Description
Filed with the SEC from Aug 30 to Sep 05:
FSI International (FSII)
Gamco Investors (GBL) owns 2,455,158 shares (6.3%) after it bought 436,431 from Aug. 22 to Aug. 28 for $6.16 to $6.17 each. On Aug. 13, FSI said it would be acquired by Tokyo Electron for $6.20 per share, cash, a 53% premium over its prior close.
BUSINESS OVERVIEW
The Company
FSI International, Inc., a Minnesota corporation organized in 1973 (“FSI”, the “Company”, “we”, “us”), designs, manufactures, markets and supports equipment used in the fabrication of microelectronics, such as advanced semiconductor devices. In fiscal 2011, we provided surface conditioning technology solutions and microlithography systems and support services to worldwide manufacturers of integrated circuits. FSI manufactures, markets and supports surface conditioning equipment that uses wet, cryogenic and other chemistry techniques to clean, strip or etch the surfaces of silicon wafers and supplies refurbished microlithography products that are used to deposit and develop light sensitive films. FSI’s business is supported by service groups that provide finance, human resources, information services, sales and service, marketing and other administrative functions.
FSI directly sells and services its products in North America, Europe, and the Asia Pacific region, except for Japan. In Japan, FSI products are sold and serviced through Apprecia Technology, Inc. (“Apprecia”), a company in which FSI maintains a 20 percent equity ownership.
Industry Background
The complex process of fabricating semiconductor devices involves several distinct phases that are repeated numerous times. Because each production phase typically requires different processing technologies and equipment, no single semiconductor equipment supplier currently produces all types of tools needed to equip an entire state-of-the-art fabrication facility. Instead, semiconductor device manufacturers typically equip their facilities by combining manufacturing equipment produced by a number of suppliers. Each set of equipment performs specific functions in the manufacturing process.
Generally, increasing demand for computer chips, new computer chip designs, new materials of fabrication and new substrate (the underlying material upon which a semiconductor device or integrated circuit is formed) types – both size and composition – drives demand for new microelectronics manufacturing equipment and ocesses. For example, the industry has shifted towards single wafer processes from batch processes. Industries that use microelectronics increasingly demand higher performance devices from manufacturers. Over the last decade, device manufacturers have reduced the feature size and substantially increased the functionality of individual devices through a number of technological advances.
Our business depends upon the microelectronics manufacturers’ capital equipment expenditures. Manufacturers’ expenditures in turn depend on the current and anticipated market demand for products that use microelectronic devices. The microelectronics industry is cyclical in nature and experiences periodic downturns. Microelectronics manufacturers require equipment suppliers to take an increasingly active role in meeting the manufacturers’ technology development and capital productivity requirements. Equipment suppliers satisfy this requirement by developing and supporting products and processes required to address the new trends in microelectronics manufacturing. These trends include development of smaller geometries, transition to new materials, migration to larger wafers and wafer level packaging (the technology of packaging an integrated circuit at wafer level).
As estimated by Gartner in September 2011, purchases of semiconductor equipment by microelectronics manufacturers totaled $32 billion in calendar 2010. Based upon the Gartner forecast in September 2011, spending on semiconductor equipment is expected to increase by 9% to $35 billion in calendar 2011 and decline by 20% from calendar 2011 to $28 billion in calendar 2012.
Batch Spray Processing Systems . Our batch spray processing systems, which include the ZETA ® and MERCURY ® Spray Cleaning Systems, are sophisticated SC systems that remove unwanted films and contaminants from the surface of semiconductor wafers at various stages in the microelectronic device fabrication process. Multiple cassettes that contain up to 27 wafers each are placed onto a turntable inside the system’s process chamber. As the turntable rotates, dispense ports apply a chemical spray to the wafers’ surfaces to dissolve and remove the undesirable films and contaminants. After chemical application, ultra pure water is sprayed on the wafer surfaces to rinse away the chemicals. Multiple chemical and rinse steps may be employed depending on the customer’s specific application. The process sequence is completed with a drying step where a flow of nitrogen into the chamber dries the wafers and the chamber. Our control system and chemical mixing manifold allow the user to define, control and monitor a variety of chemical mixtures, temperatures and sequences. This enables the user to rapidly develop new processes and utilize the systems for multiple applications.
Our batch spray systems achieve state-of-the-art performance and are well suited for applications that require removal of high levels of contamination, such as implanted photoresist and unreacted salicide metal. Through efficient mixing and use of chemicals and water packaged in a small product footprint, customers may realize lower operational costs using our batch spray systems than with competing systems. ZETA ® Systems are differentiated from our competition in that they dispense fresh chemicals during wafer processing as compared to wet bench systems that may use recirculated chemicals. Fresh chemical dispense leads to the lowest possible surface contamination levels, which is critical in the fabrication of advanced devices.
The ZETA ® System is a fully-automated batch spray processor currently available in configurations for both 200 and 300mm wafers. The ZETA ® System’s advanced process controls, process capability and automation are ideal for leading technology nodes, particularly from 90 nanometers (“nm”) to 32nm and below. Our ZETA ® products provide a reliable, automated environment to move wafers to and from the process chamber. This tool’s multi-chemical flow system allows for a wide range of chemical blend ratios. The system is also available in a lower cost semi-automated configuration capable of processing 150 or 200mm wafers.
Offered on ZETA ® and ORION ® Systems, our ViPR™ technology provides the industry with an all-wet non-ashing implanted resist strip process. Ashing is a method of stripping photoresist using an excited gas such as oxygen plasma, ozone or hydrogen-containing plasma. Ashing can cause surface damage and undesired material loss. ViPR™ provides a non-ashing alternative stripping methodology by raising the process chemistry temperature and reactivity higher than the traditional processes. The ViPR™ process is accomplished through FSI’s patented steam injection chemistry.
In 2008, ViPR™ technology was expanded to include stripping of unreacted metals for metal silicide process steps, most notably the nickel platinum silicide process which traditionally used hazardous aqua regia chemistry. Aqua regia (a mixture of nitric acid and hydrochloric acid) is also known to attack nickel platinum silicide degrading 45 and 32nm device performance. ViPR™ has demonstrated its ability to efficiently strip the unreacted metals without attacking the silicide layer.
The MERCURY ® System is a semi-automated batch spray processor designed for wafer sizes up to 200mm in diameter and process technologies through the 90nm node. The system has been widely adopted by the IC manufacturing industry, with nearly 1,000 systems shipped to customers since its introduction in 1989. MERCURY ® Systems provide the benefits of high performance cleaning, etching and stripping with the added advantage of low capital cost and low cost of ownership and a small footprint.
Single Wafer Cleaning Systems . Our newest platform, the ORION ® Single Wafer Cleaning System, is for cleaning 300mm semiconductor wafers in a closed chamber, single wafer environment. The ORION ® platform uses FSI’s core technologies, including ViPR™ technology, in-line chemical blending, energetic aerosol chemical and water delivery, recipe driven process flexibility and closed chamber environmental control. Its small footprint modular design has the flexibility to enable clustering of different chamber types and the extendibility to add modules to increase maximum throughput. In addition to offering a highly productive and space efficient cleaning solution, the system’s unique closed chamber permits control of the environment in which the wafer is processed. Benefits include elimination of water marks, reduction of oxidation and related material loss, prevention of galvanic corrosion of metal film stacks, and the use of our proprietary ViPR™ technology to strip implanted photoresist and salicide metal residues.
Since its introduction in 2008, ORION ® Systems have proven their ability to enable BEOL copper / low-k interconnect cleans and have been accepted for 45nm, 32nm and 28nm manufacturing. ORION ® Systems are also currently being used in 22nm development activities.
CryoKinetic Processing Systems . Our ANTARES ® CryoKinetic Cleaning System is a fully automated, single wafer cleaning platform designed for 200 and 300mm wafers. CryoKinetic cleaning is a physical energy transfer process used to remove non-chemically bonded particles from the surface of a microelectronic device. These systems offer a field-proven history of removing surface particle defects and improving customer yields. The ANTARES ® System uses an all-dry non-chemically reactive method for removing defects from all surface types from the beginning to the end of the device manufacturing process. Of particular benefit to our customers is its inherent compatibility with new device materials and smaller device features.
CryoKinetic cleaning technology allows our customers to insert particle removal steps in the manufacturing line where previous or traditional wet cleaning and scrubber methods have been phased out due to their incompatibility with new materials and their propensity to cause watermark residue and surface charge defects. Implementing the CryoKinetic clean technology allows our customers to recover yield that would normally be lost where traditional approaches cannot be used, such as after in-line electrical testing of wafers. In-line testing creates debris on the wafer surface that cannot be removed with traditional cleaning methods due to the sensitivity of the exposed materials (copper and low-k dielectrics). The ANTARES ® System can eliminate defects created by in-line electrical probing so IC makers can collect electrical test data without scrapping wafers.
We believe the technical capabilities of the ANTARES ® System extend beyond current technology nodes and may result in increased customer acceptance due to the limitations of wet scrubbing methods.*
Immersion Processing Systems . Immersion cleaning systems are used to clean silicon wafers by immersing wafers in multiple tanks filled with process chemicals. These systems enable the implementation of high performance isopropyl alcohol (“IPA”) assisted drying to meet the critical cleaning requirements for 90, 65, and 45nm technology nodes. Our MAGELLAN ® Immersion Cleaning System is a fully automated immersion cleaning product designed for either 200 or 300mm wafers at advanced technology nodes and is capable of multiple cleans, including critical clean, resist strip and etch. We believe this system compares favorably to competing systems through its process performance, flexibility, extendibility, and rapid cycle time in a footprint that is smaller than the leading competition when configured for specific applications. The MAGELLAN ® Immersion Cleaning System incorporates a portfolio of exclusive intellectual property, including our Surface Tension Gradient (STG ® ) rinse/dry technology, SymFlow ® etch technology, ozone oxide re-growth technology, and narrow-gate-compatible MegaLens™ Acoustic Diffuser megasonic cleaning technology. The MAGELLAN ® System is qualified for several processes including FEOL critical clean, FEOL photoresist strip and post-ash clean, as well as oxide etch and nitride etch.
Resist Processing Systems . Our POLARIS ® Microlithography System is used to deposit polyimide resist and photoresist, light-sensitive, etch-resistant materials used to transfer an image to the surface of a silicon wafer, or similar material wafer, and then bake, chill and develop the deposited material after exposure. We are focused on providing cost effective solutions to our existing base of POLARIS ® System customers and for specialized markets, including wafer level packaging, micro-electromechanical systems, and thin film media storage devices. Through our POLARIS ® Refresh Program™, in which customers can purchase pre-owned, certified POLARIS ® clusters (an integrated environmentally isolated manufacturing system consisting of process, transport, and cassette modules mechanically linked together) made of both new and/or re-manufactured modules. This allows customers to add capacity for a lower capital investment. The ratio of new to pre-owned modules is based on customer expectations and the availability of used modules. These systems are able to accommodate a variety of processes and can be purchased in a new configuration or a system can be reconfigured and upgraded to match previously installed configurations.
Spare Parts and Service
We offer system and subsystem upgrade packages, spare part kits, individual spare part components, robot refurbishment and replacement, and support services that provide product and process enhancements to extend the life of previously purchased and installed systems. Our customer service and process engineers assist and train customers worldwide to perform preventive maintenance on, and to service, our equipment. In addition, our process engineering groups develop process applications to expand the capabilities of our equipment. These upgrade and spare part packages and support service programs enable our worldwide customers to realize a higher return on their capital investment. We sell a variety of process, service and maintenance programs. A number of customers have purchased maintenance contracts in which our service employees work at the customer’s facility to provide process, service and maintenance support for our equipment.
Backlog and Seasonality
Our backlog consists of customer purchase orders with delivery dates within the next 12 months. Our backlog was $18.0 million at fiscal 2011 year-end and $16.0 million at fiscal 2010 year-end. Approximately 61% of our backlog at fiscal 2011 year-end was comprised of orders from two customers. Approximately 46% of our backlog at fiscal 2010 year-end was comprised of orders from two other customers. All orders are subject to cancellation by the customer and in some cases a penalty provision could apply to a cancellation.
In fiscal 2011 and 2010, no significant purchase orders were canceled. Because of the timing and relative size of certain orders we receive and possible changes in delivery schedules and order cancellations, our backlog can vary from time to time so that backlog as of any particular date is not necessarily indicative of actual sales for any subsequent period. Our business is cyclical but is not seasonal to any significant extent.
Research and Development
We believe that our future success depends in large part on our ability to enhance and advance, in collaboration with our customers and other equipment and materials manufacturers, our existing SC product lines to meet the changing needs of microelectronics manufacturers. We believe that industry trends, such as the use of smaller circuit geometries, the increased use of larger substrates and manufacturers’ increased desire for integrated processing equipment, will make highly automated and integrated systems, including single substrate processing systems, more important to customers. For assistance in our development efforts, we maintain relationships with our customers and industry consortium, who help identify and analyze industry trends and assess how our development activities meet the industry’s advanced technology needs.
Our current research and development programs are focused on creating new processes and technologies for cleaning substrates without damaging the smaller patterned features being used for the most advanced IC devices. We are also conducting programs to increase process control and flexibility through monitoring and software management systems and process automation, robotics automation in the cleanroom, and integration of our product offerings with other suppliers’ products. Each of these programs involves collaboration with customers and other equipment manufacturers to ensure proper machine configuration and process development to meet industry requirements.
We maintain an 8,000-square-foot, state-of-the-art demonstration and process development laboratory for our SC business at our Chaska, Minnesota facility. In addition, we lease 6,000 square feet of laboratory and office space in Allen, Texas for demonstration of our POLARIS resist processing products.
Expenditures for research and development, which are expensed as incurred, during fiscal 2011 were approximately $12.8 million, representing 13.2% of total sales. Expenditures for research and development during fiscal 2010 were approximately $12.7 million, representing 14.0% of total sales, and expenditures for research and development during fiscal 2009 were approximately $14.7 million, representing 29.1% of total sales.
We expect to continue to make substantial investments in research and development.* We also recognize the importance of managing product transitions successfully, as the introduction of new products could adversely affect sales of existing products.
Marketing, Sales and Support
We market our products worldwide to manufacturers of microelectronic devices. Our marketing and sales efforts are focused on building long-term collaborative relationships with our customers. These efforts are supported by marketing, sales, and service personnel, along with applications engineers. Our worldwide teams work collaboratively with individual IC manufacturers, in FSI process laboratories and at customer sites, to integrate FSI developed products and process innovations into customer process flows and optimize them according to customer priorities.
During fiscal 2011, we directly sold and serviced our products in North America, Europe and the Asia Pacific region, and through Apprecia in Japan.
By providing a full portfolio of direct support services, we are able to develop stronger relationships with our customers who continue to show greater interest in expanding beyond their current use of our traditional spray cleaning technologies to include new FEOL and BEOL applications for batch and single wafer spray, as well as employing our advanced immersion and CryoKinetic technologies. Our improved and extensive regional support contributes to the continued success with foundry and memory device producers resulting in FSI products being used in advanced 45nm, 32nm and 28nm production, as well as 22nm and 14nm development activity.
Manufacturing, Raw Materials and Suppliers
We maintain manufacturing facilities in Chaska, Minnesota and Allen, Texas. We typically assemble our products and systems from components and prefabricated parts manufactured and supplied by others, including process controllers, robots, integrated circuits, power supplies, stainless steel pressure vessels, chamber bowls, valves and relays. Certain items manufactured by third parties are custom-made to our specifications. Typically, final assembly and systems tests are performed by our manufacturing personnel. Quality control is maintained through quality assurance programs with suppliers, incoming inspection of components, in-process inspection during equipment assembly, and final inspection and operation of manufactured equipment prior to shipment. We have a company-wide quality program in place, utilizing many of the key processes developed when we received ISO 9001 certification in 1994, ISO 9000:2000 certification in 2003 and ISO 14001:2004 certification in 2003 (which certifications expired in November 2008 with respect to ISO 9001 and ISO 9000:2000, and April 2009 with respect to ISO 14001:2004, when we decided to stop paying the required maintenance fee).
Certain components and subassemblies included in our products are obtained from a single supplier or a limited group of suppliers to ensure overall quality and delivery timeliness. We purchased approximately 20% of our fiscal 2011, approximately 23% of our fiscal 2010 and approximately 25% of our fiscal 2009 inventory purchases from two suppliers. Although we seek to reduce dependence on sole and limited-source suppliers, disruption or termination of certain of our inventory sources could have a temporary adverse effect on our operations. We believe that alternative sources could be obtained and qualified to supply these products, if necessary, but that production delays would likely occur in some cases.* Further, a prolonged inability to obtain certain components could have an adverse effect on our operating results, delay scheduled deliveries and damage our customer relationships.*
Competition
The semiconductor equipment industry is very competitive and marked by continuous technological challenges. Each of our products competes in markets defined by the particular IC fabrication process it performs. Significant competitive factors in the equipment market include system price, which encompasses total cost of ownership, quality, process performance, reliability, flexibility, extendibility, process or tool of record, and customer support.
We believe that once a device manufacturer 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.
Many of our established competitors have greater financial, engineering, research, development, manufacturing, marketing, service and support resources. To remain competitive, we must invest in research and development, marketing, customer service and support programs, and also manage our operating expenses. We cannot ensure that we will have sufficient resources to continue to make these investments or that our products will continue to be viewed as competitive as a result of technological advances by existing or new competitors or due to changes in semiconductor technology.
Our products compete with, among others, the products of DaiNippon Screen Manufacturing Co. Ltd., Lam Research, SEMES Co., Applied Materials, Inc., Tokyo Electron Ltd. and several smaller companies. In addition, we compete with various small equipment refurbishment, equipment maintenance and spare parts providers.
CEO BACKGROUND
James A. Bernards, age 65, has served as a director of FSI since July 1981. Since June 1993, Mr. Bernards has been President of Facilitation, Inc., a provider of business and financial consulting services. Mr. Bernards was President of the accounting firm of Stirtz, Bernards & Company from May 1981 to June 1993. Since 1986, Mr. Bernards has been President of Brightstone Capital, Ltd., a venture capital fund manager.
The Board has concluded that Mr. Bernards is qualified to serve as a Director of the Company because of his extensive involvement as a consultant and director of semiconductor supply companies since 1973. He was a practicing CPA from 1973 to 1993 and has been a director of six public companies and several private companies.
Donald S. Mitchell, age 56, was named President and Chief Executive Officer of FSI in December 1999, appointed a director in March 2000 and became Chairman of the board on January 23, 2002. From its formation in 1998 until December 1999, he was President of Air Products Electronic Chemicals, Inc., a division of Pennsylvania-based Air Products and Chemicals, Inc. From 1991 to 1998, he served as President of Schumacher, Inc., a leading global chemical equipment and services supplier to the semiconductor industry. Mr. Mitchell served as the 1999-2000 Chairman of the Board of Directors of Semiconductor Equipment and Materials International (“SEMI”), a leading global industry trade association.
The Board has concluded that Mr. Mitchell is qualified to serve as a Director of the Company given his 33 years’ experience in manufacturing, marketing, sales, development and executive management in semiconductor materials and equipment businesses, as well as his former involvement with the global trade association (SEMI) as both director and chairman and his extensive experience in leading and managing semiconductor-related technology organizations.
Stan K. Yarbro , age 61, has served as a director of FSI since August 2011. He has held technical, management and executive positions in the semiconductor equipment industry for over 25 years. Since 2004, Dr. Yarbro has been employed at Varian Semiconductor Equipment Associates, Inc., a leading supplier of implant technology and equipment to the semiconductor industry, most recently as Executive Vice President of Worldwide Field Operations. From 1997 to 2004, Dr. Yarbro held several management positions at KLA Tencor Corporation, including Group Vice President of Worldwide Field Operations. From 1994 to 1997, Dr. Yarbro was President of Park Scientific, a venture-funded supplier of scanning probe microscopes. Dr. Yarbro has previously served on the board of public and private companies.
The Board has concluded that Dr. Yarbro is qualified to serve as a Director of the Company given his executive management experience in the semiconductor equipment industry, demonstrating a solid understanding of the key technical, management and financial drivers of this industry. Dr. Yarbro has experience serving as a director for other public companies and through his worldwide field operations responsibilities at Varian and KLA has an experienced-based understanding of Asian culture and business practices. His academic background includes a B.S. in Chemistry as well as a Ph.D., in Analytical Chemistry.
Terrence W. Glarner, age 68, has served as a director of FSI since October 1988. Since February 1993, Mr. Glarner has been President of West Concord Ventures, Inc., a venture capital company. From 1982 to February 1993, Mr. Glarner was President of North Star Ventures, Inc. and North Star Ventures II, Inc., two venture capital funds. Mr. Glarner is also a director of Aetrium, Inc. and NVE Corporation.
The Board has concluded that Mr. Glarner is qualified to serve as a Director of the Company because of his 35-year career as a venture capitalist; serving on numerous company boards, private and public; as well as his academic background which includes both Juris Doctorate and Chartered Financial Analyst (CFA) degrees.
David V. Smith, age 67, has served as a director of FSI since December 2005. From January 2006 to April 2008, when the company was sold, Mr. Smith was President, Chief Executive Officer and Director of GlobiTech Holding Company, a privately-held epitaxial services company based in Sherman, Texas. Mr. Smith retired as the President of TECH Semiconductor Singapore Pte. Ltd. (“TECH Semiconductor”) in June 2002. TECH Semiconductor is a joint venture DRAM memory chip manufacturing company formed by Texas Instruments, the Economic Development Board of Singapore, Canon and Hewlett-Packard. Prior to joining TECH Semiconductor, Mr. Smith served in a variety of positions with Texas Instruments, including the Managing Director of Texas Instruments Singapore and the Deputy Worldwide Memory Operations Manager of Texas Instruments Malaysia, Bipolar Operations Manager of Texas Instruments Malaysia and Discrete Operations Manager. Mr. Smith was Texas Instruments’ Korea’s Manager from 1978 to 1980.
The Board has concluded that Mr. Smith is qualified to serve as a Director of the Company given his strong background in the semiconductor equipment industry, serving as President of TECH Semiconductor Singapore Pte. Ltd. and his semiconductor industry and international experience serving as Managing Director of Texas Instruments Singapore and Texas Instruments Malaysia.
None of the directors or the nominees is related to one another or to any of our executive officers. The Board has determined that each of Messrs. Bernards, Glarner, Smith and Yarbro is independent as that term is defined under the NASDAQ Global Market listing standards.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
Our business depends upon microelectronics manufacturers’ capital equipment expenditures. Manufacturers’ expenditures in turn depend on the current and anticipated market demand for products that use microelectronic devices. The microelectronics industry is cyclical in nature and experiences periodic downturns. Despite microelectronic industry trends, equipment suppliers like FSI are required to invest in research and development to produce products that enable the next generation device production. Trends in the microelectronics industry require that semiconductor manufacturers work with the supplier in the development of smaller geometries, the transition to new materials, migration to larger wafers and wafer level packaging.
Fiscal 2011 represented a year of transition from batch to single wafer products. This transition has been occurring over several years because of the increased use of larger substrates (300mm), increased use of integrated process equipment and a desire by microelectronics manufacturers to shorten cycle time by processing single wafer lots (primarily for logic and other application-specific devices). In fiscal 2011, over 50 percent of FSI’s orders were for our ANTARES ® and ORION ® single wafer products, and the single wafer products’ percentage contribution to total revenue is expected to increase further in fiscal 2012.* We expected operating margins would come under pressure as we made the investments required to gain broader market adoption of both our ORION ® and ANTARES ® single wafer products. We did not anticipate that global economic concerns, and to a much lesser extent the Japanese earthquake, would lead to a pause in capacity and technology investments for many of our customers. In response, we believe we made appropriate adjustments to our plans as events unfolded, including limited hiring and tighter controls on variable costs. However, we remained focused on completing strategic product evaluation programs.
During the first half of fiscal 2011, in anticipation of growing ORION ® and ANTARES ® production orders, we made investments to increase our manufacturing integration and checkout capacity. This involves the integration of modules to complete a system and to run wafers through the system to check out the electromechanical systems for these products. In parallel, we continued to make progress toward reducing the manufacturing cycle time and lowering the overall production cost of these products. We also fortified our procurement and manufacturing engineering organization and increased our outsourcing in an effort to secure other cost reductions.
During the second half of fiscal 2011, we ramped up our ORION ® production levels, resulting in a significant inventory investment in anticipation of evaluation system acceptances and related follow-on orders. However, due to a delay in the expected production increase at advanced technology nodes by several customers and order-specific tool configuration changes, the shipment and revenue recognition for several ORION ® systems was delayed to fiscal 2012.We expect to utilize this inventory to fill both existing and anticipated orders as customers increase their leading edge production capacity in 2012.* We anticipate a meaningful increase in revenue contribution from the ORION ® product in 2012.*
In fiscal 2011, we were able to more than double the number of ANTARES ® systems shipped as compared to 2010. As device producers emphasize yield improvement for leading edge manufacturing processes, we expect a further increase in ANTARES ® unit shipments in fiscal 2012.*
From a cost control perspective, we limited our staffing investments to recruiting and training manufacturing and field support personnel required to increase production capacity and to support product evaluation and product installation programs. Our engineering, research and development resources focused on supporting the evaluation programs, applications development and product cost reduction activities. During the year we also upgraded our IT systems to support global growth and improve our efficiency.
Our 2012 goals include expanding the applications for which our products can be used by existing and new customers, continuing to reduce product cost and manufacturing cycle time and improving our financial performance leverage.
Results of Operations
Sales Revenue and Shipments
Fiscal 2011 sales revenue increased to $96.9 million as compared to $91.0 million in fiscal 2010. The increase related to an increase in shipments from $91.1 million in fiscal 2010 to $97.2 million in fiscal 2011 associated with improved single wafer product sales related to the shift in the industry from batch to single wafer products. Fiscal 2010 sales revenue increased to $91.0 million as compared to $50.5 million in fiscal 2009. The increase in sales revenue in fiscal 2010 related to an increase in shipments from $47.8 million in fiscal 2009 to $91.1 million in fiscal 2010 associated with improved industry and overall global economic conditions.
Based upon our revenue recognition policy, certain shipments to customers are not recognized until customer acceptance. Therefore, depending on timing of shipments and customer acceptances, there are time periods where shipments may exceed sales revenue or due to timing of acceptances, sales revenue may exceed shipments.
International sales were $55.8 million for fiscal 2011, representing 58% of total sales during fiscal 2011, $58.1 million for fiscal 2010, representing 64% of total sales during fiscal 2010, and $35.8 million for fiscal 2009, representing 71% of total sales during fiscal 2009. The decrease in fiscal 2011 international sales as compared to fiscal 2010 related to decreases in Asia, partially offset by increases in Europe. The increase in fiscal 2010 international sales as compared to fiscal 2009 related to increases in all regions associated with improved industry conditions. See Note 12 of the Notes to Consolidated Financial Statements for additional information regarding our international sales.
We ended fiscal 2011 with a backlog of approximately $18.0 million as compared to $16.0 million at the end of fiscal 2010. Backlog consists of orders with delivery dates within the next 12 months for which a customer purchase order has been received. Because of the timing and relative size of orders and the possibility of cancellations or customer delays, backlog is not necessarily indicative of sales for future periods.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the geographic and product mix; initial product placement discounts; utilization of manufacturing capacity; and the competitive pricing environment.
Gross margin as a percentage of sales was 41.6% for fiscal 2011 as compared to 47.2% for fiscal 2010 and 32.5% for fiscal 2009. The decrease in gross margin from fiscal 2010 to fiscal 2011 was primarily related to a change in product mix, and costs associated with product evaluation programs and, to a lesser extent, an increase in warranty expense. The decrease was partially offset by improved manufacturing capacity utilization and a decrease in discretionary compensation from $375,000 in fiscal 2010 to $77,000 in fiscal 2011 related to lower operating income in fiscal 2011 as compared to fiscal 2010. The increase in gross margin from fiscal 2009 to fiscal 2010 was due primarily to improved manufacturing utilization as a result of higher production and shipment levels. The increase was also due to product mix, reduced warranty claims in fiscal 2010 and $604,000 of severance expense recorded in fiscal 2009. The improvements were partially offset by $375,000 of discretionary compensation expense in fiscal 2010. There was no discretionary compensation expense in fiscal 2009.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $19.3 million, or 19.9% of total sales, in fiscal 2011, as compared to $17.7 million, or 19.4% of total sales, in fiscal 2010 and $19.5 million, or 38.6% of total sales, in fiscal 2009. The increase in selling, general and administrative expense in fiscal 2011 as compared to fiscal 2010 is due to a 22% increase in service personnel to support concurrent product evaluation programs, partially offset by a decrease in discretionary compensation from $1,250,000 in fiscal 2010 to $341,000 in fiscal 2011 related to lower operating income in fiscal 2011 as compared to fiscal 2010. The decrease in selling, general and administrative expenses in fiscal 2010 as compared to fiscal 2009 related primarily to the cost reduction initiatives associated with reductions in headcount and salary reductions taken in fiscal 2009 and improved service technician utilization rates. Severance costs included in selling, general and administrative expense were $1.1 million in fiscal 2009. The decrease of selling, general and administrative expenses in fiscal 2010 as compared to fiscal 2009 was partially offset by discretionary compensation expense of $1,250,000 in fiscal 2010 and higher non-cash stock compensation expense of $703,000 in fiscal 2010 compared to $301,000 in fiscal 2009. The higher non-cash stock compensation expense in fiscal 2010 was due to vesting under our employees stock purchase plan and the increase in our stock price. There was no discretionary compensation expense in fiscal 2009.
Research and Development Expenses
Research and development expenses for fiscal 2011 were $12.8 million, or 13.2% of total sales, as compared to $12.7 million, or 14.0% of total sales, in fiscal 2010 and $14.7 million, or 29.1% of total sales, in fiscal 2009. The increase in research and development expenses in fiscal 2011 as compared to fiscal 2010 related primarily to higher expenses associated with a 10% increase in personnel. This increase was offset by a decrease in discretionary compensation from $875,000 in fiscal 2010 to $132,000 in fiscal 2011 related to lower operating income in fiscal 2011 as compared to fiscal 2010. The increase was also offset by a decrease in non-cash stock compensation expense from $604,000 in fiscal 2010 to $202,000 in fiscal 2011. The decrease in fiscal 2010 as compared to fiscal 2009 related primarily to the cost reduction initiatives associated with reductions in headcount and salary reductions taken in fiscal 2009 and $875,000 of severance cost in fiscal 2009. The decrease was partially offset by discretionary compensation expense of $875,000 in fiscal 2010 and higher non-cash stock compensation expense of $604,000 in fiscal 2010 as compared to $129,000 in fiscal 2009. The higher non-cash stock compensation expense in fiscal 2010 was due to vesting under our employees stock purchase plan and the increase in our stock price. There was no discretionary compensation expense in fiscal 2009. The majority of our research and development resources are focused on broadening the applications capabilities of, and supporting demonstrations and evaluations for our products and product cost reduction efforts.
Gain on Sale of Marketable Securities
We recorded a gain on sale of marketable securities of $54,000 in fiscal 2010 and $110,000 in fiscal 2009 associated with ARS redemptions. See further discussion related to ARS transactions at Note 16 of Notes to Consolidated Financial Statements.
Income Tax Benefit
We recorded income tax benefit of $4,000 in fiscal 2011, primarily related to a refundable Minnesota research and development credit, which was partially offset by foreign income tax expense. We recorded income tax benefit of $63,000 in fiscal 2010, primarily related to the reversal of uncertain tax positions as a result of a lapse of the applicable statue of limitations. We recorded an income tax benefit of $84,000 in fiscal 2009 related primarily to research and development credit utilization in lieu of bonus depreciation and the reversal of uncertain tax positions as a result of a lapse of the applicable statue of limitations. As of August 27, 2011 and August 28, 2010, we had $392,000 and $410,000, respectively, of liabilities recorded related to unrecognized tax benefits. Accrued interest and penalties on these unrecognized tax benefits were $30,000 and $50,000, as of August 27, 2011 and August 28, 2010, respectively. We recognize potential interest and penalties related to income tax positions, if any, as a component of provision for income taxes on the Consolidated Statements of Operations. Included in the liability balance as of August 27, 2011 are approximately $362,000 of unrecognized tax benefits that, if recognized, will affect our effective tax rate.
Our deferred tax assets on the balance sheet as of August 27, 2011 have been fully reserved for with a valuation allowance. We assessed both positive and negative factors, including historical losses, projected taxable income and tax planning strategies and determined that there was not sufficient evidence at this time to reverse any portion of the valuation allowance. We will continue to evaluate the need to make adjustments to our valuation allowance based on anticipated future operating performance.
We are utilizing approximately $8.9 million of net operating loss carryforwards for fiscal 2011 federal income tax purposes. We had approximately $165.9 million of net operating losses at August 27, 2011 to be carried forward, which will begin to expire in fiscal 2019 through fiscal 2029, if not utilized. Of this amount, approximately $3.2 million is subject to Internal Revenue Code Section 382 limitations on utilization, which limits the amount that we can offset taxable income to approximately $1.4 million per year.
Net Income (Loss)
Net income was $8.3 million in fiscal 2011 as compared to net income of $13.0 million in fiscal 2010 and net losses of $17.6 million in fiscal 2009.
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $22.6 million as of August 27, 2011, a decrease of $15.7 million from the end of fiscal 2010. The net decrease was primarily due to $14.8 million cash used in operations and $2.2 million of capital expenditures. The decrease was net of $0.7 million of proceeds from the issuance of other common stock under our stock plans.
As of August 27, 2011, we had investments in ARS reported at a fair value of $1.9 million after reflecting a $0.1 million other than temporary impairment against $2.0 million par value. The other than temporary impairment was recorded in fiscal 2008. We value our ARS using a mark-to-model approach that relies on discounted cash flows, market data and inputs derived from similar instruments. This model takes into account, among other variables, the base interest rate, credit spreads, downgrade risks and default/recovery risk, the estimated time required to work out the disruption in the traditional auction process and its effect on liquidity, and the effects of insurance and other credit enhancements.
The ARS we hold are marketable securities with long-term stated maturities for which the interest rates are reset every 28 days through an auction process. The auctions have historically provided a liquid market for these securities as investors historically could readily sell their investments at auction. Due to the liquidity issues experienced in global credit and capital markets, the ARS held by us have experienced multiple failed auctions, beginning on February 19, 2008, as the amount of securities submitted for sale has exceeded the amount of purchase orders. During the second quarter of fiscal 2008, we reclassified $8.5 million of ARS from current marketable securities to long-term marketable securities on the consolidated balance sheet due to difficulties encountered at auction and the conditions in the general debt markets, creating uncertainty as to when successful auctions may be reestablished. During fiscal 2008, $0.8 million of ARS were partially redeemed. An additional $3.0 million were redeemed in fiscal 2009 and $0.9 million were redeemed in fiscal 2010. During fiscal 2011, $1.8 million par value of ARS were sold at their net book value of $1.7 million.
All of the ARS held by us continue to carry investment grade ratings and have not experienced any payment defaults. The $2.0 million par value ARS held by us are backed by student loans and are collateralized, insured and guaranteed by the United States Federal Department of Education and are classified as long-term. ARS that did not successfully auction reset to the maximum interest rate as prescribed in the underlying indenture and the issuers of all of our holdings continue to be current with their interest payments. If uncertainties in the credit and capital markets continue, these markets deteriorate further or any ARS we hold are downgraded by the rating agencies, the Company may be required to recognize additional impairment charges.
In addition, these ARS may not provide the liquidity to us as we need it, and it could take until the final maturity of the underlying notes (from 31 to 32 years) to realize our investments’ recorded value. Currently, there is a very limited market for any of these securities and future liquidations at this time, if possible, would likely be at a significant discount.
Accounts receivable increased by $4.3 million from the end of fiscal 2010. The increase in trade accounts receivable related primarily to the timing in shipments from 41% in the last month of the fourth quarter of fiscal 2010 to 73% in the last month of the fourth quarter of fiscal 2011. Shipments made in the final month of a quarter generally are not collected during that quarter. Trade receivables will fluctuate quarter to quarter depending on individual customers’ timing of ship dates, payment terms and cash flow conditions. In certain situations, extended payment terms may be granted to customers.
Inventory increased by approximately $22.5 million to $48.6 million at the end of fiscal 2011, as compared to $26.1 million at the end of fiscal 2010. The increase in inventory occurred in all categories, primarily related to our ORION ® and ANTARES ® system production increases. Inventory provisions were $8.0 million at August 27, 2011, as compared to provisions of $9.4 million at the end of fiscal 2010. The decrease related primarily to scrapping $3.4 million of obsolete inventory, partially offset by $2.0 million of additional reserves.
Trade accounts payable increased by approximately $2.8 million to $11.2 million as of August 27, 2011, as compared to $8.4 million at the end of fiscal 2010, related to the timing of inventory receipts and vendor payments.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Industry
In its June 2012 semiconductor forecast report, Gartner is now forecasting calendar 2012 semiconductor revenue to increase 4.0 percent from the calendar 2011 level to $319 billion (compared to the $316 billion revenue amount that it forecasted in March 2012) after growing 1.8 percent in 2011. The calendar 2012 revenue growth is expected to be led by mobile consumer devices and the broader adoption of solid state memory. We believe that power management continues to be the key driver in the move to mobility, increasing the focus on leading edge 32/28 nanometer production capacity.
From a semiconductor equipment perspective, Gartner, in its June 2012 report, revised its calendar 2012 spending forecasts from that made in March of 2012. Gartner is now forecasting calendar 2012 capital equipment spending to decrease 7.1 percent from the calendar 2011 level as compared to an 11.6 percent decline for the same period forecasted in March 2012. Gartner is forecasting capital equipment spending to increase 9.3 percent in calendar 2013 from the calendar 2012 level.
In March 2012, Gartner reported that it estimated that the surface conditioning market exceeded $2.7 billion in calendar 2011 and that it is growing at a faster rate than the total semiconductor equipment market. We are capable of addressing a substantial portion of the surface conditioning market with our three core products, including ZETA ® , ANTARES ® and ORION ® systems. According to Gartner, the single wafer cleaning segment of the market, served with our ORION and ANTARES products, now represents over 70 percent or $1.8 billion of the total surface conditioning market.
Impairment of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An asset or asset group is considered impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. If estimated fair value is less than the book value, the asset is written down to the estimated fair value and an impairment loss is recognized.
If we determine that the carrying amount of long-lived assets may not be recoverable, we measure any impairment based on the fair value of the long-lived assets. Net long-lived assets amounted to $17.0 million as of May 26, 2012.
In the first nine months of fiscal 2012 we generated positive cash flows from operations. If our long-term future plans do not yield positive cash flows in excess of the carrying amount of our long-lived assets, we may incur future impairments of those assets.
Product Warranty Estimation
We record a liability for warranty claims at the time of sale. The amount of the liability is based on the trend in the historical ratio of claims to sales, releases of new products and other factors. The warranty periods for new equipment manufactured by us typically range from six months to two years. Special warranty reserves are also accrued for major rework campaigns. Although management believes the likelihood to be relatively low, claims experience could be materially different from actual results because of the introduction of new, more complex products; competition or other external forces; manufacturing changes that could impact product quality; or as yet unrecognized defects in products sold.
Inventory Provisions Estimation
We record provisions for inventory shrinkage and for potentially excess, obsolete and slow moving inventory. The amounts of these provisions are based upon historical loss trends, inventory levels, physical inventory and cycle count adjustments, expected product lives, forecasted sales demand and recoverability. Results could be materially different if demand for our products decreased because of economic or competitive conditions, length of the industry downturn, or if products become obsolete because of technical advancements in the industry or by us. In the first nine months of fiscal 2012, we recorded approximately $2.2 million associated primarily with engineering design changes and due to additional reserves associated with our PSS product line. In the first nine months of fiscal 2011, we recorded approximately $1.7 million of additional inventory provisions associated primarily with engineering design changes.
Allowance for Doubtful Accounts Estimation
Management must estimate the uncollectibility of our accounts receivable. The most significant risk is a sudden unexpected deterioration in financial condition of a significant customer who is not considered in the allowance. Management specifically analyzes accounts receivable and analyzes historical bad debts, customer concentrations, customer credit-worthiness, current economic trends and changes in our customer payment terms when evaluating the adequacy of the allowance for doubtful accounts. Results could be materially impacted if the financial condition of a significant customer deteriorated and related accounts receivable are deemed uncollectible. Accounts receivable are determined to be past due based on payment terms and are written off after management determines that they are uncollectible.
Stock-Based Compensation
We utilize the Black-Scholes option-pricing model to estimate fair value of each award on the date of grant. The Black-Scholes model requires the input of certain assumptions that involve management judgment. Key assumptions that affect the calculation of fair value include the expected life of stock-based awards and our stock price volatility. Additionally, we expense only those shares expected to vest. The assumptions used in calculating the fair value of stock-based awards and the forfeiture rate of such awards reflect management’s best estimates. However, circumstances may change and additional data may become available over time, which could result in changes to these assumptions that materially impact the fair value determination of future awards or their estimated rate of forfeiture. If factors change and we use different assumptions in future periods, the compensation expense recorded may differ significantly from the expense recorded in the current period.
Income Taxes
Our effective income tax rate is based on income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. We have established valuation allowances for all operating losses to reflect the uncertainty of our ability to fully utilize these benefits given the limited carryforward periods permitted by the various jurisdictions. The evaluation of the realizability of our net operating losses requires the use of considerable management judgment to estimate the future taxable income for the various jurisdictions, for which the ultimate amounts and timing of such estimates may differ. We assessed both positive and negative factors and determined that there was not sufficient evidence at this time to reverse any portion of the valuation allowance. We will continue to evaluate the need to make adjustments to our valuation allowance based on anticipated future operating performance.
Significant judgment is required in determining unrecognized tax benefits. We have established accruals for unrecognized tax benefits using management’s best judgment and adjust these accruals as warranted by changing facts and circumstances. A change in our accruals in any given period could have a significant impact on our results of operations for that period. The accrual for unrecognized benefits decreased by $82,000 for the first nine months of fiscal 2012 and increased by $37,000 for the nine months of fiscal 2011.
Sales Revenue and Shipments
Sales revenue increased to $50.8 million for the third quarter of fiscal 2012 as compared to $25.6 million for the third quarter of fiscal 2011. This increase in sales revenue related to an increase in shipments from $22.9 million in the third quarter of fiscal 2011 to $52.1 million in the third quarter of fiscal 2012. Sales revenue increased to $102.5 million for the first nine months of fiscal 2012 as compared to $67.2 million for the first nine months of fiscal 2011. This increase in sales revenue related to an increase in shipments from $72.0 million in the first nine months of fiscal 2011 to $114.0 million in the first nine months of fiscal 2012. The increases in the fiscal 2012 periods as compared to the fiscal 2011 periods were primarily associated with increased ANTARES ® and ORION ® system sales, more than offsetting lower batch systems sales.
Based upon our revenue recognition policy, certain shipments to customers are not recognized until customer acceptance. Therefore, depending on the timing of shipments and customer acceptances, there are time periods where shipments may exceed sales revenue or sales revenue may exceed shipments.
International sales were $37.2 million, representing 73% of total sales, during the third quarter of fiscal 2012 and $15.8 million, representing 62% of total sales, during the third quarter of fiscal 2011. International sales were $78.6 million, representing 77% of total sales, during the first nine months of fiscal 2012 and $38.2 million, representing 57% of total sales, during the first nine months of fiscal 2011. The increase in international sales in the fiscal 2012 periods related to increased sales in Asia.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products sold; initial product placement discounts; utilization of manufacturing capacity; the competitive pricing environment; lower margins on initial product sales; and warranty and obsolescence charges.
Gross margin as a percentage of sales for the third quarter of fiscal 2012 was 40.9% as compared to 46.4% for the third quarter of fiscal 2011. Gross margin as a percentage of sales for the first nine months of fiscal 2012 was 37.8% as compared to 44.8% for the first nine months of fiscal 2011. The decrease in gross margins for fiscal 2012 periods was due primarily to changes in product mix, with sales of our ORION product representing a larger percent of total sales in the fiscal 2012 periods, and also due to increases in warranty expense.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5.7 million for the third quarters of fiscal 2012 as compared to $4.7 million in the third quarter of fiscal 2011. Selling, general and administrative expenses were $16.4 million for the first nine months of fiscal 2012 as compared to $14.3 million for the same period in fiscal 2011. The increases in the fiscal 2012 periods related to an increase in the number of service employees associated with the increase in equipment sales. In addition, the increase in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011 related to an increase in discretionary compensation expense of $326,000 in the third quarter of fiscal 2012 as compared to $31,000 in the third quarter of fiscal 2011.
Research and Development Expenses
Research and development expenses were $4.3 million for the third quarter of fiscal 2012 as compared to $3.2 million for the third quarter of fiscal 2011. Research and development expenses were $11.3 million for the first nine months of fiscal 2012 as compared to $9.3 million for the same period in fiscal 2011. The increase in the fiscal 2012 periods as compared to the fiscal 2011 periods related primarily to higher expense associated with increases in personnel and increased outside services related to several software and control system enhancement programs. In addition, the increase in the third quarter of fiscal 2012 as compared to the third quarter of fiscal 2011 related to an increase in discretionary compensation expense of $126,000 in the third quarter of fiscal 2012 as compared to $12,000 in the third quarter of fiscal 2011.
Impairment of Investment
We have an investment in Apprecia Technology, Inc. (“ATI”), our distributor in Japan. The historical carrying value of this investment accounted for under the cost method was $677,000. ATI is currently implementing certain restructuring strategies due to its current financial condition and general economic and semiconductor industry conditions in Japan. Based upon this, in addition to ATI’s recent operating performance, we performed an analysis of our investment and determined the investment was fully impaired. During the third quarter of fiscal 2012, we recorded a $677,000 impairment charge associated with our investment in ATI.
Income Taxes
We recorded an income tax expense of $44,000 in the third quarter fiscal 2012 and an income tax expense of $17,000 for the first nine months fiscal 2012 related primarily to foreign taxes and a refundable Minnesota research and development credit. We recorded an income tax expense of $6,000 in the third quarter fiscal 2011 and an income tax benefit of $1,000 for the first nine months fiscal 2011 related primarily to foreign taxes and a refundable Minnesota research and development credit.
Our net deferred tax assets on the balance sheet as of May 26, 2012 have been reserved for with a 99.8% valuation allowance. We assessed both positive and negative factors, including historical losses, projected taxable income and tax planning strategies and determined that there was not sufficient evidence at this time to reverse the valuation allowance. We will continue to evaluate the need to make adjustments to our valuation allowance based on anticipated future operating performance.
We have net operating loss carryforwards for federal income tax purposes of approximately $145.5 million, which will begin to expire in fiscal year 2019 through fiscal 2029 if not utilized. Of this amount, approximately $3.2 million is subject to Internal Revenue Code Section 382 limitations on utilization. This limitation is approximately $1.4 million per year.
Net Income
Net income was $10.0 million in the third quarter of fiscal 2012, as compared to a net income of $4.1 million in the third quarter of fiscal 2011. Net income was $10.7 million for the first nine months of fiscal 2012, as compared to a net income of $6.5 million for the first nine months of fiscal 2011.
Liquidity and Capital Resources
Cash and cash equivalents, restricted cash and long-term securities were approximately $51.0 million as of May 26, 2012, an increase of $28.4 million from the end of fiscal 2011. The increase related primarily to $30.8 million of cash generated from operations through higher earnings, accounts receivable collections, inventory management and $0.6 million from the issuance of common stock. The increase was partially offset by $3.4 million of capital expenditures, primarily related to investments in our applications laboratory and other general infrastructure programs.
As of May 26, 2012, we had investments in ARS reported at a fair value of $1.9 million after reflecting a $0.1 million other than temporary impairment against $2.0 million par value. The other than temporary impairment was recorded in fiscal 2008. The ARS we hold are marketable securities with long-term stated maturities for which the interest rates are reset every 28 days through an auction process. There were no redemptions of our ARS in the first nine months of fiscal 2012. These ARS may not provide the liquidity to us as we need it, and it could take until the final maturity of the underlying notes (from 30 to 31 years) to realize our investments’ recorded value. Currently, there is a very limited market for any of these securities and any liquidation at this time, if possible, would likely be at a discount.
Accounts receivable decreased by $0.9 million from $23.2 million at the end of fiscal 2011 to $22.3 million as of May 26, 2012. The decrease in accounts receivable, despite quarter-over-quarter revenue growth, related primarily to the timing of shipments and collection efforts. Accounts receivable will fluctuate from quarter to quarter, depending on individual customers’ timing of shipment dates and payment terms. In certain situations, extended payment terms may be granted to customers.
Inventory decreased $11.5 million to $37.1 million at May 26, 2012 from $48.6 million at the end of fiscal 2011. The decrease in inventory was related primarily to a decrease in finished goods and work-in-process inventory due to shipments in the third quarter of fiscal 2012 of $52.1 million and improved inventory management as we closed out several product evaluation programs. Inventory provisions were $9.2 million at May 26, 2012 as compared to provisions of $8.0 million at the end of fiscal 2011. The increase related primarily to $2.2 million of additional reserves related primarily to engineering design changes. There were also additional reserves associated with our PSS product line. The increase was partially offset by $1.0 million of scrapped inventory.
CONF CALL
Benno Sand - Executive Vice President, Business Development and Investor Relations
Thank you Kelly, and good afternoon. With me today is Don Mitchell, Chairman and Chief Executive Officer, and Pat Hollister, Chief Financial Officer. We will have a telephonic replay of this conference call available for the next several days. The phone number is 203-369-295. Investors also have an opportunity to listen to the conference call over the internet through Thomson CCBN's individual investor center. A webcast replay of this call will be available shortly after the call is completed and remains available for 30 days.
In compliance with Regulation FD, we have provided advance notice of this call, and the call is available to the public. Under the Securities Reform Act Safe Harbor provision, we will be making forward-looking statements during the call including expected first quarter fiscal 2009 financial performance.
Actual results may differ materially from those projected in the forward-looking statements. As you know, these statements involve various risks and uncertainties. Please refer to our press release from this afternoon and to our recently filed SEC documents, including the latest 10-K annual report and 10-Q quarterly report in which we discuss risk factors that could affect these forward-looking statements.
To begin the call, Don will summarize fourth quarter and fiscal 2008 performance, discuss current industry conditions, and review fiscal 2008 accomplishments and fiscal 2009 strategy. Pat will then provide a more detailed review of fiscal 2008 fourth quarter and full year financial results and our 2009 first quarter expectation. We will all be available for questions after the end of the call. Now let me turn the call over to John.
Don Mitchell - Chairman and Chief Executive Officer
Thank you Benno good afternoon everyone. While deteriorating economic and industry condition impacted our overall order level and financial performance in fiscal 2008, progress was made on many of the strategies that we rolled out at the beginning of the year. For example, from the financial perspective and through the effected cash management we generated one million of cash from operations. On the commercial side we should sell our data systems with our new high temperature ViPR technology the customers in Korea, Japan and Europe. On the development side we shift our first multi chamber single ViPR web system to a leading integrated circuit manufacture for using 32 nanometer note development. Industry conditions were weaker than anticipated in our fourth quarter as oversupply conditions in the memory segment and macroeconomic conditions to control on our customers. As a result of order delays from several customers during the quarter order came in at 13.6 million and revenue decreased to 14.1 million.
The protracted industry downturn led to our implementation of cost reduction in September including a reduction in our headcount by approximately 60 positions since the end of this third quarter representing 14% of our global workforce. In conjunction with the staff reduction we consolidated our European and US sales and service organization to better support our customers in these regions.
In addition we refocused our Texas and Chester Minnesota resources towards the product that we believe provides the most significant opportunity for near term revenue and future market share gains.
We anticipate that the cost reduction plan will result in 5 to 6 million of annual cost savings. We believe that our breakeven operating cash flow revenue level is 17 to 20 million. Across the achieving of these results is depended upon the overall gross margin rate and cash management. The cash reductions resulted in 2 million of severance and other restructuring charges.
In addition as a result of the subdued industry outlook we increased our reserves primarily related to inventory by 2.6 million. Since we have the finalized the cost reduction plan late in the fourth quarter we recorded these charges in the quarter. As a result of the lower fourth quarter revenue level and the charges that we recorded our fourth quarter net loss was 9.1 million with $0.40 per share, as compared to a net loss of 6.5 million or $0.21 per share in the fourth quarter of `07. The first quarter 2007 loss included 1.2 million of severance cost.
Overall fiscal 2008 orders were 70 million as compared to 93 million in the prior year. The year-over-year decline occurred primarily in the European and United States regions and for our products that are used to process 200 millimeter Silicon ViPRs. Total 2008 sales were 78 million as compared to a 116 million in 2007. The decrease in sales occurred in all regions. Our top three customers represented of total sales in fiscal ’08 as compared to 30% in '07. One of the customers was in the top three customers [31%] of total asset at the end of fiscal 2007 compared to 28% in '07. One of the customers are in the top three in both years. Our fiscal 2008 net loss was 13.6 million or $0.45 per share as compared to a loss of 14.6 million or $0.48 per share in the prior year.
In '08 we recorded 4.6 million of severance restructuring cost and increased reserves representing $0.15 per share. In fiscal '07 we recorded a 4.1 million or $0.13 per share asset impairment charge associated with our investment in Apprecia Tech a Japanese joint venture and 1.8 million or $0.6 per share of severance charges.
From an industry perspective in the past I would have provided this year and next years outlook for the semiconductor and equipment industry as forecasted by leading industry analyst along with my perspective based upon interactions with our customers. All within time there are very despaired opinion and forecast regarding our industry. Therefore, I believe there will be little volume providing the detail. While we do know is that the credit crunch, the decline in the value of many investments political uncertainty, and increasing our employment are all adversely impacting consumer confidence and technology spending. Many semiconductor manufacturers are aggressively reducing their production and factory utilization levels are declining. Some device manufacturers are shutting down most productive fabs and reconsolidation in joint ventures partner changes are rumored every week. Increasingly, device manufactures are adopting fab life or outsourcing philosophy. At a brighter note customer spending for technology advance must continues at a manageable pays. It appears that the decline in demand for our spare parts and services in borrowing, and for the most part our customers are focused on controlling their inventory level, while evaluating product that could provide productivity advantages from unit growth we accelerate. A point given the tech credit environment, customers have a preference to evaluate products or technology before they make a long term investment.
During our 35 year history we’ve managed a difficult industry conditions and we are prepared to make the strategic decision required to position us for success and global economic and industry conditions improve. As mentioned in our press release today, our Board of Directors authorized the repurchase of up to 2 million of company's common stock. The repurchases will be affected from time to time in transaction in the public market foreign private purchases. The timing and extent of repurchases will depend upon market condition, the trading price of shares and other factors and is subject to volume, price and timing under SEC rule 10b-18 and other applicable laws.
Given the uncertain industry outlook for 2009 we believe that the recent cost reduction and cash preservation activity were prudent.
In 2009 we are focusing our investment no other reduce rate on our strategic product development program including funding the ORION Single Wafer Wet product introduction and broadening the customer base for our Zeta ViPR technology. We will continue to offer customers our complete portfolio at safest conditioning and resist processing products. Should it become obvious that weak economy or industry conditions will persist well into 2009 and that our quarterly revenue run rate remain significantly below our breakeven level will manage our cost to a lower level.
Now I would like to turn the call over to Pat for more detailed review on the fourth quarter and full fiscal 2008 financial result and provide our expectation from the first quarter at fiscal 2009.
Patricia Hollister - Chief Financial Officer
Thank you Don. Good afternoon. International customers represented approximately 80% of orders in the fourth quarter of 2008 as compared to 78% in the prior year comparable period and 59% in the third quarter of '08.
For the year, international customers accounted for approximately 72% of all orders as compared to 70% in the prior year. Our gross profit margin will fluctuate from quarter-to-quarter and year to year depending on the geographic and product sales mix. Other factors that can impact gross margins are our manufacturing capacity utilization the usage of inventory that was previously written down in zero value and lower margin on initial product sales.
The fourth quarter 2008 gross margin were 26.3% as compared to 36.7% in the prior year comparable period and 61.5% in the prior quarter. 2008 fourth quarter gross margin included a $142,000 of severance costs and a $2.6 million increased in inventory reserve. The impact of these charges reduce our gross margins by 19.5 percentage point. Fiscal 2007 fourth quarter gross margin included a $150,000 of severance costs.
Fiscal 2008 gross margin were 42.1% as compared to 40.5 % in the prior year. The increase in gross margin was the result of our higher margin product mix offset by lower manufacturing capacity utilization and fourth quarter charges. Prior year gross margins included $300,000 of severance costs related cost.
SG&A expenses were $8 million for the fourth quarter of '08 as compared to $8.4 million in the prior year comparable period and $7.4 million in the third quarter of '08. Fiscal 2008 fourth quarter SG&A expenses included a $1.2 million of severance costs associated with the reduction in force and restructuring initiatives. The 2007 fourth quarter SG&A expenses included $700,000 of severance related costs.
Fiscal 2008 SG&A expenses is $29 million including $1.3 million of severance charges as compared to $34.5 million in'07. Fiscal 2007 full year severance costs was $900,000. The year-over-year decreased in SG&A expenses is primarily the result cost of reduction implemented in the second half of fiscal 2007 and the deterioration in industry conditions began.
Fourth quarter '08 ERD expenses were $5.2 million as compared to $5.8 in the prior year fourth quarter and $4.7 million in the third quarter of '08.
Fiscal 2008 fourth quarter ER&D expenses included $536,000 of severance cost. Prior year fourth quarter ER&D expenses included $400,000 of severance cost. Fiscal 2008 ER&D expenses were $90 million, including the $536,000 of severance cost, as compared to $24.1 million in 07. Fiscal 2007 ER&D expenses included $600,000of severance cost. The year-over-year decrease in ER&D expenses resulted from second half fiscal 2007 cost reduction. A significant portion of a 2008 ER&D resources were focused on broadening the applications capabilities of our product and supporting initial products placements at customers. In addition, we continue to developments our Orion Single Wafer Wet System.
Fourth quarter 2008 interest and other income net was $91,000 of expense as compared to $328,000 of income in the prior year comparable period and a $130,000 of income in the third quarter '08. Fiscal 2008 fourth quarter other income net included a $363,000 impairment charge associated with the auction-rate securities the company hold. I will discuss these investments in more detail later.
Fiscal 2008 interest and other income net was $726,000 of income as compared to $3 million of expense in 2007. The year-over-year change is primarily due to impairment charges a $4.1 million in fiscal 2007, associated with the restructuring of our ownership interest in our Japanese joint venture.
Now I briefly discuss this changes in key-balance sheet item from the end of fiscal '07 to the end of 2008. Our cash, restricted cash, cash equivalents and marketable securities represented $22.9 million of our total assets at the end of '08 as compared to $24.5 million at the end of '07. In 2008 we generated $994,000 of cash from operating activities as compared to using $4.1 million of cash in the prior year.
Our investment portfolio at the end of the fiscal 2008 included approximately $6.8 million at par of auction rate securities which are investments with contractual maturities between 5 to 35 years. These securities are classified as long term as they are not trading and conditions in the debt markets have reduced the likelihood that these securities will successfully auction in the short term.
During the fourth quarter, we recorded a $353,000 other than temporary impairment of these investments bringing the net value to $6.4 million. We recorded impairment charge in the fourth quarter since we have tendered approximately $3.1 million at par of our ARS holding in response to a conditional offer made by the insurer. Under the terms of the offers, if successful we would receive $0.94 on the dollar for the securities tendered. These auction-rate securities held are backed by student loans and are guaranteed by the United States Federal Department of Education.
In addition, as of fiscal '08 year end we had $900,000 of auction-rate securities related to manufacture housing which are collateralized by the principal housing contract trust associated with the related loans and are insured by third parties. These auctions for these securities was expanded of the original $1.5 million of manufacture housing ARS's 1.3 million has been redeemed including $700,000 in fiscal year end.
In addition, all auction rate securities held by us are rated by the major independent rating agencies either AAA or Aaa.
Account receivable decreased 8.9 to 9.6 million from the end of '07 to the end of '08. The decrease is primarily attributed to the decrease shipments in the fourth quarter of 2008 as compared to the fourth quarter of fiscal 2007. Inventory decrease $2.4 million, $27.2 million at the end of 2008 as compared to $29.6 million at the end of '07. The decrease in inventory was primarily due to the reduced shipment level and increase in reserves and inventory are implemented as part of our overall past preservation plan offset by the build of several awaiting systems in anticipation of future shipment.
I had counted the end of the year with 408 employees of certain contract representing a decrease in the 429 employee headcount level at the end of fiscal 2007. The September 2008 restructuring and reduction of those activities resulted in a reduction in our headcount of approximately 360 employees.
Best consideration of our year end backlog deferred revenue and anticipated first quarter order we are providing the following guidance; we expect first quarter 2009 orders be decrease $13 and $15 million, this is still the repeat of several follow on orders that are anticipated late in the quarter. We expect fourth quarter to be decrease $13 and $16 million achieving the high end of the revenue range a subject receiving purchase orders and obtaining kindly acceptance from customers.
Due to a change in our product mix a better factory utilization gross profit margins are expected to be decrease 40, 42% of revenue. We expect SG&A expenses to range from $6.3 million to $6.5 million reflecting two month accretive from the September absence. We expect ER&D expenses to range from $4.3 to $4.5 million as we continue to invest in our data ViPR and Orion single wafer program while subsiding minimum resources to support our other product. Interest and other income net to come in between 75 and a $125,000 and our current position and the anticipated infiltrate.
Assuming that we can achieve the revenue gross margin and operating expense levels we expect the quarter loss of 3.5 to $5 million in the first quarter of fiscal '09. We anticipate first quarter capital expenditures to be insignificant. We expect depreciation and amortization expenses to be between 1 and $1.1 million. As the expected operating level we anticipate utilizing $3.5 to $5.5 million of cash from operations in the first quarter of fiscal '09. The cash usage expense that we continue to reduce our current inventory level, but experience an increase in accounts receivable from the fiscal 2008 year-end level as several shipments are anticipated to occur late in the quarter.
Thank you. Now Don, Benno and I will take the questions.
Benno Sand - Executive Vice President, Business Development and Investor Relations
Okay, Kelly. We are ready for questions.
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