| CREDENCE SYSTEMS CORP Item 1A Risk Factors Our operating results have fluctuated significantly which has adversely affected and may continue to adversely affect our stock price |
| LOGO A variety of factors affect our results of operations |
| The above graph illustrates that our quarterly net sales and operating results have fluctuated significantly |
| We believe they will continue to fluctuate for several reasons, including: • worldwide economic conditions in the semiconductor industry in general and capital equipment industry specifically; • loss of certain key customers who account for large portions of our revenue; • patterns of capital spending by our customers, delays, cancellations or reschedulings of customer orders due to customer financial difficulties or otherwise; • market acceptance of our new products and enhanced versions of existing products; • changes in overhead absorption levels due to changes in the number of systems manufactured, the timing and shipment of orders, availability of components including custom integrated circuits, or ICs, subassemblies and services, customization and reconfiguration of our systems and product reliability; • our manufacturing capacity and ability to volume produce systems, including our newest systems, and to meet customer requirements; • manufacturing inefficiencies associated with the start-up of our new products, changes in our pricing or payment terms and cycles, and those of our competitors, customers and suppliers; • our ability to attract and retain qualified employees in a competitive market; • timing of new product announcements and new product releases by us or our competitors; 18 ______________________________________________________________________ [40]Table of Contents • write-offs of excess and obsolete inventories and accounts receivable that are not collectible; • labor and materials supply constraints; • expenses associated with acquisitions and alliances, including expenses charged for any impaired acquired intangible assets and goodwill; • operating expense reductions associated with cyclical industry downturns, including costs relating to facilities consolidations and related expenses; • the proportion of our direct sales and sales through third parties, including distributors and OEMs, the mix of products sold, the length of manufacturing and sales cycles, and product discounts; and • natural disasters, political and economic instability, currency fluctuations, regulatory changes and outbreaks of hostilities, especially in Asia |
| We intend to introduce new products and product enhancements in the future, the timing and success of which will affect our business, financial condition and results of operations |
| Our gross margins on systems sales have varied significantly and will continue to vary significantly based on a variety of factors including: • long-term pricing decreases by us and our competitors and pricing by our suppliers; • manufacturing volumes; • manufacturing inefficiencies; • hardware product sales mix; • absorption levels and the rate of capacity utilization; • inventory write-downs; • new product introductions; • product reliability; • customization and reconfiguration of systems; • the possible sale of inventory previously written-off; • international and domestic sales mix and field service margins; and • ceasing investment in underperforming or redundant product lines |
| New and enhanced products typically have lower gross margins in their early stages of commercial introduction and production, and we may build substantial finished goods inventories of such new products |
| If delays in or cancellations of orders for those products occur, it may require future inventory write-offs, which would negatively affect our future financial performance |
| Although we have recorded and continue to record inventory write-offs, product warranty costs, and deferred revenue, we cannot be certain that our estimates will be adequate |
| We cannot forecast with any certainty the impact of these and other factors on our sales and operating results in any future period |
| Results of operations in any period, therefore, should not be considered indicative of the results to be expected for any future period |
| Because of this difficulty in predicting future performance, our operating results may fall below the expectations of securities analysts or investors in some future quarter or quarters |
| Our failure in the past to meet these expectations has adversely affected the market price of our common stock and may continue to do so |
| In addition, our need for continued significant expenditures for research and development, marketing and other expenses for new products, capital equipment purchases and worldwide training and customer service and support will impact our sales and operations results in the future |
| Other significant expenditures may make it difficult for us to reduce our significant fixed expenses in a particular 19 ______________________________________________________________________ [41]Table of Contents period if we do not meet our net sales goals for that period |
| Many of these expenses are fixed and will be difficult to reduce in a particular period if our net sales goal for that period is not met |
| The semiconductor industry is cyclical |
| The semiconductor equipment industry is highly cyclical |
| Our business and results of operations depend largely upon the capital expenditures of manufacturers of semiconductors and companies that specialize in contract packaging and/or testing of semiconductors |
| This includes manufacturers and contractors that are opening new or expanding existing fabrication facilities or upgrading existing equipment, which in turn depends upon the current and anticipated market demand for semiconductors and products incorporating semiconductors |
| The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict |
| This cyclical nature of the industry in which we operate affects our ability to accurately predict future revenue and, thus, future expense levels |
| When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound |
| During a down cycle, we must be in a position to adjust our cost and expense structure to prevailing market conditions and to continue to motivate and retain our key employees |
| In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand |
| We can provide no assurance that these objectives can be met in a timely manner in response to industry cycles |
| If we fail to respond to industry cycles, our business could be seriously harmed |
| As a result of the cyclical nature of the semiconductor industry, we have experienced shipment delays, delays in commitments and restructured purchase orders by customers and we expect this activity to continue |
| Accordingly, we cannot be certain that we will be able to achieve or maintain our current or prior level of sales or rate of growth |
| We anticipate that a significant portion of new orders may depend upon demand from semiconductor device manufacturers building or expanding fabrication facilities and new device testing requirements that are not addressable by currently installed test equipment, and there can be no assurance that such demand will develop to a significant degree, or at all |
| In addition, our business, financial condition or results of operations may continue to be materially adversely affected by any factor materially adversely affecting the semiconductor industry in general or particular segments within the semiconductor industry |
| Some of our revenue is generated from a small number of key customers and the loss of a key customer could substantially reduce our revenues and be perceived as a loss of momentum in our business |
| Over time, we have expanded our base of customers; however, a large portion of our revenues are generated from a small number of key customers |
| In particular, two customers, Intel Corporation and Advanced Micro Devices, Inc, accounted for 25prca and 14prca of our net sales for fiscal 2005, respectively |
| Our top ten customers accounted for 66prca, 55prca and 45prca of our net sales for fiscal 2005, 2004 and 2003, respectively |
| We expect that our top ten customers in the aggregate will continue to account for a large portion of our net sales for the foreseeable future, and the loss of one or more of these customers or collaborative partners would harm our business and operating results |
| The loss of a significant customer could also be perceived as a loss of momentum in our business and an adverse impact on our financial results, and this may cause the market price of our common stock to fall |
| Implementation or changes to our enterprise resource planning system and other related systems may affect our business |
| We may experience difficulties in implementing, making changes or enhancements to our enterprise resource planning (“ERP”) system and other related systems that could disrupt our ability to timely and accurately process and report key components of the results of our consolidated operations, our financial position and cash flows |
| Any disruptions or difficulties that may occur in connection with implementing, making changes or enhancements to our ERP system or any future systems could also adversely affect our ability to complete the 20 ______________________________________________________________________ [42]Table of Contents evaluation of our internal controls and attestation activities pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 |
| System failure or malfunctioning may result in disruption of operations and the inability to process transactions and could adversely affect our financial results |
| Our ability to successfully bring our information technology functions in-house may affect our operations |
| We are planning to bring our information technology, or IT, functions in-house, which is currently being administered by a third party vendor |
| This requires us to hire qualified individuals, implement appropriate additional IT controls and assume all responsibilities that are currently being handled by the third party vendor |
| Failure to successfully complete the transition may result in disruption of our operations and may have an adverse impact on our financial results |
| Changes to financial accounting standards may affect our reported results of operations |
| A change in accounting standards or practices can have a significant effect on our reported results and may even affect our reporting of transactions completed before the change is effective |
| New accounting pronouncements and varying interpretations of accounting pronouncements have occurred and may occur in the future |
| Changes to existing standards or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business |
| For example, the adoption of Statement on Financial Accounting Standard Nodtta 123R “Share-Based Payment” which requires us to measure all employee stock-based compensation awards using a fair value method beginning in fiscal year 2006 and record such expense in our consolidated financial statements will have a material adverse impact on our consolidated financial statements as reported under generally accepted accounting principles in the United States |
| The adoption of this statement will adversely impact on our gross margin as well as operating expenses |
| We have a limited backlog and obtain most of our net sales from products that typically range in price from dlra200cmam000 to dlra5dtta0 million and we generally ship products generating most of our net sales near the end of each quarter, which can result in fluctuations of quarterly results |
| Other than certain memory products, for which the price range is typically below dlra50cmam000, we obtain most of our net sales from the sale of a relatively few number of systems that typically range in selling price from dlra200cmam000 to dlra5dtta0 million |
| This has resulted and could continue to result in our net sales and operating results for a particular period being significantly impacted by the timing of recognition of revenue from a single transaction |
| Our net sales and operating results for a particular period could also be materially adversely affected if an anticipated order from just one customer is not received in time to permit shipment during that period |
| Backlog at the beginning of a quarter typically does not include all orders necessary to achieve our sales objectives for that quarter |
| Orders in backlog are subject to cancellation, delay, deferral or rescheduling by customers with limited or no penalties |
| Throughout the recent fiscal years, we have experienced customer-requested shipment delays and order cancellations, and we believe it is probable that orders will be canceled and delayed in the future |
| Consequently, our quarterly net sales and operating results have in the past, and will in the future, depend upon our obtaining orders for systems to be shipped in the same quarter in which the order is received |
| We believe that in the future some of our customers may, from time to time, place orders with us for more systems than they will ultimately require, or they will order a more rapid delivery than they will ultimately require |
| For this reason, our backlog may include customer orders in excess of those that will actually be delivered |
| Furthermore, we generally ship products generating most of our net sales near the end of each quarter |
| Accordingly, our failure to receive an anticipated order or a delay or rescheduling in a shipment near the end of a particular period or a delay in receiving customer acceptance from a customer may cause net sales in a particular 21 ______________________________________________________________________ [43]Table of Contents period to fall significantly below expectations, which could have a material adverse effect on our business, financial condition or results of operations |
| The relatively long manufacturing cycle of many of our testers has caused and could continue to cause future shipments of testers to be delayed from one quarter to the next |
| Furthermore, as our competitors announce new products and technologies, and as we complete acquisitions of similar technologies, customers may defer or cancel purchases of our existing systems |
| We cannot forecast the impact of these and other factors on our sales and operating results |
| We may continue to experience delays in development, introduction, production in volume, and recognition of revenue from sales of our products |
| We have in the past experienced significant delays in the development, introduction, volume production and sales of our new systems and related feature enhancements |
| These delays related to our inability to successfully complete product hardware engineering within the time frame originally anticipated, including design errors and redesigns of ICs |
| As a result, some customers have experienced significant delays in receiving and using our testers in production |
| Delays in introducing a product or delays in our ability to obtain customer acceptance, if they occur in the future, will delay the recognition of revenue and gross profit by us |
| We cannot be certain that these or additional difficulties will not continue to arise or that delays will not continue to materially adversely affect customer relationships and future sales |
| Moreover, we cannot be certain that we will not encounter these or other difficulties that could delay future introductions or volume production or sales of our systems or enhancements |
| In the past, we have incurred and we may continue to incur substantial unanticipated costs to increase feature sets in our systems |
| If our systems experience reliability, quality or other problems, or the market perceives our products to be feature deficient, we may continue to suffer reduced orders, higher manufacturing costs, delay in collecting accounts receivable and higher service, support and warranty expenses, and/or inventory write-offs, among other effects |
| Our failure to have a competitive test system available when required by a customer could make it substantially more difficult for us to sell testers to that customer for a number of years |
| We believe that the continued acceptance, volume production, timely delivery and customer satisfaction of our newer digital, mixed signal and non-volatile memory testers are of critical importance to our future financial results |
| As a result, our inability to correct any technical, reliability, parts shortages or other difficulties associated with our systems or to manufacture and ship the systems on a timely basis to meet customer requirements could damage our relationships with current and prospective customers and would continue to materially adversely affect our business, financial condition and results of operations |
| In addition, the consolidation of our manufacturing operations in a single site exposes us to the increased risk of manufacturing delays or disruption in the event of natural disasters or other calamities at the site |
| Any delays or disruptions could materially adversely affect our business, financial condition and results of operations |
| Competition in the ATE market requires rapid technological enhancements and new products and services |
| Our ability to compete in the automatic test equipment or ATE market depends upon our ability to successfully develop and introduce new products and enhancements with enhanced features on a timely and cost-effective basis, including products under development internally as well as products obtained in acquisitions |
| Our customers require test systems with additional features, higher performance and other capabilities |
| Therefore, it is necessary for us to develop new systems and/or enhance the performance and other capabilities of our existing systems to adequately address these requirements |
| Any success we may have in developing new and enhanced systems and new features to our existing systems will depend upon a variety of factors, including: • product selection; • timely and efficient completion of product design; • implementation of manufacturing and assembly processes; • product performance; • reliability in the field; 22 ______________________________________________________________________ [44]Table of Contents • effective worldwide sales and marketing; and • labor and supply constraints |
| Because we must make new product development commitments well in advance of sales, new product decisions must anticipate both future demand and the availability of technology to satisfy that demand |
| We cannot be certain that we will be successful in selecting, developing, manufacturing and marketing new hardware products or enhancements |
| Our inability to introduce new products that contribute significantly to net sales, gross margins and net income would have a material adverse effect on our business, financial condition and results of operations |
| New product or technology introductions by our competitors could cause a decline in sales or loss of market acceptance of our existing products |
| If we introduce new products, existing customers may curtail purchases of the older products resulting in inventory write-offs and they may delay new product purchases |
| In addition, capacity utilization at outsourced assembly and test houses continues at low levels which is likely to depress our non-integrated device manufacturers, or IDM business until such time that demand and supply conditions improve |
| Any decline in demand for our hardware products could have a materially adverse effect on our business, financial condition or results of operations |
| We are continuing to invest significant resources in the expansion of our product lines and there is no certainty that our net sales will increase or remain at historical levels or that new products will contribute to revenue growth |
| We are currently devoting and intend to continue to devote significant resources to the development, enhancement, production and commercialization of new products and technologies |
| During fiscal 2005, we introduced several enhancements as well as new products that are evolutions or derivatives of existing products as well as products that were largely new |
| Under our revenue recognition policy adopted in accordance with Staff Accounting Bulletin Nodtta 104, “Revenue Recognition,” (SAB 104), we defer revenue for transactions that involve newly introduced products or when customers specify acceptance criteria that cannot be demonstrated prior to the shipment |
| This results in a delay in the recognition of revenue as compared to the historic norm of recognizing revenue upon shipment |
| Product introduction delays, if they occur in the future, will delay the recognition of revenue and gross profit and may result in delayed cash receipts by us that could materially adversely affect our business, financial condition and results of operations |
| We invested and continue to invest significant resources in property, plant and equipment, purchased and leased facilities, inventory, personnel and other costs to begin or prepare to increase production of these products |
| A significant portion of these investments will provide the marketing, administration and after-sales service and support required for these new products |
| Accordingly, we cannot be certain that gross profit margin and inventory levels will not continue to be materially adversely affected by delays in new product introductions or start-up costs associated with the initial production and installation of these new product lines |
| We also cannot be certain that we can manufacture these systems per the time and quantity required by our customers |
| The start-up costs include additional manufacturing overhead, additional inventory and warranty reserve requirements and the enhancement of after-sales service and support organizations |
| In addition, the increases in inventory on hand for new product development and customer support requirements have increased and will continue to increase the risk of significant inventory write-offs |
| We cannot be certain that our net sales will increase or remain at historical levels or that any new products will be successfully commercialized or contribute to revenue growth or that any of our additional costs will be covered |
| The ATE industry is intensely competitive which can adversely affect our ability to maintain our current net sales and our revenue growth |
| With the substantial investment required to develop test application and interfaces, we believe that once a semiconductor manufacturer has selected a particular ATE vendor’s tester, the manufacturer is likely to use that tester for a majority of its testing requirements for the market life of that semiconductor and, to the extent possible, subsequent generations of similar products |
| As a result, once an ATE customer chooses a system for the testing of a particular device, it is difficult for competing vendors to achieve significant ATE sales to such customer for similar use |
| Our inability to penetrate any particular large ATE customer or achieve significant sales to any ATE customer could have a material adverse effect on our business, financial condition or results of operations |
| 23 ______________________________________________________________________ [45]Table of Contents We face substantial competition from ATE manufacturers throughout the world |
| A substantial portion of our net sales is derived from sales of mixed-signal testers |
| We face in some cases five and in other cases seven competitors in our primary market segments of digital, mixed signal, and RF wireless ATE We believe that the ATE industry in total has not been profitable for the last three years, indicating a very competitive and volatile marketplace |
| Several of these competitors have substantially greater financial and other resources with which to pursue engineering, manufacturing, marketing and distribution of their products |
| Certain competitors have introduced or announced new products with certain performance or price characteristics equal or superior to products we currently offer |
| These competitors have introduced products that compete directly against our products |
| We believe that if the ATE industry continues to consolidate through strategic alliances or acquisitions, we will continue to face significant additional competition from larger competitors that may offer product lines and services more complete than ours |
| Our competitors are continuing to improve the performance of their current products and to introduce new products, enhancements and new technologies that provide improved cost of ownership and performance characteristics |
| New product introductions by our competitors could cause a decline in our sales or loss of market acceptance of our existing products |
| Moreover, our business, financial condition or results of operations will continue to be materially adversely affected by continuing competitive pressure and continued intense price-based competition |
| We have experienced and continue to experience significant price competition in the sale of our products |
| In addition, pricing pressures typically have become more intense during cyclical downturns when competitors seek to maintain or increase market share, at the end of a product’s life cycle and as competitors introduce more technologically advanced products |
| We believe that, to be competitive, we must continue to expend significant financial resources in order to, among other things, invest in new product development and enhancements and to maintain customer service and support centers worldwide |
| We cannot be certain that we will be able to compete successfully in the future |
| We may not be able to deliver custom hardware options to satisfy specific customer needs in a timely manner |
| We must develop and deliver customized hardware to meet our customers’ specific test requirements |
| The market requires us to manufacture these systems on a timely basis |
| Our test equipment may fail to meet our customers’ technical or cost requirements and may be replaced by competitive equipment or an alternative technology solution |
| Our inability to meet such hardware requirements could impact our ability to recognize revenue on the related equipment |
| Our inability to provide a test system that meets requested performance criteria when required by a device manufacturer would severely damage our reputation with that customer |
| This loss of reputation may make it substantially more difficult for us to sell test systems to that manufacturer for a number of years, which could have a material adverse effect on our business, financial condition or results of operations |
| We rely on Spirox Corporation and customers in Taiwan for a significant portion of our revenues and the termination of this distribution relationship would materially adversely affect our business |
| Spirox Corporation, a distributor in Taiwan that sells to end-user customers in Taiwan and China, accounted for approximately 14prca, 23prca and 19prca of our net sales in fiscal years ended October 31, 2005, 2004 and 2003, respectively |
| Our agreement with Spirox has no minimum purchase commitment and can be terminated for any reason on 180 days prior written notice |
| On May 31, 2005, we entered into an agreement with Spirox to combine our Taiwan operation with Spirox’s T1 division into a corporation named Credence Spirox, an operation owned 90prca by Spirox and 10prca by us |
| This new corporation is dedicated to support our products in the Taiwan region |
| Consequently, our business, financial condition and results of operations could be materially adversely affected by the loss of or any reduction in orders by Spirox, any termination of the Spirox relationship, or the loss of any significant Spirox customer, including the potential for reductions in orders by assembly and tester service companies due to technical, manufacturing or reliability problems with our products or continued slow-downs in the semiconductor industry or in other industries that manufacture products utilizing semiconductors |
| Our ability to maintain or increase sales levels in Taiwan will depend upon: • our ability with Spirox to obtain orders from existing and new customers; 24 ______________________________________________________________________ [46]Table of Contents • our ability to manufacture systems on a timely and cost-effective basis; • our ability to timely complete the development of our new hardware products; • Spirox and its end-user customers’ financial condition and success; • general economic conditions; and • our ability to meet increasingly stringent customer performance and other requirements and shipment delivery dates |
| We have substantial indebtedness and if we need additional financing, it could be difficult to obtain |
| We may incur substantial additional indebtedness in the future |
| The level of indebtedness, among other things, could: • make it difficult for us to make payments on our debt and other obligations, particularly upon maturity of the Notes in 2008 if we were unable to cause the conversion of this debt into equity; • make it difficult for us to obtain any necessary future financing for working capital, capital expenditures, debt service requirements or other purposes; • require the dedication of a substantial portion of any cash flow from operations to service the indebtedness, thereby reducing the amount of cash flow available for other purposes, including capital expenditures; • limit our flexibility in planning for, or reacting to changes in our business and the industries in which we compete; • place us at a possible competitive disadvantage with respect to less leveraged competitors and competitors that have better access to capital resources; and • make us more vulnerable in the event of a further downturn in our business |
| There can be no assurance that we will be able to meet our debt service obligations, including our obligations under the Notes |
| We expect that our existing cash and short-term investments will be sufficient to meet our cash requirements to fund operations and expected capital expenditures for the next twelve months |
| In the event we may need to raise additional funds, we cannot be certain that we will be able to obtain such additional financing on favorable terms if at all |
| Further, if we issue additional equity securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of common stock |
| Future financings may place restrictions on how we operate our business |
| If we cannot raise funds on acceptable terms, if and when needed, we may not be able to develop or enhance our products and services, take advantage of future business opportunities, grow our business or respond to competitive pressures, which could seriously harm our business |
| We require a significant amount of cash, and our ability to generate cash may be affected by factors beyond our control |
| Our business may not generate cash flow in an amount sufficient to enable us to fund our liquidity needs, including payment of the principal of, or interest on, our indebtedness, working capital, capital expenditures, product development efforts, strategic acquisitions, investments and alliances and other general corporate requirements |
| Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control |
| We cannot be assured that our business will generate sufficient cash flow from operations or that future borrowings or other sources of funding will be available to us, in amounts sufficient to enable us to fund our liquidity needs or with terms that are favorable to us |
| 25 ______________________________________________________________________ [47]Table of Contents We may repatriate cash from our foreign subsidiaries, which could result in additional income taxes that could negatively impact our results of operations and financial position |
| In addition, if foreign countries’ currency policies limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted |
| One or more of our foreign subsidiaries hold a portion of our cash and cash equivalents |
| If we need additional cash to acquire assets or technology, or to support our operations in the US, and if the currency policies of these foreign countries allow us, we may repatriate some of our cash from these foreign subsidiaries to the US Depending on our financial results and the financial results of our subsidiaries at the time that the cash is repatriated, we may incur additional income taxes from the repatriation, which could negatively affect our results of operations and financial position |
| In addition, if the currency policies of these foreign countries prohibit or limit our ability to repatriate the needed funds, our business and results of operations could be adversely impacted |
| Our long and variable sales cycle depends upon factors outside of our control and could cause us to expend significant time and resources prior to earning associated revenues |
| Sales of our systems depend in part upon the decision of semiconductor manufacturers to develop and manufacture new semiconductor devices or to increase manufacturing capacity |
| As a result, sales of our products are subject to a variety of factors we cannot control |
| The decision to purchase our products generally involves a significant commitment of capital, with the attendant delays frequently associated with significant capital expenditures |
| For these and other reasons, our systems have lengthy sales cycles during which we may expend substantial funds and management effort to secure a sale, subjecting us to a number of significant risks, including a risk that our competitors may compete for the sale, a further downturn in the economy or other economic factors causing our customers to withdraw or delay their orders or a change in technological requirements of the customer |
| As a result, our business, financial condition and results of operations would be materially adversely affected by our long and variable sales cycle and the uncertainty associated with expending substantial funds and effort with no guarantee that a sale will be made |
| There are limitations on our ability to find the supplies and services necessary to run our business |
| We obtain certain components, subassemblies and services necessary for the manufacture of our testers from a limited group of suppliers |
| We do not maintain long-term supply agreements with most of our vendors, and we purchase most of our components and subassemblies through individual purchase orders |
| The manufacture of certain of our components and subassemblies is an extremely complex process |
| We also rely on outside vendors to manufacture certain components and subassemblies and to provide certain services |
| We have experienced and continue to experience significant reliability, quality and timeliness problems with several critical components including certain custom ICs |
| We cannot be certain that these or other problems will not continue to occur in the future with our suppliers or outside subcontractors |
| Our reliance on a limited group of suppliers and on outside subcontractors involves several risks, including an inability to obtain an adequate supply of required components, subassemblies and services and reduced control over the price, timely delivery, reliability and quality of components, subassemblies and services |
| Shortages, delays, disruptions or terminations of the sources for these components and subassemblies have delayed and in the future may delay shipments of our systems and new products and could have a material adverse effect on our business |
| Our continuing inability to obtain adequate yields or timely deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could also have a material adverse effect on our business, financial condition or results of operations |
| Such delays, shortages and disruptions would also damage relationships with current and prospective customers and have and could continue to allow competitors to penetrate our customer accounts |
| We cannot be certain that our internal manufacturing capacity or that of our suppliers and subcontractors will be sufficient to meet customer requirements |
| 26 ______________________________________________________________________ [48]Table of Contents Our international business exposes us to additional risks |
| International sales accounted for approximately 69prca, 72prca and 64prca of our total net sales in fiscal years 2005, 2004 and 2003, respectively |
| We anticipate that international sales will continue to account for a significant portion of our total net sales in the foreseeable future |
| These international sales will continue to be subject to certain risks, including: • changes in regulatory requirements; • tariffs and other barriers; • political and economic instability; • the adverse effect of fears surrounding any health risks on our business and sales and that of our customers, especially in Taiwan, Hong Kong and China; • an outbreak of hostilities in markets where we sell our products, including Korea and Israel; • integration and management of foreign operations of acquired businesses; • foreign currency exchange rate fluctuations; • difficulties with distributors, joint venture partners, original equipment manufacturers, foreign subsidiaries and branch operations; • potentially adverse tax consequences; • the possibility of difficulty in accounts receivable collection; • greater difficulty in maintaining US accounting standards; and • greater difficulty in protecting intellectual property rights |
| We are also subject to the risks associated with the imposition of domestic and foreign legislation and regulations relating to the import or export of semiconductor equipment products |
| We cannot predict whether the import and export of our products will be adversely affected by changes in or new quotas, duties, taxes or other charges or restrictions imposed by the United States or any other country in the future |
| Any of these factors or the adoption of restrictive policies could have a material adverse effect on our business, financial condition or results of operations |
| Net sales to the Asia-Pacific region accounted for approximately 47prca, 52prca and 38prca of our total net sales in fiscal years 2005, 2004 and 2003, respectively, and thus demand for our products is subject to the risk of economic instability in that region and health risks |
| Countries in the Asia-Pacific region, including Korea and Japan, have experienced weaknesses in their currency, banking and equity markets in the recent past |
| These weaknesses could continue to adversely affect demand for our products, the availability and supply of our product components and our consolidated results of operations |
| However, one end-user customer headquartered in Europe, STMicroelectronics NV, accounted for 15prca and 10prca of our net sales in fiscal 2004 and 2003, respectively |
| No single European end-user customer accounted for more than 10prca of our net sales during fiscal 2005 |
| Two customers headquartered in the US, Intel Corporation and Advanced Micro Devices, accounted for 25prca and 14prca of our net sales in fiscal 2005, respectively |
| One customer headquartered in the US accounted for 11prca of our net sales in fiscal 2004 |
| In addition, one of our major distributors, Spirox Corporation, which accounted for 14prca, 23prca and 19prca of our net sales in fiscal 2005, 2004 and 2003, respectively, is a Taiwan-based company |
| This subjects a significant portion of our receivables and future revenues to the risks associated with doing business in a foreign country, including political and economic instability, currency exchange rate fluctuations, fears related to health risks and regulatory changes |
| Disruption of business in Asia caused by the previously mentioned factors could continue to have a material impact on our business, financial condition or results of operations |
| 27 ______________________________________________________________________ [49]Table of Contents We operate in a volatile industry—indicators of goodwill and other long-lived assets impairment under SFAS 142 and SFAS 144 may be present from time to time |
| Effective November 1, 2002, we adopted Statement of Financial Accounting Standard Nodtta 142, “Goodwill and Other Intangible Assets” (SFAS 142), which was issued by the FASB in July 2001 |
| Under this standard, we ceased amortizing goodwill and acquired workforce effective November 1, 2002 |
| During fiscal 2005 and 2004, goodwill increased by approximately dlra1dtta1 million and dlra384dtta9 million, respectively, due to our acquisition of NPTest |
| We test goodwill for possible impairment on an annual basis and at any other time if events occur or circumstances indicate that the carrying amount of goodwill may not be recoverable |
| Circumstances that could trigger an impairment test include but are not limited to: our market value falling below our net book value for a significant period of time, a significant adverse change in the business climate or legal factors; unanticipated competition; loss of key personnel; a significant change in direction with respect to investment in a product or market segment; the likelihood that a significant portion of the business will be sold or disposed of; or the results of testing for recoverability of a significant asset group within a reporting unit determined in accordance with SFAS 142 |
| As mandated by SFAS 142, we completed our annual goodwill impairment test as of July 31, 2005 during the fourth quarter of the fiscal 2005 year |
| We determined that the sum of the expected future discounted cash flows from the assets exceeded the carrying value of those assets; therefore, no impairment of goodwill was recognized |
| However, no assurances can be given that future evaluations of goodwill will not result in future impairment charges |
| We will continue to evaluate goodwill on an annual basis and at such other times as events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future discounted cash flow |
| If we determine our goodwill or intangible assets to be impaired, the result of non-cash charges could be substantial |
| During 2005, we did not note any impairment for our other intangible assets |
| However, no assurances can be given that future evaluations of other intangibles will not result in future impairment charges |
| We will continue to evaluate other intangibles at such times as events and changes in circumstances suggest that the carrying amount may not be recoverable from its estimated future undiscounted cash flow |
| Future acquisitions may be difficult to integrate, disrupt our business, dilute stockholder value or divert management attention |
| Our growth depends upon market growth, our ability to enhance our existing products, and our ability to introduce new products on a timely basis |
| We intend to continue to address the need to develop new products and enhance existing products through acquisitions of other companies, product lines, technologies, and personnel |
| Acquisitions involve numerous risks, including the following: • Difficulties in integrating the operations, technologies, products, and personnel of the acquired companies; • Diversion of management’s attention from normal daily operations of the business; • Potential difficulties in completing projects associated with in-process research and development; • Difficulties in entering markets in which we may have no or limited direct prior experience and where competitors in such markets may have stronger market positions; • Initial dependence on unfamiliar supply chains or relatively small supply partners; • Insufficient revenue to offset increased expenses associated with acquisitions; and • The potential loss of key employees of the acquired companies |
| 28 ______________________________________________________________________ [50]Table of Contents Acquisitions may also cause us to: • Issue common stock that would dilute our current shareholders’ percentage ownership; • Assume liabilities; • Record goodwill and non-amortizable intangible assets that will be subject to impairment testing on a regular basis and potential periodic impairment charges; • Incur amortization expenses related to certain intangible assets; • Incur large and immediate write-offs and restructuring and other related expenses; and • Become subject to intellectual property or other litigation |
| Mergers and acquisitions of high-technology companies are inherently risky, and no assurance can be given that our previous or future acquisitions will be successful and will not materially adversely affect our business, operating results, or financial condition |
| Failure to manage and successfully integrate acquisitions could materially harm our business and operating results |
| Prior acquisitions have resulted in a wide range of outcomes, from successful introduction of new products and technologies to an inability to do so |
| Even when an acquired company has already developed and marketed products, there can be no assurance that product enhancements will be made in a timely fashion or that pre-acquisition due diligence will have identified all possible issues that might arise with respect to such products |
| From time-to-time, we have made acquisitions that resulted in in-process research and development expenses being charged in a single quarter |
| These charges may occur in any quarter, contributing to variability in our quarterly earnings |
| Risks related to new product development also apply to acquisitions |
| Our executive officers and certain key personnel are critical to our business |
| Our future operating results depend substantially upon the continued service of our executive officers and key personnel |
| Our future operating results also depend in significant part upon our ability to attract and retain qualified management, manufacturing, technical, engineering, marketing, sales and support personnel |
| Competition for qualified personnel is intense, and we cannot ensure success in attracting or retaining qualified personnel |
| There may be only a limited number of persons with the requisite skills to serve in these positions and it may be increasingly difficult for us to hire personnel over time |
| Our business, financial condition and results of operations could be materially adversely affected by the loss of any of our key employees, by the failure of any key employee to perform in his or her current position, or by our inability to attract and retain skilled employees |
| If the protection of our proprietary rights is inadequate, our business could be harmed |
| We attempt to protect our intellectual property rights through patents, copyrights, trademarks, maintenance of trade secrets and other measures, including entering into confidentiality agreements |
| However, we cannot be certain that others will not independently develop substantially equivalent intellectual property or that we can meaningfully protect our intellectual property |
| Nor can we be certain that our patents will not be invalidated, deemed unenforceable, circumvented or challenged, or that the rights granted thereunder will provide us with competitive advantages, or that any of our pending or future patent applications will be issued with claims of the scope we seek, if at all |
| Furthermore, we cannot be certain that others will not develop similar products, duplicate our products or design around our patents, or that foreign intellectual property laws, or agreements into which we have entered will protect our intellectual property rights |
| Inability or failure to protect our intellectual property rights could have a material adverse effect upon our business, financial condition and results of operations |
| In addition, from time to time we encounter disputes over rights and obligations concerning intellectual property, including disputes with parties with whom we have licensed technologies |
| We cannot assume that we will prevail in any such intellectual property disputes |
| We have been involved in extensive, expensive and time-consuming reviews of, and litigation concerning, patent infringement claims |
| 29 ______________________________________________________________________ [51]Table of Contents Our business may be harmed if we are found to infringe proprietary rights of others |
| We have at times been notified that we may be infringing intellectual property rights of third parties and we have litigated patent infringement claims in the past |
| We cannot be certain of the success in defending patent infringement claims or claims for indemnification resulting from infringement claims |
| We cannot be certain of success in defending current or future patent or other infringement claims or claims for indemnification resulting from infringement claims |
| Our business, financial condition and results of operations could be materially adversely affected if we must pay damages to a third party or suffer an injunction or if we expend significant amounts in defending any such action, regardless of the outcome |
| With respect to any claims, we may seek to obtain a license under the third party’s intellectual property rights |
| We cannot be certain, however, that the third party will grant us a license on reasonable terms or at all |
| We could decide, in the alternative, to continue litigating such claims |
| Litigation has been and could continue to be extremely expensive and time consuming, and could materially adversely affect our business, financial condition or results of operations, regardless of the outcome |
| We may be materially adversely affected by legal proceedings |
| We have been and may in the future be subject to various legal proceedings, including claims that involve possible infringement of patent or other intellectual property rights of third parties |
| It is inherently difficult to assess the outcome of litigation matters, and there can be no assurance that we will prevail in any litigation |
| Any such litigation could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results |
| Further, adverse determinations in such litigation could result in loss of our property rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our products, any of which could materially adversely affect our business, financial condition or results of operations |
| Recently enacted and proposed changes in securities laws and regulations are likely to increase our costs |
| Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002, have increased and will continue to increase our expenses as we evaluate the implications of new rules and devote resources to respond to the new requirements |
| Sarbanes-Oxley Act mandates, among other things, that companies adopt new corporate governance measures and imposes comprehensive reporting and disclosure requirements, sets stricter independence and financial expertise standards for audit committee members and imposes increased civil and criminal penalties for companies, their chief executive officers and chief financial officers and directors for securities law violations |
| In particular, we incurred and expect to incur additional administrative expense as we implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our Independent Registered Public Accounting Firm to attest to, our internal control over financial reporting |
| In addition, The Nasdaq National Market, on which our common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance |
| These laws, rules and regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices, which could harm our results of operations and divert management’s attention from business operations |
| We also expect these developments to make it more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| Further, our board members, Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their duties |
| As a result, we may have difficultly attracting and retaining qualified board members and executive officers, which would adversely affect our business |
| 30 ______________________________________________________________________ [52]Table of Contents We are subject to the internal control evaluation and attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 |
| Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required, beginning with our fiscal year ended October 31, 2005, to include in our annual report our assessment of the effectiveness of our internal control over financial reporting and our audited financial statements as of the end of each fiscal year |
| Furthermore, our independent registered public accounting firm (Firm) is required to attest to whether our assessment of the effectiveness of our internal control over financial reporting is fairly stated in all material respects and separately report on whether it believes we maintained, in all material respects, effective internal control over financial reporting as of the end of each fiscal year |
| We have successfully completed our assessment and obtained our Firm’s attestation as to the effectiveness of our internal control over financial reporting as of October 31, 2005 |
| In future years, if we fail to timely complete this assessment, or if our Firm cannot timely attest to our assessment, we could be subject to regulatory sanctions and a loss of public confidence in our internal control |
| In addition, any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to timely meet our regulatory reporting obligations |
| Terrorist attacks, terrorist threats, geopolitical instability and government responses thereto, may negatively impact all aspects of our operations, revenues, costs and stock price |
| The terrorist attacks in September 2001 in the United States and ensuing events and the resulting decline in consumer confidence has had a material adverse effect on the economy |
| In addition, any similar future events may disrupt our operations or those of our customers and suppliers |
| Our markets currently include Taiwan, Korea and Israel, which are experiencing political instability |
| In addition, these events have had and may continue to have an adverse impact on the US and world economy in general and consumer confidence and spending in particular, which could harm our sales |
| Any of these events could increase volatility in the US and world financial markets, which could harm our stock price and may limit the capital resources available to us and our customers or suppliers |
| This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock |
| We are subject to anti-takeover provisions that could delay or prevent an acquisition of our company |
| Provisions of our amended and restated certificate of incorporation, equity incentive plans, bylaws and Delaware law may discourage transactions involving a change in corporate control |
| In addition to the foregoing, our classified board of directors and the ability of our board of directors to issue preferred stock without further stockholder approval could have the effect of delaying, deferring or preventing a third party from acquiring us and may adversely affect the voting and other rights of holders of our common stock |