NOTE 15.   Segment Reporting and Geographic Information

            The Company reports one reportable segment. Operating segments are business units that have separate financial information and are separately reviewed by the Company's chief decision maker. The Company's chief decision maker is the Chief Executive Officer. The Company is engaged in the design, development, and manufacture of high-performance control metrology, defect inspection and data analysis systems used by semiconductor device manufacturers. The Company and its subsidiaries currently operate in a single reportable segment: the design, development, manufacture, sale and service of process control systems used in semiconductor device manufacturing. The chief decision maker allocates resources and assesses performance of the business and other activities at the reporting segment level.  

         For geographical revenue reporting, revenues are attributed to the geographic location in which the product is shipped.  Revenue by geographic region is as follows: 

        Customers comprising 10% or more of revenue:

Six Months Ended

June 30,

2010

2009 Customer A 22.7% 7.2% Customer B 6.9% 16.8%

NOTE 16.   Recent Accounting Pronouncements        

        In April 2010, the FASB issued ASU No. 2010-17, "Revenue Recognition- Milestone Method (Topic 605)," which provides guidance on the criteria that should be met for determining whether the milestone method of revenue recognition is appropriate.  This ASU is effective in fiscal years, and interim periods within those years, beginning on or after June 15, 2010.  The Company does not expect the adoption of ASU No. 2010-17 to have a significant impact on its consolidated financial position and results of operations.

        In April 2010, the FASB issued ASU No.2010-13, "Compensation - Stock Compensation (Topic 718),"  which provides guidance on the classification of a share-based payment award as either equity or a liability.  A share-based payment award that contains a condition that is not a market, performance, or service condition is required to be classified as a liability.  This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010.  The Company does not expect the adoption of ASU No. 2010-13 to have a significant impact on its consolidated financial position and results of operations.

        In February 2010, the FASB issued ASU No. 2010-09, "Subsequent Events (Topic 855) - Amendments to Certain Disclosure Requirements."  The objective of this ASU was to remove the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financials statements.  This ASU is to be applied immediately upon issuance.  The Company adopted this ASU in the first quarter of 2010 and the adoption of this ASU did not have a significant effect on its consolidated financial position and results of operations.

        In January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and Disclosures (Topic 820) - Improving Disclosures about Fair Value Measurements."  This ASU requires new disclosures regarding significant transfers in and out of Levels 1 and 2, and information about activity in Level 3 fair value measurements.  In addition, this ASU clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities.  This ASU was effective for interim and annual reporting periods beginning after December 15, 2009, except for certain Level 3 activity disclosure requirements, which are effective for reporting periods beginning after December 15, 2010.  The Company adopted the new guidance in the first quarter of 2010, except for the disclosures related to purchases, sales, issuance and settlements, which will be effective for the Company beginning in the first quarter of 2011. Because these new standards are related primarily to disclosures, their adoption has not had and is not expected to have a significant impact on the Company's consolidated financial position and results of operations.

        In October 2009, the FASB issued ASU No. 2009-14 on FASB ASC 985, Software  Certain Revenue Arrangements That Include Software Elements-a consensus of the FASB Emerging Issues Task Force."  The objective of this ASU is to clarify which revenue allocation and measurement guidance should be used for arrangements that contain both tangible products and software, in cases where the software is more than incidental to the tangible product as a whole. More specifically, if the software sold with or embedded within the tangible product is essential to the functionality of the tangible product, then this software as well as undelivered software elements that relate to this software are excluded from the scope of existing software revenue guidance, which is expected to decrease the amount of revenue deferred in these cases. This update is effective for fiscal years beginning on or after June 15, 2010.  Early adoption is permitted, but this ASU must be adopted in the same period as, and use the same transition method that is used for, the ASU described in the subsequent paragraph. The Company is currently evaluating the impact, if any, of this new accounting update on its consolidated financial position and results of operations. " 

              The year-over-year increase in systems and software revenue for the six month period ended June 30, 2010 and 2009 is due to improving economic conditions leading to increased capital spending in the semiconductor industry.  This contributed to an increase in the number of inspection and metrology systems sold during the six months ended June 30, 2010 as compared to the same period in the prior year, resulting in an increase in inspection systems revenues of $43.6 million and an increase in metrology systems revenue of $7.0 million.  In addition, changes in average selling price of similarly configured systems did not have a material impact on our revenues for the same periods. The year-over-year increase in data analysis and review software of $6.6 million is primarily due to revenue from our Process Control Group, which is part of our Data Analysis and Review products, and which was acquired in the third quarter of 2009.  Systems revenue generated by our latest product releases and major enhancements in each of our product families amounted to 61% and 64% of total revenues for the three and six month periods ended June 30, 2010, compared to 39% and 27% of total revenues for the three and six month periods ended June 30, 2009.  The year-over-year increase in total parts and services revenue for the six month periods ended June 30, 2010 and 2009 is primarily due to increased spending by our customers on repairs of existing systems. Parts and services revenues are generated from part sales, maintenance service contracts, system upgrades, as well as time and material billable service calls. 

            Deferred revenues of $8.4 million are recorded in Other current liabilities at June 30, 2010 and primarily consist of $5.3 million for systems awaiting acceptance and outstanding deliverables and $3.1 million for deferred maintenance agreements.

            Gross Profit. Our gross profit has been and will continue to be affected by a variety of factors, including inventory step-up from purchase accounting, manufacturing efficiencies, excess and obsolete inventory write-offs, pricing by competitors or suppliers, new product introductions, production volume, customization and reconfiguration of systems, international and domestic sales mix, and parts and service margins. Our gross profit was $25.2 million and $45.5 million for the three and six month periods ended June 30, 2010, compared to $5.4 million and $7.7 million for the three and six month periods ended June 30, 2009.  Our gross profit represented 52.1% and 51.1% of our revenues for the three and six month periods ended June 30, 2010 and 35.2% and 29.1% of our revenues for the same periods in the prior year.  The increase in gross profit as a percentage of revenue for the three and six month periods ended June 30, 2010, compared to the three and six month periods ended June 30, 2009 is primarily due to increased product sales volume and to product mix.

            Operating Expenses.      

            The Operating expenses consist of:     

                    Research and Development.  Our research and development expense was $8.5 million and $16.3 million for the three and six month periods ended June 30, 2010, compared to $6.0 million and $12.8 million for the same periods in the prior year.  Research and development expense represented 17.5% and 18.4% of our revenues for the three and six month periods ended June 30, 2010, compared to 39.3% and 48.3% of revenues for the prior year periods.   The year-over-year dollar increase for the three and six month periods ended June 30, 2010 and 2009 in research and development expenses primarily reflects increased R&D project costs, increased patent litigation costs and  the inclusion of research and development expense of our Process Control Group, which is part of our Data Analysis and Review products and which was acquired in the third quarter of 2009.

                    Selling, General and Administrative.     Our selling, general and administrative expense was $10.0 million and $19.0 million for the three and six month periods ended June 30, 2010, compared to $6.9 million and $14.2 million for the same periods in the prior year.  Selling, general and administrative expense represented 20.7% and 21.4% of our revenues for the three and six month periods ended June 30, 2010, compared to 45.0% and 53.6% of our revenues for the same periods in the prior year.  The year-over-year dollar increase for the three and six month periods ended June 30, 2010 and 2009 in selling, general and administrative expense was primarily due to increased sales commissions, incentive compensation accruals and benefit costs. 

          The Company currently anticipates that operating expenses for the third quarter of 2010 will be approximately $17.9 million to $18.9 million.

          Other income (expense).   We recorded other income for the three and six month periods ended June 30, 2010 of $1.0 million and $0.8 million, compared to other expense of $0.9 million for the three month period ended June 30, 2009 and $2 thousand for the six month period ended June 30, 2009.  The year-over-year dollar increase for the three and six month periods ended June 30, 2010 and 2009 in other income (expense) was due primarily to foreign currency exchange gains in the second quarter 2010 period compared to foreign currency exchange losses in the second quarter 2009 period.

          Income Taxes.  For the three and six month periods ended June 30, 2010, we recorded an income tax provision of $0.9 million and $1.6 million, as compared to the income tax benefit of $44 thousand and $0.9 million for the comparable periods in 2009.  Our effective tax rate differs from the statutory rate of 35% for the three and six month periods ended June 30, 2010 primarily from projected tax payments in U.S. and foreign locations, offset by valuation allowances.

          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 substantially all of our net deferred tax assets will not be realized.  Therefore, we continue to provide a valuation allowance against these net deferred tax assets.  A portion of our net deferred tax assets relate to R&D credits which are reserved for in our FASB ASC 740 provision. We closely monitor available evidence, and may reverse some or all of the valuation allowance in future periods, if appropriate.

Liquidity and Capital Resources

            At June 30, 2010, we had $71.8 million of cash, cash equivalents and marketable securities and $139.4 million in working capital.  At December 31, 2009, we had $60.9 million of cash, cash equivalents and marketable securities and $126.8 million in working capital. 

            Typically during periods of revenue growth, changes in accounts receivable and inventories represent a use of cash as we incur costs and expend cash in advance of receiving cash from our customers.   Similarly, during periods of declining revenue, changes in accounts receivable and inventories represent a source of cash as inventory purchases decline and revenue from prior periods is collected.

           Operating activities provided $11.6 million in cash and cash equivalents for the six month period ended June 30, 2010.  The net cash and cash equivalents provided by operating activities during the six month period ended June 30, 2010 was primarily a result of net income, adjusted to exclude the effect of non-cash operating charges of $13.0 million, an increase in accounts payable and accrued liabilities of $7.4 million, an increase in other current liabilities of $2.6 million, and a decrease of $1.3 million in prepaid expenses and other assets, partially offset by an increase in accounts receivable of $6.8 million, an increase in inventory of $5.4 million, and a decrease in other non-current liabilities of $0.5 million.  Operating activities used $5.4 million in cash and cash equivalents for the six month period ended June 30, 2009.  The net cash and cash equivalents used in operating activities during the six month period ended June 30, 2009 was primarily a result of net loss, adjusted to exclude the effect of non-cash operating charges of $12.1 million, a decrease in other current liabilities of $2.9 million and a decrease in accounts payable and accrued liabilities of $0.8 million, partially offset by decreases in accounts receivable of $6.8 million, inventories of $1.9 million, and prepaid expenses and other assets of $1.8 million. 

            Net cash and cash equivalents used in investing activities during the six month period ended June 30, 2010 of $3.5 million was due to purchases of marketable securities of $6.9 million and capital expenditures of $1.0 million, partially offset by proceeds from sales of marketable securities of $4.3 million.  Net cash and cash equivalents provided by investing activities during the six month period ended June 30, 2009 of $5.0 million was due to proceeds from sales of marketable securities of $10.1 million, partially offset by purchases of marketable securities of $4.8 million, and capital expenditures of $0.3 million.  

            Net cash and cash equivalents provided by financing activities of $0.2 million and $0.1 million for the six month periods ended June 30, 2010 and 2009, respectively, were due to proceeds received for sales of shares through share-based compensation plans. 

            From time to time we evaluate whether to acquire new or complementary businesses, products and/or technologies. We may fund all or a portion of the purchase price of these acquisitions in cash, stock, or a combination of cash and stock.  On August 3, 2009, we announced that we had acquired Adventa Control Technologies, Inc., headquartered in Plano, Texas.  We accounted for this acquisition as a business combination.

            In July 2008, our Board of Directors approved a stock repurchase program of up to 3 million shares of Company common stock.  As of the time of filing this Quarterly Report on Form 10-Q, we have not purchased any shares under this program.

           Our future capital requirements will depend on many factors, including the timing and amount of our revenues and our investment decisions, which will affect our ability to generate additional cash. We believe that our existing cash, cash equivalents and marketable securities will be sufficient to meet our anticipated cash requirements for working capital and capital expenditures for the next twelve months. Thereafter, if cash generated from operations and financing activities is insufficient to satisfy our working capital requirements, we may seek additional funding through bank borrowings, sales of securities or other means. There can be no assurance that we will be able to raise any such capital on terms acceptable to us or at all.

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Interest Rate and Credit Market Risk

         We are exposed to changes in interest rates and market liquidity primarily from our investments in certain available-for-sale securities. Our available-for-sale securities consist of fixed and variable rate income investments (U.S. Treasury and Agency securities, asset-backed securities, mortgage-backed securities, auction rate securities and corporate bonds). We continually monitor our exposure to changes in interest rates, market liquidity and credit ratings of issuers from our available-for-sale securities. It is possible that we are at risk if interest rates, market liquidity or credit ratings of issuers change in an unfavorable direction. The magnitude of any gain or loss will be a function of the difference between the fixed rate of the financial instrument and the market rate and our financial condition and results of operations could be materially affected. Based on a sensitivity analysis performed on our financial investments held as of June 30, 2010, an immediate adverse change of 10% in interest rates (e.g. 3.00% to 3.30%) would result in an immaterial decrease in the fair value of our available-for-sale securities. 

Foreign Currency Risk

        We have branch operations in Taiwan, Singapore and Korea and wholly-owned subsidiaries in Europe, China and Japan.  Our international subsidiaries and branches operate primarily using local functional currencies.  The intercompany transactions denominated in U.S. dollars on the financial statements of the subsidiaries and branches are remeasured at each quarter-end resulting in gains and losses which are reflected in net income.  A hypothetical 10% appreciation or depreciation in the U.S. dollar relative to the reporting currencies of our foreign subsidiaries at June 30, 2010 would have affected the foreign-currency-denominated non-operating expenses of our foreign subsidiaries by approximately $2.2 million. We cannot accurately predict future exchange rates or the overall impact of future exchange rate fluctuations on our business, results of operations and financial condition.

        A substantial portion of our international sales are denominated in U.S. dollars with the exception of Japan and, as a result, we have relatively little exposure to foreign currency exchange risk with respect to these sales. Substantially all our sales in Japan are denominated in Japanese yen. From time to time, we may enter into forward exchange contracts to economically hedge a portion of, but not all, existing and anticipated foreign currency denominated transactions expected to occur within 12 months. The change in fair value of the forward contracts is recognized in the Condensed Consolidated Statements of Operations each reporting period. As of June 30, 2010, we had seven forward contracts outstanding with a total notional contract value of $1.8 million. We do not use derivative financial instruments for trading or speculative purposes.

The Company maintains a set of disclosure controls and procedures, as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act, designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow for timely decisions regarding required disclosure. The disclosure controls and procedures are designed to provide reasonable assurance of achieving the desired control objectives. 

Scope of the Controls Evaluation

           The evaluation of our disclosure controls and procedures included a review of the controls' objectives and design, our implementation of the controls and the effect of the controls on the information generated for use in this Quarterly Report. In the course of the evaluation, we sought to identify data errors, control problems or acts of fraud and confirm that appropriate corrective actions, if any, including process improvements, were being undertaken. This type of evaluation is performed on a quarterly basis so that the conclusions of management, including the CEO and CFO, concerning the effectiveness of the controls can be reported in our Quarterly Reports on Form 10-Q and in our Annual Reports on Form 10-K. Many of the components of our disclosure controls and procedures are also evaluated on an ongoing basis by other personnel in our accounting, finance and legal functions. The overall goals of these various evaluation activities are to monitor our disclosure controls and procedures and to modify them on an ongoing basis as necessary. A control system can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.

Conclusions

Changes in Internal Control over Financial Reporting

            There has been no change in our internal control over financial reporting that occurred during the period covered by this Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II    OTHER INFORMATION

Item 1.   Legal Proceedings

            The Company announced on July 29, 2010 that the United States District Court in Minneapolis confirmed a jury verdict originally issued on March 5, 2009 which held that Camtek infringed Rudolph's US Patent concerning Rudolph's proprietary continuous scan wafer inspection technology. The Judge's ruling stated that Rudolph's patent is valid and that the jury's finding of infringement and its award to Rudolph of lost profits plus interest (approximately $8.0 million) were supported by the evidence introduced at trial. The Court also confirmed the particulars of a permanent injunction entered against Camtek on August 28, 2009.

           Further discussion regarding the Company's pending legal proceedings is included in Part 1, Item 3, "Legal Proceedings," included in our Annual Reports on Form 10-K for the year ended December 31, 2009.

Item 1A.    Risk Factors

            There are no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

            In July 2008, our Board of Directors approved a stock repurchase program of up to 3 million shares of Company common stock. The program may be discontinued or modified at anytime. As of the time of filing this Quarterly Report on Form 10-Q, we have not purchased any shares under this program.

Item 6.   Exhibits

  Exhibit No.           Description

3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit (3.1(c)) to the Registrant's Registration Statement on Form S-1, as amended (SEC File No. 333-86821 filed on October 5, 1999).
  3.2 Amendment to Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on August 1, 2007, No. 000-27965).
  3.3 Amendment to Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on February 2, 2009, No. 000-27965).
  10.1 Second amendment dated May 19, 2010 to the Management Agreement dated July 24, 2000, as amended August 20, 2009, by and between Rudolph Technologies, Inc. and Paul F. McLaughlin.
  31.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
  31.2 Certification of  Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
  32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Paul F. McLaughlin, Chief Executive Officer of Rudolph Technologies, Inc.
  32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of Rudolph Technologies, Inc.
 

---

 

 

SIGNATURES

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

                                                                                                        Rudolph Technologies, Inc.

Date: August 4, 2010                                                                                   By:  /s/ Paul F. McLaughlin                                

                                                                                                                        Paul F. McLaughlin

                                                                                                                        Chairman and Chief Executive Officer

Date: August 4, 2010                                                                                    By:   /s/ Steven R. Roth                                     

                                                                                                                         Steven R. Roth

                                                                                                                         Senior Vice President, Chief Financial Officer

                                                                                                                         and Principal Accounting Officer

3.1 Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit (3.1(c)) to the Registrant's Registration Statement on Form S-1, as amended (SEC File No. 333-86821 filed on October 5, 1999).
  3.2 Amendment to Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on August 1, 2007, No. 000-27965).
  3.3 Amendment to Amended and Restated Bylaws of Registrant (incorporated by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on February 2, 2009, No. 000-27965).
  10.1 Second amendment dated May 19, 2010 to the Management Agreement dated July 24, 2000, as amended August 20, 2009, by and between Rudolph Technologies, Inc. and Paul F. McLaughlin.
  31.1 Certification of Paul F. McLaughlin, Chief Executive Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
  31.2 Certification of  Steven R. Roth, Chief Financial Officer, pursuant to Securities Exchange Act Rule 13a-14(a).
  32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Paul F. McLaughlin, Chief Executive Officer of Rudolph Technologies, Inc.
  32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, signed by Steven R. Roth, Chief Financial Officer of Rudolph Technologies, Inc.
 

May 19, 2010

Paul F. McLaughlin
<Address>

Re: Letter Amendment #2 to Management Agreement with an effective date of July 24, 2000

Dear Paul:

            This letter shall serve as the Second Amendment to the Management Agreement between Rudolph Technologies, Inc. ("Technologies" or the "Company") and yourself ("Executive") with an effective date of July 24, 2000, as amended August 20, 2009 (the "Agreement"). In order to maintain consistency to the terms and intent of the July 24, 2000 Management Agreement within the August 20, 2009 amendment, the Company respectfully requests that the Agreement be amended, as follows:

            A. Delete Section 5.(b)(iii) in its entirety and replace it with the following:

                    "iii. Bonus. Payment of Executive's bonus as was paid for the most recent completed bonus period in each of the two (2) years of severance under Section 5(b)ii above;"

            B. Delete Section 5.(c)(iii) in its entirety and replace it with the following:

                    "iii. Bonus. Payment of Executive's bonus as was paid for the most recent completed bonus period in each of the two (2) years of severance under Section 5(c)ii above;"

            C. All other terms and conditions of the Management Agreement shall remain in full force and effect.

            If you are in agreement with the above amendment please sign below and return one (1) original to my attention and retain the other original for your files.

Very truly yours,

Daniel H. Berry Chairman, Compensation Committee Rudolph Technologies Board of Directors

The foregoing amended terms and conditions to the Management Agreement are hereby accepted and agreed to.

Dated: _____________________ Signature: ______________________________ Paul F. McLaughlin

Date:  August 4, 2010

By:  /s/ Paul F. McLaughlin                  Paul F. McLaughlin Chairman and Chief Executive Officer

Date: August 4, 2010

By:  /s/ Steven R. Roth                                 Steven R. Roth Senior Vice President, Chief Financial Officer

I, Paul F. McLaughlin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Rudolph Technologies, Inc. on Form 10-Q for the quarter ended June 30, 2010 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Rudolph Technologies, Inc.