    (Registrant)


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

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