Semitool (SMTL) 10-Q 2009 Q1 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 December 31, 2008

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

Large accelerated filer  [   ] Accelerated filer  [ X ] Non-accelerated filer  [   ] Smaller Reporting Company  [   ]

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 January 30, 2009
                  32,724,926

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 6.
           
           
 Signatures
           

 Exhibits Financial Information

Condensed Consolidated Financial Statements

Condensed Consolidated Balance Sheets as of December 31, 2008 and September 30, 2008

Condensed Consolidated Statements of Operations for the three months ended December 31, 2008 and
   December 31, 2007

Condensed Consolidated Statements of Cash Flows for the three months ended December 31, 2008 and
   December 31, 2007

Condensed Consolidated Statements of Comprehensive Loss for the three months ended
   December 31, 2008 and December 31, 2007

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

Exhibits

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PART I — FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

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

	December 31, 2008		September 30, 2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	26,349	$	11,624
Restricted cash		254		817
Marketable securities		70		380
Trade receivables, less allowance for doubtful accounts of $259 in both periods		46,558		73,695
Inventories		83,507		88,773
Prepaid expenses and other current assets		7,426		4,843
Deferred income taxes		16,702		14,175
Total current assets		180,866		194,307
Property, plant and equipment, net		48,743		49,909
Intangibles, less accumulated amortization of $4,613 and $4,341 in 2009 and 2008		7,450		7,861
Other assets, net		1,420		735
Total assets	$	238,479	$	252,812

LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	8,100		$	19,007
Line of credit		15,000			3,215
Accrued commissions		1,594			1,972
Accrued warranty		8,463			9,786
Accrued payroll and related benefits		5,604			8,033
Income taxes payable		--			2,601
Other accrued liabilities		4,611			3,294
Customer advances		1,532			1,936
Deferred profit		5,579			7,726
Long-term debt and capital leases, due within one year		1,138			1,222
Total current liabilities		51,621			58,792
Long-term debt and capital leases, due after one year		10,149			10,417
Deferred and long-term income taxes		5,349			5,246
Total liabilities		67,119			74,455
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,
32,724,926 and 32,719,276 shares issued and outstanding in 2009 and 2008		87,593			87,293
Retained earnings		84,075			91,496
Accumulated other comprehensive loss		(308	)		(432	)
Total shareholders' equity		171,360			178,357
Total liabilities and shareholders' equity	$	238,479		$	252,812

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

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

	Three Months Ended December 31,
	2008			2007
Net sales	$	33,066		$	48,592
Cost of sales		18,905			24,420
Gross profit		14,161			24,172
Operating expenses:
Selling, general and administrative		18,463			18,696
Research and development		7,834			6,979
Downsizing costs		881			--
Total operating expenses		27,178			25,675
Loss from operations		(13,017	)		(1,503	)
Other income (loss), net		(373	)		447
Loss before income taxes		(13,390	)		(1,056	)
Income tax benefit		(5,969	)		(280	)
Net loss	$	(7,421	)	$	(776	)
Loss per share:
Basic	$	(0.23	)	$	(0.02	)
Diluted	$	(0.23	)	$	(0.02	)
Weighted average common shares outstanding:
Basic		32,533			32,155
Diluted		32,533			32,155

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

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

	Three Months Ended December 31,
	2008			2007
Operating activities:
Net loss	$	(7,421	)	$	(776	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Loss on disposition of assets		264			109
Depreciation and amortization		3,086			2,694
Deferred income taxes		(2,634	)		198
Stock-based compensation		300			699
Non-cash assets acquired in sales transactions		(972	)		(1,280	)
Change in:
Restricted cash		563			--
Trade receivables		26,959			(9,040	)
Inventories		4,745			(5,224	)
Prepaid expenses and other current assets		(2,173	)		(1,751	)
Other assets, net		(7	)		41
Accounts payable		(10,999	)		5,125
Accrued commissions		(390	)		83
Accrued warranty		(1,341	)		130
Accrued payroll and related benefits		(2,619	)		789
Income taxes payable		(2,306	)		1,597
Other accrued liabilities		1,314			66
Customer advances		(406	)		1,054
Deferred profit		(2,131	)		1,895
Net cash provided by (used in) operating activities		3,832			(3,591	)
Investing activities:
Purchases of property, plant and equipment		(628	)		(418	)
Increases in intangible assets		(100	)		(179	)
Proceeds from sale of property, plant and equipment		--			10
Net cash used in investing activities		(728	)		(587	)
Financing activities:
Proceeds from exercise of stock options		--			773
Borrowings under line of credit and short-term debt		15,246			--
Repayments of line of credit and short-term debt		(3,461	)		--
Repayments of long-term debt		(303	)		(372	)
Net cash provided by financing activities		11,482			401
Effect of exchange rate changes on cash and cash equivalents		139			76
Net increase (decrease) in cash and cash equivalents		14,725			(3,701	)
Cash and cash equivalents at beginning of period		11,624			16,090
Cash and cash equivalents at end of period	$	26,349		$	12,389

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

5

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

	Three Months Ended December 31,
	2008			2007
Net loss	$	(7,421	)	$	(776	)
Net loss on cash flow hedges		(482	)		(162	)
Unrealized loss on available-for-sale securities		(310	)		--
Foreign currency translation adjustments		916			169
Total comprehensive loss	$	(7,297	)	$	(769	)

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. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2008 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 financial position, results of operations and cash flows for the interim periods presented. 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. On an ongoing basis, 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, employee benefits, 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 December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP No. FAS 140-4 and FIN 46(R)-8).  FSP No. FAS 140-4 and FIN 46(R)-8 requires public entities to provide additional disclosures about transfers of financial assets and their involvement with variable interest entities.  The Company is required to adopt FSP No. FAS 140-4 and FIN 46(R)-8 in the interim period ending after December 15, 2008. Accordingly, the Company will adopt FSP No. FAS 140-4 and FIN 46(R)-8 in the second quarter of fiscal 2009. The Company does not expect the adoption of FSP No. FAS 140-4 and FIN 46(R)-8 to materially impact its results of operations or financial condition.

Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with Statements of Financial Accounting Standards 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.

Total compensation cost recorded in the first quarter of fiscal 2009 and fiscal 2008, respectively, was $300,000 and $699,000 pre-tax, or $183,000 and $447,000 after tax, an impact of approximately $0.01 per basic and diluted share in both periods.

In February 2004, the Board of Directors adopted and the shareholders approved the 2004 Stock Option Plan (the 2004 Plan), replacing the expiring 1994 Stock Option Plan. Upon approval of the 2007 Stock Incentive Plan (the 2007 Plan) in March 2007, the 2007 Plan immediately replaced the 2004 Plan. Options that were granted under the 2004 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 has granted options that qualify as incentive stock options to employees (including officers and employee directors) and nonqualified stock options to employees, directors and consultants. The options generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Option exercises are settled with newly issued common shares.

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The total shares reserved for issuance under the 2007 Plan are 3,157,610 at December 31, 2008, which includes an initial 1,000,000 shares plus all shares that remained available for grants of options under the 2004 Plan as of the date the 2007 Plan was approved plus any shares that would otherwise return to the 2004 Plan as a result of forfeiture of options previously granted under the 2004 Plan. The 2007 Plan provides for the grant of various awards including stock options, stock appreciation rights and restricted stock awards. As of December 31, 2008, only stock options and restricted stock awards have been awarded under the 2007 Plan. The Company may grant options that qualify as incentive stock options only to employees. Awards other than incentive stock options may be granted to employees, directors and consultants. Restricted stock awards granted under the 2007 Plan generally vest at a rate of 20% per year with 20% vesting immediately upon issuance and have a requisite service period of four years. Stock options granted under the 2007 Plan generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Stock option exercises and restricted stock are settled with newly issued common shares.

Stock Options

The fair value of each stock 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 stock 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 following assumptions were used in the Black-Scholes model for the first quarter of fiscal 2008: expected stock price volatility of 51.6%; risk-free interest rate of 4.4%; and expected life of options of 5.1 years. There were no stock options granted in the first quarter of fiscal 2009.

The weighted average grant date fair value based on the Black-Scholes option pricing model for stock options granted in the first quarter of fiscal 2008 was $4.77 per share.

The following summary shows stock option activity for the first quarter of fiscal 2009:

	Number of Shares			Weighted- average Exercise Price Per Share
	(In thousands)
Outstanding at September 30, 2008		1,402			$8.11
Options granted		--			--
Options exercised		--			--
Options forfeited		(9	)		8.22
Outstanding at December 31, 2008		1,393			$8.11
Exercisable at December 31, 2008		1,145			$8.00

As of December 31, 2008, $1.0 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted average period of 1.1 years. The weighted average remaining contractual term for options outstanding and exercisable at December 31, 2008 was 4.9 years and 4.5 years, respectively. All options outstanding at December 31, 2008 had no intrinsic value. The total intrinsic value of stock options exercised during the first quarter of fiscal 2008 was $346,000. There were no stock options exercised during the first quarter of fiscal 2009.

8

Restricted Stock Awards

A summary of the Company’s restricted stock activity for the first quarter of fiscal 2009 is as follows:

	Number of Shares			Weighted Average Grant Date Fair Value
	(In thousands)
Nonvested at September 30, 2008		205			$9.02
Restricted stock granted		2			5.12
Restricted stock vested		(47	)		9.05
Nonvested restricted stock forfeited		(5	)		9.11
Nonvested at December 31, 2008		155			$8.96

The fair value of the restricted stock was calculated based upon the fair market value of the Company’s stock at the date of the grant. As of December 31, 2008, $1.2 million of total unrecognized compensation cost related to restricted stock awards is expected to be recognized over a weighted average period of 1.6 years.

Computation of Loss Per Share

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

	Three Months Ended
	December 31, 2008			December 31, 2007
Numerator:
Net loss used for basic and
diluted loss per share	$	(7,421	)	$	(776	)
Denominator:
Weighted average common shares used for
basic loss per share		32,533			32,155
Effect of dilutive stock options		--			--
Denominator for diluted loss per share		32,533			32,155

Diluted loss per share excludes the effects of antidilutive stock options of 1,393,331 and 1,650,140 for the three months ended December 31, 2008 and 2007, respectively.

Note 2.  Restricted Cash

Restricted cash consists primarily of $254,000 in customer advance payments held under a bank guarantee until certain contractual requirements are met.

Note 3.  Financial Instruments

Effective October 1, 2008, the Company adopted the fair value measurement and disclosure provisions of SFAS No. 157 “Fair Value Measurements” (SFAS No. 157), which establishes specific criteria for the fair value measurements of financial and non-financial assets and liabilities that are already subject to fair value measurements under current accounting rules. SFAS No. 157 also requires expanded disclosures related to fair value measurements. In February 2008, the FASB approved FSP SFAS No. 157-2, “Effective Date of FASB Statement No. 157", which allows companies to elect a one-year delay in applying SFAS No. 157 to certain fair value measurements, primarily related to non-financial instruments. The Company elected the delayed adoption date for the portions of SFAS No. 157 impacted by FSP SFAS No. 157-2. The partial adoption of SFAS No. 157 did not have a significant effect on the Company’s condensed consolidated financial statements.

9

SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and lowest priority to unobservable inputs (level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:

        Level 1 — Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

        Level 2 — Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

        Level 3 — Unobservable inputs reflecting the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.

The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures quarterly and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between different levels to be rare.

The Company measures its cash equivalents, marketable equity securities and foreign currency forward contracts at fair value. Cash equivalents, marketable securities and forward contracts are primarily classified within Level 1 or Level 2 because they are valued primarily using quoted market prices, alternative pricing sources or models utilizing market observable inputs as provided to the Company by its brokers. Assets and liabilities measured at fair value on a recurring basis are as follows as of December 31, 2008:

	Fair Value Measurement at Reporting Date Using:
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Total
	(In thousands)
Money market funds (1)	$	1,348	$	--		$	1,348
Certificates of deposit (1)		33		--			33
Marketable equity securities (2)		70		--			70
Foreign currency forward contracts (3)		--		(688	)		(688	)
Total	$	1,451	$	(688	)	$	763

(1)    Included in cash and cash equivalents on the Company’s condensed consolidated balance sheet.

(2)    Included in marketable securities on the Company’s condensed consolidated balance sheet.

(3)    Included in other current liabilities on the Company’s condensed consolidated balance sheet.

Marketable securities consists of 1 million shares of common stock acquired in a sales transaction. The shares have not been registered under the Securities Act of 1933, as amended. The shares have registration rights attached to them which require registration with the SEC no later than 15 months after the date of the transaction.

The marketable equity security described in the preceding paragraph is classified as Available-for-sale. Unrealized gains or losses on the security, recorded in Other Comprehensive Income (OCI), are as follows (in thousands):

	Cost		Gross Unrealized Gain		Gross Unrealized Loss		Estimated Fair Value
December 31, 2008	$	380	$	--	$	310	$	70
September 30, 2008		380		--		--		380

There is no contractual maturity date for the equity investment held by the Company.

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Note 4.  Inventories

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

	December 31, 2008		September 30, 2008
Parts and raw materials	$	44,071	$	44,762
Work-in-process		24,000		27,100
Finished goods		15,436		16,911
	$	83,507	$	88,773

For the three months ended December 31, 2008 and 2007, a net $1,106,000 and $690,000 of inventory was transferred to property, plant and equipment for testing and laboratory use.

Note 5.  Note Payable to Bank

The Company has a $30 million Credit Agreement, renewable annually, with Wells Fargo Trade Bank with an expiration date of March 1, 2010. Borrowings are collateralized by certain assets of the Company and bear interest at the bank’s prime lending rate, 3.25% as of September 30, 2008, or at the Company’s option, LIBOR plus 2.25%, or 3.68% as of that date. The agreement requires monthly interest payments only, until March 1, 2010, when the then outstanding principal balance is due and payable in full. The agreement provides for a non-refundable annual commitment fee equal to 0.10% of the credit limit, commencing March 1, 2008. Additionally, the agreement contains various restrictive financial and non-financial covenants. The financial covenants include measurements of tangible net worth, total liabilities divided by tangible net worth and a maximum borrowing limit based on a Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio and a maximum borrowing limit based upon total accounts receivable. At December 31, 2008, there was $15.0 million in advances outstanding under the agreement.

On January 23, 2009, a customer filed an insolvency petition in a German court. Because of the insolvency, the Company wrote down a $3.5 million receivable as required by accounting principles generally accepted in the United States of America and as a result, the Company was not in compliance with the Funded Debt to EBITDA covenant as of December 31, 2008. The covenant requires a 2:1 Funded Debt to EBITDA ratio and the ratio as of that date was 2.6:1. We are working with the bank to resolve the non-compliance, but have no assurances that the bank will waive the non-compliance or modify the covenants to allow us continued access to the credit line including the amounts already drawn. Pursuant to the terms of the facility, the bank has the right to notify us that the non-compliance constitutes an event of default under the facility that (i) prevents further borrowings and (ii) gives them the right to accelerate the payment of all amounts outstanding under the loan. The bank has not provided us with any notice of default. In the event the bank provided a notice of default, we would have twenty calendar days to cure the default.

Note 6.  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.

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

	Three Months Ended
	December 31, 2008			December 31, 2007
Accrued warranty balance, beginning of period	$	9,786		$	7,781
Accruals for new warranties issued during the period		1,460			2,083
Expirations and changes in estimates to pre-existing warranties		(1,008	)		(126	)
Warranty labor and materials provided during the period		(1,775	)		(1,820	)
Accrued warranty balance, end of period	$	8,463		$	7,918

Note 7.  Contingencies

The Company is involved in legal proceedings that arise in the ordinary course of its business, including employment related litigation. 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 made only minor revisions to its estimates, any future revisions could have a material impact on its results of operations and financial condition.

Note 8.  Income Taxes

The Company’s estimated effective tax rate is 39% for the three months ended December 31, 2008 as compared to an estimated effective tax rate of 36% for the three months ended December 31, 2007. The Company’s fiscal year 2009 tax rate is higher than in fiscal 2008 due to the extension of the federal research credit during the quarter.

The first quarter of fiscal year 2009 also included a benefit of $1.0 million related to the extension of the federal research credit as it pertains to fiscal year 2008. Legislation to extend the federal research credit was signed into law after the close of our fiscal year 2008; therefore the Company was unable to recognize the federal research credit in the last three quarters of fiscal 2008. This benefit was partially offset by the quarterly FIN 48 adjustment.

Note 9.  Downsizing Costs

In November 2008, the Company announced and implemented a plan to align its cost structure with forecasted business activity levels. The cost reduction plan consisted primarily of an approximate 12% reduction in the Company’s worldwide work force, management pay cuts, reduced overtime and a three-week facilities shutdown in December 2008. One-time involuntary termination costs of $881,000 are reported as a separate component of operating expenses in the Company’s first fiscal quarter. All costs related to the downsizing plan have been fully incurred. The Company’s downsizing costs and the amount remaining to be paid is summarized as follows (in thousands):

	Three Months Ended December 31, 2008
Liability for one-time involuntary termination costs, beginning of period	$	--
One-time involuntary termination costs incurred during the period		881
One-time involuntary termination costs paid during the period		700
Liability for one-time involuntary termination costs, end of period	$	181

As a result of the cost reduction plan, the Company realized savings of approximately $5.7 million, net of downsizing costs, in the first quarter of fiscal 2009 and expects ongoing savings of $6 million per quarter.

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In response to customer push-outs of tool deliveries and a revised business activity level forecast, the Company announced additional reductions in the worldwide work force, company-wide pay cuts, mandatory paid time off and reduced working hours for hourly employees in January 2009. The Company anticipates one-time involuntary termination costs of $1.6 million which the Company expects will be fully incurred in the second quarter of fiscal 2009. The Company expects incremental ongoing savings from the January restructuring to be approximately $9 million for a total ongoing quarterly savings of approximately $15 million.

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 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, 2008. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

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

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Form 10-Q and the financial statements and notes in our last filed Annual Report on Form 10-K for a full understanding of our financial position and results of operations for the three month period ended December 31, 2008.

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 Front End of Line (FEOL), Back End of Line (BEOL) and wafer level packaging of ICs processes. Our single-wafer FEOL surface preparation systems are used for photoresist stripping, post etch and pre-diffusion cleans. Our BEOL surface preparation systems are used for polymer removal and packaging applications. Our ECD systems are used to plate copper and other metals, which are used for the IC’s internal wiring, or interconnects; to plate solder and lead free solder bumps for wafer level packaging applications; and to plate other metals for various semiconductor and related applications. Also, our surface preparation systems are used for cleaning and etching processes for wafer level packaging. Our primary product for all of these processes is the Raider platform, which is a multi-chamber single-wafer tool. 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.

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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.

Our results of operations in the first quarter of fiscal 2009 were impacted by the weakening global economy. Many of our customers slowed their capital spending with the onset of the credit crisis and the resulting uncertainty in the worldwide economy. Customers have delayed capital expenditures decisions and also pushed out delivery dates for tools already ordered. Our results of operations were also impacted by the announcement that a customer owing approximately $3.5 million filed for insolvency in a German court in late January 2009.

In response to the challenges facing us as result of the crisis in the global economy, we announced and implemented cost reduction plans in both November 2008 and January 2009 in an effort to address customer push-outs of deliveries and realign our cost structure with forecasted business activity levels. The cost reduction plan in the first quarter consisted primarily of a 12% reduction in our worldwide work force, management pay cuts, reduced overtime and a three-week facilities shutdown in December 2008. One-time involuntary termination costs of $881,000 were reported as a separate component of operating expenses in our fiscal 2009 first quarter. We realized savings of approximately $5.7 million, net of downsizing costs from these actions. We implemented similar measures in the second quarter by reducing our world wide workforce by an additional 26%, increasing and extending the pay cuts to all salaried employees, reducing the work week for our hourly employees and requiring mandatory leave. We estimate additional downsizing costs of $1.6 million will be reported in the second quarter of fiscal 2009 and expect ongoing quarterly savings of approximately $15 million from the combination of these actions. We have lowered our breakeven point by approximately $100 million annually since the end of fiscal 2008. In the current business climate, visibility as to future results is extremely difficult to forecast.

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

• First quarter fiscal 2009 bookings were $22.1 million, down from $63.8 million in the first quarter of fiscal 2008.
  
  
• Shipments in the first quarter of fiscal 2009 were $31.7 million as compared with $50.5 million in the first quarter of fiscal 2008.
  
  
• Net loss was $7.4 million on revenues of $33.1 million as compared with a net loss of $776,000 on revenues of $48.6 million during the first quarter of fiscal 2008.
  
  
• Our gross margin was 42.8% of net sales as compared with a gross margin of 49.7% of net sales in the first quarter of fiscal 2008.

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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
	December 31, 2008			December 31, 2007
Net sales		100.0	%		100.0	%
Cost of sales		57.2	%		50.3	%
Gross profit		42.8	%		49.7	%
Operating expenses:
Selling, general and administrative		55.8	%		38.5	%
Research and development		23.7	%		14.3	%
Downsizing costs		2.7	%		--	%
Total operating expenses		82.2	%		52.8	%
Loss from operations		(39.4	)%		(3.1	)%
Other income (loss), net		(1.1	)%		0.9	%
Loss before income taxes		(40.5	)%		(2.2	)%
Income tax benefit		(18.1	)%		(0.6	)%
Net loss		(22.4	)%		(1.6	)%

First Quarter of Fiscal 2009 Compared with First Quarter of Fiscal 2008

Net Sales

	Three Months Ended
	December 31, 2008		December 31, 2007
	(In thousands)
Net sales	$	33,066	$	48,592

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service and royalties. Our revenue recognition policy provides that revenue from sales of semiconductor equipment may be recognizable upon shipment if the tool incorporates proven technology (“existing tool”) and is shipped to a customer environment in which we have already successfully installed and gained acceptance of our products and the revenue recognition criteria in SEC Staff Accounting Bulletin (SAB) 104, “Revenue Recognition” have been met. Alternatively, revenue will be deferred and only recognized upon final customer acceptance for tools that are new technology products (“new tools”) 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.

Our products are highly customized. Each customer has specific technical requirements for the performance of the equipment in the fabrication of semiconductor devices. Consequently, the specific terms of the acceptance provisions are negotiated with each customer on a tool-specific basis in order to reflect the technical specifications that will be used to determine whether the tool passes the applicable acceptance tests. These acceptance specifications are lengthy, technically complex and vary greatly from customer to customer and product to product.

We have a proven track recording of obtaining customer acceptances within a reasonable timeframe. In the rare event when acceptance does not occur because the customer does not believe that the tool has met the applicable technical specifications, the parties treat the matter as a contractual issue that needs to be resolved before the customer accepts the equipment. That resolution can take many different forms, including re-testing the equipment, making technical modifications to resolve the disagreement or extending the warranty to accommodate a delayed acceptance. Whether or not a customer may have any further remedy where a resolution cannot be agreed between the parties, including any right of return of the equipment, would be a question of contract interpretation that ultimately would have to be adjudicated in accordance with applicable law.

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Net sales decreased $15.5 million, or approximately 32%, in the first quarter of fiscal 2009 as compared with the first quarter of fiscal 2008. Fiscal 2009 revenues were significantly impacted by the current worldwide economic crisis which has resulted in customers delaying orders and also pushing out delivery dates for tools already ordered and scheduled for delivery. Most Raider revenues in the first quarter of fiscal 2009 were related to wafer-level packaging applications, including through-silicon via. Raider sales for cleaning applications, primarily related to capacity purchases, declined the most sharply. In the year-to-date comparable periods, revenue from tool shipments declined approximately 45% and revenue from tool acceptances improved approximately 92%.

Geographically, our sales mix year-to-date was weighted toward North America and Europe with Asian sales declining as the major foundries placed their capital spending budgets on hold.

Gross Profit

	Three Months Ended
	December 31, 2008			December 31, 2007
	(Dollars in thousands)
Gross profit	$	14,161		$	24,172
Gross margin percentage		42.8	%		49.7	%

Gross profit decreased by $10.0 million or 41.4% in the first quarter of fiscal 2009 compared with the first quarter of fiscal 2008.

Gross profit decreased in absolute dollars because of lower sales volumes. Our gross margin declined 6.9 percentage points from the first quarter of fiscal 2008 primarily due to a higher than normal level of under-absorbed overhead costs because of under-utilized plant capacity during the quarter and increased inventory reserves taken in response to the worldwide economic slowdown. These increases were partially offset by improved spare parts and service margins. Tool gross margins were flat as compared with the first quarter of fiscal 2008.

Selling, General and Administrative

	Three Months Ended
	December 31, 2008			December 31, 2007
	(Dollars in thousands)
Selling, general and administrative	$	18,463		$	18,696
Percentage of net sales		55.8	%		38.5	%

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. In the first quarter of fiscal 2009, SG&A expenses were essentially flat as compared with the first quarter of fiscal 2008.

Employment costs decreased approximately $1.7 million or 16% in the first quarter of fiscal 2009 as compared with the first quarter of fiscal 2008 as a result of our cost reduction program. Because of lower business volumes and product mix, commission expense declined approximately 49%. Travel and professional fees also decreased in the quarterly comparison. These gains were offset by the $3.5 million write down of a customer receivable related to an announcement that the customer had filed for insolvency in a German court on January 23, 2009.

Research and Development

	Three Months Ended
	December 31, 2008			December 31, 2007
	(Dollars in thousands)
Research and development	$	7,834		$	6,979
Percentage of net sales		23.7	%		14.3	%

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. In the first quarter of fiscal 2009, R&D expense increased approximately $855,000 as compared to the first quarter of fiscal 2008.

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The primary driver of the increase in R&D expense was prototype expense which increased 66% over first quarter fiscal 2008 levels related to one-time charges for developmental tools. Depreciation expense increased by approximately $500,000 as we replaced older technology tools in our demonstration laboratories with new technology tools in order to support our customers’ development efforts. Other expenses increased because of developmental work being completed at our Austrian facility to optimize certain batch tool lines for our European customers. Employment costs decreased approximately 21% in the first quarter of fiscal 2009 as compared with the first quarter of fiscal 2008 as a result of our cost reduction plan. We continued to work on a number of leading edge projects including ongoing development of porous silicon for the solar and other industries.

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.

Downsizing Costs

	Three Months Ended
	December 31, 2008			December 31, 2007
	(Dollars in thousands)
Downsizing costs	$	881		$	--
Percentage of net sales		2.7	%		--	%

In November 2008, we announced and implemented a plan to align our cost structure with then current business activity levels. The cost reduction plan consisted primarily of a 12% reduction in our worldwide work force, management pay cuts, reduced overtime and a three-week facilities shutdown in December 2008. One-time involuntary termination costs of $881,000 were reported as a separate component of operating expenses in our fiscal 2009 first quarter. All costs related to the downsizing plan were fully incurred in the first quarter of fiscal 2009.

Our fiscal 2009 first quarter operating results included savings of approximately $5.7 million, net of downsizing costs, as employment, travel, and general business expenses declined from fourth quarter fiscal 2008 levels in response to our cost reduction plan

Other Income, Net

	Three Months Ended
	December 31, 2008			December 31, 2007
	(In thousands)
Interest income	$	39		$	96
Interest expense		(121	)		(111	)
Foreign exchange gain (loss)		(376	)		278
Other		85			184
Total other income (expense), net	$	(373	)	$	447

Net other income, expense decreased $820,000 to a net other expense of $373,000 in the first quarter of fiscal 2009 as compared with a net other income of $447,000 in the first quarter of fiscal 2008. Foreign exchange gain/loss decreased $654,000 to a $376,000 expense primarily related fluctuations in the Yen to U.S. Dollar exchange rate.

Income Taxes

	Three Months Ended
	December 31, 2008			December 31, 2007
	(In thousands)
Income tax benefit	$	(5,969	)	$	(280	)

Our estimated effective tax rate is 39% for the three months ended December 31, 2008 as compared to an estimated effective tax rate of 36% for the three months ended December 31, 2007. Our fiscal year 2009 tax rate is higher than in fiscal 2008 due to the extension of the federal research credit during the quarter.

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The first quarter of fiscal year 2009 also included a benefit of $1.0 million related to the extension of the federal research credit as it pertains to fiscal year 2008. Legislation to extend the federal research credit was signed into law after the close of our fiscal year 2008; therefore the Company was unable to recognize the federal research credit for the last three quarters of fiscal 2008. This benefit was partially offset by the quarterly FIN 48 adjustment.

Backlog and Deferred Revenue

	December 31, 2008			December 31, 2007
	(Dollars in millions)
Backlog	$	44.9		$	73.6
Percentage change in backlog year-over-year		(39.0	)%		15.0	%
Deferred revenue	$	12.2		$	17.3
Percentage change in deferred revenue year-over-year		(29.5	)%		66.3	%

Approximately 83% of our current backlog is for Raider tools. Deferred revenue decreased $5.1 million at December 31, 2008 as compared with December 31, 2007. Current revenue deferrals include all or a part of 29 Raiders as compared with 27 Raiders at December 31, 2007. The fiscal 2009 figure includes a higher percentage of Raiders that represented shipments of new tools or to new customer environments requiring full deferral of revenue on those tools. The installation component of deferred revenue decreased because we have been able to negotiate 100% net payments terms.

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. The components of deferred profit are as follows:

	December 31, 2008			September 30, 2008
	(In thousands)
Deferred revenue	$	12,194		$	13,570
Deferred cost of sales - manufacturing costs		(5,250	)		(4,605	)
Deferred cost of sales - warranty and installation costs		(1,242	)		(1,125	)
Deferred SG&A expense - commissions		(123	)		(114	)
Deferred profit	$	5,579		$	7,726

Stock-Based Compensation

Effective the beginning of fiscal 2006, we adopted Statements of Financial Accounting Standards (SFAS) No. 123(R), “Share-Based Payment,” (SFAS No. 123(R)) 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. 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. We have issued both restricted stock awards and stock options. The fair value of each stock option grant is estimated using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Our employee stock options have characteristics that differ from those of publicly traded options.

Total compensation cost for all award types recorded in the first quarter of fiscal 2009 and fiscal 2008 was $300,000 and $699,000, respectively, or $183,000 and $447,000 after tax, respectively, in each period, an impact of approximately $0.01 per basic and diluted share in both periods.

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Liquidity and Capital Resources

Cash provided by operating activities was $3.8 million in the first quarter of fiscal 2009. Trade receivables and inventory provided a combined $31.7 million in cash during the first quarter. We collected a net $27.0 million in outstanding receivables and our inventories declined $4.7 million. Accounts payable declined $11.0 million as we continued our regular pay down of payables while also slowing our inventory purchases, including a three-week facilities shutdown in December 2008. Net loss and non-cash operating activities, including depreciation and stock-based compensation expense totaled $7.4 million. Accrued payroll and related benefits decreased $2.6 million as result of our cost reduction measures while income taxes payable decreased $2.3 million as a result of the net loss.

Investing activities in the first quarter of fiscal 2009 included $628,000 in purchases of factory equipment and other property. We invested an additional $1.1 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net amount of $100,000 in our patent portfolio.

Financing activities in the first quarter of fiscal 2009 provided cash of $11.5 million including a net $11.8 million draw on our revolving line of credit which was partially offset by repayments on long-term debt of $303,000.

Cash used by operating activities was $3.6 million in the first quarter of fiscal 2008. The primary source of cash was a $5.1 million increase in accounts payable as inventory purchases increased in response to strong bookings in the fourth quarter of fiscal 2007 and the first quarter of fiscal 2008. Customer advances increased $1.1 million and non-cash operating expenses totaled $2.4 million. Trade receivables increased $9.0 million primarily due to increased shipments in the past two quarters and the timing of customer payments. Inventories increased $5.2 million as our Work-In-Process inventory grew in anticipation of second quarter shipments.

Investing activities in the first quarter of fiscal 2008 included $418,000 in purchases of factory equipment and other property. We invested an additional $690,000 in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net amount of $179,000 in our patent portfolio.

Financing activities in the first quarter of fiscal 2008 provided cash of $401,000 and consisted of stock option exercises of $773,000 which were partially offset by repayments on long-term debt and capital leases of $372,000.

As of December 31, 2008, our principal sources of liquidity consisted of approximately $26.3 million of cash and cash equivalents, including a $15.0 million draw on our $30.0 million revolving line of credit. The credit facility is with Wells Fargo Trade Bank and bears interest at the bank’s prime lending rate, 3.25% as of December 31, 2008, or at our option, LIBOR plus 2.25%, or 3.68% as of that date. During the second quarter of fiscal 2008, we amended the credit agreement with Wells Fargo, extending the expiration date of the credit facility and redefining two of the financial covenants. The revolving credit line now expires on March 1, 2010. 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 covenants. If we were to default on the credit agreement, the bank could accelerate payment of any advances outstanding under the credit agreement. In addition, the availability of funds requires compliance with certain financial covenants, including a maximum borrowing limit based on a Funded Debt to Earnings before Interest, Taxes, Depreciation and Amortization (EBITDA) ratio, and a maximum borrowing limit based on trade receivables.

On January 23, 2009, a customer filed an insolvency petition in a German court. Because of the insolvency, we wrote down a $3.5 million receivable as required by accounting principles generally accepted in the United States of America and as a result, we were not in compliance with the Funded Debt to EBITDA covenant as of December 31, 2008. The covenant requires a 2:1 Funded Debt to EBITDA ratio and the ratio as of that date was 2.6:1. We are working with the bank to resolve the non-compliance, but have no assurances that the bank will waive the non-compliance or modify the covenants to allow us continued access to the credit line including the amounts already drawn. Pursuant to the terms of the facility, the bank has the right to notify us that the non-compliance constitutes an event of default under the facility that (i) prevents further borrowings and (ii) gives them the right to accelerate the payment of all amounts outstanding under the loan. The bank has not provided us with any notice of default. In the event the bank provided a notice of default, we would have twenty calendar days to cure the default.

We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations and amounts available under our credit facility to meet operating expenses and planned capital expenditures through fiscal 2009 and into the foreseeable future. These assumptions are based on the continued access to the Wells Fargo credit facility and the non-acceleration of that facility. Historically we have generated sufficient funds from operations during industry downturns to meet our liquidity needs and expect the same during this downturn. To the extent that timing of the collection of trade receivables does not meet our cash outflow requirements, we could require access to the credit facility with Wells Fargo Trade Bank or a credit facility with another bank or other financial instruments available to us. We estimate capital expenditures will be between $1.0 million and $3.0 million during the next twelve months, most of which will come from our inventory and thus, not require additional cash outlays. If additional financial resources are required in the future, we may need to issue additional common stock or other financial instruments whichever management deems advisable. 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.

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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 ongoing 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.

There were no changes to our critical accounting policies and estimates in the first quarter of fiscal 2009 other than our adoption of SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115” (SFAS NO. 159). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS No. 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS No. 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. As allowed by FSP SFAS No. 157-2, we elected to delay the adoption of SFAS No. 157 for non-financial assets for one year. The adoption of this statement did not impact our consolidated results of operations and financial condition, but did impact our disclosures.

We adopted SFAS No. 159, which permits entities to elect, at specified election dates, to measure eligible financial instruments at fair value. As of December 31, 2008, we did not elect the fair value option for any financial assets and liabilities that were not previously measured at fair value.

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, 2008.

New Accounting Pronouncements

In December 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities” (FSP No. FAS 140-4 and FIN 46(R)-8).  FSP No. FAS 140-4 and FIN 46(R)-8 requires public entities to provide additional disclosures about transfers of financial assets and their involvement with variable interest entities.  We are required to adopt FSP No. FAS 140-4 and FIN 46(R)-8 in the interim period ending after December 15, 2008. Accordingly, we adopted FSP No. FAS 140-4 and FIN 46(R)-8 in the first quarter of fiscal 2009. The adoption of FSP No. FAS 140-4 and FIN 46(R)-8 did not materially impact ours 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 December 31, 2008, we had approximately $11.3 million in long-term debt and $15.0 million in 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. Our short-term debt bears interest at the bank’s prime lending rate, 3.25% as of December 31, 2008, or at our option, LIBOR plus 2.25%, or 3.68% as of that date. We believe that a 10% change in the long-term or the short-term interest rates would not have a material effect on our business, financial condition, results of operations or cash flows.

All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. We manage this risk and attempt to reduce such exposure through an economic hedge using short-term forward exchange contracts. At December 31, 2008, we held forward contracts to sell Japanese Yen with a total face value of $3.5 million and a total market value of $4.2 million and a total unrealized future loss of approximately $700,000. 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.

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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-15(e) and 15d-15(e) 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.

PART II — OTHER INFORMATION

Item 1.   Legal Proceedings

We are involved in legal proceedings that arise in the ordinary course of our business, including employment related litigation. 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, 2008.

Item 6.   Exhibits

      Exhibits

      31.1
      31.2
      32.1
           
      32.2
            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

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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: February 6, 2009 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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