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UTEK > SEC Filings for UTEK > Form 10-Q on 2-May-2014All Recent SEC Filings

Show all filings for ULTRATECH INC

Form 10-Q for ULTRATECH INC


2-May-2014

Quarterly Report


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

In addition to current and historical information, this Quarterly Report on Form 10-Q ("Report") contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements relate to our future operations, prospects, potential products, services, developments, and business strategies. These statements can, in some cases, be identified by the use of terms such as "may," "will," "should," "could," "would," "intend," "expect," "plan," "anticipate," "believe," "estimate," "predict," "project," "potential," or "continue" or the negative of such terms or other comparable terminology. This Report includes, among others, forward-looking statements regarding our expectations about:

the timing and recognition of revenue;

our manufacturing cycles, delivery and non-linearity of shipments, system acceptance, and installation cycles of our products;

the need for continued large overhead expenses for the commercialization of our laser processing, 1X lithography and wafer inspection systems, which have relatively long manufacturing cycles and will require a significant expenditure on research and development, engineering, sales, support, and general administration, for which an increases in any of these costs, or a failure to meet our sales targets, could materially impact our cash flow and operating results;

revenue from licensing activities and arrangements;

variations in sales from period to period in volatile markets such as nanotechnology;

the market acceptance and volume production of our advanced packaging systems, laser processing systems, inspections systems and our 1000 platform steppers;

demand for our products and technological change;

industry developments that impact our customers and demand for their products;

sales to international customers which represent a significant portion of our revenue;

our future cash flow, short term investments, and access to additional credit and equity being sufficient to meet our operating requirements for the next 12 months;

foreign and domestic tax rates and treatment; and

the financial and operational impact of acquisitions or development of future product lines, technologies, businesses, or the issuance of debt and equity securities.

These statements involve certain known and unknown risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those listed in Part II, Item 1A. "Risk Factors" of this Report. We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this Report to reflect actual results or future events or circumstances.

OVERVIEW

We develop, manufacture and market photolithography, laser thermal processing and inspection equipment for manufacturers of semiconductor devices, including advanced packaging processes and various nanotechnology components such as thin film head magnetic recording devices, laser diodes, high-brightness light emitting diodes ("HBLEDS") and atomic layer deposition ("ALD") for customers located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia. We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the semiconductor industry, we target the market for advanced packaging applications. Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, HBLEDs and atomic layer deposition for the nanotechnology portion of our defined served market.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $0.2 million to $6.0 million. As a result of the larger sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or system acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. At March 29, 2014, system orders represented approximately 87% of our backlog. Consequently, our net sales and operating results for a period have been and will continue


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to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and system acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and system acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer's facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line or as a result of industry trends impacting our foundry customers, including a shift toward semiconductors utilizing new technology transistor architecture. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations and for our operating results to vary from period to period, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers, laser thermal processing and inspection systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

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

Sales Summary

                                        Three Months Ended
                                March 29, 2014      March 30, 2013
International sales                     63 %                91 %
Domestic sales                          37 %                 9 %
Total sales                            100 %               100 %

Semiconductor systems sales             80 %                86 %
Nanotechnology systems sales            20 %                14 %
Total systems sales                    100 %               100 %



Net Sales

First Quarter

                                       Three Months Ended
                                    March 29,      March 30,      Amount of    Percentage
(In thousands, except percentages)     2014           2013         Change        Change
Sales of:
Products                           $    27,566    $    56,565    $ (28,999 )      (51 )%
Services                                 3,943          4,081         (138 )       (3 )%
Licenses                                   100              -          100          -  %
Total net sales                    $    31,609    $    60,646    $ (29,037 )      (48 )%

Net sales consist of revenues from products (system, system upgrades, and spare parts sales), services, and licensing of technologies. Product sales decreased by 51% to $27.6 million for the three month period ended March 29, 2014, as compared to $56.6 million in the corresponding period of 2013. The $29.0 million decrease was due to (i) a $27.1 million decrease in system sales, (ii) a $1.5 million decrease in parts sales, and (iii) a $0.4 million decrease in system upgrade sales.

On a product market application basis, systems sales and system upgrades to the semiconductor market decreased $24.7 million to $18.3 million for the three month period ended March 29, 2014, as compared to $43.0 million in the corresponding period of 2013. The decrease was primarily due to fewer system units sold. Semiconductor industry sales consist


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of sales to the advanced packaging market, the laser processing applications market, semiconductor and semiconductor inspection market.

Nanotechnology market system sales were $4.4 million for the three month period ended March 29, 2014 as compared to $7.2 million in system sales in the corresponding period of 2013. The decrease in sales to the nanotechnology market of $2.8 million was primarily due to the sales of fewer HBLED systems offset by an increase in the number ALD system units. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including HBLEDs, ALD, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore, we expect to experience significant variations in sales to this market from period to period.

Services sales for the three month period ended March 29, 2014 decreased by $0.2 million compared to the corresponding period in 2013 from $4.1 million to $3.9 million.

License sales were $0.1 million for the three month period ended March 29, 2014. License revenue results from tool resales by our existing customers to third parties and from royalty arrangements. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2014.

For the three month period ended March 29, 2014, international sales decreased $35.4 million to $20.0 million or 63% of total net sales, as compared to $55.4 million, or 91% of total net sales for the corresponding period of 2013. For the three month period ended March 29, 2014 as compared to the corresponding 2013 period, (i) sales to Taiwan decreased by $30.8 million, (ii) sales to Japan decreased by $1.6 million, (iii) sales to the rest of Asia (other than Taiwan, Japan and Korea) decreased by $1.3 million, (iv) sales to Korea decreased by $1.2 million and (v) sales to Europe decreased by $0.5 million.

Our international revenue generally is not subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometimes denominated in Japanese yen. Yen denominated contracts subject us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately 317.0 million Japanese yen denominated receivables at March 29, 2014. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer's willingness to purchase our product. (See Part II, Item 1A, "Risk Factors" herein).

Gross Profit

First Quarter

On a comparative basis, gross margins decreased to 41% for the three month period ended March 29, 2014, compared to 55% for the corresponding period of 2013. The 14% decrease in gross margin was due to a 13% decrease related to continued manufacturing inefficiencies caused by lower production volume and a 5% decrease related to lower service cost utilization, partially offset by a 4% increase resulting from lower material costs caused by a change in product mix.

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


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Operating Expenses

First Quarter

                                             Three Months Ended
                                          March 29,       March 30,      Amount of       Percentage
(In thousands, except percentages)          2014            2013           Change          Change
Research, development, and engineering  $     8,214     $     8,396     $     (182 )         (2 )%
Selling, general, and administrative         11,966          11,821            145            1  %
Total operating expenses                $    20,180     $    20,217     $      (37 )          -  %

Research, development and engineering expenses for the three month period ended March 29, 2014 were $8.2 million, as compared to $8.4 million for the corresponding period in 2013. The $0.2 million decrease was due to a reduction in consulting and contract labor costs. As a percentage of net sales, research, development and engineering expenses for the three months ended March 29, 2014 increased to 26% from 14% for the corresponding period of 2013. This percentage increase was primarily due to the decrease in net sales experienced in the three month period ended March 29, 2014.

Selling, general, and administrative expenses for the three month period ended March 29, 2014 were $12.0 million as compared to $11.8 million for the corresponding period of 2013. Selling, general and administrative expenses increased by $0.1 million due to a $0.6 million increase in stock-based compensation expense, offset by a $0.2 million decrease in legal expenses and a $0.3 million decrease in employee benefit costs. As a percentage of net sales, selling, general and administrative expenses for the three month period ended March 29, 2014 increased to 38% as compared to 19% for the corresponding period of 2013 primarily due to the decrease in net sales experienced in the three month period ended March 29, 2014.

Provision for Income Taxes

For the three month period ended March 29, 2014, we recorded an income tax provision of $0.1 million, as compared to an income tax benefit of $0.5 million for the comparable period in 2013. The income tax provision recognized for the three month period ended March 29, 2014 resulted primarily from foreign income taxes. The income tax benefit recognized for the three month period ended March 30, 2013 resulted primarily from a discrete tax benefit due to the extension of the federal research and development tax credits under the American Taxpayer Relief Act of 2012, partially offset by foreign income taxes. Income tax estimates can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how, when and if cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters and we do not anticipate any material earnings impact from their ultimate resolution.
We are eligible for tax incentives that provide that certain income earned in Singapore is subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within 7 years. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that, as of March 29, 2014, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. It is possible that sometime in the next 12 months the positive evidence will be sufficient to release a material amount of our valuation allowance; however there is no assurance that this will occur.
We are subject to federal and state tax examinations for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no material income tax audits currently in progress as of March 29, 2014.


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LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $3.3 million for the three month period ended March 29, 2014, compared to $0.2 million for the comparable period in 2013. Net cash used in operating activities during the three month period ended March 29, 2014 was attributable to (i) $0.7 million net loss from operations after adjustments for non-cash items such as stock-based compensation, depreciation and amortization, and (ii) $2.1 million of net cash used in changes of working capital as described below.

Working capital uses of cash were due to (i) a decrease in other current liabilities of $3.3 million, (ii) an increase of inventories of $1.0 million,
(iii) a decrease in accounts payable of $0.4 million, (iv) a decrease in deferred product and services revenues of $0.3 million, and (v) an increase in prepaid expenses and other current assets of $0.1 million. Working capital sources of cash came from a decrease in accounts receivable of $3.0 million.

We believe that because of the relatively long manufacturing cycle of certain of our systems, particularly newer products, our inventories will continue to represent a significant portion of working capital. Currently, we are devoting significant resources to the commercialization of our laser processing and inspection systems and to the development of our next generation 1X lithography technologies. We currently intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the production of our laser processing and inspection systems and by future generations of our 1X steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Moreover, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.

During the three month period ended March 29, 2014, net cash used in investing activities of $8.6 million was attributable to net purchases of short-term investments of $7.8 million and capital expenditures of $0.8 million.

Net cash used in financing activities was $2.3 million during the three months ended March 29, 2014. The decrease in cash was attributable to taxes paid of $2.6 million, net of proceeds received from the issuance of common stock and restricted stock units of $0.3 million.

At March 29, 2014, we had working capital of $344.0 million. Our principal source of liquidity is cash provided by our operations at March 29, 2014 and consisted primarily of $285.5 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit. Our cash, cash equivalents and short-term investments provides us with substantial financial flexibility in meeting our operating, investing and financing needs.

As of March 29, 2014, $29.5 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the United States. We currently have no plans to repatriate any foreign earnings back to the United States as we believe our future cash flows provided by our U.S. operations will meet our future U.S. liquidity needs.

We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 125 basis points (approximately 1.3% as of March 29, 2014). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a collateral requirement. As of March 29, 2014, $5.1 million was outstanding under this facility, with a related collateral requirement of approximately $6.8 million of our cash, cash equivalents and short-term investments.

The development and manufacture of lithography, laser-based systems, inspection systems and system enhancements is highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months.


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However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

We may in the future pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management's attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

Foreign Currency

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers, for actual or forecasted sales of our products after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. We use foreign currency forward exchange contracts and natural hedges to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of three months or less.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations . . .

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