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MTSN > SEC Filings for MTSN > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for MATTSON TECHNOLOGY INC

Form 10-Q for MATTSON TECHNOLOGY INC


9-Aug-2013

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; market demand for our products; the timing of significant customer orders for our products; our ability to attract new customer; 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; our ability to generate significant sales; 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 including our 2011 Restructuring Plan; 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 and our expectation of growth in the international market; 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; the sufficiency of our financial resources, including our Credit Agreement to support future operations and capital expenditures; compliance with financial covenants related to our revolving credit facility; and the availability of financing. 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, 2012.

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 continue to make progress in our strategic initiatives and are strengthening our product positions:

In the etch market, we continue to hold a position in advanced DRAM down to the 2x nanometer ("nm") technology node and have developed a position for 3-D NAND. In the second quarter of 2013, the enhanced capabilities of our paradigmE product are meeting the requirements for advanced 2x nm DRAM and 3-D NAND technologies. We shipped a system to a major memory maker for the qualification of their advanced products and are planning to support their production ramps beginning at the end of 2013 and continuing through 2014. In the foundry segment, we are continuing leading-edge development at an Asian foundry customer for 3-D finFET transistor products at the 2x nm and smaller technology nodes.


In Rapid Thermal Anneal, our expansion in the 2x nm foundry segment will continue through the end of the year with our Helios XP that is providing a high volume manufacturing solution at major foundries. Our Helios XP product line continues to strengthen its position in the foundry segment, reflected by multiple production repeat orders from a customer in Asia. The Helios XP is also positioned at foundry customers around the globe and is qualified for advanced technology nodes less than 20 nm.

In Millisecond Anneal, the Millios holds an important role in the startup of a major 2x nm logic production line. Having run intensive production testing in-house, we have now shipped an additional system for volume production and we expect incremental revenue contribution beginning in the fourth quarter of 2013.

In Dry Strip, our products continue to be used through the 20 nm technology node and are in development for sub-20 nm technologies. As finFET transistor technologies are being developed, we continue to enhance the capabilities of our SUPREMA products to meet advanced aspect ratio driven process requirements as well as stringent defectivity requirements. In the memory market, the SUPREMA product continues to hold a strong position in 2x nm DRAM and 3-D NAND technologies, and we have made shipments in the past two quarters to foundries for production ramps in 28 and 20 nm technology nodes.

We experienced industry weakness beginning in the second quarter of 2012, as our customers continued their cautious approach to capacity expansion in reaction to the global economic environment and their expectation of supply and demand for their products. We started to see improvements in market conditions and customer demand starting in the second quarter of 2013, and we expect continued improvement in the second half of 2013 as compared to the first half primarily driven by a memory investment cycle and foundry spending at 20nm.

In December 2011, we initiated a broad-based cost reduction plan ("2011 Restructuring Plan"). During 2012, we completed the first three phases of our cost reduction plan, which included the consolidation of our manufacturing and research and development facilities, moving a portion of our outsourced spare parts logistics operations in-house, and workforce reductions. The fourth phase of the 2011 Restructuring Plan primarily consisted of further workforce reductions across all areas of the Company, and was substantially completed during the first half of 2013.

From the inception of our cost reduction initiatives included in the 2011 Restructuring Plan in the fourth quarter of 2011, our quarterly operating expense run rate has decreased 38%, representing approximately $28 million in reductions of annual operating expenses as measured against annualized operating expenses in the third quarter of 2011. We incurred $9.5 million in restructuring and other charges under the 2011 Restructuring Plan since its inception in the fourth quarter of 2011, of which $2.7 million was recorded in the first half 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 the second half of 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 of June 30, 2013, we had cash, cash equivalents and restricted cash of $17.0 million and working capital of $29.4 million. On April 12, 2013, we entered into a three-year $25 million senior secured revolving credit facility (the "Credit Facility") with Silicon Valley Bank. Under the Credit Facility, advances are available based on (i) the achievement of certain quarterly EBITDA levels, and
(ii) a borrowing base formula equal to the sum of up to (a) 80 percent of eligible accounts receivable and advance billings and (b) 30 percent of eligible inventory, minus any reserves established by the bank. Upon closing, we borrowed $10 million under the Credit Facility at an annual interest rate of 4.75 percent, which is variable and represented the greater of the Federal Funds Effective Rate plus 0.50 percent and the prime rate, plus 1.5 percent. We believe our available financial resources are sufficient to fund our working capital and other capital requirements over the course of the next twelve 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 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 six months ended June 30, 2013. For information about critical accounting policies, see Note 1. Basis of Presentation and Summary of Significant Accounting Policies of Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.


Results of Operations
A summary of our results of operations for three and six months ended June 30,
2013 and July 1, 2012 are as follows (in thousands except for percentages):
                                            Three Months Ended
                                  June 30, 2013             July 1, 2012           Increase (Decrease)
                                Amount     Percent        Amount     Percent         Amount     Percent
Net sales                    $  24,574       100.0     $  34,884       100.0     $  (10,310 )     (29.6 )
Cost of sales                   16,107        65.5        21,629        62.0         (5,522 )     (25.5 )
Gross profit                     8,467        34.5        13,255        38.0         (4,788 )     (36.1 )
Operating expenses:
Research, development and
engineering                      4,170        17.0         5,791        16.6         (1,621 )     (28.0 )
Selling, general and
administrative                   6,952        28.3         9,705        27.8         (2,753 )     (28.4 )
Restructuring charges              404         1.6           831         2.4           (427 )      n/m    (1)
   Total operating expenses     11,526        46.9        16,327        46.8         (4,801 )     (29.4 )
Loss from operations            (3,059 )     (12.4 )      (3,072 )      (8.8 )           13        (0.4 )
Interest income (expense),
net                               (137 )      (0.6 )          39         0.1           (176 )      n/m    (1)
Other income (expense), net       (359 )      (1.5 )        (277 )      (0.8 )          (82 )      n/m    (1)
Loss before income taxes        (3,555 )     (14.5 )      (3,310 )      (9.5 )         (245 )       7.4
 Provision for income taxes         12           -            36         0.1            (24 )      n/m    (1)
Net loss                     $  (3,567 )     (14.5 )   $  (3,346 )      (9.6 )   $     (221 )       6.6


                                             Six Months Ended
                                 June 30, 2013             July 1, 2012           Increase (Decrease)
                                Amount     Percent       Amount     Percent         Amount     Percent
Net sales                    $  44,811      100.0     $  85,388       100.0     $  (40,577 )     (47.5 )
Cost of sales                   31,976       71.4        55,199        64.6        (23,223 )     (42.1 )
Gross profit                    12,835       28.6        30,189        35.4        (17,354 )     (57.5 )
Operating expenses:
Research, development and
engineering                      8,483       18.9        12,421        14.5         (3,938 )     (31.7 )
Selling, general and
administrative                  14,502       32.4        20,572        24.1         (6,070 )     (29.5 )
Restructuring charges            2,662        5.9         1,551         1.8          1,111        n/m    (1)
   Total operating expenses     25,647       57.2        34,544        40.5         (8,897 )     (25.8 )
Loss from operations           (12,812 )    (28.6 )      (4,355 )      (5.1 )       (8,457 )     194.2
Interest income (expense),
net                               (121 )     (0.3 )          70         0.1           (191 )      n/m    (1)
Other income (expense), net        (76 )     (0.2 )         105         0.1           (181 )      n/m    (1)
Loss before income taxes       (13,009 )    (29.1 )      (4,180 )      (4.9 )       (8,829 )     211.2
Provision for (benefit from)        66        0.1           285         0.3           (219 )      n/m
income taxes                                                                                             (1)
Net loss                     $ (13,075 )    (29.2 )   $  (4,465 )      (5.2 )   $   (8,610 )     192.8

(1)Not meaningful.


Net Sales
A summary of our net sales for the three and six months ended June 30, 2013 and
July 1, 2012 are as follows (in thousands except for percentages):
                                    Three Months Ended                                        Six Months Ended
                   June 30,      July 1,         Increase (Decrease)        June 30,       July 1         Increase (Decrease)
                     2013          2012          Amount         Percent       2013          2012          Amount         Percent
Net sales:
United States     $   3,252     $  2,074     $      1,178          57  %   $   6,336     $ 12,244     $     (5,908 )       (48 )%
International:
Korea                 1,407       18,798          (17,391 )       (93 )%       2,275       43,056          (40,781 )       (95 )%
Taiwan               14,659        4,087           10,572         259  %      26,724       12,030           14,694         122  %
Other Asia            4,300        6,157           (1,857 )       (30 )%       7,318       10,222           (2,904 )       (28 )%
Europe and others       956        3,768           (2,812 )       (75 )%       2,158        7,836           (5,678 )       (72 )%
                     21,322       32,810          (11,488 )       (35 )%      38,475       73,144          (34,669 )       (47 )%
Total net sales   $  24,574     $ 34,884     $    (10,310 )       (30 )%   $  44,811     $ 85,388     $    (40,577 )       (48 )%

Net sales were $24.6 million for the three months ended June 30, 2013, a decrease of approximately $10.3 million compared to $34.9 million for the three months ended July 1, 2012. Net sales were $44.8 million for the six months ended June 30, 2013, a decrease of approximately $40.6 million compared to $85.4 million for the six months ended July 1, 2012. The decreases in net sales in the three and six months ended June 30, 2013 compared to the same periods in 2012 were primarily driven by lower overall net sales of etch and strip systems into memory and logic applications.
We experienced industry weakness beginning in the second quarter of 2012, as our customers continued their cautious approach to capacity expansion in reaction to the global economic environment and their expectation of supply and demand for their products. We started to see improvements in market conditions and customer demands starting in the second quarter of 2013, and we expect continued improvement in the second half of 2013 as compared to the first half of 2013 primarily driven by a memory investment cycle and foundry spending at 20nm.

Cost of Sales and Gross Profit
A summary of our cost of sales and gross profit for the three and six months
ended June 30, 2013 and July 1, 2012 are as follows (in thousands except for
percentages):
                                Three Months Ended                                     Six Months Ended
                  June 30,     July 1,       Increase (Decrease)      June 30,      July 1,        Increase (Decrease)
                    2013         2012         Amount       Percent      2013          2012          Amount       Percent
Cost of sales    $ 16,107     $ 21,629     $    (5,522 )   (25.5)    $  31,976     $ 55,199     $    (23,223 )    (42.1 )
Gross profit     $  8,467     $ 13,255     $    (4,788 )   (36.1)    $  12,835     $ 30,189     $    (17,354 )    (57.5 )
Gross margin         34.5 %     38.0%                                   28.6%        35.4%

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 and major sub-assemblies/modules.
Gross margin decreased from 38.0 percent during the three months ended July 1, 2012 to 34.5 percent during the three months ended June 30, 2013. Gross margin decreased from 35.4 percent during the six months ended July 1, 2012 to 28.6 percent during the six months ended June 30, 2013. The decreases in gross margin in the three and six months ended June 30, 2013 compared to the same periods were primarily due to lower sales and an unfavorable mix of system sales that were heavily weighted towards our low-margin legacy strip systems in the first half of 2013, partially offset by a decrease in manufacturing spending as a result of our cost reduction initiatives.


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
In December 2011, we initiated the 2011 Restructuring Plan, which in addition to general cost reduction activities, 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. Prior to the initiation of the 2011 Restructuring Plan in the fourth quarter of 2011, annualized operating expenses from the third quarter of 2011 were $71.8 million. As a result of our cost reduction initiatives included in the 2011 Restructuring Plan in the fourth quarter of 2011, our quarterly operating expense run rate has decreased 38%, representing approximately $28 million in reductions of annual operating expenses as measured against annualized operating expenses in the third quarter of 2011.
Our financial results for the three and six months ended June 30, 2013 benefited from the favorable impact of our cost reduction initiatives. Our total operating expenses decreased $4.8 million and $8.9 million, respectively, during the three and six months ended June 30, 2013, as compared to the same periods in the prior year.
Research, Development and Engineering
A summary of our research, development and engineering expenses for the three and six months ended June 30, 2013 and July 1, 2012 are as follows (in thousands except for percentages):

                                 Three Months Ended                                    Six Months Ended
                  June 30,     July 1,       Increase (Decrease)       June 30,     July 1,        Increase (Decrease)
                    2013        2012          Amount       Percent       2013         2012          Amount       Percent
Research,
development and
engineering      $  4,170     $ 5,791     $    (1,621 )     (28.0 )   $  8,483     $ 12,421     $    (3,938 )     (31.7 )
Percentage of
net sales            17.0 %      16.6 %                                   18.9 %       14.5 %

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 $1.6 million in the three months ended June 30, 2013 compared to the three months ended July 1, 2012 largely attributable to reductions in employee related expenses, outside services and engineering materials costs. The decreases were primarily due to the cost reduction activities which have been on-going since the fourth quarter of 2011.
Research, development and engineering expenses decreased $3.9 million in the six months ended June 30, 2013 compared to the six months ended July 1, 2012 largely attributable to reductions in employee related expenses, engineering materials, outside services, depreciation expense and certain facilities costs. The decreases in employee related expenses, engineering material, outside services and certain facilities costs were primarily due to the cost reduction activities which have been on-going since the fourth quarter of 2011. The decrease in depreciation expense was the result of several assets being fully depreciated as of the end of 2012.
Selling, General and Administrative
A summary of our selling, general and administrative expenses for the three and six months ended June 30, 2013 and July 1, 2012 are as follows:

                                 Three Months Ended                                    Six Months Ended
                  June 30,     July 1,       Increase (Decrease)       June 30,     July 1,        Increase (Decrease)
                    2013        2012          Amount       Percent       2013         2012          Amount       Percent
Selling, general
and
administrative   $  6,952     $ 9,705     $    (2,753 )     (28.4 )   $ 14,502     $ 20,572     $    (6,070 )     (29.5 )
Percentage of
net sales            28.3 %      27.8 %                                   32.4 %       24.1 %


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 decreased by $2.8 million during the three months ended June 30, 2013 as compared with the three months ended July 1, 2012. Selling, general and administrative expenses decreased by $6.1 million during the six months ended June 30, 2013 as compared with the six months ended July 1, 2012. The decreases in selling, general and administrative expenses was primarily attributable to lower employee related expenses, outside services, travel and entertainment expenses, all resulting from cost reduction activities that have been on-going since the fourth quarter of 2011, as well as reduction in sales commissions due to lower net sales in the first half of 2013. These decreases were partially offset by an increase in amortization and other costs associated with supporting our evaluation tools at customer sites. Restructuring and Other Charges
As of June 30, 2013, we incurred $9.5 million in restructuring charges under the 2011 Restructuring Plan, of which $2.7 million was recorded during the first half of 2013. We completed the first three phases of the 2011 Restructuring Plan in 2012 and substantially completed the fourth phase of the 2011 Restructuring Plan during the first half of 2013.
During the three months ended June 30, 2013, we incurred $0.4 million in restructuring expense and we paid $1.9 million in employee severance and other costs and $0.8 million in contract termination costs.
During the six months ended June 30, 2013, we incurred $2.7 million in restructuring and other expense, which included recruiting costs for our new Chief Executive Officer as well as severance expense for our former Chief Executive Officer totaling approximately $0.6 million. During the first six months of 2013, we paid $4.5 million in employee severance and other costs and $0.9 million in contract termination costs.
We expect to incur an additional $0.1 million related to the 2011 Restructuring Plan in the second half of 2013.
In addition to expenses incurred under the 2011 Restructuring Plan, we also . . .

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