FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 3, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
---------------------------------
Commission File Number 0-17297
BTU INTERNATIONAL, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 04-2781248
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
23 Esquire Road, North Billerica, Massachusetts 01862-2596
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (978) 667-4111
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of the Registrant's Common
Stock, par value $.01 per share, as of the latest practicable date: As of May
16, 2005: 7,231,938 shares.
BTU INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 1-2
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Statement of Stockholders' Equity
and Consolidated Statements of Comprehensive Loss 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-11
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 12
Item 4. CONTROLS AND PROCEDURES 12
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
(Unaudited)
April 3, December 31,
2005 2004
----------- ------------
Current assets
Cash and cash equivalents $ 365 $ 372
Accounts receivable, less reserves of $172 10,171 9,170
Inventories (Note 2) 12,154 13,354
Other current assets 664 646
----------- ------------
Total current assets 23,354 23,542
----------- ------------
Property, plant and equipment, at cost
Land 210 210
Buildings and improvements 7,999 7,999
Machinery and equipment 7,851 7,850
Furniture and fixtures 891 875
----------- ------------
16,951 16,934
Less-Accumulated depreciation 14,496 14,245
----------- ------------
Net property, plant and equipment 2,455 2,689
Other assets, net of accumulated amortization of $481 at
April 3, 2005 and $460 at December 31, 2004 806 827
----------- ------------
$ 26,615 $ 27,058
=========== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Unaudited)
April 3, December 31,
2005 2004
----------- ------------
Current liabilities
Current maturities of long-term debt and
capital lease obligations (Note 3) $ 176 $ 173
Borrowings under line of credit 2,290 2,185
Accounts payable 4,488 5,417
Accrued expenses 3,129 2,831
----------- ------------
Total current liabilities 10,083 10,606
----------- ------------
Long-term debt and capital lease obligations, less
current maturities (Note 3) 5,245 5,289
Long-term deferred compensation 512 512
----------- ------------
15,840 16,407
----------- ------------
Stockholders' Equity (Note 4)
Series preferred stock, $1.00 par value-
Authorized - 5,000,000 shares-
Issued and outstanding - none - -
Authorized - 25,000,000 shares;
Issued - 8,379,073, outstanding 7,230,063
at April 3, 2005 and Issued - 8,356,448,
outstanding 7,207,438 at December 31, 2004 84 83
Additional paid-in capital 22,593 22,529
Deferred compensation (60) -
Accumulated losses (7,808) (7,975)
Treasury stock- at cost, 1,149,010 shares at
April 3, 2005 and December 31, 2004 (4,177) (4,177)
Accumulated other comprehensive income 143 191
----------- ------------
Total stockholders' equity 10,775 10,651
----------- ------------
$ 26,615 $ 27,058
=========== ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 3, 2005 AND APRIL 4, 2004
(in thousands, except share and per share data)
(Unaudited)
Three Months Ended
-----------------------
April 3, April 4,
2005 2004
---------- ----------
Net sales $ 12,792 $ 11,293
Cost of goods sold 8,277 8,643
---------- ----------
Gross profit 4,515 2,650
Operating expenses:
Selling, general and administrative 3,444 2,640
Research, development and engineering 772 917
---------- ----------
Income (Loss) from operations 299 (907)
---------- ----------
Interest income 1 5
Interest expense (133) (77)
Other income (loss), net - (1)
---------- ----------
Income (Loss) before income taxes 167 (980)
Income tax provision (benefit) - -
---------- ----------
Net income (loss) $ 167 $ (980)
========== ==========
Income (Loss) Per Share:
Basic $ 0.02 $ (0.14)
Diluted $ 0.02 $ (0.14)
========== ==========
Weighted average number of
Shares Outstanding:
Basic Shares 7,218,624 7,162,126
Effect of Dilutive Options 71,996 -
---------- ----------
Diluted Shares 7,290,620 7,162,126
========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED APRIL 3, 2005
(in thousands)
(Unaudited)
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN DEFERRED ACCUMULATED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL COMP. EARNINGS STOCK INCOME EQUITY
------ ---------- -------- ----------- -------- ------------- -------------
Balance at
Dec. 31, 2004 $ 83 $ 22,529 $ - $ (7,975) $ (4,177) $ 191 $ 10,651
Net income - - - 167 - - 167
Exercise of
Stock options 1 64 - - - - 65
Translation
Adjustment - - - - - (48) (48)
Deferred
Compensation - - (60) - - - (60)
------ ---------- -------- ----------- -------- ------------- -------------
Balance at
April 3, 2005 $ 84 $ 22,593 $ (60) $ (7,808) $ (4,177) $ 143 $ 10,775
====== ========== ======== =========== ======== ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE MONTHS ENDED APRIL 3, 2005 AND APRIL 4, 2004
(in thousands)
(Unaudited)
Three Months Ended
------------------
April 3, April 4,
2005 2004
Net income (loss) $ 167 $ (980)
Other comprehensive loss:
Foreign currency translation adjustment (48) (59)
-------- --------
Comprehensive income (loss) $ 119 $ (1,039)
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED APRIL 3, 2005 AND APRIL 4, 2004
(in thousands)
(Unaudited)
April 3, April 4,
2005 2004
-------- --------
Cash flows from operating activities:
Net income (loss) $ 167 $ (980)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities -
Depreciation and amortization 251 294
Stock based compensation - 9
Net changes in operating assets and liabilities-
Accounts receivable (1,001) (2,703)
Inventories 1,200 (1,796)
Other current assets (18) (534)
Other assets 21 (30)
Accounts payable (929) 2,404
Accrued expenses 298 371
Deferred compensation (60) (46)
-------- --------
Net cash used in operating activities (61) (3,011)
-------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (17) (140)
-------- --------
Net cash used in investing activities (17) (140)
-------- --------
Cash flows from financing activities:
Principal payments under long-term debt and capital lease
obligations (41) (13)
Borrowings against line of credit 105 -
Exercise of stock options 65 102
-------- --------
Net cash provided by financing activities 129 89
-------- --------
Effect of exchange rates on cash (48) (59)
-------- --------
Net decrease in cash and cash equivalents (7) (3,121)
Cash and cash equivalents, at beginning of the period 372 6,659
-------- --------
Cash and cash equivalents, at end of the period $ 365 $ 3,538
======== ========
Supplemental disclosures of cash flow information
Cash paid during the periods for -
Interest $ 133 $ 77
Income taxes - 22
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Basis for presentation
The condensed consolidated balance sheets as of April 3, 2005 and December
31, 2004, the related condensed consolidated statements of operations for the
three months ended April 3, 2005 and April 4, 2004, the condensed consolidated
statement of stockholders' equity for the three months ended April 3, 2005, the
condensed consolidated statements of cash flows for the three months ended April
3, 2005 and April 4, 2004, the consolidated statements of comprehensive loss for
the three months ended April 3, 2005 and April 4, 2004 are audited at
December 31, 2004 and unaudited at April 4, 2004 and April 3, 2005. In the
opinion of management, all adjustments necessary for the fair presentation of
such financial statements have been included. Such adjustments consisted only of
normal recurring items. Interim results are not necessarily indicative of
results for the full year. These financial statements do not include all
disclosures associated with annual financial statements, and accordingly, should
be read in conjunction with the footnotes contained in the Company's
consolidated financial statements as of, and for the period ended December 31,
2004, together with the auditors' report, included in the Company's Annual
Report on Form 10-K, as filed with the Securities and Exchange Commission.
(2) Inventories
Inventories at April 3, 2005 and December 31, 2004 consisted of:
(in thousands)
--------------------------
April 3, December 31,
2005 2004
-------- ------------
Raw materials and manufactured components $ 6,481 $ 7,972
Work-in-process 3,843 3,770
Finished goods 1,830 1,612
-------- ------------
$ 12,154 $ 13,354
======== ============
(3) Debt
Long-Term Debt at April 3, 2005 and December 31, 2004 consisted of:
(in thousands)
--------------------------
April 3, December 31,
2005 2004
-------- ------------
Mortgage note payable $ 5,401 $ 5,440
Capital lease obligations, interest rate of 6.75% 20 22
-------- ------------
5,421 5,462
Less-current maturities 176 173
-------- ------------
$ 5,245 $ 5,289
======== ============
The mortgage note payable is secured by the Company's land and
building in Billerica, MA and requires monthly payments of $38,269, including
interest at 5.42%. This mortgage note payable has a balloon payment of
$5,100,000 due and payable at maturity on December 26, 2006, if the Company does
not exercise its option to a three-year contractual extension.
6
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The Company has a secured revolving loan agreement with a US bank
that allows for aggregate borrowings, including letters of credit, up to a
maximum of $14 million against a borrowing base of secured accounts receivable
and inventory. The Company may elect to borrow at interest rates of either the
prime rate or a rate pegged to the LIBOR rate in effect from time to time. This
loan agreement extends to May 31, 2007 and is subject to maintaining certain
financial covenants. At April 3, 2005 borrowings outstanding under this
agreement were $2.3 million and the borrowing base formula permitted aggregate
borrowings of approximately $10.8 million.
As a result of a decrease in tangible net worth following the
write-off of the $1.6 million restructuring charge at the end of the third
quarter of 2004 and an increase in borrowings, the Company was out of compliance
with its total liabilities to tangible net worth covenant under the loan
agreement at October 3, 2004. The Company was in compliance with all financial
covenants at December 31, 2004 and April 3, 2005. The Company has provided the
bank with forecasted financial statements that show the Company is projecting to
be in compliance with all financial covenants for all of 2005.
Although the non-compliance at the end of the third quarter 2004 has
not been waived, the bank has continued to lend funds to the Company under the
terms of the existing loan agreement. On March 29, 2005, the bank proposed a
waiver for the third quarter 2004 covenant non-compliance which would amend the
loan agreement in several respects: the maximum lending under the line of credit
would be reduced from $14 million to $12 million; the borrowing base formula
would be revised to reduce availability based on inventories and lower the
percentage loaned against certain foreign accounts receivable; and the interest
rate on borrowings would be increased to prime plus 0.5%. Upon meeting certain
profitability goals for 2005, the maximum lending would return to $14 million,
the existing availability based on inventories would be reinstated, and the
interest rate on borrowings would return to the prime rate. In addition, the
bank requested that the Company use its best efforts to obtain for the bank a
second mortgage on the Company's headquarters building and provide the bank with
a negative pledge that would prevent any other party from obtaining a second
mortgage on the property if the second mortgage could not be obtained.
The Company is discussing the proposed changes to the loan agreement
with the bank, and believes it will conclude its discussions with the bank on
terms that are acceptable to both parties. Based on its 2005 forecasted business
plan, the borrowing base changes and other reductions in availability proposed
by the bank would provide sufficient credit for the Company's anticipated
working capital needs for all of 2005. As discussed under "Risk Factors" in our
2004 Form 10- K, the Company will need continued access to working capital to
fund its operations.
(4) Earnings Per Share
Basic EPS is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding during the period.
Diluted EPS is computed using the weighted average number of common and dilutive
potential common shares outstanding during the period, using the treasury stock
method. Options outstanding, which were not included in the determination of
diluted EPS for the three months ended April 4, 2004 because they were
antidilutive due to the Company reporting a loss, were 1,140,666.
The Company applies Accounting Principles Board Opinion No. 25 and related
Interpretations in accounting for its stock option and purchase plans.
Accordingly, no compensation cost has been recognized related to the plans. Had
compensation cost for the plans been determined based on the fair value at the
grant dates for the awards under these plans consistent with SFAS No. 123,
"Accounting for Stock-Based Compensation," the Company's net loss and net loss
per share would be the pro forma amounts indicated below:
7
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Three Months Ended
------------------
April 3, April 4,
2005 2004
Net Income (loss):
As reported..................... $ 167 $ (980)
Pro forma....................... 72 (1,078)
Income per basic share:
As reported..................... $ 0.02 $ (0.14)
Pro forma....................... 0.01 (0.15)
Income per diluted share:
As reported..................... $ 0.02 $ (0.14)
Pro forma....................... 0.01 (0.15)
(5) Segment Reporting
Segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision-maker in deciding how to allocate resources and in assessing
performance. The Company operates as a single business segment called thermal
processing capital equipment.
The thermal processing capital equipment segment consists of the
designing, manufacturing, selling and servicing of thermal processing equipment
and related process controls for use in the electronics, power generation,
automotive and other industries. This business segment includes the supply of
solder reflow systems used for surface mount applications in printed circuit
board assembly. Thermal processing equipment is used in: low temperature
curing/encapsulation; hybrid integrated circuit manufacturing; integrated
circuit packaging and sealing; and processing multi-chip modules. In addition,
the thermal process equipment is used for sintering nuclear fuel for commercial
power generation, as well as brazing and the sintering of ceramics and powdered
metals, and the deposition of precise thin film coatings. The business segment's
customers are multinational original equipment manufacturers and electronic
manufacturing service providers.
(6) Revenue Recognition
The Company recognizes revenue in accordance with the Securities and
Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements" as updated by SEC Staff Accounting Bulletin
No. 104, "Revenue Recognition". Under these guidelines, revenue is recognized
when persuasive evidence of an arrangement exists, shipment has occurred or
services rendered, the price is fixed or determinable and payment is reasonably
assured. Under these requirements, when the terms of sale include customer
acceptance provisions, and compliance with those provisions has not been
previously demonstrated, revenues are recognized upon acceptance. Furthermore,
revenues for products that require installation for which the installation is
essential to functionality or is not deemed inconsequential or perfunctory are
recognized upon completion of installation. Revenues for products sold where
installation is not essential to functionality and is deemed inconsequential or
perfunctory are recognized upon shipment with estimated installation and
warranty costs accrued.
Applying the requirements of SAB No. 101 to future sales arrangements used
in the Company's equipment sales may result in the deferral of the revenue for
some equipment sales.
The Company also has certain sales transactions for projects that are not
completed within the normal operating cycle of the business. These contracts are
accounted for on a percentage completion basis. Under the percentage completion
method, revenues are recognized based upon the ratio of costs incurred to the
total estimated costs. Revisions in costs and profit estimates are reflected in
the period in which the facts causing the revision become known. Provisions for
total estimated losses on uncompleted contracts, if any, are made in the period
in which such losses are determined.
8
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
For the three months ended April 3, 2005 there was no revenue recognized
using the percentage of completion method. For the three months ended April 4,
2004, there was $572,296 of revenue recognized using the percentage of
completion method.
At April 3, 2005, there are no post shipment obligations that could impact
revenue recognition.
The Company accounts for shipping and handling costs billed to customers
in accordance with the Emerging Issues Task Force (EITF) Issue 00-10 "Accounting
for Shipping and Handling Fees and Cost". Amounts billed to customers for
shipping and handling costs are recorded as revenues with the associated costs
reported as cost of goods sold.
(7) Product Warranty Costs
The Company provides standard warranty coverage for parts and labor for 12
months and special extended material only coverage on certain other products.
The Company sets aside a reserve for anticipated warranty claims based on
revenue. The reserve for warranty covers the estimated costs of material, labor
and travel. Actual warranty claims incurred are charged to expense. Factors that
affect the Company's product warranty liability include the number of installed
units, the anticipated cost of warranty repairs and historical and anticipated
rates of warranty claims.
The following table reflects changes in the Company's accrued warranty account
during the first quarter ended April 3, 2005:
2005
------
(in thousands)
Beginning Balance, December 31, 2004 $ 635
Plus accruals related to new sales 157
Less: warranty claims incurred (149)
Less: reversal of excess requirements (8)
------
Ending Balance, April 3, 2005 $ 635
======
(8) Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No.123 (revised 2004),"Share-Based
Payment" Statement. SFAS 123(R) will provide investors and other users of
financial statements with more complete and neutral financial information by
requiring that the compensation cost relating to share-based payment
transactions be recognized in financial statements. That cost will be measured
based on the fair value of the equity or liability instruments issued. Statement
123(R) covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. Statement 123(R)
replaces FASB Statement No. 123, Accounting for Stock-Based Compensation, and
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees.
Statement 123, as originally issued in 1995, established as preferable a
fair-value-based method of accounting for share-based payment transactions with
employees. However, that Statement permitted entities the option of continuing
to apply the guidance in Opinion 25, as long as the footnotes to financial
statements disclosed what net income would have been had the preferable
fair-value-based method been used. The Company will be required to apply
Statement 123(R) in their financial statements in the first quarter of fiscal
2006. The Company is currently evaluating the financial statement impact of the
adoption of SFAS 123(R).
9
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs", an
amendment of ARB No. 43, Chapter 4. The amendments made by Statement 151clarify
that abnormal amounts of idle facility expense, freight, handling costs, and
wasted materials (spoilage) should be recognized as current-period charges and
require the allocation of fixed production overheads to inventory based on the
normal capacity of the production facilities. The guidance is effective for
inventory costs incurred during fiscal years beginning after June 15, 2005.
Earlier application is permitted for inventory costs incurred during fiscal
years beginning after November 23, 2004. The Company is currently evaluating the
financial statement impact of the adoption of SFAS 151.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Net Sales. Net sales increased 13.3% from $11.3 million in the first
quarter of 2004 to $12.8 million in the first quarter of 2005. The growth in net
sales represents an increase in our large high temperature products, while other
product areas remained relatively steady.
When comparing the first quarter of 2004 to the first quarter of 2005 the
percentage of net sales attributable to our customers in the United States
increased from 19.2% to 31.3%, net sales attributable to our customers in Europe
increased from 19.1% to 36.2%, net sales attributable to our Asia Pacific
customers decreased from 58.7% to 30.0%, and net sales attributable to our
customers in the Other Americas decreased from 3.0% to 2.6%. The first quarter
of 2005 percent geographical sales is not a good indicator of future sales
distribution as several large orders in the first quarter distort the expected
trend to expanded Asian sales. We expect a continuing revenue shift from the
United States to Asia which is indicative of our USA based multinational
customers transferring their manufacturing operations from domestic facilities
to Asian operations to attain lower costs and be closer to their markets. The
Company has moved in this same direction and has established furnace assembly
operations in China to attain lower costs and be closer to the expanding Asian
market.
Gross Profit. Gross profit increased 70.4% from $2.7 million in the first
quarter of 2004 to $4.5 million in the first quarter of 2005, and as a
percentage of net sales, increased from 23.5% to 35.3%. The increase in the
gross profit percentage for the first quarter 2005 was principally the result of
a favorable product mix, which included higher-end systems for semiconductor
packaging and high temperature advanced materials processing and lower costs as
our China assembly operations expand.
Selling, General and Administrative. Selling, general and administrative
expenses increased 30.5% from $ 2.6 million in the first quarter of 2004 to $
3.4 million in the first quarter of 2005. As a percentage of net sales, selling,
general and administrative expenses increased from 23.4% in the first quarter
2004 to 26.9% in the first quarter of 2005. The increase in selling, general and
administrative expense and percentage of net sales in the first quarter of 2005
was the result of higher revenues resulting in higher commission costs at a
higher rate of commission as discounts on products decreased. Also, the Company
increased its spending for customer service related costs.
Research, Development and Engineering. Research, development and
engineering decreased 15.8% from $917,000 in the first quarter of 2004 to
$772,000 in the first quarter of 2005, and as a percentage of net sales,
decreased from 8.1% to 6.0% for the same period. The first quarter of 2005
spending reflects the reduction of R&D spending primarily related to the
Company's decision to integrate third-party to automation rather than develop it
internally.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
Operating Income. Operating income increased from a loss of $907,000 in
the first quarter of 2004 to income of $299,000 in the first quarter of 2005,
and as a percentage of net sales, increased from 8.0% to 6.0%. The increase in
operating income was primarily the result of increased revenues and improved
margins.
Income Taxes. The Company has federal and state net operating loss carry
forwards of approximately $11,500,000. Accordingly, no income tax provision is
reflected in the Statement of Operations for the three months ended April 3,
2005. The Company has recorded a full valuation allowance to offset the deferred
tax asset arising as a result of the Company's net operating loss carryforward
due to the uncertainty surrounding realization. Our statutory federal income tax
rate is 34.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of April 3, 2005 the Company had $0.4 million in cash and cash
equivalents.
During the first quarter of 2005, the Company used net cash
resources of approximately $0.1 million for operating activities. This use of
cash was primarily the result of an increase in accounts receivable of $1.0
million and a decrease in accounts payable of $0.9 million; offset by a decrease
in inventory of $1.2 million, a decrease of fixed assets of $0.2 million, an
increase in other current liabilities of $0.3 million and a net profit of $0.2
million.
Although the Company's accounts receivable increased by $1.0 million
in the first quarter of 2005, an analysis of the outstanding receivables and our
historical experience on the collection of receivables, is judged that we can
maintained the same level of reserve as at year end 2004.
In the first quarter of 2005, there were no material changes in the
Company's balance sheet accounts.
The Company has a secured revolving loan agreement with a US bank
that allows for aggregate borrowings, including letters of credit, up to a
maximum of $14 million against a borrowing base of secured accounts receivable
and inventory. The Company may elect to borrow at interest rates of either the
prime rate or a rate pegged to the LIBOR rate in effect from time to time. This
loan agreement extends to May 31, 2007 and is subject to maintaining certain
financial covenants. At April 3, 2005 borrowings outstanding under this
agreement were $2.3 million and the borrowing base formula permitted aggregate
borrowings of approximately $10.8 million.
As a result of a decrease in tangible net worth following the
write-off of the $1.6 million restructuring charge at the end of the third
quarter of 2004 and an increase in borrowings, the Company was out of compliance
with its total liabilities to tangible net worth covenant under the loan
agreement at October 3, 2004. The Company was in compliance with all financial
covenants at December 31, 2004 and April 3, 2005. The Company has provided the
bank with forecasted financial statements that show the Company is projecting to
be in compliance with all financial covenants for all of 2005.
Although the non-compliance at the end of the third quarter 2004 has
not been waived, the bank has continued to lend funds to the Company under the
terms of the existing loan agreement. On March 29, 2005, the bank proposed a
waiver for the third quarter 2004 covenant non-compliance which would amend the
loan agreement in several respects: the maximum lending under the line of credit
would be reduced from $14 million to $12 million; the borrowing base formula
would be revised to reduce availability based on inventories and lower the
percentage loaned against certain foreign accounts receivable; and the interest
rate on borrowings would be increased to prime plus 0.5%. Upon meeting certain
profitability goals for 2005, the maximum lending would return to $14 million,
the existing availability based on inventories would be reinstated, and the
interest rate on borrowings would return to the prime rate. In addition, the
bank requested that the Company use its best efforts to obtain for the bank a
second mortgage on the Company's headquarters building and provide the bank with
a negative pledge that would prevent any other party from obtaining a second
mortgage on the property if the second mortgage could not be obtained.
11
The Company is discussing the proposed changes to the loan agreement
with the bank, and believes it will conclude its discussions with the bank on
terms that are acceptable to both parties. Based on its 2005 forecasted business
plan, the borrowing base changes and other reductions in availability proposed
by the bank would provide sufficient credit for the Company's anticipated
working capital needs for all of 2005. As discussed under "Risk Factors" in our
10- K, the Company will need continued access to working capital to fund its
operations.
We have a mortgage note that is secured by our real property in Billerica,
MA. The mortgage note had an outstanding balance at April 3, 2005 of
approximately $5.4 million. The mortgage requires monthly payments of $38,269,
which includes interest calculated at the rate of 5.42% per annum. A final
balloon payment of approximately $5.1 million is due on December 26, 2006 upon
maturity of the mortgage note.
There are no material commitments for capital expenditures as of April 3,
2005.
The Company's business forecasts project that our cash position, cash flow
and our working capital line of credit will be sufficient to meet our corporate,
operating and capital requirements throughout 2005.
OTHER MATTERS
The impact of inflation and the effect of foreign exchange rate changes
during 2005 have had no material impact on our business and financial results.
RECENT ACCOUNTING DEVELOPMENTS
See 2004 Annual Report on Form 10-K, on file with the SEC.
FORWARD LOOKING STATEMENTS
This Report, other than historical financial information, includes
forward-looking statements that involve known and unknown risks and
uncertainties, including quarterly fluctuations in results. In particular, our
forecast of compliance with financial covenants in our bank agreement is a
forward-looking statement. Such statements are made pursuant to the "safe
harbor" provisions under the securities laws, and are based on the assumptions
and expectations of the Company's management at the time such statements are
made. Important factors that could cause actual results to differ include the
timely availability and acceptance of new products, general market conditions
governing supply and demand, the impact of competitive products and pricing and
other risks detailed in the Company's filings with the Securities and Exchange
Commission. Actual results may vary materially. Accordingly, you should not
place undue reliance on any forward-looking statements. Unless otherwise
required by law, the Company disclaims any obligation to revise or update such
forward-looking statements in order to reflect future events or developments.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not believe that we have any material market risk exposure with
respect to derivative or other financial instruments.
Item 4. CONTROLS AND PROCEDURES
Our management, including our Chief Executive Officer and Chief Financial
Officer, conducted an evaluation as of the end of the period covered by this
Report, of the effectiveness of our disclosure controls and procedures. Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of the
end of the period covered by this Report.
There were no changes to our internal control over financial reporting
during the quarter covered by this report that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 - Section 302 Certification
Exhibit 31.2 - Section 302 Certification
Exhibit 32.1 - Section 906 Certification
Exhibit 32.2 - Section 906 Certification
(b) Reports on Form 8-K
On February 18, 2005, the Company furnished a Current Report
on Form 8-K to notify shareholders of the Company's release to affirm its fourth
quarter guidance.
On March 3, 2005, the Company filed a Current Report on Form
8-KA to notify shareholders that the Company had entered into an employment
agreement with Paul J. van der Wansem.
On March 3, 2005, the Company filed a Current Report on Form
8-K to notify shareholders the Company's award of option grants and restricted
stock grants, acceleration of underwater stock options and establishment of 2005
Bonus Targets.
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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.
BTU INTERNATIONAL, INC.
DATE: May 18, 2005 BY: /s/ Paul J. van der Wansem
--------------------------
Paul J. van der Wansem
President, Chief Executive Officer
(principal executive officer) and Chairman of the
Board of Directors
DATE: May 18, 2005 BY: /s/ Thomas P. Kealy
-------------------
Thomas P. Kealy
Vice President, Corporate Controller and
Chief Accounting Officer (principal
financial and accounting officer)
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