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UTEK > SEC Filings for UTEK > Form 10-Q on 29-Oct-2012All Recent SEC Filings

Show all filings for ULTRATECH INC

Form 10-Q for ULTRATECH INC


29-Oct-2012

Quarterly Report


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

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as "anticipates," "expects," "intends," "will," "could," "believes," "estimates," "continues," and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers' financial condition and demand for semiconductors; demand for consumer devices; industry growth within our served markets; continued delivery of financial performance and value; cyclicality in the semiconductor and nanotechnology industries; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; quarterly revenue fluctuations; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser thermal processing operation; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of product introductions; customer concentration; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales and operations; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain key personnel; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of public health issues, wars or terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management's current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market photolithography and laser thermal processing equipment for manufacturers of semiconductor devices and nanotechnology components located throughout North America, Europe, Japan, Taiwan, Korea and the rest of Asia. We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the semiconductor industry, we target the market for advanced packaging applications. Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, and HBLEDs.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.0 million to $6.0 million. As a result of these sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or system acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and system acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and system acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the customer to permit installation of the system in the


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agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Net Sales

Third Quarter

                                                Three Months Ended
                                          September 29,        October 1,      Amount of     Percentage
(In thousands, except percentages)             2012               2011           Change        Change
Sales of:
Products                                $         56,242     $     49,283     $    6,959         14.1  %
Services                                           3,652            5,361         (1,709 )      (31.9 )%
Licenses                                             653              300            353        117.7  %
Total net sales                         $         60,547     $     54,944     $    5,603         10.2  %

Net sales consist of revenues from products (system, system upgrades, and spare parts sales), services, and licensing of technologies. Product sales increased 14.1% to $56.2 million for the three month period ended September 29, 2012, as compared to $49.3 million in the corresponding period of 2011. The $7.0 million increase was due to (i) increased system sales of $2.8 million, (ii) an increase in system upgrade sales of $2.2 million, and (iii) an increase in parts sales of $2.0 million.

On a product market application basis, systems sales and system upgrades to the semiconductor market increased $7.3 million to $42.1 million for the three month period ended September 29, 2012, as compared to $34.8 million in the corresponding period of 2011. The increase was primarily due to an increase in the average selling price of systems and number of upgrades sold. Semiconductor industry sales consist of sales to the advanced packaging market, the laser processing applications market and the semiconductor market.

Nanotechnology market system sales were $7.6 million for the three month period ended September 29, 2012 as compared to $10.0 million in system sales in the corresponding period of 2011. The $2.4 million decrease was attributable to a decrease in unit sales. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including HBLEDs, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore, we expect to experience significant variations in sales to this market from period to period.

Services sales for the three month period ended September 29, 2012 decreased $1.7 million to $3.7 million as compared to $5.4 million during the same period of 2011. The decrease in services revenue was the result of (i) $0.8 million decrease in non-contract billable services, (ii) $0.7 million in decreased contract services sales and (iii) $0.2 million decrease in sales of training.

License sales consisted of $0.7 million of royalty revenues for the three month period ended September 29, 2012 as compared to $0.3 million of royalty revenue for the corresponding period of 2011. License revenue results from tool resales by our existing customers to third parties and from royalty arrangements. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2012.


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At September 29, 2012, we had $21.7 million of net deferred product and services income compared to $15.0 million at December 31, 2011. The gross amount of deferred revenues at September 29, 2012 was $32.3 million as compared to $20.7 million at December 31, 2011. The gross amount of deferred costs at September 29, 2012 was $10.6 million as compared to $5.7 million at December 31, 2011. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or system acceptance. Deferred services income is recognized as revenue ratably over the contract period (for time-based service contracts), or as purchased services are rendered (for contracts based on a purchased quantity of hours).

For the three month period ended September 29, 2012, international net sales decreased $2.9 million to $31.4 million or 51.9% of total net sales, as compared to $34.3 million, or 62.5% of total net sales for the corresponding period of 2011. The decrease in international sales as a percentage of total sales was due to a decrease in unit sales to Asian customers. For the three month period ended September 29, 2012 as compared to the corresponding 2011 period, (i) sales to Europe increased by $1.2 million, (ii) sales to Japan decreased by $0.4 million,
(iii) sales to Taiwan decreased by $1.7 million, (iv) sales to Korea increased by $1.2 million, and (v) sales to the rest of Asia decreased by $3.2 million. Sales to Germany represented 12% of total net sales for the three month period ending September 29, 2012.

Our international revenue generally is not subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometimes denominated in Japanese yen. Yen denominated contracts subject us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately 85.7 million Japanese yen denominated receivables at September 29, 2012. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer's willingness to purchase our product. (See Part II, Item 1A, "Risk Factors" herein).

Year-To-Date
                                                 Nine Months Ended
                                           September 29,       October 1,      Amount of     Percentage
(In thousands, except percentages)             2012               2011           Change        Change
Sales of:
Products                                 $       154,870     $    140,736     $   14,134         10.0  %
Services                                          13,061           14,786         (1,725 )      (11.7 )%
Licenses                                           1,303              750            553         73.7  %
Total net sales                          $       169,234     $    156,272     $   12,962          8.3  %

Product sales increased 10% to $154.9 million for the nine month period ended September 29, 2012 as compared to the same period in 2011. The increase was due to (i) increased systems upgrade sales of $10.3 million and (ii) increased parts sales of $2.8 million, and (iii) increased systems sales of $1.0 million. On a product market applications basis during the nine months ended September 29, 2012, system sales and system upgrade sales to the semiconductor industry increased by $4.3 million to $111.2 million from the corresponding period of 2011. The increase was primarily due to the product mix of units sold and increased systems upgrade activities. Semiconductor industry sales consist of sales to the advanced packaging market, the laser processing applications market and the semiconductor market.
Nanotechnology market sales were $27.3 million for the nine month period ended September 29, 2012 compared to $20.3 million of system sales in the corresponding period of 2011. The increase in sales to the nanotechnology market was due to an increase in unit sales and product mix. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including thin film heads, automotive MEMS, LED/laser diodes, HBLEDs, and ink jet print heads, and therefore we expect to experience significant variations in sales to this market from period to period. Service revenue during the nine month period ended September 29, 2012 decreased $1.7 million from the comparable period of 2011. Revenues from licensing activities increased $0.6 million for the nine months ended September 29, 2012 as compared to the same period of 2011.


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For the nine month period ended September 29, 2012, international net sales increased $19.1 million to $106.0 million, or 62.6% of total net sales, as compared with $86.9 million, or 55.6% of total net sales, for the comparable period of 2011. The increase in international sales as a percentage of total sales was due to a combination of an increase in sales in the European and Asian regions and a decrease in sales to North America. For the nine month period ended September 29, 2012, as compared to the same period of 2011, the increase in international sales was due to (i) increased sales to the rest of Asia region of $14.5 million, and (ii) increased sales to Europe of $15.6 million, partially offset by (a) decreased sales to Japan of $4.9 million, (b) decreased sales to Taiwan of $4.6 million and (c) decreased sales to Korea of $1.6 million. Sales to Germany represented 11% of total net sales for the nine month period ending September 29, 2012.

Gross Profit

Third Quarter

On a comparative basis, gross margins increased to 56.4% for the three month period ended September 29, 2012, compared to 53.5% for the corresponding period of 2011. The 2.9 percentage point increase in gross margin was due to (i) 2.4 percentage point increase due to lower manufacturing costs, (ii) 0.7 percentage point increase related to lower service labor costs, (iii) 0.4 percentage point increase due to a reduction of inventory reserves, partially offset by a 0.6 percentage point decrease related to higher installation service costs.

Year-To-Date

On a comparative basis, gross margins increased to 55.9% for the nine month period ended September 29, 2012, compared to 51.6% for the corresponding period of 2011. The 4.3 percentage point increase in gross margins was due to (i) a 1.8 percentage point increase resulting from lower manufacturing costs, (ii) a 1.7 percentage point increase related to lower service labor costs, (iii) a 1.5 percentage point increase related to improved manufacturing efficiency, partially offset by a 0.5 percentage point decrease related to higher freight costs and fees, and a 0.2 percentage point decrease related to higher installation and warranty costs.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following:
the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets: and non-linearity of shipments during the period that can result in manufacturing inefficiencies.

Operating Expenses

Third Quarter

                                                 Three Months Ended
                                           September 29,        October 1,      Amount of      Percentage
(In thousands, except percentages)              2012               2011           Change         Change
Research, development, and engineering   $          7,745     $      6,349     $    1,396         22.0  %
Selling, general, and administrative               11,469           11,484            (15 )       (0.1 )%
Total operating expenses                 $         19,214     $     17,833     $    1,381          7.7  %

Research, development and engineering expenses for the three month period ended September 29, 2012 were $7.7 million, as compared to $6.3 million for the corresponding period in 2011. This increase was attributable to (i) $0.8 million in additional research and development related activities, (ii) $0.3 million in compensation costs, (iii) $0.2 million in depreciation, and (iv) $0.1 million related to travel expenses as compared to the corresponding period of 2011. As a percentage of net sales, research, development and engineering expenses for the three month period ended September 29, 2012 increased to 12.8% from 11.6% for the corresponding period of 2011. This percentage increase was primarily due to expenses increasing at a higher rate than revenue as compared to the corresponding period of 2011.

Selling, general, and administrative expenses for the three month period ended September 29, 2012 were $11.5 million as compared to $11.5 million for the corresponding period of 2011. Increases related to stock-based compensation and legal fees were offset by decreases in other employee-related items and non-legal professional fees. As a percentage of net


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sales, selling, general and administrative expenses for the three month period ended September 29, 2012 decreased to 18.9% as compared to 20.9% for the corresponding period of 2011 resulting primarily from the increase in net sales.

Year-To-Date
                                                  Nine Months Ended
                                           September 29,        October 1,       Amount of     Percentage
(In thousands, except percentages)              2012               2011           Change         Change
Research, development, and engineering   $         22,280     $     17,832     $     4,448         24.9 %
Selling, general, and administrative               32,938           32,301             637          2.0 %
Total operating expenses                 $         55,218     $     50,133     $     5,085         10.1 %

Research, development and engineering expenses for the nine month period ended September 29, 2012 were $22.3 million as compared to $17.8 million for the corresponding period in 2011. This $4.4 million increase was due to the following: (i) $2.4 million in additional research and development related activities, (ii) $0.8 million in compensation expense, (iii) $0.4 million in engineering consulting expense, (iv) $0.1 million of materials costs, (v) $0.1 million of travel-related expenses, and (vi) $0.6 million of other miscellaneous expenses. As a percentage of net sales, research, development and engineering expenses for the nine month period ended September 29, 2012 increased to 13.2% from 11.4% for the corresponding period of 2011.
Selling, general and administrative expenses were $32.9 million for the nine month period ended September 29, 2012 as compared with $32.3 million for the corresponding period in 2011. The $0.6 million increase was due to (i) an increase in stock-based compensation of $1.9 million, (ii) increased legal fees of $0.8 million, partially offset by (a) an allocation of administrative costs to research and development of $1.3 million, (b) a reduction of professional services costs of $0.6 million, and (c) a reduction of compensation related costs of $0.2 million. As a percentage of total net sales, selling, general and administrative expenses for the nine month period ended September 29, 2012 decreased to 19.5% from 20.7% for the corresponding period of 2011. This decrease was primarily due to the increase in net sales as compared to the corresponding period of 2011.

Provision for Income Taxes

For the three and nine month periods ended September 29, 2012, we recorded income tax provisions of $2.6 million and $5.8 million, respectively, as compared to $1.0 million and $2.4 million, respectively, for the comparable periods in 2011. The income tax provisions recognized for the three and nine month periods ended September 29, 2012 resulted primarily from U.S. federal, state and foreign income taxes. Income tax estimates can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how, when and if cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters and we do not anticipate any material earnings impact from their ultimate resolution.
We are eligible for tax incentives that provide that certain income earned in Singapore is subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within 9 years. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that, as of September 29, 2012, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. It is possible that sometime in the next 12 months the positive evidence will be sufficient to release a material amount of our valuation allowance; however, there is no assurance that this will occur.
We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2004 and forward. There are no material income tax audits currently in progress as of September 29, 2012.


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Outlook

The anticipated timing of orders, shipments and system acceptances usually requires that we fill a number of production slots in any given period in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Additionally, we may not exceed or even maintain our current or prior levels of net sales for any period in the future for the reasons enumerated in this report and our Annual Report on Form 10-K for the year ended December 31, 2011. We believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems and our 1000 Platform steppers are of critical importance to our future financial results. At September 29, 2012, these systems represented approximately 82% of our backlog. We presently expect net sales for the fourth quarter of 2012 to approximate net sales reported for the third quarter of 2012. We anticipate our cash flow to be positive for the fourth quarter of 2012. We expect sales to international customers will continue to represent a significant portion of our revenues for the remainder of fiscal 2012.

LIQUIDITY AND CAPITAL RESOURCES

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