10-K 1 utek10-k2014.htm 10-K UTEK 10-K (2014)
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark one)
ý
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 2014
Or
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from              to             
Commission File Number: 0-22248
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ULTRATECH, INC.
(Exact name of registrant as specified in its charter)
Delaware
94-3169580
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
3050 Zanker Road
San Jose, California
95134
(Address of principal executive offices)
(Zip Code)
(408) 321-8835
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Common Stock, $0.001 Par Value Per Share
NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  ý
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ¨
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨
 
Accelerated filer   ý
 
 
 
Non-accelerated filer  ¨
(Do not check if a smaller reporting company)
Smaller reporting company  ¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The aggregate market value of voting stock held by non-affiliates of the Registrant, as of June 28, 2014, was approximately $324,931,806 (based upon the closing price for shares of the Registrant’s common stock as reported by the NASDAQ Global Market on that date, the last trading date of the Registrant’s most recently completed second quarter). Shares of common stock held by each officer, director and holder of 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
As of January 30, 2015, the Registrant had 27,398,774 shares of common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2015 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K.
 
 
 
 
 




Ultratech, Inc.

Index
 
 
 
 



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PART I

ITEM 1.    

BUSINESS     

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

The Company

Ultratech, Inc. (referred to herein as “Ultratech,” the “Company,” “we,” “our” or “us”) develops, manufactures and markets photolithography, laser thermal processing, and inspection equipment designed to reduce the cost of ownership for manufacturers of semiconductor devices, including advanced packaging processes and various nanotechnology components such as thin film head magnetic recording devices (“thin film heads” or “TFHs”), laser diodes, high-brightness light emitting diodes (“HBLEDs”) as well as atomic layer deposition systems (“ALD”) for customers located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia. Ultratech was incorporated in the state of Delaware in 1992.

Lithography and ALD

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

Advanced packaging manufacturing processes such as flip chip, wafer level chip scale packaging (“WLCSP”) and 3D packaging techniques, require several lithography steps in the device fabrication process. We believe that the use of flip chip technology will continue to gain traction as customers migrate towards leading edge technology nodes. It is expected that wafer level packaging technologies will continue to play an important role for continued miniaturization of electronic products such as smartphones. As customers transition to sub-28 nm manufacturing technology, traditional front end scaling is becoming increasingly complex. As such, semiconductor manufacturing companies are now also focusing on various packaging technologies such as Through Silicon Via (“TSV”) to play an important role in delivering improved system level performance in the future. The manufacturing approach utilizing three dimensional (“3-D”) TSV technology alleviates interconnect delay considerations by reducing global interconnect wiring length. In addition, TSV delivers superior bandwidth performance, and power management improvements and addresses some device latency issues. Several customers are also evaluating silicon interposer technology solutions for delivering improved bandwidth and system level performance.

Lithography is one of the critical process steps that affect the final device performance and associated yield for advanced packaging technology. The use of 1X stepper technology provides superior operational flexibility for thick resists utilized in the advanced packaging market. Furthermore, the use of our proprietary alignment systems enables easy insertion of our products for any back end of line application. Lastly, we have also developed a large number of application specific features which deliver technology leadership and superior economic value for our packaging customers. Our steppers are used to manufacture high volume, low cost semiconductors used in a variety of applications such as communications, personal computing, automotive control systems, power systems and consumer electronics. We also supply 1X photolithography systems to thin film head manufacturers and believe that our steppers offer advantages over certain competitive reduction lithography tools with respect to field size, throughput, specialized substrate handling and cost of ownership savings. In December 2012, we purchased certain assets of Cambridge NanoTech, Inc. (“Cambridge”) which was a technological leader in the ALD market. We will continue to pursue selling opportunities in the ALD market focusing our efforts on universities and research institutes. Additionally, we may sell these products for production applications.





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Laser Anneal Technology

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

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

Inspection

In 2012, we introduced a new in-line wafer inspection system, the Superfast 3G, based on patented coherent gradient sensing technology (“CGS”). The CGS technology was developed at the California Institute of Technology during the 1990’s, and we acquired the rights to develop the CGS technology when we acquired certain assets of a semiconductor inspection startup, Oraxion Inc., in July 2006. We developed a next-generation system in 2007 which was primarily used internally. Superfast 3G represents the third generation of this technology, which is focused on the inspection of a number of critical semiconductor inspection steps.
Our products and markets are more fully described below.

General Background

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

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

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

The two principal types of steppers currently in use by the semiconductor industry are reduction steppers, which are the most widely-used steppers, and 1X steppers. Reduction steppers, which typically have reduction ratios of four- or five-to-one, employ photomask patterns that are four or five times larger than the device pattern that is to be exposed on the wafer

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surface. In addition, there is now a fourth generation of lithography tools, known as step-and-scan systems, that typically address device sizes of 0.35 micron and below. In contrast to steppers, which require lenses that cover the entire field, step-and-scan optical systems have an instantaneous field just large enough to span the width of a field and employ scanning to stretch coverage over the entire field. Each scan is followed by re-registration of the wafer with respect to the mask, i.e. “stepping”, to create multiple fields covering the entire wafer. The smaller instantaneous field size of step-and-scan system projection optical systems allows them to resolve finer geometries and scanning allows them to cover larger fields.

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

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

In addition to enhancing our current lithography solutions, we continue to develop new tools to serve new markets such as advanced annealing. The LSA family of tools is aimed at volume production of advanced state of the art devices. These products, based on the same platform and stage technology as our advanced lithography tools, employ a 3500 Watt carbon dioxide laser to activate ultra-shallow, transistor junctions. Annealing times are reduced from several seconds, typical for the current generation of Rapid Thermal Processing (“RTP”) equipment, to a millisecond or less. This results in more abrupt junctions with higher dopant activation levels and leads to transistors with higher drive currents and lower leakage. While this technology is expected to be useful for multiple IC generations, we anticipate that eventually this technology will be superseded by a laser thermal processing technology that will exceed the melting point of silicon (1412°C) and reduce the processing time below one microsecond, thereby achieving even higher performance characteristics with almost “zero” thermal budget. We believe these new laser thermal processing technologies remove several critical barriers to future device scaling and will help to extend Moore’s Law well into the future.

Thermal annealing is used by the semiconductor industry for a variety of process steps, including activation of implanted impurities, dopant activation, dielectric film formation, formation of silicides and stabilization of copper grain structures. Our LSA systems compete with annealing tools currently in use by manufacturers of semiconductor devices, including both furnaces and RTP systems. It is widely recognized that there is a need for tools that anneal at higher temperatures for shorter periods of time. We believe our current laser annealing tools are already providing this capability in a production environment for dopant activation. Our customers are also developing other applications for our laser annealing tools such as high-k dialetric anneal and silicide formation.

Inspection requirements are evolving rapidly with the development of the next-generation device nodes. Tighter device specifications, new materials and new device geometries necessitate new ways to identify and eliminate the sources of defects that compromise device performance and reduce yield. The cost of these defects is also increasing; not only do individual wafers have more value, but more importantly, rapid resolution of defects and process issues can dramatically reduce time-to-market by enabling the ramp to high volume production sooner. Traditional inspection techniques can often be difficult to extend without significant increase in cost of ownership or decrease in throughput. New inspection techniques that are accurate, precise, rapid and provide large amounts of data are essential for providing device manufacturers the insight into efficiently resolving manufacturing issues during development and high-volume production alike.




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Products

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

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

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

The NanoTech steppers have enhanced capabilities directed at TFH backend, or rowbar processing applications. These steppers are used to expose the Air Bearing Surface (ABS) patterns on rowbars. We believe that our NanoTech steppers offer technology and productivity advantages over alternative technologies.

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

For the advanced packaging market, we offer our AP series built on the Unity Platform®. These advanced packaging systems were developed for high volume flip-chip and WLCSP manufacturing and 3-D packaging applications. They provide broadband or selective exposure (gh, i, or ghi-line), and are used in conjunction with downstream processes to produce a pattern of bumps, or metal connections, on the bond pads of the die for flip chip devices. Using flip chip interconnect may result in reduced signal inductance, reduced power/ground inductance, die shrink advantages and reduced package footprint.

The AP series, consisting of the AP300W, AP300 and AP200, is built on our Unity Platform and features a customer-configurable design that supports flexible manufacturing requirements as well as tool extendibility for multiple device generations. Designed specifically for advanced packaging applications, the AP systems integrate the processing advantages associated with our advanced packaging lithography equipment with the productivity benefits of our Unity Platform. We believe that this family of lithography systems support a lower cost-of-ownership strategy due to significant throughput enhancements, higher reliability, and superior alignment and illumination systems.

We offer a family of advanced laser-based thermal annealing tools built on our Unity Platform, the LSA101, LSA101LP, LSA201 and LSA201LP. In addition to our flagship model, the LSA101, which enables junction activation and other advanced front-end annealing processes for the 28nm node and below, we have introduced a novel dual beam technology extending the system's capabilities to lower processing temperatures (LSA101LP). The addition of the LP dual beam is targeted to enable middle-of-line (MOL) applications such as silicide formation. The LSA201 is our latest LSA product offering, which enables full-wafer ambient control processing targeted for sub-20nm nodes. The LSA201's simple and robust design includes our patented micro-chamber design for achieving ambient control in a scanning system. The LSA201 platform can also be configured with the dual beam laser mentioned above-named the LSA201LP. As devices scale below 20nm, we believe the ambient control capability enables new applications such as high-k anneal and film property modification.

In 2012, we also introduced our new in-line wafer inspection system, the Superfast 3G, which provides the flexibility to address a wide range of applications including improved overlay control and enhanced yield. At advanced technology nodes, variations in stress and distortion on a wafer can have a significant impact on device performance and yield. Based on CGS technology, we believe that our Superfast 3G provides the industry’s highest wafer resolution for the targeted applications and measures over 3 million points of data per 300mm wafer. The Superfast 3G is unique in that it collects data from the whole

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wafer simultaneously, providing significantly higher data density without the need for targets or pads. The system’s high data density enables a wide range of applications from one measurement, as within-die, die-to-die and wafer-to-wafer process variations can be characterized quickly and comprehensively. The Superfast 3G approach provides other key advantages as well. First, data is obtained within each die at the location of the devices (not the location of a test target) and within-die variations can be mapped via approximately 10,000 data points. Second, data acquisition is inherently faster using rapid image capture of the whole wafer with a camera. Third, data is obtained to within 2mm of the wafer edge, providing a means to characterize issues with edge-die, which dominate yield loss at leading edge nodes.
In addition to selling new systems, we sell upgrades to systems in our installed base.    
Research, Development and Engineering

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

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

We have historically devoted a significant portion of our financial resources to research and development programs and expect to continue to allocate significant resources to these efforts in the future. As of December 31, 2014, we had approximately 89 full-time employees engaged in research, development and engineering. For 2014, 2013 and 2012, total research, development and engineering expenses were approximately $33.6 million, $33.6 million and $30.1 million, respectively, and represented 22%, 21% and 13% of our net sales, respectively.

Sales and Service

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

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

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

Manufacturing

Until the third quarter of 2010, we performed all of our manufacturing activities (final assembly, system testing and certain subassembly) in clean room environments totaling approximately 25,000 square feet located in San Jose, California. Performing manufacturing operations in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, California has previously experienced power shortages which have interrupted our operations. Such shortages could occur in the future and could again interrupt our operations resulting in product shipment delays, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations.

Beginning in the fourth quarter of 2010, we started a manufacturing operation in Singapore for the production of our lithography and inspection products. This facility consists of approximately 9,000 square feet of additional clean-room production space for the manufacturing of our advanced packaging Unity AP products, HBLED, Sapphire and Superfast 3G inspection product platforms.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to external suppliers, who then machine the lens elements. We then assemble and test the optical 1X lenses. We have recorded the critical parameters of each of our optical lenses sold since 1988, and we believe that such information enables us to supply lenses to our customers that match the characteristics of our customers’ existing lenses.

We procure some of our other critical systems’ components, subassemblies and services from single outside suppliers or from a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To date, we have been able to obtain adequate services and supplies of components and subassemblies for our systems in a timely manner. We are actively engaged with a number of our Asia-based suppliers to provide high precision parts and major opto-mechanical and electro-mechanical sub-assemblies and modules for our lithography products both in Singapore and San Jose. However, disruption or termination of certain of these sources could result in a significant adverse impact on our ability to manufacture our systems. This, in turn, would have a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole or a limited group of suppliers and our reliance on subcontractors exposes us to several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers’ failure or inability to provide such components in a timely manner, or at all, to our standards of quality, and reduced control over pricing and timely delivery of components. Manufacture of certain of these components and subassemblies is an extremely complex process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our products, which could damage relationships with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.

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

Competition

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor packaging or nanotechnology device production line. We believe that once a device manufacturer or packaging subcontractor has selected a particular supplier’s capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another supplier’s capital equipment has been selected as they are relying on reduced cost of ownership

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solutions and a decision by a customer to change solutions could have a material and adverse effect on our business and operating results.
 
Advanced Packaging and HBLED Lithography
 
We experience competition in the advanced packaging lithography market from various reduction steppers and proximity and projection aligner companies such as Canon Incorporated, Nikon Corporation (“Nikon”), Suss Microtec AG (“Suss Microtec”), Rudolph Technologies, Inc. (“Rudolph”), Shanghai Micro Electronics Equipment Co., Ltd (“SMEE”), ORC Manufacturing Co., Ltd., Ushio and from third party re-sale of used projection systems. We expect our competitors to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features. We believe that to be competitive, we will require significant financial resources to continue to invest in new product development, to invest in new features and enhancements to existing products, to introduce new generation stepper systems in our served markets on a timely basis, and to maintain customer service and support centers worldwide. In marketing our products, we may also face competition from suppliers employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

Our primary competition in the HBLED lithography market comes from contact, proximity and projection aligners offered by companies such as Suss Microtec, Ushio and EV Group, by stepper companies such as SMEE, as well as by third party sales of used reduction steppers including Nikon and ASML. Although contact, proximity aligners, and used reduction steppers generally have lower purchase prices than new 1X steppers, 1X steppers offer lower operating costs and favorable total cost of ownership in most applications. We believe that most device and HBLED manufacturers choose 1X steppers for the yield improvement, and lower modification costs, offered by the use of non-contact projection lithography.

Laser Thermal Processing
 
With respect to our laser annealing technologies, marketed under the LSA product name, our primary competition comes from companies such as Dainippon Screen Manufacturing Co., Ltd., Applied Materials, Inc. and Mattson Technology, Inc. Many of these companies also offer products utilizing RTP, which is the dominant manufacturing technology for devices above 65nm. The dopant diffusion in the lateral dimension resulting from the time scales associated with RTP limits the scaling of transistors to advanced technology nodes. Shorter annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal budgets and are working toward this goal. Several companies offer annealing tools that incorporate flash lamp anneal (“FLA”) technology, a potential advanced annealing solution, in order to reduce annealing times and increase anneal temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the 28nm node and below. This technique, which employs flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser thermal processing solution has been specifically developed to provide junction annealing on near-instantaneous timescales, while achieving high activation levels, and doing so very uniformly within the chip and within the wafer due to our unique long wavelength technology. LSA, our first implementation of laser thermal processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon time durations in the microsecond to millisecond range are required to achieve full activation, with minimal dopant diffusion.
 
In July 2000, we licensed certain rights to our then existing laser thermal processing technology, with reservations, to a competing manufacturer of semiconductor equipment. This company and others currently offer laser annealing tools to the semiconductor industry that compete with our offerings.

Inspection

Competition for the Superfast inspection systems comes from a wide range of companies, including large companies such as KLA-Tencor, as well as numerous smaller companies developing and manufacturing inspection equipment such as Nanometrics, Rudolph, Frontier Semiconductor (FSM) and Nova Measuring Instruments. Similarly, there is an extremely wide range of technologies and approaches used by the competitors. Each individual technology will have advantages for certain specific inspection applications. In general, these competitors offer systems that inspect and measure at one location on the wafer, or one data point, at a time. This can limit overall data density to only a few hundred data points per wafer, as well as

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limit throughput. Often these competitive systems require dedicated targets, pads or other special features in order to make a measurement, making them less flexible in production environments.

Intellectual Property Rights

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. Our intellectual property portfolio contains 1,018 patents and patent applications. We have patent expiration dates ranging from February 2015 to June 2033. In addition, we also have various registered trademarks and copyright registrations covering mainly applications used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies, or the expiration of patents covering our key technologies, could allow our competitors to more effectively compete against us, which could result in less revenue for us.

Environmental Regulations

We are subject to a variety of governmental regulations relating to the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. We believe that we are currently in compliance in all material respects with such regulations and that we have obtained all necessary environmental permits to conduct our business. Nevertheless, the failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, and alteration of the manufacturing process or cessation of operations. In order to comply with such regulations, we may be required to acquire expensive remediation equipment or to incur substantial expenses. Any failure by us to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances could subject us to significant liabilities.

Customers, Applications and Markets

We sell our systems to semiconductor, advanced packaging, HBLED, TFH and various other nanotechnology manufacturers located throughout North America, Europe and Asia. We sell our ALD systems to universities and research institutes throughout the world. Semiconductor manufacturers have purchased the 1000 Series steppers, the AP series of steppers, the NanoTech steppers, the LSA systems or the Superfast systems for the fabrication and/or packaging of microprocessors, applications processors, microcontrollers, DRAMs, ASICs and a host of other devices. Such systems could be used in mix-and-match applications with other production tools, such as for replacements of contact proximity printers for flip chip applications, and for high volume capacity production.

On a market application basis, sales to the semiconductor industry, primarily for advanced packaging and laser thermal processing applications, accounted for approximately 81% of systems revenue for the year ended December 31, 2014, as compared to 83% and 84% for the years ended December 31, 2013 and 2012, respectively. During the years ended December 31, 2014, 2013 and 2012, approximately 19%, 17% and 16%, respectively, of our systems revenue was derived from sales to nanotechnology manufacturers, including LED, MEMS and TFH manufacturers. Our future results of operations and financial position would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries.

International sales accounted for approximately 68%, 72% and 65% of total net sales for the years ended December 31, 2014, 2013 and 2012, respectively, with Asia representing 56%, 63% and 46% of total net sales for those same years and Europe representing 12%, 9% and 19% of total net sales for those same years, respectively.

Sales of our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity or to restructure current manufacturing facilities, either of which typically involves a significant

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commitment of capital. Many of our customers in the past have cancelled or postponed the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. In view of the significant investment involved in a system purchase, we have experienced and may continue to experience delays following initial qualification of our systems as a result of delays in a customer’s approval process. Additionally, we are presently receiving orders for some systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers’ capacity scheduling requirements. For these and other reasons, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able to obtain those orders.

Backlog

We schedule production of our systems based upon order backlog, informal customer commitments and general economic forecasts for our targeted markets. We include in our backlog all accepted customer orders for our systems with assigned shipment dates within one year, as well as all orders for service, spare parts and upgrades, in each case, that management believes to be firm. However, all orders are subject to cancellation or rescheduling by the customer with limited or no penalties. Because of changes in system delivery schedules, cancellations of orders and potential delays in system shipments, our backlog at any particular date may not necessarily be representative of actual sales for any succeeding period. As of December 31, 2014, our backlog was approximately $70.9 million, including $5.7 million of products shipped but not yet installed. As of December 31, 2013, our backlog was approximately $132.7 million, including $4.7 million of products shipped but not yet installed. Cancellation, deferrals or rescheduling of orders by these customers would have a material adverse impact on our future results of operations.

Employees

At December 31, 2014, we had approximately 342 full-time employees, including 89 engaged in research, development and engineering, 40 in sales and marketing, 111 in customer service and support, 65 in manufacturing and 37 in general administration and finance. We believe our future success depends, in large part, on our ability to attract and retain highly skilled employees. None of our employees are covered by a collective bargaining agreement. We have, however, entered into employment agreements with our Chief Executive Officer and Chief Financial Officer. We consider our relationships with our employees to be good.

Information Available at the Securities and Exchange Commission

Copies of any materials that we have filed with the Securities and Exchange Commission (“SEC”) can be viewed at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information regarding the operations of the Public Reference Room can be obtained from the SEC by calling the SEC at 1-800-SEC-0330. Additionally, the SEC maintains a website that contains reports, proxy and other information that we have filed with the SEC. The SEC website can be found at http://www.sec.gov.

Information Available on Our Website

Our website is located at http://www.ultratech.com. We make available, free of charge, through our website, our annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (and amendments to those reports), as soon as reasonably practicable after such reports are filed electronically with the SEC. We have adopted a Code of Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted this Code of Ethics on our website. Any future amendments to this Code will also be posted on our website.

ITEM IA.
RISK FACTORS

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




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The semiconductor industry historically has been highly cyclical and has experienced periods of oversupply and technology changes, which have in turn affected the market for semiconductor equipment such as ours and which can adversely affect our results of operations during such periods.

Our business depends in significant part upon capital expenditures by manufacturers of semiconductors, advanced packaging semiconductors and nanotechnology components which in turn depend upon the current and anticipated market demand for such devices and products utilizing such devices. The semiconductor industry historically has been highly cyclical and has experienced recurring periods of oversupply and technology changes. This has, from time to time, including our most recent fiscal year, resulted in significantly reduced demand for capital equipment and pricing pressure, including on the systems manufactured and marketed by us, and uncertainty among our customers. We believe that markets for new generations of semiconductors, semiconductor packaging and inspection will also be subject to similar fluctuations. Our business and operating results would be materially adversely affected by downturns or slowdowns in the semiconductor packaging market or by loss of market share. Accordingly, we may not be able to achieve or maintain our current or prior level of sales. We attempt to mitigate the risk of cyclicality by participating in multiple markets including semiconductor, semiconductor packaging, semiconductor inspection and nanotechnology sectors as well as diversifying into new markets. We believe that diversifying into new markets such as laser-based annealing for implant activation, lithography steppers for 3-D packaging, HBLED, ALD and inspection can help mitigate the effects of this cyclicality in our industry. Despite such efforts, when one or more of such markets fails to become viable as we anticipate or experience a downturn, our net sales and operating results are materially adversely affected. For example, we have experienced less revenue from laser processing as a result of the semiconductor logic foundries’ inability to effectively increase yields in 3-D FinFET devices to a level required to invest in their production ramp. Customers who manufacture both logic and memory devices are focusing their capital spending on the memory sector at this time. We believe that as a result of cyclicality and of other factors affecting our foundry customers, such as shifting customer demand, lower capacity utilization rates and changing product designs, we have and we will continue to experience reduced sales, the push out of orders to us and uncertainty in our business.

Our quarterly revenues and operating results are difficult to predict.

Our revenues and operating results may fluctuate significantly from quarter to quarter due to a number of factors, not all of which are in our control. We manage our expense levels based in part on our expectations of future revenues, and a certain amount of those expenses are relatively fixed. As a result, a change in the timing of recognition of revenue or a change in margins can have a significant impact on our operating results in any particular quarter. Factors that may cause our results of operations to fluctuate include, but are not limited to:
market conditions in the electronics and semiconductor industries;
failure of suppliers to perform in a manner consistent with our expectations;
manufacturing difficulties or delays;
customer cancellations or delays in orders, shipments, installations and/or system acceptances;
product performance issues;
competitive factors, including customers selecting competitors’ products, the introduction of new products by our competitors or any failure of our products to gain or maintain market acceptance; and
changes in selling prices and product mix.

Some of our current and potential competitors have significantly greater resources than we do, and increased competition could adversely impact sales of our products and our gross margins.

We are a comparatively small company in the highly competitive semiconductor equipment industry where we face competition from a number of companies, many of which are larger and have greater financial, engineering, manufacturing, research and development, marketing and customer support resources than we do. As a result, our competitors may be able to devote greater resources to the development, promotion and sale of new products that are competitive with our products, which could negatively impact sales of our systems. Moreover, there has been merger and acquisition activity among our competitors and potential competitors. These transactions may result in our competitors accumulating an increased amount of resources allowing them to bring to market a portfolio of products and achieve a competitive “product grouping strategy” advantage over us. As a result, there is no assurance that we will continue to achieve market share at a sufficient gross margin.


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We operate in a highly competitive industry in which customers are required to invest substantial resources in each product, which makes it difficult to achieve significant sales to a particular customer once another vendor’s equipment has been purchased by that customer.

The capital equipment industry in which we operate is intensely competitive. A substantial investment is required to install and integrate capital equipment into a semiconductor, semiconductor inspection, semiconductor packaging or nanotechnology device production line. Advanced technologies have also tended to become more capital intensive. We believe that once a device manufacturer or packaging subcontractor has selected a particular supplier’s capital equipment, the manufacturer generally relies upon that equipment for the specific production line application and, to the extent possible, subsequent generations of similar products. Accordingly, it is difficult to achieve significant sales to a particular customer once another supplier’s capital equipment has been selected.
    
We experience competition in advanced packaging from various proximity aligner and stepper companies such as Canon Incorporated, Nikon Corporation, ORC Manufacturing Co., Ltd., Rudolph Technologies, Inc. (“Rudolph”), Shanghai Micro Electronics Equipment Co., Ltd (“SMEE”), Suss Microtec AG (“Suss Microtec”), Ushio as well as from the secondary market from used projection and reduction stepper systems. In nanotechnology, we experience competition from contact, proximity and projection aligner companies, such as Nikon Engineering, SMEE, Suss Microtec and Ushio as well as other third party stepper suppliers. We expect our competitors in the lithography arena to continue to improve the performance of their current products and to introduce new products with improved price and performance characteristics. This could cause a decline in sales or loss of market acceptance of our steppers in our served markets, and thereby materially adversely affect our business, financial condition and results of operations. Enhancements to, or future generations of, competing products may be developed that offer superior cost of ownership and technical performance features.

With respect to our laser annealing technologies, marketed under the LSA101 and LSA201 product names, our primary millisecond anneal competition comes from companies such as Dainippon Screen Manufacturing Co., Ltd., Applied Materials, Inc. (“Applied Materials”) and Mattson Technology, Inc. In September 2013, Applied Materials and Tokyo Electron Limited announced that they had entered into a definitive agreement to merge, and if such merger is consummated, the combined company may have significant resources which could impact laser annealing as well as potentially other markets. Many of these companies offer products utilizing Rapid Thermal Processing (“RTP”), which is the current prevailing manufacturing technology. RTP does not prevent semiconductor device manufacturers from scaling the lateral dimensions of their transistors to obtain improved performance, but diffusion resulting from the time scales associated with RTP limits the vertical dimension of the junctions. Faster annealing times result in shallower and more abrupt junctions and faster transistors. We believe that RTP manufacturers recognize the need to reduce thermal cycle times and are working toward this goal. In July 2000, we licensed certain rights to our then existing laser thermal processing technology, with reservations, to a competing manufacturer of semiconductor equipment. We presently anticipate that this company and others intend to offer laser annealing tools to the semiconductor industry that will compete with our offerings.

Another potential advanced annealing solution utilizes flash lamp annealing technology, or “FLA.” Several companies have published papers on annealing tools that incorporate flash lamp technology in order to reduce annealing times and increase annealing temperatures. Developers of FLA technology claim to have overcome annealing difficulties at the advanced nodes. This technique, which employs flash lamps, has shown improvements over RTP in junction depth and sheet resistance, but we believe FLA suffers from pattern-related non-uniformities and could require additional, costly processes to equalize the reflectivity of different areas within the chip or wafer. Our proprietary laser thermal processing solution has been specifically developed to provide junction annealing on near-instantaneous time-scales, while achieving high activation levels. Laser thermal annealing, our first implementation of laser thermal processing, activates dopants in the microsecond-to-millisecond time frame without melting. Our research indicates that, at temperatures just below the melting point of silicon, time durations in the microsecond to millisecond range, are required to achieve full activation, and minimal dopant diffusion.

Additionally, competition to our laser thermal processing products may come from other laser annealing tools, including those presently being used by the flat panel display industry to re-crystallize silicon. Manufacturers of these tools may try to extend the use of their technologies to semiconductor device applications.

In the market for inspection systems, competition for inspection systems comes from a wide range of companies, including large companies such as KLA-Tencor, Nanometrics, Rudolph, and numerous smaller companies developing and manufacturing inspection equipment.

We believe that in order to be competitive, we will need to continue to invest significant financial resources in new product development, new features and enhancements to existing products, the introduction of new stepper systems in our served markets on a timely basis, and maintaining customer service and support centers worldwide. In marketing our products,

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we may also face competition from vendors employing other technologies. In addition, increased competitive pressure has led to intensified price-based competition in certain of our markets, resulting in lower prices and margins. Should these competitive trends continue, our business, financial condition and operating results may be materially adversely affected.

Our sales cycle is typically lengthy and involves a significant commitment of capital by our customers, which has subjected us, and is likely to continue to subject us, to delays in system acceptances of our products and other risks, any of which could adversely impact our results of operations by, among other things, delaying recognition of revenue with respect to those orders and resulting in increased installation, qualification and similar costs.

Sales of our systems depend, in significant part, upon the decision of a prospective customer to increase manufacturing capacity, replace older equipment or to restructure current manufacturing facilities, any of which typically involves a significant commitment of capital. Many of our customers in the past have canceled or postponed the development of new manufacturing facilities and have substantially reduced their capital equipment budgets. Many of our largest customers currently face uncertainty in the markets they serve, resulting in delays in placing new orders, the push out of previous orders to us and uncertainty in our business.

In view of the significant investment involved in a system purchase, we have experienced and may continue to experience delays following initial qualification of our systems as a result of delays in a customer’s approval process. Additionally, we are presently receiving orders for systems that have lengthy delivery schedules, which may be due to longer production lead times or a result of customers’ capacity scheduling requirements. For these and other reasons, our systems typically have a lengthy sales cycle during which we may expend substantial funds and management effort in securing a sale. Lengthy sales cycles subject us to a number of significant risks, including inventory obsolescence and fluctuations in operating results, over which we have little or no control. In order to maintain or exceed our present level of net sales, we are dependent upon obtaining orders for systems that will ship and be accepted in the current period. We may not be able to obtain those orders. Other important factors that could cause demand for our products to fluctuate include:
competitive pressures, including pricing pressures, from companies that have competing products;
changes in customer product needs or product preferences; and
strategic actions taken by our competitors.

Our stock price has experienced significant volatility in the past and we expect this to continue in the future as a result of many factors, some of which could be unrelated to our operating performance, and such volatility can have a major impact on the number of shares subject to outstanding stock options and restricted stock units that are included in calculating our earnings per share.

We believe that factors such as announcements of developments related to our business, fluctuations in our operating results, a shortfall in revenue or earnings, changes in our or analysts’ expectations, general conditions in the semiconductor and nanotechnology industries or the worldwide or regional economies, sales of our securities into the marketplace, our share repurchase program, an outbreak or escalation of hostilities, announcements of technological innovations or new products or enhancements by us or our competitors, developments in patents or other intellectual property rights and developments in our relationships with our customers and suppliers could cause the price of our common stock to fluctuate, perhaps substantially. The market price of our Common Stock has fluctuated significantly in the past and we expect it to continue to experience significant fluctuations in the future, including fluctuations that may be unrelated to our performance.

As of December 31, 2014, we had outstanding options to purchase and outstanding restricted stock units for a total of 4.4 million shares of our common stock. Among other determinants, the market price of our stock has a major impact on the number of shares subject to outstanding stock options and restricted stock units that are included in the weighted-average shares used in determining our net income per share. During periods of extreme volatility, the impact of higher stock prices can have a materially dilutive effect on our net income per share. Additionally, shares subject to outstanding options and restricted stock units are excluded from the calculation of net income per share when we have a net loss or when the exercise price and the average unrecognized compensation cost of the stock option or restricted stock unit is greater than the average market price of our common stock, as the impact of the stock options or restricted stock units would be anti-dilutive.

Our industry is subject to rapid technological change and product innovation, which could result in our technologies and products being replaced by those of our competitors, which would adversely affect our business and results of operations.


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The semiconductor and nanotechnology manufacturing industries are subject to rapid technological change, evolving industry standards and new product introductions and enhancements. Our ability to be competitive in these and other markets will depend, in part, upon our ability to develop new and enhanced systems and related applications, and to introduce these systems and related applications at competitive prices and on a timely and cost-effective basis to enable customers to integrate them into their operations either prior to or as they begin volume product manufacturing. We will also be required to enhance the performance of our existing systems and related applications. Our success in developing new and enhanced systems and related applications depends upon a variety of factors, including product selection, timely and efficient completion of product design, timely and efficient implementation of manufacturing and assembly processes, product performance in the field and effective sales and marketing. Product failures may result in customer dissatisfaction, high service and support costs, rework and increased inventory. Because new product development commitments must be made well in advance of sales, new product decisions must anticipate both future customer requirements and the technology that will be available to meet those requirements. We may not be successful in selecting, developing, manufacturing or marketing new products and related applications or enhancing our existing products and related applications. Any such failure would materially adversely affect our business, financial condition and results of operations. Further, we have in the past and may in the future make substantial investments in new products before we know whether they are technically feasible or commercially viable, and as a result may incur significant product development expenses that do not result in new products or revenues.

Because of the large number of components in our systems, significant delays can occur between a system’s introduction and our commencement of volume production of such systems. We have experienced delays from time to time in the introduction of, and technical and manufacturing difficulties with, certain of our systems and enhancements and related application tools features and options, and may experience delays and technical and manufacturing difficulties in future introductions or volume production of new systems or enhancements and related application tools features and options.

We may encounter additional technical, manufacturing or other difficulties that could further delay future introductions or volume production of systems or enhancements. Our inability to complete the development or meet the technical specifications of any of our systems or enhancements and related applications, or our inability to manufacture and ship these systems or enhancements and related tools in volume and in time to meet the requirements for manufacturing the future generation of semiconductor or nanotechnology devices would materially adversely affect our business, financial condition and results of operations. In addition, we may incur substantial unanticipated costs to ensure the functionality and reliability of our products early in the products’ life cycles. If new products have reliability or quality problems, reduced orders or higher manufacturing costs, delays in system acceptance, revenue recognition and collecting accounts receivable and additional service and warranty expenses may result. Any of such events may materially adversely affect our business, financial condition and results of operations.

We sell our products primarily to a limited number of customers and to customers in a limited number of industries, which subjects us to increased risks related to the business performance of our customers, and therefore their need for our products, and the business cycles of the markets into which we sell.

Historically, we have sold a substantial portion of our systems to a limited number of customers. In the year ended December 31, 2014, Intel Corporation (“Intel”), Samsung and Global Foundries Incorporated (“GFI”) accounted for 18%, 14%, and 13% of our total systems sales, respectively. In the year ended, December 31, 2013, Siliconware Precision Industries (“SPIL”) accounted for 16% of our system sales. We expect that sales to a relatively few customers will continue to account for a high percentage of our net sales in the foreseeable future and believe that our financial results depend in significant part upon the success of these major customers and our ability to meet their future capital equipment needs. Although the composition of the group comprising our largest customers may vary from period to period, the loss of a significant customer or any reduction in orders by a significant customer, including reductions due to market, economic or competitive conditions in the semiconductor, semiconductor packaging, semiconductor inspection or nanotechnology industries or in the industries that manufacture products utilizing integrated circuits, thin film heads or other nanotechnology components, would likely have a material adverse effect on our business, financial condition and results of operations. Our ability to maintain or increase our sales in the future depends, in part, on our ability to obtain orders from new customers as well as the financial condition and success of our existing customers, the semiconductor and nanotechnology industries and the economy in general.

In addition to the business risks associated with dependence on a few major customers, these significant customer concentrations have in the past resulted in significant concentrations of accounts receivable. These significant and concentrated receivables expose us to additional risks, including the risk of default by one or more customers representing a significant portion of our total receivables. If we were required to take additional accounts receivable reserves, our business, financial condition and results of operations would be materially adversely affected.


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On a market application basis, sales to the semiconductor industry, primarily for advanced packaging applications and laser thermal processing applications, accounted for 81% and 83% of our systems revenue for the year ended December 31, 2014 and 2013, respectively. We sold $21.7 million of systems to nanotechnology manufacturers, including micro systems, thin film head, ALD and optical device manufacturers for the year ended December 31, 2014, as compared to $20.3 million in sales for the year ended December 31, 2013. Systems revenue from the nanotechnology sector accounted for 19% of systems revenue for the year ended December 31, 2014, as compared to 17% revenue in the year ended December 31, 2013. Our future operating results and financial condition would be materially adversely impacted by a downturn in any of these industries, or by loss of market share in any of these industries. A growing percentage of our backlog of system orders is comprised of laser thermal processing tools. As our laser thermal processing tools are used for the continuation of reduced device geometries and customers seldom provide us with their future technical requirements, these tools may not meet all customers’ requirements upon initial delivery and installation at the customer’s facility. As a result, system acceptance of the tool could be delayed while we perform testing and attempt to meet their requirements, or the order could be cancelled if we are unable to meet those requirements. Should significant demand not materialize, due to technical, production, market or other factors, our business, financial position and results of operations would be materially adversely impacted.

We currently spend, and expect to continue to spend, significant resources to develop, introduce and commercialize our offered products and future generations of, and enhancements to these products. We may not be successful in the timely introduction of these products which may cause sales of these products to decrease or not increase as expected.

Currently, we are devoting significant resources to the development, introduction and commercialization of our laser thermal processing systems, and other products, and future generations of, and enhancements to, those products. We intend to continue to develop these products and technologies, and will continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing and general and administrative costs in order to develop, produce and support these new products and enhancements. There can be no assurance that our expenditures to develop these products will result in improved sales or that markets for these products will become viable. Additionally, gross profit margins and inventory levels may be further adversely impacted in the future by costs associated with the initial production of new products. Introduction of new products generally involves higher installation costs and product performance uncertainties that could delay system acceptance of our systems, resulting in a delay in recognizing revenue associated with those systems and a reduction in gross margins. These costs include, but are not limited to, additional manufacturing overhead, additional inventory write-downs, costs of demonstration systems and facilities and costs associated with the establishment of additional after-sales support organizations. Additionally, operating expenses may increase, relative to sales, as a result of adding additional marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our operating results could be materially adversely affected.

Our ability to commercialize our laser thermal processing technologies depends on our ability to demonstrate a manufacturing-worthy tool. We do not presently have in-house capability to fabricate devices. As a result, we must rely on partnering with semiconductor companies to develop the anneal process. The development of new process technologies is largely dependent upon our ability to interest potential customers in working on joint process development. Our ability to deliver timely solutions is also limited by wafer turnaround at the potential customer’s fabrication facility.

If we acquire companies, products, or technologies, we may face risks associated with those acquisitions.

We may not realize the anticipated benefits of any acquisition or investment. Acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. We may, in the future, pursue additional acquisitions of complementary product lines, technologies or businesses. Future acquisitions may require use of substantial amounts of our cash, cash equivalents and short-term investments, result in potentially dilutive issuances of equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies, and on single or a limited group of outside suppliers for certain materials for our products, which could result in a potential inability to obtain an adequate supply of required components due to quality problems, the

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suppliers’ failure or inability to provide such components in a timely manner, or at all, and reduced control over pricing and timely delivery of components and materials, any of which could adversely affect our results of operations.

Our manufacturing activities consist of assembling and testing components and subassemblies, which are then integrated into finished systems. We rely on a limited number of outside suppliers and subcontractors to manufacture certain components and subassemblies. We order one of the most critical components of our technology, the glass for our 1X lenses, from external suppliers. We design the 1X lenses and provide the lens specifications and the glass to other suppliers, who then grind and polish the lens elements. We then assemble and test the optical 1X lenses.

We procure some of our other critical systems’ components, subassemblies and services from single outside suppliers or a limited group of outside suppliers in order to ensure overall quality and timeliness of delivery. Many of these components and subassemblies have significant production lead times. To date, we have been able to obtain adequate services and supplies of components and subassemblies for our systems in a timely manner. However, disruption or termination of certain of these sources could have a significant adverse impact on our ability to manufacture our systems. In addition, our failure to timely use components in our manufacturing processes due to delays or cancellation of orders or quality problems requiring us to return components may lead to write downs of inventory. A disruption in supply or inventory window would, in turn, cause us to miss or delay shipments and would increases costs causing a material adverse effect on our business, financial condition and results of operations. Our reliance on a sole supplier or a limited group of suppliers and our reliance on subcontractors involve several risks, including a potential inability to obtain an adequate supply of required components due to the suppliers’ failure or inability to provide such components in a timely manner, to our quality standards, or at all, and reduced control over pricing and timely delivery of components. Manufacture of certain of these components and subassemblies is an extremely complex process, and long lead-times are required. Any inability to obtain adequate deliveries or any other circumstance that would require us to seek alternative sources of supply or to manufacture such components internally could delay our ability to ship our products, which could damage relationships with current and prospective customers and have a material adverse effect on our business, financial condition and results of operations.

We continue to expand our manufacturing and service operations in Singapore and customer support operations in other parts of the world, which will continue to result in exposure to risks inherent in doing business outside the United States, any of which risks could harm our business, financial condition and operating results.

Foreign operations subject us to risks related to the political, economic, legal and other conditions of foreign jurisdictions. These risks include risks related to:
foreign exchange rate fluctuations;
the need to comply with foreign government laws and regulations, including the imposition of regulatory requirements, tariffs, and import and export restrictions;
general geopolitical risks such as political and economic instability and changes in diplomatic and trade relationships;
the need for effective management of dispersed operations far from our headquarters in California;
the potential for strain on management resources;
difficulty in hiring and retaining local personnel for the successful operation of our business in each location;
the need to effectively manage personnel in different languages and under different cultural and legal expectations and requirements in certain locations;
meeting growth objectives and employment projections;
potentially less protection of intellectual property under the laws of foreign jurisdictions in certain locations; and
public safety or health concerns or natural disasters in foreign countries.

These risks could, among other things, result in product shipment delays, increased costs, unexpected shutdowns or other business disruptions, or loss of benefits expected to be achieved by conducting operations in affected jurisdictions. Any of the above risks, should they occur, could have a material adverse effect on our business, financial condition and results of operations.

We are dependent on our key personnel, especially Mr. Zafiropoulo, our Chief Executive Officer, and our business and results of operations would be adversely affected if we were to lose our key employees.


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Our future operating results depend, in significant part, upon the continued contributions of key personnel, many of whom would be difficult to replace. We have entered into employment agreements only with our Chief Executive Officer and Chief Financial Officer, and our employees are employed “at will.” The agreements with our Chief Executive Officer and Chief Financial Officer contain vesting acceleration and severance payment provisions that could result in significant costs or charges to us should the employee be terminated without cause, die or become disabled. We do not maintain any life insurance on any of our key employees. The loss of key personnel could have a material adverse effect on our business, financial condition and results of operations. In addition, our future operating results depend in significant part upon our ability to attract and retain other qualified management, manufacturing, technical, sales and support personnel for our operations. There are only a limited number of persons with the requisite skills to serve in these positions and it may become increasingly difficult for us to hire such personnel over time. At times, competition for such personnel has been intense, particularly in the San Francisco Bay Area where we maintain our headquarters and principal operations, and we may not be successful in attracting or retaining such personnel. The failure to attract or retain such persons would have a material adverse effect on our business, financial condition and results of operations.

A substantial portion of our sales are outside of the United States, which subjects us to risks related to customer service, installation, foreign economic and political stability, uncertain regulatory and tax rules, and foreign exchange rate fluctuations, all of which make it more difficult to operate our business.

International sales accounted for approximately 68% of total net sales for the year ended December 31, 2014, as compared to 72% in the year ended December 31, 2013. We anticipate that international sales will continue to account for a significant portion of total net sales. Although we generally transact our international sales in U.S. dollars, international sales expose us to a number of additional risk factors, including fluctuations in the value of local currencies relative to the U.S. dollar, which, in turn, impact the relative cost of ownership of our products and may further impact the purchasing ability of our international customers. We have direct sales operations in Japan and orders are often denominated in Japanese yen. This may subject us to a higher degree of risk from currency fluctuations. We attempt to mitigate this exposure through foreign currency hedging. We are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of semiconductors and nanotechnology products. We cannot predict whether the United States or any other country will implement changes to quotas, duties, taxes or other charges or restrictions upon the importation or exportation of our products. These factors, or the adoption of restrictive policies, may have a material adverse effect on our business, financial condition and results of operations. Additionally, by having a significant portion of our sales occur internationally, we are continually exposed to political and economic instability; difficulties in accounts receivable collections; reduced protection of intellectual property; natural disasters; difficulties in staffing and managing foreign subsidiary and branch operations; and potentially adverse tax consequences.

To better align with the increasingly international nature of our business, we transitioned certain manufacturing processes to Singapore, thereby bringing these activities closer to our Asian customers. This movement is somewhat recent and our experience in international manufacturing operations is limited. If we are unable to successfully operate the site to efficiently manufacture systems, our business, financial condition and results of operations could be materially adversely impacted.

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

A number of factors may negatively impact our future effective tax rates including, but not limited to:
 
the jurisdictions in which profits are determined to be earned and taxed;
changes in valuation of our deferred tax assets and liabilities;
increases in expenses not deductible for tax purposes;
changes in available tax credits;
changes in stock-based compensation; and
changes in tax laws or the interpretation of such tax laws and changes in generally accepted accounting principles in the United States or other countries in which we operate.
 
We are eligible for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. Our ability to realize benefits from these initiatives could be materially affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.


18



We may not be successful in protecting our intellectual property rights or we could be found to have infringed the intellectual property rights of others, either of which could weaken our competitive position and adversely affect our results of operations.

Although we attempt to protect our intellectual property rights through patents, copyrights, trade secrets and other measures, we believe that our success will depend more upon the innovation, technological expertise and marketing abilities of our employees. Nevertheless, we have a policy of seeking patents when appropriate on inventions resulting from our ongoing research and development and manufacturing activities. Our intellectual property portfolio has 1,018 patents and patent applications with expiration dates ranging from February 2015 to June 2033. In addition, we have various registered trademarks and copyright registrations covering mainly applications used in the operation of our systems. We also rely upon trade secret protection for our confidential and proprietary information. We may not be able to protect our technology adequately and competitors may be able to develop similar technology independently. Our pending patent applications may not be issued or U.S. or foreign intellectual property laws may not protect our intellectual property rights. In addition, litigation may be necessary to enforce our patents, copyrights or other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement. Such litigation has resulted in, and in the future could result in, substantial costs and diversion of resources and could have a material adverse effect on our business, financial condition and results of operations, regardless of the outcome of the litigation. Patents issued to us may be challenged, invalidated or circumvented and the rights granted thereunder may not provide competitive advantages to us. Furthermore, others may independently develop similar technology or products, or, if patents are issued to us, design around the patents issued to us. Invalidation of our patents related to those technologies, or the expiration of patents covering our key technologies, could allow our competitors to more effectively compete against us, which could result in less revenue for us.

We have from time to time been notified of claims that we may be infringing intellectual property rights possessed by third parties. We believe that the outcome of these matters will not be material to our business, results of operations or financial condition. Infringement claims by third parties or claims for indemnification resulting from infringement claims may be asserted in the future and such assertions could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation. With respect to any such future claims, we may seek to obtain a license under the third party’s intellectual property rights. However, a license may not be available on reasonable terms or at all. We could decide, in the alternative, to resort to litigation to challenge such claims. Such challenges could be expensive and time consuming and could materially adversely affect our business, financial condition and results of operations, regardless of the outcome of any litigation.

Our results of operations and business could be adversely affected by natural disasters, public health issues, political instability, wars, and other military action, as well as terrorist attacks and threats and government responses thereto, especially if any such actions were directed at us or our facilities or customers.

Public health issues, political instability, natural disasters, terrorist attacks in the United States and elsewhere, government responses thereto, may disrupt our operations or those of our customers and suppliers and may affect the availability of materials needed to manufacture our products or the means to transport those materials to manufacturing facilities and finished products to customers. In addition, such events could disrupt the semiconductor market, resulting in the cancellation or delay of product orders. Significant public health issues could cause damage or disruption to international commerce by creating economic and political uncertainties that may have a significant negative impact on the global economy, us and our customers or suppliers. Should such incidents increase or other public health issues arise, we could be negatively impacted by the need for more stringent employee travel restrictions, additional limitations in the availability of freight services, governmental actions limiting the movement of products between various regions and disruptions in the operations of our customers or suppliers. Similarly, political instability could affect the ability of our suppliers to provide the materials needed in our operations or the cost of acquiring such materials. Any public health issues, political instability, natural disasters, terrorist attacks, or the ongoing war on terrorism or other wars could increase volatility in the United States and world financial markets which may depress the price of our common stock and may limit the capital resources available to us or our customers or suppliers, which could result in decreased orders from customers, less favorable financing terms from suppliers, and scarcity or increased costs of materials and components of our products. Additionally, if any of these events were to directly affect or be specifically directed at us, or occur in a country where we or our suppliers or our customers operate, our ability to conduct our business could be significantly disrupted. Any of these occurrences could have a significant impact on our operating results, revenues and costs and may result in increased volatility of the market price of our common stock.

We currently perform a significant amount of our manufacturing activities in cleanroom environments in San Jose, California, an area known for seismic activity. Performing manufacturing operations in California exposes us to a higher risk of natural disasters, including earthquakes. In addition, in the past California has experienced power shortages, which have interrupted our operations. Such shortages could occur in the future. Further, our suppliers and/or customers may operate in

19



areas subject to natural disasters, the occurrence of which could affect their ability to continue to do business with us as expected or at all. An earthquake, other natural disaster, power shortage or other similar events could interrupt or otherwise limit our operations or those of our suppliers or customers resulting in product shipment delays, supply problems, cancellations or deferrals of product orders, increased costs and other problems, any of which could have a material adverse effect on our business, customer relationships and results of operations.

We use hazardous substances in the operation of our business, and any failure on our part to comply with applicable regulations or to appropriately control the use, disposal or storage of such substances could subject us to significant liabilities.

We are subject to a variety of governmental regulations relating to environment protection and workplace safety, including the use, storage, discharge, handling, emission, generation, manufacture and disposal of toxic or other hazardous substances. The failure to comply with current or future regulations could result in substantial fines being imposed on us, suspension of production, alteration of the manufacturing process or cessation of operations. Such regulations could require us to acquire expensive remediation equipment or to incur substantial expenses to comply with environmental regulations. Any failure by us to comply with these regulations, including any failure to control the use, disposal or storage of, or adequately restrict the discharge of, hazardous or toxic substances, could subject us to significant liabilities.

Our investment portfolio may suffer losses from changes in market interest rates and changes in market conditions, which could materially and adversely affect our financial condition, results of operations or liquidity.

As of December 31, 2014, we had $269.7 million in cash, cash equivalents and short-term investments. We maintain an investment portfolio of cash equivalents and short-term investments in commercial paper and U.S. government-backed securities. These investments are subject to general credit, liquidity, and market and interest rate risks. Substantially all of these securities are subject to interest rate and credit risk and will decline in value if interest rates increase or one or more of the issuers’ credit ratings is reduced. As a result of any of the foregoing, we may experience a reduction in value or loss of liquidity of our investments, which may have a negative adverse effect on our results of operations, liquidity and financial condition. We follow an established investment policy and set of guidelines to monitor, manage and limit our exposure to interest rate and credit risk. The policy sets forth credit quality standards and limits our exposure to any one issuer, as well as our maximum exposure to various asset classes.

Changes in financial accounting standards or policies in the past have affected, and in the future may affect, our reported results of operations.

We prepare our financial statements in conformity with U.S. GAAP. These principles are subject to interpretation by the FASB, the American Institute of Certified Public Accountants (AICPA), the SEC and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions which are completed before a change is announced.

Accounting policies affecting many other aspects of our business, including rules relating to revenue recognition, off-balance sheet transactions, employee stock options and other equity awards, restructuring, asset disposals and asset retirement obligations, derivative and other financial instruments are regularly under review and subject to revision. Changes to those rules or the questioning of how we interpret or implement those rules may have a material adverse effect on our reported financial results or on the way we conduct business. In addition, our preparation of financial statements in accordance with U.S. GAAP requires that we make estimates and assumptions that affect the recorded amounts of assets and liabilities, disclosure of those assets and liabilities at the date of the financial statements and the recorded amounts of expenses during the reporting period. A change in the facts and circumstances surrounding those estimates could result in a change to our estimates and could impact our future operating results.

Our equity incentive plans, certain provisions of our Certificate of Incorporation and Bylaws, and certain aspects of Delaware law may discourage third parties from pursuing a change of control transaction with us.

Certain provisions of our Certificate of Incorporation, equity incentive plans, licensing agreements, Bylaws and Delaware law may discourage certain transactions involving a change in control of our company. In addition to the foregoing, the shareholdings of our officers, directors and persons or entities that may be deemed affiliates and the ability of the Board of Directors to issue “blank check” preferred stock without further stockholder approval could have the effect of delaying, deferring or inhibiting us from experiencing a change in control and may adversely affect the voting and other rights of holders of our common stock.


20



We are subject to laws, regulations and similar requirements, changes to which may adversely affect our business and operations.

We are subject to laws, regulations and similar requirements that affect our business and operations, including, but not limited to, the areas of commerce, import and export control, intellectual property, income and other taxes, anti-trust, anti-corruption, labor, environmental, health and safety. Our compliance in these areas may be costly, especially in areas where there are inconsistencies between the various jurisdictions in which we operate. While we have implemented policies and procedures to comply with various laws and regulations, there can be no assurance that our employees, contractors, suppliers or agents will not violate such laws and regulations or our policies. Any such violation or alleged violation could materially and adversely affect our business. Any changes or potential changes to laws, regulations or similar requirements, or our ability to respond to these changes, may significantly increase our costs to maintain compliance or result in our decision to limit our business, products or jurisdictions in which we operate, any of which could materially and adversely affect our business and operations.

The Dodd-Frank Wall Street Reform and Consumer Protection Act includes provisions regarding certain minerals and metals, known as conflict minerals, mined from the Democratic Republic of Congo and adjoining countries. These provisions require companies to undertake due diligence procedures and reports on the use of conflict minerals in its products, including products manufactured by third parties. Compliance with these provisions will cause us to incur costs to certify that our supply chain is conflict free and we may face difficulties in complying with the law if our suppliers are unwilling or unable to verify the source of their materials. Our ability to source parts containing these metals and minerals may be adversely impacted. In addition, our customers may require that we provide them with a certification and our inability to do so may disqualify us as a supplier.

We hold cash and cash equivalents at various foreign subsidiaries that may not be readily available to meet domestic cash requirements.

Our various foreign subsidiaries hold cash and cash equivalents and as we intend to reinvest certain foreign earnings indefinitely, these balances held outside the United States may not be readily available to meet our domestic cash requirements. We require a substantial amount of cash in the United States for operating requirements, purchases of property and equipment, and potentially for future acquisitions. If we are unable to meet our domestic cash requirements using domestic cash flows from operations, or domestic cash and cash equivalents, it may be necessary for us to consider repatriation of earnings that we have designated as permanently reinvested. This may require us to record additional income tax expense and remit additional taxes, which could have a material adverse effect on our results of operations, cash flows and financial condition.

Our previously announced share repurchase program could affect the price of our common stock and increase volatility and may be suspended or terminated at any time, which may result in a decrease in the trading price of our common stock.

Repurchases pursuant to our share repurchase program could affect our stock price and increase its volatility. The existence of a share repurchase program could also cause our stock price to be higher than it would be in the absence of such a program and could potentially reduce the market liquidity for our stock. There can be no assurance that any share repurchases will enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock. Although our share repurchase program is intended to enhance long-term stockholder value, short-term stock price fluctuations could reduce the program’s effectiveness. Furthermore, the program does not obligate the Company to repurchase any dollar amount or number of shares of common stock, and may be suspended or discontinued at any time and any suspension or discontinuation could cause the market price of our stock to decline.


ITEM 1B.
UNRESOLVED STAFF COMMENTS

We have no unresolved staff comments.

ITEM 2.
PROPERTIES

We maintain our headquarters and manufacturing operations in San Jose, California in a leased facility, totaling approximately 100,000 square feet, which contain general administration and finance, marketing and sales, customer service and support, manufacturing and research, development and engineering. The lease for this facility expires in January 2016. We also rent sales and support offices in the United States and outside the U.S. in Taiwan, the Philippines, Japan, Korea, Thailand,

21



Germany, and China, with varying terms and expiration dates. During 2014 and 2013, we either extended our leases in several of these sales facilities or negotiated new terms.

In March 2010, we entered into an operating lease agreement for facilities in preparation for the expansion of our manufacturing operations in Singapore. The initial term of this lease was three years. On August 15, 2012, we renegotiated this lease and entered into a new operating lease that expires in June 2018. The leased facility is approximately 23,000 square feet.

In March 2013, we entered into an operating lease agreement for facilities in Waltham, Massachusetts, totaling approximately 19,000 square feet, for sales, research and development activities. The lease for this facility expires in February 2018.

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

ITEM 3.    LEGAL PROCEEDINGS

We are subject to claims and litigation arising in the ordinary course of business. We do not believe any liability from any reasonably foreseeable disposition of such claims and litigation, individually or in the aggregate, would have a material adverse effect on our consolidated financial statements.


ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.


22



PART II

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

Our common stock is traded on the NASDAQ Global Market under the symbol UTEK. The following table sets forth, for the periods indicated, the range of high and low reported sale prices of our common stock.
Fiscal 2014—Fiscal Quarter Ended
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Market Price:
High
$
29.38

 
$
29.19

 
$
26.98

 
$
23.26

 
Low
$
24.06

 
$
21.06

 
$
22.18

 
$
17.30

Fiscal 2013—Fiscal Quarter Ended
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
Market Price:
High
$
42.23

 
$
38.79

 
$
38.09

 
$
31.12

 
Low
$
35.46

 
$
29.13

 
$
27.53

 
$
23.79


Our fiscal quarters in 2014 ended on March 29, 2014, June 28, 2014, September 27, 2014 and December 31, 2014. Our fiscal quarters in 2013 ended on March 30, 2013, June 29, 2013, September 28, 2013 and December 31, 2013.

As of January 30, 2015, we had approximately 198 stockholders of record.

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

In both July 2014 and July 2013, we issued 1,000 shares of our common stock in an unregistered, private placement under Section 4(2) of the Securities Act of 1933 to SEMI Foundation, a non-profit organization, to support its efforts to educate youth interested in science and math about career opportunities in the semiconductor industry.

Issuer Purchases of Equity Securities

Common stock repurchase activity under our publicly announced stock repurchase plan during the year ended December 31, 2014 was as follows:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares
Purchased Under Publicly Announced Plan or Programs
 
Approximate Dollar Value of Shares That May Yet Be Purchased
October 27 - 31
 

 
$

 

 
$
100,000,000

November 1 - 30
 
779,800

 
$
19.23

 
779,800

 
$
85,005,000

December 1 - 31
 
220,200

 
$
19.41

 
220,200

 
$
80,730,000

Total
 
1,000,000

 
$
19.27

 
1,000,000

 
 
    
On October 27, 2014, our Board of Directors authorized the repurchase of up to $100 million of the Company’s common stock. The share repurchase plan commenced on October 28, 2014 and will expire on October 28, 2017. Any repurchases may be made through open market purchases, block trades, privately negotiated transactions and/or derivative transactions, subject to market conditions and managements’ ongoing determination that it is the best use of available cash on hand to fund any repurchases. The repurchase authorization does not obligate us to acquire any common stock.

23




Stock Performance Graph

The graph depicted below reflects a comparison of the cumulative total return (i.e., change in stock price plus reinvestment of dividends) of our common stock assuming $100 invested as of December 31, 2009 with the cumulative total returns of the NASDAQ Composite Index and the Philadelphia Semiconductor Index.

Comparison of Cumulative Total Returns(1)(2)(3)
___________________
(1)
The graph covers the period from December 31, 2009 to December 31, 2014.
(2)
No cash dividends have been declared on our common stock.
(3)
Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

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

24



ITEM 6.
SELECTED FINANCIAL DATA

In thousands, except per share data and percentage information
2014 (e)
 
2013 (d)
 
2012 (c)
 
2011(b)
 
2010(a)
Operations:
 
 
 
 
 
 
 
 
 
Net sales
$
150,540

 
$
157,272

 
$
234,825

 
$
212,333

 
$
140,603

Gross profit
$
63,273

 
$
67,382

 
$
131,810

 
$
110,325

 
$
71,641

Gross profit as a percentage of net sales
42
 %
 
43
 %
 
56
%
 
52
%
 
51
%
Operating income (loss)
$
(19,063
)
 
$
(15,058
)
 
$
56,398

 
$
44,020

 
$
17,541

Income (loss) before income taxes and cumulative effect of a change in accounting principle
$
(18,867
)
 
$
(14,916
)
 
$
56,969

 
$
44,160

 
$
17,951

Pre-tax income (loss) as a percentage of net sales
(12.5
)%
 
(9.5
)%
 
24.3
%
 
20.8
%
 
12.8
%
Provision (benefit) for income taxes
$
244

 
$
(1,147
)
 
$
9,782

 
$
4,930

 
$
1,170

Net income (loss)
$
(19,111
)
 
$
(13,769
)
 
$
47,187

 
$
39,230

 
$
16,781

Income (loss) before cumulative effect of a change in accounting principle per share—basic
$
(0.67
)
 
$
(0.49
)
 
$
1.76

 
$
1.51

 
$
0.69

Net income (loss) per share—basic
$
(0.67
)
 
$
(0.49
)
 
$
1.76

 
$
1.51

 
$
0.69

Number of shares used in per share computation—basic
28,437

 
28,106

 
26,881

 
25,915

 
24,468

Income (loss) before cumulative effect of a change in accounting principle per share—diluted
$
(0.67
)
 
$
(0.49
)
 
$
1.70

 
$
1.47

 
$
0.67

Net income (loss) per share—diluted
$
(0.67
)
 
$
(0.49
)
 
$
1.70

 
$
1.47

 
$
0.67

Number of shares used in per share computation—diluted
28,437

 
28,106

 
27,705

 
26,778

 
25,043

Balance sheet:
 
 
 
 
 
 
 
 
 
Cash, cash equivalents and short-term investments
$
269,730

 
$
297,035

 
$
302,508

 
$
227,947

 
$
184,290

Working capital
$
334,434

 
$
349,055

 
$
349,506

 
$
283,280

 
$
217,157

Total assets
$
417,518

 
$
434,164

 
$
436,986

 
$
353,448

 
$
281,294

Long-term obligations
$
15,252

 
$
11,923

 
$
11,235

 
$
8,113

 
$
5,344

Stockholders’ equity
$
365,120

 
$
386,538

 
$
375,186

 
$
296,029

 
$
231,649

__________________
(a)
Operating income in 2010 includes $4.8 million of stock-based compensation expenses.
(b)
Operating income in 2011 includes $9.0 million of stock-based compensation expenses.
(c)
Operating income in 2012 includes $12.5 million of stock-based compensation expenses.
(d)
Operating loss in 2013 includes $15.4 million of stock-based compensation expenses.
(e)
Operating loss in 2014 includes $16.9 million of stock-based compensation expenses.



25





Quarterly Data
 
Unaudited, in thousands, except per share data
1st
 
2nd
 
3rd
 
4th
2014
 
 
 
 
 
 
 
Net sales
$
31,609

 
$
36,837

 
$
33,841

 
$
48,253

Gross profit
$
12,992

 
$
16,510

 
$
13,643

 
$
20,128

Operating loss
$
(7,188
)
 
$
(4,083
)
 
$
(6,324
)
 
$
(1,468
)
Net loss
$
(6,971
)
 
$
(3,890
)
 
$
(6,622
)
 
$
(1,628
)
Net loss per share—basic
$
(0.25
)
 
$
(0.14
)
 
$
(0.23
)
 
$
(0.06
)
Number of shares used in per share computation—basic
28,144

 
28,320

 
28,534

 
28,231

Net loss per share—diluted
$
(0.25
)
 
$
(0.14
)
 
$
(0.23
)
 
$
(0.06
)
Number of shares used in per share computation—diluted
28,144

 
28,320

 
28,534

 
28,231

Unaudited, in thousands, except per share data
1st
 
2nd
 
3rd
 
4th
2013
 
 
 
 
 
 
 
Net sales
$
60,646

 
$
42,866

 
$
29,732

 
$
24,028

Gross profit
$
33,293

 
$
20,277

 
$
11,790

 
$
2,022

Operating income (loss)
$
13,076

 
$
1,113

 
$
(8,707
)
 
$
(20,540
)
Net income (loss)
$
13,692

 
$
856

 
$
(7,750
)
 
$
(20,567
)
Net income (loss) per share—basic
$
0.50

 
$
0.03

 
$
(0.28
)
 
$
(0.73
)
Number of shares used in per share computation—basic
27,571

 
27,945

 
28,079

 
28,222

Net income (loss) per share—diluted
$
0.48

 
$
0.03

 
$
(0.28
)
 
$
(0.73
)
Number of shares used in per share computation—diluted
28,563

 
28,653

 
28,079

 
28,222



26



ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Certain of the statements contained herein, which are not historical facts and which can generally be identified by words such as “anticipates,” “expects,” “thinks,” “remains,” “intends,” “will,” “could,” “believes,” “poised,” “estimates,” “continues,” and similar expressions, are forward-looking statements under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that involve risks and uncertainties, such as risks related to timing, delays, deferrals and cancellations of orders by customers, including as a result of semiconductor manufacturing capacity as well as our customers’ financial condition and demand for semiconductors; demand for consumer devices; industry growth within our served markets; continued delivery of financial performance and value; cyclicality in the semiconductor and nanotechnology industries; our dependence on new product introductions and market acceptance of new products and enhanced versions of our existing products; reliability and technical acceptance of our products; lengthy sales cycles, including the timing of system installations and acceptances; quarterly revenue fluctuations; lengthy and costly development cycles for laser-processing and lithography technologies and applications; integration, development and associated expenses of the laser processing operation; general economic and financial market conditions including impact on capital spending, as well as difficulty in predicting changes in such conditions; rapid technological change and the importance of timely product introductions; customer concentration; pricing pressures and product discounts; high degree of industry competition including competition from companies that are significantly larger than us; intellectual property matters; changes in pricing by us, our competitors or suppliers; international sales and operations; timing of new product announcements and releases by us or our competitors; improvements, including in cost and technical features, of competitors’ products; ability to volume produce systems and meet customer requirements; sole or limited sources of supply; effect of capital market fluctuations on our investment portfolio; ability and resulting costs to attract or retain key personnel; dilutive effect of employee stock option grants on net income per share, which is largely dependent upon our achieving and maintaining profitability and the market price of our stock; mix of products sold; outcome of litigation; manufacturing variances and production levels; timing and degree of success of technologies licensed to outside parties; product concentration and lack of product revenue diversification; inventory obsolescence; quality of product sourced from suppliers; asset impairment; changes to financial accounting standards; effects of certain anti-takeover provisions; future acquisitions; volatility of stock price; foreign government regulations and restrictions; business interruptions due to natural disasters or utility failures; environmental regulations; and any adverse effects of terrorist attacks in the United States or elsewhere, or government responses thereto, or military actions, on the economy, in general, or on our business in particular. Due to these and additional factors, the statements, historical results and percentage relationships set forth below are not necessarily indicative of the results of operations for any future period. These forward-looking statements are based on management’s current beliefs and expectations, some or all of which may prove to be inaccurate, and which may change. We undertake no obligation to revise or update any forward-looking statements to reflect any event or circumstance that may arise after the date of this report.

OVERVIEW

Ultratech, Inc. develops, manufactures and markets photolithography, laser thermal processing and inspection equipment for manufacturers of semiconductor devices, including advanced packaging processes and various nanotechnology components such as thin film head magnetic recording devices, laser diodes, high-brightness light emitting diodes (“HBLEDS”) as well as atomic layer deposition systems (“ALD”) for customers located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia.

We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the semiconductor industry, we target the market for advanced packaging applications. Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, ink jet print heads, HBLEDs and atomic layer deposition for the nanotechnology portion of our defined served market.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of the consolidated financial statements. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate our estimates, including those related to revenues, inventory valuation, warranty obligations, purchase order commitments, bad debts, deferred income taxes, restructuring liabilities, asset retirement obligations, stock based-compensation and contingencies and litigation. Management bases its estimates and judgments on

27



historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

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

Revenue Recognition

We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the arrangement consideration is fixed or determinable, and collectability is reasonably assured. We derive revenue from four sources: system sales, spare parts sales, service contracts and license fees.
 
Provided all other criteria are met, we recognize revenues on system sales when system acceptance provisions have been met in accordance with the terms and conditions of the arrangement. In the event that terms of the sale provide for a lapsing system acceptance period, we recognize revenue upon the expiration of the lapsing acceptance period or system acceptance, whichever occurs first. In these instances, which are infrequent, revenue is recorded only if the product has met product specifications prior to shipment and management deems that no significant uncertainties as to product performance exist.
 
Our transactions frequently include the sale of systems and services under multiple element arrangements. In transactions with multiple deliverables, revenue is recognized upon the delivery of the separate elements and when system acceptance has occurred or we are otherwise released from our system acceptance obligations.
 
For multiple element arrangements, the total consideration for an arrangement is allocated among the separate elements in the arrangement based on a selling price hierarchy. The selling price hierarchy for a deliverable is based on (i) vendor specific objective evidence (“VSOE”); if available; (ii) third party evidence of selling price if VSOE is not available; or (iii) an estimated selling price, if neither VSOE nor third party evidence is available. If we have not established VSOE and cannot obtain third party evidence of selling price, we determine our estimate of the relative selling price by considering our production costs and historical margins of similar products or services. We believe this best represents the price at which we would transact a sale if the product or service were sold on a stand-alone basis. We regularly review the method used to determine our relative selling price and update any estimates accordingly. We limit the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services or other future performance obligations.
 
We generally recognize revenue from spare parts sales upon shipment, as our products are generally sold on terms that transfer title and risk of ownership when it leaves our site. We sell service contracts for which revenue is deferred and recognized ratably over the contract period (for time-based service contracts) or as service hours are delivered (for contracts based on a purchased quantity of hours). We recognize license revenue from transactions in which our systems are re-sold by our customers to third parties, as well as from royalty arrangements.
 
Costs related to deferred product revenues are capitalized (deferred) and recognized at the time of revenue recognition. Deferred product revenue and costs are netted on our balance sheet, under the caption “deferred product and services income.” The gross amount of deferred revenues and deferred costs at December 31, 2014 were $9.8 million and $1.2 million, respectively, as compared to $8.7 million and $2.2 million, respectively, at December 31, 2013.

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

Inventories and Purchase Order Commitments

Inventories are stated at the lower of cost or market using standard costs that generally approximate actual costs on a first-in, first-out basis. We maintain a perpetual inventory system and continuously record the quantity on-hand and standard cost for each product, including purchased components, subassemblies, and finished goods. We maintain the integrity of perpetual inventory records through periodic physical counts of quantities on hand.

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

28



significant unanticipated changes in demand, product mix or technological developments would significantly impact the value of our inventory and our reported operating results. In the future, if we find that our estimates are too optimistic and we determine that our inventory needs to be reserved, we will be required to recognize such costs in our cost of sales at the time of such determination.

Warranty Obligations

We recognize the estimated cost of our product warranties at the time revenue is recognized. Our warranty obligation is affected by product failure rates, material usage rates and the efficiency by which the product failure is corrected. Should actual product failure rates, material usage rates and labor efficiencies differ from our estimates, revisions to the estimated warranty liability would be required which could result in future charges or credits to our gross margins. We believe our warranty accrual, as of December 31, 2014, will be sufficient to satisfy outstanding obligations as of that date.
    
Allowance for Bad Debts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. This reserve is established based upon historical trends, current economic conditions, delinquency status based on contractual terms and an analysis of specific exposures. If the financial conditions of our customers were to deteriorate, or even a single customer was otherwise unable to make payments, additional allowances may be required. The typical selling price of our systems is between $0.2 million and $6.0 million. Accordingly, a single customer default could have a material adverse effect on our results of operations. Our bad debt reserve for accounts receivable was $0.5 million at December 31, 2014 and 2013.

Intangible Assets

Purchased technology, patents and other intangible assets are presented at cost, net of accumulated amortization, and are amortized over their estimated useful lives using the straight-line method. We review for impairment whenever events or changes in circumstances indicate that the carrying amount of the intangible asset may not be recoverable and the carrying amount exceeds its fair value.

Stock-Based Compensation

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

Deferred Income Taxes

Deferred income taxes are provided for the tax effect of temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. ASC Topic 740, Income Taxes (“ASC 740”), provides for recognition of deferred tax assets if the realization of such deferred tax assets is more likely than not to occur. Realization of our net deferred tax assets is dependent upon the generation of sufficient taxable income in future years in appropriate tax jurisdictions to obtain the benefit of the reversal of temporary differences, net operating loss carry-forwards, and tax credit carry-forwards. Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, we concluded that it is more likely than not that, as of December 31, 2014, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan. We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. As of December 31, 2014, we have determined that the following negative evidence outweighs the positive evidence such that it is not more likely than not we will

29



generate sufficient taxable income in the relevant jurisdictions to utilize our deferred tax assets and release the associated valuation allowance:
Current U.S. pre-tax loss,
Movement of certain product manufacturing to Singapore, resulting in reduced U.S. taxable income,
Inherent earnings volatility of our industry resulting in our inability to forecast long term earnings, and
Usage limitations resulting in a longer period being required to realize our deferred tax assets.
As of December 31, 2014, we had recorded a valuation allowance of approximately $51.6 million against our net deferred tax assets except for those in Japan and Taiwan. As of December 31, 2014, we had recorded approximately $0.5 million of net foreign deferred tax assets related to our operations in Japan and Taiwan. Based on projected future pre-tax income in Japan and Taiwan, these assets were not subject to a valuation allowance as it is more likely than not that they will be realized in the future.
RESULTS OF OPERATIONS

We derive a substantial portion of our total net sales from sales of a relatively small number of newly manufactured systems, which typically range in price from $0.2 million to $6.0 million. As a result of the larger sale prices, the timing and recognition of revenue from a single transaction has had and most likely will continue to have a significant impact on our net sales and operating results for any particular period.

Our backlog at the beginning of a period typically does not include all of the sales needed to achieve our sales objectives for that period. In addition, orders in backlog are subject to cancellation, shipment or system acceptance delays, and deferral or rescheduling by a customer with limited or no penalties. Consequently, our net sales and operating results for a period have been and will continue to be dependent upon our obtaining orders for systems to be shipped and accepted in the same period in which the order is received. Our business and financial results for a particular period could be materially adversely affected if an anticipated order for even one system is not received in time to permit shipment and system acceptance during that period. Furthermore, a substantial portion of our shipments has historically occurred near the end of each quarter. Delays in installation and system acceptance due, for example, to our inability to successfully demonstrate the agreed-upon specifications or criteria at the customer’s facility, or to the failure of the customer to permit installation of the system in the agreed upon time, may cause net sales in a particular period to fall significantly below our expectations, which may materially adversely affect our operating results for that period. This risk is especially applicable in connection with the introduction and initial sales of a new product line or as a result of industry trends impacting our foundry customers, including a shift toward semiconductors utilizing new technology transistor architecture. Additionally, the failure to receive anticipated orders or delays in shipments due, for example, to rescheduling, delays, deferrals or cancellations by customers, additional customer configuration requirements, or to unexpected manufacturing, or performance difficulties, or delays in deliveries by suppliers due to their long production lead times, or quality issues with components sourced from suppliers, have caused and may continue to cause net sales in a particular period to fall significantly below our expectations and for our operating results to vary from period to period, materially adversely affecting our operating results for that period. In particular, the long manufacturing and acceptance cycles of our advanced packaging family of wafer steppers, laser thermal processing and inspection systems and the long lead time for lenses and other materials, could cause shipments and acceptances of such products to be delayed from one quarter to the next, which could materially adversely affect our financial condition and results of operations for a particular quarter.

Additionally, the need for continued expenditures for research and development, capital equipment, ongoing training and worldwide customer service and support, among other factors, will make it difficult for us to reduce our operating expenses in a particular period if we fail to achieve our net sales goals for the period.

Sales Summary
 
 
2014
 
2013
 
2012
International sales
 
68%
 
72%
 
65%
Domestic sales
 
32%
 
28%
 
35%
Total sales
 
100%
 
100%
 
100%
 
 
 
 
 
 
 
Semiconductor systems sales
 
81%
 
83%
 
84%
Nanotechnology systems sales
 
19%
 
17%
 
16%
Total systems sales
 
100%
 
100%
 
100%


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Net Sales
In millions
2014

2013

2012

2014 vs 2013

2013 vs 2012
Sales of:









Systems
$
114.5

 
$
116.6

 
$
191.8

 
(2)%
 
(39)%
Spare parts
21.6

 
23.8

 
23.9

 
(9)%
 
—%
Services
14.0

 
16.4

 
17.8

 
(15)%
 
(8)%
Licenses
0.4

 
0.5

 
1.3

 
(20)%
 
(62)%
Total net sales
$
150.5

 
$
157.3

 
$
234.8

 
(4)%
 
(33)%

2014 vs. 2013

Net sales consist of revenues from systems sales (systems and system upgrades), spare parts sales, services and licensing of technologies. For the year ended December 31, 2014, systems sales accounted for approximately 76% of total net sales. Sales of spare parts, services and licenses accounted for the remaining 24% of total net sales.

Systems sales decreased 2% to $114.5 million primarily attributable to a decrease in lithography system sales, partially offset by an increase in system upgrades and nanotechnology sales in 2014, as compared to 2013. Laser thermal processing sales remained flat in 2014, as compared to 2013.

On a product market application basis, system sales to the semiconductor industry were $92.9 million for the year ended December 31, 2014, a decrease of 4% as compared to $96.3 million in 2013. This decrease was primarily due to fewer system units sold. Semiconductor industry sales consist of sales to the advanced packaging market, semiconductor and semiconductor inspection market. System sales to the semiconductor industry is highly dependent on customer capacity demand.

System sales to the nanotechnology market were $21.7 million for the year ended December 31, 2014, a 7% increase as compared with sales of $20.3 million in 2013. The increase in sales to the nanotechnology market was primarily due to an increase in HBLED systems sales, partially offset by a decrease in ALD systems sales. System sales to the nanotechnology market are highly dependent on capacity demand in the industries we serve, including HBLEDs, ALD, thin film heads, automotive MEMS, LED/laser diodes, and ink jet print heads, we therefore expect to experience significant variations in sales within this market from period to period.

Sales of spare parts in 2014 decreased 9% to $21.6 million, as compared to $23.8 million in 2013. The decrease in sales of spare parts was the result of a decrease in spare parts demand. Services revenue decreased 15% to $14.0 million for the year ended December 31, 2014 as compared to $16.4 million in 2013. The decrease in service revenue was the result of a decrease in the number of service contracts.

Revenues from licensing activities decreased to $0.4 million in 2014, as compared with $0.5 million in 2013, primarily due to fewer systems being sold under a royalty arrangement. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold. Future revenues from licensing activities, if any, will be contingent upon existing and future licensing arrangements. We may not be successful in generating licensing revenues and do not anticipate the recognition of significant levels of licensing income in the future.

For the year ended December 31, 2014, international net sales were $102.9 million, or 68% of total net sales, as compared with $113.9 million, or 72% of total net sales in 2013. For the year ended December 31, 2014 as compared to the corresponding 2013 period, sales to Taiwan decreased by $33.5 million and sales to Japan decreased by $6.5 million, partially offset by (i) an increase in sales to Korea of $18.4 million, (ii) an increase in sales to the rest of world of $6.7 million, (iii) and an increase in sales to Europe of $3.9 million. We expect sales to international customers to continue to represent a significant amount of our future revenues as our customer base in Asia continues to expand its capacity.

Our revenue derived from sales in foreign countries is not generally subject to significant exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. However, we do sell systems and spare parts into Japan and this subjects us to the risk of currency exchange rate fluctuations since the orders are often denominated in Japanese yen. We attempt to mitigate this risk by entering into monthly foreign currency forward exchange contracts, as balance sheet derivatives, which includes our receivables that are denominated in Japanese yen from parts sales.

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We had approximately 263.7 million of Japanese yen-denominated receivables at December 31, 2014. International sales expose us to a number of additional risks, including fluctuations in the value of local currencies relative to the U.S. dollar, which impact the relative cost of ownership of our products and, thus, the customer’s willingness to purchase our product. (See “Risk Factors: International Sales”).

2013 vs. 2012

Net sales consist of revenues from systems sales (systems and system upgrades), spare parts sales, services and licensing of technologies. For the year ended December 31, 2013, systems sales accounted for approximately 74% of total net sales. Sales of spare parts, services and licenses accounted for the remaining 26%.

System sales decreased 39% to $116.6 million primarily attributable to a fewer number of all of our systems being sold in 2013 as compared to 2012.

On a product market application basis, system sales to the semiconductor industry were $96.3 million for the year ended December 31, 2013, a decrease of 40% as compared to $161.2 million in 2012. This decrease was primarily due to fewer system units sold.

System sales to the nanotechnology market were $20.3 million for the year ended December 31, 2013, a 34% decrease as compared with sales of $30.7 million in 2012. The decrease in sales to the nanotechnology market was primarily due to the lesser number of all systems sold.

Sales of spare parts in 2013 remained relatively flat to $23.8 million, as compared to $23.9 million in 2012. Services revenue decreased 8% to $16.4 million for the year ended December 31, 2013 as compared to $17.8 million in 2012. The decrease in service revenue was the result of a decrease in service contract sales.

Revenues from licensing activities decreased to $0.5 million in 2013 as compared with $1.3 million in 2012, primarily due to fewer systems being sold under a royalty arrangement. Pursuant to our license arrangements, such transactions are subject to a license fee based on units sold.

For the year ended December 31, 2013, international net sales were $113.9 million, or 72% of total net sales, as compared with $153.2 million, or 65% of total net sales in 2012. For the year ended December 31, 2013 as compared to the corresponding 2012 period, (i) sales to Europe decreased by $31.1 million, (ii) sales to the rest of world decreased by $23.4 million, and (iii) sales to Korea decreased by $5.5 million, partially offset by increased sales to Taiwan of $12.6 million and sales to Japan of $8.2 million.
    
Gross Profit

2014 vs. 2013

Gross margins were 42% and 43% for 2014 and 2013, respectively. The 1% decrease in gross margin was due to a 4% decrease resulting from costs associated with manufacturing inefficiencies due to lower production volume. This decrease was partially offset by decreases in other manufacturing costs which contributed 3% to total gross margin.

Our gross profit as a percentage of sales has been and most likely will continue to be significantly affected by a variety of factors, including: the introduction of new products, which typically have higher manufacturing costs until manufacturing efficiencies are realized and which are typically discounted more than existing products until the products gain market acceptance; the mix of products sold; the rate of capacity utilization; write-down of inventory and open purchase commitments; product discounts, pricing and competition in our targeted markets; and non-linearity of shipments during the period that can result in manufacturing inefficiencies.

2013 vs. 2012

Gross margins were 43% and 56% for 2013 and 2012, respectively. The 13% decrease in gross margin was due to (i) a 4% decrease resulting from costs associated with manufacturing inefficiencies resulting from lower production volume, (ii) a 3% decrease related to a $5.2 million increase in reserves for excess and obsolete inventory and open purchase order commitments, (iii) a 3% decrease resulting from higher material costs due to product mix, (iv) a 2% decrease related to lower service cost utilization, and (v) a 1% decrease related to increases in other manufacturing costs.


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Research, Development and Engineering Expenses
In millions
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Research, development and engineering expenses
$
33.6

 
$
33.6

 
$
30.1

 
—%
 
12%
% of revenue
22
%
 
21
%
 
13
%
 
 
 
 

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

2014 vs. 2013

Research, development and engineering expenses in 2014 remained flat at $33.6 million when compared to 2013. Although the total remained unchanged, there was (i) a $0.8 million decrease in employee benefit costs, (ii) a $0.2 million decrease in bonus plan expense, and (iii) a $0.1 million decrease in 401(k) match expense, partially offset by (a) a $0.6 million increase in manufacturing support costs, (b) a $0.4 million increase in stock-based compensation expense, and (c) $0.1 million increase in expenses related to the ALD product group. As a percentage of net sales, research, development and engineering expenses for the year ended December 31, 2014 were 22% compared to 21% for 2013. The percentage increase was due to the decrease in net sales as compared to 2013.

2013 vs. 2012

Research, development and engineering expenses in 2013 increased 12% to $33.6 million as compared to $30.1 million in 2012. The $3.5 million increase was primarily due to (i) a $2.3 million increase in expenses related to the ALD product group, (ii) a $0.7 million increase in stock-based compensation expense, (iii) a $0.6 million increase in patent related expenses, (iv) a $0.4 million increase in manufacturing support expenses, (v) a $0.3 million increase in depreciation expense, (vi) a $0.3 million increase in employee benefit related expense and (vii) a $0.2 million increase in other research, development and engineering expenses, partially offset by a $1.0 million decrease in bonus plan expense and a $0.2 million reduction in 401(k) match expense. As a percentage of net sales, engineering expenses for the year ended December 31, 2013 were 21% compared to 13% for 2012. The percentage increase was due primarily to the decrease in net sales as compared to 2012.

Selling, General and Administrative Expenses
 
In millions
2014
 
2013
 
2012
 
2014 vs 2013
 
2013 vs 2012
Selling, general and administrative expenses
$
48.7

 
$
48.9

 
$
45.3

 
—%
 
8%
% of revenue
32
%
 
31
%
 
19
%
 
 
 
 

2014 vs. 2013

Selling, general and administrative expenses decreased to $48.7 million in 2014, as compared to $48.9 million in 2013. The $0.2 million decrease was primarily due to (i) a $0.6 million decrease in employee benefit costs, (ii) a $0.4 million decrease in bonus plan expense, (iii) a $0.2 million decrease in executive deferred compensation, and (iv) a $0.1 million decrease in 401(k) match expense, partially offset by a $1.0 million increase in stock-based compensation expense and a $0.1 million increase in expenses related to the ALD product group. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2014 were 32% compared to 31% for 2013. This increase was due primarily to the decrease in net sales as compared to 2013.

2013 vs. 2012

Selling, general and administrative expenses increased by $3.6 million, or 8%, to $48.9 million in 2013, as compared to $45.3 million in 2012. The $3.6 million increase was primarily due to (i) a $2.2 million increase in stock-based compensation expense, (ii) a $2.1 million increase in expenses related to the ALD product group, (iii) a $2.1 million increase in field services costs, (iv) a $0.6 million increase in selling costs, and (v) a $0.2 million increase in other administrative cost, partially offset by (a) a $2.3 million decrease in bonus plan expense, (b) a $1.1 million decrease in legal expenses, and (c) a

33



$0.2 million reduction in 401(k) match expense. As a percentage of net sales, selling, general and administrative expenses for the year ended December 31, 2013 were 31% compared to 19% for 2012. This increase was due primarily to the decrease in net sales as compared to 2012.
Interest and Other Income, Net
In millions
2014
 
2013
 
2012
Interest income
$
0.1

 
$
0.6

 
$
0.4

Other income (expense), net
0.1

 
(0.4
)
 
0.2

Interest and other income expense, net
$
0.2

 
$
0.2

 
$
0.6


Interest and other income, net, was $0.2 million for the year ended December 31, 2014, as compared with $0.2 million and $0.6 million for 2013 and 2012, respectively. We recorded $0.1 million of interest income during the year ended December 31, 2014. The $0.5 million decrease was primarily due to the lower average short-term investments balance during the year ended December 31, 2014, as compared to 2013. We presently maintain an investment portfolio with a weighted-average maturity of less than one year. Consequently, changes in short-term interest rates have a significant impact on our interest income. Future changes in short-term interest rates are expected to continue to have a significant impact on our interest income.
Other income, net of $0.1 million for the year ended December 31, 2014 was primarily the result of $0.5 million in miscellaneous other income, partially offset by $0.4 million of losses from foreign currency movements. In 2013, other expense, net of $0.4 million, was the result of losses from foreign currency exchange. In 2012, other income, net of $0.2 million was primarily due to other income of $0.5 million resulting from the expiration of statutes in certain countries of individually insignificant items that was partially offset by unrealized losses on foreign currency transactions of $0.3 million.
Provision for Income Taxes

For the year ended December 31, 2014, we recorded income tax expense of $0.2 million, as compared to income tax benefit of $1.1 million in 2013, and income tax expense of $9.8 million in 2012. The income tax expense recorded in 2014 resulted primarily from foreign taxes. The income tax benefit recorded in 2013 resulted primarily from tax benefits due to return to provision adjustments associated with the filing of our 2012 tax return and the extension of the federal research and development tax credits under the American Taxpayer Relief Act of 2012, partially offset by state taxes and foreign taxes of $0.5 million. The income tax expense recorded in 2012 was comprised primarily of federal tax expense. The actual expense or benefit recorded for the years ended 2014, 2013, and 2012 differs from the federal tax expense or benefit at 35% primarily due to current tax expense in foreign jurisdictions and the fact that in 2014 and 2013 current year U.S. taxable losses were not utilized, in 2012 prior year U.S. credits were utilized.

We are eligible for tax incentives that provide that certain income earned in Singapore would be subject to a tax holiday and/or reduced tax rates for a limited period of time under the laws of Singapore. To realize these benefits, we must meet certain requirements relating to employment and investment activities. This exemption is expected to expire within 6 years. In 2014 the tax benefit attributable to the tax holiday was approximately $1.0 million with a $0.04 impact on diluted earnings per share. In 2013, the tax benefit attributable to the tax holiday was approximately $0.5 million with a $0.02 impact on diluted earnings per share. In 2012, the tax benefit attributable to the tax holiday was approximately $5.0 million with a $0.18 impact on diluted earnings per share. Our ability to realize benefits from these initiatives could be materially adversely affected if, among other things, applicable requirements are not met, the incentives are substantially modified, or if we incur losses for which we cannot take a deduction.

Income taxes can be affected by estimates of whether, and within which jurisdictions, future earnings will occur and how, when and if cash is repatriated to the United States, combined with other aspects of an overall income tax strategy. Additionally, taxing jurisdictions could retroactively disagree with our tax treatment of certain items, and some historical transactions have income tax effects going forward. Accounting rules require these future effects to be evaluated using current laws, rules and regulations, each of which can change at any time and in an unpredictable manner. We believe we have adequately provided for any reasonably foreseeable outcome related to these matters and we do not anticipate any material earnings impact from their ultimate resolutions.

In accordance with ASC 740, we had unrecognized benefits of $8.1 million as of December 31, 2014 due to uncertain tax positions. We continue to recognize interest and penalties as a component of income tax provision and accrued an insignificant amount for these items for the year. During the year ended December 31, 2014, the balance related to uncertain tax positions increased by $1.2 million, net. If we are able to eventually recognize these uncertain tax positions, $6.9 million of the

34



unrecognized benefit on January 1, 2014 and $8.1 million of the unrecognized benefit on December 31, 2014, would reduce our effective tax rate. We currently have a full valuation allowance against our U.S. net deferred tax asset which would impact the timing of the effective tax rate benefit should any of these uncertain tax positions be favorably settled in the future.
Each quarter we assess the likelihood that we will be able to recover our deferred tax assets. We consider available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. As a result of our analysis, and as further described in the Critical Accounting Policies and Estimates section, deferred income taxes, we concluded that it is more likely than not that, as of December 31, 2014, our net deferred tax assets will not be realized, with the exception of those in Japan and Taiwan. Therefore, we continue to provide a full valuation allowance against net deferred tax assets outside of Japan and Taiwan.
We are subject to federal and state tax examination for years 1999 forward and 1997 forward, respectively, by virtue of the tax attributes carrying forward from those years. We are also subject to audits in the foreign jurisdictions in which we operate from years 2003 and forward. There are no material income tax examinations currently in progress.
Outlook

The anticipated timing of orders, shipments and system acceptances usually requires that we fill a number of production slots in any given period in order to meet our sales targets. If we are unsuccessful in our efforts to secure those production orders, or if existing production orders are delayed or cancelled, our results of operations will be materially adversely impacted. Additionally, we may not exceed or even maintain our current or prior levels of net sales for any period in the future for the reasons enumerated in this report. We believe that the market acceptance and volume production of our advanced packaging systems, laser processing systems, inspection systems and our 1000 Platform steppers are of critical importance to our future financial results. At December 31, 2014, these systems represented approximately 78% of our backlog.

LIQUIDITY AND CAPITAL RESOURCES

Net cash used in operating activities was $6.7 million for the year ended December 31, 2014, as compared with $6.8 million for the comparable period in 2013. Net cash used in operating activities during the year ended December 31, 2014 was attributable to $13.5 million of working capital cash used by changes in operating assets and liabilities as described below, partially offset by $6.9 million of cash generated from operations after adjustments for non-cash charges such as stock-based compensation, depreciation and amortization of intangibles and others.

Working capital uses of cash of $19.0 million were due to (i) a $9.8 million increase in accounts receivables, (ii) a $4.8 million increase in inventory, (iii) a $3.5 million decrease in accrued expenses, and (iv) a $0.9 million increase in prepaid expenses and other assets. Working capital sources of cash of $5.5 million were due to (a) a $3.2 million increase in accounts payable, (b) a $2.1 million increase in deferred income, and (c) a $0.2 million total increase in other liabilities.

We believe that because of the relatively long manufacturing cycle of certain systems, particularly newer products, our inventories will continue to represent a significant portion of working capital. Currently, we are devoting significant resources to the development, introduction and commercialization of our laser thermal processing systems and inspection systems and to the development of our next generation 1X lithography technologies. We intend to continue to incur significant operating expenses in the areas of research, development and engineering, manufacturing, and selling, general and administrative costs in order to further develop, produce and support these new products. There can be no assurance that any expenditures to develop these products will result in improved sales or that markets for these products will become viable. Additionally, gross profit margins, inventory and capital equipment levels may be adversely impacted in the future by costs associated with the initial production of the laser thermal processing systems, inspection systems and by future generations of our 1X wafer steppers. These costs include, but are not limited to, additional manufacturing overhead, costs of demonstration systems and facilities and the establishment of additional after-sales support organizations. Additionally, there can be no assurance that operating expenses will not increase, relative to sales, as a result of adding technical, marketing and administrative personnel, among other costs, to support our new products. If we are unable to achieve significantly increased net sales or if our sales fall below expectations, our cash flow and operating results will be materially adversely affected until, among other factors, costs and expenses can be reduced. Our failure to achieve our sales targets for these new products could result in additional inventory write-offs and asset impairment charges, either of which could materially adversely impact our results of operations.

During the year ended December 31, 2014, net cash used in investing activities was $1.0 million, as compared with net cash used in investing activities of $10.5 million for the comparable period in 2013. Net cash used in investing activities

35



during the year ended December 31, 2014 was attributable to capital expenditures of $2.8 million, partially offset by maturities of available-for-sale investment securities of $1.9 million, net of purchases.

Net cash used in financing activities was $17.9 million during the year ended December 31, 2014, as compared with net cash provided by financing activities of $13.9 million for the comparable period in 2013. Net cash used in financing activities during the year ended December 31, 2014 was primarily attributable to repurchases of the Company’s common stock of $19.3 million, partially offset by proceeds received from the issuance of common stock under our employee stock-based compensation plans of $1.4 million, net.

Historically, our principal source of liquidity has been cash provided by our operations. At December 31, 2014, we had working capital of $334.4 million. At December 31, 2014, our cash, cash equivalents and short-term investments, net of related borrowings under our line of credit, consisted of $264.6 million.

At December 31, 2014, $26.8 million of our cash, cash equivalents, and investments were held by foreign subsidiaries. Amounts held by foreign subsidiaries are generally subject to U.S. income taxation on repatriation to the United States. We currently have no plans to repatriate any foreign earnings back to the United States as we believe our cash flows provided by our U.S. operations will meet our future U.S. liquidity needs.

In December 2004, we entered into a line of credit agreement with a brokerage firm replacing a similar arrangement that we had with a different firm. Under the terms of this agreement, we may borrow funds at a cost equal to the current Federal funds rate plus 125 basis points (i.e. 1.31% as of December 31, 2014). Certain of our cash, cash equivalents and short-term investments secure outstanding borrowings under this facility. We may borrow up to 75% of our total cash, cash equivalents and investments balance in this brokerage account. Funds are advanced to us under this facility based on pre-determined advance rates on the cash and securities held by us in this brokerage account. This agreement has no set expiration date and there are no loan covenants. As of December 31, 2014 and 2013, balances of $5.1 million were outstanding under this facility with a related collateral requirement of approximately $6.8 million of our cash, cash equivalents and investments.
    
The following summarizes our contractual obligations at December 31, 2014, and the effect such obligations are expected to have on our liquidity and cash flows in future periods:
In millions
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
After
5  years
Notes payable obligations
$
5.1

 
$
5.1

 
$

 
$

 
$

Non-cancelable capital lease obligations
2.4

 
0.9

 
1.5

 

 

Non-cancelable operating lease obligations
5.8

 
3.3

 
2.2

 
0.3

 

Long-term payables
11.4

 

 
1.5

 

 
9.9

Asset retirement obligations
2.4

 

 
2.4

 

 

Open purchase order commitments
25.4

 
25.4

 

 

 

Total contractual cash obligations
$
52.5

 
$
34.7

 
$
7.6

 
$
0.3

 
$
9.9


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

The development and manufacture of new systems and enhancements are highly capital-intensive. In order to be competitive, we believe we must continue to make significant expenditures for capital equipment; sales, service, training and support capabilities; systems, procedures and controls; and expansion of operations and research and development, among many other items. We expect that cash generated from operations and our cash, cash equivalents and short-term investments will be sufficient to meet our cash requirements for at least the next twelve months. However, in the near-term, we may continue to utilize existing and future lines of credit, and other sources of financing, in order to maintain our present levels of cash, cash equivalents and short-term investments. Beyond the next twelve months, we may require additional equity or debt financing to address our working capital or capital equipment needs. In addition, we may seek to raise equity or debt capital at any time that we deem market conditions to be favorable. Additional financing, if needed, may not be available on reasonable terms, or at all.

We have in the past, and may in the future, pursue acquisitions of complementary product lines, technologies or businesses. Future acquisitions may require the use of substantial amounts of our cash, cash equivalents and short-term

36



investments, the issuance of potentially dilutive equity securities, the incurrence of debt and contingent liabilities and amortization expenses and impairment charges related to goodwill and other intangible assets, which could materially adversely affect our financial condition and results of operations. In addition, acquisitions involve numerous risks, including difficulties in the assimilation of the operations, technologies, personnel and products of the acquired companies; the diversion of management’s attention from other business concerns; risks of entering markets in which we have limited or no direct experience; and the potential loss of key employees of the acquired company. In the event we acquire product lines, technologies or businesses which do not complement our business, or which otherwise do not enhance our sales or operating results, we may incur substantial write-offs and higher recurring operating costs, which could have a material adverse effect on our business, financial condition and results of operations. In the event that any such acquisition does occur, there can be no assurance as to the effect thereof on our business or operating results.

Off-Balance Sheet Transactions

Our off-balance sheet transactions consist of certain financial guarantees, both expressed and implied, related to indemnification for product liability, patent infringement and latent product defects. Other than liabilities recorded pursuant to known product defects, at December 31, 2014, we did not record a liability associated with these guarantees, as we have little or no history of costs associated with such indemnification requirements. See Note 17 to our Consolidated Financial Statements for additional information.

Foreign Currency

As part of our overall strategy to manage the level of exposure to the risk of foreign currency exchange rate fluctuations, we attempt to hedge most of our Japanese yen denominated foreign currency exposures. We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers, for actual or forecasted sales of equipment after receipt of customer orders, may be adversely affected by changes in foreign currency exchange rates. We use foreign currency forward exchange contracts and natural hedges to offset substantial portions of the potential gains or losses associated with our Japanese yen denominated assets and liabilities due to exchange rate fluctuations. We enter into foreign currency forward contracts that generally have maturities of nine months or less.


37



ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Our exposure to market risk due to potential changes in interest rates, relates primarily to our investment portfolio, which consisted primarily of fixed interest rate instruments as of December 31, 2014 and 2013. We maintain an investment policy designed to ensure the safety and preservation of our invested funds by limiting market risk and the risk of default.

Certain of our cash, cash equivalents and investments serve as collateral for a line of credit we maintain with a brokerage firm. The line of credit is used for liquidity purposes, mitigating the need to liquidate investments in order to meet our current operating cash requirements.
    
The following table presents the hypothetical changes in fair values in the financial instruments held by us at December 31, 2014 that are sensitive to changes in interest rates. These instruments are comprised of cash equivalents and investments. These instruments are held for purposes other than trading. The modeling techniques used to measure the change in fair values arising from selected hypothetical changes in interest rates. Assumed market value changes to our portfolio reflect immediate hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS, and 150 BPS:
Cash equivalents and
available-for-sale
investments,
in thousands
Valuation of securities
given an interest rate
decrease of X basis points
 
No change in
interest rate
 
Valuation of securities
given an interest rate
increase of X basis points
(150 BPS)
 
(100 BPS)
 
(50 BPS)
 
0 BPS
 
50 BPS
 
100 BPS
 
150 BPS
Commercial paper
$
10,017

 
$
10,010

 
$
10,004

 
$
9,998

 
$
9,992

 
$
9,985

 
$
9,979

Money market funds
26,458

 
26,457

 
26,457

 
26,456

 
26,456

 
26,456

 
26,455

U.S. treasury bills and notes
3,926

 
3,924

 
3,921

 
3,919

 
3,916

 
3,914

 
3,912

Securities and obligations of U.S. government agencies
189,978

 
189,253

 
188,535

 
187,825

 
187,122

 
186,427

 
185,738

Total investments
$
230,379

 
$
229,644

 
$
228,917

 
$
228,198

 
$
227,486

 
$
226,782

 
$
226,084


During 2014, we did not materially alter our investment objectives or criteria and believe that, although the composition of our portfolio has changed from the preceding year, the portfolio’s sensitivity to changes in interest rates is materially the same.

Credit Risk

We mitigate credit default risk by attempting to invest in high credit quality securities and by positioning our portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. Our portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity and is diversified in accordance with our investment policy. To date, we have not experienced significant liquidity problems with our portfolio. Our single largest holding at December 31, 2014, excluding the U.S. government and its agencies, was an $17.1 million money market fund.

As of December 31, 2014, we did not have any investments in mortgage backed or auction rate securities. However, we intend to closely monitor developments in the credit markets and make appropriate changes to our investment policy as deemed necessary or advisable. Based on our ability to liquidate our investment portfolio and our expected operating cash flows, we do not anticipate any liquidity constraints as a result of the current credit environment.

Foreign Exchange Risk

The majority of our revenue, expense and capital purchasing activities are transacted in U.S. dollars. However, we do enter into these transactions in other currencies, primarily Japanese yen. To protect against reductions in value and the volatility of future cash flows caused by changes in currency exchange rates, we have established cash flow and balance sheet hedging programs.


38



We use foreign currency forward contracts to hedge the risk that outstanding Japanese yen denominated receipts from customers for actual or forecasted sales of equipment may be adversely affected by changes in foreign currency exchange rates. Our hedging programs reduce, but do not always entirely eliminate, the impact of currency movements. See “Derivative instruments and hedging” in Note 4 of Notes to Consolidated Financial Statements for additional disclosures.

39




ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ULTRATECH, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Financial Statements included in Item 8:
 


40



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Ultratech, Inc.
We have audited the accompanying consolidated balance sheets of Ultratech, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Ultratech, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Ultratech, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated February 27, 2015 expressed an unqualified opinion thereon.
 
 /s/ ERNST & YOUNG LLP
San Jose, California
 
February 27, 2015
 

41




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of Ultratech, Inc.
We have audited Ultratech, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the COSO criteria). Ultratech, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Ultratech, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Ultratech, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2014 of Ultratech, Inc. and our report dated February 27, 2015 expressed an unqualified opinion thereon.
 
  /s/ ERNST & YOUNG LLP
San Jose, California
 
February 27, 2015
 








42



ULTRATECH, INC.
CONSOLIDATED BALANCE SHEETS
 
In thousands, except share and per share amounts
 
December 31, 2014
 
December 31, 2013
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
67,988

 
$
93,550

Short-term investments
 
201,742

 
203,485

Accounts receivable, net of allowance for doubtful accounts of $498 and $498 at December 31, 2014 and 2013, respectively
 
44,217

 
34,441

Inventories, net
 
51,859

 
47,784

Prepaid expenses and other current assets
 
5,774

 
5,498

Total current assets
 
371,580

 
384,758

Property, plant, and equipment, net
 
20,926

 
21,811

Intangible assets, net
 
13,995

 
15,735

Other assets
 
11,017

 
11,860

Total assets
 
$
417,518

 
$
434,164

Liabilities and Stockholders’ Equity
 
 
 
 
Current liabilities:
 
 
 
 
Notes payable
 
$
5,120

 
$
5,120

Accounts payable
 
12,086

 
8,914

Accrued expenses
 
11,302

 
15,095

Deferred product and services income
 
8,638

 
6,574

Total current liabilities
 
37,146

 
35,703

Other liabilities
 
15,252

 
11,923

Commitments and contingencies
 

 

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

 

Common stock, $0.001 par value: 80,000,000 shares authorized; 30,230,075 and 29,690,354 shares issued at December 31, 2014 and 2013, respectively; and 27,395,774 and 27,854,553 outstanding at December 31, 2014 and 2013, respectively
 
30

 
29

Additional paid-in capital
 
353,366

 
335,232

Treasury stock: 2,834,301 and 1,835,801 shares at December 31, 2014 and 2013, respectively
 
(45,747
)
 
(26,497
)
Accumulated other comprehensive loss, net
 
(1,259
)
 
(67
)
Retained earnings
 
58,730

 
77,841

Total stockholders’ equity
 
365,120

 
386,538

Total liabilities and stockholders’ equity
 
$
417,518

 
$
434,164

See accompanying notes to consolidated financial statements.

43



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Years Ended December 31,
In thousands, except per share amounts
2014
 
2013
 
2012
Net sales
 
 
 
 
 
Products
$
136,169

 
$
140,340

 
$
215,711

Services
13,973

 
16,432

 
17,811

Licenses
398

 
500

 
1,303

Total net sales
150,540

 
157,272

 
234,825

Cost of sales
 
 
 
 
 
Cost of products sold
74,872

 
77,740

 
89,750

Cost of services
12,395

 
12,150

 
13,265

Gross profit
63,273

 
67,382

 
131,810

Research, development and engineering
33,590

 
33,582

 
30,085

General and administrative
48,746

 
48,858

 
45,327

Operating income (loss)
(19,063
)
 
(15,058
)
 
56,398

Interest expense
(35
)
 
(48
)
 
5

Interest and other income, net
231

 
190

 
566

Income (loss) before income taxes
(18,867
)
 
(14,916
)
 
56,969

Provision (benefit) for income taxes
244

 
(1,147
)
 
9,782

Net income (loss)
$
(19,111
)
 
$
(13,769
)
 
$
47,187

Net income (loss) per share—basic
 
 
 
 
 
Net income (loss) per share
$
(0.67
)
 
$
(0.49
)
 
$
1.76

Number of shares used in per share computations—basic
28,437

 
28,106

 
26,881

Net income (loss) per share—diluted
 
 
 
 
 
Net income (loss) per share
$
(0.67
)
 
$
(0.49
)
 
$
1.70

Number of shares used in per share computations—diluted
28,437

 
28,106

 
27,705

See accompanying notes to consolidated financial statements.

44



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

 
Years Ended December 31,
(In thousands)
2014
 
2013
 
2012
 
Net income (loss)
$
(19,111
)
 
$
(13,769
)
 
$
47,187

 
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
      Change in unrealized gain (loss) on investments
(86
)
 
(60
)
 
55

 
      Change in minimum postretirement medical obligation
(1,066
)
 
(1
)
 
(2
)
 
      Change in unrealized gain (loss) on hedge contracts
(40
)
 
(49
)
 
89

 
Other comprehensive income (loss)
(1,192
)
 
(110
)
 
142

 
Total comprehensive income (loss)
$
(20,303
)
 
$
(13,879
)
 
$
47,329

 
See accompanying notes to consolidated financial statements.


45



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Years Ended December 31,
In thousands
2014
 
2013
 
2012
Cash flows from operating activities:
 
 
 
 
 
Net income (loss)
$
(19,111
)
 
$
(13,769
)
 
$
47,187

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Depreciation
6,353

 
5,642

 
4,643

Amortization of securities discount
(200
)
 
(393
)
 
344

Amortization of intangible assets
1,740

 
1,547

 
496

Amortization of other
827

 
426

 
334

Accretion of asset retirement obligations
136

 
126

 
117

Loss on disposal of equipment
9

 
139

 
5

Provision for inventory reserves and purchase order commitments
306

 
5,606

 
456

Stock-based compensation
16,827

 
15,473

 
12,512

Excess tax benefit from share-based arrangements

 
(384
)
 
(6,961
)
Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(9,776
)
 
8,023

 
14,042

Inventories
(4,830
)
 
(12,230
)
 
(5,316
)
Prepaid expenses and other current assets
(316
)
 
2,758

 
(1,368
)
Other assets
(638
)
 
(673
)
 
(585
)
Accounts payable
3,172

 
(8,827
)
 
6,761

Accrued expenses
(3,462
)
 
(647
)
 
(7,513
)
Deferred product and services income
2,064

 
(10,390
)
 
2,011

Other liabilities
245

 
822

 
9,966

Net cash provided by (used in) operating activities
(6,654
)
 
(6,751
)
 
77,131

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(2,823
)
 
(7,933
)
 
(9,271
)
Purchase of patents and intangible assets

 
(5,000
)
 
(12,327
)
Purchase of investments in securities
(230,033
)
 
(229,740
)
 
(281,854
)
Proceeds from maturities of investments
231,889

 
232,128

 
245,193

Net cash used in investing activities
(967
)
 
(10,545
)
 
(58,259
)
Cash flows from financing activities:
 
 
 
 
 
Proceeds from notes payable
20,480

 
8,120

 
4,000

Repayment of notes payable
(20,480
)
 
(4,000
)
 
(4,000
)
Proceeds from issuance of common stock for stock option exercises
4,279

 
12,808

 
16,677

Tax payments for restricted stock unit releases
(2,950
)
 
(3,434
)
 
(4,322
)
Excess tax benefit from exercise of stock options

 
384

 
6,961

Repurchase of common stock
(19,270
)
 

 

Net cash provided by (used in) financing activities
(17,941
)
 
13,878

 
19,316

Net increase (decrease) in cash and cash equivalents
(25,562
)
 
(3,418
)
 
38,188

Cash and cash equivalents at beginning of period
93,550

 
96,968

 
58,780

Cash and cash equivalents at end of period
$
67,988

 
$
93,550

 
$
96,968

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the period for income taxes
$
396

 
$
343

 
$
615

Other non-cash changes:
 
 
 
 
 
Systems transferred from inventory and other assets to equipment, net
$
302

 
$
6,641

 
$
736

Capital lease of equipment
$
2,460

 
$

 
$

See accompanying notes to consolidated financial statements.

46



ULTRATECH, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY 
 
Stockholders’ Equity
 
Common Stock
 
Additional
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Retained
Earnings
(Accumulated
Deficit)
 
Total
Stockholders’
Equity
In thousands, except share data
Shares
 
Amount
 
Balance at December 31, 2011
25,837,994

 
$
27

 
$
278,204

 
$
(26,526
)
 
$
(99
)
 
$
44,423

 
$
296,029

Net issuance of common stock under stock option plans
1,254,248

 
1

 
12,340

 
14

 

 

 
12,355

Stock-based compensation

 

 
12,512

 

 

 

 
12,512

Excess tax benefit related to stock options

 

 
6,961

 

 

 

 
6,961

Other comprehensive income

 

 

 

 
142

 

 
142

Net income

 

 

 

 

 
47,187

 
47,187

Total comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
47,329

Balance at December 31, 2012
27,092,242

 
28

 
310,017

 
(26,512
)
 
43

 
91,610

 
375,186

Net issuance of common stock under stock option plans
762,311

 
1

 
9,358

 
15

 

 

 
9,374

Stock-based compensation

 

 
15,473

 

 

 

 
15,473

Excess tax benefit related to stock options

 

 
384

 

 

 

 
384

Other comprehensive loss

 

 

 

 
(110
)
 

 
(110
)
Net loss

 

 

 

 

 
(13,769
)
 
(13,769
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(13,879
)
Balance at December 31, 2013
27,854,553

 
29

 
335,232

 
(26,497
)
 
(67
)
 
77,841

 
386,538

Net issuance of common stock under stock option plans
541,221

 
1

 
1,307

 
20

 

 

 
1,328

Stock-based compensation


 

 
16,827

 

 

 

 
16,827

Repurchase of common stock
(1,000,000
)
 

 

 
(19,270
)
 

 

 
(19,270
)
Other comprehensive loss

 

 

 

 
(1,192
)
 

 
(1,192
)
Net loss

 

 

 

 

 
(19,111
)
 
(19,111
)
Total comprehensive loss
 
 
 
 
 
 
 
 
 
 
 
 
(20,303
)
Balance at December 31, 2014
27,395,774

 
$
30

 
$
353,366

 
$
(45,747
)
 
$
(1,259
)
 
$
58,730

 
$
365,120


See accompanying notes to consolidated financial statements.

47



ULTRATECH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. COMPANY AND INDUSTRY INFORMATION

Nature of Operations

Ultratech, Inc. develops, manufactures and markets photolithography, laser thermal processing and inspection equipment for manufacturers of integrated circuits and nanotechnology components located throughout North America, Europe, Singapore, Japan, Taiwan, Korea and the rest of Asia.
We supply step-and-repeat photolithography systems based on one-to-one imaging technology. Within the integrated circuit industry, we target the market for advanced packaging applications. Within the nanotechnology industry, our target markets include thin film head magnetic recording devices, laser diodes, high-brightness light emitting diodes (“HBLEDs”) and atomic layer deposition (“ALD”). Our laser thermal processing equipment is targeted at advanced annealing applications within the semiconductor industry.

Major Customers

In 2014, Intel Corporation (“Intel”), Samsung and Global Foundries Incorporated (“GFI”) accounted for 18%, 14%, and 13% of our total systems sales, respectively. In 2013, Siliconware Precision Industries Co. Ltd. (“SPIL”) accounted for 16% of our total system sales. In 2012, GFI, Intel and Taiwan Semiconductor Manufacturing Co. Ltd. (“TSMC”) accounted for 25%, 21% and 11% of our total system sales, respectively.

At December 31, 2014, GFI, Samsung, Semiconductor Manufacturing International Corporation (“SMIC”), and Intel accounted for 16%, 14%, 14%, and 11%, of our accounts receivable, respectively. At December 31, 2013, GFI and SMIC accounted for 37% and 17% of our accounts receivable, respectively.

Business Segments

In evaluating our business, we give consideration to the Chief Executive Officer’s review of financial information and the organizational structure of our management. Based on this review, we concluded that, at the present time, resources are allocated and other financial decisions are made based on consolidated financial information. Accordingly, we have determined that we operate in one business segment, which is the manufacture and distribution of capital equipment to manufacturers of integrated circuits and nanotechnology components.


48



Enterprise-Wide Disclosures

Our products are manufactured in the United States and Singapore, and are sold worldwide. We market our products internationally through domestic and foreign-based sales and service offices. The following table presents enterprise-wide sales to external customers and long-lived assets by geographic region:
In thousands
2014
 
2013
 
2012
Net sales:
 
 
 
 
 
United States
$
47,629

 
$
43,383

 
$
81,724

International:
 
 
 
 
 
Taiwan
27,961

 
61,460

 
48,843

Rest of the world
26,474

 
19,871

 
43,227

Korea
25,752

 
7,416

 
12,916

Europe
17,688

 
13,660

 
44,804

Japan
5,036

 
11,482

 
3,311

Subtotal
102,911

 
113,889

 
153,101

Total
$
150,540

 
$
157,272

 
$
234,825

Long-lived assets:
 
 
 
 
 
United States
$
39,577

 
$
40,347

 
$
27,118

Singapore
5,367

 
7,913

 
5,610

Rest of the world
994

 
1,146

 
777

Total
$
45,938

 
$
49,406

 
$
33,505

    
The rest of the world is comprised of sales to customers and long-lived assets in countries that are individually insignificant.

With the exception of Japan, our operations in foreign countries are not currently subject to significant currency exchange rate fluctuations, principally because sales contracts for our systems are generally denominated in U.S. dollars. In Japan, we sell our products in both U.S. dollars and Japanese yen. However, we attempt to mitigate our currency exchange rate exposure through the use of currency forward contracts. (See “Derivative Instruments and Hedging” in Note 4.)

2. CONCENTRATIONS OF RISKS

Financial instruments that potentially subject us to concentrations of credit risk consist principally of cash equivalents, short-term investments and trade receivables. These credit risks include the potential inability of an issuer or customer to honor their obligations under the terms of the instrument or the sales agreement. We place our cash equivalents and investments with high credit-quality financial institutions. We invest our excess cash in commercial paper, readily marketable debt instruments and collateralized funds of United States and state government entities. We have established guidelines relative to credit ratings, diversification and maturities that seek to maintain principal balance and liquidity.

A majority of our trade receivables are derived from sales in various geographic areas, principally the United States, Europe, Korea, Japan, Taiwan and the rest of Asia, to large companies within the integrated circuit and nanotechnology industries. We perform ongoing credit evaluations of our customers’ financial condition and require collateral, whenever deemed necessary. As of December 31, 2014 and 2013, the recorded value of our accounts receivable approximated fair value due to the short-term nature of our accounts receivable.

Sole-source and single-source suppliers provide critical components and services for the manufacture of our products. The reliance on sole or limited groups of suppliers may subject us from time to time to quality, allocation and pricing constraints.