UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
Commission File Number 0-25434
BROOKS-PRI AUTOMATION, INC.
15 Elizabeth DriveChelmsford, Massachusetts(Address of principal executive offices)
01824(Zip Code)
Registrant’s telephone number, including area code: (978) 262-2400
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practical date, January 28, 2003:
TABLE OF CONTENTS
INDEX
BROOKS-PRI AUTOMATION, INC.CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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BROOKS-PRI AUTOMATION, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
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BROOKS-PRI AUTOMATION, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
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BROOKS-PRI AUTOMATION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
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BROOKS-PRI AUTOMATION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued
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The changes in the carrying amount of goodwill for the three months ended December 31, 2002 are as follows (in thousands):
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain statements in this quarterly report constitute “forward-looking statements” which involve known risks, uncertainties and other factors which may cause the actual results, performance or achievements of Brooks-PRI Automation, Inc. (“Brooks” or the “Company”) to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include the “Factors That May Affect Future Results” set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, which is included in this report. Precautionary statements made herein should be read as being applicable to all related forward-looking statements whenever they appear in this report.
OVERVIEW
Brooks is a leading supplier of integrated tool and factory automation solutions for the global semiconductor and related industries, such as the data storage and flat panel display manufacturing industries and other precision electronics manufacturing industries. Beginning in 1998, the Company began a program to diversify its product portfolio through research and development investment and acquisitions, and in May 2002 acquired PRI Automation, Inc., a significant acquisition. The Company’s offerings have grown from individual robots used to transfer semiconductor wafers in advanced production equipment to fully integrated automation solutions that control the movement and management of wafers and reticles in a wafer fabrication factory.
The Company offers comprehensive and flexible solutions that address a wide range of automation requirements for semiconductor manufacturers and for original equipment manufacturers (“OEMs”) of semiconductor process tools. The Company has distinguished itself as a technology and market leader, particularly in the demanding cluster-tool vacuum-processing environment and in integrated factory automation software applications. The Company’s factory automation systems, software and services help semiconductor manufacturers optimize the flow of material and data throughout the semiconductor fabrication facility (“fab”). They enable customers to respond quickly to changing industry demands and to effectively plan, schedule and optimize their production activity. As a result, Brooks believes its semiconductor manufacturer customers are able to improve productivity and increase their return on investment. Brooks’ customers include many of the world’s leading semiconductor manufacturers and semiconductor capital equipment suppliers.
Traditionally, the Company’s foreign revenues have been generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of the Company’s international subsidiaries are recorded in local currency, and foreign currency translation adjustments are reflected as a component of “Accumulated other comprehensive loss” in the Company’s Consolidated Balance Sheets. To the extent that the Company expands its international operations or changes its pricing practices to denominate prices in foreign currencies, the Company will be exposed to increased risk of currency fluctuation.
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BROOKS-PRI AUTOMATION, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS — Continued
In view of the currently prevailing downturn in the semiconductor industry and the resulting market pressures, the Company is focusing its major efforts in the following areas:
The Company’s cost-containment activities are discussed below in the “Restructuring” section. The Company’s marketing efforts are affected by certain trends that management believes are emerging. One is the potential for increased outsourcing by semiconductor original equipment manufacturers (“OEMs”). This trend is driven by efforts of the OEMs to reduce the overall cost structure of their businesses by procuring items they consider a non-core competency, such as the automation components and systems provided by the Company, on the open market and focusing their internal investment and manufacturing operations on their core competencies. This trend is also influenced in part by the extent to which semiconductor chip manufacturers adopt the use of 300mm semiconductor wafers in the manufacturing of semiconductor chips.
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ACQUISITIONS
The Company has determined that it has assembled the businesses and capabilities that management believes are necessary to optimize the Company’s product and service offerings in the current environment and, accordingly, the Company is not now actively pursuing or evaluating further acquisitions.
On October 9, 2002, the Company acquired Microtool, Inc. (“Microtool”), located in Colorado Springs, Colorado. Microtool provides automation metrology for the 200mm and 300mm markets. The acquisition was recorded using the purchase method of accounting in accordance with Financial Accounting Standards Board Statement No. 141, “Business Combinations” (“FAS 141”). Accordingly, the Company’s Consolidated Statements of Operations and of Cash Flows for the three months ended December 31, 2002, include the results of Microtool for the period subsequent to its acquisition.
On July 3, 2002, the Company acquired Hermos Informatik GmbH (“Hermos”). Hermos, located in Germany, is a provider of wafer carrier ID readers for the 300mm market. On May 14, 2002, the Company completed the acquisition of PRI Automation, Inc. (“PRI”). PRI, principally located in Billerica, Massachusetts and Mountain View, California, supplies advanced factory automation systems equipment, software and services that optimize the productivity of semiconductor and precision electronics manufacturers, as well as OEM process tool manufacturers. On February 15, 2002, the Company acquired substantially all of the assets of Intelligent Automation Systems, Inc. and IAS Products, Inc. (collectively, “IAS”), two privately held companies affiliated with each other, located in Cambridge Massachusetts. IAS provides standard and custom automation technology and products for the semiconductor, photonics, life sciences and certain other industries. These transactions were recorded using the purchase method of accounting in accordance with FAS 141. Accordingly, the Company’s Consolidated Statements of Operations and of Cash Flows for the three months ended December 31, 2002, include fully the results of these acquired entities.
On December 15, 2001, the Company acquired Fab Air Control (“Fab Air”), a Massachusetts company that develops exhaust control and airflow management systems for the semiconductor industry. On December 13, 2001, the Company acquired the Automation Systems Group of Zygo Corporation (“Zygo Group”), located in Boulder, Colorado. Zygo Group, located in Florida, is a manufacturer of reticle automation systems, including reticle sorters, reticle macro inspection systems and reticle handling solutions for the semiconductor industry. On October 9, 2001, the Company acquired 90% of the capital stock of Tec-Sem A.G., a Swiss company (“Tec-Sem”). During March 2002, the Company exercised its option to purchase the remaining 10% of the outstanding capital stock. Tec-Sem is a manufacturer of bare reticle stockers, tool buffers and batch transfer systems for the semiconductor industry. On October 5, 2001, the Company acquired substantially all of the assets of General Precision, Inc. (“GPI”). GPI, located in Valencia, California, is a supplier of high-end environmental solutions for the semiconductor industry. These transactions were recorded using the purchase method of accounting in accordance with FAS 141. Accordingly, the Company’s Consolidated Statements of Operations and of Cash Flows for the three months ended December 31, 2001, include the results of these acquired entities for the periods subsequent to their respective acquisitions; the Company’s Consolidated Statements of Operations and of Cash Flows for the three months ended December 31, 2002, include fully the results of these acquired entities.
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In June 1999, the Company formed a joint venture in Korea. This joint venture is 70% owned by the Company and 30% owned by third parties unaffiliated with the Company. The Company consolidates fully the financial position and results of operations of the joint venture and accounts for the minority interest in the consolidated financial statements.
RELATED PARTIES
On June 11, 2001, the Company appointed Joseph R. Martin to its Board of Directors. Mr. Martin is also chief financial officer and a director of Fairchild Semiconductor International, Inc. (“Fairchild”), one of the Company’s customers. Accordingly, Fairchild is considered a related party for the period subsequent to June 11, 2001. Revenues from Fairchild for the three months ended December 31, 2002 and 2001 were approximately $44,000 and $50,000, respectively. The amounts due from Fairchild included in accounts receivable at December 31, 2002 and September 30, 2002 were approximately $6,000 and $68,000, respectively.
RESTRUCTURING
The Company’s business is significantly dependent on capital expenditures by semiconductor manufacturers and OEMs, which are, in turn, dependent on the current and anticipated market demand for semiconductors. The Company’s revenues grew substantially in fiscal 2000 and the first half of fiscal 2001, due in large part to high levels of capital expenditures of semiconductor manufacturers. Demand for semiconductors is cyclical and has historically experienced periodic downturns. The semiconductor industry is currently experiencing such a downturn, which began to impact the Company in the third quarter of fiscal 2001 and has continued through the first quarter of fiscal 2003. The downturn has affected revenues, gross margins and operating results. In response to this prolonged and continuing downturn, the Company has initiated, and continues to implement, cost reduction programs aimed at aligning its ongoing operating costs with its currently expected revenues over the near term. These cost management initiatives have included consolidating facilities, reductions to headcount, salary and wage reductions and reduced spending. Although the Company continues to address cost management in response to the downturn, and plans additional cost reduction programs in the near term, it will continue to invest in those areas which it believes are important to the long-term growth of the Company, including customer support and new products. It is critical that the Company executes restructure actions on a timely basis to achieve the objective of aligning its cost structure. See “The Company May Have Difficulty Managing Operations” below for additional discussion of the challenges the Company faces in implementing its restructuring programs. The Company believes that its cost reduction programs will be implemented and executed on a timely basis and will align costs with revenues. In the event that the Company is unable to achieve this alignment, additional cost cutting programs may be required in the future.
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Fiscal 2003 Restructuring
Based on current estimates of its near term future revenues and operating costs, the Company announced in December 2002 plans to take additional and significant cost reduction actions. These cost reduction programs include, among other things: an additional reduction to employee headcount, a reduction of new hires, consolidation of identified facilities, abandonment of certain information technology projects and an exit from certain product lines. On December 10, 2002, the Company’s chief executive officer approved a formal plan of restructure for these actions and, accordingly, a charge of $19.1 million was recorded for these actions. Of this amount, $12.4 related to workforce reductions of approximately 400 employees, expected to be paid in fiscal 2003 and $0.6 million related to the consolidation of several of the Company’s facilities, expected to be paid over the next six months. The $12.4 million related to workforce reductions, consisting principally of severance costs, was recorded based on specific identification of employees to be terminated, along with their job classifications or functions and their locations. The $0.6 million related to excess facilities was recorded to recognize the remaining lease obligations, net of any sublease rentals. These costs have been estimated from the time these facilities are expected to be vacated and there are no plans to utilize the facility in the future. Costs incurred prior to vacating the facilities are being charged to operations. In addition, the write-off of $6.1 million of capitalized costs related to cancelled infrastructure programs was recorded. A portion of these actions has been implemented in the first quarter of fiscal 2003. The Company anticipates additional cost reduction initiatives will be implemented through the remainder of fiscal year 2003 in its continuing efforts to align costs with revenues.
Acquisition-related charges of $2.0 million for the three months ended December 31, 2002, are primarily comprised of legal, relocation and consulting costs to integrate the PRI entities and employees into the Company, as well as legal fees for consolidating acquired entities into existing Brooks entities. Acquisition-related charges of $0.1 million for the three months ended December 31, 2001, primarily relate to legal and accounting fees incurred for the acquisition of Progressive Technologies, Inc. (“PTI”) on July 12, 2001, which the Company had accounted for as a pooling of interests transaction.
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Fiscal 2002 Restructuring
On September 13, 2002, the Company’s chief executive officer approved a formal plan of restructure in response to the ongoing downturn in the semiconductor industry, which has continued to exert downward pressure on the Company’s revenues and cost structure. Pursuant to that plan, the Company recorded restructuring charges of $16.1 million in the fourth quarter of fiscal 2002. Of this amount, $9.1 million relates to workforce reductions of approximately 430 employees, and is expected to be paid in fiscal 2003, $6.7 million was for the consolidation of several of the Company’s facilities and $0.3 million was for other restructuring costs. Workforce-related charges, consisting principally of severance costs, were recorded based on specific identification of employees to be terminated, along with their job classifications or functions and their locations. The charges for the Company’s excess facilities were recorded to recognize the remaining lease obligations, net of any sublease rentals. These costs have been estimated from the time when the space is expected to be vacated and there are no plans to utilize the facility in the future. Costs incurred prior to vacating the facilities are being charged to operations.
As part of the plan to integrate the PRI acquisition, certain sales, technical support and administrative functions were combined and headcount and related costs reduced. Accordingly, during the third quarter of fiscal 2002, the Company recorded $2.8 million of restructuring charges, comprised of $1.3 million for workforce reduction-related costs for existing Brooks employees, $0.4 million related to excess existing Brooks facilities and $1.1 million of other restructuring costs. The $0.4 million for the Company’s excess facilities was recorded to recognize the remaining lease obligations, net of any sublease rentals. These costs have been estimated from the time these facilities are expected to be vacated and there are no plans to utilize the facility in the future. Costs incurred prior to vacating the facilities are being charged to operations.
Restructuring costs of $13.5 million for former PRI employees, $11.1 million for PRI facilities and $2.3 million for other costs were accrued as part of the purchase accounting for the PRI acquisition, relating to the consolidation and elimination of certain PRI duplicate facilities and redundant PRI personnel. The Company anticipated headcount reductions of approximately 325 people across all functional areas of the combined company and, as such, included an estimated accrual for workforce reductions of $13.5 million comprised of severance, employee benefits and outplacement support. The former chief executive officer of PRI has entered into a non-competition agreement with the Company, which became effective upon completion of the combination and which will require a total payment of $1.1 million over a two-year period, of which $0.6 million was recorded as a long-term liability. The Company has identified redundant facilities consisting of sales and support offices, manufacturing facilities and administrative offices. Accordingly, an accrual of $11.1 million to terminate lease obligations under these agreements was provided. These payments represent the fair value of the minimum rental commitment on facilities with lease terms to 2011. The Company accrued for $1.2 million of amounts to be incurred subsequent to the acquisition related to legal costs to close subsidiaries of PRI.
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Fiscal 2001 Restructuring
On September 5, 2001, the Company’s Board of Directors approved a formal plan of restructure in response to the downturn in the semiconductor industry. To that effect, the Company recorded restructuring charges of $5.4 million in the fourth quarter of the fiscal year. Of this amount, $2.0 million was related to workforce reductions of approximately 140 employees, which was paid in fiscal 2002, and $3.4 million was for the consolidation and strategic focus realignment of several facilities, of which $l.9 million was paid through fiscal 2002, $0.5 million is expected to be paid in fiscal 2003 and $1.0 million in the subsequent years. Workforce charges, consisting principally of severance costs, were recorded based on specific identification of employees to be terminated, along with their job classifications or functions and their locations. The charges for the Company’s excess facilities were recorded to recognize the remaining lease obligations, net of any sublease rentals. These costs were estimated from the time the space was expected to be vacated and there are no plans to utilize the facility in the future. Costs incurred prior to vacating the facilities are being charged to operations.
Adjustments to Restructuring Accruals
Periodically, the accruals related to the acquisition-related and restructuring charges are reviewed and compared to their respective cash requirements. As a result of those reviews, the accruals are adjusted for changes in cost and timing as assumptions of previously approved and recorded initiatives. During the year ended September 30, 2002, the Company identified excess workforce-related accruals recorded for earlier initiatives of $0.4 million, which were reversed in the period ended September 30, 2002.
Implementation of Restructuring Programs
As of December 31, 2002, approximately 1,000 employees had been terminated and 15 facilities had been consolidated into other existing Brooks facilities in connection with the restructuring plans described above.
The activity for the three months ended December 31, 2002 and 2001 and the year ended September 30, 2002 (including the three months ended December 31, 2001) related to the Company’s restructuring accruals described above is summarized below (in thousands):
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THREE MONTHS ENDED DECEMBER 31, 2002,COMPARED TO THREE MONTHS ENDED DECEMBER 31, 2001
Revenues
The Company reported revenues of $84.9 million in the three months ended December 31, 2002, compared to $58.2 million in the same prior year period. The increase is primarily attributable to acquisitions completed since the end of the first quarter of fiscal 2002, principally PRI. These acquisitions accounted for approximately $24 million of the increase in revenues in the three months ended December 31, 2002, compared to the same period of the prior year.
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The Company’s equipment automation segment reported revenues of $36.3 million in the three months ended December 31, 2002, an increase of 40.5% from revenues of $25.8 million in the same prior year period. The increase is attributable to acquisitions, which accounted for approximately $10 million of revenues in the current quarter. Excluding revenue from these acquisitions completed since the end of the first quarter of fiscal 2002, revenues for the equipment automation segment were flat, primarily as a result of the ongoing downturn in the semiconductor industry. The Company’s factory automation hardware segment reported revenues of $26.5 million in the three months ended December 31, 2002, more than double its revenues of $12.1 million in the same prior year period. The increase is attributable to acquisitions completed since the end of the first quarter of fiscal 2002. These acquisitions accounted for approximately $14 million of the segment’s revenues in the three months ended December 31, 2002. Excluding the impact of acquisitions, the Company’s factory automation hardware segment revenues were flat, increasing $0.8 million in the three months ended December 31, 2002, compared to the same prior year period. The Company’s factory automation software segment reported revenues of $21.5 million in the three months ended December 31, 2002, an increase of $1.2 million from the same prior year period.
Product revenues increased $16.0 million, to $55.0 million, in the three months ended December 31, 2002, compared to $39.0 million in the three months ended December 31, 2001. The increase is attributable to acquisitions completed since the end of the first quarter of fiscal 2002.
Service revenues for the three months ended December 31, 2002 were $29.9 million, an increase of $10.7 million, or 55.9%, from the three months ended December 31, 2001. The increase is primarily attributable to acquisitions completed since the end of the first quarter of fiscal 2002, which accounted for approximately $8 million of service revenues in the three months ended December 31, 2002.
Foreign revenues were $39.5 million, or 46.5% of revenues, and $34.0 million, or 58.4% of revenues, in the three month periods ended December 31, 2002 and 2001, respectively. The Company’s acquisition of PRI, primarily located in the United States, has contributed to the increase in sales in the United States both as a percentage of sales and in absolute dollars, while the Company’s expanded global presence through acquisitions and expanded sales and marketing activities has enabled international sales to remain a significant portion of total revenues. The Company expects that foreign revenues will continue to account for a significant portion of total revenues. The current international component of revenues may not be indicative of future international revenues.
Gross Margin
Gross margin decreased to 28.7% for the three months ended December 31, 2002, compared to 35.8% for the same prior year period. The decrease is primarily attributable to the downturn that continues to affect the semiconductor industry, coupled with the historically lower margin rates of several of the Company’s fiscal 2002 acquisitions. The Company’s cost absorption due to excess manufacturing capacity continues to exert downward pressure on gross margins. The Company’s equipment automation segment gross margin decreased to 18.9% in the three months ended December 31, 2002, from 24.7% in the comparable prior year period. The decrease is primarily the result of product and customer mix, coupled with the effects of the continuing downturn in the semiconductor industry and the resulting excess manufacturing capacity and lower margin rates of the Company’s recently acquired businesses. Gross margin for the Company’s factory automation hardware segment decreased to 23.1% in the three months ended December 31, 2002, from 26.7% in the same prior year period. The decrease is in part a result of lower margin hardware sales comprising a higher percentage of the segment’s business, coupled with the
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historically lower margin rates of the Company’s recently acquired businesses. The Company’s factory automation software segment’s gross margin for the three months ended December 31, 2002, decreased to 52.8%, compared to 55.4% in the same prior year period. The change is primarily due to unfavorable product mix shifts between license and service revenues.
Gross margin on product revenues was 29.7% for the three months ended December 31, 2002, a decrease from 37.5% in the same prior year period. Excluding other charges aggregating $2.1 million, consisting of $0.9 million of inventory writedowns, $0.2 million of retention bonuses, $0.4 million of deferred compensation costs related to stock options granted to employees of acquired companies and $0.6 million for accelerated depreciation on assets for abandoned facilities, gross margin was 33.5% in the three months ended December 31, 2002. The decrease in gross margin is primarily attributable to the effects of the continuing downturn in the semiconductor industry, causing lower absorption of manufacturing fixed costs.
Gross margin on service revenues was 27.0% for the three months ended December 31, 2002, a decrease from 32.5% for the three months ended December 31, 2001. The decrease is primarily a result of a change in business mix, combined with pricing pressure in the end user services business and the effects of the continuing downturn in the semiconductor industry on the Company’s fixed cost absorption.
Research and Development
Research and development expenses for the three months ended December 31, 2002 were $19.7 million; an increase of $5.6 million, compared to $14.1 million in the three months ended December 31, 2001, and is attributable to the Company’s recent acquisitions. The decrease in spending as a percentage of total revenues is primarily attributable to the Company’s ongoing cost reduction actions. The Company plans to continue to invest in research and development to enhance existing and develop new tool and factory hardware and software automation solutions for the semiconductor, data storage and flat panel display manufacturing industries; however, the Company continues to selectively invest in those research and development projects that are most consistent with its business realignment currently in progress.
Selling, General and Administrative
Selling, general and administrative expenses were $34.1 million for the three months ended December 31, 2002, an increase of $15.2 million, compared to $18.9 million in the same prior year period. Selling, general and administrative expenses also increased as a percentage of revenues in the three months ended December 31,
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2002, to 40.2%, from 32.5% in the comparable prior year period. The increase in these expenditures as a percentage of revenues for the three months ended December 31, 2002, is partially attributable to the Company’s recent acquisitions, which accounted for approximately $5 million of the Company’s selling, general and administrative expense in the current quarter, coupled with $7.1 million of accelerated depreciation associated with the Company’s restructuring plans for facilities consolidation and $1.0 million of other charges, primarily deferred compensation costs related to stock options granted to employees of acquired companies. Excluding the impact of acquisitions and the other charges described above, selling, general and administrative expenses increased by approximately $3 million compared to the same prior year period. The Company expects that the planned implementation of its recently announced restructuring actions will reduce selling, general and administrative expense in subsequent periods.
Amortization of Acquired Intangible Assets
Amortization expense for acquired intangible assets totaled $2.0 million in the three months ended December 31, 2002, compared to $3.6 million in the three months ended December 31, 2001. The reduction in amortization of acquired intangible assets is attributable to the writedown of the carrying value of these assets at September 30, 2002 as a result of the Company’s impairment of intangible assets.
Interest Income and Expense
Interest income decreased by $1.0 million, to $1.8 million, in the three months ended December 31, 2002, compared to the same prior year period, primarily a result of lower interest rates coupled with lower balances available for investment. Interest expense of $2.6 million for the three months ended December 31, 2002 is primarily attributable to interest on the Company’s Convertible Subordinated Notes. Interest expense of $2.6 million in the same prior year period is primarily comprised of $2.3 million related to the Company’s Convertible Subordinated Notes and imputed interest expense on the notes payable to the Company’s recent acquisitions of the e-Diagnostics product line and SimCon, aggregating $0.2 million.
Other (Income) Expense
As a result of the acquisition of PRI, the Company acquired PRI’s minority investment in Shinsung Engineering Co., Ltd. (“Shinsung”), a South Korean manufacturer of semiconductor clean room equipment and other industrial systems. PRI made a minority investment in Shinsung of $11.5 million in exchange for 3,109,091 shares of Shinsung common stock and warrants to purchase an additional 3,866,900 common shares. The Shinsung warrants were fair valued using the Black-Scholes valuation model at each reporting date, and changes in valuation were recorded as a component of “Other comprehensive income (loss)”.
In connection with the Company’s ongoing restructuring and consolidation efforts, the Company determined that its strategic manufacturing relationship with Shinsung no longer aligns with the future needs and direction of the Company. As a result, in December 2002, the Company received an offer from, entered into negotiations with, and on January 27, 2003, concluded the sale to, Shinsung of the warrants for $0.5 million. As a result, the Company determined that the carrying value of these warrants was impaired and, accordingly, wrote down the carrying value of the warrants to $0.5 million as of December 31, 2002. The impairment of $11.5 million is reported in “Other (income) expense” on the Company’s Consolidated Statement of Operations for the three months ended December 31, 2002.
Income Tax Provision
The Company recorded a net income tax provision of $4.8 million in the three months ended December 31, 2002, compared to a net income tax benefit of $5.2 million in the same prior year period. The tax provision in the current quarter is attributable to foreign and withholding taxes. Federal and state taxes have not been benefited in the three months ended December 31, 2002, as the Company believes it is more likely than not that future net tax benefits from accumulated net operating losses and deferred taxes will not be realized. The tax benefit in the three months ended December 31, 2001 is attributable to the loss in that quarter.
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LIQUIDITY AND CAPITAL RESOURCES
The Company has recorded significant losses from operations and has an accumulated deficit of $836.4 million at December 31, 2002. Revenues have increased from the prior year period primarily as a result of acquisitions completed since that period. Net cash outflows from operations have increased significantly as a result of these acquisitions, primarily for acquired fixed costs, and the current downturn within the semiconductor sector and related industries. Consequently, the Company has undertaken several restructuring programs during the period from October 1, 2001 through December 31, 2002, to align its cost structures and its revenues. The cyclical nature of the industry, the extended period of the current downturn and the current uncertainty as to the timing and speed of recovery mean that estimates of future revenues, results of revenues, results of operations and net cash flows are inherently difficult.
At December 31, 2002, the Company had cash, cash equivalents and marketable securities aggregating $215.0 million. This amount was comprised of $109.8 million of cash and cash equivalents, $30.2 million of investments in short-term marketable securities and $75.0 million of investments in long-term marketable securities.
At September 30, 2002, the Company had cash, cash equivalents and marketable securities aggregating $245.7 million. This amount was comprised of $125.3 million of cash and cash equivalents, $25.3 million of investments in short-term marketable securities and $95.1 million of investments in long-term marketable securities.
Cash and cash equivalents were $109.8 million at December 31, 2002, a decrease of $15.5 million from September 30, 2002. This decrease in cash and cash equivalents is primarily due to cash used in operations of $26.0 million and capital expenditures of $4.6 million. These amounts were partially offset by $15.2 million of net sales and maturities of marketable securities.
Cash used in operations was $26.0 million for the three months ended December 31, 2002, and is primarily attributable to the Company’s net loss of $71.0 million, which includes acquisition-related and restructuring expense of $21.1 million, non-cash impairments of assets aggregating $17.6 million and depreciation and amortization of $14.8 million. The Company used $10.4 million and $10.6 million for accounts payable and restructuring payments, respectively. These amounts were partially offset by $12.2 million of cash provided by the reduction of the Company’s accounts receivable.
Cash provided by investing activities was $9.5 million for the three months ended December 31, 2002, and is principally comprised of proceeds from the net sales and maturities of marketable securities aggregating $15.2 million, used to fund operating losses, partially offset by cash consideration and transaction costs totaling $0.7 million related to the acquisition of Microtool and $4.6 million of capital additions.
Cash used in financing activities for the three months ended December 31, 2002, was comprised of $24,000 for the payment of long-term debt, partially offset by $2,000 from the exercise of options to purchase the Company’s common stock.
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In connection with the acquisition of the e-Diagnostics product business in June 2001, the Company could be required to make additional cash payments under certain conditions. Additional cash payments aggregating a maximum of $8.0 million over the next two years could be required for payment of consideration contingent upon meeting certain performance objectives, if the Company elected to settle any or all potential contingent payments in cash.
On May 23, 2001, the Company completed the private placement of $175.0 million aggregate principal amount of 4.75% Convertible Subordinated Notes due in 2008. Interest on the notes is paid on June 1 and December 1, of each year. The Company made its first interest payment on December 1, 2001. The notes will mature on June 1, 2008. The Company may redeem the notes at stated premiums on or after June 6, 2004, or earlier if the price of the Company’s common stock reaches certain prices. Holders may require the Company to repurchase the notes upon a change in control of the Company in certain circumstances. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of the Company’s common stock, at a conversion price of $70.23 per share, subject to certain adjustments. The notes are subordinated to the Company’s senior indebtedness and structurally subordinated to all indebtedness and other liabilities of the Company’s subsidiaries.
The Company had a $10.0 million uncommitted demand promissory note facility with ABN AMRO Bank N.V. (“ABN AMRO”), which expired on May 31, 2002. Accordingly, ABN AMRO will not extend loans or issue additional letters of credit. At December 31, 2002, the Company had $1.1 million remaining in outstanding letters of credit under this facility.
While the Company has no significant capital commitments, the Company anticipates that it will continue to make capital expenditures to support its business. The Company may also use its resources to acquire companies, technologies or products that complement the business of the Company.
The Company’s contractual obligations consist of the following (in thousands):
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The table does not include an accrual of $9.9 million related to the projected retirement benefit to be paid to the Company’s chief executive officer under his current employment agreement. The projected amount payable is due immediately upon his retirement; however, his retirement date is not determinable at this time. His current employment agreement will expire on October 1, 2005.
The Company believes that its existing resources will be adequate to fund the Company’s currently planned working capital and capital expenditure requirements for at least the next twelve months. However, the Company used $26.0 million to fund its operations in the three months ended December 31, 2002, and $55.7 million to fund its operations in fiscal 2002, and the cyclical nature of the semiconductor industry makes it very difficult for the Company to predict future liquidity requirements with certainty. Accordingly, over the longer term it is important that the restructuring programs described above succeed in aligning costs with revenues. In addition, the Company may experience unforeseen capital needs in connection with its recently completed acquisitions. If the Company is unable to generate sufficient cash flows from operations, the Company may need to raise additional funds to develop new or enhanced products, respond to competitive pressures or make acquisitions. The Company may be unable to obtain any required additional financing on terms favorable to it, if at all. If adequate funds are not available on acceptable terms, the Company may be unable to fund its expansion, successfully develop or enhance products, respond to competitive pressure or take advantage of acquisition opportunities, any of which could have a material adverse effect on the Company’s business.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 146, “Accounting for Exit or Disposal Activities” (“FAS 146”). FAS 146 addresses significant issues regarding the recognition, measurement and reporting of costs that are associated with exit and disposal activities, including restructuring activities that are currently accounted for under Emerging Issues Task Force No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)” (“EITF 94-3”). The scope of FAS 146 also includes costs related to terminating a contract that is not a capital lease and termination benefits that employees who are involuntarily terminated receive under the terms of a one-time benefit that is not an ongoing benefit arrangement or an individual deferred compensation contract. On January 1, 2003, the Company adopted the provisions of FAS 146 effective for exit or disposal activities initiated after December 31, 2002. The adoption of FAS 146 will change, on a prospective basis, the timing of recording restructure charges from the commitment date to when the liability is incurred. The adoption of this standard will impact the timing of recording restructuring activities initiated subsequent to December 31, 2002.
In November 2002, the FASB Emerging Issues Task Force released Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF 00-21”). EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF 00-21 establishes three principles: (a) revenue arrangements with multiple deliverables should be divided into separate units of accounting; (b) arrangement consideration should be allocated among the separate units of accounting based on their relative fair values; and (c) revenue recognition criteria should be considered separately for separate units of accounting. EITF 00-21 is effective for all arrangements entered into in fiscal periods beginning after June 15, 2003, with early adoption permitted. The Company is currently reviewing the impact of EITF 00-21.
On December 31, 2002, the FASB issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment of FAS 123” (“FAS 148”). FAS 148 provides additional transition guidance for those entities that elect to voluntarily adopt the accounting provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”). The standard is intended to encourage the adoption of the provisions of FAS 123 relating to the fair value-based method of accounting for employee stock options. The Company currently applies the disclosure-only provisions of FAS 123. Under the provisions of FAS 148, companies that choose to adopt the accounting provisions of FAS 123 will be permitted to select from three transition methods: the prospective method, the modified prospective method and the retroactive restatement method. The prospective method, however, may no longer be applied for adoptions of the accounting provisions of FAS 123 for periods beginning after December 15, 2003. FAS 148 requires certain new disclosures that are incremental to those required by FAS 123, which must also be made in interim financial statements. The transition and annual disclosure provisions of FAS 148 are effective for fiscal years ending after December 31, 2002. The new interim disclosure provisions are effective for the first interim period beginning after December 15, 2002. The Company is currently reviewing the alternatives under the provisions of FAS 148.
On January 17, 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB 51” (“FIN 46”). The primary objectives of FIN 46 are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities” or “VIEs”) and how to determine when and which business enterprise should consolidate the VIE. This new model for consolidation applies to an entity which either: (a) the equity investors (if any) do not have a controlling financial interest; or (b) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that both the primary beneficiary and all other enterprises with a significant variable interest in a VIE make additional disclosures. The Company does not believe that the adoption of FIN 46 will have any impact on the Company’s results of operations or financial position.
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FACTORS THAT MAY AFFECT FUTURE RESULTS
You should carefully consider the risks described below and the other information in this report before deciding to invest in shares of our common stock. These are the risks and uncertainties we believe are most important for you to consider. Additional risks and uncertainties not presently known to us, or which we currently deem immaterial, or which are similar to those faced by other companies in our industry or business in general, may also impair our business operations. If any of the following risks or uncertainties actually occur, our business, financial condition and operating results would likely suffer. In that event, the market price of our common stock could decline and you could lose all or part of your investment.
Risk Factors Relating to Our Industry
The Cyclical Demand of Semiconductor Manufacturers Affects Our Operating Results and the Ongoing Downturn in the Industry Could Seriously Harm Our Operating Results.
Our business is significantly dependent on capital expenditures by semiconductor manufacturers. The level of semiconductor manufacturers’ capital expenditures is dependent on the current and anticipated market demand for semiconductors. The semiconductor industry is highly cyclical and is currently experiencing a downturn. The downturn may continue for several more quarters. As a result of cost reductions in response to the decrease in net sales and uncertainty over the timing and extent of any industry recovery, we may be unable to continue to invest in marketing, research and development and engineering at the levels that we believe are necessary to maintain our competitive position. Ours failure to make these investments could seriously curtail our long-term business prospects. Consistent with our experience in past downturns, the current industry downturn has reduced our revenues and caused us to incur losses. There can be no guarantee of when this downturn will end or that we will return to profitability when the downturn does end.
Industry Consolidation and Outsourcing of the Manufacture of Semiconductors to Foundries Could Reduce the Number of Available Customers.
The substantial expense of building or expanding a semiconductor fabrication facility is leading increasing numbers of semiconductor companies to contract with foundries, which manufacture semiconductors designed by others. As manufacturing is shifted to foundries, the number of our potential customers could decrease, which would increase our dependence on our remaining customers. Recently, consolidation within the semiconductor manufacturing industry has increased. If semiconductor manufacturing is consolidated into a small number of foundries and other large companies, our failure to win any significant bid to supply equipment to those customers could seriously harm our reputation and materially and adversely affect our revenue and operating results.
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Our Future Operations Could Be Harmed if the Commercial Adoption of 300mm Wafer Technology Continues to Progress Slowly or is Halted.
Our future operations depend in part on the adoption of new systems and technologies to automate the processing of 300mm wafers. However, the industry transition from the current, widely used 200mm manufacturing technology to 300mm manufacturing technology is occurring more slowly than originally expected. A significant delay in the adoption of 300mm manufacturing technology, or the failure of the industry to adopt 300mm manufacturing technology, could significantly impair our operations. Moreover, continued delay in transition to 300mm technology could permit our competitors to introduce competing or superior 300mm products at more competitive prices. As a result of these factors, competition for 300mm orders could become more vigorous and could harm our results of operations.
Our merger with PRI on May 14, 2002 did not reduce this risk. Manufacturers implementing factory automation in 300mm pilot projects typically seek to purchase systems from multiple vendors. Automated material handling systems are a major component of the former PRI’s business. To date, nearly all manufacturers with pilot projects have selected automated material handling systems made by competitors for these projects. Manufacturers’ awards to these competitors of orders for early stage 300mm fabs could make it more difficult for us to win orders from those manufacturers for their full-scale 300mm production facilities.
Risk Factors Relating to Our Acquisitions
Our Business Could Be Harmed if We Fail to Adequately Integrate the Operations of the Businesses That We Acquired.
Over the past several years, we completed a number of acquisitions in a relatively short period of time, including our acquisition of PRI in May 2002. Our management must devote substantial time and resources to integrating the operations of the businesses we acquired with our core business and the other acquired businesses. If we fail to accomplish this integration efficiently, we may not realize the anticipated benefits of our acquisitions. We were required to record impairment charges on acquired intangible assets and goodwill
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aggregating $479.3 million in fiscal 2002. We may be required in the future to record additional significant future impairment costs in the event that the carrying value exceeds the fair value of acquired intangible assets. The process of integrating supply and distribution channels, research and development initiatives, computer and accounting systems and other aspects of the operation of our acquired businesses, presents a significant challenge to our management. This is compounded by the challenge of simultaneously managing a larger entity. These businesses have operations and personnel located in Asia, Europe and the United States and present a number of difficulties of integration, including:
If we delay the integration or fail to integrate an acquired business or experience other unforeseen difficulties, the integration process may require a disproportionate amount of our management’s attention and financial and other resources. Our failure to adequately address these difficulties could harm our business and financial results.
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Risk Factors Relating to Our Operations
Our Sales Volume Substantially Depends on the Sales Volume of our Original Equipment Manufacturer Customers and on Investment in Major Capital Expansion Programs by End-User Semiconductor Manufacturing Companies.
We sell a majority of our tool automation products to original equipment manufacturers that incorporate our products into their equipment. Therefore, our revenues depend on the ability of these customers to develop, market and sell their equipment in a timely, cost-effective manner. Approximately 45% of our total revenue in the three months ended December 31, 2002, and 50% and 56% of our total revenue in fiscal 2002 and fiscal 2001, respectively, came from sales to original equipment manufacturers.
We also generate significant revenues from large orders from semiconductor manufacturing companies that build new plants or invest in major automation retrofits. Our revenues depend, in part, on continued capital investment by semiconductor manufacturing companies. Approximately 55% of our total revenue in the three months ended December 31, 2002 and 50% and 44% of our total revenue in fiscal 2002 and fiscal 2001, respectively, came from sales to semiconductor manufacturing companies. The percentage of our total revenue attributable to semiconductor manufacturing companies should rise in fiscal 2003 as a result of our acquisition of PRI. Our revenues will be adversely affected if semiconductor manufacturing companies do not invest in capital expansion programs due to the downturn in the semiconductor industry or for other reasons.
Demand For Our Products Fluctuates Rapidly and Unpredictably, Which Makes it Difficult to Manage Our Business Efficiently and Can Reduce Our Gross Margins and Profitability.
Our expense levels are based in part on our expectations for future demand. Many expenses, particularly those relating to capital equipment and manufacturing overhead, are relatively fixed. The rapid and unpredictable shifts in demand for our products make it difficult to plan manufacturing capacity and business operations efficiently. If demand is significantly below expectations, we may be unable to rapidly reduce these fixed costs, which can diminish gross margins and cause losses. A sudden downturn may also leave us with excess inventory, which may be rendered obsolete as products evolve during the downturn and demand shifts to newer products. For example, as a result of the current industry downturn, we recorded inventory adjustments of $12.5 million in the fourth quarter of fiscal 2002 relating to inventory writedowns. Our ability to reduce expenses is further constrained because we must continue to invest in research and development to maintain our competitive position and to maintain service and support for our existing global customer base. Conversely, during periods of increased demand our ability to satisfy increased customer demand may be constrained by our projections. If our projections underestimate demand, we may have inadequate inventory and may not be able to expand our manufacturing capacity, which could result in delays in shipments and loss of customers and reduced gross margins and profitability. In sudden upturns, we sometimes incur significant expenses to rapidly expedite delivery of components, procure scarce components and outsource additional manufacturing processes. This risk is more acute in fiscal 2003 as we consolidate several of our manufacturing locations, making our manufacturing capabilities more vulnerable to sudden demands for production. Even if we are able to sufficiently expand our capacity, we may not efficiently manage this expansion which would adversely affect our gross margin and profitability. Any of these results could seriously harm our business.
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We Rely on a Relatively Limited Number of Customers for a Large Portion of Our Revenues and Business.
We receive a significant portion of our revenues in each fiscal period from a relatively limited number of customers. The loss of one or more of these major customers, or a decrease in orders by one or more customers, could adversely affect our revenue, business and reputation. In addition, our customers have in the past sought price concessions from us and may continue to do so in the future, particularly during downturns in the semiconductor market, which could in turn reduce our profitability and gross margins. Our sales to our ten largest customers accounted for approximately 41% of total revenues in the three months ended December 31, 2002, 33% in fiscal 2002, 37% in fiscal 2001 and 40% in fiscal 2000.
Delays in or Cancellation of Shipments or Customer Acceptance of a Few of Our Large Orders Could Substantially Decrease Our Revenues or Reduce Our Stock Price.
Historically, a substantial portion of our quarterly and annual revenues came from sales of a small number of large orders. Some of our products have high selling prices compared to our other products. As a result, the timing of when we recognize revenue from one of these large orders can have a significant impact on our total revenues and operating results for a particular period because our sales in that fiscal period could fall significantly below the expectations of financial analysts and investors. This could cause the value of our common stock to fall. Our operating results could be harmed if a small number of large orders are canceled or rescheduled by customers or cannot be filled due to delays in manufacturing, testing, shipping or product acceptance.
We Do Not Have Long-term Contracts With Our Customers and Our Customers May Cease Purchasing Our Products at Any Time.
We generally do not have long-term contracts with our customers that require them to place continuing purchase orders with us. As a result, our agreements with our customers do not provide any assurance of future sales. Accordingly:
Sales typically are made pursuant to individual purchase orders and product delivery often occurs with extremely short lead times. If we are unable to fulfill these orders in a timely manner, we could lose sales and customers.
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Our Systems Integration Services Business Has Grown Significantly Recently and Poor Execution of Those Services Could Adversely Impact Our Operating Results.
The number of projects that we are pursuing for our systems integration services business has grown significantly recently. This business consists of a combination of products and services in which we integrate combinations of our software and hardware products to provide more comprehensive solutions for our end-user customers. The delivery of these services typically is complex, requiring us to coordinate personnel with varying technical backgrounds in performing substantial amounts of services in accordance with timetables. We are in the early stages of developing this business and we are subject to the risks attendant to entering a business in which we have limited direct experience. In addition, our ability to supply these services and increase our revenues is limited by our ability to retain, hire and train systems integration personnel. We believe that there is significant competition for personnel with the advanced skills and technical knowledge that it needs. Some of our competitors may have greater resources to hire personnel with those skills and knowledge. Our operating margins could be adversely impacted if we do not effectively hire and train additional personnel or deliver systems integration services to our customers on a satisfactory and timely basis consistent within budget.
Our Lengthy Sales Cycle Requires Us to Incur Significant Expenses with No Assurance That We Will Generate Revenue.
Our tool automation products are generally incorporated into original equipment manufacturer equipment at the design stage. To obtain new business from original equipment manufacturer customers, we must develop products for selection by a potential customer at the design stage. This often requires us to make significant expenditures without any assurance of success. The original equipment manufacturer’s design decisions often precede the generation of volume sales, if any, by a year or more. We cannot guarantee that the equipment manufactured by our original equipment manufacturing customers will be commercially successful. If we or our original equipment manufacturing customers fails to develop and introduce new products successfully and in a timely manner, our business and financial results will suffer.
We also must complete successfully a costly evaluation and proposal process before we can achieve volume sales of our factory automation hardware and software and systems integration products to customers. These undertakings are major decisions for most prospective customers and typically involve significant capital commitments and lengthy evaluation and approval processes. We cannot guarantee that we will continue to satisfy evaluations by our end-user customers.
Our Operating Results Would Be Harmed if One of Our Key Suppliers Fails to Deliver Components for Our Products.
We currently obtain many of our components on an as needed, purchase order basis. Generally, we do not have long-term supply contracts with our vendors and believe many of our vendors have been taking cost containment measures in response to the industry downturn. When demand for semiconductor manufacturing equipment increases, our suppliers face significant challenges in delivering components on a timely basis. Our inability to obtain components in required quantities or of acceptable quality could result in significant delays or reductions in our product shipments. This could create customer dissatisfaction, cause lost revenue and otherwise materially and adversely affect our operating results. Delays on our part could also cause us to incur contractual penalties for late delivery.
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The Possibility of War or Other Hostilities Affects Demand for Our Products and Could Affect Other Aspects of Our Business.
The ongoing threat of the outbreak of war in the Middle East or hostilities involving Western nations and North Korea could at any time lead to a reduction in demand for our products by our customers as they consider the possible effects of war on their own businesses. This could occur even prior to the outbreak of actual hostilities. In addition, should warfare, the threat of war, civil unrest, terrorist activity or political instability occur in the United States, Iraq, Israel, the Middle East generally, North Korea or elsewhere, those events could disrupt our manufacturing, logistics, security and communications activities and could lead to a reduction in demand for our products.
As a Result of Our Acquisition of PRI, We Are Becoming Increasingly Dependent on Subcontractors and One or a Few Suppliers for Some Components and Manufacturing Processes.
For some products, components and specialized processes that PRI used in its products, PRI depended on subcontractors or had available only one or a few suppliers. For example, its TurboStocker, AeroLoader, AeroTrak and Guardian products each include components and assemblies for which PRI had qualified, or for which there existed, only one supplier or a small number of suppliers. As a result of the acquisition of PRI, we are dependent on these limited suppliers. In general, we do not have long-term agreements with these suppliers, or agreements that obligate them to supply all of our requirements for such components or assemblies.
Our reliance on subcontractors gives us less control over the manufacturing process and exposes us to significant risks, especially inadequate capacity, late delivery, substandard quality and high costs. We intend to continue to explore the possibility of outsourcing additional aspects of our manufacturing operations to subcontractors and suppliers. We could experience disruption in obtaining products or needed components and may be unable to develop alternatives in a timely manner. If we are unable to obtain adequate deliveries of products or components for an extended period of time, we may have to pay more for inventory, parts and other supplies, seek alternative sources of supply or delay shipping products to our customers. These outcomes could damage our relationships with our customers. Any such increased costs, delays in shipping or damage to customer relationships could seriously harm our business.
Our dependence on third-party suppliers could harm our ability to negotiate the terms of our future business relationships with these parties, and we may be unable to replace any of them on terms favorable to us. In addition, outsourcing portions of our manufacturing to third parties may require us to share our proprietary information with these suppliers. Although we enter into confidentiality agreements with these third parties, these agreements may not fully protect our proprietary information.
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We May Experience Delays and Technical Difficulties in New Product Introductions and Manufacturing, Which Can Adversely Affect Our Revenues, Gross Margins and Net Income.
Because our systems are complex, there can be a significant lag between the time we introduce a system and the time we begin to produce that system in volume. As technology in the semiconductor industry becomes more sophisticated, we are finding it increasingly challenging to design and integrate complex technologies into our systems, to procure adequate supplies of specialized components, to train our technical and manufacturing personnel and to make timely transitions to high-volume manufacturing. Many customers also require customized systems, which compound these challenges. We sometimes incur substantial unanticipated costs to ensure that our new products function properly and reliably early in their life cycle. These costs could include greater than expected installation and support costs or increased materials costs as a result of expedited changes. We may not be able to pass these costs on to our customers. In addition, we have experienced, and may continue to experience, greater than expected costs in both low and high volume manufacturing. Any of these results could seriously harm our business.
For example, beginning late in the third quarter of fiscal 2000, PRI encountered manufacturing and supply chain problems relating to its TurboStocker product, which PRI had planned to begin manufacturing in high volume in response to increased customer demand at that time. These problems delayed shipments and customer acceptance, which caused PRI’s revenues for fiscal 2000 and 2001 to be lower than expected and also contributed to its net losses for these periods. From the time PRI discovered these problems through the end of fiscal 2001, PRI incurred expenditures of $15.4 million to address these problems, consisting of approximately $3.4 million for associated engineering costs, $5.7 million of additional warranty costs, and $6.3 million to repair or retrofit TurboStockers already installed in the field where necessary. These costs also contributed to PRI’s losses for these periods. Of these costs, the $6.3 million reserve for repairs and retrofits was recorded as a special charge in the fourth quarter of PRI’s fiscal year 2001. The balance of the costs were recorded in PRI’s results of operations during the period beginning with the fourth quarter of its fiscal year 2000 and ending with the last quarter of its fiscal year 2001. PRI also consolidated its TurboStocker manufacturing operations into a single location, upgraded its enterprise resource planning system and outsourced additional manufacturing of components and subassemblies. PRI’s and our efforts to date may be insufficient to resolve the manufacturing problems with the TurboStocker, and we may encounter similar difficulties and delays in the future.
Moreover, on occasion we have failed to meet our customers’ delivery or performance criteria, and as a result we have deferred revenue recognition, incurred late delivery penalties and had higher warranty and service costs. These failures could occur again and could also cause us to lose business from those customers and suffer long-term damage to our reputation.
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We May Have Difficulty Managing Operations.
In September and December 2002, we announced restructuring programs to further reduce our cost structure. The Company anticipates additional cost reduction initiatives will be implemented through the remainder of fiscal year 2003 in its continuing efforts to align costs with revenues. The restructuring programs will include, among other things, additional reductions in employee headcount, abandonment of certain product lines and information technology projects and the consolidation of certain facilities. We had also announced a restructuring program in September 2001. Due in large part to the prolonged downturn in the semiconductor industry, this program did not achieve its aim of aligning our operating costs with our expected revenues. We cannot guarantee that our more recently announced restructuring programs will be successful in that respect. The reduction in force could result in a temporary reduction in productivity by our employees. In addition, our future operating results will depend on the success of this restructuring program as well as on our overall ability to manage operations, which includes, among other things:
An unexpected further decline in revenues without a corresponding and timely reduction in expenses or a failure to manage other aspects of our operations could have a further material adverse effect on our business, results of operations or financial condition.
We May Be Unable to Retain Necessary Personnel Because of Intense Competition for Highly Skilled Personnel.
We need to retain a substantial number of employees with technical backgrounds for both our hardware and our software engineering, manufacturing, sales and support staffs. The market for these employees is very competitive, and we have occasionally experienced delays in hiring qualified personnel. Due to the cyclical nature of the demand for our products and the current prolonged downturn in the semiconductor market, we recently reduced our workforce on several occasions as a cost reduction measure. If the semiconductor market experiences an upturn, we may need to rebuild our workforce. Due to the competitive nature of the labor markets in which we operate, this type of employment cycle increases the risk of being unable to retain and recruit key personnel. Our inability to recruit, retain and train adequate numbers of qualified personnel on a timely basis could adversely affect our ability to develop, manufacture, install and support our products and may result in lost revenue and market share if customers seek alternative solutions.
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Our International Business Operations Expose Us to a Number of Difficulties in Coordinating Our Activities Abroad and in Dealing With Multiple Regulatory Environments.
Sales to customers outside North America accounted for approximately 46% of our total revenues in the three months ended December 31, 2002, 48% of our total revenues, excluding PRI’s revenues, in fiscal 2002, 50% in fiscal 2001 and 48% in fiscal 2000. We anticipate that international sales will continue to account for a significant portion of our revenues. Many of our vendors are located in foreign countries. As a result of our international business operations, we are subject to various risks, including:
To support our international customers, we maintain locations in several countries, including Belgium, Canada, China, France, Germany, Japan, Malaysia, Singapore, South Korea, Switzerland, Taiwan and the United Kingdom. We cannot guarantee that we will be able to manage these operations effectively. Also, we cannot guarantee that our investment in these international operations will enable us to compete successfully in international markets or to meet the service and support needs of our customers, some of whom are located in countries where we have no infrastructure.
Although our international sales are primarily denominated in U.S. dollars, changes in currency exchange rates can make it more difficult for us to compete with foreign manufacturers on price. If our international sales increase relative to our total revenues, these factors could have a more pronounced effect on our operating results.
In Taiwan, our business could be impacted by the political, economic and military conditions in that country. China does not recognize Taiwan’s independence and the two countries are continuously engaged in political disputes. Both countries have continued to conduct military exercises in or near the others territorial waters and airspace. These disputes may continue or escalate, resulting in an economic embargo, a disruption in shipping or even military hostilities. The political instability in Taiwan could result in the creation of political or other non-economic barriers to us being able to sell our products or create local economic conditions that reduce demand for our products among our target markets.
In both Taiwan and Japan, our customers are subject to risk of natural disasters, which, if they were to occur, could harm our revenue. Semiconductor fabrication facilities have in the past experienced major reductions in foundry capacity due to earthquakes in Taiwan and Japan. For example, in 1999, Taiwan experienced several earthquakes which impacted foundries due to power outages, physical damage and employee dislocation. Our business could suffer if a major customer’s manufacturing capacity was adversely affected by a natural disaster such as an earthquake, fire, tornado or flood.
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The political stability of Asia may be negatively affected by North Korea’s renewed efforts to produce nuclear weapons. This political instability could result in economic instability in the region, particularly in South Korea. Any kind of economic instability in South Korea, Taiwan and Japan or other parts of Asia where we do business could have a severe negative impact on our operating results due to the large concentration of our sales activities in this region.
We Must Continually Improve Our Technology to Remain Competitive.
Technology changes rapidly in the semiconductor, data storage and flat panel display manufacturing industries. We believe our success depends in part upon our ability to enhance our existing products and to develop and market new products to meet customer needs, even in industry downturns. For example, as the semiconductor industry transitions from 200mm manufacturing technology to 300mm technology, we believe it is important to our future success to develop and sell new products that are compatible with 300mm technology. If our competitors introduce new technologies or new products, our sales could decline and our existing products could lose market acceptance. We cannot guarantee that we will identify and adjust to changing market conditions or succeed in introducing commercially rewarding products or product enhancements. The success of our product development and introduction depends on a number of factors, including:
Because we must commit resources to product development well in advance of sales, our product development decisions must anticipate technological advances by leading semiconductor manufacturers. We may not succeed in that effort. Our inability to select, develop, manufacture and market new products or enhance our existing products could cause us to lose our competitive position and could seriously harm our business.
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We Face Significant Competition Which Could Result in Decreased Demand for Our Products or Services.
The markets for our products are intensely competitive. We may be unable to compete successfully.
We believe the primary competitive factors in the equipment automation segment are throughput, reliability, contamination control, accuracy and price/performance. We believe that our primary competition in the equipment automation market is from integrated original equipment manufacturers that satisfy their semiconductor and flat panel display handling needs internally rather than by purchasing systems or modules from an independent supplier like us. Many of these original equipment manufacturers have substantially greater resources than we do. Applied Materials, Inc., the leading process equipment original equipment manufacturer, develops and manufactures its own central wafer handling systems and modules. We may not be successful in selling our products to original equipment manufacturers that internally satisfy their wafer or substrate handling needs, regardless of the performance or the price of our products. Moreover, integrated original equipment manufacturers may begin to commercialize their handling capabilities and become our competitors.
We believe that the primary competitive factors for factory interface products in the factory automation hardware segment are technical and technological capabilities, reliability, price/performance, ease of integration and global sales and support capability. In this market, we compete directly with Asyst, Rorze, Fortrend, Newport, TDK, Yasakawa and Hirata. Some of these competitors have substantial financial resources and extensive engineering, manufacturing and marketing capabilities. Our automated material handling systems division in the factory automation hardware segment competes with Daifuku, Murata Machiner, the Asyst-Shinko Electric joint venture and a number of other smaller foreign and domestic manufacturers of automated machinery used in semiconductor fabrication facilities. The primary competitive factors in this market are quality, robustness and performance, price, ease of integration, vendor reputation, financial stability, support and on-time delivery.
We believe that the primary competitive factors in the end-user semiconductor manufacturer market for factory automation software are product functionality, price/performance, ease of use, ease of integration and installation, hardware and software platform compatibility, costs to support and maintain, vendor reputation and financial stability. The relative importance of these competitive factors may change over time. We directly compete in this market with various competitors, including Applied Materials-Consilium, IBM, Si-view, HP/Compaq, TRW, Camstar and numerous small, independent software companies. We also compete with the in-house software staffs of semiconductor manufacturers like NEC, Texas Instruments and Intel. Most of those manufacturers have substantially greater resources than we do.
It is a normal incident of the purchasing process of most of our existing and potential customers to actively evaluate the product and service offerings of our competitors. In some cases that process involves utilizing the products of competitors on a trial basis at the customer’s site. This is done to allow those customers to identify the product and service offerings that they judge to be of the highest quality and most suited to their needs. Customers also engage in such practices as part of a program to avoid dependence on sole-source suppliers for certain of their needs. The existence of such practices can make it more difficult for us to gain new customers and to win repeat business from existing customers.
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New products developed by our competitors or more efficient production of their products could increase pricing pressure on our products. In addition, companies in the semiconductor capital equipment industry have been facing pressure to reduce costs. Either of these factors may require us to make significant price reductions to avoid losing orders. Further, our current and prospective customers continuously exert pressure on us to lower prices, shorten delivery times and improve the capabilities of our products. Failure to respond adequately to such pressures could result in a loss of customers or orders.
Much of Our Success and Value Lies in Our Ownership and Use of Intellectual Property, and Our Failure to Protect that Property Could Adversely Affect Our Future Operations.
Our ability to compete is heavily affected by our ability to protect our intellectual property. We rely primarily on trade secret laws, confidentiality procedures, patents, copyrights, trademarks and licensing arrangements to protect our intellectual property. The steps that we have taken to protect our technology may be inadequate. Existing trade secret, trademark and copyright laws offer only limited protection. Our patents could be invalidated or circumvented. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold may not fully protect our products. This may make the possibility of piracy of our technology and products more likely. We cannot guarantee that the steps we have taken to protect our intellectual property will be adequate to prevent misappropriation of our technology. Other companies could independently develop similar or superior technology without violating our proprietary rights. There has been substantial litigation regarding patent and other intellectual property rights in semiconductor-related industries. We may engage in litigation to:
Any litigation could result in substantial cost to us and divert the attention of our management, which could harm our operating results and our future operations.
Our Operations Could Infringe on the Intellectual Property Rights of Others.
Particular aspects of our technology could be found to infringe on the intellectual property rights or patents of others. Other companies may hold or obtain patents on inventions or may otherwise claim proprietary rights to technology necessary to our business. We cannot predict the extent to which we may be required to seek licenses or alter our products so that they no longer infringe the rights of others. We cannot guarantee that the terms of any licenses that we may be required to seek will be reasonable. Similarly, changing our products or processes to avoid infringing the rights of others may be costly or impractical or could detract from the value of our products. A party making a claim of infringement could secure a judgment against us that requires it to pay substantial damages. A judgment could also include an injunction or other court order that could prevent us from selling our products. Any claim of infringement by a third party also could cause us to incur substantial costs defending against the claim, even if the claim is invalid, and could distract the attention of our management. Any of these events could seriously harm our business.
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Our Business May Be Harmed by Infringement Claims of General Signal or Applied Materials.
We received notice from General Signal Corporation (“General Signal”) alleging certain of our tool automation products that we sell to semiconductor process tool manufacturers infringed General Signal’s patent rights. The notification advised us that General Signal was attempting to enforce its rights to those patents in litigation against Applied Materials, and that, at the conclusion of that litigation, General Signal intended to enforce its rights against us and others. According to a press release issued by Applied Materials in November 1997, Applied Materials settled its litigation with General Signal by acquiring ownership of five General Signal patents. Although not verified by us, these five patents would appear to be the patents referred to by General Signal in its prior notice to us. Applied Materials has not contacted us regarding these patents. We cannot guarantee that we would prevail in any litigation by Applied Materials seeking damages or expenses from it or to enjoin it from selling its products on the basis of the alleged patent infringement, or that a license for any of the alleged infringed patents will be available to us on reasonable terms, if at all. A substantial portion of our revenues for fiscal 2001 derived from the products that are alleged to infringe.
Our Business May Be Harmed by Infringement Claims of Asyst Technologies, Inc.
We acquired certain assets, including a transport system known as IridNet, from the Infab division of Jenoptik AG on September 30, 1999. Asyst Technologies, Inc. (“Asyst”) had previously filed suit against Jenoptik AG and other defendants, claiming that products of the defendants, including IridNet, infringe Asyst’s patents. This ongoing litigation may ultimately affect certain products sold by us. We received notice that Asyst may amend its complaint to name us as an additional defendant. Based on our investigation of Asyst’s allegations, we do not believe we are infringing any claims of Asyst’s patents. We intend to continue to support Jenoptik to argue vigorously, among other things, the position that the IridNet system does not infringe the Asyst patents. If Asyst prevails in prosecuting its case, Asyst may seek to prohibit us from developing, marketing and using the IridNet product without a license. Because patent litigation can be extremely expensive, time-consuming, and its outcome uncertain, we may seek to obtain licenses to the disputed patents. We cannot guarantee that licenses will be available to us on reasonable terms, if at all. If a license from Asyst is not available, we could be forced to incur substantial costs to reengineer the IridNet system, which could diminish its value. In any case, we may face litigation with Asyst. Such litigation could be costly and would divert our management’s attention and resources. In addition, even though sales of IridNet comprise a small percentage of our revenues, if we do not prevail in such litigation, we could be forced to pay significant damages or amounts in settlement. Jenoptik has agreed to indemnify us for losses that we may incur in this action.
In addition, Asyst made assertions in approximately 1995 that certain technology employed in products manufactured and sold by Hermos Informatik GmbH infringed one or more of Asyst’s patents. We acquired Hermos in July 2002. To date Asyst has taken no steps to assert or enforce any such rights against us and, to our knowledge, Asyst never commenced enforcement proceedings against Hermos prior to our acquisition of Hermos. Should Asyst seek to pursue any such claims against Hermos or us, we would be subject to all of the business and litigation risks identified in the preceding paragraph.
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Our Software Products May Contain Errors or Defects That Could Result in Lost Revenue, Delayed or Limited Market Acceptance or Product Liability Claims with Substantial Litigation Costs.
Complex software products like ours can contain errors or defects, particularly when we first introduce new products or when it releases new versions or enhancements. Any defects or errors could result in lost revenue or a delay in market acceptance, which would seriously harm our business and operating results. We have occasionally discovered software errors in our new software products and new releases after their introduction, and we expect that this will continue. Despite internal testing and testing by current and potential customers, our current and future products may contain serious defects.
Because many of our customers use their products for business-critical applications, any errors, defects or other performance problems could result in financial or other damage to our customers and could significantly impair their operations. Our customers could seek to recover damages from us for losses related to any of these issues. A product liability claim brought against us, even if not successful, would likely be time-consuming and costly to defend and could adversely affect our marketing efforts.
Risk Factors Relating to Our Common Stock
Our Operating Results Fluctuate Significantly, Which Could Negatively Impact Our Business and Our Stock Price.
Our revenues, margins and other operating results can fluctuate significantly from quarter to quarter depending upon a variety of factors, including:
A portion of our revenues from the factory automation software business depends on achieving project milestones. As a result, our revenue from the factory automation software business is subject to fluctuations depending upon a number of factors, including our ability to achieve project milestones on a timely basis, if at all, as well as the timing and size of projects.
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Our Stock Price is Volatile.
The market price of our common stock has fluctuated widely. For example, between July 25, 2002 and August 22, 2002, the price of our common stock rose from approximately $14.15 to $23.80 per share and between August 22, 2002 and September 24, 2002, the price of our common stock dropped from approximately $23.80 to $10.30 per share. Consequently, the current market price of our common stock may not be indicative of future market prices, and we may be unable to sustain or increase the value of an investment in our common stock. Factors affecting our stock price may include:
In addition, the stock market has recently experienced extreme price and volume fluctuations. These fluctuations have particularly affected the market prices of the securities of high technology companies like ours. These market fluctuations could adversely affect the market price of our common stock.
Provisions of Our Certificate of Incorporation, Bylaws, Contracts and 4.75% Convertible Subordinated Notes Due 2008 May Discourage Takeover Offers and May Limit the Price Investors Would Be Willing to Pay For Our Common Stock.
Our certificate of incorporation and bylaws contain provisions that may make an acquisition of us more difficult and discourage changes in our management. These provisions could limit the price that investors might be willing to pay for shares of our common stock. In addition, we have adopted a shareholder rights plan. In many potential takeover situations, rights issued under the plan become exercisable to purchase our common stock at a price substantially discounted from the then applicable market price of our common stock. Because of its possible dilutive effect to a potential acquirer, the rights plan would generally discourage third parties from proposing a merger with or initiating a tender offer for us that is not approved by our board of directors. Accordingly, the rights plan could have an adverse impact on our stockholders who might want to vote in favor of a merger or participate in a tender offer. In addition, we may issue shares of preferred stock upon terms the board of directors deems appropriate without stockholder approval. Our ability to issue preferred stock in such a manner could enable our board of directors to prevent changes in our management or control. Finally, upon a change of control of us, we may be required to repurchase convertible subordinated notes at a price equal to 100% of the principal outstanding amount thereof, plus accrued and unpaid interest, if any, to the date of the repurchase. Such a repurchase of the notes would represent a substantial cash outflow; accordingly, the repayment of the notes upon a change of control could discourage third parties from proposing a merger with, initiating a tender offer for or otherwise attempting to gain control of us.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
INTEREST RATE EXPOSURE
Based on Brooks’ overall interest exposure at December 31, 2002, including all interest rate-sensitive instruments, a near-term change in interest rates within a 95% confidence level based on historical interest rate movements would not materially affect the consolidated results of operations or financial position.
CURRENCY RATE EXPOSURE
Traditionally, Brooks’ foreign revenues have been generally denominated in United States dollars. Accordingly, foreign currency fluctuations have not had a significant impact on the comparison of the results of operations for the periods presented. The costs and expenses of Brooks’ international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of Brooks’ international subsidiaries is the local currency, foreign currency translation adjustments do not impact operating results, but instead are reflected as a component of stockholders’ equity under the caption “Accumulated other comprehensive income (loss)”. To the extent Brooks expands its international operations or changes its pricing practices to denominate prices in foreign currencies, Brooks will be exposed to increased risk of currency fluctuation.
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Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Within the 90 day period preceding the filing of this Report, and pursuant to Rules 13a-14(c) and 15(d)-14(c) under the Securities Exchange Act of 1934, the Company’s chief executive officer (“CEO”) and acting chief financial officer (“CFO”) have concluded, subject to the limitations inherent in such controls noted below, that the Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time specified in the SEC’s rules and forms and are operating in an effective manner.
(b) Limitations Inherent In All Controls. The Company’s management, including the CEO and CFO, recognizes that our disclosure controls and our internal controls (discussed below) cannot prevent all error or all attempts at fraud. Any controls system, no matter how well crafted and operated, can only provide reasonable, and not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints that affect the operation of any such system and that the benefits of controls must be considered relative to their costs. Because of the inherent limitations in any control system, no evaluation or implementation of a control system can provide complete assurance that all control issues and all possible instances of fraud have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake.
(c) Change in Internal Controls. In July 2002, concerns were raised that the Company’s internal processes may not have identified in timely fashion a customer communication affecting the Company’s ability to continue to recognize revenue from a particular transaction. Actions were then implemented beginning in August 2002 to improve the Company’s internal controls regarding customer communications. These included the Company’s former CFO holding meetings with senior management to ensure that they understood the importance of immediately communicating, either in writing or verbally, all material issues that could affect revenue recognition to appropriate financial and legal representatives inside the Company. Additionally, meetings and presentations were prepared and delivered to the Company’s sales personnel in October and November 2002 to educate these employees concerning the importance of bringing all such matters to the immediate attention of the Company’s senior cross-functional management team. Further, the Company has initiated actions to implement a senior cross-functional project review process designed to ensure that all elements of customer programs, including revenue recognition issues, are regularly reviewed at senior levels.
The transaction described above was reported by the Company’s independent auditors to management and the Audit Committee of the Company’s Board of Directors as a material control weakness at the Audit Committee’s meeting held on November 18, 2002.
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PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(b) There were no reports on Form 8-K filed during the quarterly period ended December 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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CERTIFICATIONS
I, Robert J. Therrien, do certify that:
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I, Steven E. Hebert, do certify that:
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EXHIBIT INDEX
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