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RTEC > SEC Filings for RTEC > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for RUDOLPH TECHNOLOGIES INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for RUDOLPH TECHNOLOGIES INC


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Certain statements in this Quarterly Report on Form 10-Q are forward-looking statements, including those concerning the benefit to customers of our products and customer service, our expectations of the semiconductor market outlook future revenues, gross profits, research and development and engineering expenses, selling, general and administrative expenses, product introductions, technology development, manufacturing practices, cash requirements and anticipated trends and developments in and management plans for, our business and the markets in which we operate, Rudolph's ability to be successful in managing our cost structure and cash expenditures (including the statement that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the next twelve months) and results of litigation, including ongoing litigation with ITC. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by the words such as, but not limited to, "anticipate," "believe," "expect," "intend," "plan," "should," "may," "could," "will," and words or phrases of similar meaning, as they relate to our management or us.
The forward-looking statements contained herein reflect our current expectations with respect to future events and are subject to certain risks, uncertainties and assumptions. Actual results may differ materially from those projected in such forward-looking statements for a number of reasons including, but not limited to, the following: variations in the level of orders which can be affected by general economic conditions and growth rates in the semiconductor manufacturing industry and in the markets served by our customers, the global economic and political climates, difficulties or delays in product functionality or performance, the delivery performance of sole source vendors, the timing of future product releases, failure to respond adequately to either changes in technology or customer preferences, changes in pricing by us or our competitors, ability to manage growth, risk of nonpayment of accounts receivable, changes in budgeted costs, our ability to leverage our resources to improve our position in our core markets, our ability to weather difficult economic environments, our ability to open new market opportunities and target high-margin markets, the strength/weakness of the back-end and /or front-end semiconductor market segments, results of litigation, including ongoing litigation with ITC and the "Risk Factors" set forth in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2011 and in Item 1A Part II of this Form 10-Q. The forward-looking statements reflect our position as of the date of this report and we undertake no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
Critical Accounting Policies
The preparation of condensed consolidated financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates that affect the amounts reported. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below. A critical accounting policy is defined as one that is both material to the presentation of our condensed consolidated financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition or results of operations. Specifically, these policies have the following attributes: (1) we are required to make judgments and assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, could have a material effect on our financial position and results of operations. Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have been included in the condensed consolidated financial statements as soon as they became known. In addition, management is periodically faced with uncertainties, the outcomes of which are not within its control and will not be known for prolonged periods of time. Certain of these uncertainties are discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 and in our Quarterly Reports on Form 10-Q filed with the SEC, in 2012, in each case in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our condensed consolidated financial statements are fairly stated in accordance with accounting principles generally accepted in the United States of America, and provide a fair presentation of our financial position and results of operations.
For more information, please see our critical accounting policies as previously disclosed in our 2011 Annual Report on Form 10-K.
See Note 1 to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q regarding the impact of recent accounting pronouncements on our financial position and results of operations.


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Results of Operations for the Three and Nine Month Periods Ended September 30, 2012 and 2011
We are a worldwide leader in the design, development, manufacture and support of high-performance defect inspection, process control metrology and data analysis systems used by semiconductor device manufacturers. We provide yield management solutions used in both wafer processing and final manufacturing through a family of standalone systems for both macro-defect inspection and transparent and opaque thin film measurements. All of these systems feature production-worthy automation and are backed by worldwide customer support.
Rudolph's business is affected by the annual spending patterns of our customers on semiconductor capital equipment. The amount that our customers devote to capital equipment spending depends on a number of factors, including general worldwide economic conditions as well as other economic drivers such as personal computer, tablet, cell phone, other personal electronic devices and automotive sales. Current forecasts by industry analysts for the semiconductor device manufacturing industry project a year-over-year decrease in capital spending of 0-10% for 2012. We monitor capital equipment spending through announced capital spending plans by our customers and monthly-published industry data such as the book-to-bill ratio. The book-to-bill ratio is a 3-month running statistic that compares bookings or orders placed with capital equipment suppliers to billings or shipments. A book-to-bill above 1.0 shows that semiconductor device equipment manufacturers are ordering equipment at a pace that exceeds the equipment suppliers' shipments for the period. The 3-month rolling average North American semiconductor equipment book-to-bill ratio was 0.8 at September 30, 2012, a decrease from the book-to-bill ratio of 0.9 at December 31, 2011.
Historically, a significant portion of our revenues in each quarter and year has been derived from sales to relatively few customers, and we expect this trend to continue. For the nine month period ended September 30, 2012 and for the years ended December 31, 2011, 2010 and 2009, sales to customers that individually represented at least five percent of our revenues accounted for 56.8%, 43.6%, 44.4%, and 44.8% of our revenues, respectively.
We do not have purchase contracts with any of our customers that obligate them to continue to purchase our products, and they could cease purchasing products from us at any time. A delay in purchase or cancellation by any of our large customers could cause quarterly revenues to vary significantly. In addition, during a given quarter, a significant portion of our revenues may be derived from the sale of a relatively small number of systems. Our macro-defect inspection and probe card and test analysis systems range in average selling price from approximately $250,000 to $1.7 million per system, our transparent film measurement systems range in average selling price from approximately $250,000 to $1.0 million per system and our opaque film measurement systems range in average selling price from approximately $1.0 million to $2.0 million per system.
A significant portion of our revenues has been derived from customers outside of the United States. We expect that revenues generated from customers outside of the United States will continue to account for a significant percentage of our revenues.
The following table lists, for the periods indicated, the revenue derived from customers outside of the United States (in percentages of total revenues):

                             Nine Months Ended
                               September 30,         Years Ended December 31,
                                   2012             2011         2010       2009
Asia                                  70.2 %        51.3 %       65.7 %    60.8 %
Europe                                14.1 %        20.4 %       11.1 %    11.6 %
Total international revenue           84.3 %        71.7 %       76.8 %    72.4 %

The sales cycle for our systems typically ranges from nine to 15 months, and can be longer when our customers are evaluating new technology. Due to the length of these cycles, we invest significantly in research and development and sales and marketing in advance of generating revenues related to these investments. Revenues. Our revenues are primarily derived from the sale of our systems, services, spare parts and software licensing. Our revenue was $62.2 million and $164.2 million for the three and nine month periods ended September 30, 2012, compared to $41.4 million and $143.6 million for the three and nine month periods ended September 30, 2011, representing increases of 50.0% and 14.4% in the year-over-year periods.
The following table lists, for the periods indicated, the different sources of our revenues in dollars (thousands) and as percentages of our total revenues:


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                                  Three Months Ended                    Nine Months Ended
                                    September 30,                         September 30,
                                2012              2011               2012               2011
Systems and Software:
Inspection                $ 42,415    68 %  $ 21,102    51 %   $  99,220    60 %  $  72,054    50 %
Metrology                    6,892    11 %     5,892    14 %      25,911    16 %     27,235    19 %
Data Analysis and Review     5,082     8 %     6,048    15 %      15,213     9 %     18,199    13 %
Parts                        4,838     8 %     5,461    13 %      15,488    10 %     17,291    12 %
Services                     2,925     5 %     2,931     7 %       8,355     5 %      8,797     6 %
Total revenue             $ 62,152   100 %  $ 41,434   100 %   $ 164,187   100 %  $ 143,576   100 %

The year-over-year increase in systems revenue for the nine month period ended September 30, 2012 is primarily due to increased customer demand for inspection systems through the third quarter of 2012. The number of inspection systems sold during the nine month period ended September 30, 2012 increased as compared to the same period in the prior year, resulting in an increase in inspection systems revenue of $27.2 million for the 2012 period. The number of metrology systems sold during the nine month period ended September 30, 2012 decreased as compared to the same period in the prior year, resulting in a decrease in metrology systems revenue of $1.3 million for the 2012 period. The year-over-year decrease in data analysis and review software revenue for the nine month period ended September 30, 2012 of $3.0 million is primarily due to decreased sales in licensing and consulting revenue. As a result, the increase in revenue for the 2012 period was caused by increased volume rather than pricing changes. Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 73% and 68% of total revenues for the three and nine month periods ended September 30, 2012, compared to 63% and 54% of total revenues for the three and nine month periods ended September 30, 2011. The year-over-year decrease in total parts and services revenue for the nine month period ended September 30, 2012 and 2011 is primarily due to decreased spending by our customers on system upgrades and repairs of existing systems. Parts and services revenues are generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls.
Deferred revenues of $12.8 million are recorded in the Condensed Consolidated Balance Sheets within the caption "Other current liabilities" at September 30, 2012 and primarily consist of $3.2 million for systems awaiting acceptance and outstanding deliverables and $9.6 million for deferred maintenance agreements. Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including manufacturing efficiencies, excess and obsolete inventory write-offs, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, and parts and service margins. Our gross profit was $33.1 million and $87.1 million for the three and nine month periods ended September 30, 2012, compared to $22.3 million and $77.4 million for the three and nine month periods ended September 30, 2011. Our gross profit represented 53.3% and 53.1% of our revenues for the three and nine month periods ended September 30, 2012 and 53.7% and 53.9% of our revenues for the same periods in the prior year. The decrease in gross profit as a percentage of revenue for the three and nine month periods ended September 30, 2012 compared to the same periods in the prior year is primarily due to product mix, which included lower software sales, and acquisition-related items.
Operating Expenses. Major components of operating expenses include research and development as well as selling, general and administrative expenses. Research and Development. Our research and development expense was $10.2 million and $29.4 million for the three and nine month periods ended September 30, 2012, compared to $8.3 million and $26.7 million for the same periods in the prior year. Research and development expense represented 16.5% and 17.9% of our revenues for the three and nine month periods ended September 30, 2012, compared to 20.0% and 18.6% of revenues for the prior year periods. The year-over-year dollar increase for the nine month period ended September 30, 2012 and 2011 in research and development expenses primarily reflects increased compensation, project costs, and the inclusion of research and development expenses for the NanoPhotonics acquisition in the second quarter 2012.
Selling, General and Administrative. Our selling, general and administrative expense was $10.3 million and $29.4 million for the three and nine month periods ended September 30, 2012, compared to $8.4 million and $28.1 million for the same period in the prior year. Selling, general and administrative expense represented 16.6% and 17.9% of our revenues for the three and nine month periods ended September 30, 2012, compared to 20.2% and 19.6% of our revenues for the same period in the prior year. The year-over-year dollar increase for the nine month period ended September 30, 2012 and 2011 in selling, general and administrative expense was primarily due to higher compensation costs, and the


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inclusion of selling, general and administrative expenses for the NanoPhotonics acquisition in the second quarter 2012, partially offset by a non-recurring charge to establish the Company's charitable matching gift program in the second quarter of 2011.
Income Taxes. For the three and nine month periods ended September 30, 2012, we recorded an income tax provision of $3.9 million and $8.5 million as compared to $33.0 thousand and $2.4 million for the comparable periods in 2011. Our effective tax rate approximates the statutory tax rate of 35% for the three and nine month periods ended September 30, 2012. Our effective tax rate differs from the statutory rate of 35% for the three and nine month periods ended September 30, 2011 primarily due to anticipated utilization of federal credit carryforwards in the 2011 year against which a full valuation allowance had been recorded.
We currently have a partial valuation allowance recorded against our deferred tax assets. 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 a valuation allowance. As a result of our analysis, we concluded that it is more likely than not that a portion of our net deferred tax assets will not be realized. Therefore, we continue to provide a valuation allowance against certain net deferred tax assets. We continue to closely monitor available evidence and may reverse some or all of the valuation allowance in future periods, if appropriate.
Litigation. As discussed in Part II, Item 1 ("Legal Proceedings"), we are subject to legal proceedings and claims, which includes, among other things, our on-going litigation with ITC in which we are in the process of appealing an order of the U.S. District Court in a patent infringement action related to the predictive scrub feature of our PrecisionPoint™, PrecisionWoRx® and ProbeWoRx® products in which we were the defendents. See Part II, Item 1 for a discussion of this action and the District Court's adverse order affirming the jury award and ordering other relief in this matter. We intend to appeal the Order and damages assessment. In the event that the ultimate decision in the ITC Litigation results in a judgment of damages against us at the high end of our estimated range, such result will have a material impact on our results of operations and may also have a material impact on our liquidity and financial condition.
Liquidity and Capital Resources
At September 30, 2012, we had $173.7 million of cash, cash equivalents and marketable securities and $249.7 million in working capital. At December 31, 2011, we had $167.6 million of cash, cash equivalents and marketable securities and $234.2 million in working capital.
Typically during periods of revenue growth, changes in accounts receivable and inventories represent a use of cash as we incur costs and expend cash in advance of receiving cash from our customers. Similarly, during periods of declining revenue, changes in accounts receivable and inventories represent a source of cash as inventory purchases decline and revenue from prior periods is collected. Operating activities provided $15.8 million in cash and cash equivalents for the nine month period ended September 30, 2012. The net cash and cash equivalents provided by operating activities during the nine month period ended September 30, 2012 was primarily a result of net income, adjusted to exclude the effect of non-cash operating charges of $27.0 million, an increase in accounts payable and accrued liabilities of $11.6 million, and an increase in other current liabilities of $11.3 million, partially offset by an increase in accounts receivable of $19.8 million, an increase in inventory of $9.8 million, and an increase prepaid expenses and other assets of $4.7 million. Operating activities provided $35.5 million in cash and cash equivalents for the nine month period ended September 30, 2011. The net cash and cash equivalents provided by operating activities during the nine month period ended September 30, 2011 was primarily a result of net income, adjusted to exclude the effect of non-cash operating charges of $28.5 million, a decrease in accounts receivable of $20.2 million, partially offset by increase in inventory of $6.5 million, a decrease in accounts payable and accrued liabilities of $2.5 million, a decrease in other current liabilities of $1.4 million, and an increase in prepaid expenses and other assets of $2.9 million.
Net cash and cash equivalents used in investing activities during the nine month period ended September 30, 2012 of $6.6 million was due to the purchase of marketable securities of $70.6 million, the purchase of business of $7.9 million, and capital expenditures of $1.3 million, partially offset by the proceeds from sales of marketable securities of $73.2 million. Net cash and cash equivalents used in investing activities during the nine month period ended September 30, 2011 of $25.2 million was due to the purchase of marketable securities of $29.1 million and capital expenditures of $1.4 million, partially offset by the proceeds from sales of marketable securities of $5.3 million. Net cash and cash equivalents provided by financing activities was $51.0 million for the nine month period ended September 30, 2011 was due primarily to net proceeds from the issuance of convertible senior notes of $57.7 million and proceeds from the sale of a warrant of $7.0 million, partially offset by the purchase of the convertible note hedge of $14.5 million.
From time to time, we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all or a portion of the purchase price of these acquisitions in cash, stock, or a combination of cash and stock. On June


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21, 2012, we announced that we had acquired NanoPhotonics GmbH, headquartered in Mainz, Germany for cash. We accounted for this acquisition as a business combination.
In July 2008, our Board of Directors approved a stock repurchase program of up to 3 million shares of Company common stock. As of the time of filing this Quarterly Report on Form 10-Q, we have not purchased any shares under this program.
On July 25, 2011, we issued $60 million aggregate principal amount of 3.75% convertible senior notes, which mature on July 15, 2016 and pay interest semiannually commencing on January 15, 2012. In connection with the issuance, we entered into convertible note hedge and warrant transactions. The convertible note hedge transaction is intended to reduce potential dilution in our stock upon conversion of the notes. However, the warrant transaction will have a dilutive effect on our earnings per share to the extent that the price of our common stock exceeds the strike price of the warrant. Net proceeds realized from the sale of the convertible senior notes, the convertible note hedge and warrant transactions were $50.2 million. We intend to use the net proceeds for general corporate purposes, which may include financing potential acquisitions and strategic transactions, growth initiatives and working capital. Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the next twelve months. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.

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