UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
OR
Commission File Number 0-25434
BROOKS AUTOMATION, INC.
15 Elizabeth DriveChelmsford, Massachusetts
01824
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.
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 31, 2004:
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TABLE OF CONTENTS
INDEX
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BROOKS AUTOMATION, INC.CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these unaudited consolidated financial statements.
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BROOKS AUTOMATION, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
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BROOKS AUTOMATION, INC.CONSOLIDATED STATEMENTS OF CASH FLOWS
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BROOKS AUTOMATION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation
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BROOKS AUTOMATION, INC.NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) - Continued
2. Goodwill and Intangible Assets
Components of the Company’s identifiable intangible assets are as follows (in thousands):
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3. Loss per Share
4. Comprehensive Loss
5. Common Stock Offering
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6. Stock Based Compensation
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7. Segment, Geographic Information and Significant Customers
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8. Restructuring and Acquisition-Related Liabilities
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9. Other Balance Sheet Information
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10. Contingencies
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” which involve known risks, uncertainties and other factors which may cause the actual results, our performance or achievements 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
We are a leading supplier of automation products and solutions primarily serving the worldwide semiconductor market. We supply hardware, software and services to both chip manufacturers and original equipment manufacturers, or OEMs, who make process equipment for semiconductor manufacturing. Our offerings range from hardware and software modules to fully integrated systems and services. Although our core business addresses the increasingly complex automation requirements of the global semiconductor industry, we are also focused on providing automation solutions for a number of related industries, including flat panel display manufacturing, data storage and other complex manufacturing.
We operate in three major segments: equipment automation, factory automation hardware and factory automation software. Equipment or tool automation consists of hardware and software used on or within process tools to move individual wafers in and out of a tool. Factory automation hardware consists of equipment used inside the fab, but external to a process tool, to automate the handling of batches of wafers or other material throughout the production floor, as well as specialized tools for automatically sorting, storing and inspecting material. Factory automation software is used within a factory in computer integrated manufacturing for controlling and managing production and resources in a fab. We sell our products and services to nearly every major semiconductor chip manufacturer and OEM in the world, including all of the top ten chip companies and nine of the top ten equipment companies.
Traditionally, our 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 our international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of our international subsidiaries is the local currency, foreign currency translation adjustments are reflected as “Accumulated other comprehensive income (loss),” which is a component of stockholders’ equity. As certain of our manufacturing costs are denominated in foreign currency, weakness in the United States dollar can generate margin pressure. To the extent that we expand our international operations or change our pricing practices to denominate prices in foreign currencies, we will be exposed to increased risk of currency fluctuation.
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BROOKS AUTOMATION, INC.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS - Continued
In view of the market conditions we are currently facing, we are focusing our major efforts in the following areas:
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Three Months Ended December 31, 2003, Compared to Three Months Ended December 31, 2002
Revenues
We reported revenues of $82.5 million in the three months ended December 31, 2003, compared to $84.9 million in the same prior year period. We are currently experiencing an increase in the market for products to our OEM customer base. This current trend however may not be indicative of future results.
Our equipment automation segment reported revenues of $47.8 million in the three months ended December 31, 2003, an increase of 31.8% from revenues of $36.3 million in the same prior year period. The increase is attributable to increased shipments to our OEM customer base as demand for products from these customers has increased. Our factory automation hardware segment reported revenues of $12.5 million in the three months ended December 31, 2003, a decrease of 52.7% from revenues of $26.5 million in the same prior year period. The decrease is attributable to the completion and acceptance by the customer of a major project in the prior year period principally related to our automated material handling system business. We have recently experienced improved order volume for our factory automation hardware products reflective of current industry trends. This may be indicative of increased revenues in future periods. Our factory automation software segment reported revenues of $21.2 million in the three months ended December 31, 2003, a slight decrease of $0.2 million from the same prior year period.
Product revenues increased slightly, to $55.3 million, in the three months ended December 31, 2003, compared to $55.0 million in the three months ended December 31, 2002. The increase is primarily attributable to increased OEM product shipments from our equipment automation segment offset by lower product revenues from our factory automation hardware segment.
Service revenues for the three months ended December 31, 2003 were $27.3 million, a decrease of $2.6 million from the three months ended December 31, 2002. The decrease is primarily attributable to the completion and acceptance by the customer of a major project for our factory automation hardware segment in the prior year period.
Foreign revenues were $35.7 million, or 43.3% of revenues, and $39.5 million, or 46.5% of revenues, in the three month periods ended December 31, 2003 and 2002, respectively. We expect that foreign revenues will continue to account for a significant portion of total revenues.
Deferred revenues of $34.3 million at December 31, 2003 consisted of $5.2 million related to deferred maintenance contracts and $29.1 million related to revenues deferred for acceptance based and completed contract method arrangements. Deferred revenues of $33.7 million at September 30, 2003 consisted of $6.6 million related to deferred maintenance contracts and $27.1 million related to revenues deferred for acceptance based and completed contract method arrangements. We expect our deferred revenues balance to decrease significantly in the next six months with the anticipated completion and acceptance of significant projects.
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Gross Margin
Gross margin increased to 36.6% for the three months ended December 31, 2003, compared to 28.7% for the same prior year period. The increase is primarily attributable to our plant consolidation and other cost reduction measures as well as a more favorable mix of OEM products which traditionally have higher gross margins. Our equipment automation segment gross margin increased to 34.1% in the three months ended December 31, 2003, from 18.9% in the comparable prior year period. The increase is primarily attributable to our plant consolidation and other cost reduction measures. Gross margin for our factory automation hardware segment decreased to 6.2% in the three months ended December 31, 2003, from 23.1% in the same prior year period. The decrease is primarily the result of a decrease in the sales volume of our factory automation hardware products resulting in decreased absorption of our fixed costs related to this segment. Our factory automation software segment’s gross margin for the three months ended December 31, 2003 increased to 61.6%, compared to 52.8% in the same prior year period. The change is primarily due to the impact of our cost reduction measures.
Gross margin on product revenues was 32.8% for the three months ended December 31, 2003, an increase from 29.7% in the same prior year period. The increase in gross margin is primarily attributable to the impact of our cost reduction measures and additional OEM mix.
Gross margin on service revenues was 44.4% for the three months ended December 31, 2003, an increase from 27.0% for the three months ended December 31, 2002. The increase is primarily a result of a change in business mix and the positive impact of our cost reduction measures.
Research and Development
Research and development expenses for the three months ended December 31, 2003 were $16.1 million, a decrease of $3.6 million, compared to $19.7 million in the three months ended December 31, 2002. The decrease in spending is primarily the result of our cost reduction actions. Our plan is to continue to invest in research and development to enhance existing products and develop new tool and factory hardware and software automation solutions for the semiconductor, data storage and flat panel display manufacturing industries. These investments will be focused on those research and development projects that are most consistent with our business realignment.
Selling, General and Administrative
Selling, general and administrative expenses were $19.8 million for the three months ended December 31, 2003, a decrease of $14.3 million, compared to $34.1 million in the same prior year period. Selling, general and administrative expenses also decreased as a percentage of revenues in the three months ended December 31, 2003, to 24.0%, from 40.2% in the comparable prior year period. The decrease in these expenditures as a percentage of revenues for the three months ended December 31, 2003, is attributable to our cost containment and reduction initiatives, coupled with $7.1 million of accelerated depreciation associated with our 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, which were recorded in the prior year period. We expect that selling, general and administrative expense in subsequent periods will grow slightly from the current existing levels.
Amortization of Acquired Intangible Assets
Amortization expense for acquired intangible assets totaled $0.9 million in the three months ended December 31, 2003, compared to $2.0 million in the three months ended December 31, 2002. The reduction in amortization of acquired intangible assets is primarily attributable to many assets reaching the end of their useful lives.
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Restructuring and Acquisition-related Charges
Restructuring and acquisition-related charges decreased by $21.1 million in the three months ended December 31, 2003 compared to the same prior year period, the result of a charge taken in the three months ended December 31, 2002. The charge related to our ongoing efforts to realign costs with revenues and consisted of $12.4 million related to workforce reductions, $0.6 million related to the consolidation of several of the our facilities, $6.1 million of capitalized costs related to cancelled systems and $2.0 million comprised of legal, relocation and consulting costs to integrate our PRI acquisition. We continue to evaluate measures in which to consolidate operations and reduce costs, which may result in charges in future periods.
Interest Income and Expense
Interest income decreased by $0.8 million, to $0.9 million, in the three months ended December 31, 2003, compared to the same prior year period, primarily a result of lower interest rates. Interest expense of $2.4 million and $2.6 million for the three months ended December 31, 2003 and 2002, respectively, is primarily attributable to interest on our Convertible Subordinated Notes.
Other (Income) Expense
Other (income) expense in the three months ended December 31, 2003 primarily represents realized gains on foreign currency transactions during the period. Other expense of $12.7 million in the three months ended December 31, 2002 was primarily the result of the impairment of $11.5 million on our investment in Shinsung warrants which was recorded in the prior year period.
Income Tax Provision
We recorded a net income tax provision of $1.0 million in the three months ended December 31, 2003, compared to a net income tax provision of $4.8 million in the same prior year period. The tax provision in the current quarter is attributable to foreign income and withholding taxes. We continue to provide a full valuation allowance at December 31, 2003, as we believe it is more likely than not that future net tax benefits from accumulated net operating losses and deferred taxes will not be realized.
Liquidity and Capital Resources
At December 31, 2003, we had cash, cash equivalents and marketable securities aggregating $312.7 million. This amount was comprised of $212.3 million of cash and cash equivalents, $3.0 million of investments in short-term marketable securities and $97.4 million of investments in long-term marketable securities.
Cash and cash equivalents were $212.3 million at December 31, 2003, an increase of $87.3 million from September 30, 2003. This increase in cash and cash equivalents is primarily due to cash provided from the issuance of common stock and exercise of common stock options of $125.1 million, offset by cash used in operations of $10.2 million, capital expenditures of $1.2 million, and net purchases of marketable securities of $26.6 million.
Cash used in operations was $10.2 million for the three months ended December 31, 2003, and is primarily attributable to our net loss of $8.9 million, which includes depreciation and amortization of $4.6 million. Working capital changes provided approximately $2.0 million while other working capital changes of restructuring payments and our semi-annual interest payment used approximately $5.1 million and $4.2 million, respectively.
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Cash used in investing activities was $28.0 million for the three months ended December 31, 2003, and is principally comprised of net purchases of marketable securities aggregating $26.6 million and $1.2 million of capital additions.
Cash provided by financing activities for the three months ended December 31, 2003, was comprised of $125.1 million of proceeds from our common stock offering and from the exercise of options to purchase our common stock offset by $33,000 for the payment of long-term debt. We expect to use the proceeds from the supplemental common stock offering for general corporate purposes as well as possibly using a portion of the proceeds to reduce, repay or refinance existing indebtedness. We may also use our resources to acquire companies, technologies or products that complement our business.
On May 23, 2001, we 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 notes will mature on June 1, 2008. We may redeem the notes at stated premiums on or after June 6, 2004, or earlier if the price of our common stock reaches certain prices. Holders may require us to repurchase the notes upon a change in control in certain circumstances. The notes are convertible at any time prior to maturity, at the option of the holders, into shares of our common stock, at a conversion price of $70.23 per share, subject to certain adjustments. The notes are subordinated to our senior indebtedness and structurally subordinated to all indebtedness and other liabilities of our subsidiaries.
While we have no significant capital commitments, as we expand our product offerings, we anticipate that we will continue to make capital expenditures to support our business and improve our computer systems infrastructure.
At December 31, 2003, we had approximately $0.5 million of an uncommitted demand promissory note facility still in use, all of it for letters of credit.
Our contractual obligations consist of the following (in thousands):
The table above does not include an accrual of $9.9 million related to the projected retirement benefit to be paid to our Chief Executive Officer under his current employment agreement. The projected amount payable is earned over time and due immediately upon his retirement; however, at this time, his retirement date is not determinable. His current employment agreement will expire on October 1, 2005.
We believe that our existing resources will be adequate to fund our currently planned working capital and capital expenditure requirements for at least the next twelve months. However, we used $10.2 million to fund our operations for the three months ended December 31, 2003, and the cyclical nature of the semiconductor industry makes it very difficult for us to predict future liquidity requirements with certainty.
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Recently Enacted Accounting Pronouncements
In December, 2000 the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46R”), which clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements”, to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support and replaces FASB Interpretation No. 46. FIN 46 provides 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. 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. This interpretation is effective in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application of this pronouncement by public entities for all other types of entities, subject to FIN 46R, is required in financial statements for periods ending after March 15, 2004. The adoption of FIN 46R is not expected to have a material impact on our financial position or results of operations.
In December 2003, the Staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition”, which supercedes SAB 101, “Revenue Recognition in Financial Statements”. The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, superceded as a result of the issuance of EITF 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables.” Additionally, SAB 104 rescinds the SEC’s “Revenue Recognition in Financial Statements Frequently Asked Questions and Answers” (the “FAQ”) issued with SAB 101 that had been codified in SEC Topic 13, “Revenue Recognition”. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 had no impact on our financial position or results of operations.
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, 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.
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Risks Relating to Our Industry
Due in part to the cyclical nature of the semiconductor manufacturing industry, we have recently incurred substantial operating losses and may have future losses.
Our business is largely dependent on the semiconductor manufacturing industry and other businesses employing similar manufacturing technology. In recent years, these businesses have experienced unpredictable and volatile business cycles due in large part to rapid changes in demand and manufacturing capacity for semiconductors. The semiconductor industry has been in a prolonged downturn, which has negatively impacted us since the third quarter of fiscal 2001. As a result of the downturn, our OEM and end-user customers significantly reduced the rate at which they purchase our products and services. This reduced demand adversely affected our sales volume and gross margins and resulted in substantial operating losses during fiscal 2001, 2002 and 2003. These losses were due to, among other things, writedowns for obsolete inventory and expenses related to investments in research and development and global service and support necessary to maintain our competitive position. We may have future operating losses in the event of future industry downturns.
The cyclical nature of the semiconductor industry also presents risks in the event of a sustained market upturn.
In recent months, spending in the semiconductor capital equipment industry has increased, with a resulting increase in the demand for our products and services. As a result of this upturn we may have insufficient inventory and manufacturing capacity to meet our customer needs on a timely basis, which could result in customer dissatisfaction, the loss of customers and various other expenses that could reduce gross margins and profitability. It is also not possible to predict the duration of any increase in the demand for our products and services. There can be no assurance that this current trend will continue.
Risks Relating to Brooks
Our operating results could fluctuate significantly, which could negatively impact our business.
Our revenues, operating margins and other operating results could fluctuate significantly from quarter to quarter depending upon a variety of factors, including:
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As a result of these risks, we believe that quarter to quarter comparisons of our revenue and operating results may not be meaningful, and that these comparisons may not be an accurate indicator of our future performance. If our quarterly results fluctuate significantly, our business could be harmed.
Our restructuring activities and cost reduction measures may be insufficient to offset reduced demand for our products and may have materially harmed our business.
Primarily in response to reduced demand for our products, during the recent downturn in the semiconductor industry, we implemented cost reductions and other restructuring activities throughout our organization. These cost saving measures included several reductions in workforce, salary and wage reductions, reduced inventory levels, consolidation of our manufacturing facilities to our Chelmsford, Massachusetts facilities and the discontinuation of certain product lines and information technology projects. We cannot assure you that these cost reductions will be sufficient to offset the reduced sales levels we experienced during the downturn. Our failure to adequately reduce our costs, without a corresponding increase in demand for our products and sales level, could materially harm our business and prospects and our ability to maintain our competitive position. Our restructuring activities may have harmed us because they may have resulted in reduced productivity by our employees and increased difficulty in retaining and hiring a sufficient number of qualified employees familiar with our products and processes and the locales in which we operate.
Delays and technical difficulties in our products and operations may result in lost revenue, lost profit, delayed or limited market acceptance or product liability claims.
As the technology in our systems and manufacturing operations has become more complex and customized, it has become increasingly difficult to design and integrate these technologies into our newly-introduced systems, procure adequate supplies of specialized components, train technical and manufacturing personnel and make timely transitions to volume manufacturing. Due to the complexity of our manufacturing processes, we have on occasion 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. We cannot guarantee that we will not experience these problems in the future. We may be unable to recover expenses we incur due to changes or cancellations of customized orders. There are also substantial unanticipated costs associated with ensuring that new products function properly and reliably in the early stages of their life cycle. These costs have been and could in the future be greater than expected as a result of these complexities. Our failure to control these costs could materially harm our business and profitability.
Because many of our customers use our products for business-critical applications, any errors, defects or other performance or technical 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.
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If we do not continue to introduce new products and services that reflect advances in technology in a timely manner, our products and services will become obsolete and our operating results will suffer.
Our success is dependent on our ability to respond to the rapid rate of technological change present in the semiconductor manufacturing industry. The success of our product introduction and development depends on our ability to:
If we cannot succeed in responding in a timely manner to technological and/or market changes, we could lose our competitive position which could materially harm our business and our prospects.
Our systems integration services business has grown significantly, and poor execution of that business could adversely affect our operating results.
The number of projects for our systems integration services business, which integrates our software and hardware products with products provided by our customers or others, has grown significantly. We are in the early stages of developing this business. Accordingly, we are subject to the risks attendant to entering a business in which we have little direct experience. Due to complexities in this business, we may be unable to integrate our customers’ products with our software and hardware products in a cost effective and timely manner, which could adversely affect our operating results and materially harm our business. Our ability to succeed in this business and increase our revenues is further 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 this business requires. Since some of our competitors may have greater resources to hire personnel with those skills and knowledge, our operating margins could be adversely affected if we cannot hire and train additional personnel or deliver integrated systems to our customers on a timely basis consistent with our budgets.
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The global nature of our business exposes it to multiple risks.
For the quarter ended December 31, 2003, approximately 43% of our revenues were derived from sales outside North America. We expect that international sales, including increased sales in Asia, will continue to account for a significant portion of our revenues. As a result of our international operations, we are exposed to many risks and uncertainties, including:
• difficulties in staffing, managing and supporting operations in multiple countries;
• longer sales-cycles and time to collection;
• tariff and international trade barriers;
• fewer legal protections for intellectual property and contract rights abroad;
• different and changing legal and regulatory requirements in the jurisdictions in which we operate;
• government currency control and restrictions on repatriation of earnings;
• fluctuations in foreign currency exchange and interest rates; and
• political and economic changes, hostilities and other disruptions in regions where we operate.
Negative developments in any of these areas in one or more countries could result in a reduction in demand for our products, the cancellation or delay of orders already placed, threats to our intellectual property, difficulty in collecting receivables, and a higher cost of doing business, any of which could materially harm our business and profitability.
Our business could be materially harmed if we fail to adequately integrate the operations of the businesses that we may acquire.
We have made in the past, and may make in the future, acquisitions or significant investments in businesses with complementary products, services and/or technologies. Our acquisitions present numerous risks, including:
• difficulties in integrating the operations, technologies, products and personnel of the acquired companies and realizing upon the anticipated synergies of the combined businesses;
• defining and executing a comprehensive product strategy;
• managing the risks of entering markets or types of businesses in which we have limited or no direct experience;
• the potential loss of key employees, customers and strategic partners of acquired companies;
• unanticipated problems or latent liabilities, such as problems with the quality of the installed base of the target company’s products;
• problems associated with compliance with the target company’s existing contracts;
• difficulties in managing geographically dispersed operations; and
• the diversion of management’s attention from normal daily operations of the business.
If we acquire a new business, we may be required to expend significant funds, incur additional debt or issue additional securities, which may negatively affect our operations and be dilutive to our stockholders. In periods following an acquisition, we will be required to evaluate goodwill and acquisition-related intangible assets for impairment. When such assets are found to be impaired, they will be written down to estimated fair value, with a charge against earnings. For example, we were required to record impairment charges on acquired intangible assets and goodwill aggregating $479.3 million in fiscal 2002. The failure to adequately address these risks could materially harm our business and financial results.
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Risks Relating to Our Customers
We face substantial competition which may lead to price pressure an otherwise adversely affect our sales.
We face substantial competition throughout the world in each of our product areas. Our primary competitors range from large companies such as Asyst/Shinko, Daifuku, HP/Compaq, IBM, Murata, Rorze, TDK and Yaskawa to smaller, regional companies. We also compete with OEM manufacturers, such as Applied Materials, that satisfy their semiconductor and flat panel display handling needs internally rather than by purchasing systems or modules from a supplier like us. Some of our competitors have substantially greater financial resources and more extensive engineering, manufacturing, marketing and customer support capabilities than we do. We expect our competitors to continue to improve the performance of their current products and to introduce new products and technologies that could adversely affect sales of our current and future products and services. New products and technologies developed by our competitors or more efficient production of their products could require us to make significant price reductions to avoid losing orders. If we fail to respond adequately to pricing pressures or fail to develop products with improved performance or developments with respect to the other factors on which we compete, we could lose customers or orders. If we are unable to compete effectively, our business and prospects could be materially harmed.
Because we rely on a limited number of customers for a large portion of our revenues, the loss of one or more of these customers could materially harm our business.
We receive a significant portion of our revenues in each fiscal period from a relatively limited number of customers, and that trend is likely to continue. Sales to our ten largest customers accounted for approximately 37% of our total revenues in fiscal 2003, 33% in fiscal 2002 and 37% in fiscal 2001. As the semiconductor manufacturing industry continues to consolidate and further shifts to foundries which manufacture semiconductors designed by others, the number of our potential customers could decrease, which would increase our dependence on our limited number of customers. The loss of one or more of these major customers or a decrease in orders from one of these customers could materially affect our revenue, business and reputation.
Because of the lengthy sales cycles of many of our products, we may incur significant expenses before we generate any revenues related to those products.
Our customers may need several months to test and evaluate our products. This increases the possibility that a customer may decide to cancel or change plans, which could reduce or eliminate our sales to that customer. As a result of this lengthy sales cycle, we may incur significant research and development expenses, and selling, general and administrative expenses before we generate the related revenues for these products, and we may never generate the anticipated revenues if our customer cancels or changes its plans.
In addition, many of our products will not be sold directly to the end-user but will be components of other products. As a result, we rely on OEMs of our products to select our products from among alternative offerings to be incorporated into their equipment at the design stage; so-called design ins. The OEM’s decisions often precede the generation of volume sales, if any, by a year or more. Moreover, if we are unable to achieve these design ins from OEMs, we would have difficulty selling our products to that OEM because changing suppliers involves significant cost, time, effort and risk on the part of that OEM.
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Customers do not make long term commitments to purchase our products and our customers may cease purchasing our products at any time.
Sales of our products are often made pursuant to individual purchase orders and not under long-term commitments and contracts. Our customers frequently do not provide any assurance of minimum or future sales and are not prohibited from purchasing products from our competitors at any time. Accordingly, we are exposed to competitive pricing pressures on each order. Our customers also engage in the practice of purchasing products from more than one manufacturer to avoid dependence on sole-source suppliers for certain of their needs. The existence of these practices makes it more difficult for us to gain new customers and to win repeat business from existing customers.
Other Risks
We may be subject to claims of infringement of third-party intellectual property rights, or demands that we license third-party technology, which could result in significant expense and prevent us from using our technology.
We rely upon patents, trade secret laws, confidentiality procedures, copyrights, trademarks and licensing agreements to protect our technology. Due to the rapid technological change that characterizes the semiconductor and flat panel display process equipment industries, we believe that the improvement of existing technology, reliance upon trade secrets and unpatented proprietary know-how and the development of new products may be as important as patent protection in establishing and maintaining competitive advantage. To protect trade secrets and know-how, it is our policy to require all technical and management personnel to enter into nondisclosure agreements. We cannot guarantee that these efforts will meaningfully protect our trade secrets.
There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor related industries. We have in the past been, and may in the future be, notified that we may be infringing intellectual property rights possessed by other third parties. We cannot guarantee that infringement claims by third parties or other claims for indemnification by customers or end users of our products resulting from infringement claims will not be asserted in the future or that such assertions, if proven to be true, will not materially and adversely affect our business, financial condition and results of operations.
Particular elements 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 otherwise claim proprietary rights to technology necessary to our business. For example, twice in 1992 and once in 1994 we received notice from General Signal Corporation that it believed that certain of our tool automation products infringed General Signal’s patent rights. We believe the matters identified in the notice from General Signal were also the subject of a dispute between General Signal and Applied Materials, Inc., which was settled in November 1997. There are also claims that have been made by Asyst Technologies Inc. that certain products we acquired through acquisition embody intellectual property owned by Asyst and claims that have been made by Newport Corporation that certain of our products embody intellectual property owned by Newport. To date no action has been instituted against us directly by General Signal, Applied Materials, Asyst or Newport.
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We cannot predict the extent to which we might be required to seek licenses or alter our products so that they no longer infringe the rights of others. We also cannot guarantee that the terms of any licenses 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 and could detract from the value of our products. If a judgment of infringement were obtained against us, we could be required to pay substantial damages and a court could issue an order preventing us from selling one or more of our products. Further the cost and diversion of management attention brought about by such litigation could be substantial, even if we were to prevail. Any of these events could result in significant expense to us and may materially harm our business and our prospects.
Our failure to protect our intellectual property could adversely affect our future operations.
Our ability to compete is significantly affected by our ability to protect our intellectual property. Existing trade secret, trademark and copyright laws offer only limited protection, and certain of our patents could be invalidated or circumvented. In addition, the laws of some countries in which our products are or may be developed, manufactured or sold may not fully protect our products. We cannot guarantee that the steps we have taken to protect our intellectual property will be adequate to prevent the misappropriation of our technology. Other companies could independently develop similar or superior technology without violating our intellectual property rights. In the future, it may be necessary to engage in litigation or like activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others, including our customers. This could require us to incur significant expenses and to divert the efforts and attention of our management and technical personnel from our business operations.
If the site of the majority of our manufacturing operations were to experience a significant disruption in operations, our business could be materially harmed.
Most of our manufacturing facilities are concentrated in one location. If the operations of these facilities were disrupted as a result of a natural disaster, fire, power or other utility outage, work stoppage or other similar event, our business could be seriously harmed because we may be unable to manufacture and ship products and parts to our customers in a timely fashion.
Our business could be materially harmed if one or more key suppliers fail to deliver key components.
We currently obtain many of our key components on an as-needed, purchase order basis from numerous suppliers. We do not generally have long-term supply contracts with these suppliers, and many of them have undertaken cost-containment measures in light of the recent downturn in the semiconductor industry. In the event that the industry upturn we appear to be experiencing continues in future months or quarters these suppliers could 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 delays or reductions in product shipments to our customers. This could cause us to lose customers, result in delayed or lost revenue and otherwise materially harm our business.
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Our stock price is volatile.
The market price of our common stock has fluctuated widely. For example, between May 14, 2002 and September 30, 2002, the closing price of our common stock dropped from approximately $39.55 to $11.45 per share and between April 14, 2003 and September 8, 2003, the price of our common stock rose from approximately $7.80 to $27.68 per share. The market price of our common stock reached a low of approximately $7.59 on April 11, 2003. 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 in our organizational documents, contracts and 4.75% Convertible Subordinated Notes due 2008 may make it difficult for someone to acquire control of us.
Our certificate of incorporation, bylaws, contracts and 4.75% Convertible Subordinated Notes Due 2008 contain provisions that would make more difficult an acquisition of control of us and could limit the price that investors might be willing to pay for our securities, including:
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Item 3. Quantitative and Qualitative Disclosure About Market Risk
Interest Rate Exposure
At December 31, 2003, we had no variable interest rate debt, accordingly, a 10% change in the effective interest rate percentage would not materially affect the consolidated results of operations or financial position.
Currency Rate Exposure
Our foreign revenues are 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 our international subsidiaries are generally denominated in currencies other than the United States dollar. However, since the functional currency of our 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)”. As certain of our manufacturing costs are denominated in foreign currency, weakness in the United States dollar can generate margin pressure. To the extent that we expand our international operations or change our pricing practices to denominate prices in foreign currencies, we will be exposed to increased risk of currency fluctuation. Assets and liabilities of our international subsidiaries are translated at period end exchange rates. As such, foreign currency fluctuation results in increases and decreases in translated foreign currency assets and liabilities with the resulting offset being reflected in “Accumulated other comprehensive income (loss)”.
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Item 4. Controls and Procedures
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(b) The following report on Form 8-K was furnished during the quarterly period ended December 31, 2003:
The following reports on Form 8-K were filed during the quarterly period ended December 31, 2003:
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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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EXHIBIT INDEX
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