Selling, general and administrative (SG&A) expenses for the quarter ended March 31, 2008 increased $1.5 million, or 64%, from $2.4 million to $4.0 million compared to the quarter ended March 31, 2007. The increase was due primarily to $0.6 million of increased selling expense for higher revenues generated in regions where third party sales agents are utilized. In addition, we incurred $0.3 million of expense at R2D for which there were no comparable expenses in the prior year quarter. SG&A expenses include $0.1 million of stock-based compensation expense in the quarters ended March 31, 2008 and 2007. The remainder of the increase in SG&A resulted from increased depreciation and operating costs for the new building in The Netherlands and increased personnel and consulting costs. The increased personnel and consulting costs include costs incurred to improve internal financial and operational reporting, to comply with the Sarbanes-Oxley Act, and to implement improvements in operational efficiencies.
For the six months ended March 31, 2008, SG&A increased $2.6 million or 57% compared to the six month period ended March 31, 2007. The increase reflects $0.6 million of costs incurred by R2D in fiscal 2008 for which there were no comparable expenses in the prior year period. Selling expenses increased $1.0 million due to increased commissions and increased sales and marketing activity. As previously discussed, personnel costs and professional fees, including costs related to moving our Netherlands operations into our new building, increased as we continued to execute our growth strategies and manage the increasing compliance obligations of a growing multi-national public company.
Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes; materials and supplies used in those activities; and product prototyping. .
Research and development costs for the three and six months ended March 31, 2008 increased $0.1 million and $0.2 million, respectively compared to the three and six-month periods ended March 31, 2007. The increase results from increased focus on the solar industry and reflects our partnering-based approach, in which our engineering and development teams work closely with our customers to ensure our products are tailored to meet our customers’ specific requirements while at the same time minimizing research and development costs.
Interest and other income (expense), net includes mainly interest income, interest expense and gains and losses on foreign currency transactions.
Interest income represents earnings on invested funds. Interest expense primarily consists of interest incurred on our overdraft facility, revolving line of credit, equipment financing, and amortization of debt issuance costs. Due to an increase in cash and cash equivalents raised in the secondary public offerings of common stock during the second quarter of fiscal 2007 and the first quarter of fiscal 2008, net interest income increased by $0.2 million and $0.4 million, respectively during the three and six months ended March 31, 2008, from the comparable periods in fiscal 2007.
Income Taxes
During the three months ended March 31, 2008 and 2007 we recorded income tax provisions of $0.1 million and $0.2 million, respectively for an effective tax rate of 39% in both periods. During the six months ended March 31, 2008 and 2007, we recorded income tax provisions of $0.2 million. The effective tax rates used for calculating the income tax provisions for the six months ended March 31, 2008 and 2007 were approximately 39% and 47%, respectively, based upon estimates of annual income, annual permanent differences, changes in the valuation allowance and statutory tax rates for fiscal 2008 and 2007, respectively, in the various jurisdictions in which we operate. . The effective tax rate for the six months ended March 31, 2007 was negatively impacted by permanent differences between financial income and taxable income, which were higher in relation to pre-tax income.
As a result of the application of the provisions of FIN 48 as of October 1, 2007, we recognized an additional tax liability of $0.3 million for uncertain tax positions and a decrease in the October 1, 2007 balance of retained earnings of an equal amount. Upon the adoption of FIN 48, the Company classified uncertain tax positions as non-current income taxes payable unless expected to be paid within one year. The Company intends to maintain a valuation allowance for state and foreign net operating losses until evidence supports the conclusion that it is more likely than not that those deferred tax assets may be realized. The amount of the valuation allowance at March 31, 2008 and October 1, 2007 was $0.6 million and $0.5 million respectively.
Liquidity and Capital Resources
At March 31, 2008 and September 30, 2007, cash and cash equivalents and restricted cash were $37.8 million and $18.8 million, respectively. Our working capital increased $27.5 million to $58.0 million as of March 31, 2008, compared to $30.5 million at September 30, 2007. Our ratio of current assets to current liabilities increased to 4.0:1 at March 31, 2008, from 3.6:1 at September 30, 2007. The increase in cash and cash equivalents and working capital and the improvement in the current ratio resulted primarily from the $33.6 million of net proceeds after deducting expenses raised from the secondary public offering of common stock during November 2007. The increase was partially offset by $8.0 million invested in the acquisition of R2D and capital expenditures made primarily to improve the manufacturing facility in The Netherlands, which increased the capacity of our solar and semiconductor equipment segment.
At March 31, 2008, our principal sources of liquidity consisted of $37.8 million of cash and cash equivalents and the $2.0 million in domestic 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 March 31, 2008. The Silicon Valley Bank line of credit expired in April, 2008 and was not immediately renewed.
We have a line of credit in the amount of Euro 1.0 million (approximately $1.6 million) as of March 31, 2008. The line of credit accrues interest at a rate of 1.75% over a Netherlands bank’s basic interest rate (5.5% as of March 31, 2008). The line of credit has no fixed expiration date. The line of credit is secured by trade account receivable in the Netherlands. As of March 31, 2008, bank guarantees in the amount of Euro 0.9 million were secured by this line of credit leaving Euro 0.1 million available. Effective May 1, 2008 the line of credit was reduced to Euro 0.6 million.
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 capital leases, long-term debt and the sale of equity securities, which include common and preferred stock sold in private transactions and public offerings. In the first quarter of fiscal 2008, we utilized approximately $7.0 million of cash to acquire R2D Ingenierie and made a working capital infusion to R2D of $1.0 million that was used to satisfy certain outstanding obligations. Cash of $5.5 million was paid at closing plus acquisition costs of $0.9 million, including cost of legal representation and due diligence. Cash contingent payments of $1.6 million to be paid to sellers upon fulfillment of certain requirements have been deposited in an escrow account. R2D is a solar cell and semiconductor automation equipment manufacturing company located near Montpellier, France. Also, in the first quarter of fiscal 2008, we completed the sale of 2,500,000 shares of common stock in a public offering for $14.41 per share. The net proceeds of the sale of common stock after offering expenses and underwriting fees was approximately $33.6 million. The availability of such capital resources in the future depends on the condition of the relevant debt or equity markets and our long-term and recent operating performance and financial condition. There can be no assurance that we can raise such additional capital resources on satisfactory terms. We intend to use the net proceeds from this offering for working capital and other general corporate purposes. Pending application of these proceeds, we intend to invest the net proceeds in short-term, interest bearing investment grade securities.
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Cash Flows from Operating Activities
Cash used in our operating activities was $4.1 million for the six months ended March 31, 2008, compared to $1.4 million used in such activities for the six months ended March 31, 2007. During the six months ended March 31, 2008 cash was primarily used to finance increases in accounts receivable (0.9 million), inventory ($6.6 million), prepaid and other assets ($0.8 million) and deferred profit of ($0.2 million). This use of cash was partially offset by increases in accounts payable of $2.8 million and accrued liabilities and customer deposits of $0.8 million.
Cash Flows from Investing Activities
Our investing activities for the six months ended March 31, 2008 and 2007 used $9.5 million and $3.2 million of cash, respectively. Our investing activities for the six months ended March 31, 2008 used $8.0 million of cash in the acquisition of R2D. Capital expenditures of $1.9 million resulted primarily from improvements to the new building in The Netherlands. Restricted cash decreased $0.4 million. Restricted cash represents bank guarantees in excess of our available credit facility in The Netherlands. During fiscal 2007, the most significant investment was the purchase of a 48,000 sq. ft. manufacturing facility located in Vaassen, The Netherlands for approximately $3.1 million.
Cash Flows from Financing Activities
Cash provided by financing activities for the six months ended March 31, 2008 was $33.3 million. Cash of $33.6 million was provided by the sale of 2,500,000 shares of common stock in an underwritten public offering at a price to the public of $14.41 per share. An additional $0.3 million was provided by the exercise of stock options. These sources of cash were offset by the payment of long-term debt of $0.6 million. In the second quarter of 2008, we paid the remaining balance of the mortgage on our building in Heerde, The Netherlands in the amount of $0.5 million. This compares to $19.5 million of cash provided by financing activities during the six months ended March 31, 2007 which primarily consists of the $19.4 million, net of expenses, raised in the secondary public offering of the Company’s common stock.
Off-Balance Sheet Arrangements
As of March 31, 2008, 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 2007 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, 2007, 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.
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 the Annual Report on Form 10-K for the year ended September 30, 2007. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
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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 solar and semiconductor 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.
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.
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Inventory Valuation.We value our inventory at the lower of cost or net realizable value. Costs for approximately 50% of inventory is determined on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. 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. 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 March 31, 2008, 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 2008, 2007 or 2006. 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 solar and semiconductor 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 operations 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, 2007.
As of March 31, 2008, 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 and six month periods ended March 31, 2008 and 2007. As of March 31, 2008, our foreign subsidiaries had $2.5 million of assets (cash and receivables) denominated in currencies other than the functional currency. A 10% change in the value of the functional currency relative to the nonfunctional currency would result in gains or losses of $0.3 million. As of March 31, 2008, we had $3.9 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 functional currency relative to the non-functional currency would result in net gains or losses of $0.4 million. Our net investment in and long-term advances to our foreign operations totaled $28.3 million as of March 31, 2008. A 10% change in the value of the Euro relative to the U.S. dollar would cause an approximately $2.8 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity.
During the six months ended March 31, 2008, our European operations transacted U.S. dollar denominated sales and purchases of $1.3 million and $1.1 million, respectively. As of March 31, 2008, sales commitments denominated in a currency other than the function currency of our transacting operation totaled $1.8 million. Our lead-times to fulfill these commitments generally range between 13 and 26 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 $0.2 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 March 31, 2008, 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 six months of fiscal 2008 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 4. Submission of Matters to a Vote of Security Holders
Election of Directors
At our annual shareholders’ meeting, which was held on March 13, 2008, 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:
| Nominee(1) | | For | | Withheld |
| Jong S. Whang | | 6,511,039 | | 127,334 |
| Michael Garnreiter | | 6,042,535 | | 595,768 |
| Alfred W. Giese | | 6,534,014 | | 104,289 |
| Brian L. Hoekstra | | 6,504,059 | | 134,244 |
| Robert F. King | | 6,510,970 | | 127,333 |
(1) Abstentions were not counted in the election of the directors.
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* |
____________________
* Filed herewith.
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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 14, 2008 | |
| |
| | Robert T. Hass | | | |
| | Chief Accounting Officer | | | |
| | (Principal Accounting Officer) | | | |
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EXHIBIT INDEX
| Exhibit | | | | Page or |
| Number | | Description | | 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 | | * |
____________________
* Filed herewith.
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