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BTU INTERNATIONAL INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) BTU International, Inc. (the "Company"), which was founded in 1950, was incorporated as a Delaware corporation in 1981 and is headquartered in North Billerica, Massachusetts. The Company operates as a single business segment called Thermal Processing Capital Equipment. The Company's business consists of designing, manufacturing, selling and servicing thermal processing equipment and related process controls for use in the electronics, alternative energy, automotive and other industries. This includes the supply of solder reflow systems used for surface mount applications in printed circuit board assembly and semiconductor packaging applications. Thermal processing equipment is used in low temperature curing/encapsulation, hybrid integrated circuit manufacturing, integrated circuit packaging and sealing, and processing multi-chip modules. In addition, the equipment is used for solar cell processing, sintering nuclear fuel for commercial power generation, brazing and sintering of ceramics and powdered metals, and depositing precise thin film coatings. The Company's customers are multinational original equipment manufacturers and contract manufacturing companies. The Company's customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. In electronics assembly, the Company's convection solder reflow systems are used to attach electronic components to the printed circuit boards, primarily in the advanced, high-density, surface mount segments of this market. In the semiconductor market, the Company participates in both wafer level and die level packaging, where its thermal processing systems are used to connect and seal integrated circuits into a package. In the alternative energy market, the Company offers processing equipment for the production of both silicon solar cells and thin film photovoltaics. The Company is also the key provider for customers who use its thermal systems for the processing of nuclear fuel. Pending Merger On October 21, 2014, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement"), by and among the Company, Amtech Systems, Inc., an Arizona corporation ("Amtech"), and BTU Merger Sub, Inc., a Delaware corporation ("Merger Sub"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving as a wholly owned subsidiary of Amtech. The Merger Agreement has been approved by the Boards of Directors of both the Company and Amtech and is subject to approval of the Company's and Amtech's stockholders. Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of common stock, par value $0.01 per share, of the Company ("Company Shares"), issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive and become exchangeable for 0.3291 shares (the "Exchange Ratio") of common stock, par value $0.01 per share, of Amtech ("Amtech Shares"). Any outstanding Company stock option shall be assumed by Amtech and shall be converted into an option to purchase shares of Amtech common stock on substantially the same terms and conditions as were applicable to such Company stock option, with appropriate adjustments based upon the Exchange Ratio to the exercise price and the number of shares of Amtech common stock subject to such stock option. Each Company restricted stock unit that remains unvested immediately prior to the effective time of the Merger will become a fully vested and unrestricted share of Company common stock. The Company and Amtech have each made customary representations, warranties and covenants and the merger is subject to various closing conditions. The foregoing is not a complete description of all of the terms and conditions of the Merger Agreement and reference is made to the full text of the Merger Agreement, which is filed as an exhibit to our Current Report on Form 8-K filed with the SEC on October 22, 2014, for more information. 13-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Three months ended September 28, 2014 compared to the three months ended September 29, 2013. The following table sets forth certain items in the Company's Consolidated Statements of Operations as a percentage of net sales for the periods indicated. Summary Condensed Consolidated Statements of Operations Three Months Ended September 28, 2014 September 29, 2013 ( $ in thousands) % of % of Percent Net Sales Net Sales Change Net sales $ 15,917 100.0 % $ 12,014 100.0 % 32.5 % Cost of goods sold 9,840 61.8 % 8,480 70.6 % 16.0 % Gross profit 6,077 38.2 % 3,534 29.4 % 72.0 % Selling, general and administrative expenses 4,921 30.9 % 6,228 51.8 % (21.0 )% Research, development and engineering expenses 939 5.9 % 1,276 10.6 % (26.4 )% Operating income (loss) 217 1.4 % (3,970 ) (33.0 )% (105.5 )% Income (loss) before provision for income taxes 110 0.7 % (4,076 ) (33.9 )% (102.7 )% Provision for income taxes 110 0.7 % 998 8.3 % (89.0 )% Net loss $ (0 ) (0.0 )% $ (5,074 ) (42.2 )% (100.0 )% Net Sales. Net sales for the third quarter of 2014 were $15.9 million representing an increase of $3.9 million, or 32.5%, as compared to the same period in the prior year. Net sales of electronic market systems increased by $3.4 million, or 36.4%, as compared to the same period in the prior year. Net sales of alternative energy systems increased by $0.2 million or 13.7%, as compared to the same period in the prior year. Net sales for other market systems, parts and service increased by $0.3 million, or 22.8%, as compared to the same period in the prior year. The electronic market systems increase represents an increase in demand for Surface Mount Technology systems, particularly in Asia. The increase in alternative energy sales is mainly due to increased nuclear product sales. The Company's overall alternative energy sales continue to be low due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The increase in sales in the other market systems, parts and service is primarily due to an overall increase in our parts and service business. 14 -------------------------------------------------------------------------------- Table of Contents The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed in dollars per thousand and as a percentage of total revenue. The values shown represent the amount sold into each of the listed geographical areas. Three Months Ended September 28, 2014 September 29, 2013 ($ in thousands) % of % of $ Revenues $ Revenues United States $ 3,665 23.0 % $ 2,357 19.6 % Europe, Near East 2,196 13.8 % 2,007 16.7 % Asia Pacific 9,794 61.5 % 6,118 50.9 % Other Americas 262 1.7 % 1,532 12.8 % Total Revenue $ 15,917 $ 12,014 Gross Profit. In the third quarter of 2014, gross profit was $6.1 million, an increase of $2.5 million, as compared to the same period in the prior year due primarily to the 32.5% increase in net sales. In the third quarter of 2014, gross profit as a percentage of sales increased to 38.2% as compared to 29.4% in the same period in the prior year. This increase in the third quarter of 2014 was mainly the result of product sales mix, lower inventory reserves and lower under-absorption in the Company's factories as compared to the same period in the prior year. Selling, General and Administrative (SG&A). SG&A expense in the third quarter of 2014 of $4.9 million decreased by $1.3 million as compared to the same period in the prior year. The prior year comparable period SG&A expense included a legal settlement in the amount of $1.5 million; offset by $0.2 million of lower commission expense. Research, Development and Engineering (RD&E). RD&E expense in the third quarter of 2014 of $0.9 million decreased by $0.3 million as compared to the same period in the prior year. This decrease in spending was the result of lower development project spending. Interest Income (Expense). In the third quarter of 2014, net interest expense remained relatively flat at $0.1 million as compared to the same period in the prior year. Foreign Exchange Income (Loss). The foreign exchange loss in the third quarter of 2014 was $34,000 as compared to a loss of $33,000 in the same period in the prior year. The net exchange loss is primarily the result of foreign currency transactions in the Company's foreign operations for the applicable period. Income Taxes. For the three months ended September 28, 2014, the Company recorded an income tax provision of $110,000 as compared to an income tax provision of $1.0 million for the same period in the prior year. The Company's income tax provision primarily relates to withholding taxes. However, the income tax provision recorded in the same period in the prior year included the establishment of a $1.1 million valuation allowance on all deferred tax assets related to the China manufacturing subsidiary. The significant fluctuations in the Company's quarterly tax rate, exclusive of the fluctuation related to the establishment of the valuation allowance, as a percent of consolidated pre-tax income or loss, are the result of the different statutory tax rates in each of the Company's non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. Chinese withholding taxes primarily result from corporate royalty charges on net sales of the Company's Chinese manufacturing subsidiary. U.S. taxes have had no impact on the rate fluctuation as the U.S. entity operates at a loss for which no benefit is recognized due to a full valuation allowance. 15 -------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS Nine months ended September 28, 2014 compared to the nine months ended September 29, 2013. The following table sets forth certain items in the Company's Consolidated Statements of Operations as a percentage of net sales for the periods indicated. Summary Condensed Consolidated Statements of Operations Nine Months Ended September 28, 2014 September 29, 2013 ( $ in thousands) % of % of Percent net sales net sales change Net sales $ 44,037 100.0 % $ 36,761 100.0 % 19.8 % Cost of goods sold 26,925 61.1 % 25,103 68.3 % 7.3 % Gross profit 17,112 38.9 % 11,658 31.7 % 46.8 % Selling, general and administrative expenses 14,622 33.2 % 15,237 41.4 % (4.0 )% Research, development and engineering expenses 3,179 7.2 % 3,427 9.3 % (7.2 )% Operating loss (689 ) (1.6 )% (7,006 ) (19.1 )% (90.2 )% Loss before provision for income taxes (884 ) (2.0 )% (7,377 ) (20.1 )% (88.0 )% Provision for income taxes 308 0.7 % 1,083 2.9 % (71.6 )% Net loss $ (1,192 ) (2.7 )% $ (8,460 ) (23.0 )% (85.9 )% Net Sales. Net sales for the first nine months of 2014 were $44.0 million representing an increase of $7.3 million, or 19.8%, as compared to the same period in the prior year. Net sales of electronic market systems increased by $4.8 million, or 15.9%, and net sales of alternative energy systems increased by $1.1 million or 68.6%, as compared to the same period in the prior year. Net sales for the Company's other market systems, parts and service sales increased by $1.4 million, or 29.0%, as compared to the same period in the prior year. The electronic market systems increase represents an increase in demand for Surface Mount Technology systems, particularly in Asia. The increase in alternative energy sales is mainly due to increased nuclear product sales. The Company's overall alternative energy sales continue to be low due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The increase in sales in the other market systems and parts and service is primarily due to a $1.1 million of other market custom sales in the first nine months of 2014 compared to no other market custom sales in the first nine months of 2013. The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed as a percentage of total revenues. The values shown represent the amount sold into each of the listed geographical areas. Nine Months Ended September 28, 2014 September 28, 2013 ($ in thousands) % of % of $ revenues $ revenues United States $ 8,094 18.4 % $ 6,333 17.2 % Europe, Near East 7,113 16.2 % 4,695 12.8 % Asia Pacific 26,220 59.5 % 22,567 61.4 % Other Americas 2,610 5.9 % 3,166 8.6 % Total Revenue $ 44,037 $ 36,761 16 -------------------------------------------------------------------------------- Table of Contents Gross Profit. The first nine months of 2014 gross profit of $17.1 million increased by $5.5 million compared to the first nine months of 2013 due primarily to the 19.8% increase in net sales. In the first nine months of 2014, gross profit as a percentage of sales increased to 38.9% as compared to 31.7% in the same period in 2013, due primarily to product mix and improved overhead under absorption at our factories combined with lower inventory write-downs. The Company assesses inventory at each period end and records inventory write-downs as appropriate based on market conditions. Selling, General and Administrative (SG&A). SG&A expense in the first nine months of 2014 of $14.6 million decreased by $0.6 million compared to the same period in the prior year. The prior year comparable period SG&A expense included a legal settlement in the amount of $1.5 million; offset by current period increased commissions and warranty expense due to increased sales volume for the first nine months of 2014. Research, Development and Engineering (RD&E). RD&E expense in the first nine months of 2014 of $3.2 million decreased by $0.2 million as compared to the same period in the prior year. This decrease in spending was the result of lower development project spending. Interest Income (Expense). In the first nine months of 2014, net interest expense remained relatively flat at $0.2 million as compared to the same period in 2013. Foreign Exchange Income (Loss). The foreign exchange gain in the first nine months of 2014 was $22,000 as compared to a loss of $147,000 in the same period in the prior year. The net exchange gain or loss is primarily the result of foreign currency transactions in the Company's foreign operations in the applicable period. Income Taxes. For the nine months ended September 28, 2014, the Company recorded an income tax provision of $308,000 compared to a provision of $1.1 million in the same period in the prior year. The Company's income tax provision primarily relates to withholding taxes. However, the income tax provision recorded in the same period in the prior year included the establishment of a $1.1 million valuation allowance on all deferred tax assets related to the China manufacturing subsidiary. The significant fluctuations in the Company's quarterly tax rate, exclusive of the fluctuation related to the establishment of the valuation allowance, as a percent of consolidated pre-tax income or loss, are the result of the different statutory tax rates in each of the Company's non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. Chinese withholding taxes primarily result from corporate royalty charges on net sales of the Company's Chinese manufacturing subsidiary. U.S. taxes have had no impact on the rate fluctuation as the U.S. entity operates at a loss for which no benefit is recognized due to the full valuation allowance. LIQUIDITY AND CAPITAL RESOURCES For the full year 2013, the Company's net cash used in operating activities was $5.8 million. In the first nine months of 2014, the Company's net cash used in operating activities was $3.2 million. The Company's operating loss was $0.7 million in the first nine months of 2014. The Company's operating loss was $9.7 million for the full year 2013. On September 28, 2014, the Company had cash and cash equivalents of approximately $10.4 million, a decrease of $3.6 million, compared to $14.0 million at December 31, 2013. During the nine months ended September 28, 2014, the Company used net cash of approximately $3.2 million for operating activities. This use of cash was primarily the result of a net loss of $1.2 million, a decrease in deferred revenue of $1.4 million, an increase in accounts receivable of $1.4 million, an increase in inventory of $1.3 million, an increase in other assets of $1.6 million and a decrease in accrued expenses of $0.6 million; offset by an increase in accounts payable of $2.0 million, a decrease in other current assets of $0.4 million and the adding back of non-cash expenses for depreciation and amortization of $0.9 million, stock-based compensation of $0.5 million, and inventory provisions of $0.3 million. In recent years, the Company's sales have declined as we continue to experience a significant downturn in the solar industry. The electronics and semiconductor industries have historically been cyclical and have experienced periodic downturns which affect the demand for equipment that we manufacture and market. If the solar market does not improve, or if our products do not gain the acceptance we have planned, our cash resources will not allow us to continue making investments in the solar market and we may need to take action to restructure the Company. To conserve cash and manage the Company's liquidity, the Company has implemented certain expense reductions throughout 2013 and 2014. The Company will continue to assess its cost structure as it relates to its revenues and cash position in 2014, and may take further actions as it deems necessary. As of September 28, 2014, the Company has no material commitments relating to capital expenditures. There were no significant changes in the Company's commitments from those that were outlined in the "Contractual Obligations" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. The Company's total current assets at September 28, 2014 were $34.5 million, current liabilities were $14.2 million and long-term debt was $6.9 million. Although the Company has incurred increased legal, accounting and other administrative fees and costs in connection with its pending merger with Amtech, the Company believes that existing cash and anticipated cash flows from operations will be sufficient to support its current operating plan for the next twelve months. However, these cash flow and operating results expectations are subject to numerous assumptions, many of which may not actually occur. If some or all of such assumptions do not occur, the Company's results may be substantially different than expected, and its cash resources could be reduced faster than currently anticipated. Such assumptions include, without limitation, assumptions about the timing and progress of the Amtech merger, the success of certain expense reduction efforts, the market acceptance of the Company's products, and not experiencing an adverse result in potential litigation. For more information about the risks relating to the Company's business, please read carefully the section of this report entitled "Risk Factors" under Part II - Item 1A. 17 -------------------------------------------------------------------------------- Table of Contents Mortgage Note On March 30, 2006, the Company entered into a $10 million mortgage note secured by its real property in Billerica, Massachusetts, which had an initial maturity date of December 23, 2015. On September 9, 2010, the Company signed a First Loan Modification Agreement relating to the mortgage note, which reduced the annual interest rate from 6.84% to 5.50% and the monthly payment from $76,280 to $69,000. On September 26, 2013, the Company signed a Second Loan Modification Agreement relating to the mortgage note, which extended the maturity date from December 23, 2015 to September 26, 2023. The modification also reduced the annual interest rate from 5.50% to 4.43% through September 26, 2018, at which time the interest rate will be adjusted to a per annum fixed rate equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points. The current monthly payment was reduced from $69,000 to $57,997. The mortgage note had an outstanding balance on September 28, 2014 of approximately $7.3 million. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date. Letters of Credit On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank, pursuant to which the bank agreed to issue letters of credit which the Company will cash collateralize via restricted cash deposits at the bank. As of September 28, 2014, the value of the outstanding letters of credit issued by the bank for the Company was $249,221. This restricted cash value is included in the Company's balance sheet in other current assets. 18-------------------------------------------------------------------------------- Table of Contents CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES During the nine months ended September 28, 2014, there have been no significant changes to the items disclosed as the Company's critical accounting policies and estimates in the "Critical Accounting Policies and Significant Estimates" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013. FORWARD LOOKING STATEMENTS This report contains forward-looking statements, including without limitation statements about the Company's expectation for minimal revenue from solar equipment in 2014 and the sufficiency of its cash position and cash flows. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "may," "intends," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are neither promises nor guarantees but rather are subject to risks and uncertainties described in this report and other reports the Company has filed with the SEC, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the "safe harbor" provisions established by the federal securities laws, and are based on the assumptions and expectations of the Company's management at the time such statements are made. Important factors that could cause actual results to differ include, but are not limited to, the parties' ability to consummate the merger, the conditions to the completion of the merger, the parties' ability to meet expectations regarding the timing, completion and accounting and tax treatments of the merger, the possibility that the parties may be unable to achieve expected synergies and operating efficiencies within the expected timeframes or at all or be unable to successfully integrate the company's operations into those of Amtech, the possibility that the integration of the company into Amtech may be more difficult, time consuming or costly than expected, increases in operating costs, customer loss and business disruption, the ability of Amtech to retain certain key employees of the company, the condition of the world economy, the timely availability and acceptance of new products in the electronics, semiconductor and alternative energy generation industries, manufacturing problems with the Company's foreign operations in China, the impact of competitive products and pricing, particularly from companies in Asia, and other risks detailed under the section entitled "Risk Factors" in Part II - Item 1A of this report and in the Company's most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. Actual results may vary materially. Unless otherwise required by law, the Company disclaims any obligation to revise or update this information in order to reflect future events or developments, whether or not anticipated. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made. |