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MTSN > SEC Filings for MTSN > Form 10-K on 15-Mar-2013All Recent SEC Filings

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Form 10-K for MATTSON TECHNOLOGY INC


15-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. "Selected Financial Data," our consolidated financial statements and related notes included elsewhere in this document. In addition to historical information, the discussion below contains certain forward?looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, those matters discussed under the heading "Forward-looking Statements." Our actual results could differ materially from those anticipated by these forward?looking statements due to various factors, including, but not limited to, those set forth under Item 1A. Risk Factors in this Annual Report on Form 10-K and elsewhere in this document.

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 the 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 also is highly cyclical. The semiconductor equipment industry typically is characterized by wide swings in operating results as the industry rotates between cycles. Demand also is 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 over the past several years and are strengthening our product positions.

•In the etch market, during 2012, we further extended our position with our paradigmE system, as we added capabilities that improve on-wafer performance while keeping costs low. Our paradigmE systems continued to be released for production and development in the foundry/logic segments of the industry. Our paradigmE system is also in qualification process for advanced 3D NAND production. We now have over 50 etch systems in production at our customers.

•During 2012, in the rapid thermal processing ("RTP") market, our Helios XP system was shipped and moved into production in NAND facilities. We received the first follow-on order and shipment to a leading foundry customer. We also extended our RTP position by shipping the Helios XP to a fourth foundry customer. In millisecond anneal, we sold our Millios system to a major foundry/logic semiconductor manufacturer, and placed a Millios system at another customer site for evaluation.

•Strip is our most prolific product line with solid market share positions across the foundry/logic, DRAM and NAND markets. Our SUPREMA system delivers a broad capability to our customers from bulk strip to critical strip for finFET and 3D NAND. We have strengthened our technical performance and secured production tool of record status for the 28 nanometer technology node and development tool of record at leading 20 nanometer development facilities.

We experienced industry weakness during the second half 2012 as our customers reacted to the global economic environment and their expectation of supply and demand for their products. We currently expect such weakness to continue at least through the first quarter of 2013.

In December 2011, we initiated a broad-based cost reduction plan ("2011 Restructuring Plan"). The first phase of the 2011 Restructuring Plan included the transfer of the research, development and pilot-line production of our Millios system 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. During 2012, we initiated two additional phases of the 2011 Restructuring Plan that expanded on the aforementioned cost reduction activities but also included, in the latter part of 2012, salary reductions through furlough programs and the consolidation of our global manufacturing operations to our corporate headquarters in Fremont, California.


On January 15, 2013, we announced plans for the fourth phase of the 2011 Restructuring Plan, which primarily consists of further workforce reductions across all areas of the Company. All four phases of the 2011 Restructuring Plan are expected to be completed by the end of the first quarter of 2013.

We expect that our cost reduction initiatives included in the 2011 Restructuring Plan will provide reductions of over $30 million in annual operating expenses beginning in the second quarter of 2013. As of December 31, 2012, we have incurred $6.9 million in restructuring charges under the 2011 Restructuring Plan, of which $5.1 million was recorded in 2012, 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 expenses incurred under the 2011 Restructuring Plan, we also expect to incur up to $1.0 million in capital expenditures in 2013 related to the transfer of research, development and pilot-line production of the Millios system to our facility in Dornstadt, Germany and the consolidation of global manufacturing in our facility in Fremont, California.
As a result of the aforementioned cost reduction activities, our gross margin improved 5 percentage points to 35 percent in 2012 as compared to 30 percent in 2011 despite a decrease in industry demand in the second half of 2012. Total operating expenses of $64.2 million, which included $5.1 million in restructuring charges, decreased $8.6 million from total operating expenses in 2011of $72.8 million, which included $1.9 million in restructuring charges. As a result of our ongoing gross margin improvement and cost reduction efforts, we expect a significant reduction in our cash flow break-even point for fiscal year 2013.
As of December 31, 2012, we had cash, cash equivalents and restricted cash of $16.2 million and working capital of $41.5 million. With our current cash and liquidity position, we believe we have sufficient resources to meet our working capital requirements for the next 12 months. We will continue to review our operations and take further actions, as necessary, to minimize the cash used in operations and retain sufficient liquidity to fund our operating activities. However, improvements in our results of operations and resulting cash position are largely dependent upon an improvement in the semiconductor equipment industry.
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 also will include our ability to (a) 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 discusses our 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 management 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 revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and judgments, including those related to reserves for excess and obsolete inventory, warranty obligations, bad debts, income taxes, restructuring costs, 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.

We consider our accounting policies related to revenue recognition, allowance for doubtful accounts, warranty obligations, inventories, impairment of long-lived assets, restructuring, income taxes and stock-based compensation as critical to our business operations and an understanding of our results of operations.

Revenue Recognition. We derive net sales from the following primary sources:
equipment (tool or system) sales, spare part sales and service and maintenance contracts. In accordance with the authoritative guidance on revenue recognition, we recognize revenue on equipment sales as follows: 1) for equipment sales of existing products with new specifications and for sales of new products, revenue is recognized upon customer acceptance; 2) for equipment sales to existing customers with previously demonstrated equipment acceptance, or equipment sales to new customers purchasing equipment with established reliability, we recognize revenue on a multiple element approach in which revenue is recognized upon the delivery of the separate elements to the customer. The revenue we recognize on a delivered element is limited to the amount that is not contingent upon the delivery of additional items such as installation and customer acceptance. For equipment sales we


generally recognize revenue for 90 percent of the total invoice amount as revenue upon shipment while 100 percent of the equipment's cost is recognized upon shipment. The remaining portion, generally 10 percent of the total invoice amount, is contingent upon customer acceptance and is recognized once installation services are completed and final customer acceptance of the equipment is received.

For multiple element arrangements initiated at or prior to December 31, 2010, the revenue relating to the undelivered elements is deferred at its estimated fair values until delivery of the deferred elements. For multiple element arrangements initiated or materially modified subsequent to December 31, 2010, the revenue relating to the undelivered elements should be deferred using the relative selling price method, which allocates revenue to each element using the estimated selling prices for the deliverables when vendor-specific objective evidence or third-party evidence is not available. We have determined that the fair value of installation services is substantially less than the 10% of the total invoice amount typically assigned to the installation element in our customer agreements. As such, since the amount collectible upon successful installation and customer acceptance exceeds the fair value of the installation services, we defer the amount collectible upon successful installation and customer acceptance.

From time to time, we allow customers to evaluate equipment, with the customer maintaining the right to return the equipment at its discretion with limited or no penalty. For this type of arrangement, we do not recognize revenue until customer acceptance is received. For spare parts, we recognize revenue upon shipment. For service and maintenance contracts, we recognize revenue on a straight-line basis over the service period of the related contract or as services are performed. In all cases, revenue is only recognized when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured. Accounts receivable for which revenue has not been recognized are classified as advance billings.

Allowance for Doubtful Accounts. We perform ongoing credit evaluations of our customers and record specific allowances for bad debts when a customer is unable to meet its financial obligations, as in the case of bankruptcy filings or a deteriorated financial position. We estimate the allowances for bad debts for all other customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. We write-off a receivable when all rights, remedies and recourses against the account and its principals are exhausted and record a benefit when previously reserved accounts are collected.

Warranty. The warranty we offer on equipment sales is generally 12 months, except where previous customer agreements state otherwise. A provision for the estimated cost of warranty, based on historical costs, is recorded as a cost of sale when the revenue is recognized for the sale of the related equipment. Our warranty obligations require us to repair or replace defective products or parts during the warranty period at no cost to the customer. The actual system performance and/or field expense profiles may differ from historical experience, and in those cases we adjust our warranty reserves accordingly. Actual warranty reserves and settlements against reserves are highly dependent on our equipment volumes.

Inventory Valuation. Our policy is to assess the valuation of all inventories, including manufacturing raw materials, work-in-process, finished goods and spare parts, in each reporting period. Although we attempt to accurately forecast future inventory demand, given the competitive pressures and cyclicality of the semiconductor industry, there may be significant unanticipated changes in demand or technological developments that could have a significant impact on the value of our inventories and reported operating results. We evaluate the carrying value of inventory for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand, and reduce the carrying value of our inventory accordingly. In addition, inventories are evaluated for potential obsolescence due to the effect of known and anticipated engineering change orders and new products. If actual demand were to be substantially lower than estimated, additional inventory reductions for excess or obsolete inventory may be required, which could have a material adverse effect on our business, financial condition and results of operations.

Fair Value Measurements of Assets and Liabilities. We measure certain of our assets at fair value, using observable market data. The authoritative guidance on fair value measurement defines fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, and establishes valuation hierarchy based on the level of independent objective evidence available regarding the value of assets or liabilities. The authoritative guidance also establishes three classes of assets or liabilities: Level 1 consists of assets and liabilities for which there are quoted prices in active markets; Level 2 consists of assets and liabilities for which observable inputs other than Level 1 inputs are used such as prices for similar assets or liabilities in active markets or for identical assets or liabilities in less active markets and model-derived valuations for which the variables are derived from or corroborated by observable market data; and Level 3 consists of assets and liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value. Our cash equivalents and equity instruments are classified within Level 1 of the fair value hierarchy, as these instruments are valued using quoted market prices. We had no


assets or liabilities classified within Level 2 or 3 as of December 31, 2012 and 2011.

Impairment of Long-Lived Assets. We review our long-lived assets, including property and equipment, intangibles and other long-lived assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is measured by a comparison of the assets' carrying amount to their expected future undiscounted net cash flows. If such assets are considered to be impaired, the impairment is measured based on the amount by which the carrying amount of the asset exceeds its fair value.

Restructuring. We recognize expenses related to employee termination benefits when the benefit arrangement is communicated to the employee and no significant future services are required of the employee. If an employee is required to render service until a specific termination date in order to receive the termination benefits, the fair value of the associated liability would be recognized ratably over the future service period. The costs of severance are determined by local statutory requirements and our policies. For some entities, where salaries are paid during the notice period, a portion of the severance reserves would be based on estimates of the ability to find employment during the notice period, and we would determine the reserves in accordance with these estimates.

We recognize the present value of facility lease termination obligations, net of estimated sublease income and other exit costs, when we have future lease payments with no future economic benefit. In future periods, we will record accretion expense to increase the liability to an amount equal to the estimated future cash payments necessary to exit the lease. This requires a significant amount of judgment and management estimation in order to determine the expected time frame it will take to secure a subtenant, the amount of sublease income to be received and the appropriate discount rate to calculate the present value of the future cash flows. If actual lease exit costs differ from estimates, we would adjust the restructuring charge, which would impact net income in the period any adjustment was recorded.

Income Taxes. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate resolution.

For all tax jurisdictions, except Korea, we recorded a 100 percent valuation allowance against our net deferred tax asset as we expect it is more likely than not that we will not realize our net deferred tax asset as of December 31, 2012. In assessing the need for a valuation allowance, we consider historical levels of income and losses, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies. In the event we determine that we would be able to realize additional deferred tax assets in the future in excess of the net recorded amount, or if we subsequently determine that realization of an amount previously recorded is unlikely, we would record an adjustment to the deferred tax asset valuation allowance, which would change income in the period of the adjustment.

Stock-based Compensation. We measure the fair value of all stock-based awards, including stock options, restricted stock units, and purchase rights under our employee stock purchase plan, on the date of grant, and we recognize the related stock-based compensation expense on a straight-line basis over the requisite service period, which is generally the vesting period.

We use the Black-Scholes option-pricing model to determine the fair value of certain of our stock-based awards. The determination of fair value using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables, which includes expected stock price volatility over the term of the awards, actual and projected employee exercise and cancellation behaviors, risk-free interest rates, and expected dividends.

We estimate the expected life of options based on an analysis of our historical experience of employee exercise and post-vesting termination behavior considered in relation to the contractual life of the option; expected volatility is based on the historical volatility of our common stock; and the risk-free interest rate is equal to the U.S. Treasury rate with a maturity approximating the expected life of the option. We do not currently pay cash dividends on our common stock and do not anticipate doing so in the foreseeable future; accordingly, the expected dividend yield is zero.

We estimate forfeiture rates on stock-based awards at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Such forfeiture estimates are based on historical experience. If the assumptions for estimating stock-based compensation expense change in future periods, the amount of future stock-based compensation may differ significantly from the amounts we recorded in the current and prior periods.

Stock-based compensation expense in 2012, 2011 and 2010 was $1.6 million, $2.3 million and $2.7 million, respectively.


Recent Accounting Pronouncements

Information with respect to recent accounting pronouncements may be found in Note 1. Basis of Presentation and Significant Accounting Policies in the notes to the consolidated financial statements included in this Annual Report on Form 10-K, which section is incorporated herein by reference.

Results of Operations
A summary of our results of operations for years ended December 31, 2012, 2011 and 2010 are as follows (in thousands, except for percentages):

                                            Year Ended December 31,
                                        2012                      2011               Increase (Decrease)
                                  Amount     Percent        Amount     Percent         Amount     Percent
Net sales                      $ 126,526       100.0     $ 184,947       100.0     $  (58,421 )     (31.6 )
Cost of sales                     81,626        64.5       128,699        69.6        (47,073 )     (36.6 )
Gross profit                      44,900        35.5        56,248        30.4        (11,348 )     (20.2 )
Operating expenses:
Research, development and
engineering                       22,328        17.6        26,189        14.2         (3,861 )     (14.7 )
Selling, general and
administrative                    36,786        29.1        44,720        24.2         (7,934 )     (17.7 )
Restructuring charges              5,070         4.0         1,889         1.0          3,181       168.4
   Total operating expenses       64,184        50.7        72,798        39.4         (8,614 )     (11.8 )
Loss from operations             (19,284 )     (15.2 )     (16,550 )      (9.0 )       (2,734 )      16.5
Interest income (expense), net       133         0.1           107         0.1             26        24.3
Other income (expense), net          316         0.2           163         0.1            153        93.9
Loss before income taxes         (18,835 )     (14.9 )     (16,280 )      (8.8 )       (2,555 )      15.7
 Provision for (benefit from)        484         0.4         1,670         0.9         (1,186 )     (71.0 )
income taxes
Net loss                       $ (19,319 )     (15.3 )   $ (17,950 )      (9.7 )   $   (1,369 )       7.6


                                           Years Ended December 31.
                                        2011                     2010               Increase (Decrease)
                                  Amount     Percent       Amount     Percent         Amount     Percent
Net sales                      $ 184,947      100.0     $ 138,336       100.0     $   46,611        33.7
Cost of sales                    128,699       69.6        98,952        71.5         29,747        30.1
Gross profit                      56,248       30.4        39,384        28.5         16,864        42.8
Operating expenses:
Research, development and
engineering                       26,189       14.2        27,791        20.1         (1,602 )      (5.8 )
Selling, general and
administrative                    44,720       24.2        44,902        32.5           (182 )      (0.4 )
Restructuring charges              1,889        1.0          (114 )      (0.1 )        2,003        n/m    (1)
   Total operating expenses       72,798       39.4        72,579        52.5            219         0.3
Loss from operations             (16,550 )     (9.0 )     (33,195 )     (24.0 )       16,645       (50.1 )
Interest income (expense), net       107        0.1             5           -            102        n/m    (1)
Other income (expense), net          163        0.1           108         0.1             55        50.9   (1)
Loss before income taxes         (16,280 )     (8.8 )     (33,082 )     (23.9 )       16,802       (50.8 )
Provision for (benefit from)       1,670        0.9           321         0.2          1,349        n/m
income taxes                                                                                               (1)
Net loss                       $ (17,950 )     (9.7 )   $ (33,403 )     (24.1 )   $   15,453       (46.3 )

(1)Not meaningful.


Net Sales
A summary of our net sales for years ended December 31, 2012, 2011 and 2010 are
as follows (in thousands, except for percentages):
                                                     Years Ended December 31,
                                                 Increase (Decrease)                     Increase (Decrease)
                     2012          2011           Amount       Percent     2010           Amount        Percent
Net sales:
United States     $  17,476     $  10,311     $      7,165       69.5   $   7,211     $     3,100         43.0
International:
Korea                47,611        84,623          (37,012 )    (43.7 )    67,973          16,650         24.5
Taiwan               28,577        37,507           (8,930 )    (23.8 )    18,878          18,629         98.7
Other Asia           22,177        33,112          (10,935 )    (33.0 )    36,856          (3,744 )      (10.2 )
Europe and others    10,685        19,394           (8,709 )    (44.9 )     7,418          11,976        161.4
                    109,050       174,636          (65,586 )    (37.6 )   131,125          43,511         33.2
Total net sales   $ 126,526     $ 184,947     $    (58,421 )    (31.6 ) $ 138,336     $    46,611         33.7

Net sales were $126.5 million for the year ended December 31, 2012, a $58.4 million, or 32 percent, decrease compared to $184.9 million for the year ended December 31, 2011, primarily driven by lower overall net sales of etch and strip systems into memory applications. We experienced lower industry demand in the second half of 2012 as our customers reacted to the global economic environment, and we expect such weakness to continue at least through the first quarter of 2013.
Net sales were $184.9 million in 2011, an increase of $46.6 million, or 34 percent, compared to $138.3 million in 2010. The increase in net sales was primarily due to the improvement in the global economy and the semiconductor equipment sector as compared to the prior year, and from our continued penetration in the etch market which contributed over one-third of our system sales in 2011. In 2011, system sales generated from the etch market were over $22.7 million higher than in 2010. . . .

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