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NANOMETRICS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding future periods, financial results, revenues, margins, growth, customers, tax rates, product performance, and the impact of accounting rules on our business and the future implications of our statements regarding goals, strategy, and similar terms. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "likely," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would," and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain risks, uncertainties and changes in circumstances, many of which may be difficult to predict or beyond our control, including those factors referenced in Part II, Item 1A, Risk Factors, and elsewhere in this document, and in Part I, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. In particular our results could vary significantly based on: changes in customer and industry spending; rate and extent of changes in product mix; adoption of new products; timing of orders, shipments, and acceptance of products; our ability to secure volume supply agreements; and general economic conditions. In evaluating our business, investors should carefully consider these factors in addition to any other risks and uncertainties set forth elsewhere. The occurrence of the events described in the risk factors and elsewhere in this report as well as other risks and uncertainties could materially and adversely affect our business, operating results and financial condition. While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with (i) our audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2013, which were included in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission ("SEC") on March 7, 2014, and (ii) our other filings with the SEC. We are an innovator in the field of metrology and inspection systems for semiconductor manufacturing and other industries. Our systems are designed to precisely monitor film thickness and critical dimensions that are necessary to control the manufacturing process and to identify defects that can affect production yields and performance. Principal factors that impact our revenue growth include capital expenditures by manufacturers of semiconductors to increase capacity and to enable their development of new technologies, and our ability to gain market share. The increasing complexity of the manufacturing processes for semiconductors is an important factor in the demand for our innovative metrology systems, as are the adoption of optical critical dimension metrology across fabrication processes, the adoption of immersion lithography and double patterning, the adoption of new types of thin film materials, the adoption of advanced packaging strategies and wafer backside inspection, and the need for improved process control to drive process efficiencies. Our strategy is to continue to innovate organically as well as to evaluate strategic acquisitions to address business challenges and opportunities. Our revenues are primarily derived from product sales but are also derived from customer service and system upgrades ("services'') for the installed base of our products. For the six months ended June 28, 2014, we derived 83% of our total net revenues from product sales and 17% of our total net revenues from services. Overview Nanometrics Incorporated, together with its subsidiaries, is a leading provider of advanced, high-performance process control metrology and inspection systems used primarily in the fabrication of integrated circuits, high-brightness LEDs ("HB-LED"), discrete components and data storage devices. Our automated and integrated systems address numerous process control applications, including critical dimension and film thickness measurement, device topography, defect inspection, overlay registration, and analysis of various other film properties such as optical, electrical and material characteristics. Our process control solutions are deployed throughout the fabrication process, from front-end-of-line substrate manufacturing, to high-volume production of semiconductors and other devices, to advanced wafer-scale packaging applications. Our systems enable device manufacturers to improve yields, increase productivity and lower their manufacturing costs. Our defect inspection systems locate large area and microscopic defects on patterned and unpatterned wafers. This system can be used for inspection at nearly every stage of the semiconductor production flow. 21 -------------------------------------------------------------------------------- Nanometrics Products We offer a diverse line of systems to address the broad range of process control requirements of the semiconductor manufacturing industry. In addition, we believe that our engineering expertise, strategic acquisitions, supplier alliances and short-cycle production strategies enable us to develop and offer advanced process control solutions in the future that should address industry advancement and trends. We categorize our systems as follows: Automated Standalone Systems Our automated systems are made up of both semi-automated and fully automated metrology systems which are employed in both high-volume and low-volume production environments. The Atlas® II, Atlas II+, Atlas XP/Atlas XP+ and Atlas-M represent our line of high-performance metrology systems providing optical critical dimension ("OCD"®), thin film metrology and wafer stress for transistor and interconnect metrology applications. The OCD technology is supported by our NanoCD® suite of solutions including our NanoDiffract® software and NanoGenTM scalable computing engine that enables visualization, modeling, and analysis of complex structures. The UniFireTM system enables users to measure multiple parameters at any given process step in the advanced packaging process flow for critical dimension, overlay, and topography applications. Our SPARKTM defect inspection system, offers ultra-fast inspection of patterned and unpatterned semiconductor wafers. We continue to offer automated products for 200mm factories running at 90nm nodes and above, as well as systems supporting micro-electrical mechanical systems ("MEMS"). System Platform The Lynx® platform enables cluster metrology factory automation for improved cost of ownership to our customers by combining our Atlas® II and IMPULSE®, UniFire metrology and SPARK inspection systems in configurations to provide high throughput, reduced footprint systems for leading 300mm wafer metrology applications including OCD and thin film process control. Integrated Systems Our integrated metrology ("IM") systems are installed directly onto wafer processing equipment to provide near real-time measurements for improved process control and maximum throughput. Our IM systems are sold directly to end customers and through OEM channels. The IMPULSE® system is our latest metrology platform for OCD and thin film metrology, and has been successfully qualified on numerous OEM platforms. Our 90x0 system is qualified for OEM and direct sales supporting thin film and OCD applications. Our NanoCD solutions suite is sold in conjunction with our IMPULSE® and legacy 90x0 systems. Our Trajectory® system provides in-line measurement of layers in thin film thickness and composition in semiconductor applications. Materials Characterization Our Materials Characterization products include systems that are used to monitor the physical, optical, electrical and material characteristics of discrete electronic industry, HB-LED, solar Photo-Voltaics ("PV"), compound semiconductor, strained silicon and silicon-on-insulator ("SOI") devices, including composition, crystal structure, layer thickness, dopant concentration, contamination and electron mobility. Our Vertex™ is a photoluminescence ("PL") mapping system designed for high-volume compound semiconductor metrology applications including power control and photonics applications. The RPMBlue™ is our latest PL mapping system designed specifically for the HB-LED market. We sell Fourier-Transform Infrared ("FTIR") automated and manual systems in the QS2200/3300 and QS1200 respectively. The FTIR systems are spectrometers designed for non-destructive wafer analysis for various applications. The NanoSpec® line, including the NanoSpec II products supporting thin film measurement across all applications in both low volume production and research applications. We are continually working to strengthen our competitive position by developing new technologies and products in our market segment. In furtherance of our goals, we have: • Introduced new products in every core product line and primary market served; • Diversified our product line and addressed new markets through acquisitions, such as the 2011 acquisition of Nanda Technologies GmbH, a supplier of high sensitivity, high throughput defect inspection systems; • Continued development of new measurement and inspection technologies for advanced fabrication processes; and 22--------------------------------------------------------------------------------• Researched and developed innovative applications of existing technology to new market opportunities within the solar PV, HB-LED, and data storage industries. Important Themes and Significant Trends The semiconductor equipment industry is characterized by cyclical growth. Changing trends in the semiconductor industry continue to drive the need for metrology as a major component of manufacturing systems. These trends include: • Proliferation of Optical Critical Dimension Metrology across Fabrication Processes. Our customers use photolithographic processes to create patterns on wafers. Critical dimensions must be carefully controlled during this process. In advanced node device definition, additional monitoring of thickness and profile dimensions on these patterned structures at CMP, Etch, and Thin Film processing is driving broader OCD adoption. Our proprietary OCD systems can provide the critical process control of these circuit dimensions that is necessary for successful manufacturing of these state-of-the-art devices. Nanometrics OCD technology is broadly adopted across NAND, DRAM, HDD, and logic semiconductor manufacturing processes. • Adoption of Advanced Packaging Processes. Our customers use photolithographic, etching, metallization and wafer thinning to enable next generation advanced packaging solutions for semiconductor devices. The new packaging leads to increased functionality in smaller, less expensive form factors. Advanced packages can be broken down into high density flip chip or bump packages that increase pin density allowing for more complex I/O on advanced CPU parts. Similar or different devices can be stacked at the wafer level using a Through Silicon Via ("TSV") process. The TSV process enables high density small form factor parts, being primarily driven by mobile consumer products (e.g. cellular telephones with integrated CMOS camera sensors). Increasingly advanced packaging technologies are being adopted by our end customers. • Adoption of New Types of Thin Film Materials. The need for ever increasing device circuit speed coupled with lower power consumption has pushed semiconductor device manufacturers to begin the replacement of the traditional aluminum etch back interconnect flows as well as conventional gate dielectric materials, all which drive a broader adoption of thin film and OCD metrology systems. To achieve greater semiconductor device speed, manufacturers have adopted copper in Logic/IDM and it is now proliferating in next generation DRAM and Flash nodes. Additionally, to achieve improved transistor performance in logic devices and higher cell densities in memory devices, new materials including high dielectric constant (or high-k) gate materials are increasingly being substituted for traditional silicon-oxide gate dielectric materials. High-k materials comprise complex thin films including layers of hafnium oxide and a bi-layer of thin film metals. Our advanced metrology and inspection solutions are required for control of process steps, which are critical to enable the device performance improvements that these new materials allow. • Development of 3D Transistor Architectures. Our end customers continue to improve device density and performance by scaling front end of line transistor architectures. Many of these designs, including fin-fet transistors and 3D-NAND have buried features and high aspect ratio stacked features that enable improved performance and density. The advanced designs require additional process control to manage the complex shapes and materials properties, driving additional applications for both OCD and our UniFire systems. • Need for Improved Process Control to Drive Process Efficiencies. Competitive forces influencing semiconductor device manufacturers, such as price-cutting and shorter product life cycles, place pressure on manufacturers to rapidly achieve production efficiency. Device manufacturers are using our integrated and automated systems throughout the fabrication to ensure that manufacturing processes scale rapidly, are accurate and can be repeated on a consistent basis. • Reduced Number of Customers. Our market is characterized by an ongoing oligopsonistic trend which drives customer concentration. Our largest customer accounted for 35% of our total revenue in the six months ended June 28, 2014, and 27% of our total revenue in the six months ended June 29, 2013. Critical Accounting Policies The preparation of our financial statements conforms to accounting principles generally accepted in the United States of America, which requires management, in applying our accounting policies, to make estimates and judgments that have an important impact on our reported amounts of assets, liabilities, revenue, expenses and related disclosures at the date of our financial statements. On an on-going basis, management evaluates its estimates including those related to bad debts, inventory valuations, warranty obligations, impairment and income taxes. Management bases its estimates and judgments on historical experience and on various other factors 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 management's estimates. There were no significant changes in our critical accounting policies during the six months ended June 28, 2014. Please refer to Item 7, "Management's Discussion and Analysis of 23 -------------------------------------------------------------------------------- Financial Condition and Results of Operations," in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013 for a complete discussion of our critical accounting policies. Recent Accounting Pronouncements See Note 2 of the Unaudited Condensed Consolidated Financial Statements for a description of recent accounting pronouncements, including the respective dates of adoption and effects or anticipated effects on our results of operations and financial condition. Results of Operations Net Revenues Our net revenues by category were as follows (in thousands, except percentages): Three Months Ended Six Months Ended June 28, June 29, Changes In June 28, June 29, Changes In 2014 2013 Amount % 2014 2013 Amount % Automated Systems $ 33,456 $ 23,366 $ 10,090 43 % $ 67,339 $ 28,628 $ 38,711 135 % Integrated Systems 2,853 1,761 1,092 62 % 9,775 3,916 5,859 150 % Materials Characterization 2,915 1,406 1,509 107 % 5,390 7,068 (1,678 ) (24 )% Total product revenues 39,224 26,533 12,691 48 % 82,504 39,612 42,892 108 % Service revenues 8,805 8,019 786 10 % 17,101 19,492 (2,391 ) (12 )% Total net revenues $ 48,029 $ 34,552 $ 13,477 39 % $ 99,605 $ 59,104 $ 40,501 69 % For the three and six months ended June 28, 2014, total net revenues increased by $13.5 million and $40.5 million, respectively, relative to the comparable 2013 periods. These increase were primarily from an industry-wide improvement in memory-related semiconductor capital spending and from an increase in foundry penetration, supported by the adoption of multiple Atlas®, UniFireTM and IMPULSE® systems by multiple customers. For the three and six months ended June 28, 2014, product revenues increased by $12.7 million and $42.9 million, respectively, relative to the comparable 2013 period. These increases were led by a $10.1 million and $38.7 million increase in the three and six months ended June 28, 2014, relative to the comparable 2013 periods, in Automated Systems sales (primarily from Atlas® II, followed by UniFireTM ) and a $1.1 million and $5.9 million increase in the three and six months ended June 28, 2014, relative to the comparable 2013 periods, in Integrated Systems sales (primarily from IMPULSE® systems), for the reasons cited above. Service revenues increased by $0.8 million during the three months ended June 28, 2014, relative to the comparable 2013 period, due to an increase in demand for core services from customers. Service revenues decreased by $2.4 million during the six months ended June 28, 2014, relative to the comparable 2013 period, primarily due to upgrades of a large number of installed tools by a customer during the first quarter of 2013. Upgrades tend to fluctuate from quarter-to-quarter based on availability of new functionality from upgrades and customer production cycles, which determine when customers purchase available upgrades. With a significant portion of the world's semiconductor manufacturing capacity located in Asia, a substantial portion of our revenues continue to be generated in that region. Although sales to customers within individual countries of that region will vary from time-to-time, we expect that a substantial portion of our revenues will continue to be generated in Asia. 24 --------------------------------------------------------------------------------Gross Margin Our gross margin for product and services were as follows: Three Months Ended Six Months Ended June 28, June 29, June 28, June 29, 2014 2013 2014 2013 Product 47.8 % 41.7 % 48.1 % 39.2 % Services 47.1 % 42.7 % 42.9 % 48.5 % The calculation of product gross margin includes both cost of products and amortization of intangible assets. Product gross margin for the three and six months ended June 28, 2014, was 47.8% and 48.1%, respectively, reflecting an increase of 6.1 percentage points and 8.9 percentage points, respectively, from the comparable periods in 2013. The increase during the three and six months ended June 28, 2014, compared to the same periods of the prior fiscal year, was primarily driven by the favorable impact of higher revenues against fixed costs, such as fixed overhead and amortization of intangible assets, and by the decrease in reserves for excess and obsolete inventory. The gross margin for our services business was 47.1% and 42.9%, respectively, for the three and six months ended June 28, 2014, reflecting an increase of 4.4 percentage points and a decrease of 5.6 percentage points, respectively, from the comparable period in 2013. The increase in the three months ended June 28, 2014, as compared to the same period in 2013, was primarily driven by higher core services revenue. The decrease in the six months ended June 28, 2014, as compared to the same period in 2013, was due principally to a decrease in upgrade revenues, which typically have higher margins than core service revenue. Operating Expenses Our operating expenses comprised the following (in thousands, except percentages): Three Months Ended Six Months Ended Changes in Changes in June 28, June 29, June 28, June 29, 2014 2013 Amount % 2014 2013 Amount % Research and development $ 9,373 $ 8,321 $ 1,052 13 % $ 17,687 $ 15,768 $ 1,919 12 % Selling 6,681 6,613 68 1 % 14,054 13,545 509 4 % General and administrative 6,001 5,507 494 9 % 12,339 11,019 1,320 12 % Amortization of intangible assets 107 195 (88 ) (45 )% 215 393 (178 ) (45 )% Total operating expenses $ 22,162 $ 20,636 $ 1,526 7 % $ 44,295 $ 40,725 $ 3,570 9 % Research and development. Research and development expenses increased by $1.1 million for the three months ended June 28, 2014, over the comparable period in 2013, primarily due to the following: •a $0.8 million increase in spending for non-recurring engineering projects, including product design and prototype development, along with related material spending; and •a $0.5 million increase in personnel related costs, primarily related to increased headcount and personnel related benefit cost; partially offset by •a $0.3 million decrease in use of outside consultants. Research and development expenses increased by $1.9 million for the six months ended June 28, 2014, over the comparable period in 2013, primarily due to the following: •a $1.2 million increase in spending for non-recurring engineering projects, including product design and prototype development, along with related material spending; and •a $1.0 million increase in personnel related costs, primarily related to increased headcount and personnel-related benefit cost; partially offset by 25 -------------------------------------------------------------------------------- •a $0.3 million decrease in use of outside consultants. Selling. Selling expenses were unchanged for the three months ended June 28, 2014, over the comparable period in 2013. Increases in personnel related cost and sales commissions of $0.3 million were offset by a decrease of $0.2 million in demonstration equipment amortization. Selling expenses increased by $0.5 million for the six months ended June 28, 2014, over the comparable period in 2013, primarily due to the following: •a $0.6 million increase in personnel related costs, including commissions and travel costs; partially offset by •a $0.2 million decrease in demonstration tool amortization. General and administrative. General and administrative expenses increased by $0.5 million for the three months ended June 28, 2014, over the comparable period in 2013, primarily due to the increase in consulting, and software license fees and amortization related to the implementation of a new Enterprise Resource Planning ("ERP") system in the first quarter of 2014. General and administrative expenses increased by $1.3 million for the six months ended June 28, 2014, over the comparable periods in 2013, primarily due to a $0.9 million increase in consulting, and software license fees and amortization related to the implementation of the ERP system in the first quarter of 2014. Restructuring. In July 2014, the Company communicated a plan to consolidate a portion of its European operations to maximize efficiencies. In the second half of 2014, the Company anticipates recording a charge related to employee involuntary termination benefits of approximately $0.7 million. The Company will incur additional charges related to a facility lease which currently expires in 2017. The Company will measure and recognize the exit liability associated with this lease at the cease-use date. The Company expects to complete this restructuring plan by March 2015. Other related costs will be recognized as incurred. Amortization of intangible assets. Amortization of intangible assets decreased for the three and six months ended June 28, 2014, compared to the same periods in 2013, as a result of the reduction in amortization due to intangible assets that became fully amortized in 2013. Other Income (expense), net. Our other income (expense), net, consisted of the following categories (in thousands, except percentages): Three Months Ended Six Months Ended Changes in Changes in June 28, 2014 June 29, 2013 Amount % June 28, 2014 June 29, 2013 Amount % Interest income $ 10 $ 20 $ (10 ) (50 )% $ 24 $ 45 $ (21 ) (47 )% Interest expense (96 ) (205 ) 109 (53 )% (196 ) (431 ) 235 (55 )% Other income (expense), net (84 ) (637 ) 553 (87 )% 168 (597 ) 765 (128 )% Total other income (expense), net $ (170 ) $ (822 ) $ 652 (79 )% $ (4 ) $ (983 ) $ 979 (100 )% Interest expense for the three and six months ended June 28, 2014, was lower than the comparable prior year period due to the repayment of the entire outstanding balance of the mortgage on our headquarters during 2013. The decrease in other expense, net, during the three and six months ended June 28, 2014, compared to the same periods in 2013, was primarily due to a change in fair value of contingent consideration payable as a result of fluctuation of unobservable inputs, which resulted in an increase of $0.5 million and $0.8 million in other expense during the three and six months ended June 30, 2013, compared to a nominal adjustment during the three and six months ended June 28, 2014. Income Taxes We account for income taxes under the provisions of ASC 740, Accounting for Income Taxes. We adjust the effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We also record the tax effect of unusual or infrequently occurring discrete items, including changes in judgment about valuation allowances and effects of changes in tax laws or tax rates, in the interim period in which they occur. Our effective tax rate reflects the impact of a portion of its earnings being taxed in foreign jurisdictions as well as a valuation allowance maintained on certain deferred tax assets. 26 -------------------------------------------------------------------------------- We recorded a tax benefit of $0.1 million and $2.4 million for the three months ended June 28, 2014 and June 29, 2013, respectively, and a tax provision of $0.6 million and a tax benefit of $6.6 million for the six months ended June 28, 2014 and June 29, 2013, respectively. The change during the three months ended June 28, 2014, compared to the corresponding period in 2013, was primarily related to the increase in profitability during the three months ended June 28, 2014. The change during the six months ended June 28, 2014, compared to the corresponding period in 2013, was primarily related to the increase in profitability during the six months ended June 28, 2014, as well as a one-time benefit of $0.6 million recorded during the six months ended June 29, 2013 related to the retroactive reinstatement of the 2012 Federal R&D tax credit. As of June 28, 2014, we continued to maintain a valuation allowance against certain net deferred tax assets as a result of uncertainties regarding the realization of the asset due to cumulative losses and uncertainty of future taxable income in various tax jurisdictions. In the event that we determine that the deferred tax assets are realizable, an adjustment to the valuation allowance will be reflected in the tax provision for the period such determination is made. We are subject to taxation in the United States and various states including California, and foreign jurisdictions including South Korea, Japan and the United Kingdom. Due to tax attribute carry-forwards, we are subject to examination by the IRS for tax years beginning from the 2003 tax year for U.S. tax purposes. We are also subject to examination in various states for tax years beginning from the 2002 tax year. We are also subject to examination in various foreign jurisdictions beginning from the 2006 tax year. On September 13, 2013, the U.S. Treasury Department and the IRS issued final regulations that address costs incurred in acquiring, producing, or improving tangible property (the "tangible property regulations"). The tangible property regulations are generally effective for tax years beginning on or after January 1, 2014. The tangible property regulations required us to make additional tax accounting method changes as of January 1, 2014. The impact of these changes was not material to our consolidated financial position or our results of operations. We accrue interest and penalties related to unrecognized tax benefits in the provision for income taxes. The total amount of accrued penalties and interest was immaterial for the three and six months ended June 28, 2014. During the next twelve months, we anticipate increases in our unrecognized tax benefits of approximately $0.3 million. Liquidity and Capital Resources We maintain an ongoing investment strategy of maintaining a portion of our cash and investments in available-for-sale investments with the objective of preserving capital and maintaining liquidity while mitigating concentration risk and increasing yields. Our policy is to maintain a marketable securities portfolio consisting of highly rated investments that may include: obligations issued by the U.S. Treasury and its agencies, corporate bonds and commercial paper, tax exempt debt obligations of U.S. municipalities, and time deposits at commercial banks. Our policy is that, with the exception of U.S. treasury and agency issues, no single issue at the time of purchase, may exceed 5% of the total portfolio or have a duration exceeding two years. At June 28, 2014, our cash and cash equivalents, and marketable securities totaled $87.4 million and working capital was $151.5 million, compared to $92.9 million and $141.8 million, respectively, as of December 28, 2013. Our principal cash requirements include working capital, capital expenditures, and payment of taxes. In addition, we regularly evaluate our ability to repurchase our common stock and acquire other businesses and technologies. Our principal sources of liquidity are from our cash, cash equivalents and marketable securities, cash flow generated from our operations, and, to a lesser extent, available borrowings from a line of credit. Our liquidity is affected by many factors, including those that relate to our specific operations and those that relate to the uncertainties of global and regional economies and the sectors of the semiconductor industry which we operate in. Although our cash requirements will fluctuate based on the timing and extent of these factors, we believe our existing cash, cash equivalents and marketable securities, and borrowing availability, combined with cash currently projected to be generated from our operations, will be sufficient to meet our liquidity needs through at least the next twelve months. Cash Flows from Operating Activities Cash used in operating activities for the six months ended June 28, 2014, was $4.6 million, which resulted primarily from the following factors: Net income of $2.2 million and non-cash transactions of $10.3 million, offset in part by an $17.1 million reduction in non-cash working capital. Non-cash transactions primarily consisted of depreciation and amortization expense of $4.8 million, stock based compensation of $3.4 million, inventory write down of $1.5 million, and a $0.5 million decrease in deferred income taxes. The reduction in non-cash working capital as of June 28, 2014, compared to December 28, 2013, was primarily due to a $15.0 million decrease in deferred revenue, a $3.0 million decrease in accounts payables, accrued and other liabilities, a $3.8 million increase in inventory, and a $1.9 million increase in accounts receivables, offset in part by a $6.5 million decrease in inventory - delivered systems and a $1.2 million decrease in prepaid expenses and other. 27 -------------------------------------------------------------------------------- Cash used by operating activities for the six months ended June 29, 2013, was $17.0 million, which resulted primarily from the following factors: net loss of $10.1 million and a $11.8 million decrease in non-cash working capital offset in part by non-cash items of $5.0 million. Non-cash items primarily consisted of depreciation and amortization expense of $4.3 million, stock based compensation of $3.2 million, inventory write down of $2.8 million, and a $1.0 million increase in the fair value of contingent consideration, offset in part by $6.7 million of deferred income taxes. The reduction in non-cash working capital as of June 29, 2013, from December 29, 2012, was primarily due to an $11.1 million increase in accounts receivable as a result of higher sales volumes during the second quarter ended June 29, 2013, and a $4.1 million increase in inventory, partially offset by a $2.5 million decrease in deferred revenue. Cash Flows from Investing Activities For the six months ended June 28, 2014, $19.5 million of cash was used for purchases of marketable securities, and $3.8 million for capital asset purchases. These outflows were offset in part by $17.6 million cash received from maturities of marketable securities. For the six months ended June 29, 2013, $23.5 million of cash was used for purchases of marketable securities, and $2.0 million for capital asset purchases. These outflows were offset by $22.8 million cash received from maturities of marketable securities. Cash Flows from Financing Activities For the six months ended June 28, 2014, $3.3 million was provided by financing activities primarily from $4.2 million, net of tax, received from the issuance of common stock from employee stock option exercises and stock purchased under the employee stock purchase program, partially offset by a $0.7 million reduction related to employee taxes paid on net issuances of stock awards and $0.3 million paid to Zygo related to royalties and sustaining engineering payments. For the six months ended June 29, 2013, $3.3 million was used for financing activities primarily composed of $5.0 million used to repurchase common stock, $0.5 million used to repay debt obligations, and a $0.4 million reduction related to the effect of excess tax benefits from the exercise of stock options. These payments were partially offset by $2.9 million, net of tax, received from the issuance of common stock from employee stock option exercises and stock purchased under the employee stock purchase program. Line of Credit On May 30, 2014, we amended our revolving line of credit facility with Comerica Bank principally (i) to extend the maturity date of such facility by two years to May 30, 2016, and (ii) to increase the minimum amount available to borrow to $12.0 million. The instrument governing the line of credit facility includes certain financial covenants regarding tangible net worth. The revolving line of credit agreement includes a provision for the issuance of commercial or standby letters of credit by the bank on our behalf. The value of all letters of credit outstanding reduces the total line of credit available. The revolving line of credit is collateralized by a blanket lien on all of our domestic assets excluding intellectual property and real estate. The minimum borrowing interest rate is 3.00% per annum. Borrowing is limited to the lesser of (a) $12.0 million plus the borrowing base, or (b) $20.0 million. The total borrowing available as of June 28, 2014 was $17.6 million. As of June 28, 2014, we were not in breach of any restrictive covenants in connection with this line of credit. There were no outstanding amounts drawn on this facility as of June 28, 2014. Although we have no current plans to request advances under this credit facility, we may use the proceeds of any future borrowing for general corporate purposes, future acquisitions or expansion of our business. Mortgage Loan In July 2008, we entered into a loan agreement with General Electric Commercial Finance ("GE") pursuant to which we borrowed $13.5 million, secured, in part, by a lien on and security interest in the building and land comprising our principal offices in Milpitas, California. The loan initially bore interest at the rate of 7.18% per annum which rate was scheduled to reset in August 2013 to 3.03% over the weekly average yield of five-year U.S. Dollar Interest Rate Swaps as published by the Federal Reserve. Monthly principal and interest payments were based on a 20 year amortization for the first 60 months and 15 year amortization thereafter. The remaining principal balance of the loan and any accrued but unpaid interest was due on August 1, 2018. According to the terms of the loan agreement, we could make annual pre-payments of up to 20% of the outstanding principal balance without incurring any penalty. GE subsequently sold the mortgage on March 31, 2011 to Sterling Saving Bank; however, no changes were made to the terms of the original loan agreement with GE as a result of the sale. In July 2012, we prepaid $1.4 million of the loan, respectively, representing 20% of the outstanding balance at the time of prepayment. On July 18, 2013, we repaid $4.8 million of the loan, representing the entire outstanding principal balance of the loan and all accrued interest. We did not incur any fees associated with the prepayment of the loan. As of June 28, 2014, there was no outstanding balance and no available amount to borrow under the loan. 28 --------------------------------------------------------------------------------Repurchases of Common Stock On May 29, 2012, our Board of Directors approved a program to repurchase up to $20.0 million of our common stock, referred to as the 2012 program. Stock repurchases under this program may be made through open market and privately negotiated transactions, at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased is dependent on a variety of factors including price, corporate and regulatory requirements and other market conditions. During the three months ended March 30, 2013, we repurchased and retired 332,771 shares of our common stock under this approved program at the weighted average price of $15.03 per share. We made no repurchases of our common stock during the six months ended June 28, 2014. As of June 28, 2014, $11.5 million remained available for the future repurchase of shares of our common stock under the 2012 program. Business Partnership On June 17, 2009, we announced a strategic business relationship with Zygo under which we purchased inventory and certain other assets including the UniFire system from Zygo and the two companies entered into a supply agreement. We will make payments to Zygo (with an estimated present value of $2.6 million as of June 28, 2014, compared to $2.8 million as of December 28, 2013) over a period of time as acquired inventory is sold and other aspects of the supply agreement are executed. We made royalty and sustaining engineering payments of $0.3 million and $0.2 million to Zygo in each of the six months ended June 28, 2014 and June 29, 2013, respectively. We have evaluated and will continue to evaluate the acquisitions of products, technologies or businesses that are complementary to our business. These activities may result in product and business investments, which may affect our cash position and working capital balances. Some of these activities might require significant cash outlays. We believe our cash, cash equivalents, marketable securities, and borrowing availability will be sufficient to meet our needs through at least the next twelve months. Our ability to fund our working capital needs, planned capital expenditures and scheduled debt payments, as well as to comply with all of the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which in turn are subject to prevailing economic conditions, and to financial, business and other factors, some of which are beyond our control. Off-Balance Sheet Arrangements As of June 28, 2014, we had no off-balance sheet arrangements or obligations. |