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AMTECH SYSTEMS INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[August 07, 2014]

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, 2013.



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, 2013 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 • Impact of Recently Issued Accounting Pronouncements Overview We operate in two segments: (i) the solar and semiconductor equipment segment and (ii) the polishing supplies segment. In our solar and semiconductor equipment segment, 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 to the solar market. In our polishing supplies segment, we produce consumables and machinery for lapping (fine abrading) and polishing of materials, such as sapphire substrates, optical components, silicon wafers, numerous types of crystal materials, ceramics and metal components. Since the 2011 acquisition of 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, 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 and 2013, the solar cell industry experienced a structural imbalance between supply and demand. 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.

Results of Operations The following table sets forth certain operational data as a percentage of net revenue for the periods indicated: Three Months Ended Nine Months Ended June 30, June 30, June 30, June 30, 2014 2013 2014 2013 Net revenue 100 % 100 % 100 % 100 % Cost of goods sold 81 % 83 % 75 % 81 % Write-down of inventory 1 % 43 % 1 % 15 % Gross margin 18 % (26 )% 24 % 4 % Operating expenses: Selling, general and administrative 45 % 52 % 37 % 49 % Restructuring charges 0 % 2 % 0 % 3 % Research and development 15 % 19 % 12 % 18 % Total operating expenses 60 % 73 % 49 % 70 % Loss from operations (42 )% (99 )% (25 )% (66 )% Interest income (expense), net 0 % 1 % 0 % 1 % Loss before income taxes (42 )% (98 )% (25 )% (65 )% Income taxes provision (benefit) 14 % 25 % 5 % 5 % Net loss (56 )% (123 )% (30 )% (70 )% Add: net loss (income) attributable to noncontrolling interest (1 )% 5 % 2 % 4 % Net loss attributable to Amtech Systems, Inc. (57 )% (118 )% (28 )% (66 )% 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 system sales, revenue and operating income can be significantly impacted by the timing of system shipments, and recognition of revenue based on customer acceptances.

19-------------------------------------------------------------------------------- Table of Contents Three months ended June 30, Nine months ended June 30, Segment 2014 2013 Inc (Dec) % 2014 2013 Inc (Dec) % (dollars in thousands) Solar and semiconductor equipment segment $ 6,764 $ 8,426 $ (1,662 ) (20 )% $ 29,615 $ 21,647 $ 7,968 37 % Polishing supplies segment 2,426 1,972 454 23 % 7,063 6,226 837 13 % Total net revenue $ 9,190 $ 10,398 $ (1,208 ) (12 )% $ 36,678 $ 27,873 $ 8,805 32 % Net revenue for the quarters ended June 30, 2014 and 2013 was $9.2 million and $10.4 million, respectively, a decrease of $1.2 million or 12%. Revenue from the solar and semiconductor equipment segment decreased 20% due primarily to revenue deferrals related to shipment of equipment that is considered to be new technology. According to our revenue recognition policy, 100% of the revenue for plasma-enhanced chemical vapor deposition (PECVD) equipment as well as revenue for ion implant equipment was deferred, because it is considered new technology until the customer's defined specifications have been met for two similarly configured systems and processes. Net revenue from the solar market was $2.1 million and $6.5 million for the three months ended June 30, 2014 and 2013, respectively. The current supply / demand imbalance and global economic conditions have continued to negatively impact sales in the solar equipment market and have caused our customers to significantly slow or push out their capacity expansion plans, and it is difficult to predict when the overall market will improve. Partially offsetting the decrease in solar net revenues were increased revenues from our semiconductor equipment customers who increased their capital equipment purchases.

Net revenue for the nine months ended June 30, 2014 and 2013 was $36.7 million and $27.9 million, respectively, an increase of $8.8 million or 32%. Revenue from the solar and semiconductor equipment segment increased 37% due primarily to an upturn in our semiconductor customers' capital equipment purchases. Net revenue from the solar market was $14.8 million and $14.6 million for the nine months ended June 30, 2014, and 2013, respectively. The large shipments of n-type cell technology in fiscal 2014 were partially offset by deferred revenue due to the significant amount of new product shipped.

Increased revenues from the polishing supplies segment resulted from significant increases in sales of polishing templates, which are used in single-sided polishing processes. Sales of polishing templates have improved due primarily to the increased demand for sapphire substrates used in LED lighting and mobile communication devices.

Backlog and Orders Our order backlog as of June 30, 2014 and 2013 was $39.4 million and $24.8 million, respectively, an increase of 59%. Our backlog as of June 30, 2014 includes approximately $30.6 million of orders and deferred revenue from our solar industry customers, compared to $19.3 million at June 30, 2013. New orders booked in the quarter ended June 30, 2014 were $17.9 million versus $20.7 million of customer orders in the quarter ended June 30, 2013. As of June 30, 2014, two customers individually accounted for 20% and 19% of our backlog. 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 plus write-down of inventory. 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.

20-------------------------------------------------------------------------------- Table of Contents Three Months Ended June 30, Nine months ended June 30, Segment 2014 2013 Inc (Dec) % 2014 2013 Inc (Dec) % (dollars in thousands) Solar and semiconductor equipment segment $ 569 $ (3,411 ) $ 3,980 117 % $ 6,262 $ (702 ) $ 6,964 992 % Polishing supplies segment 1,062 734 328 45 % 2,801 1,856 945 51 % Total gross profit (loss) $ 1,631 $ (2,677 ) $ 4,308 161 % $ 9,063 $ 1,154 $ 7,909 685 % Gross profit (loss) for the three months ended June 30, 2014 and 2013 was $1.6 million and $(2.7) million, respectively; an increase of $4.3 million. Gross margin on products from our solar and semiconductor equipment segment was 8% in the quarter ended June 30, 2014, compared to (40)% in the quarter ended June 30, 2013. Gross margins in the third quarter of fiscal 2014 were 8% due to lower levels of revenue, higher levels of deferred revenue and sales of new products with higher initial costs, partially offset by a benefit from the cancellation of inventory purchase orders and utilization of previously written-down inventory. Negative gross margins in the third quarter of fiscal 2013 were primarily due to inventory write-downs of $4.4 million. In the quarter ended June 30, 2014, we deferred profit of $1.9 million compared to a net recognition of previously-deferred profit of $0.8 million in the quarter ended June 30, 2013.

Gross profit for the nine months ended June 30, 2014 and 2013 was $9.1 million and $1.2 million, respectively; an increase of $7.9 million. Gross margin on products from our solar and semiconductor equipment segment was 21% in the nine months ended June 30, 2014, compared to (3)% in the nine months ended June 30, 2013. Improved utilization of manufacturing capacity with increased sales volumes as well as expense reductions from company-wide cost-control initiatives favorably impacted the gross margins. The gross margin for the first nine months of fiscal 2014 also benefited, in part, from the use of $2.2 million of previously-written down inventory and $1.0 million of revenue from a second quarter sales order cancellation. In the nine months ended June 30, 2014, we deferred profit of $6.2 million compared to net recognition of previously-deferred profit of $6.1 million in the nine months ended June 30, 2013.

Gross margin on products from our polishing supplies segment was 44% and 40% respectively for the three and nine months ended June 30, 2014. Gross margin for the three and nine months ended June 30, 2013 was 37% and 30%, respectively.

Higher margins in this segment resulted primarily from improved operational efficiencies associated with increased sales of templates.

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, accounting expenses and bad debt expense.

Three Months Ended June 30, Nine months ended June 30, Segment 2014 2013 Inc (Dec) % 2014 2013 Inc (Dec) % (dollars in thousands) Solar and semiconductor equipment segment $ 3,578 $ 4,888 $ (1,310 ) (27 )% $ 11,973 $ 12,069 $ (96 ) (1 )% Polishing supplies segment 525 555 (30 ) (5 )% 1,531 1,613 (82 ) (5 )% Total selling, general and administrative expenses $ 4,103 $ 5,443 $ (1,340 ) (25 )% $ 13,504 $ 13,682 $ (178 ) (1 )% Selling, general and administrative (SG&A) expenses for the three months ended June 30, 2014 and 2013 were $4.1 million and $5.4 million , respectively. The decrease results from lower stock-based compensation expense which was $0.2 million and $1.6 million for the respective three month periods.

SG&A expenses for the nine month periods ended June 30, 2014 and 2013 were $13.5 million and $13.7 million, respectively. This includes $0.6 million and $2.3 million of stock-based compensation for the respective nine month periods. The decrease in stock-based compensation expenses in Fiscal 2014 was partially offset by bad debt expense of $1.3 million related to financial difficulties being encountered by certain customers. Collection efforts and negotiations of continued service of these customers 21-------------------------------------------------------------------------------- Table of Contents are ongoing. In fiscal 2014, we also realized savings from continued company-wide cost-control initiatives, including lower salaries and benefits.

Restructuring Charges There were no restructuring charges in the first nine months of fiscal 2014.

Restructuring charges for the nine months ended June 30, 2013 were $0.9 million, resulting from the company's cost-cutting efforts in fiscal 2013, primarily severance costs related to reductions-in-force.

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 June 30, Nine Months Ended June 30, Incr. Incr.

2014 2013 (Decr.) % change 2014 2013 (Decr.) % change (dollars in thousands) (dollars in thousands)Research and development $ 3,053 $ 2,158 $ 895 41 % $ 8,442 $ 6,801 $ 1,641 24 % Grants earned (1,654 ) (211 ) (1,443 ) 684 % (3,999 ) (1,746 ) (2,253 ) 129 % Net research and development $ 1,399 $ 1,947 $ (548 ) (28 )% $ 4,443 $ 5,055 $ (612 ) (12 )% Research and development ("R&D") expense (net of grants earned) for the three months ended June 30, 2014 decreased $0.5 million compared to the three months ended June 30, 2013. For the nine months ended June 30, 2014, R&D expense, net of grants earned decreased $0.6 million from net R&D expense for the nine months ended June 30, 2013. The decrease in net R&D expense is due to the recognition of a significant amount of government grant funding. Gross R&D spending increased due primarily to higher activity in the development of equipment for the solar industry, as well as ion implant technology for markets other than solar.

As described in our Annual report on Form 10-K for the fiscal year ended September 30, 2013, our Kingstone subsidiary has entered into an agreement for the development of ion implant technology in China for markets other than solar.

Depending on its progress, as well as the timing of grant recognition, this development project may result in a significant quarter-to-quarter fluctuations in research and development expenses.

Income Taxes For the three month and nine month periods ended June 30, 2014 we recorded income tax expense of $1.3 million and $1.9 million, respectively. For the three months and nine months ended June 30, 2013 we recorded income tax of $2.6 million and $1.3 million, respectively. 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 are treated separately. No tax benefit has been recognized for losses related to Kingstone's ion implant development project, because Kingstone does not have a sufficient history of earnings. No tax benefit has been recognized for losses related to the Netherlands and France operations due to cumulative losses in the Netherlands and France.

The Financial Accounting Standards requires that a valuation allowance be established when it is "more likely than not" that all or a portion of deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including a company's performance, the market environment in which the company operates and the length of carryback and carryforward periods. According to those standards, it is difficult to conclude that a valuation allowance is not needed when the negative evidence includes cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. As a result of the review as of June 30, 2014, we concluded that it was appropriate to increase the valuation allowance for the net net operating losses incurred this year in China, the Netherlands and France where cumulative losses have been incurred, and for most of the previously recognized deferred assets in France. Available tax planning strategies cause us to believe that it is more likely than not the deferred tax assets related to the United States tax jurisdiction will be realized despite cumulative losses there.

22-------------------------------------------------------------------------------- Table of Contents Our future effective income tax rate depends on various factors, such as the amount of income (loss) in each tax jurisdiction, tax regulations governing each region, non-tax deductible expenses incurred 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 restructure on our tax rate depends on the amount of income or loss earned in the Netherlands.

Liquidity and Capital Resources At June 30, 2014, and September 30, 2013, cash and cash equivalents were $31.6 million and $37.2 million, respectively. At June 30, 2014, and September 30, 2013, restricted cash was $3.1 million and $5.1 million, respectively. Our working capital was $36.0 million as of June 30, 2014 and $42.9 million as of September 30, 2013.

The decrease in cash for the first nine months of fiscal 2014 of $5.6 million was primarily due to cash used in operating activities of $6.8 million, partially offset by cash provided by financing activities, both 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 2.0:1 and 2.0:1 as of June 30, 2014, and September 30, 2013, respectively.

At June 30, 2014, we have current taxes payable of $6.0 million, reflecting an expected payment of U.S. taxes in fiscal 2015. 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. 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 $6.8 million for the nine months ended June 30, 2014, compared to $8.0 million used by such activities for the nine months ended June 30, 2013. During the nine months ended June 30, 2014, $6.0 million was used as a result of investments in new products and the net loss from operations, adjusted for non-cash charges. Increases in accounts receivable and decreases in accrued liabilities and customer deposits were significant uses of cash during the first nine months of fiscal 2014, partially offset by decreases in inventory and receipt of refundable income taxes.

Cash Flows from Investing Activities Our investing activities for each of then nine month periods ended June 30, 2014 and 2013 consisted of purchases of property, plant and equipment of approximately $0.2 million.

Cash Flows from Financing Activities For the nine months ended June 30, 2014, the primary source of $1.2 million of cash provided by financing activities was proceeds from the exercise of stock options. There were no significant cash flows from financing activities in the nine months ended June 30, 2013.

Off-Balance Sheet Arrangements As of June 30, 2014, 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 $9.3 million as of June 30, 2014, compared to $12.3 million as of September 30, 2013, a decrease of $3.0 million. Refer to Amtech's annual report on Form 10-K for the year ended September 30, 2013, for information on the Company's other contractual obligations.

23-------------------------------------------------------------------------------- Table of Contents 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, 2013. 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, 2013 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 nine months ended June 30, 2014.

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".

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