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MTSN > SEC Filings for MTSN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for MATTSON TECHNOLOGY INC

Form 10-Q for MATTSON TECHNOLOGY INC


8-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report on Form 10-Q contains forward-looking statements, which are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management's current expectations and beliefs, including estimates and projections about our industry. Our forward-looking statements may include statements that relate to our future revenue, earnings, cash flow and cash position; growth of the industry and the size of our served available market; the timing of significant customer orders for our products; customer acceptance of delivered products and our ability to collect amounts due upon shipment and upon acceptance; end-user demand for semiconductors, including the growing mobile device industry; customer demand for semiconductor manufacturing equipment; our ability to timely manufacture, deliver and support ordered products; our ability to bring new products to market, to gain market share with such products and the overall mix of our products; customer rate of adoption of new technologies; risks inherent in the development of complex technology; the timing and competitiveness of new product releases by our competitors; margins; product development plans and levels of research, development and engineering activity; our ability to align our cost structure with market conditions, including outsourcing plans, operating expenses, and the expected effects, cost and timing of restructuring activities; tax expenses; excess inventory reserves, including the level of our vendor commitments compared to our requirements; economic conditions in general and in our industry; our dependence on international sales; the impact of any litigation or investigation on our operating results or financial position; any offering and sale of securities pursuant to our shelf registration statement or otherwise; volatility in our stock price and any delisting of our stock from NASDAQ for the failure to maintain a minimum bid price; and the sufficiency of our financial resources to support future operations and capital expenditures. Forward-looking statements typically are identified by use of terms such as "anticipates," "expects," "intends," "plans," "seeks," "estimates," "believes" and similar expressions, although some forward-looking statements are expressed differently. These statements are not guarantees of future performance and are subject to numerous risks, uncertainties and assumptions that are difficult to predict. Such risks and uncertainties include those set forth in Part II, Item 1A under "Risk Factors" and this Part I, Item 2 under "Management's Discussion and Analysis of Financial Condition and Results of Operations." Our actual results could differ materially from those anticipated by these forward-looking statements. The forward-looking statements in this report speak only as of the time they are made and do not necessarily reflect our outlook at any other point in time. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future event, or for any other reason. This discussion should be read in conjunction with the condensed consolidated financial statements and notes presented in this Quarterly Report on Form 10-Q and the consolidated financial statements and notes in our last filed Annual Report on Form 10-K for the year ended December 31, 2011 (the "2011 Form 10-K").

Overview
We are a supplier of semiconductor wafer processing equipment used in the fabrication of integrated circuits ("ICs"). Our manufacturing equipment is primarily used for semiconductor manufacturing utilizing innovative technology to deliver advanced processing capabilities and high productivity for the fabrication of current and next-generation ICs. We were incorporated in California in 1988 and reincorporated in Delaware in 1997.
Our business depends upon capital expenditures by manufacturers of semiconductor devices. The level of capital expenditures by these manufacturers depends upon the current and anticipated market demand for such devices. Since the demand for semiconductor devices is highly cyclical, the demand for wafer processing equipment is also highly cyclical. The semiconductor equipment industry is typically characterized by wide swings in operating results as the industry moves through its cycle. Demand is also becoming prone to seasonality due to the buying patterns of customers, which is dependent upon the consumer product industry.
We have made progress in our strategic initiatives and are strengthening our product positions.

•In the etch market, during 2012, our paradigmE system has been released for production at a leading semiconductor logic/foundry facility; selected by a major Asian complementary metal-oxide-semiconductor ("CMOS") image sensor foundry in a new growth market; shipped to a new memory customer; and placed into volume production at a major foundry customer.

•In the rapid thermal processing ("RTP") market, during 2012, our Helios XP system moved into production at a leading NAND manufacturer, and received the first follow-on order and shipment to a leading foundry customer. Also during 2012, we shipped the Millios system to two major foundry/logic semiconductor manufacturers, as well as a major logic customer.


•Strip is our most prolific product line, and we have solid market share positions across the foundry/logic, DRAM and NAND markets. We have continued our strategy to gain both market share and sales ranking in strip systems.

We have experienced industry weakness during the second and third quarters of 2012 as our customers have reacted to the current global economic environment and their expectation of supply and demand for their products. We currently expect such weakness to continue at least through the end of 2012.
In December 2011, we initiated a cost reduction plan ("2011 Restructuring Plan") as part of our broader cost reduction initiatives. The first phase of our cost reduction initiatives and the 2011 Restructuring Plan included the consolidation of our Millios product research, development and prototype production from Vancouver, Canada to our facility in Dornstadt, Germany; moving a portion of our outsourced spare parts logistics operations in-house; workforce reductions; the elimination of certain contractors; and the renegotiation of certain contracts. In the first quarter of 2012, we initiated a second phase of our cost reduction initiative and the 2011 Restructuring Plan, which included; a reduction in force; lower levels of investments in customer evaluation systems; renegotiation of key contracts with outside service providers; cost saving to production material; additional reductions in outside contractors; and reduced spending in discretionary areas. We began implementation of the third phase of our cost reduction initiatives and the 2011 Restructuring Plan in the third quarter of 2012, which entailed a broader reduction in force; salary reductions through furlough programs and the consolidation of our global manufacturing operations to the corporate headquarters in Fremont, California.
We expect that our cost reduction initiatives including the 2011 Restructuring Plan will provide over $20 million reductions in annual operating expenses beginning in 2013. As of September 30, 2012, we have incurred $3.8 million in restructuring charges under the 2011 Restructuring Plan and expect to incur an additional $2.0 million to $3.0 million, of which the majority is expected to be incurred by the end of first quarter of 2013.
In addition to our 2011 Restructuring Plan, we also expect to incur approximately $1.0 million in capital expenditures in the fourth quarter of 2012 to support product research, development and prototype production of the Millios system into our German facility and consolidation of global manufacturing in the Fremont facility.
Our gross margin in the three and nine months ended September 30, 2012 improved compared to the same periods in 2011, despite significantly lower sales, largely as a result of our cost reduction initiatives. Our total operating expenses decreased $4.3 million and $5.7 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. To date, our combined efforts to reduce operating expenses and improve gross margin have lowered our cash flow break-even point to the mid-$30 million quarterly net sales level. We expect operating expenses to decline further through the end of 2012 as a result of continued focus on cost reduction activities. As of September 30, 2012, we had cash, cash equivalents and restricted cash of $25.0 million and working capital of $49.6 million. With our current cash and liquidity position, we believe we have sufficient resources to meet our working capital requirements for the next twelve months. We will continue to review our operations and take further cost reduction measures as necessary in order to minimize the cash used in operations and retain sufficient cash reserves for the next year, as described under "Restructuring Charges" below. However, though we will pursue these measures, we are largely dependent upon improvement in the semiconductor equipment industry specifically, and general continued improvement in the economy as a whole, to increase our net sales in order to improve our profitability and cash position. In addition, our stock may be subject to eventual delisting from NASDAQ if we do not maintain a minimum $1.00 per share trading price.
The future success of our business will depend on numerous factors, including, but not limited to, the market demand for semiconductors and semiconductor wafer processing equipment. Such factors will also include our ability to (a) significantly grow in order to enhance our competitiveness and profitability;
(b) develop and bring to market new products that address our customers' needs;
(c) grow customer loyalty through collaboration with and support of our customers; (d) maintain a cost structure that will enable us to operate effectively and profitably throughout changing industry cycles and (e) generate the gross profits necessary to enable us to make the necessary investments in our business.

Critical Accounting Policies and Use of Estimates Management's discussion and analysis of financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting periods.


On an on-going basis, we evaluate our estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty, bad debts, intangible assets, income taxes, restructuring costs, stock-based compensation, contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. These 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 significant changes to our critical accounting policies during the nine months ended September 30, 2012. For information about critical accounting policies, see Note 2. Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements, in our 2011 Form 10-K.

Results of Operations
A summary of our results of operations for three and nine months ended September
30, 2012 and October 2, 2011 are as follows (in thousands except for
percentages):
                                                           Three Months Ended
                                 September 30, 2012         October 2, 2011         Increase (Decrease)
                                  Amount     Percent       Amount     Percent         Amount     Percent
Net sales                      $  20,398       100.0     $ 44,945       100.0     $  (24,547 )     (54.6 )
Cost of sales                     12,664        62.1       29,429        65.5        (16,765 )     (57.0 )
Gross profit                       7,734        37.9       15,516        34.5         (7,782 )     (50.2 )
Operating expenses:
Research, development and
engineering                        5,217        25.6        6,733        15.0         (1,516 )     (22.5 )
Selling, general and
administrative                     8,205        40.2       11,227        25.0         (3,022 )     (26.9 )
Restructuring charges                453         2.2          181         0.4            272        n/m    (1)
   Total operating expenses       13,875        68.0       18,141        40.4         (4,266 )     (23.5 )
Loss from operations              (6,141 )     (30.1 )     (2,625 )      (5.8 )       (3,516 )     133.9
Interest income (expense), net        36         0.2           24         0.1             12        n/m    (1)
Other income (expense), net          (45 )      (0.2 )        548         1.2           (593 )      n/m    (1)
Loss before income taxes          (6,150 )     (30.2 )     (2,053 )      (4.6 )       (4,097 )     199.6
 Provision for (benefit from)       (116 )      (0.6 )        236         0.5           (352 )      n/m
income taxes                                                                                               (1)
Net loss                       $  (6,034 )     (29.6 )   $ (2,289 )      (5.1 )   $   (3,745 )     163.6

(1)Not meaningful.


                                                             Nine Months Ended
                                  September 30, 2012          October 2, 2011         Increase (Decrease)
                                    Amount     Percent       Amount     Percent         Amount     Percent
Net sales                      $   105,786      100.0     $ 143,253       100.0     $  (37,467 )     (26.2 )
Cost of sales                       67,863       64.2       100,872        70.4        (33,009 )     (32.7 )
Gross profit                        37,923       35.8        42,381        29.6         (4,458 )     (10.5 )
Operating expenses:
Research, development and
engineering                         17,638       16.7        19,893        13.9         (2,255 )     (11.3 )
Selling, general and
administrative                      28,777       27.2        34,119        23.8         (5,342 )     (15.7 )
Restructuring charges                2,004        1.9           103         0.1          1,901        n/m    (1)
   Total operating expenses         48,419       45.8        54,115        37.8         (5,696 )     (10.5 )
Loss from operations               (10,496 )    (10.0 )     (11,734 )      (8.2 )        1,238       (10.6 )
Interest income (expense), net         106        0.1            61           -             45        n/m    (1)
Other income (expense), net             60        0.1        (1,927 )      (1.3 )        1,987        n/m    (1)
Loss before income taxes           (10,330 )     (9.8 )     (13,600 )      (9.5 )        3,270       (24.0 )
Provision for (benefit from)           169        0.2           176         0.1             (7 )      n/m
income taxes                                                                                                 (1)
Net loss                       $   (10,499 )    (10.0 )   $ (13,776 )      (9.6 )   $    3,277       (23.8 )

(1)Not meaningful.

Net Sales
A summary of our net sales for three and nine months ended September 30, 2012
and October 2, 2011 are as follows (in thousands except for percentages):
                                        Three Months Ended                                               Nine Months Ended
                    September 30,       October 2,        Increase (Decrease)        September 30,       October 2,        Increase (Decrease)
                        2012               2011            Amount       Percent          2012               2011            Amount       Percent
Net sales:
United States     $         2,034     $      4,959     $     (2,925 )    (59.0 )   $        14,279     $      7,782     $      6,497       83.5
International:
Korea                       3,234           15,507          (12,273 )    (79.1 )            46,290           59,028          (12,738 )    (21.6 )
Taiwan                      5,972            8,243           (2,271 )    (27.6 )            18,002           31,575          (13,573 )    (43.0 )
Other Asia                  7,972           10,235           (2,263 )    (22.1 )            18,192           31,078          (12,886 )    (41.5 )
Europe and others           1,186            6,001           (4,815 )    (80.2 )             9,023           13,790           (4,767 )    (34.6 )
                           18,364           39,986          (21,622 )    (54.1 )            91,507          135,471          (43,964 )    (32.5 )
Total net sales   $        20,398     $     44,945     $    (24,547 )    (54.6 )   $       105,786     $    143,253     $    (37,467 )    (26.2 )

Net sales were $20.4 million for the three months ended September 30, 2012, a decrease of approximately $24.5 million compared to $44.9 million for the three months ended October 2, 2011 primarily driven by lower net sales into memory applications.
Net sales were $105.8 million for the nine months ended September 30, 2012, a decrease of approximately $37.5 million compared to $143.3 million for the nine months ended October 2, 2011. This decrease was primarily due to lower net sales into memory applications.
During the first nine months of 2012, sales to customers in Asia continued to account for a significant portion of our total net sales. For the three months ended September 30, 2012 and October 2, 2011, international sales comprised approximately 90 and 89 percent, respectively, of our total net sales. For the nine months ended September 30, 2012 and October 2, 2011,


international sales accounted for approximately 87 percent and 95 percent, respectively, of our total net sales. We anticipate that international sales will continue to account for a significant portion of our net sales. Cost of Sales and Gross Profit
A summary of our cost of sales and gross profit for three and nine months ended September 30, 2012 and October 2, 2011 are as follows (in thousands except for percentages):

                                  Three Months Ended                                            Nine Months Ended
               September 30,     October 2,        Increase (Decrease)       September 30,     October 2,       Increase (Decrease)
                   2012             2011            Amount       Percent         2012             2011           Amount       Percent
Cost of sales $      12,664     $    29,429     $    (16,765 )    (57.0 )   $      67,863     $  100,872     $    (33,009 )    (32.7 )
Gross profit  $       7,734     $    15,516     $     (7,782 )    (50.2 )   $      37,923     $   42,381     $     (4,458 )    (10.5 )
Gross margin           37.9 %          34.5 %                                        35.8 %         29.6 %

Our cost of sales consists of the costs associated with manufacturing our products, and includes the purchase of raw materials and related overhead, labor, warranty costs, charges for excess and obsolete inventory and costs incurred by our contract manufacturers in the production of our components, major sub-assemblies/modules and complete systems.
Gross margin improved from 34.5 percent in three months ended October 2, 2011 to 37.9 percent in the three months ended September 30, 2012. The increase in gross margin in the third quarter of 2012 as compared to the same period in 2011was largely related to cost reduction activities and a more favorable mix of sales, as well as the sale of an evaluation system for which the cost had previously been amortized in full.
Gross margin improved from 29.6 percent in the nine months ended October 2, 2011 to 35.8 percent in nine months ended September 30, 2012, primarily driven by cost reduction activities and a more favorable mix of sales, as well as the sale of an evaluation system for which the cost had previously been amortized in full.
Our gross margin has varied over the years and will continue to be affected by many factors, including competitive pressures, product mix, inventory reserves, economies of scale, material and other costs, overhead absorption levels and the timing of revenue recognition.
Operating Expenses
Our results for the three and nine month periods ending September 30, 2012 have benefited from the favorable impact of our cost reduction initiatives. Our total operating expenses decreased $4.3 million and $5.7 million in the three and nine months ended September 30, 2012, respectively, compared to the same periods in 2011. To date, our combined efforts to reduce operating expenses and improve gross margin have lowered our cash flow break-even point to the mid-$30 million quarterly net sales level. We expect operating expenses to decline further through the end of 2012 as a result of continued focus on cost reduction activities.
Research, Development and Engineering
A summary of our research, development and engineering expenses for the three months ended September 30, 2012 and October 2, 2011 are as follows (in thousands except for percentages):

                                 Three Months Ended                                           Nine Months Ended
               September 30,     October 2,       Increase (Decrease)      September 30,     October 2,       Increase (Decrease)
                   2012             2011           Amount       Percent        2012             2011           Amount       Percent
Research,
development
and
engineering   $       5,217     $     6,733     $    (1,516 )   (22.5)    $      17,638     $    19,893     $    (2,255 )   (11.3)
Percentage of
net sales              25.6 %          15.0 %                                      16.7 %          13.9 %

Research, development and engineering expenses consist primarily of salaries and related costs of employees engaged in research, development and engineering activities, costs of product development and depreciation on equipment used in the course of research, development and engineering activities.
Research, development and engineering expenses decreased $1.5 million in the three months ended September 30, 2012 compared to the three months ended October 2, 2011 and decreased $2.3 million in the nine months ended September 30, 2012


compared to the nine months ended October 2, 2011. These decreases were largely attributable to a reductions in employee related expenses, engineering materials, depreciation expense on lab tools, and certain facilities and information technology costs. The decreases in employee related expenses were primarily due to the cost reduction activities which have been on-going since the fourth quarter of 2011. The decrease in depreciation expense on lab tools was the result of several assets being fully depreciated as of the end of 2011. The decrease in engineering materials resulted from cost reduction activities during the three and nine months ended September 30, 2012 as compared to the same periods in 2011.
Selling, General and Administrative
A summary of our selling, general and administrative expenses for the three and nine months ended September 30, 2012 and October 2, 2011 are as follows:

                                      Three Months Ended                                           Nine Months Ended
                    September 30,     October 2,       Increase (Decrease)      September 30,     October 2,       Increase (Decrease)
                        2012             2011           Amount       Percent        2012             2011           Amount       Percent
Selling, general
and administrative $       8,205     $    11,227     $    (3,022 )   (26.9)    $      28,777     $    34,119     $    (5,342 )   (15.7)
Percentage of net
sales                       40.2 %          25.0 %                                      27.2 %          23.8 %

Selling, general and administrative expenses consist primarily of employee-related expenses, as well as legal and professional fees, insurance costs, amortization of evaluation systems and certain facilities and information technology costs.
Selling, general and administrative expenses were $8.2 million in the three months ended September 30, 2012, a decrease of $3.0 million compared to $11.2 million in the three months ended October 2, 2011. Selling, general and administrative expenses were $28.8 million in the nine months ended September 30, 2012 and October 2, 2011, a decrease of $5.3 million compared to $34.1 million in the nine months ended October 2, 2011.
The decrease in selling, general and administrative expenses was primarily attributable to a decrease in amortization and other costs associated with supporting our evaluation tools at customer sites, which was related, in part, to our ability to convert certain of these tools into sales during the past year; a decrease in depreciation expense related to fully depreciated assets; a decrease in employee related expenses and outside services costs and a decrease in facilities costs as a result of certain lease termination agreements entered into at the end of 2011. The decrease in employee-related expenses and outside services was largely due to cost reduction activities which have been on-going since the fourth quarter of 2011 as well as lower sales commissions resulting from lower net sales in 2012.
Restructuring Charges
In December 2011, we initiated a cost reduction plan ("2011 Restructuring Plan") as part of our broader cost reduction initiatives, which included consolidation of our manufacturing and research and development facilities, moving a portion of our outsourced spare parts logistics operations in-house, and workforce reductions.
We expect that our cost reduction initiatives including the 2011 Restructuring Plan will provide a reduction of over $20 million in annual operating expenses beginning in 2013. We expect to incur a total of approximately $6.0 million to $7.0 million in restructuring charges under the 2011 Restructuring Plan. During the three months and nine months ended September 30, 2012 , we expensed $0.5 million and $2.0 million in employee severance and other expenses, respectively. As of September 30, 2012, we incurred $3.8 million in restructuring charges under the 2011 Restructuring Plan and expect to incur an additional $2.0 million to $3.0 million, of which the majority is expected to be incurred by the end of the first quarter of 2013.
In addition to our 2011 Restructuring Plan, we also expect to incur approximately $1.0 million in capital expenditures in the fourth quarter of 2012 to support the Millios product research, development and prototype production consolidation into our German facility and consolidation of global manufacturing in the Fremont facility.


Other Income (Expense), net
Other income (expense), net was a $45 thousand expense for the three months . . .

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