For the six months ended March 31, 2009, SG&A increased $0.3 million or 4% compared to the six month period ended March 31, 2008. SG&A expenses include $0.3 million and $0.2 million of stock-based compensation expense for the six months ended March 31, 2009 and 2008, respectively. SG&A expenses for the six months ended March 31, 2009 and 2008 include $0.1 million and $0.2 million, respectively, of costs related to compliance with the Sarbanes-Oxley Act. Selling expenses increased $0.2 million due to increased commissions.
The Bruce operations are primarily dependent upon a mature segment of the semiconductor industry which is experiencing a significant downturn. The industry downturn resulted in recent operating losses and deterioration in forecasted revenue and earnings at Bruce. It is uncertain when, and to what extent, the markets served by Bruce will recover. Therefore, the Bruce operations were restructured in the second quarter of fiscal 2009 to focus primarily on a parts supply business versus furnace systems sales. The restructuring included a reduction in the number of employees and a reduction in the amount of space required to operate the business. The restructuring resulted in a charge of $620,000, which includes a $350,000 charge for unutilized leased space, a $160,000 write-off of furnace-related inventory parts that are not expected to be utilized in the future and $110,000 of severance and outplacement costs.
Due to the circumstances related to the Bruce operations discussed above, the Company determined it was necessary to conduct an assessment of the ability to recover the carrying amount of long-lived assets of the Bruce operations. Recoverability is based upon the Company’s judgments and estimates of undiscounted cash flows during the estimated remaining useful life of the assets. It was determined that the carrying value of the net assets was not fully recoverable; therefore, an impairment charge of $373,000 was recorded for the excess of carrying value over the fair value of the customer list and non-compete agreement.
As a result of the impairment of long-lived assets described above, it was necessary to conduct an interim review of the goodwill and Bruce trademark for impairment. The fair value of the assets group was determined through estimates of the present value of future cash flows based upon the anticipated future use of the assets. As the carrying value of the Bruce assets exceeded their estimated fair value, the carrying values of goodwill ($89,000) and the Bruce trademark ($592,000) were also recorded as an impairment charge in the second quarter of fiscal 2009.
The total amount of the impairment charge was $1.1 million. Details of the impairment charge are as follows:
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, 2009 decreased $0.1 million compared to the three and six-month periods ended March 31, 2008. The decrease is due primarily to increased reimbursements through governmental research and development grants which are netted against these expenses.
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 | | Six Months Ended |
| | March 31, | | March 31, | | Inc. | | March 31, | | March 31, | | Inc. |
| Interest and other income (expense), net | | 2009 | | 2008 | | (Dec) | | 2009 | | 2008 | | (Dec) |
| | (dollars in thousands) | | (dollars in thousands) |
| Interest and other income (expense), net | | $ | 8 | | | $ | 298 | | $ | (290 | ) | | $ | 58 | | | $ | 504 | | | $ | (446 | ) |
| Foreign currency gains (losses) | | | (22 | ) | | | 50 | | | (72 | ) | | | (11 | ) | | | (3 | ) | | | (8 | ) |
| Total | | $ | (14 | ) | | $ | 348 | | $ | (362 | ) | | $ | 47 | | | $ | 501 | | | $ | (454 | ) |
Interest income represents earnings on invested funds. Interest expense primarily consists of interest incurred on equipment financing. Interest income on invested funds decreased due to lower interest rates during fiscal 2009. Foreign currency gains or losses were less than $0.1 million in each reporting period.
Income Taxes
During the three months ended March 31, 2009 and 2008, we recorded income tax expense (benefit) of ($0.6) million and $0.1 million, for an effective tax rate of 22% and 39%, respectively. During the six months ended March 31, 2009 and 2008, we recorded income tax provisions of $0.0 million and $0.2 million respectively. The effective tax rates used for calculating the income tax provisions for the six months ended March 31, 2009 and March 31, 2008 were approximately 0% and 39%, respectively based upon estimates of annual income, annual permanent differences, changes in the valuation allowance and statutory tax rates for fiscal 2009 and 2008 for the various jurisdictions in which we operate. The effective tax rate for the six months ended March 31, 2009 was negatively impacted by an increase to the valuation allowance and permanent differences between financial income and taxable income, which were higher in relation to the pre-tax loss. Without these adjustments a tax benefit would have been recorded for the period.
Liquidity and Capital Resources
At March 31, 2009 and September 30, 2008, cash and cash equivalents and current restricted cash were $37.2 million and $38.5 million, respectively. The decrease in cash and cash equivalents resulted primarily from cash used in investing activities such as purchases of property, plant and equipment as well as payments for our licensing agreements with PST. Cash was also used to repurchase approximately 144,000 shares for $0.4 million. In the first quarter of fiscal 2009 we terminated our line of credit in the amount of Euro 1.0 million (approximately $1.3 million). Our working capital as of March 31, 2009 and September 30, 2008 was $55.2 million and $57.2 million, respectively. We believe that our principal sources of liquidity discussed above are sufficient to meet our anticipated needs for current operations for at least the next 12 months.
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. There can be no assurance that we can raise such additional capital resources on satisfactory terms.
In December, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $4 million of common stock. Under the program, shares may be repurchased from time to time in open market transactions at prevailing market prices or in privately negotiated purchases. The timing and actual number of future purchases of shares will depend on a variety of factors, such as price, corporate and regulatory requirements, alternative investment opportunities, and other market and economic conditions. Repurchases under the program are funded from available working capital. The program may be suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice.
24
Cash Flows from Operating Activities
Cash provided by our operating activities was $1.5 million for the six months ended March 31, 2009, compared to $3.6 million used in such activities for the six months ended March 31, 2008. In the first six months of fiscal 2009, cash was generated by decreases in accounts receivable and current restricted cash as well as earnings from operations, adjusted for non-cash charges, partially offset by decreases in accounts payable, accrued liabilities and customer deposits, and increases in inventories. During the six months ended March 31, 2008 cash was primarily used to finance increases in inventory, accounts receivable, prepaid and other assets. This use of cash was partially offset by increases in accounts payable, accrued liabilities and customer deposits.
Cash Flows from Investing Activities
Our investing activities for the six months ended March 31, 2009 and 2008 used $1.4 million and $9.9 million respectively. For the six months ended March 31, 2009, capital expenditures amounted to $0.8 million primarily for machinery and equipment and we made $0.6 million of payments for our licensing agreements with PST. For six months ended March 31, 2008, we used cash of $8.0 million related to the acquisition of R2D. Capital expenditures in the same period were $1.9 million, primarily related to the improvements of our facilities in The Netherlands.
Cash Flows from Financing Activities
For the six months ended March 31, 2009, $0.5 million of cash was used in financing activities for the repurchase of shares ($0.4 million) and for the payment of long-term debt of $0.1 million. This compares to cash of $33.9 million 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 in the first half of fiscal 2008. Payments of long-term debt amounted to $0.6 million in the first half of fiscal 2008.
Off-Balance Sheet Arrangements
As of March 31, 2009, 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 September 30, 2008 have been changes in purchase obligations (See Note 7 of the Condensed Consolidated Financial Statements). Refer to Amtech’s annual report on Form 10-K for the year ended September 30, 2008, 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, 2008. We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
25
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 thecustomer upon shipment, we recognize revenue upon shipment for those products where the customer’sdefined specifications have been met with at least two similarly configured systems and processes for acomparably 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 contractprice 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 tasksare completed. Since we defer only those costs directly related to installation or other unit of accountingnot yet delivered and that portion of the contract price is often considerably greater than the fair marketvalue of those items, our policy at times will result in deferral of profit that is disproportionately greaterthan the deferred revenue. When this is the case, the gross profit recognized in one period will be lowerand 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 similarlyconfigured systems and processes, the revenue and directly related costs are deferred at the time ofshipment and recognized into income at the time of customer acceptance or when this criterion has beenmet. We have, on occasion, experienced longer than expected delays in receiving cash from certaincustomers pending final installation or system acceptance. If some of our customers refuse to pay thefinal payment, or otherwise delay final acceptance or installation, the deferred revenue would not berecognized, adversely affecting our future operating results.
- Equipment sold by the polishing supplies segment does not include process guarantees, acceptancecriteria or holdbacks; therefore, the related revenue is recorded upon transfer of title which is generallyat time of shipment. Our shipping terms for both segments are customarily FOB our shipping point orequivalent terms.
- For all segments, sales of spare parts and consumables are recognized upon shipment, as there are nopost shipment obligations other than standard warranties.
- Service revenue is recognized upon performance of the services requested by the customer. Revenuerelated to service contracts is recognized ratably over the period of the contract or in accordance with theterms of the contract, which generally coincides with the performance of the services requested by thecustomer.
Income Taxes. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with our expectations could have a material impact on our operations and financial condition.
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 in certain state and foreign jurisdictions available to 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. During the period from 2005 through 2008, we achieved increasing profitability and utilized all of our federal net operating loss carry forwards. Each quarter, we analyze 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 adjust the valuation allowance to the amount of deferred taxes that do not meet the criteria for recognition under SFAS No. 109. Currently, we only maintain a valuation allowance with respect to certain state and foreign net operating losses that may not be recovered.
26
In fiscal 2008, we adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,” (FIN 48) as of the beginning of fiscal 2008. FIN 48 requires application of a more likely than not threshold to the recognition and derecognition of uncertain tax positions. FIN 48 requires us to recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies.
Inventory Valuation.We value our inventory at the lower of cost or net realizable value. Costs for approximately 80% of inventory is determined on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. 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, 2009, 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. For the quarter ended March 31, 2009, we recorded impairment in our Bruce operations due to the existing and projected downturn of the semiconductor industry resulting in recent operating losses and deterioration in forecasted revenue and earnings in the Bruce operation. We did not experience any impairment to long-lived assets during fiscal 2008. Future adverse changes could be caused by, among other factors, a downturn in the industries served, 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”.
27
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, 2008.
As of March 31, 2009, 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, 2009 and 2008. As of March 31, 2009, our foreign subsidiaries had $1.3 million of net assets (cash, receivables and amounts due to our foreign subsidiaries by our U.S. companies offset by minor amounts of accounts payable) denominated in currencies other than the functional currency. A 10% change in the value of the functional currency relative to the other currencies would result in gains or losses of approximately $0.1 million.
During the six months ended March 31, 2009 we incurred foreign currency translation losses, a component of comprehensive income (loss) which was a direct adjustment to stockholders’ equity, of $2.7 million due to the strengthening of the U.S. dollar relative to the Euro. Our net investment in and long-term advances to our foreign operations totaled $40.6 million as of March 31, 2009. A 10% change in the value of the Euro relative to the U.S. dollar would cause a foreign currency translation adjustment of approximately $4.1 million.
During the six months ended March 31, 2009, our European operations transacted U.S. dollar denominated sales and purchases of $4.0 million and $2.1 million, respectively. As of March 31, 2009, sales commitments denominated in a currency other than the function currency of our transacting operation totaled less than $0.1 million. 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 no more than $0.1 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, 2009, 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 three months ended March 31, 2009 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
28
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 12, 2009, 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 | | 4,591,067 | | 2,491,522 |
| Michael Garnreiter | | 4,590,510 | | 2,492,079 |
| Alfred W. Giese | | 4,614,738 | | 2,467,851 |
| Brian L. Hoekstra | | 4,623,834 | | 2,458,755 |
| Robert F. King | | 4,658,065 | | 2,459,524 |
(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.
29
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 11, 2009 | |
| | |
| | | Robert T. Hass | | | |
| | Chief Accounting Officer | | | |
| | (Principal Accounting Officer) | | | |
30
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.
31
