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Semitool 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-31
  3. Ex-31
  4. Ex-32
  5. Ex-32
  6. Ex-32
f10q_3rdqtr2007

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


(Mark one)


[ X ]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2007

OR

[    ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ______________ to ______________


Commission file number 0-25424


Semitool, Inc.
(Exact Name of Registrant as Specified in Its Charter)

              Montana     81-0384392
(State or Other Jurisdiction of
Incorporation or Organization)
 (I.R.S. Employer
Identification No.)

655 West Reserve Drive
Kalispell, Montana 59901
(Address of principal executive offices, zip code)

Registrant’s telephone number, including area code: (406) 752-2107



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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer   [    ] Accelerated filer   [ X ] Non-accelerated filer   [    ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES    NO X 

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

       Title
Common Stock
Outstanding as of July 31, 2007
                32,079,957

Semitool, Inc.
Form 10-Q
Table of Contents

Part I.

  Item 1.
          
          

          
          

          
          

          
          

          

  Item 2.

          

          
          

          

          

          

          

          

          

  Item 3.

  Item 4.

Part II.

  Item 1.

  Item 1A.

  Item 6.
          
          
Signatures
          

Exhibits
Financial Information

Condensed Consolidated Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of June 30, 2007 and September 30, 2006

Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2007 and
    June 30, 2006


Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2007 and
    June 30, 2006


Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended
    June 30, 2007 and June 30, 2006


Notes to Condensed Consolidated Financial Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction - Forward-Looking Statements

Documents to Review in Connection with Management's Discussion and Analysis of Financial Condition and
    Results of Operations


Overview

Key Performance Indicators

Results of Operations

Liquidity and Capital Resources

Critical Accounting Policies and Estimates

New Accounting Pronouncements

Quantitative and Qualitative Disclosures About Market Risk

Controls and Procedures

Other Information

Legal Proceedings

Risk Factors

Exhibits







2


PART I — FINANCIAL INFORMATION

Item 1.   Condensed Consolidated Financial Statements

SEMITOOL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share Amounts)


June 30,
2007

September 30,
2006

(Unaudited)
ASSETS

Current assets:
           
   Cash and cash equivalents   $ 10,701   $ 17,347  
   Trade receivables, less allowance for doubtful accounts of $269 in both periods    51,006    56,593  
   Inventories    87,255    90,159  
   Prepaid expenses and other current assets    3,788    3,046  
   Deferred income taxes    11,161    11,268  


      Total current assets    163,911    178,413  
Property, plant and equipment, net    48,298    44,610  
Intangibles, less accumulated amortization of $3,027 and $2,390 in 2007 and 2006    8,319    8,470  
Other assets    888    903  


      Total assets   $ 221,416   $ 232,396  



LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
           
   Note payable to bank   $ --   $ 3,109  
   Accounts payable    10,971    22,882  
   Accrued commissions    1,914    2,328  
   Accrued warranty    7,662    7,368  
   Accrued payroll and related benefits    7,167    8,784  
   Income taxes payable    --    3,274  
   Other accrued liabilities    2,112    2,070  
   Customer advances    804    4,560  
   Deferred profit    6,821    8,604  
   Long-term debt and capital leases, due within one year    1,141    571  


      Total current liabilities    38,592    63,550  
Long-term debt and capital leases, due after one year    10,165    4,699  
Deferred income taxes    2,837    3,123  


      Total liabilities    51,594    71,372  



Commitments and contingencies
  

Shareholders' equity:
  
   Preferred stock, no par value, 5,000,000 shares authorized,  
    no shares issued and outstanding    --    --  
   Common stock, no par value, 75,000,000 shares authorized,  
    32,079,507 and 31,924,781 shares issued and outstanding in 2007 and 2006    82,770    80,738  
   Retained earnings    87,617    80,899  
   Accumulated other comprehensive loss    (565 )  (613 )


      Total shareholders' equity    169,822    161,024  


      Total liabilities and shareholders' equity   $ 221,416   $ 232,396  


The accompanying notes are an integral part of the condensed consolidated financial statements.



3


SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in Thousands, Except Per Share Amounts)


Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006

Net sales
    $ 46,606   $ 59,095   $ 168,045   $ 178,208  
Cost of sales    24,497    31,455    86,790    96,251  




Gross profit    22,109    27,640    81,255    81,957  





Operating expenses:
  
     Selling, general and administrative    16,050    17,992    54,380    54,068  
     Research and development    6,518    6,186    20,265    18,248  
     Downsizing costs    677    --    677    --  
     Gain on sale of building    --    --    (648 )  --  




          Total operating expenses    23,245    24,178    74,674    72,316  





Income (loss) from operations
    (1,136 )  3,462    6,581    9,641  
Other income (expense), net    (372 )  212    (111 )  (310 )





Income (loss) before income taxes
    (1,508 )  3,674    6,470    9,331  
Income tax provision (benefit)    (1,463 )  1,323    (248 )  3,359  





Net income (loss)
   $ (45 ) $ 2,351   $ 6,718   $ 5,972  





Earnings (loss) per share:
  
     Basic   $ (0.00 ) $ 0.07   $ 0.21   $ 0.19  




     Diluted   $ (0.00 ) $ 0.07   $ 0.21   $ 0.19  





Weighted average common shares outstanding:
  
     Basic    32,074    31,906    32,015    30,924  




    Diluted    32,074    32,230    32,478    31,281  




The accompanying notes are an integral part of the condensed consolidated financial statements.



4


SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in Thousands)


Nine Months Ended
June 30,

2007
2006

Operating activities:
           
  Net income   $ 6,718   $ 5,972  
  Adjustments to reconcile net income to net cash used in operating activities:  
     (Gain) loss on disposition of assets    (433 )  35  
     Depreciation and amortization    7,945    7,054  
     Deferred income taxes    (195 )  (1,652 )
     Income tax effect of nonqualified stock options exercised    161    --  
     Compensation expense recognized under employee stock option plans    801    1,003  
     Change in:  
       Restricted cash    --    (1,500 )
       Trade receivables    5,012    (12,467 )
       Inventories    (874 )  (18,424 )
       Prepaid expenses and other current assets    (766 )  889  
       Other assets    11    (637 )
       Accounts payable    (11,484 )  (193 )
       Accrued commissions    (409 )  (438 )
       Accrued warranty    300    1,456  
       Accrued payroll and related benefits    (1,581 )  601  
       Income taxes payable    (3,273 )  1,880  
       Other accrued liabilities    58    (5 )
       Customer advances    (3,754 )  5,947  
       Deferred profit    (1,696 )  (882 )


          Net cash used in operating activities    (3,459 )  (11,361 )



Investing activities:
  
  Proceeds from sale and maturities of marketable securities    --    475  
  Purchases of property, plant and equipment    (7,984 )  (10,573 )
  Increases in intangible assets    (771 )  (1,080 )
  Proceeds from sale of property, plant and equipment    1,885    89  


          Net cash used in investing activities    (6,870 )  (11,089 )



Financing activities:
  
  Net proceeds from stock offering    --    27,930  
  Proceeds from exercise of stock options    1,071    1,198  
  Borrowings under line of credit and short-term debt    20,538    70,738  
  Repayments of line of credit and short-term debt    (23,647 )  (70,738 )
  Borrowings under long-term debt    6,466    1,403  
  Repayments of long-term debt    (666 )  (248 )


          Net cash provided by financing activities    3,762    30,283  



Effect of exchange rate changes on cash and cash equivalents
    (79 )  (26 )


Net increase (decrease) in cash and cash equivalents    (6,646 )  7,807  
Cash and cash equivalents at beginning of period    17,347    6,557  


Cash and cash equivalents at end of period   $ 10,701   $ 14,364  


The accompanying notes are an integral part of the condensed consolidated financial statements.



5


SEMITOOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in Thousands)


Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006

Net income (loss)
    $ (45 ) $ 2,351   $ 6,718   $ 5,972  
Net gain (loss) on cash flow hedges    95    30    (119 )  (110 )
Foreign currency translation adjustments    185    78    167    (62 )





Total comprehensive income
   $ 235   $ 2,459   $ 6,766   $ 5,800  




The accompanying notes are an integral part of the condensed consolidated financial statements.



6


SEMITOOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Basis of Presentation

Semitool, Inc. (the Company) prepared the condensed consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted as permitted by such rules and regulations. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These condensed consolidated statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended September 30, 2006 previously filed with the SEC on Form 10-K.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all of the adjustments (normal and recurring in nature) necessary to present fairly the Company’s condensed consolidated financial position as of June 30, 2007, the condensed consolidated results of operations for the three and nine month periods ended June 30, 2007 and 2006, and the condensed consolidated cash flows for the nine month periods ended June 30, 2007 and 2006. The results of operations for the periods presented may not be indicative of the results that may be expected for the entire fiscal year.

The discussion and analysis of the Company’s financial condition and results of operations is based upon its condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, bad debts, inventories, stock-based compensation, investments, intangible assets, income taxes, financing operations, warranty obligations, employee benefits, contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company’s condensed consolidated financial statements include the accounts of Semitool, Inc. and its wholly-owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Semitool has only one reportable segment.

New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Accordingly, the Company will adopt SFAS No. 159 in the first quarter of fiscal 2009. The Company is currently evaluating the potential impact of the adoption of SFAS No. 159 on its results of operations and financial condition.

Stock-Based Compensation

In February 2004, the Board of Directors adopted and the shareholders approved the 2004 Stock Option Plan (the 2004 Plan), replacing the expiring 1994 Stock Option Plan. Upon approval of the 2007 Stock Incentive Plan (the 2007 Plan) in March 2007, the 2007 Plan immediately replaced the 2004 Plan. Options that were granted under the 2004 Plan generally become exercisable at a rate of 5% per quarter commencing three months after the grant date and have a requisite service period of five years. The Company has granted options that qualify as incentive stock options to employees (including officers and employee directors) and nonqualified stock options to employees, directors and consultants. The options generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Option exercises are settled with newly issued common shares.



7


The total shares reserved for issuance under the 2007 Plan are 3,419,000 at June 30, 2007, which includes an initial 1,000,000 shares plus all shares that remained available for grants of options under the 2004 Plan as of the date the 2007 Plan was approved plus any shares that would otherwise return to the 2004 Plan as a result of forfeiture of options previously granted under the 2004 Plan. The 2007 Plan provides for the grant of various awards including stock options, restricted stock, restricted stock units, and stock appreciation rights. As of June 30, 2007, only stock options and restricted stock have been awarded. The Company may grant options that qualify as incentive stock options only to employees. Awards other than incentive stock options may be granted to employees, directors and consultants. Awards granted under the 2007 Plan generally vest at a rate of 5% per quarter commencing three months after the grant date and have a requisite service period of five years. Awards generally have a ten-year term, unless earlier terminated by the discontinuation of service by the grantee. Stock option exercises and restricted stock are settled with newly issued common shares.

The Company accounts for stock-based compensation in accordance with SFAS No. 123(R), “Share-Based Payment.” Total compensation cost recorded in the third quarter of fiscal 2007 and fiscal 2006, respectively, was $246,000 and $344,000 pre-tax, or $204,000 and $221,000 after tax, in both periods, an impact of approximately $0.01 per basic and diluted share in both periods. Total compensation cost recorded in the first nine months of fiscal 2007 and fiscal 2006, respectively, was $800,000 and $1.0 million pre-tax, or $664,000 and $642,000 after tax, respectively, an impact of approximately $0.02 per basic and diluted share in both periods. As of June 30, 2007, $2.3 million of total unrecognized compensation cost related to non-vested awards is expected to be recognized over a weighted average period of 1.5 years.

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on a blended rate of historical and implied volatilities from the traded options on the Company’s stock. The expected term of stock options granted is based on analyses of historical employee termination rates, option exercises and other factors. The risk-free rates are based on the U.S. Treasury yield in effect at the time of the grant. The assumptions used in the Black-Scholes model are presented below:

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006

Expected stock price volatility
     51.6 %  59.6 %  51.6 %  59.6 %
Risk-free interest rate    4.7 %  5.0 %  4.5 %  4.4 %
Dividend yield    --    --    --    --  
Expected life of options (in years)    5.1    5.2    5.1    5.2  

A summary of the Company’s stock option activity for the first nine months of fiscal 2007 is as follows:

Number of
Shares

Weighted-
average
Exercise Price
Per Share

Weighted-
average
Remaining
Contractual
Term

Aggregate
Intrinsic
Value

(In thousands) (In years) (In thousands)

Outstanding at September 30, 2006
     1,922    $7.53          
   Stock options granted    32    12.49  
   Stock options exercised    (154 )  6.92  
   Stock options forfeited    (27 )  8.63  


Outstanding at June 30, 2007
    1,773    $7.66    5.8    $3,457  


Exercisable at June 30, 2007
    1,208    $7.54    4.8    $2,501  

The weighted average grant date fair values based on the Black-Scholes stock option pricing model for stock options granted in the third quarter and first nine months of fiscal 2007 were $5.40 per share and $6.28 per share, respectively, and for stock options granted in the third quarter and first nine months of fiscal 2006 were $5.15 and $4.98 per share, respectively. The total intrinsic value of stock options exercised during the third quarter and first nine months of fiscal 2007 was $75,000 and $860,000, and during the third quarter and first nine months of fiscal 2006 was $20,000 and $926,000.



8


A summary of restricted stock activity for the first nine months of fiscal 2007 is as follows:

Number of
Shares

Weighted
Average
Grant Date
Fair Value

(In thousands)

Unvested at September 30, 2006
     --    $      --  
   Restricted stock granted    3    10.23  
   Restricted stock vested    --    --  
   Restricted stock forfeited    --    --  



Unvested at June 30, 2007
   3   $10.23  


The fair value of the restricted stock was calculated based upon the fair market value of the Company’s stock at the date of the grant. Unrecognized compensation cost related to restricted stock is minimal for the third quarter and year-to-date because of the limited restricted stock grants during the period.

Computation of Earnings (Loss) Per Share

The computation of basic and diluted earnings (loss) per share is based on the following (in thousands):

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006

Numerator:
                   
  Net income (loss) used for basic and  
     diluted earnings (loss) per share   $ (45 ) $ 2,351   $ 6,718   $ 5,972  





Denominator:
  
  Weighted average common shares used for  
     basic earnings (loss) per share    32,074    31,906    32,015    30,924  
  Effect of dilutive stock options    --    324    463    357  




Denominator for diluted earnings per share    32,074    32,230    32,478    31,281  




Diluted earnings per share excludes the effects of antidilutive stock options of 1,772,650 and 211,075 for the three months ended June 30, 2007 and 2006, respectively, and 346,723 and 204,575 for the nine months ended June 30, 2007 and 2006, respectively.

Shareholders’ Equity

In conjunction with an equity offering of common stock in December 2005, the Company issued three million shares of common stock resulting in approximately $27.8 million in net cash proceeds, after deducting underwriters’ fees and other offering costs of approximately $1.8 million.

Foreign Currency

The functional currency for most of the Company’s foreign subsidiaries is the U.S. Dollar. For these foreign operations, realized gains and losses from foreign currency transactions and unrealized gains and losses from re-measurement of the financial statements of the foreign operations into the functional currency are included in the Consolidated Statements of Operations.

Semitool Japan uses the Yen as its functional currency and invoices its customers in Yen. All assets and liabilities of Semitool Japan are translated at period-end exchange rates and all revenues and expenses are re-measured at average rates prevailing during the period. Translation adjustments are reported as a separate component of accumulated other comprehensive loss. Transaction gains and losses are included in the Consolidated Statements of Operations.

Beginning in April 2007, due to a change in how the Company conducts business and following an evaluation of the scope of its operations and business practices, the Company concluded that the Euro is the currency of the primary economic environment in which Semitool Austria operates and consequently, changed the functional currency for Semitool Austria to the Euro. Semitool Austria invoices its customers in Euros and its financing and operating activities are denominated in the Euro. Accordingly, from April 1, 2007, all assets and liabilities of Semitool Austria are translated at period-end exchange rates and all revenues and expenses are re-measured at average rates prevailing during the period. Translation adjustments are reported as a separate component of accumulated other comprehensive loss. Transaction gains and losses are included in the Consolidated Statements of Operations.



9


Note 2.  Inventories

The Company’s inventories are summarized as follows (in thousands):

June 30, 2007
September 30, 2006

Parts and raw materials
    $ 47,649   $ 47,793  
Work-in-process    31,388    33,878  
Finished goods    8,218    8,488  


    $ 87,255   $ 90,159  


For the three and nine months ended June 30, 2007, a net $1.6 million and $3.5 million, respectively, of inventory was transferred to property, plant and equipment for testing and laboratory use.


Note 3.  Note Payable to Bank

The Company currently has a $30 million Credit Agreement with Wells Fargo that bears interest at the bank’s prime lending rate or, at the Company’s option, LIBOR plus 2.25%. As of June 30, 2007, the prime lending rate was 8.25% and the Company had no advances outstanding under the agreement. The Credit Agreement expires on March 31, 2008 and includes financial and non-financial covenants. The Company was in compliance with the debt covenants as of June 30, 2007.


Note 4.  Related Party Transaction

On June 5, 2007, the Company executed Amendment No. 3 to Lease Agreement, between Eagle I, LLC and the Company, reducing the rental payments under the Aircraft Lease Agreement, dated January 15, 2004, from $175,000 per month to $100,000 per month. Raymon F. Thompson, the Chairman and CEO of the Company, is the sole shareholder of Eagle I, LLC, which dry leases a Falcon 900 aircraft to the Company on a month-to-month basis.


Note 5.  Long-Term Debt and Capital Leases

The Company entered into a loan agreement with First Interstate Bank in the first quarter of fiscal 2007 to finance the acquisition, remodeling and equipping of a manufacturing facility located near Kalispell, Montana. The $4.9 million loan was made under the State of Montana Board of Investments (MBOI) value-added loan program and is for a 10-year term, with the MBOI’s 75% participation in the loan bearing interest at a 2.5% interest rate (including a 0.5% servicing charge) for the first 5 years and a 6.5% interest rate for the second 5 years. The 25% portion financed by First Interstate Bank bears an interest rate of 7.75% for a term of 10 years. The Company is in compliance with the covenants of the loan agreement.


Note 6.  Guarantees

The Company, in its Articles of Incorporation, has indemnified its officers and the members of its Board of Directors to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred in such capacity as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the officers or directors are named.

The Company has entered into agreements with customers that include limited intellectual property indemnification obligations that are customary in the industry. These guarantees generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. The nature of the intellectual property indemnification obligations prevents the Company from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers. The Company has not made any indemnification payments under such agreements and no amount has been accrued in the accompanying condensed consolidated financial statements with respect to these indemnification obligations.

Obligations for warranty are accrued concurrently with the revenue recognized on the related equipment. Provisions for warranty obligations are made based upon historical costs incurred for such obligations adjusted, as necessary, for current conditions and factors. Due to the significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs and specifications, the ultimate amount incurred for warranty costs could change in the near term from the Company’s current estimate.



10


Changes in the Company’s accrued warranty liability were as follows (in thousands):

Nine Months Ended
June 30,

2007
2006

Accrued warranty balance, beginning of period
    $ 7,368   $ 5,521  
Accruals for new warranties issued during the period    6,576    9,165  
Expirations and changes in estimates to pre-existing warranties    2,512    519  
Warranty labor and materials provided during the period    (8,794 )  (8,230 )


Accrued warranty balance, end of period   $ 7,662   $ 6,975  



Note 7.  Contingencies

The Company is involved in legal proceedings that arise in the ordinary course of its business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on its business, financial condition, results of operations or cash flows.

Periodically, but not less than quarterly, the Company reviews the status of each significant matter and assesses its potential financial exposure. If the potential loss from any legal proceeding or claim is considered probable and the amount can be reasonably estimated, the Company accrues a liability for the estimated loss. Significant judgment is required in both the determination of probability and the determination as to whether an exposure is reasonably estimable. Due to the uncertainties related to these matters, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to its pending litigation and claims and may revise its estimates. Although the Company has made only minor revisions to its estimates, any future revisions could have a material impact on its results of operations and financial condition.


Note 8.  Income Taxes

The Company’s estimated effective full year tax rate for fiscal 2007 is 17% as compared to the effective tax rate for fiscal 2006 of 33%.  The Company’s fiscal year 2007 tax rate is lower than in fiscal 2006 based on a combination of the extension of the federal Research and Experimentation Credit (Credit) from fiscal 2006, the current year estimated Credit and the Company’s business outlook for the remainder of fiscal 2007.

For the third quarter and first nine months of fiscal year 2007, the Company recorded an income tax benefit of $1.5 million and $248,000, respectively, as compared to tax provisions of $1.3 million and $3.4 million, respectively, for the corresponding periods of fiscal year 2006. The first quarter of fiscal year 2007 included a benefit of $540,000 related to the extension of the Credit as it pertains to the Company’s fiscal year 2006. Legislation to extend the Credit was signed into law after the close of the Company’s fiscal year 2006 on September 30, 2006; therefore the Company was unable to recognize the full Credit in fiscal 2006. The third quarter of fiscal year 2007 includes a benefit of $808,000 due to increased Research and Experimentation Credit and deductions related to foreign sales on the Company’s fiscal year 2006 U.S. income tax return.

In addition, the Company’s effective tax rate is also based on the Company’s continued investments in research and development programs qualifying for the Credit and the Company’s expectations of earnings from operations in jurisdictions with lower tax rates throughout the world.


Note 9.  Downsizing Costs

In April 2007, the Company announced and implemented a plan to align its cost structure with current business activity levels. The cost reduction plan consists primarily of a seven percent reduction in the Company’s worldwide work force, management pay cuts, reduced overtime and mandatory leave. One-time involuntary termination costs of $677,000 are reported as a separate component of operating expenses in the Company’s fiscal third quarter. All costs related to the downsizing plan have been fully incurred. The Company’s downsizing costs and the amount remaining to be paid are summarized as follows (in thousands):

Three Months Ended
June 30, 2007


Liability for one-time involuntary termination costs, beginning of period
    $ --  
One-time involuntary termination costs incurred during the period    677  
One-time involuntary termination costs paid during the period    (411 )

Liability for one-time involuntary termination costs, end of period   $ 266  



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

Introduction – Forward–Looking Statements

Statements contained in this Quarterly Report on Form 10-Q which are not purely historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based on management’s estimates, projections and assumptions that underlie such statements at the time they are made. Forward-looking statements may contain words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Examples of forward-looking statements made in this Quarterly Report on Form 10-Q include statements regarding:

  • key trends in the semiconductor industry that are driving growth;
  • expectations regarding the geographic distribution of our sales, including our belief that
    Asia is the geographic area with the most significant growth opportunities;
  • expected ongoing cost savings from a cost reduction plan initiated in April 2007;
  • the sufficiency of funds and sources of liquidity;
  • estimates of capital expenditures;
  • the level of research and development expenditures;
  • the ability to finance activities;
  • our expected effective tax rate;
  • accounting policies and estimates; and
  • effects of new accounting standards.

Management cautions that forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected in such forward-looking statements. The risks, uncertainties and other important factors that may cause our results to differ materially from those projected in such forward-looking statements are detailed under the heading “Risk Factors” and elsewhere in our Annual Report on Form 10-K for our fiscal year ended September 30, 2006. We undertake no obligation to update forward-looking statements to reflect subsequent events, changed circumstances, or the occurrence of unanticipated events.

Documents to Review in Connection with Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes presented in this Form 10-Q and the financial statements and notes in our last filed Annual Report on Form 10-K for a full understanding of our financial position and results of operations for the three and nine month periods ended June 30, 2007.

Overview

We design, manufacture, install and service highly-sophisticated equipment for use in the fabrication of semiconductor devices. Our products are focused on the wet chemical process steps in integrated circuit, or IC, manufacturing and include systems for wafer surface preparation and electrochemical deposition, or ECD, applications. Our surface preparation systems are designed for wet cleaning, stripping and etching processes, including photoresist and polymer removal and metal etching. Our ECD systems are used to plate copper and other metals, which are used for the IC’s internal wiring, or interconnects; to plate solder and lead free bumps for wafer level packaging applications; and to plate other metals for various semiconductor and related applications. Our products address critical applications within the semiconductor manufacturing process, and help enable our customers to manufacture more advanced semiconductor devices that feature higher levels of performance. The fabrication of semiconductor devices typically requires several hundred manufacturing steps, with the number of steps continuing to increase for advanced devices. Due to the breadth of our product portfolio and advanced technology capabilities, our solutions address over 150 of these manufacturing steps.

There are several key trends in the semiconductor manufacturing industry driving growth in demand for wafer surface preparation, ECD and other advanced semiconductor equipment:

  • smaller device features for lower cost and higher performance;
  • new materials to fabricate more advanced semiconductor devices;
  • increased use of 300mm wafers to reduce manufacturing costs;
  • move to single-wafer spray from immersion processing technologies for enhanced surface preparation;
  • wafer level and other advanced packaging enable smaller portable products; and
  • emerging need for thinner wafers driven by the demand for smaller portable devices.


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As the semiconductor manufacturing process increases in complexity and production parameters become even more stringent, semiconductor manufacturers increasingly rely upon manufacturers of semiconductor equipment to achieve improved process control, provide a smaller equipment footprint and lower the cost of ownership of their manufacturing processes. Key elements of our solution include technological leadership, a comprehensive product portfolio, including our Raider platform, and vertically-integrated manufacturing and design capabilities.

Key Performance Indicators

Our management focuses on revenues, gross margin, operating expenses and profitability in managing our business. In addition to these financial measures found in our condensed consolidated financial statements, we also use bookings, backlog, shipments and deferred revenue as key performance indicators. Bookings are firm orders for which we have received written customer authorization in the fiscal period. Backlog is the balance of yet-to-be delivered orders at the end of a fiscal period. In order to be included in bookings or backlog, an order must be scheduled to ship within the next 12 months. Backlog and forecasted orders drive our production schedule. Shipments measure how well we have met our production plan and are viewed as a primary measure of factory output. Deferred revenue primarily represents tool deliveries for which we are awaiting final customer acceptance.

A summary of key factors which impacted our financial performance during the third quarter includes:

  • Third quarter fiscal 2007 equipment bookings were $50.6 million compared with net bookings of $77.3 million in the third quarter of fiscal 2006 and represent an increase of $12.8 million over second quarter fiscal 2007 bookings of $37.8 million.

  • Shipments in the third quarter of fiscal 2007 were $42.1 million compared with shipments of $55.5 million in the third quarter of fiscal 2006. Year-to-date shipments are approximately $167.8 million compared with $170.5 million in fiscal 2006.

  • Deferred revenue at June 30, 2007 was $10.4 million.

  • Net loss was $45,000 on revenues of $46.6 million during the third quarter of fiscal 2007 compared to net income of $2.4 million on revenues of $59.1 million in the third quarter of fiscal 2006.

  • Our gross margin was 47.4% of net sales, up from the 46.8% gross margin we reported in the third quarter of fiscal 2006.

  • Cash and cash equivalents were $10.7 million at June 30, 2007, a decrease of $6.6 million from $17.3 million at September 30, 2006.

Results of Operations

The following table sets forth our condensed consolidated results of operations for the periods indicated as a percentage of net sales:


Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006

Net sales
     100.0 %  100.0 %  100.0 %  100.0 %
Cost of sales    52.6 %  53.2 %  51.6 %  54.0 %




Gross profit    47.4 %  46.8 %  48.4 %  46.0 %





Operating expenses:
  
  Selling, general and administrative    34.4 %  30.4 %  32.4 %  30.3 %
  Research and development    14.0 %  10.5 %  12.1 %  10.2 %
  Downsizing costs    1.4 %  -- %  0.4 %  -- %
  Gain on sale of building    -- %  -- %  (0.4 )%  -- %




Total operating expenses    49.8 %  40.9 %  44.5 %  40.5 %





Income (loss) from operations
    (2.4 )%  5.9 %  3.9 %  5.5 %
Other income (expense), net    (0.8 )%  0.3 %  0.0 %  (0.2 )%





Income (loss) before income taxes
    (3.2 )%  6.2 %  3.9 %  5.3 %
Income tax provision (benefit)    (3.1 )%  2.2 %  (0.1 )%  1.9 %





Net income (loss)
    (0.1 )%  4.0 %  4.0 %  3.4 %








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Third Quarter and First Nine Months of Fiscal 2007 Compared with Third Quarter and First Nine Months of Fiscal 2006


Net Sales

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(In thousands)

Net sales
    $ 46,606   $ 59,095   $ 168,045   $ 178,208  

Net sales consist of revenues from sales of semiconductor equipment, spare parts and service and royalties. Our revenue recognition policy provides that revenue from sales of semiconductor equipment may be recognized upon shipment if the product is an existing tool to a customer environment in which we have already successfully installed and gained acceptance of our products and the revenue recognition criteria in SAB 104, “Revenue Recognition” have been met. Alternatively, revenue will be deferred and only recognized upon final customer acceptance for tools that are new products or where an existing tool is sold into a new customer environment. Revenue for elements other than equipment, such as installation revenue, is included in tool acceptance revenue.

Net sales declined $12.5 million in the third quarter of fiscal 2007 as compared with the third quarter of fiscal 2006. Our bookings in the first two quarters of fiscal 2007 declined in response to a slowdown in the semiconductor industry and that decline has been reflected in our revenues the past two quarters. Revenues from shipments in the quarter decreased approximately 37% in the third quarter of fiscal 2007 as compared to the same period in fiscal 2006. Revenue from tool acceptances in the quarter increased approximately 22% over third quarter fiscal 2006 levels. Revenue from both shipments and acceptances during the quarter was weighted toward our Raider platform. Fiscal 2006 revenue also included a one-time tool cancellation fee.

Net sales decreased $10.2 million in the first nine months of fiscal 2007 as compared with the first nine months of fiscal 2006. Revenue from tool shipments year-to-date increased approximately 5.2% over the first nine months of fiscal 2006, primarily based on shipments in the first quarter of fiscal 2007. Revenue from tool acceptances declined year-over-year as we were able to recognize more revenue upon tool shipment in fiscal 2007 than in fiscal 2006. Revenue in both fiscal 2007 and fiscal 2006 is weighted toward the Raider platform.

Geographically, net sales were evenly weighted between the U.S. and Europe in the first nine months of fiscal 2007 and we expect the fourth quarter to be relatively evenly balanced between the U.S. and Europe with the Asian markets being down from last fiscal year. As we compare ourselves with the industry, we continue to view Asia as the primary market for growth opportunity.


Gross Profit

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(Dollars in thousands)

Gross profit
    $ 22,109   $ 27,640   $ 81,255   $ 81,957  
Percentage of net sales    47.4 %  46.8 %  48.4 %  46.0 %

Gross profit decreased by $5.5 million or 20.0% in the third quarter of fiscal 2007 compared with the third quarter of fiscal 2006 and decreased by $702,000 or 0.9% in the first nine months of fiscal 2007 as compared with the first nine months of fiscal 2006. Third quarter fiscal 2007 margins gained 0.6 percentage points over third quarter fiscal 2006 levels and rebounded 2.4 percentage points in the first nine months of fiscal 2007 as compared with the same period in fiscal 2006.



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Gross profit decreased in absolute dollars in the third quarter, primarily due to lower sales volumes. Gross profit improved on a percentage basis in both periods of fiscal 2007. The primary drivers impacting gross margin in the quarterly and year-to-date comparisons include:

  • Tool margins improved slightly in the quarterly comparison and by more than two points in the year-to-date comparison. Fiscal 2006 tool margins were negatively impacted by approximately five percentage points by selected tool installations for first time customer use of new applications whereas the third quarter and year-to-date gross profit in fiscal 2007 have been minimally impacted by strategic tool placements.

  • Period costs, including reserves for excess inventory, increased in both the quarterly and nine-month comparison, negatively impacting gross margin percentages by approximately two and three percentage points, respectively, as compared to the same periods in fiscal 2006.

  • Spare parts, service and restorations increased as a percentage of net sales in fiscal 2007 and therefore contributed more to the overall gross margin than in fiscal 2006. Margins on spare parts, service and restorations are typically higher than tool margins and improved by approximately two percentage points in both comparative periods.

  • Warranty and installation costs were flat in the quarterly comparison and decreased by one percentage point in the year-to-date comparison.

Additionally, fiscal 2007 tool margins have been more favorably impacted than in fiscal 2006 by increased installation revenue, with minimal related cost of goods sold.


Selling, General and Administrative

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(Dollars in thousands)

Selling, general and administrative
    $ 16,050   $ 17,992   $ 54,380   $ 54,068  
Percentage of net sales    34.4 %  30.4 %  32.4 %  30.3 %

Selling, general and administrative (SG&A) expenses include employment costs for sales, marketing, customer support and administrative personnel as well as travel, communications, professional fees and expenses related to sales and service offices at North American and international locations. In the third quarter of fiscal 2007, SG&A expenses decreased $1.9 million as compared to the same period in fiscal 2006 but increased four percentage points to 34.4% of net sales. In the first nine months of fiscal 2007, SG&A expenses increased $312,000 or to 32.4% of net sales from 30.3% of net sales in fiscal 2006.

In April 2007, we implemented a plan to align our cost structure with our business outlook for the remainder of the fiscal year. As a result, SG&A employment, travel and general business costs were reduced in the third quarter of fiscal 2007, decreasing approximately $1.3 million from fiscal 2006 levels.

Professional fees decreased $340,000 as compared with the third quarter of fiscal 2006 primarily because of efficiencies resulting from the replacement of our independent auditors in fiscal 2006. Commission expense declined $370,000 from third quarter fiscal 2006 as a result of our transition to a direct sales and customer service force in Taiwan and China in fiscal 2006.

Year-to-date, SG&A expenses increased $312,000 to $54.4 million. Employment costs related to increased staffing, wage increases and payroll taxes increased $2.7 million in the year-to-date comparison. Travel and related general business expenses increased year-to-date along with the increase in employment costs. These increases were partially offset by a $2.2 million decrease in commission expense related to our transition to a direct sales and customer service force in Taiwan and China as well as by lower professional fees and travel expenses in fiscal 2007. Despite the increase in expense in the year-to-date comparison, employment, travel and general business expenses trended downward in the third quarter of fiscal 2007 in response to our cost reduction program.



15


Research and Development

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(Dollars in thousands)

Research and development
    $ 6,518   $ 6,186   $ 20,265   $ 18,248  
Percentage of net sales    14.0 %  10.5 %  12.1 %  10.2 %

Research and Development (R&D) expense consists of salaries, project materials, laboratory costs, consulting fees and other costs associated with our product development efforts. In the third quarter of fiscal 2007, R&D expense increased $332,000 as compared to the third quarter of fiscal 2006 or from 10.5% of net sales to 14.0% of net sales and increased $2.0 million to 12.1% of net sales as compared to 10.2% of net sales in the first nine months of fiscal 2006.

Prototype expenses and contracted services costs accounted for most of the increase in R&D expense in the third quarter of fiscal 2007 as compared with the third quarter of fiscal 2006. Our development work is focused on yield enhancing and enabling 32 nanometer device fabrication processes and our projects range from new prototype development to tools that are currently being evaluated at customer sites. These increases were partially offset by decreased employment costs and general business expenses resulting from our cost reduction plan.

Prototype expense was the primary driver in the $2.0 million increase in R&D expense in the first nine months of fiscal 2007 as compared with the first nine months of fiscal 2006. Employment costs increased approximately $400,000 related to increased headcount, payroll taxes and wage increases; however employment costs decreased in the third quarter of fiscal 2007 as a result of our cost reduction program. Depreciation expense increased approximately $100,000 as we replaced older technology tools in our demonstration laboratories.

Our research and development expense has fluctuated from quarter-to-quarter in the past. We expect such fluctuations to continue in the future, both in absolute dollars and as a percentage of net sales, primarily due to the timing of expenditures and fluctuations in the level of net sales in a given quarter. We expect to continue to fund research and development expenditures with a multi-year perspective and are committed to technology leadership in our sector of the semiconductor equipment industry.


Downsizing Costs

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(Dollars in thousands)

Downsizing costs
    $ 677   $ --   $ 677   $ --  
Percentage of net sales    1.4 %  -- %  0.4 %  -- %

In April 2007, we announced and implemented a plan to align our cost structure with current business activity levels. The cost reduction plan consists primarily of a seven percent reduction in our worldwide work force, management pay cuts, reduced overtime and mandatory leave. One-time involuntary termination costs of $677,000 are reported as a separate component of operating expenses in our fiscal third quarter. All costs related to the downsizing plan were fully incurred in the third quarter.

Our third quarter operating results include savings of $2.5 million, net of downsizing costs, as employment, travel, and general business expenses declined from second quarter fiscal 2007 levels in response to our cost reduction plan. We expect ongoing savings of approximately $3 million per quarter.


Gain on Sale of Building

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(Dollars in thousands)

Gain on sale of building
    $ --   $ --   $ (648 ) $ --  
Percentage of net sales    -- %  -- %  (0.4 )%  -- %

We sold a manufacturing facility located near Kalispell, Montana during the first quarter of fiscal 2007 for approximately $1.9 million and recognized a gain on the sale of approximately $648,000.



16


Other Income (Expense), Net

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(In thousands)

Interest income
    $ 66   $ 180   $ 228   $ 358  
Interest expense    (312 )  (81 )  (530 )  (385 )
Foreign exchange loss    (107 )  (63 )  (267 )  (209 )
Other    (19 )  176    458    (74 )




Total other income (expense), net   $ (372 ) $ 212   $ (111 ) $ (310 )




Other income (expense), net decreased by approximately $584,000 in the third quarter of fiscal 2007 to a net other expense of $372,000 as compared to a net other income of $212,000 in the same period in fiscal 2006 primarily because interest expense increased $231,000 related to a tax settlement with the Internal Revenue Service.

In the year-to-date comparison, Other income (expense), net improved by approximately $199,000. Fiscal 2006 included a $440,000 expense related to a patent lawsuit settlement involving a product representing less than 2% of our net sales. Offsetting this, interest income declined year-over-year because of lower cash investment balances in fiscal 2007 and interest expense increased in fiscal 2007 as discussed above.

Foreign exchange gains and losses were flat in both comparable periods. Beginning in April 2007, due to a change in how we conduct business and following an evaluation of the scope of our operations and business practices, we concluded that the Euro is the currency of the primary economic environment in which Semitool Austria operates and, consequently, changed the functional currency for Semitool Austria to the Euro. Semitool Austria invoices its customers in Euros and its financing and operating activities are denominated in the Euro. Accordingly, from April 1, 2007, all assets and liabilities of Semitool Austria are translated at period-end exchange rates and all revenues and expenses are re-measured at average rates prevailing during the period. Translation adjustments are reported as a separate component of accumulated other comprehensive loss. We do not expect the transition from a U.S. dollar functional currency to a Euro functional currency for our Austrian subsidiary to have a material impact on our results of operations.


Income Taxes

Three Months Ended
June 30,

Nine Months Ended
June 30,

2007
2006
2007
2006
(In thousands)

Income tax provision (benefit)
    $ (1,463 ) $ 1,323   $ (248 ) $ 3,359  

Our estimated effective full year tax rate for fiscal 2007 is 17% as compared to the effective tax rate for fiscal 2006 of 33%.  Our fiscal year 2007 tax rate is lower than in fiscal 2006 based on a combination of the extension of the federal Research and Experimentation Credit (Credit) from fiscal 2006, the current year estimated Credit and our business outlook for the remainder of fiscal 2007.

For the third quarter and first nine months of fiscal year 2007, we recorded an income tax benefit of $1.5 million and $248,000, respectively, as compared to tax provisions of $1.3 million and $3.4 million, respectively, for the corresponding periods of fiscal year 2006. The first quarter of fiscal year 2007 included a benefit of $540,000 related to the extension of the Credit as it pertains to our fiscal year 2006. Legislation to extend the Credit was signed into law after the close of our fiscal year 2006 on September 30, 2006; therefore we were unable to recognize the full Credit in fiscal 2006. The third quarter of fiscal year 2007 includes a benefit of $808,000 due to increased Research and Experimentation Credit and deductions related to foreign sales on our fiscal year 2006 U.S. income tax return.

In addition, our effective tax rate is also based on our continued investments in research and development programs qualifying for the Credit and our expectations of earnings from operations in jurisdictions with lower tax rates throughout the world.



17


Backlog and Deferred Revenue

June 30,
2007

June 30,
2006

(Dollars in millions)

Backlog
    $ 50.9   $ 84.3  
Percentage change in backlog year-over-year    (39.7 )%  129.7 %


Deferred revenue
   $ 10.4   $ 14.7  
Percentage change in deferred revenue year-over-year    (29.0 )%  (52.6 )%

Approximately 80% of our current backlog is for Raider tools. Deferred revenue decreased $4.3 million at June 30, 2007 as compared with June 30, 2006 primarily due to lower shipment volumes in the third quarter of fiscal 2007 than in third quarter of fiscal 2006 in response to the general softening in the semiconductor industry in the first two quarters of fiscal 2007. Current deferred revenue includes all or a part of the revenue on 13 Raiders at June 30, 2007 as compared with 32 Raiders at June 30, 2006.

We include in backlog those customer orders for which we have written customer authorization and for which shipment is scheduled within the next 12 months. Orders are generally subject to cancellation or rescheduling by customers with limited or no cancellation fees. As the result of systems ordered and shipped in the same quarter, possible changes in customer delivery dates, cancellations and shipment delays, the backlog at any particular date and the bookings for any particular period are not necessarily indicative of actual revenue for any succeeding period. In particular, during periods of downturns in the semiconductor industry we have experienced cancellations and significant shipment delays.

Deferred profit included in our current liabilities is derived from deferred revenue, which primarily relates to equipment delivered to customers that has not been accepted by the customer, less the deferred cost of sales, including warranty and installation, and commission expenses. Deferred revenue is not included in orders backlog.


Stock-Based Compensation

Effective the beginning of fiscal 2006, we adopted SFAS No. 123(R), “Share-Based Payment,” and elected to adopt the modified prospective application method. SFAS No. 123(R) requires us to use a fair-value based method to account for stock-based compensation. Stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as expense over the employees’ requisite service period. The fair value of each stock option grant is estimated using the Black-Scholes option pricing model. This model was developed for use in estimating the value of publicly traded options that have no vesting restrictions and are fully transferable. Our employee stock options have characteristics that differ from those of publicly traded options.

Total compensation cost recorded in the third quarter of fiscal 2007 and fiscal 2006, respectively, was $246,000 and $344,000 pre-tax, or $204,000 and $221,000 after tax, in both periods, an impact of approximately $0.01 per basic and diluted share in both periods. Total compensation cost recorded in the first nine months of fiscal 2007 and fiscal 2006, respectively, was $800,000 and $1.0 million pre-tax, or $664,000 and $642,000 after tax, respectively, an impact of approximately $0.02 per basic and diluted share in both periods.


Liquidity and Capital Resources

In the first nine months of fiscal 2007, cash used by operating activities was $3.5 million. The primary use of cash in the first nine months of fiscal 2007 was an $11.5 million decrease in accounts payable as our accounts payable pool declined from higher business activity levels and we reduced inventory spending. Inventories increased $874,000 year-to-date but decreased $5.0 million in the third quarter due to an inventory reduction plan implemented in the third quarter. Customer advances decreased $3.8 million as we shipped the tools underlying those advances. Income taxes payable and payroll related liabilities decreased $4.9 million. The primary sources of cash from operations during the first nine months of fiscal 2007 were net income of $6.7 million and other non-cash operating activities of $8.3 million. Trade receivables provided $5.0 million year-to date as collections exceeded shipments. In the third quarter of fiscal 2007, trade receivables provided $8.4 million in cash and were the primary contributor to the $5.0 million net cash provided by operations in the quarter.

Investing activities in the first nine months of fiscal 2007 included $8.0 million in purchases of factory equipment, other property and the expansion and remodeling of our Rhetech subsidiary facility. We invested an additional $3.5 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. These investments in our equipment and facilities were partially offset by proceeds from the sale of property, plant and equipment, primarily a manufacturing facility located near Kalispell, Montana, which we sold for approximately $1.9 million. We also invested a net amount of $771,000 in our patent portfolio.



18


Financing activities in the first nine months of fiscal 2007 provided cash of $3.8 million and consisted primarily of $1.6 million in borrowings under long-term debt for our Rhetech subsidiary expansion and remodeling project and $4.9 million in new long-term debt used to finance the acquisition, remodeling and equipping of a manufacturing facility located near Kalispell, Montana. The $4.9 million financing with First Interstate Bank is under a value-added loan program sponsored by the Montana Board of Investments (MBOI). The MBOI participation in 75% of the loan carries an interest rate of 2.5% for the first five years and 6.5% for the second five years of a ten-year term. The 25% of the loan financed by First Interstate Bank has a 7.75% interest rate over the ten-year term. Stock option exercises also provided $1.1 million in the first nine months of fiscal 2007. Offsetting these sources of cash, we repaid short-term borrowings of $3.1 million on our revolving line of credit in the first nine months of fiscal 2007. There are currently no advances outstanding on the revolving credit line.

In the first nine months of fiscal 2006, cash used by operating activities was $11.4 million. The primary use of cash in fiscal 2006 was a $12.5 million increase in trade receivables related to sales volumes and the timing of tool shipments. Collections of trade receivables were the primary contributor to the $7.9 million cash provided by operations in the third quarter of fiscal 2006. Inventories increased $18.4 million, and included several substantially complete tools, most of which were scheduled to ship in the first part of the fiscal 2006 fourth quarter. Raw materials inventory grew to support fiscal 2006 current and expected shipment volumes and to ensure the availability of adequate inventory near our customers’ fabs to support their operations. The primary sources of cash from operations in fiscal 2006 were a $5.9 million increase in Customer Advances, net operating income of $6.0 million and other non-cash operating activities of $6.4 million.

Investing activities in the first nine months of fiscal 2006 included $10.6 million in purchases of factory equipment and other property, the construction of a new facility in Austria and the acquisition and remodeling of an additional manufacturing facility near our headquarters. Investing activities also included net cash proceeds of $475,000 from the sale of marketable securities. We invested an additional net $1.7 million in our development and demonstration laboratories by transferring finished goods inventory to property, plant and equipment. We also invested a net $1.1 million in our patent portfolio and acquired intellectual property for a component of one of our ancillary products.

Financing activities in the first nine months of fiscal 2006 consisted primarily of approximately $28.0 million in cash proceeds from an equity offering of three million shares of common stock in December, borrowings under long-term debt of $1.4 million for a new facility that was being constructed in Austria and $1.2 million from the exercise of stock options.

As of June 30, 2007, our principal sources of liquidity consisted of approximately $10.7 million in cash and cash equivalents and $30 million available under our $30 million revolving line of credit. The credit facility is with Wells Fargo and bears interest at the bank’s prime lending rate or, at our option, LIBOR plus 2.25%. As of June 30, 2007, the prime lending rate was 8.25%. The revolving credit line expires on March 1, 2008. The credit agreement has various restrictive covenants including a prohibition against pledging real, fixed or intangible assets during the term of the agreement and the maintenance of various financial ratios. We are in compliance with our debt covenants as of June 30, 2007.

We believe that we have sufficient cash and cash equivalents, along with funds expected to be generated from operations to meet operating expenses and planned capital expenditures through fiscal 2007 and into the foreseeable future. We estimate capital expenditures will be between $7 million and $9 million for the next 12 months. We currently have an effective shelf registration statement, which registers the offer and sale of up to an aggregate $47 million of our securities. If additional financial resources are required in the future, we expect either to issue additional common stock or other financial instruments, whichever management deems advisable. Of course, there can be no assurance that in the future we will be able to issue additional common stock or other financial instruments on acceptable terms.


Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, inventories, warranty obligations, bad debts, investments, intangible assets, income taxes, stock-based compensation, financing operations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

There were no changes to our critical accounting policies in the first nine months of fiscal 2007. For further information about other critical accounting policies, please refer to the discussion of critical accounting policies in our Form 10-K for the fiscal year ended September 30, 2006.



19


New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. SFAS No. 159 also includes an amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” which applies to all entities with available-for-sale and trading securities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Accordingly, we will adopt SFAS No. 159 in the first quarter of fiscal 2009. We are currently evaluating the potential impact of the adoption of SFAS No. 159 on our results of operations and financial condition.


Item 3.   Quantitative and Qualitative Disclosures About Market Risk

Market Risks

Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates.

As of June 30, 2007, we had approximately $11.3 million in long-term debt. Our long-term debt bears interest at fixed rates. As a result, changes in the fixed rate interest market would change the estimated fair value of the fixed rate long-term debt. However, we believe that a 10% change in the long-term interest rate would not have a material effect on our business, financial condition, results of operations or cash flows.

All of our international operations are subject to inherent risks in conducting business abroad, including fluctuation in the relative value of currencies. We manage this risk and attempt to reduce such exposure through an economic hedge using short-term forward exchange contracts. At June 30, 2007, we held forward contracts to sell Japanese Yen with a total face value of $1.8 million and a total market value of $1.7 million and an unrealized gain of approximately $100,000. The impact of movements in currency exchange rates on forward contracts is offset to the extent of receivables denominated in Japanese Yen. The effect of a 10% change in foreign exchange rates on hedged transactions involving Japanese Yen forward exchange contracts and the underlying transactions would not be material to our financial condition, results of operations or cash flows. We do not hold or issue derivative financial instruments for trading or speculative purposes.


Item 4.   Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. As of the end of the period covered by this report, Semitool conducted an evaluation, under the supervision and with the participation of our principal executive officer and principal financial officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and such information is accumulated and communicated to management to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting during our most recently completed fiscal quarter which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



20


PART II — OTHER INFORMATION


Item 1.   Legal Proceedings

We are involved in legal proceedings that arise in the ordinary course of our business. Although there can be no assurance as to the ultimate disposition of these matters, it is the opinion of management, based upon the information available at this time, that the currently expected outcome of these matters, individually or in the aggregate, will not have a material adverse effect on our business, financial condition, results of operations or cash flows.


Item 1A.   Risk Factors

There are no material changes from risk factors as previously disclosed in our Annual Report on Form 10-K for our fiscal year ended September 30, 2006.


Item 6.   Exhibits

      Exhibits

      10.95
     
      31.1
      31.2
      32.1
     
      32.2
Amendment No. 3 dated June 5, 2007 to Aircraft Lease Agreement dated January 15, 2004 between Eagle I,
   LLC and Semitool, Inc. (1)
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
   Section 906 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
   Section 906 of the Sarbanes-Oxley Act of 2002


(1)     Incorporated herein by reference to Exhibit 10.95 to the Company’s Report on Form 8-K, date of report June 5, 2007.



21


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.








Date: August 8, 2007
        SEMITOOL, INC.
            (Registrant)



By:/s/Larry A. Viano
——————————————
Larry A. Viano
Vice President and Chief Financial Officer
(Principal Accounting and Financial Officer)

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