UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 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 August 15,
2005: 7,376,092 shares.
BTU INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Operations 2
Condensed Consolidated Statement of Stockholders' Equity and
Comprehensive Income (Loss) 3-4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 11-14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
Item 4. CONTROLS AND PROCEDURES 15
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(Unaudited) (Audited)
July 3, December 31,
2005 2004
----------- ------------
Assets
Current assets
Cash and cash equivalents $ 468 $ 372
Accounts receivable, less reserves of $227 13,022 9,170
Inventories 12,295 13,354
Other current assets 903 646
------- -------
Total current assets 26,688 23,542
------- -------
Property, plant and equipment, net 2,284 2,689
Other assets, net 130 827
------- -------
Total assets $29,102 $27,058
======= =======
Liabilities and stockholders' equity
Current liabilities
Current portion of long-term debt $ 178 $ 173
Borrowings under line of credit 2,812 2,185
Accounts payable 5,457 5,417
Accrued expenses 3,351 2,831
------- -------
Total current liabilities 11,798 10,606
Long-term debt, less current portion 5,199 5,289
Long-term deferred compensation 283 512
------- -------
Total liabilities 17,280 16,407
------- -------
Commitments and contingencies
Stockholders' equity
Preferred stock, $1.00 par value - 5,000 shares
authorized; no shares issued or outstanding -- --
Common stock, $0.01 par value - 25,000,000 shares
authorized; 8,475,805 shares issued and 7,326,795
shares outstanding at July 3, 2005 and 8,356,448
shares issued and 7,207,438 shares
outstanding at December 31, 2004 85 83
Additional paid in capital 22,913 22,529
Deferred compensation (60) --
Accumulated deficit (7,038) (7,975)
Treasury stock, at cost (4,177) (4,177)
Accumulated other comprehensive income 99 191
------- -------
Total stockholders' equity 11,822 10,651
------- -------
Total liabilities and stockholders' equity $29,102 $27,058
======= =======
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except share and per share data)
Three Months Ended Six Months Ended
--------------------------- ---------------------------
July 3, 2005 July 4, 2004 July 3, 2005 July 4, 2004
------------ ------------ ------------ ------------
Net sales $ 15,806 $ 14,303 $ 28,598 $ 25,595
Costs of goods sold 10,218 11,035 18,495 19,678
---------- ---------- ---------- ----------
Gross profit 5,588 3,268 10,103 5,917
Operating expenses:
Selling, general and administrative 3,813 3,098 7,257 5,738
Research, development and engineering 867 981 1,639 1,898
---------- ---------- ---------- ----------
Operating income (loss) 908 (811) 1,207 (1,719)
Interest income 1 -- 2 --
Interest expense (139) (84) (272) (161)
Other income, net -- 3 -- 8
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes 770 (892) 937 (1,872)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ 770 $ (892) $ 937 $ (1,872)
========== ========== ========== ==========
Income (loss) per share:
Basic $ 0.11 $ (0.12) $ 0.13 $ (0.26)
Diluted $ 0.11 $ (0.12) $ 0.13 $ (0.26)
Weighted average number of shares outstanding:
Basic shares 7,246,924 7,186,849 7,232,620 7,174,229
Effect of dilutive options 119,805 -- 100,545 --
---------- ---------- ---------- ----------
Diluted shares 7,366,729 7,186,849 7,333,165 7,174,229
========== ========== ========== ==========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME
THREE AND SIX MONTHS ENDED JULY 3, 2005
(unaudited)
(in thousands)
Accumulated
Additional Other
Common Paid-In Deferred Retained Treasury Comprehensive
Stock Capital Comp. Deficit Stock Income Total
------ ---------- -------- -------- -------- ------------- -------
Three months ended July 3, 2005
Balance at April 3, 2005 $84 $22,593 $(60) $(7,808) $(4,177) $143 $10,775
Net income -- -- -- 770 -- -- 770
Exercise of stock options 1 320 -- -- -- -- 321
Translation adjustment -- -- -- -- -- (44) (44)
Deferred compensation -- -- -- -- -- -- --
--- ------- ---- ------- ------- ---- -------
Balance at July 3, 2005 $85 $22,913 $(60) $(7,038) $(4,177) $ 99 $11,822
=== ======= ==== ======= ======= ==== =======
Six months ended July 3, 2005
Balance at December 31, 2004 $83 $22,529 $ -- $(7,975) $(4,177) $191 $10,651
Net income -- -- -- 937 -- -- 937
Exercise of stock options 2 384 -- -- -- -- 386
Translation adjustment -- -- -- -- -- (92) (92)
Deferred compensation -- -- (60) -- -- -- (60)
--- ------- ---- ------- ------- ---- -------
Balance at July 3, 2005 $85 $22,913 $(60) $(7,038) $(4,177) $ 99 $11,822
=== ======= ==== ======= ======= ==== =======
Three Six
Months Months
Ended Ended
------ ------
July 3, 2005
---------------
Comprehensive income is calculated as follows:
Net income $770 $937
Other comprehensive loss
Foreign currency translation adjustment (44) (92)
---- ----
Comprehensive income $726 $845
==== ====
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY AND COMPREHENSIVE LOSS
THREE AND SIX MONTHS ENDED JULY 4, 2004
(unaudited)
(in thousands)
Accumulated
Additional Other
Common Paid-In Deferred Retained Treasury Comprehensive
Stock Capital Comp. Deficit Stock Income Total
------ ---------- -------- -------- -------- ------------- -------
Three months ended July 4, 2004
Balance at April 4, 2004 $83 $22,451 $ (9) $(4,774) $(4,177) $ 318 $13,892
Net loss -- -- -- (892) -- -- (892)
Exercise of stock options -- 44 -- -- -- -- 44
Translation adjustment -- -- -- -- -- (79) (79)
Deferred compensation -- -- 9 -- -- -- 9
--- ------- ---- ------- ------- ----- -------
Balance at July 4, 2004 $83 $22,495 $ -- $(5,666) $(4,177) $ 239 $12,974
=== ======= ==== ======= ======= ===== =======
Six months ended July 4, 2004
Balance at December 31, 2003 $83 $22,349 $(18) $(3,794) $(4,177) $ 377 $14,820
Net loss -- -- -- (1,872) -- -- (1,872)
Exercise of stock options -- 146 -- -- -- -- 146
Translation adjustment -- -- -- -- -- (138) (138)
Deferred compensation -- -- 18 -- -- -- 18
--- ------- ---- ------- ------- ----- -------
Balance at July 4, 2004 $83 $22,495 $ -- $(5,666) $(4,177) $ 239 $12,974
=== ======= ==== ======= ======= ===== =======
Three Six
Months Months
Ended Ended
------ -------
July 4, 2004
----------------
Comprehensive loss is calculated as follows:
Net loss $(892) $(1,872)
Other comprehensive loss
Foreign currency translation adjustment (79) (138)
----- -------
Comprehensive loss $(971) $(2,010)
===== =======
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 SIX MONTHS ENDED JULY 3, 2005 AND JULY 4, 2004
(unaudited)
(in thousands)
July 3, July 4,
2005 2004
------- -------
Cash flows from operating activities:
Net income (loss) $ 937 $(1,872)
Adjustments to reconcile net cash used in operating activities:
Depreciation and amortization 515 548
Stock based compensation (60) 18
Net change in operating assets and liabilities:
Accounts receivable (3,852) (5,799)
Inventories 1,059 (3,816)
Other current assets (257) (317)
Other assets 697 51
Accounts payable 40 3,436
Accrued expenses 520 466
Deferred compensation (229) (92)
------- -------
Net cash used in operating activities (630) (7,377)
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (110) (236)
------- -------
Net cash used in investing activities (110) (236)
------- -------
Cash flows from financing activities:
Principal payments under loan and capital lease agreements (85) (54)
Net borrowings under revolving credit agreement 627 2,418
Proceeds from the exercise of stock options 386 146
------- -------
Net cash provided by financing activities 928 2,510
------- -------
Effects of exchange rates on cash (92) (138)
------- -------
Net increase (decrease) in cash and cash equivalents 96 (5,241)
Cash and cash equivalents, beginning of period 372 6,659
------- -------
Cash and cash equivalents, end of period $ 468 $ 1,418
======= =======
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 272 $ 161
Income taxes $ 24 $ --
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 sheet, financial information and related
disclosures as of December 31, 2004, have been audited as of that date. The
condensed consolidated balance sheet as of July 3, 2005 and the related
condensed consolidated statements of operations and the condensed consolidated
statements of stockholders' equity and comprehensive income for the three and
six months ended July 3, 2005 and July 4, 2004 are unaudited. The condensed
consolidated statements of cash flows for the six months ended July 3, 2005 and
July 4, 2004 are unaudited. 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 July 3, 2005 and December 31, 2004 consisted of (in thousands):
July 3, December 31,
2005 2004
------- ------------
Raw materials and manufactured components $ 6,454 $ 7,972
Work-in-process 3,485 3,770
Finished goods 2,356 1,612
------- -------
$12,295 $13,354
======= =======
(3) Debt
Long-Term Debt at July 3, 2005 and December 31, 2004 consisted of (in
thousands):
July 3, December 31,
2005 2004
------- ------------
Mortgage note payable $5,372 $5,440
Capital lease obligations, interest rate of 6.75% 5 22
------ ------
5,377 5,462
Less - current maturities 178 173
------ ------
$5,199 $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 $5.1 million 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)
On June 30, 2005, the Company executed a loan modification agreement on its
secured revolving loan agreement that allows for aggregate borrowings, including
letters of credit, up to a maximum of $12 million against a borrowing base of
secured accounts receivable. The Company may elect to borrow at interest rates
of either the bank's prime rate plus 0.25% or LIBOR plus 2.50%. This loan
agreement extends to May 31, 2007 and is subject to maintaining certain
financial covenants. At July 3, 2005 borrowings outstanding under this agreement
were $2.8 million with the borrowing base formula permitting aggregate
borrowings of approximately $9.5 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 July 3, 2005. On June 30, 2005, the Company received a waiver for
the October 3, 2004 noncompliance.
(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 and six months ended July 4, 2004 because they were
anti-dilutive due to the Company reporting a loss, were 1,156,894. In addition,
for the three and six months ended July 3, 2005, 324,205 and 315,734 shares
respectively, of common stock issuable relative to stock options had exercise
prices per share that exceeded the average market price of the Company's common
stock and were excluded from the calculation of the diluted shares since their
inclusion would be anti-dilutive.
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 income (loss) and
net income (loss) per share would be the pro forma amounts indicated below (in
thousands, except per share data):
Three Months Ended Six Months Ended
------------------ -----------------
July 3, July 4, July 3, July 4,
2005 2004 2005 2004
------- ------- ------- -------
Net income (loss):
As reported $ 770 $ (892) $ 937 $(1,872)
Pro forma $ 657 $ (993) $ 711 $(2,073)
Income per basic share
As reported $0.11 $(0.12) $0.13 $ (0.26)
Pro forma $0.09 $(0.14) $0.10 $ (0.29)
Income per diluted share
As reported $0.11 $(0.12) $0.13 $ (0.26)
Pro forma $0.09 $(0.14) $0.10 $ (0.29)
7
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(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.
Revenue by geographic location is as follows (in thousands):
Three Months Ended Six Months Ended
------------------ -----------------
July 3, July 4, July 3, July 4,
2005 2004 2005 2004
------- ------- ------- -------
United States $ 2,852 $ 2,978 $ 6,471 $ 5,174
Europe 3,290 3,314 7,489 5,559
Asia Pacific 9,140 7,739 13,823 14,267
Other Americas 524 272 815 595
------- ------- ------- -------
$15,806 $14,303 $28,598 $25,595
======= ======= ======= =======
Long-lived assets by geographic location is as follows (in thousands):
July 3, December 31,
2005 2004
------- ------------
North America $2,179 $3,364
Asia Pacific 235 152
------ ------
$2,414 $3,516
====== ======
(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
8
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
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.
For the three and six months ended July 3, 2005, there was $699,000 of revenue
recognized using the percentage of completion method. For the six months ended
July 4, 2004, there was $1,256,000 of revenue recognized using the percentage of
completion method.
At July 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 six months ended July 3, 2005 (in thousands):
2005
-----
Beginning balance, December 31, 2004 $ 635
Plus: accruals related to new sales 202
Less: warranty claims incurred (173)
Less: reversal of excess requirements (29)
-----
Balance, end of period $ 635
=====
9
BTU INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
(8) Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.123 (revised
2004),"Share-Based Payment". 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).
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs", an amendment
of ARB No. 43, Chapter 4. The amendments made by Statement 151 clarify 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.
10
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
BTU International, Inc. designs, manufactures, sells and supports advanced
thermal processing systems used primarily for semiconductor packaging, printed
circuit board (PCB) assembly and energy generation. In addition, we produce
custom thermal systems for a variety of specialty applications for a wide range
of temperatures. We are one of the leading suppliers of thermal systems used by
electronics manufacturers.
Our electronics customers serve the advanced segments of the industry. In the
semiconductor market, we participate in both wafer level processing and die
level packaging where the integrated circuits are connected and sealed into a
package. In the SMT market, electronic components are attached to the PCB
through the reflow process using our convection soldering systems. In the energy
generation market, our materials customers serve multiple markets in which
advanced ceramics and metal alloys are used in end-use applications for the fuel
cell, solar cell, nuclear, communications, automotive, and other industries. Our
customers typically require high throughput, high yield and highly reliable
advanced thermal processing systems with tightly controlled temperature and
atmosphere parameters.
RESULTS OF OPERATIONS
The following tables sets forth, for the periods indicated, selected items in
our statements of operations (in thousands) expressed as a percentage of total
revenue and percent change.
Three Months Ended
-----------------------------------------------
July 3, 2005 July 4, 2004
---------------------- ----------------------
% of % of Percent
$ thousands revenues $ thousands revenues change
----------- -------- ----------- -------- -------
Total revenues $15,806 100.0% $14,303 100.0% 10.5%
Cost of goods sold 10,218 64.6% 11,035 77.2% (7.4)%
------- -------
Gross profit 5,588 35.4% 3,268 22.8% 71.0%
Selling, general and administrative expenses 3,813 24.1% 3,098 21.7% 23.1%
Research, development and engineering 867 5.5% 981 6.9% (11.6)%
------- -------
Operating income (loss) 908 5.8% (811) (5.8)% 212.0%
Income (loss) before provision for income taxes 770 4.9% (892) (6.2)% 186.3%
------- -------
Net income (loss) $ 770 4.9% $ (892) (6.2)% 186.3%
======= =======
Six Months Ended
-----------------------------------------------
July 3, 2005 July 4, 2004
---------------------- ----------------------
% of % of Percent
$ thousands revenues $ thousands revenues change
----------- -------- ----------- -------- -------
Total revenues $28,598 100.0% $25,595 100.0% 11.7%
Cost of goods sold 18,495 64.7% 19,678 76.9% (6.0)%
------- -------
Gross profit 10,103 35.3% 5,917 23.1% 70.7%
Selling, general and administrative expenses 7,257 25.4% 5,738 22.4% 26.5%
Research, development and engineering 1,639 5.7% 1,898 7.4% (13.6)%
------- -------
Operating income (loss) 1,207 4.2% (1,719) (6.7)% 170.2%
Income (loss) before provision for income taxes 937 3.3% (1,872) (7.3)% 150.1%
------- -------
Net income (loss) $ 937 3.3% $(1,872) (7.3)% 150.1%
======= =======
Net Sales. The growth in net sales in the second quarter was primarily due to an
increase in orders from our SMT (Surface Mount Technology) products while the
growth in net sales for the first quarter represents an increase in orders for
our high temperature products. Year to date growth in net sales has primarily
been from the SMT and high temperature products.
11
The following tables sets forth, for the periods indicated, select geographical
data (in thousands) expressed as a percentage of total revenue.
Three Months Ended Six Months Ended
--------------------------------------- ---------------------------------------
July 3, 2005 July 4, 2004 July 3, 2005 July 4, 2004
------------------ ------------------ ------------------ ------------------
% of % of % of % of
$ revenues $ revenues $ revenues $ revenues
------- -------- ------- -------- ------- -------- ------- --------
United States $ 2,852 18.0% $ 2,978 20.8% $ 6,471 22.6% $ 5,174 20.2%
Europe 3,290 20.8% 3,314 23.2% 7,489 26.2% 5,559 21.7%
Asia Pacific 9,140 57.9% 7,739 54.1% 13,823 48.4% 14,267 55.8%
Other Americas 524 3.3% 272 1.9% 815 2.8% 595 2.3%
------- ------- ------- -------
$15,806 $14,303 $28,598 $25,595
======= ======= ======= =======
The second quarter of 2005 percent geographical sales is an indicator of future
sales distribution as orders continue the expected trend to expanded Asian
sales. We expect a continuing revenue shift from the United States to Asia which
is indicative of our 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. The increase in the gross profit percentage for the second quarter
2005 was principally the result of lower costs as our China assembly and China
material sourcing operations expanded, combined with growth in the SMT markets
at higher average selling prices due to lower discounts. The increase in gross
profit for the first quarter was primarily due to a favorable product mix, which
included higher-end systems for wafer level semiconductor packaging and high
temperature energy processing.
Selling, General and Administrative. The increase in selling, general and
administrative expense and as a percentage of net sales in 2005 was due to
increased commission costs resulting from additional sales and higher commission
rates as discounts on products decreased. Also, the Company increased its
spending for customer service, sales, marketing and administration related costs
in line with its expanding business needs.
Research, Development and Engineering. The 2005 spending reduction primarily
reflects the reduction of research and development spending primarily related to
the Company's decision to integrate third-party automation rather than develop
it internally.
Operating Income. 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 $12 million. Accordingly, no income tax provision is
reflected in the Statement of Operations for the three and six months ended July
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 July 3, 2005, the Company had $0.5 million in cash and cash equivalents.
During the six months ended July 3, 2005, the Company used net cash resources of
approximately $0.6 million for operating activities. This use of cash was
primarily the result of an increase in accounts receivable of $3.9 million;
offset by a decrease in inventory of $1.1 million, adding back depreciation and
amortization of $0.5 million, an increase in current liabilities of $0.4
million, a decrease in other current and long term assets of $0.4 million and a
net profit of $0.9 million.
Although the Company's accounts receivable increased by $3.9 million in the six
months ended July 3, 2005, an analysis of the outstanding receivables and our
historical experience on the collection of receivables it is judged that we can
maintain a reserve for bad debt at near the same level as at year end 2004.
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On June 30, 2005, the Company executed a loan modification agreement on its
secured revolving loan agreement that allows for aggregate borrowings, including
letters of credit, up to a maximum of $12 million against a borrowing base of
secured accounts receivable. The Company may elect to borrow at interest rates
of either the bank's prime rate plus 0.25% or LIBOR plus 2.50%. This loan
agreement extends to May 31, 2007 and is subject to maintaining certain
financial covenants. At July 3, 2005 borrowings outstanding under this agreement
were $2.8 million with the borrowing base formula permitting aggregate
borrowings of approximately $9.5 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 July 3, 2005. On June 30, 2005, the Company received a waiver for
the October 3, 2004 noncompliance.
We have a mortgage note that is secured by our real property in Billerica, MA.
The mortgage note had an outstanding balance at July 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. This mortgage note payable
has a balloon payment of $5.1 million due and payable at maturity on December
26, 2006, if the Company does not exercise its option to a three-year
contractual extension.
There are no material commitments for capital expenditures as of July 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
We are subject to cyclical downturns in the electronics and semiconductor
industry
Our business depends predominantly on the capital expenditures of electronics
and semiconductor manufacturers, which in turn depend on current and anticipated
market demand for printed circuit board and integrated circuits and the products
that use them. The electronics and semiconductor industry has historically been
very cyclical and has experienced periodic downturns that have had a material
adverse effect on the demand for electronic and semiconductor processing
equipment, including equipment that we manufacture and market. The rate of
changes in demand is accelerating, rendering the global electronic and
semiconductor industry increasingly volatile. During periods of reduced and
declining demand, we must be able to quickly and effectively align our costs
with prevailing market conditions, as well as motivate and retain key employees.
In particular, our inventory levels during periods of reduced demand have at
times
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been higher than optimal, relative to the current levels of production demand.
We cannot provide any assurance that we may not be required to make inventory
valuation adjustments in future periods. During periods of rapid growth, we must
be able to acquire and/or develop sufficient manufacturing capacity to meet
customer demand, and hire and assimilate a sufficient number of qualified
people. Our business may be adversely affected if we fail to respond to rapidly
changing industry cycles in a timely and effective manner.
We have shifted a substantial portion of our production capacity to a new and
expanding manufacturing facility in Shanghai, China
In 2004 the Company began manufacturing and material sourcing operations in a
new leased facility in Shanghai, China. The volume and variety of the Company's
products produced in China is expected to continue to increase throughout 2005.
The successful operation of our China facility is important to sustaining our
business profitability and allowing us to remain competitive. We need to address
successfully the transitional leadership, management, technical and
administrative organization requirements of doing business in China. If we are
not successful in managing our China operation, our business and profitability
will be adversely affected. In addition, during 2005, the Company plans to begin
the construction of additional facilities, which will be leased, and we will
need to execute this expansion successfully to realize the benefit of our China
operations in 2006 and beyond.
Some of the requirements of Sarbanes-Oxley affect us as a small company
disproportionately and we may not be able to comply despite great effort and
expense
The Sarbanes-Oxley Act of 2002 imposed many new requirements on public
companies, the most significant of which involves the documentation, testing and
auditing of our internal control over financial reporting. Although we are not
required to be in compliance until our annual report for the year ended December
2006, we must document and test our internal controls in a way that we have
never before been required to do as a small company. We expect this effort will
involve substantial time and expense, and we cannot be sure that we will be able
to complete the task or that our internal controls will meet the standards that
are currently required. If we fail to comply with these requirements involving
internal controls, investor confidence in our company might suffer, which could
result in a decline in our stock price.
If we do not have access to additional credit, we may not be able to take
advantage of a significant growth in the markets that we serve
The electronics market that we serve may have a significantly higher growth
rate. We need access to credit to take advantage of a higher growth rate and
allow us to meet the demand for our products. As a result of our non-compliance
with a bank covenant at the end of the third quarter of 2004, and as a condition
to waiving that non-compliance, our bank has imposed additional restrictions on
our ability to borrow. Although we believe the modified line of credit provides
us with a sufficient amount of credit that we need for our 2005 forecasted
business plan, it may not be sufficient to allow us to take full advantage of
significantly higher increases in orders for our products. In addition, if we do
not continue to comply with our bank covenants, we may not be able to borrow and
our business would be adversely affected.
Our primary computer business system is of an older generation. A significant
malfunction could disrupt the activities of the Company
The Company's manufacturing business system is at the end of its life,
potentially posing a risk to the operation of the business. Some of the computer
system hardware and software have limited support, which could result in an
interruption in business activities. Solutions to address these risks are being
developed but may not be developed in time.
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.
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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 10.1 - Sovereign Bank waiver and revised terms and conditions
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.
On March 14, 2005, the Company filed a Current Report on Form 8-KA to
notify shareholders that the Company had entered incorrect information on the
previously filed March 3, 2005 8-K.
On April 22, 2005, the Company furnished a Current Report on Form 8-K
to notify shareholders of the Company's release of its first quarter results.
On June 21, 2005, the Company filed a Current Report on Form 8-K to
notify shareholders that the Company had entered into an amendment to the
employment agreement with Paul J. van der Wansem.
On July 22, 2005, the Company furnished a Current Report on Form 8-K
to notify shareholders of the Company's release of its second quarter results.
On July 22, 2005, the Company furnished a Current Report on Form 8-K
to notify shareholders that the Company had executed an agreement with its bank.
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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: August 17, 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: August 17, 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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