Ultratech, Inc.
ULTRATECH INC (Form: 10-Q, Received: 04/29/2011 16:15:15)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 0-22248

 

 

ULTRATECH, INC.

(Exact name of registrant as specified in its charter)

 

 

 

DELAWARE   94-3169580

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3050 Zanker Road, San Jose, California   95134
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (408) 321-8835

 

(Former name, former address and former fiscal year, if changed since last report.)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

Class

 

Outstanding as of April 2, 2011

common stock, $0.01 par value   25,147,136

 

 

 


Table of Contents

ULTRATECH, INC.

INDEX

 

PART I. FINANCIAL INFORMATION      3   
Item 1. Financial Statements      3   

Condensed Consolidated Balance Sheets as of April 2, 2011 and December 31, 2010

     3   

Condensed Consolidated Statements of Operations for the three months ended April  2, 2011 and April 3, 2010

     4   

Condensed Consolidated Statements of Cash Flows for the three months ended April  2, 2011 and April 3, 2010

     5   

Notes to Condensed Consolidated Financial Statements

     6   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations      18   
Item 3. Quantitative and Qualitative Disclosures About Market Risk      23   
Item 4. Controls and Procedures      23   
PART II. OTHER INFORMATION      24   
Item 1. Legal Proceedings      24   
Item 1A. Risk Factors      24   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds      33   
Item 3. Defaults Upon Senior Securities      33   
Item 4. Reserved      33   
Item 5. Other Information      33   
Item 6. Exhibits      34   
SIGNATURES      36   

EXHIBIT 31.1

  

EXHIBIT 31.2

  

EXHIBIT 32.1

  

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ULTRATECH, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands)

   April 2,
2011
     December 31,
2010*
 
     (Unaudited)         

ASSETS

     

Current assets:

     

Cash and cash equivalents

   $ 55,626       $ 63,626   

Short-term investments

     133,854         120,664   

Accounts receivable, net

     40,221         32,825   

Inventories

     39,052         37,088   

Prepaid expenses and other current assets

     7,869         7,777   
                 

Total current assets

     276,622         261,980   

Equipment and leasehold improvements, net

     14,605         14,835   

Other assets

     4,438         4,479   
                 

Total assets

   $ 295,665       $ 281,294   
                 

LIABILITIES AND STOCKHOLDERS’ EQUITY

     

Current liabilities:

     

Notes payable

   $ 3,000       $ 6,000   

Accounts payable

     11,665         13,154   

Deferred product and services income

     19,238         13,641   

Other current liabilities

     11,689         12,028   
                 

Total current liabilities

     45,592         44,823   

Other liabilities

     6,530         5,344   

Stockholders’ equity

     243,543         231,127   
                 

Total liabilities and stockholders’ equity

   $ 295,665       $ 281,294   
                 

 

* The Balance Sheet as of December 31, 2010 has been derived from the audited financial statements at that date.

See accompanying notes to unaudited condensed consolidated financial statements

 

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ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

     Three Months Ended  

(In thousands, except per share amounts)

   April 2,
2011
    April 3,
2010
 

Net sales:

    

Products

   $ 42,800      $ 23,968   

Services

     4,454        3,535   

Licenses

     125        —     
                

Total net sales

     47,379        27,503   

Cost of sales:

    

Cost of products sold

     20,059        10,596   

Cost of services

     3,611        2,854   
                

Total cost of sales

     23,670        13,450   
                

Gross profit

     23,709        14,053   

Operating expenses:

    

Research, development, and engineering

     5,724        4,791   

Selling, general, and administrative

     9,819        7,395   
                

Operating income

     8,166        1,867   

Interest income (expense)

     (6     10   

Interest and other income (expense), net

     7        174   
                

Income before income tax

     8,167        2,051   

Provision for income taxes

     300        103   
                

Net income

   $ 7,867      $ 1,948   
                

Net income per share - basic

   $ 0.31      $ 0.08   

Number of shares used in per share computations - basic

     25,264        24,033   

Net income per share - diluted

   $ 0.30      $ 0.08   

Number of shares used in per share computations - diluted

     26,169        24,308   

See accompanying notes to unaudited condensed consolidated financial statements

 

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ULTRATECH, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three Months Ended  

(In thousands)

   April 2,
2011
    April 3,
2010
 

Cash flows from operating activities:

    

Net income

   $ 7,867      $ 1,948   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation

     893        732   

Amortization

     27        131   

Accretion of asset retirement obligations

     26        34   

(Gain) loss on disposal of equipment

     (4     12   

Stock-based compensation

     1,476        820   

Deferred income taxes

     (11     28   

Changes in operating assets and liabilities:

    

Accounts receivable

     (7,396     2,383   

Inventories

     (1,964     39   

Prepaid expenses and other current assets

     (92     (2,895

Other assets

     (63     208   

Accounts payable

     (1,489     339   

Deferred product and services income

     5,597        3,967   

Other current liabilities

     (339     1,387   

Other liabilities

     1,172        (1,381
                

Net cash provided by operating activities

     5,700        7,752   
                

Cash flows from investing activities:

    

Capital expenditures

     (679     (266

Proceeds from sales of fixed assets

     —          —     

Purchase of investments in securities

     (43,630     (37,810

Proceeds from maturities of investments

     30,572        22,597   
                

Net cash used in investing activities

     (13,737     (15,479
                

Cash flows from financing activities:

    

Proceeds from notes payable

     3,000        6,000   

Repayment of notes payable

     (6,000     (6,000

Proceeds from issuance of common stock for stock option exercises

     4,231        508   

Tax payment for issuance of common stock from release of restricted stock units

     (1,194     (46
                

Net cash provided by financing activities

     37        462   
                

Net decrease in cash and cash equivalents

     (8,000     (7,265

Cash and cash equivalents at beginning of period

     63,626        58,617   
                

Cash and cash equivalents at end of period

   $ 55,626      $ 51,352   
                

See accompanying notes to unaudited condensed consolidated financial statements

 

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Ultratech, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

April 2, 2011

(1) Description of Business

Ultratech, Inc. (referred to as “Ultratech,” the “Company” and “we”) develops, manufactures and markets photolithography and laser thermal processing equipment designed to reduce the cost of ownership for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Taiwan, Singapore, and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and high-brightness light emitting diodes (“HBLEDs”). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

In evaluating our business, we gave consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made based on our consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology components.

(2) Basis of Presentation

The accompanying condensed consolidated financial statements include our accounts and the accounts of our subsidiaries. All intercompany accounts and transactions have been eliminated.

Our interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“U.S.GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial statements and accounting policies, consistent, in all material respects with those applied in preparing our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010, filed with the SEC on March 1, 2011. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of only normal recurring adjustments considered necessary for fair presentation, have been included.

Our fiscal periods end on the Saturday closest to month-end, except that our fiscal year ends on December 31. All references to the quarter refer to our fiscal quarter. Our fiscal quarters covered by this report ended on April 2, 2011 and April 3, 2010, respectively.

Operating results for the three months ended April 2, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011 or any future period.

Certain immaterial amounts of service and product costs for prior periods have been reclassified between product cost of sales and service cost of sales in the Condensed Consolidated Statements of Operations to be consistent with current presentation.

USE OF ESTIMATES — The preparation of the financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an ongoing basis, we evaluate our estimates, including those related to inventories, warranty obligations, purchase order commitments, asset retirement obligations, bad debts, estimated useful lives of fixed assets, asset impairment, income taxes, intangible assets, contingencies and litigation. We base our estimates on historical experience and on various other analyses and assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

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IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS — In January 2010, The FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements , to provide amendments to Subtopic 820-10 that require new disclosures for transfers in and out of Levels 1 and 2 and for activity in Level 3 fair value measurements. It also clarifies existing disclosures for level of disaggregation and disclosures about inputs and valuation techniques. The update is effective for interim and annual reporting periods beginning on January 1, 2010, except for the disclosures of roll forward activities in Level 3 fair value measurements. Those disclosures are effective for interim and annual reporting periods beginning on January 1, 2011. The adoption of the update did not have an impact on our consolidated financial statements.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the seller’s price is fixed or determinable, and collectability is reasonably assured. We derive revenue from four sources—system sales, spare parts sales, service contracts and license fees.

Provided all other criteria are met, we recognize revenues on system sales when we have received customer acceptance of the system. In the event that terms of the sale provide for a lapsing customer acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or customer acceptance, whichever occurs first. In these instances, which are infrequent, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.

Our transactions frequently include the sale of systems and services under multiple element arrangements. In situations with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when we receive customer acceptance or are otherwise released from our customer acceptance obligations.

In the first quarter of 2011, we adopted Accounting Standard Update (“ASU”) No. 2009-13 , Revenue Recognition (Topic 605) – Multi-Deliverables Revenue Arrangements, a Consensus of the FASB Emerging Issues Task Force on a prospective basis for applicable transactions originating or materially modified on or subsequent to January 1, 2011. The new standard changed the requirements for establishing separate units of accounting in a multiple element arrangement and requires the allocation of arrangement consideration to each deliverable to be based on the relative selling price. Implementation of this new authoritative guidance had an insignificant impact on reported revenue as compared to revenue under previous guidance, as the new guidance did not change the units of accounting within sales arrangements and the elimination of the residual method for the allocation of arrangement consideration had an immaterial impact on the amount and timing of reported revenue.

For multiple element arrangements entered into or materially modified on or subsequent to January 1, 2011, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (VSOE); if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. If we have not established VSOE and cannot obtain third party evidence of selling price, we determine our estimate of the relative selling price by considering our production costs and historical margins of similar products or services. We believe this best represents the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We regularly review the method used to determine our relative selling price and update any estimates accordingly. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.

For multiple element arrangements entered into prior to January 1, 2011, revenue is allocated among the separate accounting units based on the residual method under which the revenue is allocated to undelivered elements based on fair value of such undelivered elements and the residual amounts of revenue are allocated to delivered elements, provided the delivered elements have value on a stand alone basis, there is objective and reliable evidence of fair value for the undelivered elements, the arrangement does not include a general right of return relative to the delivered item and delivery or performance of the undelivered item(s) is considered probable and substantially in our control. The maximum revenue recognized on a delivered element is limited to the amount that is not contingent upon the delivery of additional items.

We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time-based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). We recognize license revenue from transactions in which our systems are re-sold by our customers to third parties as well as from royalty arrangements.

 

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Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.”

Costs incurred for shipping and handling are included in cost of sales.

(3) Stock-Based Compensation

Stock-based compensation expense recognized under ASC Topic 718, Compensation – Stock Compensation (“ASC 718”), for employees and directors and the effect on our Condensed Consolidated Statements of Operations were as follows:

 

     Three Months Ended  

(In thousands)

   April 2,
2011
     April 3,
2010
 

Cost of Sales

   $ 121       $ 62   

Research, development, and engineering

     263         146   

Selling, general and administrative expenses

     1,092         612   
                 

Total stock-based compensation expense

   $ 1,476       $ 820   
                 

Compensation cost capitalized as part of inventory was $67,000 for the three-month period ended April 2, 2011 and was immaterial for the three-month period ended, April 3, 2010.

As required by ASC 718, we estimate expected forfeitures and recognize compensation costs only for those equity awards expected to vest. As of April 2, 2011, there were $18.9 million of total unrecognized compensation costs related to non-vested share-based compensation arrangements granted under our 1993 Stock Option Plan/Stock Issuance Plan, as amended (“1993 Plan”), and our 1998 Supplemental Stock Option/Stock Issuance Plan, as amended ( “1998 Plan”). The costs related to stock options and restricted stock units are expected to be recognized over a weighted average period of 5.5 years and 4.4 years, respectively.

These plans provide for the grant of stock-based awards to our eligible employees, consultants and advisors and non-employee directors. We believe that such awards better align the interests of our employees with those of our stockholders. There were no shares reserved for future awards under the 1998 Plan since the plan expired on October 19, 2008. However, as of April 2, 2011, there were 1.0 million shares reserved for future awards under the 1993 Plan.

We used the following weighted-average assumptions to estimate the fair value of our stock options granted during the three-month periods ended April 2, 2011 and April 3, 2010, respectively:

 

     Three Months Ended  
     April 2,
2011
    April 3,
2010
 

Expected life (in years)

     8.4        7.8   

Risk-free interest rate

     3.3     3.3

Volatility factor

     48     52

Dividend yield

     —          —     

A majority of our stock options granted during the three-month period ended April 2, 2011 were granted with a vesting term of 100 months and the remaining stock options were granted with a vesting term of 50 months. As such, the weighted-average expected life of our stock options granted during the three months ended April 2, 2011 increased to 8.4 years.

 

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(4) Basic and Diluted Net Income Per Share

The following table sets forth the computation of basic and diluted net income per share:

 

     Three Months Ended  

(In thousands, except per share amounts)

   April 2,
2011
     April 3,
2010
 

Numerator:

     

Net income

   $ 7,867       $ 1,948   

Denominator:

     

Basic weighted-average shares outstanding

     25,264         24,033   

Effect of dilutive employee stock options and restricted stock units

     905         275   
                 

Diluted weighted-average shares outstanding

     26,169         24,308   
                 

Net income per share - basic:

     

Net income

   $ 0.31       $ 0.08   
                 

Net income per share - diluted:

     

Net income

   $ 0.30       $ 0.08   
                 

For the three-month period ended April 2, 2011, 1.0 million shares of common stock subject to outstanding options were excluded from the computation of diluted net income per share, as the effect would have been anti-dilutive, as compared to the exclusion of 2.6 million shares of common stock subject to outstanding options in the corresponding period of 2010. In addition, for each of the three-month periods ended April 2, 2011 and April 3, 2010, the number of shares of common stock underlying outstanding restricted stock units excluded from the computation was immaterial. Options and restricted stock units are anti-dilutive when we have a net loss or when the exercise price and the average unrecognized compensation cost of the stock option or restricted stock unit is greater than the average market price of our common stock during the period.

(5) Fair Value Measurements

Fair value is defined under ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under ASC 820 must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

 

   

Level 1 - Quoted prices for identical assets or liabilities in active markets.

 

   

Level 2 - Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

 

   

Level 3 - Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.

We measure certain financial assets and liabilities at fair value on a recurring basis, including available-for-sale securities and foreign currency derivatives. The fair value of these certain financial assets and liabilities was determined using the following inputs at April 2, 2011 and December 31, 2010, respectively:

 

     Fair Value Measurements at April 2, 2011 Using  

(In thousands)

   Total      Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Available-for-sale securities (1)

           

Commercial papers

   $ 13,996       $ —         $ 13,996       $ —     

Money market funds

     6,683         6,683         —           —     

U.S. treasury bills and notes

     3,927         —           3,927         —     

Securities and obligations of U.S. government agencies

     123,929         —           123,929         —     
                                   
     148,535         6,683         141,852         —     

Foreign currency derivatives (2)

     3         —           3         —     
                                   
   $ 148,538       $ 6,683       $ 141,855       $ —     
                                   

 

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     Fair Value Measurements at December 31, 2010 Using  

In thousands

   Total     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs
(Level 2)
    Significant
Unobservable
Inputs

(Level 3)
 

Available-for-sale securities (1)

         

Commercial papers

   $ 11,994      $ —         $ 11,994      $ —     

Money market funds

     9,593        9,593         —          —     

U.S. treasury bills and notes

     —          —           —          —     

Securities and obligations of U.S. government agencies

     114,669        —           114,669        —     
                                 
     136,256        9,593         126,663        —     

Foreign currency derivatives (2)

     (26     —           (26     —     
                                 
   $ 136,230      $ 9,593       $ 126,637      $ —     
                                 

 

(1)  

Included in cash and cash equivalents and short-term investments on our condensed consolidated balance sheet. See “Investments” in Note 6 for further details.

(2)  

Included in other current assets and other current liabilities on our condensed consolidated balance sheet. Consisted of forward foreign exchange contracts for the Japanese yen. See “Derivative Instruments and Hedging” in Note 7 for further details.

(6) Investments

We classified all of our investments as “available for sale” as of April 2, 2011 and December 31, 2010. Accordingly, we state our investments at estimated fair value. Fair values are determined based on quoted market prices or pricing models using current market rates. We deem all investments to be available to meet current working capital requirements. The cost of securities sold was determined based on the specific identification method.

The following is a summary of our investments:

 

     April 2, 2011      December 31, 2010  

Cash equivalents and Available-

for-sale Investments

(in thousands)

   Amortized
Cost
     Accumulated
Other
Comprehensive
     Estimated
Fair Value
     Amortized
Cost
     Accumulated
Other
Comprehensive
     Estimated
Fair Value
 
      Gains      Losses            Gains      Losses     

Commercial papers

   $ 13,996       $ —         $ —         $ 13,996       $ 11,994       $ —         $ —         $ 11,994   

Money market funds

     6,683         —           —           6,683         9,593         —           —           9,593   

U.S. treasury bills and notes

     3,925         3         —           3,928         —           —           —           —     

Securities and obligations of U.S. government agencies

     123,958         39         69         123,928         114,731         17         79         114,669   
                                                                       

Total

   $ 148,562       $ 42       $ 69       $ 148,535       $ 136,318       $ 17       $ 79       $ 136,256   
                                                                       

The following is a reconciliation of our investments to the balance sheet classifications at April 2, 2011 and December 31, 2010:

 

(In thousands)

   April 2, 2011      December 31, 2010  

Cash equivalents

   $ 14,681       $ 15,592   

Short-term investments

     133,854         120,664   
                 

Investments, at estimated fair value

   $ 148,535       $ 136,256   
                 

 

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The gross amortized cost and estimated fair value of our investments at April 2, 2011 and December 31, 2010, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

 

     April 2, 2011      December 31, 2010  

(In thousands)

   Gross
Amortized
Cost
     Fair
Value
     Gross
Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 138,043       $ 138,017       $ 129,847       $ 129,783   

Due after one year through five years

     10,519         10,518         6,471         6,473   
                                   

Total

   $ 148,562       $ 148,535       $ 136,318       $ 136,256   
                                   

The following table provides the breakdown of the cash equivalents and investments with unrealized losses on April 2, 2011:

 

     In Loss Position for
Less Than 12 Months
     In Loss Position for
More Than 12 Months
     Total  

(In thousands)

   Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 

Securities and obligations of the U.S. government agencies

   $ 30,828       $ 69       $ —         $ —         $ 30,828       $ 69   
                                                     

Total

   $ 30,828       $ 69       $ —         $ —         $ 30,828       $ 69   
                                                     

The following table provides the breakdown of the cash equivalents and investments with unrealized losses at December 31, 2010:

 

     In Loss Position for
Less Than 12 Months
     In Loss Position for
More Than 12 Months
     Total  

Investments, in thousands

   Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
     Fair
Value
     Gross
Unrealized
Losses
 
                 

Securities and obligations of U.S. government agencies

     68,998         79         —           —           68,998         79   
                                                     

Total

   $ 68,998       $ 79       $ —         $ —         $ 68,998       $ 79   
                                                     

We review our investment portfolio regularly for impairment. A security is considered impaired when its fair value is less than its cost basis. If we intend to sell an impaired debt security or it is more likely than not that we will be required to sell it prior to recovery of its amortized cost basis, an other-than-temporary-impairment (“OTTI”) is deemed to have occurred. In these instances, the OTTI loss is recognized in earnings equal to the entire difference between the debt security’s amortized cost basis and its fair value at the balance sheet date.

 

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If we do not intend to sell an impaired debt security and it is not more likely than not that we will be required to sell it prior to recovery of its amortized cost basis, we must determine whether it will recover its amortized cost basis. If we conclude it will not, a credit loss exists and the resulting OTTI is separated into:

 

   

The amount representing the credit loss, which is recognized in earnings, and

 

   

The amount related to all other factors, which is recognized in other comprehensive income.

As part of this assessment, we will consider the various characteristics of each security, including, but not limited to the following: the length of time and the extent to which the fair value has been less than the amortized cost basis; adverse conditions specifically related to the security, an industry, or a geographic area; the payment structure of the debt security; failure of the issuer of the security to make scheduled interest or principal payments; any changes to the rating of the security by a rating agency and related outlook or status; recoveries or additional declines in fair value subsequent to the balance sheet date. The relative importance of this information varies based on the facts and circumstances surrounding each security, as well as the economic environment at the time of assessment.

We have not recorded any OTTI of our investments for the three-month periods ended April 2, 2011 and April 3, 2010, respectively.

(7) Derivative Instruments and Hedging

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we also enter into these transactions in other currencies, primarily Japanese yen as we have direct sales operations in Japan and orders are often denominated in Japanese yen. This subjects us to a higher degree of risk from currency exchange rate fluctuations.

Our policy is to minimize foreign currency denominated transaction and remeasurement exposures with derivative instruments, mainly forward contracts. We enter into foreign currency forward contracts that generally have maturities of nine months or less. The gains and losses on these derivatives are intended to mitigate the translation gains and losses recognized in earnings. We do not enter into foreign exchange forward contracts for speculative purposes.

Under ASC Topic 815, Derivatives and Hedging (“ASC 815”), all derivatives are recorded on the balance sheet at fair value. The gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated and qualifies for hedge accounting. All of our derivatives are designated as hedging instruments under ASC 815. The fair value of derivative instruments recorded in our Condensed Consolidated Balance Sheets is as follows:

 

     Asset Derivatives  
            Fair Value as of  

(In thousands)

   Balance Sheet Location      April 2, 2011     December 31, 2010  

Foreign exchange contracts

     Other current assets       $ 6      $ 15   
     Other current liabilities         (3     (41
                   

Total derivatives

      $ 3      $ (26
                   

Our derivative financial instruments are subject to both credit and market risk. Credit risk is the risk of loss due to failure of a counterparty to perform its obligations in accordance with contractual terms. Market risk is the potential change in an investment’s value caused by fluctuations in interest and currency exchange rates, credit spreads or other variables. We monitor the credit-worthiness of the financial institutions that are counterparties to our derivative financial instruments and do not consider the risks of counterparty nonperformance to be material. Credit and market risks, as a result of an offset by the underlying cash flow being hedged, related to derivative instruments were not considered material at April 2, 2011 and December 31, 2010.

Cash Flow Hedging

We use foreign exchange forward contracts to hedge the risk that forecasted revenue may be adversely affected by changes in foreign currency exchange rates. These hedges are designated as cash flow hedges. We do not enter into these forward contracts for speculative purposes. The effective portion of the contracts’ gains or losses is included in accumulated other comprehensive income (loss) (“OCI”) until the period in which the forecasted sale being hedged is recognized, at which time the amount in OCI is reclassified to earnings as a component of revenue.

To the extent that any of these contracts are not considered to be effective in offsetting the change in the value of the forecasted sales being hedged, the ineffective portion of these contracts is immediately reclassified from OCI and recognized in the consolidated statement of operations as a component of interest and other income (expense), net. The contracts are considered ineffective when the underlying forecasted transaction does not occur within the designated hedge period or it becomes probable that the forecasted transaction will not occur.

 

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We calculate hedge effectiveness at a minimum each fiscal quarter. We measure hedge effectiveness by comparing the cumulative change in the spot rate of the derivative with the cumulative change in the spot rate of the anticipated sales transactions. We record any excluded components of the hedge in interest and other income (expense), net. There was no hedge ineffectiveness for the three-month period ended April 2, 2011 and we did not have any derivatives classified as cash flow hedges outstanding at April 2, 2011 and December 31, 2010, respectively. As such, we did not record any accumulated losses or gains as a component of other comprehensive income (loss) at April 2, 2011 and December 31, 2010, respectively.

Fair Value Hedging

We manage the foreign currency risk associated with Japanese yen denominated assets and liabilities using foreign exchange forward contracts. The change in fair value of these derivatives is recognized as a component of interest and other income (expense), net and is intended to offset the remeasurement gains and losses associated with the non-functional currency denominated assets and liabilities. At April 2, 2011, we had currency forward contracts for the sale of 82.0 million Japanese yen, or approximately $1.0 million and currency forward contracts for the purchase of 36.0 million Japanese yen, or approximately $0.4 million. The fair value of derivatives classified as balance sheet hedges at April 2, 2011 and December 31, 2010 was a net liability of an immaterial amount recorded in “other current assets” and “other current liabilities”. The following sets forth the effect of the derivative instruments on our Condensed Consolidated Statements of Operations for the three-month periods ended April 2, 2011 and April 3, 2010, respectively:

 

         Amount of Gain Recognized in
Income on Derivatives During
Three Months Ended
 

Derivatives in ASC 815

Fair Value Hedging Relationship

   Location of Gain Recognized
in Income on Derivatives
  April 2, 2011
(in thousands)
     April 3, 2010
(in thousands)
 

Foreign exchange contracts

   Interest and other income (expense), net   $ 29       $ 36   

(8) Inventories

Inventories consist of the following:

 

(In thousands)

   April 2,
2011
     December 31,
2010
 

Raw materials

   $ 17,765       $ 14,862   

Work-in-process

     11,925         12,307   

Finished products

     9,362         9,919   
                 
   $ 39,052       $ 37,088   
                 

(9) Notes Payable

We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 125 basis points (approximately 1.4% as of April 2, 2011). Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. Under this facility, we may borrow up to 75% of our total cash, cash equivalents and investments balance in this brokerage account with no restriction in the use of those assets. This agreement has no set expiration date and there are no loan covenants, other than the aforementioned collateral requirement. As of April 2, 2011 and December 31, 2010, $3.0 million and $6.0 million, respectively, were outstanding under this facility, with a related collateral requirement of approximately $4.0 million and $8.0 million, respectively, of our cash, cash equivalents and investments.

 

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(10) Other Current Liabilities

Other current liabilities consist of the following:

 

(In thousands)

   April 2,
2011
     December 31,
2010
 

Salaries and benefits

   $ 6,157       $ 7,513   

Warranty accrual

     2,424         2,111   

Accrued taxes-other

     795         291   

Capital lease, current portion

     167         165   

Other

     2,146         1,948   
                 
   $ 11,689       $ 12,028   
                 

Warranty Accrual

We generally warrant our products for a period of twelve months for new products, or three months for refurbished products, from the date of customer acceptance for material and labor to repair the product; accordingly, an accrual for the estimated cost of the warranty is recorded at the time the product is shipped. Extended warranty terms, if granted, result in deferral of revenue equating to our standard pricing for similar service contracts. Recognition of the related warranty cost is deferred until product revenue is recognized. Factors that affect our warranty liability include the number of installed units, historical and anticipated rates of warranty claims, and cost per claim. We periodically assess the adequacy of our recorded warranty liabilities and adjust the amounts as necessary. We believe our warranty accrual, as of April 2, 2011, will be sufficient to satisfy outstanding obligations as of that date. Changes in our warranty accrual are as follows:

 

     Three Months Ended  

(In thousands)

   April 2,
2011
    April 3,
2010
 

Balance, beginning of the period

   $ 2,111      $ 1,710   

Warranties accrued for shipments during the period

     908        791   

Settlements made during the period

     (362     (174

Changes in accrued warranty liabilities

     (233     (219
                

Balance, end of the period

   $ 2,424      $ 2,108   
                

Deferred Services Revenue

A portion of our revenue is generated from service contracts. Payments from certain of these service contracts are collected in advance. As such, revenues from these service contracts are deferred and recognized ratably over the contract period for time based service contracts, or as service hours are delivered for contracts based on a purchased quantity of hours. Changes in our deferred service revenue are as follows:

 

     Three Months Ended  

(In thousands)

   April 2,
2011
    April 3,
2010
 

Balance, beginning of the period

   $ 2,903      $ 1,907   

Service contracts sold during the period

     2,548        934   

Service contract revenue recognized during the period

     (2,039     (668
                

Balance, end of the period

   $ 3,412      $ 2,173   
                

(11) Other Liabilities

Other liabilities consist of the following:

 

(In thousands)

   April 2,
2011
     December 31,
2010
 

Deferred compensation

     1,333         1,154   

Long-term income taxes payable

     1,769         924   

Asset retirement obligation

     1,485         1,726   

Postretirement medical obligation

     842         831   

Deferred service income

     705         —     

Long-term capital lease

     147         176   

Other

     249         533   
                 
   $ 6,530       $ 5,344   
                 

 

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Pursuant to the terms of the lease amendment signed in October 2009, in consideration for the waiver of certain asset retirement obligations set forth in the original lease of a building in San Jose, California, we paid the landlord $0.6 million and surrendered possession of the premises on March 31, 2010.

(12) Accumulated Other Comprehensive income

The components of comprehensive income, net of tax, are as follows:

 

     Three Months Ended  

(In thousands)

   April 2,
2011
     April 3,
2010
 

Net income

   $ 7,867       $ 1,948   

Other comprehensive income

     

Unrealized gain (loss) on available-for-sale investments before adjustment

     35         (59
                 

Net unrealized gain (loss) on available-for-sale investments

     35         (59

Change in minimum postretirement medical obligation

     1         15   
                 

Comprehensive income

   $ 7,903       $ 1,904   
                 

Accumulated other comprehensive loss, net of tax, is comprised of the following items:

 

(In thousands)

   April 2,
2011
    December 31,
2010
 

Unrealized loss on:

    

Available-for-sale investments

   $ (27   $ (62

Change in minimum postretirement medical obligation

     (55     (56
                

Accumulated other comprehensive loss at end of period

   $ (82   $ (118
                

(13) Employee Benefit Plans

Employee bonus plans

We currently sponsor an executive incentive bonus plan that distributes employee awards based on the achievement of predetermined targets. We recorded a charge of $0.8 million under this bonus plan for the three-month period ended April 2, 2011, as compared to $0.5 million for the corresponding period of 2010.

Employee savings and retirement plans

We sponsor a 401(k) employee salary deferral plan that allows voluntary contributions by all full-time employees of from 1% to 20% of their pretax earnings. We may also make matching contributions to this plan at our discretion. Employees are eligible for the plan if they contribute at least 2% of their compensation. Our contributions, when made, are limited to a maximum of 6% of the employee’s compensation if the company exceeds certain income levels. We contributed $0.2 million to this plan for the three-month period ended April 2, 2011 and had no contributions for the three month period ended April 3, 2010.

We also sponsor an executive non-qualified deferred compensation plan (the “Plan”) that allows qualifying executives to defer current cash compensation. As of April 2, 2011, Plan assets of $1.1 million, representing the cash surrender value of life insurance policies held by us, and liabilities of $1.3 million were included in our Consolidated Balance Sheets under the captions “Other assets” and “Other liabilities.” In conjunction with the Plan, the related expense for each of the three-month period ended April 2, 2011 and April 3, 2010 was immaterial.

Postretirement benefits

We have committed to providing and fully paying for lifetime postretirement medical and dental benefits to our Chief Executive Officer and Chief Financial Officer and their spouses, commencing after retirement. We recorded net periodic benefit costs of $12,600 for the three-month period ended April 2, 2011, as compared to $23,000 for the three-month period ended April 3, 2010. These expenses included interest cost and amortization of prior service cost.

 

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(14) Income Taxes

For the three-month period ended April 2, 2011, we recorded an income tax provision of $0.3 million, as compared to $0.1 million for the corresponding period in 2010. The income tax provision recognized for the three-month period ended April 2, 2011 resulted primarily from federal, foreign and state income taxes.

In accordance with FASB ASC Topic 740, Income Taxes (“ASC 740”), we had unrecognized tax benefits of $4.1 million as of January 1, 2011. We continue to recognize interest and penalties as a component of the income tax provision. If we are able to eventually recognize these uncertain tax positions, $4.1 million of our unrecognized benefit would reduce the effective tax rate. Over the next twelve months, we expect an immaterial decline in liabilities associated with our uncertain tax positions as a result of expiring statutes of limitations.

We currently have a full valuation allowance against our U.S. net deferred tax asset. We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. As of April 2, 2011, we have experienced historical profitability. However, as of April 2, 2011, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not the Company will generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:

 

   

Recent movement of certain product manufacturing to Singapore, potentially resulting in reduced U.S. taxable income,

 

   

Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and

 

   

NOL usage limitations resulting in a longer period being required to realize our deferred tax assets.

It is possible that sometime in the next 12 months the positive evidence will be sufficient to release a material amount of our valuation allowance; however there is no assurance that this will occur.

As a result of our analysis, we concluded that it is more likely than not that, as of April 2, 2011, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. We closely monitor available evidence, and may release some or all of the valuation allowance in future periods.

We are subject to federal and state tax examinations for years 1994 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2004 and forward. There are no material income tax audits currently in progress as of April 2, 2011.

(15) Commitments and Contingencies

Commitments

We lease our facilities and certain equipment under operating leases. Some of our regional office leases begin to expire in 2011. We are currently negotiating leases for two of our regional sales offices. The leases for our headquarters and manufacturing operations contain a five-year renewal option subject to a fair market value pricing adjustment. In addition, certain of our leases require us to restore the facilities back to the original condition at the end of lease terms.

In March 2010, the Company entered into a building lease agreement in preparation for the expansion of our manufacturing operations in Singapore. The initial term of the lease is three years, and is accounted for as an operating lease.

In July 2007, we capitalized a five-year lease agreement for a new phone system recorded as office equipment. The amortization of this phone system is included with depreciation expense.

In August 2008 and December 2009, we entered into agreements with a leasing company for the sale and leaseback of certain assets for an initial term of four years. The sale price of the items was $6.8 million and $5.4 million for the sale in 2008 and 2009, respectively. There was no gain or loss from these transactions. Under these sale-leaseback arrangements, we have an option to purchase the assets back at the future current fair market value upon the expiration of the lease in 2012 and 2013, respectively. The leases are classified as operating leases in accordance with ASC Topic 840, Leases . In January 2009, we bought back assets with values totaling $1.3 million. We did not buy back any assets during the three-month period ended April 2, 2011. However, in April 2010, subsequent to the first quarter of 2010, we bought back an asset with a value of $1.2 million. As of April 2, 2011, the minimum future lease payments to be made under these agreements were $3.1 million.

In October 2009, we entered into two lease amendments for our facilities in San Jose, California. The first lease amendment extended one of the building leases for five years. This lease extension will expire in January 2016. We account for this lease as an operating lease; any improvements to the leased property are capitalized and classified as leasehold improvements. Pursuant to the terms of the second lease amendment, in consideration for the waiver of certain surrender obligations set forth in the original lease of a separate building, we paid the landlord $0.6 million and surrendered possession of the premises on March 31, 2010.

 

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Legal Proceedings

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has merit, particularly given the denial by the federal court of that company’s request to be awarded attorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’s affirmation of the order denying any such award. We filed a motion to have the state court complaint dismissed under California’s anti-strategic lawsuit against public participation (“anti-SLAPP”) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individual’s constitutional rights to free speech or seeking redress of grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. Our subsequent appeals to the appellate court and California Supreme Court were unsuccessful, and the matter has returned to Riverside County Superior Court. We moved for summary judgment on the matter based on federal preemption, but the Superior Court denied the motion. A subsequent writ of mandamus filed by us was also not successful.

On April 19, 2011, the Riverside County Superior Court ruled in favor of Ultratech with respect to the malicious prosecution claim, and we expect judgment to be entered in our favor in due course.

 

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

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,” “estimates,” “continues,” and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers’ financial condition and demand for semiconductors; cyclicality in the semiconductor and nanotechnology industries; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer concentration; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; lengthy sales cycles, including the timing of system installations and acceptances; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser thermal processing operation; pricing pressures and product discounts; high degree of industry competition; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales; timing of new product announcements and releases by us or our competitors; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain sufficient personnel to achieve our targets for a particular period; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of the public health issues, wars or terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions in Iraq, Afghanistan and elsewhere, on the economy in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

We develop, manufacture and market photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Japan, Singapore, Taiwan and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuits industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, laser diodes and high-brightness light emitting diodes (“HBLEDs”). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $1.0 million to $6.0 million. As a result of these high sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or customer acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and could continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and customer acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and customer acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing difficulties or delays in deliveries by suppliers due to their long production lead times or otherwise, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers and laser thermal processing systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

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

Net Sales

 

     Three Months Ended                

(In thousands, except percentages)

   April 2,
2011
     April 3,
2010
     Amount of
Change
     Percentage
Change
 

Sales of:

           

Products

   $ 42,800       $ 23,968       $ 18,832         78.6

Services

     4,454         3,535         919         26.0

Licenses

     125         —           125         —     
                             

Total net sales

   $ 47,379       $ 27,503       $ 19,876         72.3
                             

 

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Net sales consist of revenues from products (system and spare parts sales), services and licensing of technologies. Product sales increased 78.6% to $42.8 million for the three-month period April 2, 2011, compared to $24.0 million in the corresponding period of 2010. The increase was due to (i) increased systems sales of $15.6 million, (ii) $1.3 million increase of upgrades, and (iii) $1.9 million increase of parts sales.

On a product market application basis, system sales to the semiconductor industry, consisting of sales to the advanced packaging market, the laser thermal processing applications market and the semiconductor market, increased $10.4 million to $31.4 million for the three-month period April 2, 2011, compared to $21.0 million in the corresponding period of 2010. This increase was primarily due to volume increases as compared to the corresponding period of 2010.

There was $5.2 million system sales to the nanotechnology market for the three-month period April 2, 2011 compared to no sales in the corresponding period of 2010. System sales to the nanotechnology market are highly dependent on customer capacity demand in the industries we serve, including HBLED, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, and therefore we expect to experience significant variations in sales to this market from quarter to quarter.

Sales from services for the three-month period April 2, 2011 increased to $4.5 million, as compared with $3.5 million compared to the corresponding period of 2010.

Licensing sales were $0.1 million for the three-month period ended April 2, 2011 as compared to no license revenue for the corresponding period of April 3, 2010. This is primarily due to the timing and frequency of the resale of our tools by our existing customers to third parties. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues in the future and do not anticipate the recognition of significant levels of licensing income during the remainder of 2011.

At April 2, 2011, we had approximately $19.2 million of deferred product and services income compared to $13.6 million at December 31, 2010. The gross amount of deferred revenues at April 2, 2011 was $30.4 million as compared to $20.1 million at December 31, 2010. The gross amount of deferred costs at April 2, 2011 was $11.2 million as compared to $6.5 million at December 31, 2010. Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or customer acceptance. Deferred services income is recognized as revenue ratably over the contract period (for time-based service contracts), or as purchased services are rendered (for contracts based on a purchased quantity of hours).

For the three-month period ended April 2, 2011, international net sales were $22.3 million, or 47.0% of total net sales, as compared to $17.2 million, or 62.4% of total net sales for the corresponding period of 2010. For the three-month period ended April 2, 2011 compared to the corresponding period of 2010, sales to the rest of Asia increased by $2.6 million, sales to Japan increased by $1.0 million, sales to Europe decreased by $2.8 million, sales to Taiwan decreased by $0.9 million. Sales to the Philippines were 13.1% of total revenue at $6.2 million for the three months ended April 2, 2011. We expect sales to international customers will continue to represent a significant portion of our revenues during the remainder of 2011 as companies continue to build their manufacturing plants overseas, especially in Asia.

Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, however, orders are sometimes denominated in Japanese yen. This subjects us to the risk of currency fluctuations. We attempt to mitigate this risk by entering into foreign currency forward exchange contracts for the period between when an order is received and when it is recorded as revenue. After recording revenue, we use various mechanisms, such as natural hedges, to offset substantial portions of the gains or losses associated with our Japanese yen denominated receivables due to exchange rate fluctuations. We had approximately ¥161.7 million of Japanese yen denominated receivables at April 2, 2011. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See Part II, Item 1A, “Risk Factors” herein).

Gross Profit

On a comparative basis, gross margins decreased to 50.0% for the three-month period ended April 2, 2011, as compared to 51.1% for the corresponding period of 2010. This 1.1 percentage point decrease in gross margin was primarily due to a lower margin product mix which was partially offset by volume increase improvements.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including the following: the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain

 

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market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; non-linearity of shipments during the quarter which can result in manufacturing inefficiencies; and the percentage of international sales, which typically have lower gross margins than domestic sales principally due to higher field service and support costs.

Operating Expenses

 

     Three Months Ended                

(In thousands, except percentages)

   April 2,
2011
     April 3,
2010
     Amount of
Change
     Percentage
Change
 

Research, development, and engineering

   $ 5,724       $ 4,791       $ 933         19.5

Selling, general, and administrative

     9,819         7,395         2,424         32.8
                             

Total operating expenses

   $ 15,543       $ 12,186       $ 3,357         27.5
                             

Research, development and engineering expenses for the three-month period April 2, 2011 were $5.7 million, as compared to $4.8 million for the corresponding period in 2010. This increase was primarily attributable to (i) increased contracted services of $0.4 million, and (ii) higher labor costs of $0.2 million, (iii) increased service charges of $0.2 million and (iv) $0.1 million of additional travel related expenses as compared to the corresponding period of 2010. As a percentage of net sales, research, development and engineering expenses for the three-month period April 2, 2011 decreased to 12.1% from 17.4% for the corresponding period of 2010. The increase in sales was the primary reason for the percentage decrease.

Selling, general, and administrative expenses for the three-month period April 2, 2011 were $9.8 million as compared to $7.4 million for the corresponding period of 2010. This increase was primarily attributable to higher compensation costs of $1.0 million, higher legal costs of $0.5 million, higher travel related expense of $0.4 million, higher outside professional services of $0.3 million, and higher bonus plan expense of $0.2 million. Administrative expenses, as a percent of net sales for the three-month period April 2, 2011 decreased slightly to 20.7% from 26.9%, from the corresponding period of 2010. The decrease in percentage was caused by the increased sales over the corresponding period of 2010.

Interest and Other Income (Expense), Net

Interest and other income (expense), net, which consists primarily of interest income and gain (loss) from foreign currency exchange, was immaterial for the three months ended April 2, 2011, as compared to a net income of $0.2 million for the corresponding period of 2010. This decrease was primarily attributable to a decline in interest income earned by our cash and investment positions of $0.1 million. The cost of securities sold was determined based on the specific identification method. As of April 2, 2010, the weighted-average maturity of our investment portfolio was less than a year. Changes in interest rates have had, and will continue to have, an impact on our interest income.

Provision for Income Taxes

For the three-month period ended April 2, 2011, we recorded an income tax provision of $0.3 million, as compared to $0.1 million for the corresponding period in 2010. The income tax provision recognized for the three-month period ended April 2, 2011 resulted primarily from federal, foreign and state income taxes. Income tax estimates can be affected by whether and within which jurisdictions future earnings will occur and how and when cash is repatriated to the United States, as well as other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters, and we do not anticipate any material earnings impact from their ultimate resolution.

Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that, as of April 2, 2011, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan.

It is possible that sometime in the next 12 months the positive evidence will be sufficient to release a material amount of our valuation allowance; however there is no assurance that this will occur.

 

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We are subject to federal and state tax examination for years 1994 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2004 and forward. There are no material income tax audits currently in progress as of April 2, 2011.

Outlook

The anticipated timing of orders, shipments and customer acceptances usually requires that we fill a number of production slots in any given quarter in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We presently expect net sales for the second quarter of 2011 will increase approximately 5% to 10% from the net sales reported in the first quarter of 2011. For the full fiscal year of 2011, we believe that total net sales may be in the range of $200 million to $220 million for fiscal 2011. We anticipate our cash flow to be positive for each of the remaining quarters of 2011.

Because our net sales are subject to a number of risks, including risks associated with the market acceptance of our new laser thermal processing product line, delays in customer acceptance, intense competition in the capital equipment industry, uncertainty relating to the timing and market acceptance of our products, and the condition of the macro-economy and the semiconductor industry and the other risks described in this report and in our Annual Report on Form 10-K for the year ended December 31, 2010, we may not exceed or even maintain our current or prior level of net sales for any period in the future. Additionally, we believe that the market acceptance and volume production of our advanced packaging systems, laser thermal processing systems and our 1000 Platform steppers are of critical importance to our future financial results. At April 2, 2011, these critical systems represented approximately 85.3% of our backlog. To the extent that these products do not achieve or maintain significant sales due to difficulties involving manufacturing or engineering, the inability to reduce the current long manufacturing cycles for these products, competition, excess capacity in the semiconductor or nanotechnology device industries, or for any other reason, our business, financial condition and results of operations would be materially adversely affected.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $5.7 million for the three months ended April 2, 2011, as compared to $7.8 million for the corresponding period in 2010. Net cash provided by operating activities during the three months ended April 2, 2011 was primarily attributable to (i) a $10.3 million net cash provided by operations after adjustments from non-cash charges to the income statement and (ii) a $4.6 million net cash used from changes in working capital.

Reductions of working capital were from (i) fewer cash collections of accounts receivable for $7.4 million, (ii) net inventory purchases of $2.0 million, (iii) decreases in accounts payable of $0.6 million, (iv) increases of prepaid expense and other assets of $0.1 million each, offset by (v) higher deferred income of $5.6 million.

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

During the three months ended April 2, 2011, net cash used in investing activities was $13.7 million, attributable to net purchase of short-term investments of $13.0 million and capital expenditures of $0.7 million.

Net cash provided by financing activities was less than $0.1 million during the three months ended April 2, 2011, attributable to proceeds from the issuance of common stock of $4.2 million, offset by repayment of notes payable of $3.0 million, and $1.2 tax payments related to the release of restricted stock units.

 

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At April 2, 2011, we had working capital of $231.0 million. Our principal sources of liquidity at April 2, 2011 consisted of $186.5 million in cash, cash equivalents and short-term investments, net of outstanding borrowings under our line of credit. We have a line of credit agreement with a brokerage firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds open rate plus 125 basis points (approximately 1.4% as of April 2, 2011). Certain of our cash, cash equivalents and marketable securities secure borrowings outstanding under this facility, but we are not restricted in the use of those assets. Funds are advanced to us under this facility in accordance with pre-determined advance rates based on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants other than a collateral requirement. As of April 2, 2011, $3.0 million was outstanding under this facility as compared to $6.0 million for the corresponding period of 2010, with a related collateral requirement of approximately $4.0 million and $8.0 million, respectively of our cash, cash equivalents and short-term investments.

The continuing development and manufacture of new lithography and laser-based systems and system enhancements is highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

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

Foreign Currency

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

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

 

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Information Available on Company Website

Our website is located at www.ultratech.com . We make available, free of charge through our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports), as soon as reasonably practicable after such reports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to or waivers of this Code of Ethics will also be posted on our website.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Reference is made to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2010 and to the subheading “Derivative Instruments and Hedging” under the heading “Notes to Consolidated Financial Statements” in Item 8, “Financial Statements and Supplementary Data” of our Annual Report on Form 10-K for the year ended December 31, 2010.

Interest Rate Risk

Our exposure to market risk due to potential changes in interest rates relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of April 2, 2011. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

Certain of our cash, cash equivalents and short and long-term investments serve as collateral for a line of credit we maintain with a brokerage firm. The line of credit is used for liquidity purposes, mitigating the need to liquidate investments in order to meet our current operating cash requirements.

Credit Risk

We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and is diversified in accordance with our investment policy. To date, we have not experienced any liquidity problems with our portfolio.

As of April 2, 2011, we did not have any investments in mortgage backed or auction rate securities or any security investments in the financial service sector. However, we intend to closely monitor developments in the credit markets and make appropriate changes to our investment policy as we deem necessary or advisable. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment.

Foreign Currency Risk Management

The majority of our revenue, expenses and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have established cash flow and balance sheet hedging programs.

We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. See “Derivative Instruments and Hedging” in Note 7 under the heading “Notes to Condensed Consolidated Financial Statements” of Part I, Item 1, “Financial Statements” herein for further disclosures.

Item 4. Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded that, as of the Evaluation Date, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms.

 

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Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Management is further required to apply judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the three-month period April 2, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Legal Proceedings

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has merit, particularly given the denial by the federal court of that company’s request to be awarded attorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’s affirmation of the order denying any such award. We filed a motion to have the state court complaint dismissed under California’s anti-strategic lawsuit against public participation (“anti-SLAPP”) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individual’s constitutional rights to free speech or seeking redress of grievances (i.e., filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. Our subsequent appeals to the appellate court and California Supreme Court were unsuccessful, and the matter has returned to Riverside County Superior Court. We moved for summary judgment on the matter based on federal preemption, but the Superior Court denied the motion. A subsequent writ of mandamus filed by us was also not successful.

On April 19, 2011, the Riverside County Superior Court ruled in favor of Ultratech with respect to the malicious prosecution claim, and we expect judgment to be entered in our favor in due course.

Item 1A. Risk Factors

In addition to risks described in the foregoing discussions, the following risks, among others, apply to our business and us :

The semiconductor industry historically has been highly cyclical and has experienced periods of oversupply, which have in turn affected the market for semiconductor equipment such as ours and which can adversely affect our results of operations during such periods.

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors and nanotechnology components which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and has experienced recurring periods of oversupply. This has, from time to time, resulted in significantly reduced demand for capital equipment including the systems manufactured and marketed by us. We believe that markets for new generations of semiconductors and semiconductor packaging will also be subject to similar fluctuations. Our business and operating results

 

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would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, and nanotechnology sectors. Diversifying into new markets such as laser-based annealing for implant activation, lithography steppers for 3-D packaging and HBLED can somewhat help this cyclicality. Despite such efforts, when one or more of such markets experiences a downturn or a situation of excess capacity, our net sales and operating results are materially adversely affected.

Our sales cycle is typically lengthy and involves a significant commitment of capital by our customers, which has subjected us, and is likely to continue to subject us, to delays in customer acceptances of our products and other risks, any of which could adversely impact our results of operations by, among other things, delaying recognition of revenue with respect to those orders and resulting in increased installation, qualification and similar costs.

Sales of our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity, replace older equipment or to restructure current manufacturing facilities, any of which typically involves a significant commitment of capital. Many of our customers in the past have cancelled or postponed the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, we have experienced and may continue to experience delays following initial qualification of our systems as a result of delays in a customer’s approval process. Additionally, we are presently receiving orders for systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers’ capacity scheduling requirements. For these and other reasons, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able to obtain those orders. Other important factors that could cause demand for our products to fluctuate include:

 

 

competitive pressures, including pricing pressures, from companies that have competing products;

 

 

changes in customer product needs; and

 

 

strategic actions taken by our competitors.

Our quarterly revenues and operating results are difficult to predict.

Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. We manage our expense levels based in part on our expectations of future revenues, and a certain amount of those expenses are relatively fixed. As a result, a change in the timing of recognition of revenue or a change in margins can have a significant impact on our operating results in any particular quarter. Factors that may cause our results of operations to fluctuate include, but are not limited to:

 

   

market conditions in the electronics and semiconductor industries;

 

   

failure of suppliers to perform in a manner consistent with our expectations;

 

   

manufacturing difficulties or delays;

 

   

customer cancellations or delays in shipments, installations and/or customer acceptances;

 

   

competitive factors, including the introduction of new products by our competitors or any failure of our products to gain or maintain market acceptance; and

 

   

changes in selling prices and product mix.

The continuing global financial economic crisis or the effects of natural disasters, could result in the cancellation, deferral or rescheduling of orders by our customers as well as changes in projection of new business.

Orders in backlog are subject to cancellation, deferral or rescheduling by a customer with limited or no penalties. Sales of our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant commitment of capital. Further, the purchase of our products involves a significant commitment of capital on the part of our customers. If the markets for our customers’ products experience a period of declining demand or if our customers’ ability to raise capital is limited, they may choose to cancel, delay or reschedule purchases of our products. The current global financial economic crisis or the effects of natural disasters, and the uncertainty created thereby could result in such a decline in demand or limited ability to raise capital, or could otherwise affect our customers’ markets, financial condition or willingness to incur expenses. As a result, we could experience the cancellation, delay or rescheduling of orders in our current backlog or of orders we currently expect to receive. Any such decision by our customers or potential customers would adversely affect our net sales and results of operations.

 

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We currently spend, and expect to continue to spend, significant resources to develop, introduce and commercialize our laser thermal processing systems, AP, Nanotechnology, and HBLED lithography stepper products, and future generations of these enhancements to these products. We may not be successful in the timely introduction of these products which may cause sales of these products to decrease or not increase as expected.

Currently, we are devoting significant resources to the development, introduction and commercialization of our laser thermal processing systems, AP, Nanotechnology, and HBLED lithography stepper products, and future generations of and enhancements to those products. We intend to continue to develop these products and technologies, and will continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing and general and administrative costs in order to develop, produce and support these new products. Additionally, gross profit margins and inventory levels may be further adversely impacted in the future by costs associated with the initial production of new products. Introduction of new products generally involves higher installation costs and product performance uncertainties that could delay customer acceptance of our systems, resulting in a delay in recognizing revenue associated with those systems and a reduction in gross margins. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-downs, costs of demonstration systems and facilities and costs associated with the establishment of additional after-sales support organizations. Additionally, operating expenses may increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our operating results could be materially adversely affected.

Our ability to commercialize our laser thermal processing technologies depends on our ability to demonstrate a manufacturing-worthy tool. We do not presently have in-house capability to fabricate devices. As a result, we must rely on partnering with semiconductor companies to develop the anneal process. The development of new process technologies is largely dependent upon our ability to interest potential customers in working on joint process development. Our ability to deliver timely solutions is also limited by wafer turnaround at the potential customer’s fabrication facility.

We operate in a highly competitive industry in which customers are required to invest substantial resources in each product, which makes it difficult to achieve significant sales to a particular customer once another vendor’s equipment has been purchased by that customer.

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. We believe that once a device manufacturer or packaging subcontractor has selected a particular supplier’s capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another supplier’s capital equipment has been selected.

We experience competition in advanced packaging from various proximity aligner companies such as Suss Microtec AG (“Suss Microtec”) and used projection systems. In addition, some device manufacturers may consider using reduction steppers for advanced packaging processes. In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other stepper manufacturers who have developed or are developing tools specifically designed for nanotechnology applications. We expect our competitors in the lithography arena to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

With respect to our laser annealing technologies, marketed under the LSA100A and LSA101 product names our primary competition comes from companies such as Dainippon Screen Manufacturing Co., Ltd., Applied Materials, Inc. and Mattson Technology, Inc. Many of these companies offer products utilizing rapid thermal processing (“RTP”) which is the current prevailing manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. In July 2000, we licensed certain rights to our then existing laser thermal processing technology, with reservations, to a competing manufacturer of semiconductor equipment. We presently anticipate that this company and others intend to offer laser annealing tools to the semiconductor industry that will compete with our offerings.

 

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Another potential advanced annealing solution utilizes flash lamp annealing technology, or FLA. Several companies have published papers on annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase annealing temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the advanced nodes. This technique, which employs xenon flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser thermal processing solution has been specifically developed to provide junction annealing on near-instantaneous time-scales, while achieving high activation levels. Laser thermal processing, our first implementation of laser thermal processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range, are required to achieve full activation, and minimal dopant diffusion.

Additionally, competition to our laser thermal processing products may come from other laser annealing tools, including those presently being used by the flat panel display industry to re-crystallize silicon. Manufacturers of these tools may try to extend the use of their technologies to semiconductor device applications.

We believe that in order to be competitive, we will need to continue to invest significant financial resources in new product development, new features and enhancements to existing products, the introduction of new stepper systems in our served markets on a timely basis, and maintaining customer service and support centers worldwide. In marketing our products, we may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

We sell our products primarily to a limited number of customers and to customers in a limited number of industries, which subjects us to increased risks related to the business performance of our customers, and therefore their need for our products, and the business cycles of the markets into which we sell.

Historically, we have sold a substantial portion of our systems to a limited number of customers. In the three-month period ended April 2, 2011, our top five customers accounted for 93.4% of our system sales compared to 98.8% in the corresponding period of 2010. We expect that sales to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

In addition to the business risks associated with dependence on a few major customers, these significant customer concentrations have in the past resulted in significant concentrations of accounts receivable. These significant and concentrated receivables expose us to additional risks, including the risk of default by one or more customers representing a significant portion of our total receivables. If we were required to take additional accounts receivable reserves, our business, financial condition and results of operations would be materially adversely affected.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications and laser thermal processing applications, accounted for 86% of our system revenue for the three months ended April 2, 2011 and the corresponding period in 2010. We had $5.2 million of sales to nanotechnology manufacturers, including micro systems, thin film head and optical device manufacturers, for the three months ended April 2, 2011 as compared to no sales for the corresponding period of 2010. Systems revenue for HBLED accounted for 14% of systems revenue for the three months ended April 2, 2011, as compared to no revenue for the corresponding period in 2010. Our future operating results and financial condition would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries. A growing portion of our backlog of system orders is comprised of laser thermal processing tools. As our laser thermal processing tools are used for the continuation of reduced device geometries and customers seldom provide us with their future technical requirements, these tools may not meet all customers’ requirements upon initial delivery and installation at the customer’s facility. As a result, acceptance of the tool by the customer could be delayed while we perform testing and attempt to meet their requirements, or the order could be cancelled if we are unable to meet those requirements. Should significant demand not materialize, due to technical, production, market, or other factors, our business, financial position and results of operations would be materially adversely impacted.

 

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We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies, and on single or a limited group of outside suppliers for certain materials for our products, which could result in a potential inability to obtain an adequate supply of required components due to the suppliers’ failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components and materials, any of which could adversely affect our results of operations.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who then grind and polish the lens elements. We then assemble and test the optical 1X lenses.

We procure some of our other critical systems’ components, subassemblies and services from single outside suppliers or a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To date, we have been able to obtain adequate services and supplies of components and subassemblies for our systems in a timely manner. However, disruption or termination of certain of these sources could have a significant adverse impact on our ability to manufacture our systems. This, in turn, would have a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole supplier or a limited group of suppliers and our reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers’ failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components. Although the timeliness, yield and quality of deliveries to date from our subcontractors have been acceptable, manufacture of certain of these components and subassemblies is an extremely complex process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our products, which could damage relationships with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.

Our industry is subject to rapid technological change and product innovation, which could result in our technologies and products being replaced by those of our competitors, which would adversely affect our business and results of operations.

The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change, evolving industry standards and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our ability to develop new and enhanced systems and related applications, and to introduce these systems and related applications at competitive prices and on a timely and cost-effective basis to enable customers to integrate them into their operations either prior to or as they begin volume product manufacturing. We will also be required to enhance the performance of our existing systems and related applications. Our success in developing new and enhanced systems and related applications depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future customer requirements and the technology that will be available to meet those requirements. We may not be successful in selecting, developing, manufacturing or marketing new products and related applications or enhancing our existing products and related applications. Any such failure would materially adversely affect our business, financial condition and results of operations. Further, we may make substantial investments in new products before we know whether they are technically feasible or commercially viable, and as a result may incur significant product development expenses that do not result in new products or revenues.

Because of the large number of components in our systems, significant delays can occur between a system’s introduction and our commencement of volume production of such systems. We have experienced delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of our systems and enhancements and related application tools features and options, and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements and related application tools features and options.

We may encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume production of systems or enhancements. Our inability to complete the development or meet the technical specifications of any of our systems or enhancements and related applications, or our inability to manufacture and ship these systems or enhancements and related tools in volume and in time to meet the requirements for manufacturing the future

 

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generation of semiconductor or nanotechnology devices would materially adversely affect our business, financial condition and results of operations. In addition, we may incur substantial unanticipated costs to ensure the functionality and reliability of our products early in the products’ life cycles. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in customer acceptance, revenue recognition and collecting accounts receivable and additional service and warranty expenses may result. Any of such events may materially adversely affect our business, financial condition and results of operations.

We may not be successful in protecting our intellectual property rights or we could be found to have infringed the intellectual property rights of others, either of which could weaken our competitive position and adversely affect our results of operations.

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. We own 163 U.S. and foreign patents, which expire on dates ranging from July 2011 to July 2028 and have 58 U.S. and foreign patent applications pending. In addition, we have various registered trademarks and copyright registrations covering mainly applications used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies, or the expiration of patents covering our key technologies, could allow our competitors to more effectively compete against us, which could result in less revenue for us.

On July 11, 2003, we filed a lawsuit against a Southern California company asserting infringement of certain claims related to U.S. patent No. 5,621,813 in the U.S. District Court in and for the Northern District of California. On May 17, 2005, the court found the subject patent to be invalid. We appealed this decision. The defendant subsequently brought a motion for reimbursement of its attorneys’ fees and costs in a total asserted amount of approximately $2 million. We opposed this motion, and on October 12, 2005, the District Court denied the defendant’s request for attorneys’ fees in its entirety. The defendant appealed that decision. On November 3, 2005, the defendant filed a notice of appeal with respect to the court’s ruling on its motion for attorneys’ fees. In March 2006, the Federal Circuit court upheld the district court’s ruling that the subject patent is invalid. On August 8, 2006, the Federal Circuit court upheld the District Court’s denial of attorneys’ fees. Neither side appealed the rulings by the Federal Circuit.

In May 2006, the same company filed a state court lawsuit against us for malicious prosecution and abuse of process claiming that attorney’s fees, costs and other damages were due based on the outcome of the federal patent litigation suit described above. We do not believe this action has merit, particularly given the denial by the federal court of that company’s request to be awarded attorneys’ fees payable by us in the patent litigation and the subsequent federal appellate court’s affirmation of the order denying any such award. We filed a motion to have the state court complaint dismissed under California’s anti-strategic lawsuit against public participation (“anti-SLAPP”) and demurrer statutes. The anti-SLAPP statute is aimed at striking lawsuits that are brought in order to quash an individual’s constitutional rights to free speech or seeking redress of grievances (i.e. filing suit). The state court granted the anti-SLAPP motion as to the abuse of process claim, but denied it as to the malicious prosecution claim. Our subsequent appeals to the appellate court and California Supreme Court were unsuccessful, and the matter was returned to Riverside County Superior Court. We moved for summary judgment on the matter based on federal preemption, but the Superior Court denied the motion. A subsequent writ of mandamus filed by us was also not successful.

On April 19, 2011, the Riverside County Superior Court ruled in favor of Ultratech with respect to the malicious prosecution claim, and we expect judgment to be entered in our favor in due course. We believe that the outcome of these matters will not be material to our business, financial condition or results of operations.

We have from time to time been notified of claims that we may be infringing intellectual property rights possessed by third parties. We believe that the outcome of these matters will not be material to our business, results of operations or financial condition.

 

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Infringement claims by third parties or claims for indemnification resulting from infringement claims may be asserted in the future and such assertions could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, we may seek to obtain a license under the third party’s intellectual property rights. However, a license may not be available on reasonable terms or at all. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation.

A substantial portion of our sales are outside of the United States, which subjects us to risks related to customer service, installation, foreign economic and political stability, uncertain regulatory and tax rules, and foreign exchange rate fluctuations, all of which make it more difficult to operate our business.

International sales accounted for approximately 47.0% of total net sales for the three-month period ended April 2, 2011, compared to 62.4% in the corresponding period of 2010. We anticipate that international sales will continue to account for a significant portion of total net sales. As a result, a significant portion of our net sales will continue to be subject to certain risks, including unexpected changes in regulatory requirements; difficulty in satisfying existing regulatory requirements; exchange rate fluctuations; tariffs and other barriers; political and economic instability; difficulties in accounts receivable collections; reduced protection of intellectual property; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

Although we generally transact our international sales in U.S. dollars, international sales expose us to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of our products and may further impact the purchasing ability of our international customers. We have direct sales operations in Japan and orders are often denominated in Japanese yen. This may subject us to a higher degree of risk from currency fluctuations. We attempt to mitigate this exposure through foreign currency hedging. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductors and nanotechnology products. We cannot predict whether the United States or any other country will implement changes to quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products. These factors, or the adoption of restrictive policies, may have a material adverse effect on our business, financial condition and results of operations.

To better align with the increasingly international nature of our business, we are transitioning certain manufacturing processes into Singapore, thereby bringing these activities closer to our Asian customers. We are pursuing available tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday or reduced tax rates. Our ability to realize benefits from these initiatives could be materially affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.

We continue to expand our manufacturing and service operations in Singapore and customer support operations in other parts of the world, which will continue to increase exposure to risks inherent in doing business outside the United States, any of which risks could harm our business, financial condition and operating results.

Foreign operations subject us to risks related to the political, economic, legal and other conditions of foreign jurisdictions. These risks include risks related to:

 

 

foreign exchange rate fluctuations;

 

 

the need to comply with foreign government laws and regulations, including the imposition of regulatory requirements, tariffs, and import and export restrictions;

 

 

general geopolitical risks such as political and economic instability and changes in diplomatic and trade relationships;

 

 

the need for effective management of dispersed operations far from our headquarters in California;

 

 

the potential for strain on management resources;

 

 

difficulty in hiring and retaining local personnel for the successful operation of our business in each location;

 

 

the need to effectively manage personnel in different languages and under different cultural and legal expectations and requirements;

 

 

potentially less protection of intellectual property under the laws of foreign jurisdictions; and

 

 

public safety or health concerns or natural disasters in foreign countries.

 

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These risks could, among other things, result in product shipment delays, increased costs, unexpected shutdowns or other business disruptions, or loss of benefits expected to be achieved by conducting operations in affected jurisdictions. Any of the above risks, should they occur, could have a material adverse effect on our business, financial condition and results of operations.

Our investment portfolio may become impaired by further deterioration of the capital markets.

Our cash equivalent and short-term investment portfolio as of April 2, 2011 consisted of securities and obligations of U.S. government agencies, money market funds, commercial paper and corporate debt securities. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

As a result of current financial market conditions, investments in some financial instruments, such as structured investment vehicles, sub-prime mortgage-backed securities and collateralized debt obligations, may lose some or all of their value due to liquidity and credit concerns. As of April 2, 2011, we had no holdings in these categories of investments and no impairment charge associated with our short-term investment portfolio. Although we believe our current investment portfolio has little risk of impairment, we cannot predict future market conditions or market liquidity and our investment portfolio could become impaired.

We are dependent on our key personnel, especially Mr. Zafiropoulo, our Chief Executive Officer, and our business and results of operations would be adversely affected if we were to lose our key employees.

Our future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. We have entered into employment agreements only with our Chief Executive Officer and Chief Financial Officer, and our employees are employed “at will.” The agreements with our Chief Executive Officer and Chief Financial Officer contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or have a disability. We do not maintain any life insurance on any of our key employees. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our operations. There are only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area where we maintain our headquarters and principal operations, and we may not be successful in attracting or retaining such personnel. The failure to attract or retain such persons would materially adversely affect our business, financial condition and results of operations.

Our results of operations and business could be adversely affected by natural disasters, public health issues, political instability, wars, and other military action, as well as terrorist attacks and threats and government responses thereto, especially if any such actions were directed at us or our facilities or customers.

Natural disasters such as what occurred in Japan may cause disruption in the semiconductor industry and its markets resulting in order cancellations or requests to delay order deliveries of our products. Public health issues, political instability (for example, recent unrest in the Middle East), terrorist attacks in the United States and elsewhere, government responses thereto, and military actions in Iraq, Afghanistan and elsewhere, may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. Significant public health issues could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a significant negative impact on the global economy, us and our customers or suppliers. Should such incidents increase or other public health issues arise, we could be negatively impacted by the need for more stringent employee travel restrictions, additional limitations in the availability of freight services, governmental actions limiting the movement of products between various regions and disruptions in the operations of our customers or suppliers. Similarly, political instability could affect the ability of our suppliers to provide the materials needed in our operations or the cost of acquiring such materials. Any public health issues, political instability, any terrorist attacks, or the ongoing war on terrorism or other wars could increase volatility in the United States and world financial markets which may depress the price of our Common Stock and may limit the capital resources available to us or our customers or suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Additionally, if any of these events were to directly affect or be specifically directed at us, or occur in a country where we or our suppliers or our customers operate, our ability to conduct our business could be significantly disrupted. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our Common Stock.

 

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Changes in financial accounting standards or policies in the past have affected, and in the future may, affect, our reported results of operations.

We prepare our financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”). These principles are subject to interpretation by the Financial Accounting Standards Board (“FASB”), the American Institute of Certified Public Accountants (“AICPA”), the Securities and Exchange Commission (“SEC”) and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.

Accounting policies affecting many other aspects of our business, including rules relating to revenue recognition, off-balance sheet transactions, employee stock options and other equity awards, restructurings, asset disposals and asset retirement obligations, derivative and other financial instruments are regularly under review and subject to revision.. Changes to those rules or the questioning of how we interpret or implement those rules may have a material adverse effect on our reported financial results or on the way we conduct business. In addition, our preparation of financial statements in accordance with U.S. GAAP requires that we make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to our estimates and could impact our future operating results.

Our equity incentive plans, certain provisions of our Certificate of Incorporation and Bylaws, and certain aspects of Delaware law may discourage third parties from pursuing a change of control transaction with us.

Certain provisions of our Certificate of Incorporation, equity incentive plans, licensing agreements, Bylaws and Delaware law may discourage certain transactions involving a change in control of our company. In addition to the foregoing, the shareholdings of our officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue “blank check” preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing us from experiencing a change in control and may adversely affect the voting and other rights of holders of our Common Stock.

We use hazardous substances in the operation of our business, and any failure on our part to comply with applicable regulations or to appropriately control the use, disposal or storage of such substances could subject us to significant liabilities.

We are subject to a variety of governmental regulations relating to environment protection and workplace safety, including the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. The failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by us to comply with these regulations, including any failure to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances, could subject us to significant liabilities.

Our stock price has experienced significant volatility in the past and we expect this to continue in the future as a result of many factors, some of which could be unrelated to our operating performance, and such volatility can have a major impact on the number of shares subject to outstanding stock options and restricted stock units that are included in calculating our earnings per share.

We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, a shortfall in revenue or earnings, changes in analysts’ expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the marketplace, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our relationships with our customers and suppliers could cause the price of our Common Stock to fluctuate, perhaps substantially. The market price of our Common Stock has fluctuated significantly in the past and we expect it to continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of April 2, 2011, we had outstanding options to purchase and outstanding restricted stock units totaling 4.0 million shares of our Common Stock. Among other determinants, the market price of our stock has a major bearing on the number of shares subject to outstanding stock options and restricted stock units that are included in the weighted-average shares used in determining our net income per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income per share. Additionally, shares subject to outstanding options and restricted stock

 

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units are excluded from the calculation of net income per share when we have a net loss or when the exercise price and the average unrecognized compensation cost of the stock option or restricted stock unit is greater than the average market price of our Common Stock, as the impact of the stock options or restricted stock units would be anti-dilutive.

If we acquire companies, products, or technologies, we may face risks associated with those acquisitions.

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

Our long-term expenses reduction programs may result in an increase in short-term expenses.

As part of our continued effort to reduce company-wide expenses, we have recorded certain expenses related to work force reductions pursuant to the provisions of Accounting Standard Codification (“ASC”) Topic 420, Exit or Disposal Cost Obligations . Although we expect our cost cutting efforts to result in a decrease in expenses over the long-term, these accounting charges may result in an increase in our short-term expenses. We may from time to time undertake additional expense reduction programs or actions, any of which could result in current period charges and expenses that could have a material adverse effect on that period’s operating results.

If earthquakes or other catastrophic events occur, our business may be harmed.

We currently perform a majority of our manufacturing activities in cleanroom environments in San Jose, California, an area known for seismic activity. Performing manufacturing operations in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, in the past California has experienced power shortages, which have interrupted our operations. Such shortages could occur in the future. Further, our suppliers and/or customers may operate in areas subject to natural disasters, the occurrence of which could affect their ability to continue to do business with us as expected or at all. An earthquake, other natural disaster, power shortage or other similar events could interrupt or otherwise limit our operations or those of our suppliers or customers resulting in product shipment delays, supply problems, cancellations or deferrals of product orders, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Reserved

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

    3.1(a)   Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.
    3.1.1(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed May 17, 1995.
    3.1.2(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 17, 1998.
    3.1.3(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 20, 2003.
    3.1.4(b)  

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed

August 31, 2009.

    3.2(c)   Amended and Restated Bylaws of the Registrant, as amended.
  10.1(d)   Ultratech, Inc. Long-Term Incentive Compensation Plan as Amended and Restated January 24, 2011.
  10.2(d)   Amendment No. 2 to Ultratech, Inc. Non-Qualified Supplemental Deferred Compensation Plan, as amended and restated and subsequently amended effective as of January 1, 2005.
  31.1   Certification of Chief Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(a) Previously filed with our Quarterly Report on Form 10-Q for the three-month period June 28, 2003 (Commission File No. 0-22248) and incorporated herein by reference.
(b) Previously filed with our Quarterly Report on Form 10-Q for the three-month period October 3, 2009 (Commission File No. 0-22248) and incorporated herein by reference.
(c) Previously filed with our Current Report on Form 8-K filed on October 20, 2008 (Commission File No. 0-22248) and incorporated herein by reference.
(d) Previously filed with our Current Report on Form 8-K filed on January 28, 2011 (Commission File No. 0-22248) and incorporated herein by reference.
 * Exhibit 32.1 is being furnished and shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act, or the Exchange Act, except as otherwise stated in such filing.

 

34


Table of Contents

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.

 

   

ULTRATECH, INC.

(Registrant)

Date: April 29, 2011     By:  

/s/ BRUCE WRIGHT

      Bruce Wright
     

Senior Vice President, Finance and Chief

Financial Officer (Duly Authorized Officer

and Principal Financial and Accounting

Officer)

 

35


Table of Contents

EXHIBIT INDEX

 

    3.1(a)   Amended and Restated Certificate of Incorporation of the Registrant, filed October 6, 1993.
    3.1.1(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed May 17, 1995.
    3.1.2(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 17, 1998.
    3.1.3(a)   Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed June 20, 2003.
    3.1.4(b)  

Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, filed

August 31, 2009.

    3.2(c)   Amended and Restated Bylaws of the Registrant, as amended.
  10.1(d)   Ultratech, Inc. Long-Term Incentive Compensation Plan as Amended and Restated January 24, 2011.
  10.2(d)   Amendment No. 2 to Ultratech, Inc. Non-Qualified Supplemental Deferred Compensation Plan, as amended and restated and subsequently amended effective as of January 1, 2005.
  31.1   Certification of Chief Executive Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2   Certification of Chief Financial Officer required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1*   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(a) Previously filed with our Quarterly Report on Form 10-Q for the three-month period June 28, 2003 (Commission File No. 0-22248) and incorporated herein by reference.  
(b) Previously filed with our Quarterly Report on Form 10-Q for the three-month period October 3, 2009 (Commission File No. 0-22248) and incorporated herein by reference.  
(c) Previously filed with our Current Report on Form 8-K on October 20, 2008 (Commission File No. 0-22248) and incorporated herein by reference.
(d) Previously filed with our Current Report on Form 8-K filed on January 28, 2011 (Commission File No. 0-22248) and incorporated herein by reference.
 * Exhibit 32.1 is being furnished and shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall such exhibit be deemed to be incorporated by reference in any registration statement or other document filed under the Securities Act, or the Exchange Act, except as otherwise stated in such filing.

 

36

Exhibit 31.1

I, Arthur Zafiropoulo, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ultratech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2011      

/s/ ARTHUR ZAFIROPOULO

      Arthur Zafiropoulo
      Chief Executive Officer

Exhibit 31.2

I, Bruce Wright, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Ultratech, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 29, 2011      

/s/ BRUCE WRIGHT

      Bruce Wright
      Chief Financial Officer

Exhibit 32.1

CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Arthur Zafiropoulo, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

   

the Quarterly Report of Ultratech, Inc. on Form 10-Q for the period ended April 2, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

   

the information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Ultratech, Inc.

 

  By:   

/s/ ARTHUR ZAFIROPOULO

      Date: April 29, 2011   
     Name: Arthur Zafiropoulo         
     Title: Chief Executive Officer         

I, Bruce Wright, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

 

   

the Quarterly Report of Ultratech, Inc. on Form 10-Q for the period ended April 2, 2011 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

   

the information contained in such Quarterly Report fairly presents in all material respects the financial condition and results of operations of Ultratech, Inc.

 

  By:   

/s/ BRUCE WRIGHT

      Date: April 29, 2011   
     Name: Bruce Wright         
     Title: Chief Financial Officer         

 

* A signed original of this written statement required by Section 906 has been provided to Ultratech, Inc. and will be retained by Ultratech, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.