UNITED STATESSECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
OR
Commission File Number 0-25434
BROOKS 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.
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, May 2, 2005:
Common stock, $0.01 par value 45,267,084 shares
INDEX
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The accompanying notes are an integral part of these unaudited consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
The unaudited consolidated financial statements of Brooks Automation, Inc. and its subsidiaries (“Brooks” or the “Company”) included herein have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all material adjustments which are of a normal and recurring nature necessary for a fair presentation of the results for the periods presented have been reflected.
The accompanying financial information should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K, filed with the United States Securities and Exchange Commission for the year ended September 30, 2004.
Certain amounts in previously issued financial statements have been reclassified to conform to current presentation.
In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs - an Amendment of ARB No. 43, Chapter 4” (“FAS 151”). FAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the provisions of FAS 151 is not expected to have a material impact on the Company’s financial position or results of operations.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. FAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The provisions of this Statement are effective for the first annual reporting period that begins after June 15, 2005. The Company will adopt the provisions of FAS 123(R) effective as of October 1, 2005. The Company is currently evaluating the method of adoption and the impact of FAS 123(R) on the Company’s financial position and results of operations. The Company is also evaluating the form of any stock based incentive compensation it may offer in the future.
In December 2004, the FASB issued FASB Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“FAS 153”). FAS 153 requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. Further, it expands the exception for nonmonetary exchanges of similar productive assets to nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of the provisions of FAS 153 is not expected to have a material impact on the Company’s financial position or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) — Continued
The Company’s employee stock compensation plans are accounted for in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”) and related interpretations. Under this method, no compensation expense is recognized as long as the exercise price equals or exceeds the market price of the underlying stock on the date of the grant. The Company elected the disclosure-only alternative permitted under Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by FAS 148, for fixed stock-based awards to employees. All non-employee stock-based awards are accounted for at fair value and recorded as compensation expense over the period of service in accordance with FAS 123 and related interpretations.
On December 23, 2004, the Company accelerated the vesting of certain unvested stock options awarded to employees, officers and other eligible participants under the Company’s various stock option plans, other than its 1993 Non-Employee Director Stock Option Plan. As such, the Company fully vested options to purchase 1,229,239 shares of the Company’s common stock with exercise prices greater than or equal to $24.00 per share. The acceleration of the vesting of these options did not result in a charge based on generally accepted accounting principles. For pro forma disclosure requirements under FAS 123, the Company recognized $21.6 million of stock-based compensation for all options whose vesting was accelerated. The Company took this action because it may produce a more favorable impact on the Company’s results from operations in light of the effective date of FAS 123(R), which will take place in the Company’s first fiscal quarter of 2006.
The following pro forma information regarding net income (loss) has been calculated as if the Company had accounted for its employee stock options and stock purchase plan under the fair value method under FAS 123.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share information):
The results of applying the fair value method may have a materially different effect on pro forma net income (loss) in future years because of the acceleration of vesting described above, the fact that most options vest over several years and additional option grants are expected to be made subsequent to March 31, 2005.
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Property, plant and equipment as of March 31, 2005 and September 30, 2004 were as follows:
Depreciation expense was $3.1 million and $3.4 million for the three months ended March 31, 2005 and 2004, respectively, and $6.2 million and $7.0 million for the six months ended March 31, 2005 and 2004, respectively. As of March 31, 2005 and September 30, 2004, the Company did not have any equipment under capital leases.
Below is a reconciliation of net income (loss) per share and weighted average common shares outstanding for purposes of calculating basic and diluted earnings (loss) per share (in thousands, except per share data):
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Approximately 5,052,000 and 4,953,000 options to purchase common stock, 273,000 and 0 shares of restricted stock and approximately 2,492,000 and 2,492,000 shares of common stock obtained from the assumed conversion of the Company’s convertible debt were excluded from the computation of diluted earnings (loss) per share for the three months ended March 31, 2005 and 2004, respectively, as their effect would be anti-dilutive. Approximately 4,972,000 and 5,468,000 options to purchase common stock, 267,000 and 0 shares of restricted stock and approximately 2,492,000 and 2,492,000 shares of common stock obtained from the assumed conversion of the Company’s convertible debt were excluded from the computation of diluted loss per share for the six months ended March 31, 2005 and 2004, respectively, as their effect would be anti-dilutive. These options, restricted stock and conversions could, however, become dilutive in future periods.
Comprehensive income (loss) for the Company is computed as the sum of the Company’s net income (loss), the change in the cumulative translation adjustment and the total unrealized gain (loss) on the Company’s marketable securities. The calculation of the Company’s comprehensive income (loss) for the three and six months ended March 31, 2005 and 2004 is as follows (in thousands):
During the three and six months ended March 31, 2005, the Company issued 22,000 and 283,000 shares of restricted stock under the 2000 Equity Incentive Stock Option Plan. In addition, during the three months ended March 31, 2005, the Company cancelled 10,000 shares of restricted stock previously issued. These restricted stock awards have graded vesting over periods ranging from two to three years. Compensation expense related to the restricted stock is being recognized on a straight line basis over the vesting period, based on the fair market value on the date of the restricted stock grant. The Company calculated the grant date fair value of all the restricted stock awards to be $4.5 million and recorded compensation expense of $0.4 million and $0.6 million related to the vesting of the restricted stock in the three and six months ended March 31, 2005.
The Company has four reportable segments: equipment automation, factory automation hardware, factory automation software and the “other’ segment.
The equipment automation segment provides automated material handling products and components for use within semiconductor process equipment. These systems automate the movement of wafers into and out of semiconductor manufacturing process chambers and provide an integration point between factory automation systems and process tools. These include vacuum and atmospheric systems and robots and related components. Also included is the assembly and manufacturing of customer designed automation systems (“CDA”). The primary customers for these solutions are manufacturers of process tool equipment in semiconductor and flat panel display.
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The factory automation hardware segment provides automated material management products and components for use within the factory. The Company’s factory automation hardware products consist of automated storage and retrieval systems and wafer/reticle transport systems based on its proprietary AeroTrak overhead monorail systems and AeroLoader overhead hoist vehicle. They store, transport and manage the movement of work-in-process wafers and lithography reticles throughout the fab. The factory automation hardware segment also provides hardware and software solutions, including mini-environments and other automated transfer mechanisms to isolate the semiconductor wafer from the production environment.
The factory automation software segment provides software products that are used primarily in semiconductor and flat panel display, but also assembly and test, automotive, medical device and aerospace and defense manufacturing markets. This segment also includes consulting and support services. The Company’s software products enable manufacturers to increase their return on investment by maximizing production efficiency by improving cycle times. Products may be sold as part of an integrated solution or on a stand-alone basis.
The Company’s other segment currently consists of the Specialty Equipment and Life Sciences division (“SELS”), which provides standard and custom automation technology and products for the semiconductor, photonics, life sciences and certain other industries. As discussed in footnote 8, in January 2005, the Company began to wind down operations in its “other” segment.
The Company evaluates performance and allocates resources based on revenues and operating income (loss). Operating income (loss) for each segment includes selling, general and administrative expenses directly attributable to the segment. Amortization of acquired intangible assets, including impairment of these assets and of goodwill and restructuring and acquisition-related charges are excluded from the segments’ operating income (loss). The Company’s non-allocable overhead costs, which include corporate general and administrative expenses, are allocated between the segments based upon segment revenues. Segment assets exclude deferred tax assets, acquired intangible assets, goodwill and marketable securities and cash equivalents.
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Financial information for the Company’s business segments is as follows (in thousands):
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A reconciliation of the Company’s reportable segment operating income (loss) to the corresponding consolidated amounts for the three and six month periods ended March 31, 2005 and 2004 is as follows (in thousands):
A reconciliation of the Company’s reportable segment assets to the corresponding consolidated amounts as of March 31, 2005 and September 30, 2004 is as follows (in thousands):
Revenues based upon the source of the customer order by geographic area are as follows (in thousands):
The Company had no customers that accounted for more than 10% of revenues in the three or six months ended March 31, 2005. The Company had one customer that accounted for 16.1% of revenues in the three months ended March 31, 2004. The Company had a separate customer that accounted for 12.8% of revenues in the six months ended March 31, 2004. The Company had no customers that accounted for more than 10% of accounts receivable at March 31, 2005 or September 30, 2004.
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The Company signed a letter of intent to sell substantially all the assets of the Company’s SELS division to a third party on October 19, 2004. The parties were not able to negotiate a definitive purchase and sale agreement, thus the Company began to wind down operations in its “other” segment during the second fiscal quarter. As such, the Company made headcount reductions of approximately 20 individuals related to the SELS division. The Company intends to complete existing obligations, however, it does not intend to take on any new business.
In December 2004, the Company announced to its workforce in its Jena, Germany facility, a reduction plan which will take place during the course of fiscal 2005. As part of its efforts to reduce costs, the Company has decided to downsize its capabilities in its Jena, Germany facility by integrating various functions into existing facilities or outsourcing certain functions where it makes economic sense. The Company will continue to have operations in Jena, Germany principally to service the European market and to do final integration and test of certain products. During the three months ended March 31, 2005, the Company completed severance discussions with the workers’ council for the German facility and as such, the Company took charges for headcount reductions of approximately 65 individuals.
Based on estimates of its near term future revenues and operating costs, the Company announced in fiscal 2005 plans to take additional cost reduction actions. Accordingly, charges of $6.7 million were recorded for these actions in the second quarter of fiscal 2005. Of this amount, $6.0 million related to workforce reductions of approximately 120 employees world wide and $0.7 million related to lease and other costs on vacated facilities. The accruals for workforce reductions are expected to be paid into the first quarter of fiscal 2006 and the facilities accruals over the respective lease terms extending to 2011. The Company estimates that salary and benefit savings as a result of these actions will be approximately $6.0 million annually. The impact of these cost reductions on the Company’s liquidity is not significant, as these cost savings yield actual cash savings within twelve months.
The Company has recorded a total charge to operations of $9.4 million in the six months ended March 31, 2005, of which $8.4 million related to workforce reductions of approximately 180 employees world wide and $1.0 million related to excess facilities. Excess facilities charges of $1.0 million consisted of remaining lease obligations on facilities vacated in fiscal 2005. The accruals for workforce reductions are expected to be paid into the first quarter of fiscal 2006 and the facilities accruals over the respective lease terms extending to 2011. The Company estimates that salary and benefit savings as a result of these actions will be approximately $10.3 million annually. The impact of these cost reductions on the Company’s liquidity is not significant, as these cost savings yield actual cash savings within twelve months.
The Company recorded a charge to operations of $2.2 million in the three and six months ended March 31, 2004, of which $1.6 million related to workforce reductions and $0.6 million related to excess facilities. The impact of these cost reductions on the Company’s liquidity was not significant, as the cost savings yielded actual cash savings within twelve months.
The Company continues to review and align its cost structure to sustain profitable operations amid the changing semiconductor cycles.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited) – Continued
The activity for the three and six months ended March 31, 2005 and 2004 related to the Company’s restructuring accruals is summarized below (in thousands):
The Company expects the majority of the remaining severance costs totaling $6.2 million will be paid within nine months. The expected facilities costs, totaling $16.0 million, net of estimated sub-rental income, will be paid on leases that expire through September 2011.
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9. Other Balance Sheet Information
Components of other selected captions in the Consolidated Balance Sheets are as follows (in thousands):
The Company provides for the estimated cost of product warranties, primarily from historical information, at the time product revenue is recognized and for retrofit accruals at the time the retrofit programs are established. While the Company engages in extensive product quality programs and processes, including actively monitoring and evaluating the quality of its component suppliers, the Company’s warranty obligation is affected by product failure rates, utilization levels, material usage, service delivery costs incurred in correcting a product failure, and supplier warranties on parts delivered to the Company. Product warranty and retrofit activity on a gross basis for three and six months ended March 31, 2005 and 2004 is as follows (in thousands):
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10. Contingencies
There has been substantial litigation regarding patent and other intellectual property rights in the semiconductor and related industries. Brooks has in the past been, and may in the future be, notified that it may be infringing intellectual property rights possessed by other third parties. Brooks cannot guarantee that infringement claims by third parties or other claims for indemnification by customers or end users of its 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 Brooks’ business, financial condition and results of operations. If any such claims are asserted against Brooks’ intellectual property rights, the Company may seek to enter into a royalty or licensing arrangement. Brooks cannot guarantee, however, that a license will be available on reasonable terms or at all. Brooks could decide in the alternative to resort to litigation to challenge such claims or to attempt to design around the patented technology. Litigation or an attempted design around could be costly and would divert the Company management’s attention and resources. In addition, if Brooks does not prevail in such litigation or succeed in an attempted design around, Brooks could be forced to pay significant damages or amounts in settlement. Even if a design around is effective, the functional value of the product in question could be greatly diminished.
On or about April 21, 2005, Brooks was served with a third-party complaint seeking to join Brooks as a party to a patent lawsuit brought by an entity named Information Technology Innovation, LLC based in Northbrook, Illinois (“ITI”) against Motorola, Inc. (“Motorola”) and Freescale Semiconductor, Inc. (“Freescale”). ITI began the lawsuit against Motorola in the United States District Court for the Northern District of Illinois (Eastern Division) in November 2004, and ITI added Freescale to the lawsuit in March 2005. ITI claims that Motorola and Freescale have infringed a U.S. patent that ITI asserts covers processes used to model a semiconductor manufacturing plant.
Freescale alleges that Brooks has a duty to indemnify Freescale and Motorola from any infringement claims asserted against them based on their use of Brooks’ AutoSched software program by paying all costs and expenses and all or part of any damages that either of them might incur as a result of the suit brought by ITI. AutoSched is a software program sold by Brooks and by one or more companies that formerly owned the AutoSched product prior to the acquisition of AutoSched by Brooks in 1999 from Daifuku U.S.A, Inc.
Brooks believes that ITI is not a company that is engaged in the business of manufacturing hardware or software products. It is a limited liability company that apparently acquired an exclusive license to the patent at issue in the litigation and is now in the business of seeking to license the patent to others.
Brooks believes that it has meritorious defenses to any claim that Brooks’ AutoSched product infringes the patent identified by ITI in its suit against Motorola and Freescale, and Brooks will contest any such claim. Brooks also believes that meritorious defenses exist to the claims asserted by ITI against Motorola and Freescale, and Brooks intends to cooperate fully with Motorola and Freescale in the defense of those claims. In any such matter there can be no assurance as to the outcome, and for the reasons described in the first paragraph of this Note 10, the ITI litigation could have a material adverse effect on Brooks.
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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 and other related technology markets. 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 semiconductor equipment companies.
We have concluded that certain products and functions within our Jena, Germany manufacturing facility are able to be produced and provided at lower costs through third party suppliers. As such, we have announced a reduction plan that will take place during the course of fiscal 2005 designed to continue to increase efficiency and reduce costs. In addition, we have begun to wind down the operations of our Specialty Equipment and Life Sciences (“SELS”) division over the course of the second fiscal quarter. We intend to complete existing obligations; however we do not intend to take on any new business.
The semiconductor industry is cyclical in nature, and the market conditions indicate relatively flat to declining demand as compared to last fiscal year. We are focusing our major efforts in the following areas:
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS – Continued
Three and Six Months Ended March 31, 2005, Compared to the Three and Six Months Ended March 31, 2004
Revenues
We reported revenues of $129.5 million for the three months ended March 31, 2005, compared to $138.0 million in the same prior year period, a 6.2% decrease. Our revenues for the six months ended March 31, 2005 were $247.3 million, compared to $220.5 million in the same prior year period, a 12.1% increase. Included in the March 31, 2004 quarter we recognized $17.3 million of revenue on a European software services contract which had been accounted for on the completed contract basis. Excluding the impact of this contract for each of the three and six month periods, revenues grew by 7.3% and 21.7%, respectively. This increase is consistent with, and reflective of, an increase in demand for semiconductor capital equipment experienced on a comparative quarter basis. The increase in customer demand for our hardware and software products experienced during the first six months of fiscal 2005 compared to the same prior year period may not be indicative of future results as current industry forecasts indicate softening market demand.
Our equipment automation segment reported revenues of $70.7 million for the three months ended March 31, 2005, a decrease of 9.3% from revenues of $78.0 million in the same prior year period. Equipment automation segment revenues for the six months ended March 31, 2005 were $134.2 million, an increase of 7.9% from revenues of $124.3 million in the same prior year period. The decrease on a three month basis is primarily attributable to decreased shipments to our OEM customer base due to decreased demand on a comparative quarter basis, offset by an increase in CDA revenues of $5.4 million, to $11.8 million. The primary factor driving the increase of revenues on a six month basis was $20.2 million of CDA revenues, an increase of $13.7 million from the same prior year period, as we have expanded our sales of products to OEM customers that produce automation equipment internally. There is a continued trend among these customers to outsource this capability to providers of automation equipment. We expect third quarter revenues for our equipment automation segment to decrease slightly as compared to present levels as forecasted demand softens.
Our factory automation hardware segment reported revenues of $32.7 million for the three months ended March 31, 2005, an increase of 55.2% from revenues of $21.1 million in the same prior year period. Factory automation hardware segment revenues for the six months ended March 31, 2005 were $60.7 million, an increase of 73.0% from revenues of $35.1 million in the same prior year period. The increase is primarily attributable to the completion of installation procedures and the acceptance of factory transport systems. We also recognized $3.3 million in revenue on a contract for sorters to an Asian fab in the three months ended March 31, 2005. We expect near term revenues for our factory automation hardware segment to decrease as compared to present levels.
Our factory automation software segment reported revenues of $26.0 million for the three months ended March 31, 2005, a decrease of 32.0% from revenues of $38.3 million in the same prior year period. Factory automation software segment revenues for the six months ended March 31, 2005 were $51.8 million, a decrease of 12.9% from revenues of $59.5 million in the same prior year period. As discussed above, included in the March 31, 2004 quarter we recognized $17.3 million of revenue on a European software services contract which had been accounted for on the completed contract basis. Excluding the impact of this contract for each of the three and six month periods, revenues grew by 23.8% and 22.7%, respectively. The increase is primarily attributable to strong maintenance revenues as customers continued to use previously purchased software products and renewed related maintenance arrangements. We expect near term revenues for our factory automation software segment to increase slightly as compared to current levels.
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Product revenues increased $2.4 million, or 2.5%, to $98.3 million, in the three months ended March 31, 2005, from $95.9 million in the three months ended March 31, 2004. The increase is primarily attributable to the completion of installation procedures and the acceptance of to factory transport systems within our factory automation hardware segment. Product revenues increased $29.9 million, or 19.7%, to $181.0 million, in the six months ended March 31, 2005, from $151.2 million in the six months ended March 31, 2004. This increase is attributable to strong demand for our equipment automation products and $13.7 million of incremental CDA revenue on a comparative six months basis and the completion of installation procedures and the acceptance of factory transport systems within our factory automation hardware segment. Service revenues decreased $10.9 million, or 26.0%, to $31.2 million in the three months ended March 31, 2005, from $42.1 million in the three months ended March 31, 2004. Service revenues decreased $3.1 million, or 4.5%, to $66.3 million in the six months ended March 31, 2005, from $69.4 million in the six months ended March 31, 2004. As discussed above, included in the March 31, 2004 quarter we recognized $17.3 million of revenue on a European software services contract which had been accounted for on the completed contract basis. Excluding the impact of this contract for each of the three and six month periods, service revenues grew by 25.8% and 27.3%, respectively. This increase for both the three and six month periods is primarily attributable to continued strong maintenance revenues from our factory automation software segment and strong service contract and service repair revenues from our factory automation hardware segment.
Revenues outside of the United States were $63.2 million, or 48.8% of revenues, and $115.5 million, or 46.7% of revenues, in the three and six months ended March 31, 2005, respectively. Revenues outside of the United States were $74.7 million, or 54.1%, and $110.4 million, or 50.1% of revenues, in the three and six months ended March 31, 2004, respectively. We expect that foreign revenues will continue to account for a significant portion of total revenues. The current international component of revenues is not indicative of the future international component of revenues.
Deferred revenues of $31.3 million at March 31, 2005 consisted of $14.5 million related to deferred maintenance contracts and $16.8 million related to revenues deferred for completed contract method arrangements and contracts awaiting final customer acceptance.
Gross Profit
Gross margin dollars decreased to $43.6 million for the three months ended March 31, 2005, compared to $50.9 million for the three months ended March 31, 2004, while gross margin percentage decreased to 33.7% for the three months ended March 31, 2005, compared to 36.9% for the three months ended March 31, 2004. Our equipment automation segment gross margin decreased to $20.6 million or 29.1% in the three months ended March 31, 2005, from $27.6 million or 35.4% in the three months ended March 31, 2004. The decrease in gross margin percentage is primarily the result of changing product mix as well as additional overhead spending in manufacturing engineering and quality assurance in the Chelmsford facility. In addition, decreased product volumes resulted in less overhead absorption for the period. We had $11.8 million of CDA revenues which have lower gross margins of 20.0% in the three months ended March 31, 2005 compared to $6.4 million of such revenues in the three months ended March 31, 2004. Gross margin for our factory automation hardware segment decreased to $5.1 million or 15.6% in the three months ended March 31, 2005, from $6.6 million or 31.2% in the three months ended March 31, 2004. The decrease in gross margin percentage is primarily the result of low margin projects in the current period as well as the recognition of $3.3 million in revenue on a contract for sorters to an Asian fab at zero gross margin in the three months ended March 31, 2005. Our factory automation software segment’s gross margin for the three months ended March 31, 2005, increased to $18.2 million or 69.9%, compared to $16.7 million or 43.7% in the prior year. The increase in gross margin percentage is primarily the result of lower gross margins realized on the $17.3 million of software project revenue recognized upon completion and acceptance by the customer in the prior year comparative quarter.
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Gross margin dollars increased to $85.3 million for the six months ended March 31, 2005, compared to $81.2 million for the six months ended March 31, 2004, while gross margin percentage decreased to 34.5% for the six months ended March 31, 2005, compared to 36.8% for the six months ended March 31, 2004. Our equipment automation segment gross margin decreased to $39.7 million or 29.6% in the six months ended March 31, 2005, from $42.3 million or 34.0% in the six months ended March 31, 2004. The decrease on gross margin percentage is primarily the result of changing product mix within our OEM products as well as additional overhead spending in manufacturing engineering and quality assurance in the Chelmsford facility. We had $20.2 million of CDA revenues which have lower gross margins of 20.0% in the six months ended March 31, 2005 compared to $6.5 million in the six months ended March 31, 2004. Gross margin for our factory automation hardware segment increased to $11.2 million or 18.4% in the six months ended March 31, 2005, from $9.3 million or 26.4% in the six months ended March 31, 2004. The decrease in gross margin percentage is primarily the result of low margin projects in the six month period as compared to prior year. Our factory automation software segment’s gross margin for the six months ended March 31, 2005, increased to $35.0 million or 67.6%, compared to $29.3 million or 49.2% in the prior year. The increase in gross margin percentage is primarily the result of lower gross margins realized on the $17.3 million of software project revenue recognized upon completion and acceptance by the customer in the prior year comparative period as well as increased software maintenance revenues.
Gross margin on product revenues was $27.9 million or 28.4% for the three months ended March 31, 2005, compared to $38.1 million or 39.7% for the three months ended March 31, 2004. The decrease in product margins is primarily attributable to the impact of product mix within our OEM products and lower factory automation hardware project margins in the current year period. Gross margin on product revenues was $52.9 million or 29.2% for the six months ended March 31, 2005, compared to $56.3 million or 37.2% for the six months ended March 31, 2004. The decrease in product margins is primarily attributable to the impact of product mix within our OEM products and the incremental CDA revenue discussed previously.
Gross margin on service revenues was $15.7 million or 50.3% for the three months ended March 31, 2005, compared to $12.8 million or 30.4% in the three months ended March 31, 2004. Gross margin on service revenues was $32.4 million or 48.8% for the six months ended March 31, 2005, compared to $24.9 million or 35.9% in the six months ended March 31, 2004. The increase in gross margin percentage for both the three and six month periods is primarily the result of lower gross margins realized on the $17.3 million of software project revenue recognized upon completion and acceptance by the customer in the prior year comparative period as well as increased software maintenance revenues.
Research and Development
Research and development expenses for the three months ended March 31, 2005, were $16.5 million, a slight decrease of $0.1 million, compared to $16.6 million in the three months ended March 31, 2004. Research and development expenses for the six months ended March 31, 2005, were $32.4 million, a decrease of $0.3 million, compared to the $32.7 million in the six months ended March 31, 2004. The decrease in absolute spending for both the three and six month periods was primarily the result of continued focus on controlling costs and refocusing our development efforts to be more efficient.
Selling, General and Administrative
Selling, general and administrative expenses were $20.7 million for the three months ended March 31, 2005, a decrease of $0.8 million, compared to $21.5 million in the three months ended March 31, 2004. Selling, general and administrative expenses were $41.6 million for the six months ended March 31, 2005, an increase of $0.3 million, compared to $41.2 million in the six months ended March 31, 2004. The changes in absolute spending for the three month periods is primarily the result of a reduction in incentive compensation between comparative periods.
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Amortization of Acquired Intangible Assets
Amortization expense for acquired intangible assets totaled $0.7 million and $1.6 million for the three and six months ended March 31, 2005, respectively, compared to $0.9 million and $1.9 million for the three and six months ended March 31, 2004, respectively. The reduction in amortization of acquired intangible assets for both the three and six month periods, respectively, is attributable to certain assets reaching the end of their useful lives. Future amortization will remain relatively flat as the intangibles continue to amortize over their expected useful lives.
Restructuring Charges
We signed a letter of intent to sell substantially all the assets of our SELS division to a third party on October 19, 2004. The parties were not able to negotiate a definitive purchase and sale agreement, thus we began to wind down operations in our “other” segment during the second fiscal quarter. As such, we made headcount reductions of approximately 20 individuals related to the SELS division. We intend to complete existing obligations, however, we do not intend to take on any new business.
In December 2004, we announced to our workforce in our Jena, Germany facility, a reduction plan which will take place during the course of fiscal 2005. As part of our efforts to reduce costs, we have decided to downsize our capabilities in our Jena, Germany facility by integrating various functions into existing facilities or outsourcing certain functions where it makes economic sense. We will continue to have operations in Jena, Germany principally to service the European market and to do final integration and test of certain products. During the three months ended March 31, 2005, we completed severance discussions with the workers’ council for the German facility and as such, we took charges for headcount reductions of approximately 65 individuals.
We recorded a charge to operations of $6.7 million in the three months ended March 31, 2005, of which $6.0 million related to workforce reductions of approximately 120 employees world wide and $0.7 million related to lease and other costs on vacated facilities. The accruals for workforce reductions are expected to be paid through the first quarter of fiscal 2006 and the facilities accruals over the respective lease terms extending to 2011. We estimate that salary and benefit savings as a result of these actions will be approximately $6.0 million annually. The impact of these cost reductions on our liquidity is not significant, as these cost savings yield actual cash savings within twelve months.
We recorded a charge to operations of $9.4 million in the six months ended March 31, 2005, of which $8.4 million related to workforce reductions of approximately 180 employees world wide and $1.0 million related to excess facilities. Excess facilities charges of $1.0 million consisted of remaining lease obligations on facilities vacated in fiscal 2005. The accruals for workforce reductions are expected to be paid through the first quarter of fiscal 2006 and the facilities accruals over the respective lease terms extending to 2011. We estimate that salary and benefit savings as a result of these actions will be approximately $10.3 million annually. The impact of these cost reductions on our liquidity is not significant, as these cost savings yield actual cash savings within twelve months.
We recorded a charge to operations of $2.2 million in the three and six months ended March 31, 2004, of which $1.6 million related to workforce reductions and $0.6 million related to excess facilities. The impact of these cost reductions on our liquidity was not significant, as the cost savings yielded actual cash savings within twelve months.
We continue to review and align our cost structure with an aim to achieve profitable operations amid the changing semiconductor cycles. We may record additional restructuring charges if changing market conditions deem it necessary.
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Interest Income and Expense
Interest income increased by $0.9 million, to $2.2 million, in the three months ended March 31, 2005, from $1.3 million in the three months ended March 31, 2004. This increase is primarily the result of higher interest realized on our investment balances. Interest income increased by $2.0 million, to $4.2 million, in the six months ended March 31, 2005, from $2.2 million in the six months ended March 31, 2005. This increase is primarily the result of higher investment balances for the entire six month period and higher interest realized on our investment balances. Interest expense of $2.4 million and $4.8 million for the three and six months ended March 31, 2005, respectively, and $2.4 million and $4.7 million for the three and six months ended March 31, 2004, respectively, relates primarily to the 4.75% Convertible Subordinated Notes.
Other (Income) Expense
Other income, net of $0.3 million and $0.1 million for the three and six months ended March 31, 2005, respectively, consisted primarily to realized foreign exchange gains. Other expense, net of $0.2 million in the three and six months ended March 31, 2004 consisted primarily of realized foreign exchange losses.
Income Tax Provision
We recorded an income tax provision of $1.5 million and $3.0 million in the three and six months ended March 31, 2005, respectively, compared to an income tax provision of $1.8 million and $2.8 million in the three and six months ended March 31, 2004. The tax provision recorded for both periods was primarily due to foreign income and withholding taxes. We continue to provide a full valuation allowance for our net deferred tax assets at March 31, 2005, as we believe it is more likely than not that the future tax benefits from accumulated net operating losses and deferred taxes will not be realized. If we generate future taxable income against which these tax attributes may be applied, some portion or all of the valuation allowance would be reversed and a corresponding increase in net income would be reported in future periods.
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Liquidity and Capital Resources
Our business is significantly dependent on capital expenditures by semiconductor manufacturers and OEM’s that are, in turn, dependent on the current and anticipated market demand for semiconductors. Demand for semiconductors is cyclical and has historically experienced periodic downturns. The semiconductor industry experienced such a downturn that extended from 2001 well into 2003. The downturn affected revenues, gross margins and overall operating results. In response to this downturn, we have implemented cost reduction programs aimed at aligning our ongoing operating costs with our 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. We believe the semiconductor industry has again softened after a modest upturn in 2004. During the quarter just completed our revenues declined from the same period last year. As discussed above, we have implemented continuing cost reduction programs, and we believe that the cost reduction programs implemented have aligned costs with revenues. In the event we are unable to sustain this alignment, additional cost cutting programs may be required in the future. The cyclical nature of the industry make estimates of future revenues, results of operations and net cash flows inherently uncertain.
At March 31, 2005, we had cash, cash equivalents and marketable securities aggregating $351.2 million. This amount was comprised of $196.4 million of cash and cash equivalents, $99.6 million of investments in short-term marketable securities and $55.2 million of investments in long-term marketable securities. At September 30, 2004, we had cash, cash equivalents and marketable securities aggregating $329.1 million. This amount was comprised of $193.3 million of cash and cash equivalents, $62.1 million of investments in short-term marketable securities and $73.7 million of investments in long-term marketable securities.
Cash provided by operations was $24.6 million for the six months ended March 31, 2005, and was primarily attributable to changes in our net working capital of $17.2 million, offset by our net loss of $3.4 million and adjusted for non-cash depreciation and amortization of $7.9 million and compensation expense related to common stock and options of $1.3 million. The change in working capital was primarily the result of decreased accounts receivable balances of $35.3 million and a $9.7 million decrease in our inventory balance. The decrease in accounts receivable is a result of our strong collections during the six months ended March 31, 2005. Our days sales outstanding decreased to 63 days at March 31, 2005 from 70 days at September 30, 2004. Decreased inventory levels are reflective of the continued focus on inventory management. Other changes in working capital included a decrease in accounts payable of $8.0 million, a decrease in accrued compensation and benefits of $9.2 million resulting from payments for variable cash compensation plans and a decrease in accrued expenses and other current liabilities of $10.8 million primarily the result of our $10.1 million retirement benefit paid to our former Chief Executive Officer in January 2005 under the terms of his employment agreement.
Cash used by investing activities was $24.7 million for the six months ended March 31, 2005, and is principally comprised of net purchases of marketable securities of $19.6 million to maximize investment returns and $5.2 million used for capital additions.
Cash provided by financing activities was $3.3 million for the six months ended March 31, 2005, and is primarily comprised of $3.3 million from the issuance of stock under our employee stock purchase plan and the exercise of options to purchase our common stock.
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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 become redeemable on June 1, 2008. We may redeem the notes at stated premiums. Holders may require us to repurchase the notes upon a change in control of us 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. We may also use our resources to acquire companies, technologies or products that complement our business.
At March 31, 2005, we had approximately $0.7 million of letters of credit outstanding.
We believe that our existing resources will be adequate to fund our currently planned working capital and capital expenditure requirements for both the short and long-term. However, the cyclical nature of the semiconductor industry makes it difficult for us to predict future liquidity requirements with certainty. We may be unable to obtain any required additional financing on terms favorable to us, if at all. If adequate funds are not available on acceptable terms, we may be unable to fund our 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 our business.
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Recently Enacted Accounting Pronouncements
In November 2004, the FASB issued FASB Statement No. 151, “Inventory Costs – an Amendment of ARB No. 43, Chapter 4” (“FAS 151”). FAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of the provisions of FAS 151 is not expected to have a material impact on our financial position or results of operations.
In December 2004, the FASB issued FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“FAS 123(R)”). FAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. FAS 123(R) requires that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The provisions of this Statement are effective for the first annual reporting period that begins after June 15, 2005. We will adopt the provisions of FAS 123(R) effective as of October 1, 2005. We are currently evaluating the method of adoption and the impact of FAS 123(R) on our financial position and results of operations. We are also evaluating the form of any stock based incentive compensation we may offer in the future.
In December 2004, the FASB issued FASB Statement No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions” (“FAS 153”). FAS 153 requires that exchanges of nonmonetary assets be measured based on the fair value of the assets exchanged. Further, it expands the exception for nonmonetary exchanges of similar productive assets to nonmonetary assets that do not have commercial substance. The provisions of this Statement are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The adoption of the provisions of FAS 153 is not expected to have a material 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 occurs, 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 and related industries, we have recently incurred substantial operating losses and may have future losses.
Our business is largely dependent on capital expenditures in the semiconductor manufacturing industry and other businesses employing similar manufacturing technology. The semiconductor manufacturing industry in turn depends on current and anticipated demand for integrated circuits and the products that use them. 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 experienced a prolonged downturn, which negatively impacted us from the third quarter of fiscal 2001 until well into 2003. As a result of that downturn, our OEM and end-user customers significantly reduced the rate at which they purchased our products and services. That 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. Although our business became profitable during 2004, there appears to be a downward trend again developing in the semiconductor industry, and our revenues in the quarter just ended declined from the same period in the prior year resulting in a loss for the quarter. We could continue to experience future operating losses during an industry downturn and any period of uncertain demand. If an industry downturn continues for an extended period of time, our business could be materially harmed. Conversely, if demand improves rapidly, we could have insufficient inventory and manufacturing capacity to meet our customer needs on a timely basis, which could result in the loss of customers and various other expenses that could reduce gross margins and profitability. We cannot assure you as to whether we will be able to return to the profitability we achieved in the prior year.
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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:
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. Although we had net income in fiscal 2004 when the semiconductor industry rebounded, we experienced a net loss in the first six months of fiscal 2005 when our sales levels began to decline. Our failure to adequately reduce our costs, without our products sales levels staying at least level with fiscal 2004, could materially harm our business and prospects and our ability to maintain our competitive position. Our restructuring activities could harm us because they may result 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.
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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.
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 development and introduction 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.
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The global nature of our business exposes us to multiple risks.
For the six months ended March 31, 2005, approximately 47% 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:
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:
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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Failure to retain key personnel could impair our ability to execute our business strategy.
The continuing service of our executive officers and essential engineering, technical and management personnel, together with our ability to attract and retain such personnel, is an important factor in our continuing ability to execute our strategy. There is substantial competition to attract such employees and the loss of any such key employees could have a material adverse effect on our business and operating results. The same could be true if we were to experience a high turnover rate among engineering and technical personnel and we were unable to replace them.
Risks Relating to Our Customers
We face substantial competition which may lead to price pressure and otherwise adversely affect our sales.
We face substantial competition throughout the world in each of our product areas. Our primary competitors are Asyst/Shinko, Daifuku, Camstar, Datasweep, Intercim, IBM, Murata, Rorze, TDK and Yaskawa and other smaller, regional companies. We also compete with OEM manufacturers, such as Applied Materials, Novellus, KLA-Tencor and TEL, 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 44% of our total revenues in the six months ended March 31, 2005, 39% of our total revenues in fiscal 2004, 37% in fiscal 2003 and 33% in fiscal 2002. 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.
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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.
Customers generally 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
Claims of infringement involving one or more of our products in a case pending in a U.S. Federal court could result in significant expense.
On or about April 21, 2005, we were served with a third-party complaint seeking to join us as a party to a patent lawsuit brought by an entity named Information Technology Innovation, LLC based in Northbrook, Illinois (“ITI”) against Motorola, Inc. (“Motorola”) and Freescale Semiconductor, Inc. (“Freescale”). ITI began the lawsuit against Motorola in the United States District Court for the Northern District of Illinois (Eastern Division) in November 2004, and ITI added Freescale to the lawsuit in March 2005. ITI claims that Motorola and Freescale have infringed a U.S. patent that ITI asserts covers processes used to model a semiconductor manufacturing plant.
Freescale alleges that we have a duty to indemnify Freescale and Motorola from any infringement claims asserted against them based on their use of our AutoSched software program by paying all costs and expenses and all or part of any damages that either of them might incur as a result of the suit brought by ITI. AutoSched is a software program sold by us and by one or more companies that formerly owned the AutoSched product prior to the acquisition of AutoSched by us in 1999 from Daifuku U.S.A, Inc.
We believe that ITI is not a company that is engaged in the business of manufacturing hardware or software products. It is a limited liability company that apparently acquired an exclusive license to the patent at issue in the litigation and is now in the business of seeking to license the patent to others.
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We believe that we have meritorious defenses to any claim that our AutoSched product infringes the patent identified by ITI in its suit against Motorola and Freescale, and we will contest any such claim. We also believe that meritorious defenses exist to the claims asserted by ITI against Motorola and Freescale, and we intend to cooperate fully with Motorola and Freescale in the defense of those claims. In any patent litigation matter there can be no assurances as to the final outcome and this litigation could have a material adverse effect on us. 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 continuing to sell our AutoSched product. We cannot predict the extent to which we might be required to seek licenses or alter our products as a result of the ITI litigation so that they no longer infringe upon 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. Further, the cost of defending this litigation and the diversion of management attention brought about by such litigation could be substantial, even if we ultimately prevail.
We may be subject to additional 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. To date no action has been instituted against us directly by General Signal, Applied Materials or Asyst.
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.
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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 of an industry upturn 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.
Our stock price is volatile.
The market price of our common stock has fluctuated widely. During fiscal 2004 our stock price fluctuated between a high of $27.30 per share and a low of $11.62 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 significant 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.
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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
Concentration of Credit Risk
Financial instruments that potentially subject us to concentration of credit risk consist primarily of trade receivables and temporary and long-term cash investments in treasury bills, certificates of deposit and commercial paper. We restrict our investments to repurchase agreements with major banks, U.S. government and corporate securities, and mutual funds that invest in U.S. government securities, which are subject to minimal credit and market risk. Our customers are concentrated in the semiconductor industry, and relatively few customers account for a significant portion of our revenues. Our top ten largest customers accounted for 44% of revenues for the six months ended March 31, 2005. Our top twenty largest customers account for 58% of revenues for the six months ended March 31, 2005. We regularly monitor the creditworthiness of our customers and believe that we have adequately provided for exposure to potential credit losses.
Interest Rate Exposure
At March 31, 2005, we had no variable interest rate debt, accordingly, a 10% change in the effective interest rate percentage would impact interest income although it 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)”. 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 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders of the Company was held on February 17, 2005, at which the stockholders voted on whether to elect seven directors to the Company’s board of directors for terms of office expiring at the 2006 Annual Meeting of Stockholders. The Company’s stockholders voted to elect the following directors:
Robert J. Therrien, with 39,128,585 shares voting for and 2,210,555 shares withheld;Roger D. Emerick, with 38,100,941 shares voting for and 3,238,199 shares withheld;Amin J. Khoury, with 38,038,494 shares voting for and 3,300,646 shares withheld;Joseph R. Martin, with _38,104,475 shares voting for and 3,234,665 shares withheld;Edward C. Grady, with 39,676,265 shares voting for and 1,662,875 shares withheld;A. Clinton Allen, with _39,049,490 shares voting for and 2,289,650 shares withheld;John K. McGillicuddy , with 38,809,636 shares voting for and 2,529,304 shares withheld; andin each case, there were no shares abstaining and no broker non-voting shares cast.
Item 6. Exhibits
The following exhibits are included herein:
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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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