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AMTECH SYSTEMS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in Item 1, "Condensed Consolidated Financial Statements" in this quarterly report on Form 10-Q and our consolidated financial statements and related notes included in Item 8, "Financial Statements and Supplementary Data" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012. Cautionary Statement Regarding Forward-Looking Statements Certain information contained or incorporated by reference in this Quarterly Report on Form 10-Q is forward-looking in nature. All statements included or incorporated by reference in this Quarterly Report on Form 10-Q, or made by management of Amtech Systems, Inc. and its subsidiaries ("the Company" or "Amtech"), other than statements of historical fact, are hereby identified as "forward-looking statements" (as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended). In some cases, forward-looking statements can be identified by terminology such as "may," "will," "should," "would," "expects," "plans," "anticipates," "intends," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Examples of forward-looking statements include statements regarding Amtech's future financial results, operating results, business strategies, projected costs, products under development, competitive positions and plans and objectives of the Company and its management for future operations. We cannot guarantee that any forward-looking statement will be realized, although we believe that the expectations reflected in the forward-looking statements are reasonable. Achievement of future results is subject to risks, uncertainties and potentially inaccurate assumptions. The Form 10-K that we filed with the Securities and Exchange Commission for the year-ended September 30, 2012 listed various important factors that could affect Amtech's future operating results and financial condition and could cause actual results to differ materially from historical results and expectations based on forward-looking statements made in this document or elsewhere by Amtech or on its behalf. These factors can be found under the heading "Risk Factors" in the Form 10-K and investors should refer to them. Because it is not possible to predict or identify all such factors, any such list cannot be considered a complete set of all potential risks or uncertainties. Except as required by law, we undertake no obligation to publicly update forward-looking statements, whether as a result of new information, future events, or otherwise. Introduction Management's Discussion and Analysis ("MD&A") is intended to facilitate an understanding of our business and results of operations. MD&A consists of the following sections: • Overview • Results of Operations • Liquidity and Capital Resources • Off - Balance Sheet Arrangements • Contractual Obligations • Critical Accounting Policies • Recently Issued Accounting Pronouncements Overview We are a leading supplier of thermal processing systems, including related automation, parts and services, to the solar/photovoltaic, semiconductor, silicon wafer and MEMS industries and also offer PECVD (plasma-enhanced chemical vapor deposition) equipment. We also manufacture polishing templates, steel carriers and double-sided polishing and lapping machines for fabricators of LED's, optics, quartz, ceramics and metal parts, and for manufacturers of medical equipment components. Since the 2011 acquisition of Kingstone, we have advanced the development of an ion implanter to provide our solar customers with a more complete solution for their next-generation high-efficiency solar cell production. Our customers are primarily manufacturers of solar cells and integrated circuits. The solar cell and semiconductor industries are cyclical and historically have experienced significant fluctuations. Our revenue is impacted by these broad industry trends. In 2012, the solar cell industry experienced a structural imbalance between supply and demand and we expect this structural imbalance to continue into at least fiscal 2014. This imbalance has negatively impacted our results of operations and is expected to do so in the future. Our strategy has been, and continues to be, to grow the Company through strategic product development and acquisitions. In addition to internal product development, we have acquired companies with complementary products or products that serve adjacent process steps. In October 2007, we acquired R2D Automation SAS, which allowed us to provide our diffusion furnaces with integrated automation that is also sold as a stand-alone product. In February 2011, we acquired a 55% ownership interest in Kingstone Technology Hong Kong, Limited ("Kingstone"), a holding company that owns 100% of Kingstone Semiconductor Company Ltd., a Shanghai-based technology company specializing in ion implant solutions for the solar industry. Results of Operations The following table sets forth certain operational data as a percentage of net revenue for the periods indicated: Three Months Ended Six Months Ended March 31, March 31, March 31, March 31, 2013 2012 2013 2012 Net revenue 100 % 100 % 100 % 100 % Cost of goods sold 70 % 81 % 78 % 76 % Gross margin 30 % 19 % 22 % 24 % Operating expenses: Selling, general and administrative 50 % 28 % 47 % 27 % Restructuring and impairment charges 0 % 3 % 4 % 1 % Research and Development 24 % 16 % 18 % 13 % Total operating expenses 74 % 47 % 69 % 41 % Loss from operations (44 )% (28 )% (47 )% (17 )% Interest income (expense), net 0 % 0 % 0 % 0 % Loss before income taxes (44 )% (28 )% (47 )% (17 )% Income taxes benefit (10 )% (1 )% (7 )% (1 )% Net loss (34 )% (27 )% (40 )% (16 )% Add: net loss attributable to noncontrolling interest 7 % 3 % 3 % 3 % Net loss attributable to Amtech Systems, Inc. (27 )% (24 )% (37 )% (13 )% Net Revenue Net revenue consists of revenue recognized upon shipment or installation of products using proven technology and upon acceptance of products using new technology. In addition, spare parts sales are recognized upon shipment. Service revenue is recognized upon completion of the service activity or ratably over the term of the service contract. Since the majority of our revenue is generated from large thermal system sales, revenue and operating income can be significantly impacted by the timing of system shipments, the net impact of revenue deferral on those shipments and recognition of revenue based on customer acceptances. Net revenue for the quarters ended March 31, 2013 and 2012 was $8.1 million and $21.6 million, respectively, a decrease of $13.4 million or 62%. Revenue decreased primarily due to significantly lower shipments of our equipment to the solar and semiconductor industries. Net revenue from the solar market was $3.9 million and $10.6 million for the three months ended March 31, 2013 and 2012, respectively. The current supply / demand imbalance and global economic conditions have negatively impacted sales in the solar equipment market and have caused our customers to significantly slow or push out their capacity expansion plans. It is difficult to predict when the market will improve, but we expect this downturn to continue into at least fiscal 2014. Lower revenues from the semiconductor industry are a result of the current cyclical downturn affecting the semiconductor equipment market. 17-------------------------------------------------------------------------------- Table of Contents Net revenue for the six months ended March 31, 2013 and 2012 was $17.5 million and $46.3 million, respectively, a decrease of $28.8 million or 62%. Revenue decreased primarily due to significantly lower shipments of our equipment to the solar and semiconductor industries, as well as decreased recognition of previously-deferred revenue. Net revenue from the solar market was $8.2 million and $26.2 million for the six months ended March 31, 2013 and 2012, respectively. The year-to-date results were negatively impacted by the supply / demand imbalance and global economic conditions discussed above. Backlog and Orders Our order backlog as of March 31, 2013 and 2012 was $14.1 million and $67.4 million, respectively. Our backlog as of March 31, 2013 includes approximately $10.5 million of orders and deferred revenue from our solar industry customers, compared to $54.1 million at March 31, 2012. New orders booked in the quarter ended March 31, 2013 were $9.6 million compared to $18.0 million in the quarter ended March 31, 2012. As the majority of the backlog is denominated in Euros, the weakening of the Euro during the second quarter of fiscal 2013 resulted in a decrease in backlog of approximately $0.4 million. As of March 31, 2013, two customers individually accounted for 38% and 13% of our order backlog. Our order pipeline is slow, due to the worldwide overcapacity of solar cell production as well as a slowdown in orders from our customers serving the semiconductor industry. The pipeline is also negatively influenced by slower growth in demand for solar modules caused by the frequently-fluctuating government subsidies for solar energy installations. The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize profit from completing these orders. Our backlog also includes revenue deferred pursuant to our revenue recognition policy, derived from orders that have already been shipped, but which have not met the criteria for revenue recognition. Gross Profit and Gross Margin Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment and spare parts and the cost of service and support to customers for installation, warranty and paid service calls. Gross margin is gross profit as a percent of net revenue. Gross profit for the three months ended March 31, 2013 and 2012 was $2.5 million and $4.0 million, respectively; a decrease of $1.6 million or 39%. Gross margin was 30% in the quarter ended March 31, 2013 compared to 19% in the quarter ended March 31, 2012. In the fiscal 2013 second quarter, recognition of previously-deferred revenue was a larger portion of total net revenue compared to fiscal 2012. This had a favorable impact on the gross margin as did lower spending resulting from company-wide cost-control initiatives, partially offset by lower capacity utilization. In the quarters ended March 31, 2013 and 2012, we had a net recognition of deferred profit of $2.8 million and $3.1 million, respectively. In the first half of fiscal 2013, deferred profit decreased from $10.2 million at September 30, 2012 to $5.1 million at March 31, 2013. We expect future recognition of previously-deferred profit to be lower than in the second quarter of fiscal 2013. This is expected to have a negative impact on gross margins. Gross profit for the six months ended March 31, 2013 and 2012 was $3.8 million and $11.2 million, respectively, a decrease of $7.4 million or 66%. Gross margin was 22% in the six months ended March 31, 2013 compared to 24% in the six months ended March 31, 2012. Gross margins were negatively impacted by lower sales volumes and the related lower capacity utilization, partially offset by lower spending resulting from company-wide cost-control initiatives and proportionally higher recognition of previously-deferred revenues. In the six months ended March 31, 2013 and 2012, we had a net recognition of deferred profit of $5.3 million and $8.0 million, respectively. For reasons discussed above, we expect future recognition of previously-deferred profit to be lower than in the first half of fiscal 2013. This is expected to have a negative impact on gross margins. Selling, General and Administrative Selling, general and administrative expenses consist of the cost of employees, consultants and contractors, facility costs, sales commissions, shipping costs, promotional marketing expenses, legal and accounting expenses. Selling, general and administrative (SG&A) expenses for the three months ended March 31, 2013 and 2012 were $4.0 million and $6.0 million, respectively. SG&A expenses include $0.3 million and $0.4 million of stock-based compensation expense for the 18-------------------------------------------------------------------------------- Table of Contents quarters ended March 31, 2013 and 2012, respectively. The decrease in SG&A expenses was due primarily to lower commissions and shipping expenses related to lower revenues and also reflects company-wide cost-control initiatives. SG&A expenses for the six months ended March 31, 2013 and 2012 were $8.2 million and $12.3 million, respectively. SG&A expenses include $0.8 million and $0.9 million of stock-based compensation expense for the six months ended March 31, 2013 and 2012, respectively. The decrease in SG&A expenses was due primarily to lower commissions and shipping expenses related to lower revenues and also reflects company-wide cost-control initiatives. Impairment and Restructuring Charges Impairment and restructuring charges for the six months ended March 31, 2013 and 2012 were each $0.7 million. The company's cost-cutting efforts in the first quarter of fiscal 2013 included reductions-in-force which resulted in restructuring charges related primarily to severance costs at certain operations. In fiscal 2012, an impairment charge was recorded for assets related to a product development project. Research and Development Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes as well as materials and supplies used in producing prototypes. Reimbursement of research and development costs in the form of governmental research and development grants are netted against these expenses. Three Months Ended Six Months Ended Incr. Incr. March 31, 2013 March 31, 2012 (Decr.) % change March 31, 2013 March 31, 2012 (Decr.) % change (dollars in thousands) (dollars in thousands)Research and development $ 2,184 $ 3,408 $ (1,224 ) (36 )% $ 4,643 $ 6,246 $ (1,603 ) (26 )% Grants earned (238 ) (109 ) (129 ) (118 )% (1,535 ) (194 ) (1,341 ) 691 % Net research and development $ 1,946 $ 3,299 $ (1,353 ) (41 )% $ 3,108 $ 6,052 $ (2,944 ) (49 )% Research and development costs (net of grants earned) for the three months ended March 31, 2013 decreased $1.4 million compared to the three months ended March 31, 2012. Research and development costs (net of grants earned) for the six months ended March 31, 2013 decreased $2.9 million compared to the six months ended March 31, 2012. Decreased research and development spending relates to reduced activity in solar research and development. We receive reimbursements through governmental research and development grants which are netted against these expenses. The increase in the year-to-date amount of government grants earned resulted primarily from grant funding for development of the solar ion implanter. Income Taxes For the three months ended March 31, 2013 and 2012, we recorded an income tax benefit of $0.8 million and $0.2 million for effective tax rates of 23% and 4%, respectively. For the six months ended March 31, 2013 and 2012, we recorded an income tax benefit of $1.3 million and $0.5 million for effective tax rates of 16% and 7%, respectively. The effective tax rate is the ratio of total income tax expense (benefit) to pre-tax income (loss). The tax benefit for the first six months of fiscal 2012 includes the benefit realized from the favorable resolution of an uncertain tax position. The income tax provisions are based upon estimates of annual income, annual permanent differences and statutory tax rates in the various jurisdictions in which we operate, except that certain loss jurisdictions and discrete items, such as the resolution of uncertain tax positions, are treated separately. No tax benefit has been recognized for losses related to Kingstone's ion implant development project, because it does not have a sufficient history of earnings to support a determination that realization of the tax benefit is more likely than not. Our future effective income tax rate depends on various factors, such as the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses as a percent of pre-tax income and the effectiveness of our tax planning strategies. At the end of 2011, we restructured our European operations to lower the tax rate on The Netherlands operations from 35% to a marginal rate of 25%, as we intend to permanently reinvest future Dutch earnings in our foreign operations. The effect of the restructuring on our tax rate depends on the amount of income or loss realized in The Netherlands, as well as the portion of such income that can be demonstrated to have been derived from qualified new technologies, as well as the factors mentioned above. 19-------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources At March 31, 2013 and September 30, 2012, cash and cash equivalents were $38.8 million and $46.7 million, respectively. At March 31, 2013 and September 30, 2011, restricted cash was $6.7 million and $4.6 million, respectively. Restricted cash increased in the first half of fiscal 2013 primarily due to the receipt of research and development grants which are to be passed through to our development partners, as well as the receipt of other grant funds subject to restrictions. Our working capital was $55.0 million as of March 31, 2013 and $60.2 million as of September 30, 2012. The decrease in cash for the first six months of fiscal 2013 was due to cash used in operating activities of $7.8 million discussed below. We maintain a portion of our cash and cash equivalents in Euros at our Dutch and French operations, therefore, changes in the exchange rate have an impact on our cash balances. Our ratio of current assets to current liabilities was 2.6:1 as of March 31, 2013 and 2.4:1 at September 30, 2012. We expect to pay approximately $8.8 million of Dutch income tax and interest payments during the remainder of fiscal year 2013, and receive a refund of those taxes of approximately $7.3 million by December 31, 2013, for a net $1.5 million of Dutch tax payments. In fiscal year 2014, we expect to make U.S. income tax and interest payments of approximately $6.9 million. See information below regarding other contractual obligations. We have never paid dividends on our Common Stock. The success of our growth strategy is dependent upon the availability of additional capital resources on terms satisfactory to management. Our sources of capital in the past have included the sale of equity securities, which include common and preferred stock sold in private transactions and public offerings, capital leases and long-term debt. There can be no assurance that we can raise such additional capital resources on satisfactory terms. We believe that our principal sources of liquidity discussed above are sufficient to support operations for at least the next twelve months. Cash Flows from Operating Activities Cash used in our operating activities was $7.8 million for the six months ended March 31, 2013, compared to $12.7 million used by such activities for the six months ended March 31, 2012. During the six months ended March 31, 2013, $4.3 million of cash was used as a result of the net loss from operations, adjusted for non-cash charges. Additional cash was used by the payment of accounts payable, income taxes and accrued compensation. Cash was generated by reductions in inventory and from collections of accounts receivable in excess of the reductions in deferred profit and customer deposits. Cash Flows from Investing Activities Our investing activities for the six months ended March 31, 2013 and 2012 consisted of purchases of property, plant and equipment of $0.2 million and $1.1 million, respectively. Cash Flows from Financing Activities There were no cash flows from financing activities in the six months ended March 31, 2013. For the six months ended March 31, 2012 $4.1 million was used to reacquire shares issued in connection with the Kingstone acquisition. Off-Balance Sheet Arrangements As of March 31, 2013, Amtech had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission. Contractual Obligations Purchase obligations were $7.6 million as of March 31, 2013 compared to $12.1 million as of September 30, 2012, a decrease of $4.5 million. Refer to Amtech's annual report on Form 10-K for the year ended September 30, 2012, for information on the Company's other contractual obligations. Critical Accounting Policies "Management's Discussion and Analysis of Financial Condition and Results of Operations" discusses our condensed consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the condensed consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, accounts and notes receivable collectability, warranty and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. The results of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. A critical accounting policy is one that is both important to the presentation of our financial position and results of operations, and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended September 30, 2012. We believe our critical accounting policies relate to the more significant judgments and estimates used in the preparation of our consolidated financial statements. We believe the critical accounting policies discussed in the section entitled "Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended September 30, 2012 represent the most significant judgments and estimates used in the preparation of our consolidated financial statements. There have been no significant changes in our critical accounting policies during the six months ended March 31, 2013. Impact of Recently Issued Accounting Pronouncements For discussion of the impact of recently issued accounting pronouncements, see "Item 1: Financial Information" under "Impact of Recently Issued Accounting Pronouncements". |