Net new orders for the three and six months ended March 31, 2006 increased approximately 28% and 32%, respectively, over the same periods in fiscal 2005. The 2006 increase was fueled almost entirely by the semiconductor equipment segment. New orders have been, and are expected to remain volatile due to the size and timing of large system orders.
For the quarter ended March 31, 2006, gross profit for the semiconductor equipment segment, as a percentage of net revenues, was 24% compared to 28% in the prior year quarter. The decrease in percentage is due primarily to change in product mix and the deferred profit on the multi-system shipment made in the second quarter of fiscal 2006.
For the quarter ended March 31, 2006, gross profit for the polishing supplies segment, as a percentage of net revenues, was 31% compared to 28% in the prior year quarter. The improvement in gross profit percentage is due primarily to our investment in the laser cutting equipment installed in early fiscal 2005 for which efficiencies were not fully realized until later in the year. The remainder of the improvement is attributable to favorable product mix and higher revenues to cover certain fixed manufacturing costs.
Consolidated gross profit for the six months ended March 31, 2006 was $5.3 million, or 28% of net revenues, compared to $4.6 million, or 29% of net revenues in fiscal 2005. For the six months ended March 31, 2006, gross profit for the semiconductor equipment segment as a percentage of net revenues was 27% compared to 30% for the six months ended March 31, 2005. As a percentage of net revenues, gross profit for the polishing supplies segment was 33% and 25% for the six months ended March 31, 2006 and 2005, respectively. The year-to-date fluctuations are driven largely by the fluctuations in the second quarter discussed above.
Our gross profit has significantly fluctuated in the past, and will continue to fluctuate in the future due to several factors, including, but not limited to industry cycles, product mix, timing of equipment installations and related customer acceptances.
The timing of revenue recognition has a particularly significant effect on gross profit when the equipment revenue of an order is recognized in one period and the remainder of the revenue attributed to installation, generally 10% to 20% of the order, is recognized in a later period. The latter is generally assigned revenue equal to the holdback, which is significantly higher than the fair market value of those services. As a result, the equipment generally has a lower gross margin percent than the installation services, which are provided one or two quarters after delivery.
Selling, General and Administrative Expenses - Consolidated selling, general and administrative expenses for the three months ended March 31, 2006 and 2005 were $2.2 million, or 20% of net revenues, and $1.8 million, or 20% of net revenues, respectively. The $0.4 million increase in selling, general and administrative expenses was the result of the recording of shared-based compensation in the financial statements starting in fiscal 2006, higher operating activity related to the $5.1 million multi-system shipment in the March quarter, and costs related to the upgrade of our financial systems.
For the six month ended March 31, 2006 and 2005, consolidated selling, general and administrative expense were $4.1 million, or 22% of net revenues, and $3.7 million, or 23% of net revenues, respectively. The increase in selling, general and administrative expenses was caused primarily by the higher costs in the second quarter March 31, 2006, which are explained above. However, such expenses declined as a percentage of net revenues due to the significant increase in revenues. Selling, general and administrative expenses are expected to increase as we implement additional procedures in preparation for complying with Section 404 of the Sarbanes-Oxley Act between now and September 30, 2007.
Research and Development Expenses - Research and development expenses were approximately 1% and 2%, respectively, of the net revenues for the three months ended March 31, 2006 and 2005.
Research and development expenses were approximately 2% of net revenues for the six months ended March 31, 2006 and 2005. Research & development costs consist primarily of salaries, outside contractors, laboratory and other expenses related to ongoing product and technology development projects, which include process development for our new vertical diffusion furnace.
Operating Income - Operating income for the second quarter of fiscal 2006 and 2005 was approximately $0.4 million and $0.5 million, respectively. Operating income decreased due to the decline in gross profit margins and higher selling, general and administrative expenses which are explained above.
Operating income for the six months ended March 31, 2006 and 2005 was approximately $0.9 million and $0.6 million, respectively. The year-to-date improvement in operating income was due to the increase in gross profit, which was partially offset by the increase in operating expenses.
Income Tax Expense - In 2004, we recorded a valuation allowance for the total of our deferred tax assets, including a net operating loss carryforward. As the deferred tax assets increase or decrease, we record an additional tax provision or recognize a benefit, respectively, so that the valuation allowance remains equal to the total of our deferred tax assets. During the second quarter of fiscal 2006, we utilized the remaining federal net operating loss carryforward, which was more than offset by an increase in other deferred tax assets, primarily deferred profit. Our effective tax rate for the three months ended March 31, 2006 was 55%, compared to a small benefit in fiscal 2005. The effective tax rate during the second quarter of fiscal 2006 was higher than our marginal state and federal income tax rate due to the portion of the share-based compensation expense not deductible for tax purposes (approximately $50,000) and the provision against the net increase in deferred tax assets. For the six months ended March 31, 2006 the effective tax rate was 30% compared to a small tax benefit in the prior year. The effective tax rate for the first six months of fiscal 2006 was lower than our marginal statutory state and federal income tax rate due to the benefit recognized as a result of the year to date decline in deferred tax assets, primarily resulting from the utilization of the federal net operating losses. That benefit was partially offset by the portion of the share-based compensation expense not deductible for tax purposes. Our future effective income tax rate depends on various factors, such as tax legislation, the geographic composition of our pre-tax income, the level of expenses that are not deductible for tax purposes, changes in our deferred tax assets and the effectiveness of our tax planning strategies.
Net Income - As a result of the operating results described above, our net income for the second quarter of fiscal 2006 was $0.2 million or $0.05 per diluted share, compared to $0.5 million or $0.18 per diluted share for the second quarter of fiscal 2005.
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Net income for the first half of fiscal 2006 was $0.7 million or $0.19 per diluted share, compared to $0.6 million or $0.21 per diluted share for the first half of fiscal 2005.
Backlog - Our backlog has historically been, and will continue to be volatile due to the size and timing of large system orders. The orders included in our backlog are generally credit approved customer purchase orders usually scheduled to ship in the next 12 months. The backlog also includes revenues deferred on orders that have already been shipped, but which have not met the criteria for revenue recognition. We schedule production of our systems based on order backlog and customer commitments.
Our order backlog grew substantially in the fourth quarter of fiscal 2005 due to receipt of a $5.1 million order for our Bruce Technologies horizontal diffusion furnaces and its proprietary APEX Process Management Software System complete with 3rd-party automation. Backlog continued to grow during the first quarter of fiscal year 2006, due mainly to new orders for diffusion equipment, particularly from manufacturers of solar cells. Despite the shipment of the large multi-system order in the second quarter of fiscal 2006, our order backlog at March 31, 2006, was 189% greater than our backlog at March 31, 2005. Contributing to the increased backlog is the $0.5 million increase in deferred revenues for the quarter ended March 31, 2006. Two customers accounted for 14% and 12%, respectively, of the $13.3 million backlog as of March 31, 2006.
Customers may delay the delivery of products or cancel orders suddenly and without sufficient notice, subject to possible cancellation penalties. Due to possible customer changes in delivery schedules and cancellations of orders, our backlog at any particular date is not necessarily indicative of actual sales for any succeeding period. Delays in delivery schedules and/or a reduction of backlog during any particular reporting period could have a material adverse effect on our business, financial position and results of operations. In addition, our backlog does not provide any assurance that we will realize a profit from those orders, or indicate in which period revenue will be recognized.
When customers cancel orders, we attempt to collect cancellation penalties, to the extent provided in our quotation, or to recover the costs incurred or committed prior to cancellation. However, we consider the potential for other current and future business with the customer. Thus, actual cancellation fees are negotiated on a case-by-case basis.
Liquidity and Capital Resources
At March 31, 2006 and September 30, 2005, cash and cash equivalents were $1.5 million and $3.3 million, respectively. Our ratio of current assets to current liabilities declined to 2.4:1 at March 31, 2006 from 3.7:1 at September 30, 2005 as a result of the decrease in cash and cash equivalents and the build-up of work-in-process inventory and accounts payable to support the shipments scheduled for in the third fiscal quarter of 2006.
Working capital increased approximately $1.2 million or 12% in the first half of fiscal 2006. Accounts receivable increased $5.3 million due to the increase and timing of shipments late in the second quarter of fiscal 2006 as compared to the fourth quarter of fiscal 2005. Inventories, which increased $2.4 million during the first quarter of fiscal 2006, remained at $6.7 million as of March 31, 2006, as we produced the high level of orders expected to ship during the third quarter of this fiscal year. Accounts payable increased $2.3 million since the end of last fiscal year, as our production schedules remain full through at least June 30, 2006. Another change within the components of working capital was the increase of $1.0 million in deferred profit on systems awaiting installation and/or customer acceptance.
At March 31, 2006, our principal sources of liquidity consisted of $1.5 million of cash and cash equivalents. Since that time we have received approximately $3.1 million in payments on the $5.1 million multi-system shipment. Also, in April 2006 we secured $3.0 million in revolving lines of credit to provide additional liquidity to support future growth. We continue to believe that we have sufficient liquidity for our operations.
On April 7, 2006, Amtech Systems, Inc. (the “Company”) entered into domestic and export revolver loan and security agreements with the Silicon Valley Bank (the “LSAs”) and a Working Capital Guarantee Program Borrower Agreement with the Export-Import Bank of the United States, all of which expire April 7, 2008. The Company can borrow a maximum of $3 million, including $2 million under the domestic LSA and $1 million under the export LSA, subject to the availability of sufficient eligible receivables and inventory, as defined under the agreements, and certain other restrictions. The interest rate under the agreements is Silicon Valley Bank’s prime rate plus 1%. The fee for the unused portion of the loans is equal to twenty-five hundredths percent (0.25%) per annum of the average unused portion of the $3 million revolving lines of credit.
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In the event of a default by the Company under the LSAs, Silicon Valley Bank may declare all amounts due under the LSAs to be immediately due and payable. In addition, the lines of credit are secured by substantially all of the assets of the Company’s United States based operations. The Company secured the $3 million lines of credit to provide additional liquidity for future growth.
The LSA includes a covenant requiring a minimum tangible net worth of $10.0 million. As of March 31, 2006, our tangible net worth as defined in the LSA was $12.5 million.
Critical Accounting Policies
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with U. S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, accounts receivable collectibility, 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 “Risk Factors” of our Annual Report on Form 10- K for the fiscal year ended September 30, 2005.
We continually review our business activities to determine which of our policies meet these criteria. 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, 2005 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, 2006.
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”.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to financial market risks, including changes in foreign currency exchange rates and interest rates. Our operations in the United States are conducted in U.S. dollars. Our operation in the Netherlands, a component of the semiconductor equipment segment, conducts business primarily in the Euro and the U.S. dollar. The functional currency of our Netherlands operation is the Euro. The functional currency for all other operating units is the U.S. dollar. The following disclosures about market risk should be read in conjunction with more in depth discussion in Item 7A. Quantitative and Qualitative Disclosures About Market Risk in our Annual Report on Form 10-K for the fiscal year ended September 30, 2005.
We estimate that, typically, not more than 10% of our transactions are denominated in a currency other than the functional currency of the operating unit. However, for the six months ended March 31, 2006, such transactions amounted to approximately 25% of the value of all transactions. The increase is due to the fact that a large portion of the multi-system order was transacted by our European operations in US dollars.
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As of March 31, 2006, we did not hold any stand-alone or separate derivative instruments. We incurred net foreign currency transaction gains or losses of less than $0.1 million during the six months ended March 31, 2006 and 2005. As of March 31, 2006, we had $2.3 million of net assets (cash and receivables less payables) denominated in currencies other than the functional currency. A 10% change in the value of the functional currency relative to the non-functional currency may result in a gain or loss of $0.2 million. Our investment in and advances to our Netherlands operation totaled $7.3 million as of March 31, 2006. A 10% change in the value of the Euro relative to the U.S. dollar would cause an approximately $0.7 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity.
ITEM 4. CONTROLS AND PROCEDURES
Our management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), has carried out an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2006, pursuant to Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon that evaluation, our CEO and CFO have concluded that as of such date, our disclosure controls and procedures in place are effective.
There have been no changes in our internal controls over financial reporting during the second quarter of fiscal 2006 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At our annual shareholders’ meeting, which was held on March 2, 2006, all nominees standing for election as directors were elected to serve for one year terms or until their successors are elected and qualified. The following chart indicates the number of votes cast for and the number of votes withheld with respect to each nominee for director:
Proposal One - Election of Directors (1)
Nominee | | For | | Withheld |
| |
| |
|
Jong S. Whang | | 2,331,826 | | 4,884 |
Lawrence D. Firestone | | 2,320,826 | | 15,884 |
Robert F. King | | 2,319,462 | | 17,248 |
|
(1) | Abstentions were not counted in the election of the directors. |
No other matters were submitted to a vote of security holders.
Item 6. Exhibits
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended. | * |
| | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended. | * |
| | |
32.1 | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * |
| | |
32.2 | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | * |
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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.
| AMTECH SYSTEMS, INC. | |
| | | |
| | | |
| By | /s/ Robert T. Hass | Dated: May 15, 2006 |
| |
| |
| | Robert T. Hass | |
| | Chief Accounting Officer | |
| | (Principal Accounting Officer) | |
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EXHIBIT INDEX
Exhibit
Number | | Description | | Page or Method of Filing |
| |
| |
|
31.1 | | Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended | | * |
| | | | |
31.2 | | Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as Amended | | * |
| | | | |
32.1 | | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | * |
| | | | |
32.2 | | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | * |
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