Ultratech, Inc.
ULTRATECH INC (Form: 10-K, Received: 02/29/2012 16:50:42)
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
————————————————————
FORM 10-K
(Mark one)
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2011
Or
¨
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
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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)
(408) 321-8835
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨     No   ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨     No   ý
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   ý     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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   ý     No   ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     ý
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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   ý
The aggregate market value of voting stock held by non-affiliates of the Registrant, as of July 2, 2011 , was approximately $471,779,922 (based upon the closing price for shares of the Registrant’s common stock as reported by the NASDAQ Global Market on that date, the last trading date of the Registrant’s most recently completed second quarter). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of January 31, 2012 , the Registrant had 26,113,018 shares of common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 
 
 




Ultratech, Inc.

Index
 
 
 
 



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PART I

ITEM 1.
BUSINESS

This Annual Report on Form 10-K contains, in addition to historical information, certain forward-looking statements that involve significant risks and uncertainties, which are difficult to predict, and are not guarantees of future performance. Such statements can generally be identified by words such as “anticipates,” “expects,” “intends,” “will,” “could,” “believes,” “estimates,” “continue,” and similar expressions. Our actual results could differ materially from the information set forth in any such forward-looking statements. Factors that could cause or contribute to such differences include those discussed below, as well as those discussed under “Item 1A. Risk Factors” and elsewhere in this Annual Report on Form 10-K.

The Company

Ultratech, Inc. (“Ultratech” or “we”) develops, manufactures and markets photolithography and laser thermal processing equipment designed to reduce the cost of ownership for manufacturers of integrated circuits, including advanced packaging processes and various nanotechnology components, thin film head magnetic recording devices (“thin film heads” or “TFHs”), optical networking devices, laser diodes and high-brightness light emitting diodes (“HBLEDs”). Ultratech was incorporated in the state of Delaware in 1992.

Lithography

We supply step-and-repeat photolithography systems based on one-to-one (“1X”) imaging technology to customers located throughout North America, Europe and Asia. We believe that our 1X steppers utilizing the Wynne Dyson optical design offer cost and performance advantages, as compared with competitors’ contact aligners or reduction steppers, to semiconductor device manufacturers for applications involving line geometries of 0.75 microns or greater (“non-critical feature sizes”) and to nanotechnology manufacturers.

Advanced packaging for integrated circuits, specifically bump or wafer level chip scale packaging (“WLCSP”) techniques, require lithography steps in the device fabrication process. We continue to enhance our product offerings for bump, WLCSP processing and post passivation lithography (“PPL”). Our steppers are used to manufacture high volume, low cost semiconductors used in a variety of applications such as telecommunications, automotive control systems, power systems and consumer electronics. We also supply 1X photolithography systems to thin film head manufacturers and believe that our steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost. Additionally, we supply 1X photolithography equipment to various other nanotechnology markets where certain technical features, such as high resolution at gh-line wavelengths, large depth of focus and custom size substrate handling, may offer advantages over certain competing tools.

Laser Anneal Technology

Device scaling has been the predominant means pursued by the semiconductor industry to achieve the gains in productivity and performance quantified by Moore’s Law. In the past several years, scaled device performance has been compromised because traditional transistor materials, such as silicon, silicon dioxide, and polysilicon, have been pushed to their fundamental materials limits. Continued scaling thus requires the introduction of new materials. For example, the traditional gate dielectric has been silicon dioxide, and as devices are scaled below 45 nanometers (nm), high K material such as hafnium oxide must be considered because silicon dioxide begins to lose its effectiveness at levels below 45 nm. These new materials impose added challenges to the methods used to dope and activate silicon to produce very shallow, highly activated junctions. The main challenges regarding short channel effects include achieving maximum activation and minimal diffusion with abrupt junctions.

By leveraging our core competencies in optics engineering and system integration and our extensive knowledge of laser thermal processing, we introduced the LSA100A laser spike annealing system to enable thermal annealing solutions at the 65 nm technology node and below. This advanced annealing technology provides solutions to the difficult challenge of fabricating ultra-shallow junctions and highly activated source/drain contacts. Laser thermal processing offers the flexibility to operate at near-instantaneous timeframes (microseconds to milliseconds) at temperatures below the melting point of silicon (1412° C). At these temperatures and anneal times, full activation is achieved with negligible diffusion. In addition, our proprietary hardware design minimizes the pattern density effect, reducing absorptivity variations.

Our products and markets are more fully described below.


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General Background

The fabrication of devices such as integrated circuits (“semiconductors” or “ICs”) requires a large number of complex processing steps, including deposition, photolithography and etching.

Photolithography is one of the most critical and expensive steps in IC device manufacturing. Photolithography exposure equipment is used to create device features by patterning a light-sensitive polymer coating on the wafer surface using a photomask containing the master image of a particular device layer. Typically, each exposure results in the patterning of a different deposited layer, and therefore requires a different pattern on the device. Each new device layer must be properly aligned to previously defined layers before imaging takes place, so that structures formed on the wafers are correctly placed, one on top of the other, in order to ensure a functioning device.

Since the introduction of the earliest commercial photolithography tools for IC manufacturing in the early 1960s, a number of tools have been introduced to enable manufacturers to produce ever more complex devices that incorporate progressively finer line widths. In the early 1970s, photolithography tools included contact printers and proximity aligners, which required the photomask to physically contact or nearly contact the wafer in order to transfer the entire pattern during a single exposure. By the mid 1970s, there were also projection scanners, which transferred the device image through reflective optics having a very narrow annular field that spanned the width of the wafer. Exposure was achieved by scanning the entire photomask and wafer in a single, continuous motion across the annular field. Scanners were followed by steppers, which expose a rectangular area or field on the wafer containing one or more chip patterns in a single exposure, then move or “step” the wafer to an adjacent site to repeat the exposure. This stepping process is repeated as often as necessary until the entire wafer has been exposed. By imaging a small area, steppers are able to achieve finer resolution, improved image size control and better alignment between the multiple device layers resulting in higher yield and higher performance devices than was possible with earlier tools.

The two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely used steppers, and 1X steppers. Reduction steppers, which typically have reduction ratios of four- or five-to-one, employ photomask patterns that are four or five times larger than the device pattern that is to be exposed on the wafer surface. In addition, there is now a fourth generation of lithography tools, known as step-and-scan systems, that typically address device sizes of 0.35 micron and below. In contrast to steppers, which require lenses that cover the entire field, step-and-scan optical systems have an instantaneous field just large enough to span the width of a field and employ scanning to stretch coverage over the entire field. Each scan is followed by re-registration of the wafer with respect to the mask, i.e. “stepping”, to create multiple fields covering the entire wafer. The smaller instantaneous field size of step-and-scan system projection optical systems allows them to resolve finer geometries and scanning allows them to cover larger fields.

The principal advantage of reduction steppers and step-and-scan systems is that they may be used in manufacturing steps requiring critical feature sizes and are therefore necessary for manufacturing advanced ICs. 1X steppers, on the other hand, employ photomask patterns that are the same scale as the device pattern that is exposed on the wafer surface. The optical projection system, employed in our 1X steppers is based on a Wynne Dyson design, which uses both a reflective mirror and refractive lens elements. This design approach leads to a very simple and versatile optical system that is less expensive than those employed in reduction steppers. Because our 1X optical design covers a much broader spectral range than reduction steppers, it delivers a greater proportion of the exposure energy from the lamp to the wafer surface. Depending on the size of the lamp used and the exposure energy required for an application, this can result in appreciably higher throughput. Resolution considerations currently limit 1X steppers to manufacturing steps involving less-critical, larger feature sizes. Accordingly, we believe that sales of these systems are highly dependent upon capacity expansions by our current 1X customers, or by customers making the transition to chips containing “bump” connections, that facilitate the use of higher data rates and a higher number of connections.

In the past, manufacturers of ICs and similar devices purchased capital equipment based principally on performance specifications. In view of the significant capital expenditures required to construct, equip and maintain advanced fabrication facilities, relatively short product cycles and manufacturers’ increasing concern for overall fabrication costs, we believe that focus has shifted to the total cost of ownership. Cost of ownership includes the costs associated with the acquisition of equipment, as well as components based on throughput, yield, up-time, service, labor overhead, maintenance, and various other costs associated with owning and using the equipment. As a result, in many cases the most technologically advanced system will not necessarily be the manufacturing system of choice.

In addition to enhancing our current lithography solutions, we have been developing new tools to serve new markets such as advanced annealing. The LSA100A tool is aimed at volume production of advanced state of the art devices. These products, based on the same platform and stage technology as our advanced lithography tools, employ a 3500 Watt carbon

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dioxide laser to activate ultra-shallow, transistor junctions. Annealing times are reduced from several seconds, typical for the current generation of Rapid Thermal Processing ("RTP") equipment, to a millisecond or less. This results in more abrupt junctions with higher dopant activation levels and leads to transistors with higher drive currents and lower leakage. While this technology is expected to be useful for multiple IC generations, we anticipate that eventually this technology will be superseded by a laser thermal processing technology that will exceed the melting point of silicon (1412°C) and reduce the processing time below one microsecond, thereby achieving even higher performance characteristics with almost “zero” thermal budget. We believe these new laser thermal processing technologies remove several critical barriers to future device scaling and will help to extend Moore’s Law well into the future.

Products

We currently offer two different series of 1X lithography systems for use in the semiconductor fabrication process: the 1000 series, which addresses the markets for HBLED, semiconductor fabrication and nanotechnology applications; and the AP series, which is designed to meet the requirements of the advanced packaging market. These steppers currently offer minimum feature size capabilities ranging from 2.0 microns to 0.75 microns.

For the advanced packaging market, we offer our AP series built on the Unity Platform ® . These advanced packaging systems were developed for high volume bump and WLCSP manufacturing and PPL applications. They provide broadband or selective exposure (gh, i, or ghi-line), and are used in conjunction with downstream processes to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. Using flip chip interconnect offers reduced signal inductance, reduced power/ground inductance, die shrink advantages and reduced package footprint.

The AP series, consisting of the AP300 and AP200, is built on our Unity Platform and features a customer-configurable design that supports flexible manufacturing requirements as well as tool extendibility for multiple device generations. Designed to optimize productivity, the AP systems integrate the processing advantages associated with our advanced packaging lithography equipment with the productivity benefits of our new Unity Platform. We believe that these new lithography systems support a lower cost-of-ownership strategy due to significant throughput enhancements, higher reliability, and superior alignment and illumination systems.

The 1000 series systems are small field systems available with gh-line, i-line and broadband ghi-line illumination options. We offer the Sapphire 100 and Sapphire 100E for HBLED applications, the Star 100 for semiconductor and nanotechnology applications, and the Nanotech 190 for data storage applications for backend TFH processing. These 1000 series platform systems are typically used in the manufacture of HBLED’s, power devices, ASICs, analog devices and compound semiconductors. In addition, this platform is used for a number of nanotechnology applications.

Nanotechnology manufacturing combines electronics with mechanics in small devices. We have defined a nanotechnology device as a device that has at least one dimension in the XYZ direction less than 0.1 microns. Examples include accelerometers used to activate air bags in automobiles and membrane pressure sensors used in industrial control systems. These micro-machined devices are manufactured on silicon substrates using photolithography techniques similar to those used for manufacturing semiconductors and thin film head devices.

The NanoTech steppers have enhanced capabilities directed at TFH backend, or rowbar processing applications. These steppers are used to expose the Air Bearing Surface (“ABS”) patterns on rowbars. We believe that our NanoTech steppers offer resolution and depth of focus advantages over alternative technologies to the manufacturers of nanotechnology components.

In 2010, we introduced the Sapphire 100 system, and in 2011 we introduced the Sapphire 100E system. These systems are configurable with customized options designed specifically for high volume HBLED manufacturing applications. The Sapphire 100 and the Sapphire 100E are also based on the 1000 Series platform, with additional features developed specifically for HBLED lithography applications. HBLED manufacturing requires special substrate handling capabilities for the small diameter sapphire and silicon carbide substrates used to manufacture the LED devices for display backlighting and general lighting applications. For HBLED applications, we believe our Sapphire 100 and our Sapphire 100E steppers offer depth of focus, productivity and yield improvement advantages over competitive product offerings.

In addition to selling new systems, we sell upgrades to systems in our installed base and refurbished systems. These refurbished systems typically have a purchase price that is lower than the purchase price for our new systems.

We offer an advanced laser-based thermal annealing tool, the LSA100A, built on our Unity Platform. Thermal annealing is used by the semiconductor industry for a variety of process steps, including activation of implanted impurities, dielectric film formation, formation of silicides and stabilization of copper grain structures. Annealing tools currently in use by

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manufacturers of semiconductor devices are furnaces and rapid thermal annealing, or RTP, systems. We believe there is a need for tools that anneal at higher temperatures for shorter periods of time and that our future laser annealing tools may ultimately provide this capability to the industry. The near-term application of our laser-based thermal annealing tools is anticipated to be in the area of source/drain dopant activation. However, we are also researching the use of these tools for other applications.

Our current systems are set forth below:
Product Line
Wavelength
Resolution
(microns)
1X Steppers:
 
 
Sapphire 100
i-line, gh-line, ghi-line
0.8 - 2.0 (i and gh-line), 2.0 (ghi-line)
Sapphire 100E
i-line, gh-line, ghi-line
0.8 - 2.0 (i and gh-line), 2.0 (ghi-line)
Star 100
i-line, gh-line
0.8 - 2.0
NanoTech 190
gh-line
1.0 - 2.0
Prisma-ghi
ghi-line
2.0 - 4.0
AP200
ghi-line
2.0
AP300
ghi-line
2.0

Research, Development and Engineering

The semiconductor and nanotechnology industries are subject to rapid technological change and new product introductions and enhancements. We believe that continued and timely development and introduction of new and enhanced systems to serve these markets is essential for us to maintain our competitive position. We have made and continue to make substantial investments in the research and development of our core optical technology, which we believe is critical to our future financial results. We intend to continue to develop our technology and to develop innovative products and product features to meet customer demands. Current engineering projects include continued research and development and process insertion for our laser thermal processing technologies and continued development of our 1X stepper products. Other research and development efforts are currently focused on: performance enhancement and development of new features for existing systems, both for inclusion as a standard component in our systems and to meet special customer order requirements; reliability improvement; and manufacturing cost reductions. These research and development efforts are undertaken, principally, by our research, development and engineering organizations and costs are generally expensed as incurred. Other operating groups within Ultratech support our research, development and engineering efforts, and the associated costs are charged to those organizations and expensed as incurred.

We work with many customers to jointly develop technology required to manufacture advanced devices or to lower the customer’s cost of ownership. We also have a worldwide engineering support organization including reticle engineering, photo processing capability and applications support.

We have historically devoted a significant portion of our financial resources to research and development programs and expect to continue to allocate significant resources to these efforts in the future. As of December 31, 2011 , we had approximately 71 full-time employees engaged in research, development and engineering. For 2011 , 2010 and 2009 , total research, development and engineering expenses were approximately $23.6 million , $19.9 million and $18.8 million , respectively, and represented 11% , 14% and 20% of our net sales, respectively.

Sales and Service

We market and sell our products in North America, Europe and Asia principally through our direct sales organization. We also have service personnel based throughout the United States, Europe, Japan and the rest of Asia. We believe that as semiconductor and nanotechnology device manufacturers produce increasingly complex devices, they will require an increased level of support. Global support capability as well as product reliability, performance, yield, cost, uptime and mean time between failures are increasingly important factors by which customers evaluate potential suppliers of photolithography equipment. We believe that the strength of our worldwide service and support organization is an important factor in our ability to sell our systems, maintain customer loyalty and reduce the maintenance costs of our systems. In addition, we believe that working with our suppliers and customers is necessary to ensure that our systems are cost effective, technically advanced and

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designed to satisfy customer requirements.

We support our customers with field service, applications, technical support service engineers and training programs. We provide our customers with comprehensive support and service before, during and after delivery of our systems. To support the sales process and to enhance customer relationships, we work closely with prospective customers to develop hardware, applications test specifications and benchmarks, and often design customized applications to enable prospective customers to evaluate our equipment for their specific needs. Prior to shipment, our support personnel typically assist the customer in site preparation and inspection, and provide customers with training at our facilities or at the customer’s location. We currently offer our customers various courses of instruction on our systems, including instructions in system hardware and related applications tools for optimizing our systems to fit a customer’s particular needs. Our customer training program also includes instructions in the maintenance of our systems. Our field support personnel work with the customer to install the system and demonstrate system readiness. Technical support is also available via telephone 24 hours a day, seven days a week at our headquarters in San Jose, California and through our on-site personnel.

In general, we warrant our new systems against defects in design, materials and workmanship for one year. We offer our customers additional support after the warranty period for a fee in the form of service contracts for specified time periods. Service contracts include various options such as priority response, planned preventive maintenance, scheduled one-on-one training, daily on-site support, and monthly system and performance analysis.

Manufacturing

Until the third quarter of 2010, we performed all of our manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 25,000 square feet located in San Jose, California. 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 and could again interrupt our operations resulting in product shipment delays, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations.

Beginning in the fourth quarter of 2010, we have had a manufacturing operation in Singapore for production of our lithography products. This facility consists of approximately 18,000 square feet of additional clean-room production space for the manufacturing of our advanced packaging Unity AP products and HBLED Sapphire product platforms. Our Singapore manufacturing personnel undergo an extensive training program, including a minimum six-month training program at our San Jose manufacturing facility The first Singapore-based production lithography tools began manufacturing in the fourth quarter of 2010. In 2011, we manufactured, shipped, and recognized revenue from multiple production lithography tools from our Singapore location.

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 machine the lens elements. We then assemble and test the optical 1X lenses. We have recorded the critical parameters of each of our optical lenses sold since 1988, and believe that such information enables us to supply lenses to our customers that match the characteristics of our customers’ existing 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. We are actively engaged with a number of our Asia-based suppliers to provide high precision parts and major opto-mechanical and electro-mechanical sub-assemblies and modules for our lithography products both in Singapore and San Jose. However, disruption or termination of certain of these sources could result in 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 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

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on our business, financial condition and results of operations.

We maintain a company-wide quality and environmental program. Our San Jose operations achieved ISO 9001:1994 certification in 1996 and ISO 14001:1996 certification in March 2001. Our San Jose ISO 9001 certification was upgraded to the ISO 9001:2000 standard in January 2002, and to the ISO 9001:2008 standard in June 2010. Our San Jose ISO 14001 certification was upgraded to the ISO 14001:2004 standard in June 2006. Our ISO 9001 and 14001 certifications were expanded to our Singapore operation in August 2011. All certifications have been maintained uninterrupted through the date of this report.

Competition

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.
 
Advanced Packaging and HBLED Lithography
 
We experience competition in the advanced packaging lithography market from various reduction steppers and proximity and projection aligner companies such as Canon Incorporated (“Canon”), Nikon Corporation (“Nikon”), Suss Microtec AG (“Suss Microtec”), and Ushio and from the third party re-sale of used projection systems. We expect our competitors 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. We believe that to be competitive, we will require significant financial resources to continue to invest in new product development, to invest in new features and enhancements to existing products, to introduce new generation stepper systems in our served markets on a timely basis, and to maintain customer service and support centers worldwide. In marketing our products, we may also face competition from suppliers 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 have obtained a growing position in the high brightness lithography market and have successfully introduced our Sapphire 100 stepper into the HBLED market for various LED lithography applications. Our primary competition in these markets comes from contact and proximity aligners offered by companies such as Suss Microtec and Ushio, as well as third party sales of used reduction steppers. Although contact, proximity aligners, and used reduction steppers generally have lower purchase prices than 1X steppers, 1X steppers offer lower operating costs and total cost of ownership in most applications. We believe that most device manufacturers and HBLED fabs choose 1X steppers for the yield improvement, and lower modification costs, offered by the use of non-contact projection lithography.

Laser Thermal Processing
 
With respect to our laser annealing technologies, marketed under the LSA product name, 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 RTP, which is the current 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. Shorter 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. Several companies have published papers on annealing tools that incorporate flash lamp anneal (“FLA”) technology, a potential advanced annealing solution, in order to reduce annealing times and increase anneal temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the 28nm node. 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 timescales, while achieving high activation levels. LSA, our first implementation of laser thermal processing, activates dopants in the

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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, with minimal dopant diffusion.
 
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.

Intellectual Property Rights

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. Our intellectual property portfolio contains 328 patents and patent applications. We have patent expiration dates ranging from March 2012 to May 2030. In addition, we also 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.

Environmental Regulations

We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, and 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 control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.

Customers, Applications and Markets

We sell our systems to semiconductor, advanced packaging, HBLED, TFH and various other nanotechnology manufacturers located throughout North America, Europe and Asia. Semiconductor manufacturers have purchased the 1000 Series steppers, the AP series of steppers, and the NanoTech steppers for the fabrication and/or packaging of microprocessors, microcontrollers, DRAMs, ASICs and a host of other devices. Such systems could be used in mix-and-match applications with other lithography tools, as replacements for contact proximity printers, in packaging for flip chip applications and for high volume, low cost of ownership for less critical feature size production.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging and laser thermal processing applications, accounted for approximately 86% of systems revenue for the year ended December 31, 2011 , as compared to 93% and 94% for the years ended December 31, 2010 and 2009 , respectively. During 2011 , 2010 and 2009 , approximately 14% , 7% and 6%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including micro systems, TFH and optical networking device manufacturers. Our future results of operations and financial position would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries.

International sales accounted for approximately 60% , 79% and 72% of total net sales for the years 2011 , 2010 and 2009 , respectively, with Asia representing 51% , 65% and 68% of total net sales for those same years and Europe representing

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10% , 15% and 3% of total net sales for those same years, respectively. Sales from Japan represented 4% , 3% and 12% of total net sales for the years 2011 , 2010 and 2009 , respectively.

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. 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 some 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.

Backlog

We schedule production of our systems based upon order backlog, informal customer commitments and general economic forecasts for our targeted markets. We include in our backlog all accepted customer orders for our systems with assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades, in each case, that management believes to be firm. However, all orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of changes in system delivery schedules, cancellations of orders and potential delays in system shipments, our backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2011 , our backlog was approximately $132.5 million, including $17.1 million of products shipped but not yet installed. As of December 31, 2010 , our backlog was approximately $107.1 million, including $17.2 million of products shipped but not yet installed. Cancellation, deferrals or rescheduling of orders by these customers would have a material adverse impact on our future results of operations.

Employees

At December 31, 2011 , we had approximately 322 full-time employees, including 71 engaged in research, development and engineering, 33 in sales and marketing, 104 in customer service and support, 73 in manufacturing and 41 in general administration and finance. We believe our future success depends, in large part, on our ability to attract and retain highly skilled employees. None of our employees are covered by a collective bargaining agreement. We have, however, entered into employment agreements with our Chief Executive Officer and Chief Financial Officer. We consider our relationships with our employees to be good.

Information Available on Our Website

Our website is located at www.ultratech.com . We make available, free of charge, through our website, our annual report 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 this Code will also be posted on our website.

ITEM IA.
RISK FACTORS

In addition to risks described in the foregoing discussions under “Business,” including but not limited to those under “Products,” “Research, Development and Engineering,” “Sales and Service,” “Manufacturing,” “Competition,” “Intellectual Property Rights,” “Environmental Regulations,” “Customers, Applications and Markets,” “Backlog,” and “Employees,” the following risks 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

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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 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 as well as diversifying into new markets. We believe that diversifying into new markets such as laser-based annealing for implant activation, lithography steppers for 3-D packaging and HBLED can help mitigate the effects of this cyclicality in our industry. 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.

The continuing global or regional financial crises and any uncertainty created thereby, such as that currently being experienced in Europe 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 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.

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 system 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 canceled 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:

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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 system 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.

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.

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 Canon, Nikon, Suss Microtec, AG (“Suss Microtec”), Ushio and used projection and reduction stepper systems. In nanotechnology, we experience competition from proximity aligner companies, such as Suss Microtec, as well as other third party stepper suppliers. 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

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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 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.

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 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 annealing, 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 currently spend, and expect to continue to spend, significant resources to develop, introduce and commercialize our offered products and future generations of, and 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, and other 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 and enhancements. 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 system 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.

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

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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 December 31, 2011 , we had outstanding options to purchase and outstanding restricted stock units for a total of 4.4 million shares of our Common Stock. Among other determinants, the market price of our stock has a major impact 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 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.

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 fiscal year ended December 31, 2011 , Intel Corporation, Samsung Corporation, and Taiwan Semiconductor Manufacturing Corporation ("TSMC") accounted for 24%, 18%, and 12% of our net sales, respectively. In 2010, Samsung, TSMC, and Intel accounted for 19%, 11%, and 11% of our net sales, respectively. In 2009, TSMC, Intel, and StatsChipPac Ltd. accounted for 22%, 19%, and 14% of our net sales, respectively. 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% and 93% of our systems revenue for the fiscal year ended December 31, 2011 and the corresponding period in 2010, respectively. We had $24.7 million of sales to nanotechnology manufacturers, including micro systems, thin film head and optical device manufacturers for the year ended December 31, 2011 as compared to $7.9 million in sales for the corresponding period of 2010. Systems revenue from the nanotechnology sector accounted for 14% of systems revenue for the year ended December 31, 2011 , as compared to 7% 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 percentage 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

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adversely impacted.

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 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 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 system 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.

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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. Our intellectual property portfolio has 328 patents and patent applications with expiration dates ranging from March 2012 to May 2030. 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 our favor with respect to the malicious prosecution claim. Judgment was formally entered in our favor on September 27, 2011 in the amount of $0.3 million. The opposing company has filed a notice of appeal of the judgment. In view of the court's ruling, we concluded that the likelihood of a loss with respect to this matter is less than reasonably possible and therefore, a range of loss cannot be provided.

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. 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

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fluctuations, all of which make it more difficult to operate our business.

International sales accounted for approximately 60% of total net sales for the year ended December 31, 2011 , compared to 79% in the corresponding period of 2010. The decrease in international sales as a percentage of total sales was due to an increase in domestic sales. 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 transitioned certain manufacturing processes to Singapore, thereby bringing these activities closer to our Asian customers. This movement is recent and our experience in international manufacturing operations is limited. If we are unable to successfully operate the site to efficiently manufacture systems, our business, financial condition and results of operations could be materially adversely impacted.

Changes in our effective tax rate may harm our results of operations.

A number of factors may negatively impact our future effective tax rates including, but not limited to:

the jurisdictions in which profits are determined to be earned and taxed;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in stock-based compensation; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles in the United States or other countries in which we operate.

We are eligible for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. 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.

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

Our cash equivalent and short-term investment portfolio as of December 31, 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 December 31, 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.

Our investment portfolio may suffer losses from changes in market interest rates and changes in market conditions,

17



which could materially and adversely affect our financial condition, results of operations or liquidity.

As of December 31, 2011 , we had $227.9 million in cash, cash equivalents and short-term investments. We maintain an investment portfolio of cash equivalents and short-term investments in commercial paper and U.S. government-backed securities. These investments are subject to general credit, liquidity, and market and interest rate risks. Substantially all of these securities are subject to interest rate and credit risk and will decline in value if interest rates increase or one or more of the issuers’ credit ratings is reduced. As a result of any of the foregoing, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition.

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, restructuring, 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.

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 result in 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 in certain locations;
potentially less protection of intellectual property under the laws of foreign jurisdictions in certain locations; and
public safety or health concerns or natural disasters in foreign countries.

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 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.


18



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 inhibiting us from experiencing a change in control and may adversely affect the voting and other rights of holders of our Common Stock.

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 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.

Public health issues, political instability (for example, recent unrest in the Middle East), natural disasters (such as those recently affecting Japan and Thailand), 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. In addition, such events could disrupt the semiconductor market, resulting in the cancellation or delay of product orders. 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, natural disasters, 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.

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.

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.

19




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.

ITEM 1B.
UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.

ITEM 2.
PROPERTIES

We maintain our headquarters and manufacturing operations in San Jose, California in a leased facility, totaling approximately 100,000 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development and engineering. The lease for this facility expires in January 2016. We also rent sales and support offices in the United States in East Fishkill, New York and Woburn, Massachusetts, and outside the U.S. in Taiwan, the Philippines, Japan, Korea, Singapore, Thailand, Germany, and China, with varying terms and expiration dates. 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. The facility is approximately 18,000 square feet. During 2011, we either extended our leases in several of these sales facilities or negotiated new terms.

We believe that our existing facilities will be adequate to meet our currently anticipated requirements and that suitable additional or substitute space will be available as needed.

ITEM 3.
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. 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 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 our favor with respect to the malicious prosecution claim. Judgment was formally entered in our favor on September 27, 2011 in the amount of $0.3 million. The opposing company has filed a notice of appeal of the judgment. In view of the court's ruling, we concluded that the likelihood of a loss with respect to this matter is less than reasonably possible and therefore, a range of loss cannot be provided.



20






ITEM 4.
RESERVED

Executive Officers of the Registrant

As of December 31, 2011, the executive officers of Ultratech, who are appointed by and serve at the discretion of the Board of Directors, were as follows:  
Name
 
Age
 
Position with the Company
Arthur W. Zafiropoulo
 
72
 
Chairman of the Board of Directors, Chief Executive Officer and President
Bruce R. Wright
 
63
 
Senior Vice President, Finance, Chief Financial Officer and Secretary

Mr. Zafiropoulo founded Ultratech in September 1992 to acquire certain assets and liabilities of the Ultratech Stepper Division (the “Predecessor”) of General Signal Technology Corporation (“General Signal”) and, since March 1993, has served as Chief Executive Officer and Chairman of the Board. Additionally, Mr. Zafiropoulo served as President of Ultratech from March 1993 to March 1996, from May 1997 until April 1999 and from April 2001 to January 2004. In October 2006, he resumed the responsibilities of President and Chief Operating Officer. Between September 1990 and March 1993, he was President of the Predecessor. From February 1989 to September 1990, Mr. Zafiropoulo was President of General Signal’s Semiconductor Equipment Group International, a semiconductor equipment company. From August 1980 to February 1989, Mr. Zafiropoulo was President and Chief Executive Officer of Drytek, Inc., a plasma dry-etch company that he founded in August 1980, and which was later sold to General Signal in 1986. From July 1987 to September 1989, Mr. Zafiropoulo was also President of Kayex, a semiconductor equipment manufacturer, which was a unit of General Signal. From July 2001 to July 2002, Mr. Zafiropoulo served as Vice Chairman of Semiconductor Equipment and Materials International (“SEMI”), an international trade association representing the semiconductor, flat panel display equipment and materials industry. From July 2002 to June 2003, Mr. Zafiropoulo served as Chairman of SEMI, and Mr. Zafiropoulo has been on the Board of Directors of SEMI since July 1995. In December 2007, Mr. Zafiropoulo was elected as Director Emeritus of SEMI.

Mr. Wright has served as Senior Vice President, Finance, Chief Financial Officer and Secretary since joining Ultratech in June 1999. From May 1997 to May 1999, Mr. Wright served as Executive Vice President, Finance and Chief Financial Officer of Spectrian Corporation, a radio frequency amplifier company. From November 1994 through May 1997, Mr. Wright was Senior Vice President of Finance and Administration, and Chief Financial Officer of Tencor Instruments until its acquisition by KLA Instruments Corporation in 1997, which formed KLA-Tencor Corporation, and from December 1991 through October 1994, Mr. Wright was Vice President and Chief Financial Officer of Tencor Instruments. Mr. Wright serves on the Board of Directors of LTX-Credence Corporation, a global provider of automated test equipment solutions for the testing of semiconductor integrated circuits.


21



PART II

ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Market under the symbol UTEK. The following table sets forth, for the periods indicated, the range of high and low reported sale prices of our common stock.
Fiscal 2011—Fiscal Quarter Ended
1st Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
Market Price:
High
$
29.66

 
$
33.85

 
$
31.50

 
$
25.04

 
Low
$
18.01

 
$
24.79

 
$
17.13

 
$
15.81

Fiscal 2010—Fiscal Quarter Ended
1st Quarter
 
2 nd  Quarter
 
3 rd  Quarter
 
4 th  Quarter
Market Price:
High
$
15.71

 
$
17.11

 
$
19.11

 
$
21.29

 
Low
$
12.23

 
$
12.55

 
$
15.21

 
$
16.76


Our fiscal quarters in 2011 ended on April 2, 2011, July 2, 2011, October 1, 2011 and December 31, 2011. Our fiscal quarters in 2010 ended on April 3, 2010, July 3, 2010, October 2, 2010 and December 31, 2010.

As of January 31, 2012 , we had approximately 242 stockholders of record.

We have not paid cash dividends on our common stock since inception, and our Board of Directors presently plans to reinvest our earnings in our business. Accordingly, it is anticipated that no cash dividends will be paid to holders of common stock in the foreseeable future.

In August 2011 and August 2010, we issued 1,000 and 2,000 shares, respectively, of our common stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit organization, to support its efforts to educate youth interested in science and math about career opportunities in the semiconductor industry. We issued 2,500 shares to SEMI Foundation in 2009 in an unregistered, private placement under Section 4(2) of the Securities Act of 1933.

22




Stock Performance Graph

The graph depicted below reflects a comparison of the cumulative total return (i.e., change in stock price plus reinvestment of dividends) of our common stock assuming $100 invested as of December 31, 2006 with the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Index.

Comparison of Cumulative Total Returns(1)(2)(3)


___________________
(1)
The graph covers the period from December 31, 2006 to December 31, 2011 .
(2)
No cash dividends have been declared on our common stock.
(3)
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

Notwithstanding anything to the contrary set forth in any of our previous filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, which might incorporate our future filings under those statutes, the preceding Stock Performance Graph will not be incorporated by reference into any of those prior filings, nor will such report or graph be incorporated by reference into any of our future filings under those statutes.


23



ITEM 6.
SELECTED FINANCIAL DATA

In thousands, except per share data and percentage information
2011(e)
 
2010(d)
 
2009(c)
 
2008(b)
 
2007(a)
Operations:
 
 
 
 
 
 
 
 
 
Net sales
$
212,333

 
$
140,603

 
$
95,813

 
$
131,747

 
$
112,310

Gross profit
$
110,325

 
$
71,641

 
$
44,990

 
$
64,374

 
$
48,859

Gross profit as a percentage of net sales
52
%
 
51
%
 
47
%
 
49
%
 
44
 %
Operating income (loss)
$
44,020

 
$
17,541

 
$
(1,102
)
 
$
9,135

 
$
(5,767
)
Income (loss) before income taxes and cumulative effect of a change in accounting principle
$
44,160

 
$
17,951

 
$
2,059

 
$
12,185

 
$
(758
)
Pre-tax income (loss) as a percentage of net sales
20.8
%
 
12.8
%
 
2.1
%
 
9.2
%
 
(0.7
)%
Provision (benefit) for income taxes
$
4,930

 
$
1,170

 
$
(70
)
 
$
408

 
$
286

Net income (loss)
$
39,230

 
$
16,781

 
$
2,129

 
$
11,777

 
$
(1,044
)
Income (loss) before cumulative effect of a change in accounting principle per share—basic
$
1.51

 
$
0.69

 
$
0.09

 
$
0.50

 
$
(0.04
)
Net income (loss) per share—basic
$
1.51

 
$
0.69

 
$
0.09

 
$
0.50

 
$
(0.04
)
Number of shares used in per share computation—basic
25,915

 
24,468

 
23,690

 
23,524

 
23,354

Income (loss) before cumulative effect of a change in accounting principle per share—diluted
$
1.47

 
$
0.67

 
$
0.09

 
$
0.50

 
$
(0.04
)
Net income (loss) per share—diluted
$
1.47

 
$
0.67

 
$
0.09

 
$
0.50

 
$
(0.04
)
Number of shares used in per share computation—diluted
26,778

 
25,043

 
23,852

 
23,665

 
23,354

Balance sheet:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
227,947

 
$
184,290

 
$
160,341

 
$
158,498

 
$
131,998

Working capital
$
283,280

 
$
217,157

 
$
193,133

 
$
184,189

 
$
161,855

Total assets
$
353,448

 
$
281,294

 
$
234,581

 
$
229,191

 
$
218,641

Long-term obligations
$
8,113

 
$
4,822

 
$
5,935

 
$
6,687

 
$
7,534

Stockholders’ equity
$
296,029

 
$
231,649

 
$
199,968

 
$
193,423

 
$
177,400


24




Quarterly Data
 
Unaudited, in thousands, except per share data
1st
 
2nd
 
3rd
 
4th
2011
 
 
 
 
 
 
 
Net sales
$
47,379

 
$
53,949

 
$
54,944

 
$
56,061

Gross profit
$
23,709

 
$
27,484

 
$
29,395

 
$
29,737

Operating income
$
8,166

 
$
10,727

 
$
11,562

 
$
13,565

Net income
$
7,867

 
$
9,728

 
$
10,464

 
$
11,171

Net income per share—basic
$
0.31

 
$
0.38

 
$
0.40

 
$
0.43

Number of shares used in per share computation—basic
25,264

 
25,731

 
25,977

 
26,223

Net income per share—diluted
$
0.30

 
$
0.36

 
$
0.39

 
$
0.42

Number of shares used in per share computation—diluted
26,169

 
26,888

 
26,647

 
26,819

Unaudited, in thousands, except per share data
1st
 
2nd
 
3rd
 
4th
2010
 
 
 
 
 
 
 
Net sales
$
27,503

 
$
31,551

 
$
37,937

 
$
43,612

Gross profit
$
14,053

 
$
16,654

 
$
18,522

 
$
22,412

Operating income
$
1,867

 
$
3,753

 
$
4,908

 
$
7,013

Net income
$
1,948

 
$
3,617

 
$
4,902

 
$
6,314

Net income per share—basic
$
0.08

 
$
0.15

 
$
0.20

 
$
0.25

Number of shares used in per share computation—basic
24,033

 
24,155

 
24,370

 
24,879

Net income per share—diluted
$
0.08

 
$
0.15

 
$
0.20

 
$
0.25

Number of shares used in per share computation—diluted
24,308

 
24,587

 
25,067

 
25,618

___________________
(a)
Operating loss in 2007 includes a charge of $1.6 million related to certain exit activities, a credit of $0.9 million which resulted from a refund of employee health insurance premiums paid previously, a benefit of $0.5 million related to sale of previously written down inventory and a credit of $0.3 million due to a change in the estimate related to collectability of certain accounts receivable.
(b)
Operating income in 2008 includes $2.4 million of stock-based compensation expenses and a charge of $0.6 million related to certain exit activities.
(c)
Operating loss in 2009 includes $2.9 million of stock-based compensation expenses and a charge of $0.6 million related to certain exit activities. Refer to Notes 5 and 12 of our consolidated financial statements herein for further disclosures related to these items.
(d)
Operating income in 2010 includes $4.8 million of stock-based compensation expenses. There were no charges related to exit activities for the fiscal year ending December 31, 2010. Refer to Notes 5 and 12 of our consolidated financial statement herein for further disclosures related to these items.
(e)
Operating income in 2011 includes $9.0 million of stock-based compensation expenses. There were no charges related to exit activities for the fiscal year ending December 31, 2011. Refer to Notes 5 and 12 of our consolidated financial statement herein for further disclosures related to these items.

ITEM 7.
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,”"thinks", “intends,” “will,” “could,” “believes,” “estimates,” “continue,” and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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; demand for consumer devices; industry growth within our served markets; continued delivery of financial performance and value; cyclicality in the semiconductor and nanotechnology industries; 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; quarterly revenue

25



fluctuations; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser thermal processing operation; 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 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 technologies and applications; integration, development and associated expenses of the laser 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 and operations; 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 key personnel; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon us 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 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
Ultratech, Inc. develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe and Asia.
We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuit industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, optical networking devices, high-brightness laser diodes and light emitting diodes (“HBLEDs”). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and 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 on-going basis, we evaluate our estimates, including those related to revenues, inventories, warranty obligations, purchase order commitments, bad debts, deferred income taxes, restructuring liabilities, asset retirement obligations, restructuring, stock based-compensation and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other assumptions that are believed 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.

We believe the following critical accounting policies are affected by our more significant judgments and estimates used in the preparation of our consolidated financial statements. We have reviewed these policies with our Audit Committee.

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement consideration 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 system acceptance provisions have

26



been met in accordance with the terms and conditions of the arrangement. In the event that terms of the sale provide for a lapsing system acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or system 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 transactions with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when system acceptance has occurred or we are otherwise released from our system 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.
 
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.” The gross amount of deferred revenues and deferred costs at December 31, 2011 were $20.7 million and $5.7 million , respectively, as compared to $20.1 million and $6.5 million , respectively, at December 31, 2010 .

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

Inventories and Purchase Order Commitments

The semiconductor industry is characterized by rapid technological change, changes in customer requirements and evolving industry standards. We perform a detailed assessment of inventory at each balance sheet date, which includes a review of, among other factors, demand requirements and market conditions. Based on this analysis, we record adjustments, when appropriate, to reflect inventory at lower of cost or market. Although we make every effort to ensure the accuracy of our forecasts of product demand, any significant unanticipated changes in demand, product mix or technological developments

27



would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too optimistic and we determine that our inventory needs to be reserved, we will be required to recognize such costs in our cost of sales at the time of such determination. For example, if the demand assumption used in our assessment at December 31, 2011 was reduced by 10%, assuming all other assumptions such as product mix are kept the same and that mitigation efforts were not possible, we would have had to reserve our inventory and open purchase commitments by $0.1 million. Conversely, if we find our estimates are too pessimistic and we subsequently sell product that has previously been reserved, our gross margin in that period will be favorably impacted.

Warranty Obligations

We recognize the estimated cost of our product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from our estimates, revisions to the estimated warranty liability would be required which could result in future charges or credits to our gross margins. We believe our warranty accrual, as of December 31, 2011 , will be sufficient to satisfy outstanding obligations as of that date.

Allowance for Bad Debts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. If the financial conditions of our customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The typical selling price of our systems is between $1.0 million and $6.0 million. Accordingly, a single customer default could have a material adverse effect on our results of operations. Our bad debt reserve for accounts receivable at December 31, 2011 was $0.5 million as compared to $0.3 million at December 31, 2010 .

Deferred Income Taxes

Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. ASC Topic 740, Income Taxes (“ASC 740”), provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon the generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain the benefit of the reversal of temporary differences, net operating loss carry-forwards, and tax credit carry-forwards. 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 December 31, 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. Management continues to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. As of December 31, 2011, we have experienced historical profitability. However, as of December 31, 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:

Movement of certain product manufacturing to Singapore, resulting in reduced U.S. taxable income,
Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and
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 of December 31, 2011, we had recorded a valuation allowance of approximately $42.7 million against our net deferred tax assets except for those in Japan and Taiwan. As of December 31, 2011, we had recorded approximately $0.5 million of net foreign deferred tax assets related to our operations in Japan and Taiwan. Based on projected future pre-tax income in Japan and Taiwan, these assets were not subject to a valuation allowance as it is more likely than not that they will be realized in the future.


28



Stock-Based Compensation

Under the fair value recognition provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC 718”), share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimating our stock price volatility, employee stock option exercise behaviors and employee option forfeiture rates. If actual results differ significantly from these estimates, stock-based compensation expense recognized in our results of operations could be materially affected. As stock-based compensation expense recognized in the Consolidated Statement of Operations is based on awards that ultimately are expected to vest, the amount of the expense has been reduced for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience. If factors change and we employ different assumptions in the application of ASC 718, the compensation expense that we record in future periods may differ significantly from what we have recorded in the current period.

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 system 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 will 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 system acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and system acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line. 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
In millions
2011

2010

2009

2011 v 2010

2010 v 2009
Sales of:









Systems
$
174.7

 
$
112.8

 
$
70.0

 
55%
 
61%
Spare parts
16.9

 
11.8

 
10.5

 
43%
 
12%
Services
19.6

 
15.6

 
15.1

 
26%
 
3%
Licenses
1.1

 
0.4

 
0.2

 
175%
 
100%
Total Net Sales
$
212.3

 
$
140.6

 
$
95.8

 
51%
 
47%

2011 vs. 2010

Net sales consist of revenues from systems sales, spare parts sales, services and licensing of technologies. For the year

29



ended December 31, 2011 , systems revenue accounted for approximately 82% of total net sales, and services, licenses and spare parts accounted for the remaining 18%.

System sales increased 55% to $174.7 million primarily attributable to approximately a 90% increase in the number of units sold in 2011 compared to 2010 .

At December 31, 2011 , we had approximately $15.0 million of deferred product and services income resulting from products shipped but not yet accepted, as compared with $13.6 million at December 31, 2010 . The increase was primarily due to the timing differences of installation and system acceptance. In general, it takes about two to three months to install and complete system acceptance. The gross amounts of deferred revenues and deferred costs at December 31, 2011 were $20.7 million and $5.7 million , respectively, as compared to $20.1 million and $6.5 million , respectively, at December 31, 2010 . Deferred product income is recognized as revenue upon satisfying the contractual obligations for installation and/or system 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).

On a product market application basis, system sales to the semiconductor industry were $150.0 million for the year ended December 31, 2011 , an increase of 43% as compared to $105.0 million in 2010 . This increase was primarily due to a volume unit increases in our advanced packaging and laser thermal processing markets. System sales to the nanotechnology market were $24.7 million for the year ended December 31, 2011 , a 214% increase as compared with sales of $7.8 million in 2010 . System sales to the nanotechnology market are highly dependent on customer capacity demand.

Sales of spare parts in 2011 increased 43% , to $16.9 million , as compared to $11.8 million in 2010 . This increase was mainly due to increased demand for spare parts. Sales from services increased 26% to $19.6 million for the year ended December 31, 2011 as compared to $15.6 million in 2010 . The increase in service revenue was primarily due to more new service contracts that were recognized as revenue in 2011 .

Revenues from licensing activities increased to $1.1 million in 2011 as compared with $0.4 million in 2010 primarily due to more systems being sold under a royalty arrangement. 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 and do not anticipate the recognition of significant levels of licensing income in the future.

For the year ended December 31, 2011 , international net sales were $127.8 million , or 60% of total net sales, as compared with $111.5 million , or 79% of total net sales in 2010 . Although international sales increased $16.3 million from the prior year, the decrease as a percentage of total sales was primarily due to increased U.S. sales of $55.4 million related to (i) increased sales to a significant domestic customer, and (ii) increased sales to two foreign customers with operations in the United States. We expect sales to international customers to continue to represent a significant majority of our revenues during 2012 as companies continue to build 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 often denominated in Japanese yen.

For the year ended December 31, 2011 , we recorded no system sales in Japan. However, we do sell spare parts into Japan and this subjects us to the risk of currency exchange rate 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 $1.5 million of Japanese yen-denominated receivables at December 31, 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 “Risk Factors: International Sales”).

2010 vs. 2009
         For the year ended December 31, 2010, systems revenue accounted for approximately 80% of total net sales, and services, licenses and spare parts accounted for the remaining 20%.
    System sales increased 61% to $112.8 million primarily attributable to a 7% increase in the average selling price of systems sold in 2010 compared to 2009, a 50% increase in system unit volume and a change in product mix primarily resulting from improved volume increases from laser thermal processing tools.

30



         At December 31, 2010, we had approximately $13.6 million of deferred product and services income resulting from products shipped but not yet accepted, as compared with $8.8 million at December 31, 2009. The increase was primarily due to the timing differences of shipment and acceptance. The gross amounts of deferred revenues and deferred costs at December 31, 2010 were $20.1 million and $6.5 million, respectively, as compared to $13.4 million and $4.5 million, respectively, at December 31, 2009.
         On a product market application basis, system sales to the semiconductor industry were $105.0 million for the year ended December 31, 2010, an increase of 59% as compared to $65.9 million in 2009. This increase was primarily due to a $29.4 million increase in sales to the laser thermal processing market. System sales to the nanotechnology market were $7.8 million for the year ended December 31, 2010, a 91% increase as compared with sales of $4.1 million in 2009.
         Sales of spare parts in 2010 increased 12%, to $11.8 million, as compared to $10.5 million in 2009. This increase was mainly due to increased spare part usage. Sales from services increased 3% to $15.6 million for the year ended December 31, 2010 as compared to $15.1 million in 2009. The increase in service revenue was primarily due to more new service contracts that were recognized as revenue in 2010.
         Revenues from licensing activities increased to $0.4 million in 2010 as compared with $0.2 million in 2009 primarily due to more systems being sold under a royalty arrangement.
         For the year ended December 31, 2010, international net sales were $111.5 million, or 79% of total net sales, as compared with $68.8 million, or 72% of total net sales in 2009.
         For the year ended December 31, 2010, we recorded no system sales in Japan. We had approximately $1.2 million of Japanese yen-denominated receivables at December 31, 2010.

Gross Profit

2011 vs. 2010

On a comparative basis, gross margins were 52% and 51% for 2011 and 2010, respectively. The one percentage point increase in gross margin from 2010 was primarily due to a favorable change in product mix and unit volume increases in all product lines.
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 mix of products sold; the introduction of new products, which typically have higher manufacturing, installation and after-sale support costs until efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the rate of capacity utilization; write-downs 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.

2010 vs. 2009

On a comparative basis, gross margins were 51% and 47% for 2010 and 2009, respectively. The four percentage point increase in gross margin in 2010 was primarily due to an increase in the average selling prices of systems sold and unit volume increases in the laser thermal processing market.
    
Research, Development and Engineering Expenses
In millions
2011
 
2010
 
2009
 
2011 v 2010
 
2010 v 2009
Research, development and engineering expenses
$
23.6

 
$
19.9

 
$
18.8

 
19%
 
6%
% of revenue
11%
 
14%
 
20%
 
 
 
 

An inherent delay exists between the time product development activities and expenditures occur and when resultant product revenue is ultimately realized. We expect current year research, development and engineering program investments to contribute to revenue in future years.

2011 vs 2010

Research, development and engineering expenses in 2011 increased 19% to $23.6 million as compared to $19.9

31



million in 2010 . The $3.7 million increase was primarily due to (i) higher salary and compensation related expenses of $1.6 million resulting from our executive bonus plan and new hires, (ii) an increase of $1.2 million from higher materials expenses, (iii) a $1.0 million increase in outside services, (iv) a $0.6 million increase in stock-based compensation expense, (v) a $0.4 million increase in contributions to fund external research projects, and (vi) an increase of $0.2 million in travel related expense. These increases were partially offset by (i) $0.5 million in reduced expenses related to facilities costs, and (ii) a $0.8 decrease in engineering expense related to manufacturing support for the period. As a percentage of net sales, engineering expenses for the year ended December 31, 2011 were 11% compared to 14% for 2010 . This decrease was due primarily to the increase in net sales as compared to 2010 discussed above.

2010 vs. 2009

Research, development and engineering expenses in 2010 increased 6% to $19.9 million as compared to $18.8 million in 2009. This increase was primarily due to higher salary and compensation related expenses of (i) $1.3 million resulting from executive bonus plan, new hires compensation, and discontinuing salary reduction programs from the prior year, (ii) $0.3 million higher travel related expenses and outside services. These increases were partially offset by $0.5 million in reduced expenses related to management expense reduction programs. As a percentage of net sales, engineering expenses for the year ended December 31, 2010 were 14% compared to 20% for 2009. This decrease was due primarily to the increase in net sales as compared to 2010 as discussed above.

Selling, General and Administrative Expenses
 
In millions
2011
 
2010
 
2009
 
2011 v 2010
 
2010 v 2009
Selling, general and administrative expenses
$
42.7

 
$
34.2

 
$
27.3

 
25%
 
25%
% of revenue
20%
 
24%
 
29%
 
 
 
 

2011 vs. 2010

Selling, general and administrative expenses increased by $8.5 million , or 25% , to $42.7 million in 2011 , as compared to $34.2 million in 2010 . The increase was primarily due to (i) $3.5 million of stock-based compensation expense, (ii) a $2.3 million increase in salaries expense, of which $1.0 million was non-recurring in nature, (iii) a $1.6 million increase of external services costs, (iv) a $0.8 million increase in travel-related expense, (v) a $0.4 million increase in sales commission expense, and (vi) a $0.2 million increase in bad debt expense, partially offset by a reduction in property taxes of $0.3 million compared to 2010. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2011 were 20% compared to 24% for 2010 . This decrease was due primarily to the increase in net sales as compared to 2009.

2010 vs. 2009

Selling, general and administrative expenses increased by $6.9 million, or 25%, to $34.2 million in 2010, as compared to $27.3 million in 2009. The increase was primarily due to (i) increased salary and compensation related expenses of $0.9 million of new hire compensation and $0.4 million from discontinuing salary reduction programs from the prior year, (ii) a $1.4 million increase in stock-based compensation expense, (iii) a $0.7 million increase of external service costs, (iv) a $0.6 million increase in travel related expense, (v) a $2.0 million increase related to our management incentive plan, and (vi) a $0.9 million increase in sales expenses. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2010 were 24% compared to 29% for 2009. This decrease was due primarily to the increase in net sales as compared to 2009.

Interest and Other Income, Net
In millions
2011
 
2010
 
2009
Interest income
$
0.3

 
$
0.5

 
$
1.3

Other income (expense), net
(0.1
)
 
(0.1
)
 
1.6

Interest and other income, net
$
0.2

 
$
0.4

 
$
2.9


Interest and other income, net, was $0.2 million for the year ended December 31, 2011, as compared with $0.4 million and $2.9 million for 2010 and 2009, respectively. The decrease for all years presented was primarily due to lower interest rates on our investments. We presently maintain an investment portfolio with a weighted-average maturity less than a year.

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Consequently, changes in short-term interest rates have a significant impact on our interest income. Future changes in short-term interest rates are expected to continue to have a significant impact on our interest income.

Other income (expense), net, was unchanged at $0.1 million for the year ended December 31, 2011 and 2010, as compared with other income of $1.6 million for 2009. In 2011, other expense of $0.1 million was the loss from foreign currency exchange. The decrease in 2010 in other income was primarily attributable to the recognition of a foreign consumption tax incentive totaling $2.5 million during 2009, partially offset by a loss from foreign currency exchange of $0.4 million resulting from the depreciation of Japanese yen and loss on equipment disposal of $0.2 million.

The foreign consumption tax incentive related to a benefit we received in fiscal years 2004 and 2005 and was previously reserved due to uncertainties as to the ultimate realization of the incentive. In 2009, we determined that those uncertainties had been sufficiently reduced to allow recognition of the benefit. We do not expect to recognize any additional benefit with respect to this tax incentive.

Provision for Income Taxes

For the year ended December 31, 2011, we recorded income tax expense of $4.9 million as compared to income tax expense of $1.2 million and income tax benefit of $70,000 respectively, in 2010 and 2009. The income tax expense recorded in 2011 was comprised primarily of federal taxes of $4.2 million, state taxes of $0.4 million and foreign taxes of $0.3 million accrued on worldwide income. The income tax expense recorded in 2010 was comprised primarily of federal and foreign tax expense while the income tax benefit recorded in 2009 was comprised primarily of foreign taxes offset by federal tax benefits. The actual expense or benefit recorded for the years ending 2011, 2010, and 2009 differs from the federal tax expense at 35% primarily due to current tax expense in foreign jurisdictions and the fact that the prior year U.S. losses were utilized.

We are eligible for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within 9 years. In 2011, the tax benefit attributable to the tax holiday was approximately $0.3 million with a $0.01 impact on diluted earnings per share. In 2010, the tax benefit attributable to the tax holiday was approximately $1.5 million with a $0.06 impact on diluted earnings per share. We did not have any benefits attributable to tax holidays in 2009. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.
        Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how, when and if cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters and we do not anticipate any material earnings impact from their ultimate resolutions.
In accordance with ASC 740, we had unrecognized benefits of $5.5 million as of December 31, 2011 due to uncertain tax positions. We continue to recognize interest and penalties as a component of income tax provision and accrued an immaterial amount for these items for the year. During the year ended December 31, 2011, the balance related to uncertain tax positions increased by $1.5 million. Over the next twelve months, we expect an immaterial decline in the estimated amount of liabilities associated with our uncertain tax positions which arose prior to December 31, 2010 as a result of expiring statutes of limitations.
     If we are able to eventually recognize these uncertain tax positions, $4.1 million of the unrecognized benefit on January 1, 2011 and $5.5 million of the unrecognized benefit on December 31, 2011, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
         We recognize interest and penalties related to uncertain tax positions as a component of income tax expense. As of December 31, 2011, we had accrued an immaterial amount of accrued interest and penalties related to uncertain tax positions.
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, and as further described in the Critical Accounting Policies and Estimates section,

33



deferred income taxes, we concluded that it is more likely than not that, as of December 31, 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.
We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate for years 2003 and forward. There are no material income tax examinations currently in progress.
Outlook

The anticipated timing of orders, shipments and system 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 in 2012 to remain flat or decrease approximately 10% from 2011 net sales of $212.3 million.

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 system 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, we may not exceed or 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 series family of wafer steppers are of critical importance to our future financial results. At December 31, 2011, these critical systems represented 91% 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 $37.4 million for the year ended December 31, 2011 , as compared with $22.9 million for the comparable period in 2010 . Net cash provided by operating activities during the year ended December 31, 2011 was attributable to (i) $49.7 million of cash generated from operations after adjustments for non-cash charges that was partially offset by (ii) $12.3 million of cash used from changes in working capital.

The net $12.3 million of cash used from changes in working capital consisted of (i) $23.7 million increase in accounts receivable balances due to increased sales volumes and a large volume of shipments during the last month of the year, (ii) $4.2 million of cash used in increased inventory purchases, and (iii) a $2.2 million decrease in accounts payable offset by sources of cash from, (i) a $9.6 million increase in accrued expenses, (ii) a $3.3 million increase in income tax liabilities, (iii) a $3.2 million increase in other liabilities, (iv) a $1.3 million increase in deferred income, and (v) a $0.4 million decrease in prepaid and other assets.

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 development, introduction and 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 initial production of the 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. Additionally, 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 additional inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.

34




During the year ended December 31, 2011 , net cash used in investing activities was $53.9 million , as compared with net cash provided by investing activities of $27.5 million for the comparable period in 2010 . Net cash used in investing activities during the year ended December 31, 2011 was attributable to net purchases of short-term investments of $48.6 million and capital expenditures of $5.3 million .

Net cash provided by financing activities was $11.6 million during the year ended December 31, 2011 , as compared with $9.6 million for the comparable period in 2010 . Net cash provided by financing activities during the year ended December 31, 2011 was primarily attributable to proceeds received from the issuance of common stock under our employee stock option plans.

Our principal source of liquidity is cash provided by our operations. At December 31, 2011 , we had working capital of $283.3 million . At December 31, 2011 , our cash, cash equivalents and short-term investments, net of related borrowings under our line of credit, consisted of $226.9 million .

As of December 31, 2011, $23.5 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the United States We currently have no plans to repatriate any foreign earnings back to the United States as we believe our cash flows provided by our U.S. operations will meet our future U.S. liquidity needs.

In December 2004, we entered into a line of credit agreement with a brokerage firm replacing a similar arrangement that we had with a different firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 125 basis points (i.e. 1.3% as of December 31, 2011 ). Certain of our cash, cash equivalents and short-term investments secure outstanding borrowings under this facility. We may borrow up to 75% of our total cash, cash equivalents and investments balance in this brokerage account. 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. This agreement has no set expiration date and there are no loan covenants. As of December 31, 2011 and 2010, balances of $1.0 million and $6.0 million , respectively, were outstanding under this facility, with a related collateral requirement of approximately $1.3 million and $8.0 million , respectively, of our cash, cash equivalents and investments.

The following summarizes our contractual obligations at December 31, 2011 , and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
In millions
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
After
5  years
Notes payable obligations
$
1.0

 
$
1.0

 
$

 
$

 
$

Non-cancelable capital lease obligations
0.2

 
0.2

 

 

 

Non-cancelable operating lease obligations
7.8

 
2.3

 
5.4

 
0.1

 

Long-term payables
6.2

 
0.4

 
1.5

 

 
4.3

Asset retirement obligations
1.9

 

 
0.4

 
1.5

 

Open purchase order commitments
73.0

 
52.6

 
20.4

 

 

Total contractual cash obligations
$
90.1

 
$
56.5

 
$
27.7

 
$
1.6

 
$
4.3


The amounts shown in the table above for open purchase order commitments are primarily related to the purchase of inventories, equipment and leasehold improvements. We record charges to operations for purchase order commitments we deem in excess of normal operating requirements (see “Critical Accounting Policies and Estimates”).

The development and manufacture of new lithography systems and enhancements are 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 short-term 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.

35




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.

Off-Balance Sheet Transactions

Our off-balance sheet transactions consist of certain financial guarantees, both expressed and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2011 , we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. (See Note 16 to our Consolidated Financial Statements for additional information.)

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 equipment 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.

ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 December 31, 2011 and 2010 . 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 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.

The following table presents the hypothetical changes in fair values in the financial instruments held by us at December 31, 2011 that are sensitive to changes in interest rates. These instruments are comprised of cash equivalents and investments. These instruments are held for purposes other than trading. The modeling techniques used measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to our portfolio reflects immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS:

36



Cash equivalents and
Available-for-sale
Investments,
in thousands
Valuation of securities
given an interest rate
decrease of X basis points
 
No change in
interest rate
 
Valuation of securities
given an interest rate
increase of X basis points
(150 BPS)
 
(100 BPS)
 
(50 BPS)
 
0 BPS
 
50 BPS
 
100 BPS
 
150 BPS
Commercial paper
$
10,030

 
$
10,019

 
$
10,008

 
$
9,996

 
$
9,985

 
$
9,974

 
$
9,963

Money market funds
6,706

 
6,706

 
6,706

 
6,706

 
6,706

 
6,705

 
6,705

U.S. corporate debt securities
1,446

 
1,444

 
1,442

 
1,440

 
1,438

 
1,436

 
1,434

U.S. treasury bills and notes
3,932

 
3,925

 
3,919

 
3,912

 
3,906

 
3,899

 
3,893

Securities and obligations of U.S. government agencies
164,258

 
163,724

 
163,194

 
162,669

 
162,150

 
161,635

 
161,125

Total investments
$
186,372

 
$
185,817

 
$
185,268

 
$
184,724

 
$
184,185

 
$
183,651

 
$
183,122


During 2011 , we did not materially alter our investment objectives or criteria and believe that, although the composition of our portfolio has changed from the preceding year, the portfolio’s sensitivity to changes in interest rates is materially the same.

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 significant liquidity problems with our portfolio. Our single largest holding at December 31, 2011 , excluding the U.S. government and its agencies, was a $3.5 million money market fund.

As of December 31, 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 deemed 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 Exchange Risk

The majority of our revenue, expense 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 4 of Notes to Consolidated Financial Statements for additional disclosures.



37



ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Selected Financial Data information contained in Item 6 of Part II hereof is hereby incorporated by reference into this Item 8 of Part II of this Form 10-K.

ULTRATECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements included in Item 8:
 
 
Page Number


38



ULTRATECH, INC.
CONSOLIDATED BALANCE SHEETS
 
In thousands, except share and per share amounts
 
December 31, 2011
 
December 31, 2010
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
58,780

 
$
63,626

Short-term investments
 
169,167

 
120,664

Accounts receivable, net of allowance for doubtful accounts of $498 and $345 at December 31, 2011 and 2010, respectively
 
56,506

 
32,825

Inventories
 
41,285

 
37,088

Prepaid expenses and other current assets
 
6,848

 
7,777

Total current assets
 
332,586

 
261,980

Property, plant, and equipment, net
 
16,009

 
14,835

Other assets
 
4,853

 
4,479

Total assets
 
$
353,448

 
$
281,294

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Notes payable
 
$
1,000

 
$
6,000

Accounts payable
 
10,980

 
13,154

Accrued expenses
 
22,373

 
12,028

Deferred product and services income
 
14,953

 
13,641

Total current liabilities
 
49,306

 
44,823

Other liabilities
 
8,113

 
5,344

Commitments and contingencies
 

 

Stockholders’ equity:
 
 
 
 
Preferred Stock, $0.001 par value: 2,000,000 shares authorized; none issued
 

 

Common Stock, $0.001 par value: 40,000,000 shares authorized; 25,837,994 and 24,739,040 shares issued and outstanding at December 31, 2011 and 2010, respectively
 
27

 
27

Additional paid-in capital
 
278,204

 
252,565

Treasury stock: 1,837,801 and 1,838,801 shares at December 31, 2011 and 2010, respectively
 
(26,526
)
 
(26,540
)
Accumulated other comprehensive income, net
 
(99
)
 
(118
)
Retained earnings
 
44,423

 
5,193

Total stockholders’ equity
 
296,029

 
231,127

Total liabilities and stockholders’ equity
 
$
353,448

 
$
281,294

See accompanying notes to consolidated financial statements.

39



UL TRATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Years Ended December 31,
In thousands, except per share amounts
2011
 
2010
 
2009
Net sales
 
 
 
 
 
Products
$
191,538

 
$
124,626

 
$
80,540

Services
19,660

 
15,602

 
15,066

Licenses
1,135

 
375

 
207

Total net sales
212,333

 
140,603

 
95,813

Cost of sales
 
 
 
 
 
Cost of products sold
86,967

 
56,435

 
38,813

Cost of services
15,041

 
12,527

 
12,010

Gross profit
110,325

 
71,641

 
44,990

Research, development and engineering
23,616

 
19,906

 
18,759

General and administrative
42,689

 
34,194

 
27,333

Operating income (loss)
44,020

 
17,541

 
(1,102
)
Interest expense
(21
)
 
(15
)
 
288

Interest and other income, net
161

 
425

 
2,873

Income before income taxes
44,160

 
17,951

 
2,059

Provision (benefit) for income taxes
4,930

 
1,170

 
(70
)
Net income
$
39,230

 
$
16,781

 
$
2,129

Net income per share—basic
 
 
 
 
 
Net income
$
1.51

 
$
0.69

 
$
0.09

Number of shares used in per share computations—basic
25,915

 
24,468

 
23,690

Net income per share—diluted
 
 
 
 
 
Net income
$
1.47

 
$
0.67

 
$
0.09

Number of shares used in per share computations—diluted
26,778

 
25,043

 
23,852

See accompanying notes to consolidated financial statements.

40



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
 
Years Ended December 31,
In thousands
2011
 
2010
 
2009
Cash flows from operating activities:
 
 
 
 
 
Net income
$
39,230

 
$
16,781

 
$
2,129

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Depreciation
3,991

 
3,241

 
4,350

Amortization
403

 
388

 
611

Amortization (benefit) of postretirement benefit plan obligation
(13
)
 
(12
)
 
46

Accretion of asset retirement obligations
109

 
111

 
167

(Gain) loss on disposal of equipment
(2
)
 
112

 
120

Stock-based compensation
9,017

 
4,839

 
2,922

Excess tax benefit from share-based arrangements
(3,023
)
 

 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(23,681
)
 
(1,399
)
 
(13,108
)
Inventories
(4,197
)
 
(11,291
)
 
6,554

Prepaid expenses and other current assets
924

 
(3,614
)
 
757

Other assets
(533
)
 
(1,722
)
 
36

Accounts payable
(2,174
)
 
6,042

 
(1,718
)
Accrued expenses
9,550

 
3,908

 
(2,787
)
Income taxes payable
3,316

 
242

 
(126
)
Deferred product and services income
1,312

 
4,795

 
4,518

Other liabilities
3,162

 
458

 
(1,245
)
Net cash provided by operating activities
37,391

 
22,879

 
3,226

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(5,284
)
 
(8,258
)
 
(3,646
)
Proceeds from sales of fixed assets

 

 
1,137

Purchase of investments in securities
(225,104
)
 
(181,194
)
 
(125,134
)
Proceeds from maturities of investments
176,508

 
162,001

 
87,024

Net cash used in investing activities
(53,880
)
 
(27,451
)
 
(40,619
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from notes payable
11,000

 
24,000

 
34,056

Repayment of notes payable
(16,000
)
 
(24,000
)
 
(34,056
)
Proceeds from issuance of common stock for stock option exercises
14,886

 
10,425

 
2,448

Tax payment for issuance of common stock from release of restricted stock units
(1,266
)
 
(844
)
 
(472
)
Excess tax benefit from exercise of stock options
3,023

 

 

Net cash provided by financing activities
11,643

 
9,581

 
1,976

Net increase (decrease) in cash and cash equivalents
(4,846
)
 
5,009

 
(35,417
)
Cash and cash equivalents at beginning of period
63,626

 
58,617

 
94,034

Cash and cash equivalents at end of period
$
58,780

 
$
63,626

 
$
58,617

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period for:
 
 
 
 
 
Interest
$
20

 
$
15

 
$
32

Income taxes paid
$
334

 
$
248

 
$
194

Other non-cash changes:
 
 
 
 
 
Systems transferred from inventory to equipment and other assets, net
$
34

 
$
936

 
$
1,361

See accompanying notes to consolidated financial statements.

41



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY  
 
Stockholders’ Equity
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated
Deficit)
 
Total
Stockholders’
Equity
In thousands, except share data
Shares
 
Amount
 
Balance at December 31, 2008
23,516,198

 
$
25

 
$
233,246

 
$
(26,605
)
 
$
474

 
$
(13,717
)
 
$
193,423

Net issuance of common stock under stock option plans
321,886

 
1

 
1,968

 
36

 

 

 
2,005

Stock-based compensation

 

 
2,923

 

 

 

 
2,923

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments

 

 

 

 
(643
)
 

 
(643
)
Foreign exchange contracts

 

 

 

 
84

 

 
84

Change in postretirement benefits obligation

 

 

 

 
47

 

 
47

Net income

 

 

 

 

 
2,129

 
2,129

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
1,617

Balance at December 31, 2009
23,838,084

 
26

 
238,137

 
(26,569
)
 
(38
)
 
(11,588
)
 
199,968

Net issuance of common stock under stock option plans
900,956

 
1

 
9,589

 
29

 

 

 
9,619

Stock-based compensation

 

 
4,839

 

 

 

 
4,839

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments

 

 

 

 
(68
)
 

 
(68
)
Foreign exchange contracts

 

 

 

 

 

 

Change in postretirement benefits obligation

 

 

 

 
(12
)
 

 
(12
)
Net income

 

 

 

 

 
16,781

 
16,781

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
16,701

Balance at December 31, 2010
24,739,040

 
27

 
252,565

 
(26,540
)
 
(118
)
 
5,193

 
231,127

Net issuance of common stock under stock option plans
1,098,954

 

 
13,599

 
14

 
 
 
 
 
13,613

Stock-based compensation


 

 
9,017

 

 

 

 
9,017

Excess tax benefit related to stock options

 

 
3,023

 

 

 

 
3,023

Components of comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Change in net unrealized gains (losses) on:
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale investments

 

 


 

 
32

 

 
32

Change in postretirement benefits obligation

 

 

 

 
(13
)
 

 
(13
)
Net income

 

 

 

 

 
39,230

 
39,230

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
39,249

Balance at December 31, 2011
25,837,994

 
$
27

 
$
278,204

 
$
(26,526
)
 
$
(99
)
 
$
44,423

 
$
296,029

See accompanying notes to consolidated financial statements.

42



ULTRATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY AND INDUSTRY INFORMATION

Nature of Operations

Ultratech, Inc. (referred to as “Ultratech” and “we”) develops, manufactures and markets photolithography and laser thermal processing equipment for manufacturers of semiconductor and nanotechnology components located throughout North America, Europe and Asia.

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

Major Customers

In 2011 , Intel Corporation (“Intel”), Samsung Corporation (“Samsung”) and Taiwan Semiconductor Manufacturing Co. Ltd. (“TSMC”) accounted for 24% , 18% , and 12%