Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment and spare parts and the cost of service and factory and field support to customers for warranty, installation and paid service calls. In addition, the cost of outsourcing the assembly or manufacturing of certain systems and subsystems to third parties and supplemental contract field service is included in cost of goods sold.
The decrease in gross margin of 7% was primarily a result of changes in the mix of the products we sold and increased overhead burden. In the quarter ended December 31, 2005 we shipped a significantly higher number of semiconductor automation systems and etching machines, which typically carry a higher gross margin, than the most recent quarter ended December 31, 2006. The decrease was also impacted by a change in segment product mix, as the polishing supplies segment (which typically has higher gross margins) declined as a percentage of consolidated revenue. The continued growth of our sales to the solar industry has created capacity constraints at our European operations. We expect to relocate our European operations to expand capacity and improve operational efficiencies.
Selling, general and administrative expenses consist of the cost of employees, consultants and contractors, facility costs, sales commissions, promotional marketing expenses, legal and accounting expenses.
The increase in selling, general and administrative expense of $0.3 million, or 17%, over the quarter ended December 31, 2005 was primarily due to increased personnel and consulting costs. The increased personnel and consulting costs were a result of the need to (i) improve internal financial and operational reporting, (ii) identify potential improvements in operational efficiencies, (iii) assist in developing and executing our growth strategies, (iv) and manage the increasing compliance obligations of a growing multi-national public company. The increases to our infrastructure were initiated in the third quarter of fiscal 2006 and further enhanced in the quarter ended December 31, 2006.
Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products; materials and supplies used in product prototyping, including wafers, chemicals and process gases; depreciation and amortization expense; charges for repairs to research equipment; and costs of outside services for facilities, process engineering support and wafer analytical services. We also include in research and development expenses amortization of costs associated with the preparation and filing of patents and other intellectual property. Any reimbursements of these costs in the form of governmental research and development grants are netted against these expenses.
| | Three Months Ended | | | | | | | |
| |
| | | | | | | |
Research and Development | | December 31,
2006 | | December 31,
2005 | | Increase
(Decrease) | | % | |
| |
| |
| |
| |
| |
| | (dollars in thousands) | | | | | | |
Semiconductor and Solar Equipment Segment | | $ | 118 | | $ | 170 | | $ | (52 | ) | | (31 | )% |
Polishing Supplies Segment | | | | | | | | | — | | | 0 | % |
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|
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|
| |
|
| | | | |
Total | | $ | 118 | | $ | 170 | | $ | (52 | ) | | (31 | )% |
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|
| |
|
| |
|
| | | | |
Percent of net revenue | | | 1 | % | | 2 | % | | | | | | |
Research and development costs declined during the three months ended December 31, 2006, respectively, as compared to the three months ended December 31, 2005 primarily due to lower research and development spending on our products.
Interest and other income (expense), net
Interest and other income (expense), net includes mainly interest income, interest expense and gains and losses on foreign currency transactions.
| | Three Months Ended | | | | | | | |
| |
| | | | | | | |
Interest and other income (expense), net | | December 31,
2006 | | December 31,
2005 | | Increase
(Decrease) | | % | |
| |
| |
| |
| |
| |
| | (dollars in thousands) | | | | | | |
Interest and other income (expense), net | | $ | 23 | | $ | 13 | | $ | 10 | | | 77 | % |
Foreign currency gains (losses) | | | (2 | ) | | 30 | | | (32 | ) | | (107 | )% |
| |
|
| |
|
| |
|
| | | | |
Total | | $ | 21 | | $ | 43 | | $ | (22 | ) | | (51 | )% |
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|
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|
| |
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| | | | |
Interest income represents earnings on invested funds. Interest expense primarily consists of interest incurred on our overdraft facility, revolving line of credit, mortgage, which is secured by a mortgage on Amtech’s land and buildings in the Netherlands, and amortization of debt issuance costs. Due to an increase in cash and cash equivalents, interest expense was more than offset by interest earned on invested cash during the three months ended December 31, 2006 and 2005.
Income Taxes
During the three months ended December 31, 2006 and 2005 we recorded income taxes of less than $0.1 million. The effective tax rate for the three months ended December 31, 2006 and 2005 was 91% and 10%, respectively. The increased effective tax rate in the more recent quarter was caused by permanent differences between financial income and taxable income which are proportionately higher due to the decline in pre-tax income. Also, we were unable to recognize a tax benefit for losses incurred in certain jurisdictions. During the quarter ended December 31, 2006, the valuation allowance was increased by $14,000 for state net operating losses that may not be recovered. We made estimated tax payments of $299,000 based upon estimated taxable income. We also recorded a net deferred tax asset of $360,000 for items that meet the more likely than not criteria for recognition under SFAS No. 109. (See Note 2 to the financial statements).
Liquidity and Capital Resources
At December 31, 2006 and September 30, 2006, cash and cash equivalents were $5.2 million, and $6.4 million, respectively. Our working capital remained relatively unchanged at $12.3 million as of December 31, 2006, compared to $11.9 million at September 30, 2006. Our ratio of current assets to current liabilities declined to 2.4:1 at December 31, 2006, from 2.6:1 at September 30, 2006, as a result of the increase in current assets and current liabilities required to support the increased revenue base and backlog during the current period.
At December 31, 2006, our principal sources of liquidity consisted of $5.2 million of cash and cash equivalents and the $3.3 million in credit facilities to provide additional liquidity to support future growth. Amtech’s revolving line of credit with Silicon Valley Bank contains certain financial and other covenants. Amtech was in compliance with these covenants as of December 31, 2006.
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Since December 31, 2006, we received $17.2 million in proceeds from the sale of 2,625,000 shares of common stock $.01 par value, net of the underwriter’s discount and before estimated offering expenses. We believe that our principal sources of liquidity discussed above and the increased capital and liquidity resulting from this secondary public offering are sufficient to support operations and will allow us to pursue our growth strategies, which include possible acquisitions.
Cash Flows from Operating Activities
Cash used by our operating activities was $1.3 million for the three months ended December 31, 2006, compared to $0.4 million provided by such activities for the three months ended December 31, 2005. During the quarter ended December 31, 2006 cash was primarily used to finance increases in accounts receivable ($0.8 million), inventory ($1.0 million), prepaid and other assets ($0.5 million), and to reduce accounts payables ($0.7 million). This use of cash was partially offset by increases in accrued liabilities and customer deposits of $1.3 million, deferred profit of $0.4 million and accrued income taxes of $0.1 million.
Cash Flows from Investing Activities
Our investing activities for the three months ended December 31, 2006 and 2005 used $0.1 million of cash primarily to purchase equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the three months ended December 31, 2006 was $0.2 million. This resulted from the October, 2006 equipment financing of $0.4 million less $0.2 million of payments on long-term debt. This compares to $0.1 million of cash used by financing activities during the three months ended December 31, 2005, primarily from the payment of dividends on then outstanding preferred stock, offset by proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
As of December 31, 2006, 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
The only significant changes in contractual obligations since the end of fiscal 2006 have been changes in purchase obligations and long-term debt (See Notes 1 and 7 of the Condensed Consolidated Financial Statements). Refer to Amtech’s annual report on Form 10-K for the year ended September 30, 2006, 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 consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 revenue 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.
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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 “Item 1A. Risk Factors” of this Annual Report on Form 10-K. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. We review product and service sales contracts with multiple deliverables to determine if separate units of accounting are present in the arrangements. Where separate units of accounting exist, revenue is allocated to delivered items equal to the total sales price less the greater of the relative fair value of the undelivered items, and all contingent portions of the sales arrangement.
We recognize revenue when persuasive evidence of an arrangement exists; the product has been delivered and title has transferred, or services have been rendered; the seller’s price to the buyer is fixed or determinable; and collectibility is reasonably assured. For us, this policy generally results in revenue recognition at the following points:
| • | For the semiconductor and solar equipment segment, transactions where legal title passes to the customer upon shipment, we recognize revenue upon shipment for those products where the customer’s defined specifications have been met with at least two similarly configured systems and processes for a comparably situated customer. However, a portion of the revenue associated with certain installation-related tasks, equal to the greater of the relative fair value of those tasks or the portion of the contract price contingent upon their completion, generally 10%-20% of the system’s selling price (the “holdback”), and directly related costs, if any, are deferred and recognized into income when the tasks are completed. Since we defer only those costs directly related to installation or other unit of accounting not yet delivered and that portion of the contract price is often considerably greater than the fair market value of those items, our policy at times will result in deferral of profit that is disproportionately greater than the deferred revenue. When this is the case, the gross profit recognized in one period will be lower and the gross profit reported in a subsequent period will improve. |
| | |
| • | For products where the customer’s defined specifications have not been met with at least two similarly configured systems and processes, the revenue and directly related costs are deferred at the time of shipment and recognized into income at the time of customer acceptance or when this criterion has been met. We have, on occasion, experienced longer than expected delays in receiving cash from certain customers pending final installation or system acceptance. If some of our customers refuse to pay the final payment, or otherwise delay final acceptance or installation, the deferred revenue would not be recognized, adversely affecting our future operating results. |
| | |
| • | Equipment sold by the polishing supplies segment does not include process guarantees, acceptance criteria or holdbacks; therefore, the related revenue is recorded upon transfer of title which is generally at time of shipment. Our shipping terms for both segments are customarily FOB our shipping point or equivalent terms. |
| | |
| • | For all segments, sales of spare parts and consumables are recognized upon shipment, as there are no post shipment obligations other than standard warranties. |
| | |
| • | Service revenue is recognized upon performance of the services requested by the customer. Revenue related to service contracts is recognized ratably over the period of the contract or in accordance with the terms of the contract, which generally coincides with the performance of the services requested by the customer. |
Deferred Tax Asset Valuation Allowance. We currently have significant deferred tax assets resulting from expenses not currently deductible for tax purposes, revenue recognized for tax purposes but deferred for financial statement purposes and state net operating loss carryforwards that will reduce taxable income in future periods.
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During fiscal 2004, we recorded a valuation allowance for the total of our deferred tax assets. SFAS No. 109 requires 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. It also states that it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, the cumulative losses weigh heavily in the overall assessment. Each quarter, Amtech analyzes each deferred tax asset to determine the amount that is more likely than not to be realized, based upon the weight of available evidence, and adjusts the valuation allowance to the amount of deferred taxes that do not meet the criteria for recognition under SFAS No. 109.
Inventory Valuation. We value our inventory at the lower of cost (first-in, first-out method) or net realizable value. We regularly review inventory quantities and record a write-down for excess and obsolete inventory. The write-down is primarily based on historical inventory usage adjusted for expected changes in product demand and production requirements. However, our industry is characterized by customers in highly cyclical industries, rapid technological changes, frequent new product developments and rapid product obsolescence. While the inventories acquired in the Bruce Technologies transaction will require several years to consume in production and through spare parts sales, management believes the write-downs taken were sufficient to protect against future losses, as this product line is receiving greater attention under its current ownership. Changes in demand for our products and product mix could result in further write-downs.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues we have identified. Since a significant portion of our revenue is derived from the sale of high-value systems, our accounts receivable are often concentrated in a relatively few number of customers. A significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectibility of our accounts receivable and our future operating results.
Warranty. We provide a limited warranty, generally for 12 to 24 months, to our customers. A provision for the estimated cost of providing warranty coverage is recorded upon shipment of all systems. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that the systems are ultimately accepted or to maintain customer goodwill. While our warranty costs have historically been within our expectations and we believe that the amounts accrued for warranty expenditures are sufficient for all systems sold through December 31, 2006, we cannot guarantee that we will continue to experience a similar level of predictability with regard to warranty costs. In addition, technological changes or previously unknown defects in raw materials or components may result in more extensive and frequent warranty service than anticipated, which could result in an increase in our warranty expense.
Impairment of Long-lived Assets. We periodically evaluate whether events and circumstances have occurred that indicate the estimated useful lives of long-lived assets or intangible assets may warrant revision or that the remaining balance may not be recoverable. Goodwill is also tested for impairment at least annually. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted net cash flows generated by the asset over the remaining estimated life of the asset in measuring whether the asset is recoverable. We make judgments and estimates used in establishing the carrying value of long-lived or intangible assets. Those judgments and estimates could be modified if adverse changes occurred in the future resulting in an inability to recover the carrying value of these assets. We have not experienced any impairment to long-lived assets during fiscal 2007, 2006 or 2005. Future adverse changes could be caused by, among other factors, a downturn in the semiconductor industry, a general economic slowdown, reduced demand for our products in the marketplace, poor operating results, the inability to protect intellectual property or changing technologies and product obsolescence.
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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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 operations in Europe, a component of the semiconductor and solar equipment segment, conduct business primarily in the Euro, but also sell products in Asia in the U.S. dollar. The functional currency of our European operation is the Euro. Nearly all of the transactions, assets and liabilities of all other operating units are denominated in the U.S. dollar, their functional currency. The following disclosures about market risk should be read in conjunction with the 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, 2006.
As of December 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 three months ended December 31, 2006 and 2005. As of December 31, 2006, our foreign subsidiaries had $4.1 million of assets (cash and receivables) denominated in currencies other than the functional currency. As of December 31, 2006, we had $4.6 million of accounts payable, consisting primarily of amounts owed by our foreign subsidiaries to our U.S. companies, denominated in U.S. dollars. Although the intercompany accounts are eliminated in consolidation, a 10% change in the value of the euro relative to the U.S. dollar would result in a gain or loss of $0.5 million. A 10% change in the value of the functional currency relative to the non-functional currency would result in a gain or loss of $0.4 million. Our net investment in and advances to our foreign operations totaled $2.3 million as of December 31, 2006. A 10% change in the value of the Euro relative to the U.S. dollar would cause an approximately $0.2 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity.
During three months ended December 31, 2006, our European operations transacted U.S. dollar denominated sales and purchases of $1.4 million and $1.2 million, respectively. As of December 31, 2006, sales commitments denominated in a currency other than the function currency of our transacting operation totaled $4.8 million. Our lead-times to fulfill these commitments generally range between 13 and 20 weeks. A 10% change in the relevant exchange rates between the time the order was taken and the time of shipment would cause our gross profit on such orders to be approximately $0.5 million greater than or less than expected on the date the order was taken.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure 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 December 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.
Changes in Internal Control Over Financial Reporting
There has been no change in Amtech’s internal control over financial reporting during the first quarter of fiscal 2007 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 6. | | Exhibits | |
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| |
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: February 14, 2007 |
|
| |
| 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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