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 October 2, 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 000-17297
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 Exchange Act). Yes No X
----- -----
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange 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 November 11,
2005: 7,621,771 shares.
BTU INTERNATIONAL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
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 11-16
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 16
Item 4. CONTROLS AND PROCEDURES 17
PART II. OTHER INFORMATION
Item 6. EXHIBITS 18
SIGNATURES 19
BTU INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(in thousands, except share data)
October 2, December 31,
2005 2004
---------- ------------
Assets
Current assets
Cash and cash equivalents $ 581 $ 372
Accounts receivable, net 15,754 9,170
Inventories 13,922 13,354
Other current assets 791 646
------- -------
Total current assets 31,048 23,542
------- -------
Property, plant and equipment, net 2,177 2,689
Other assets, net 161 827
------- -------
Total assets $33,386 $27,058
======= =======
Liabilities and stockholders' equity
Current liabilities
Current portion of long-term debt $ 180 $ 173
Borrowings under line of credit 3,589 2,185
Accounts payable 6,068 5,417
Accrued expenses 4,359 2,831
------- -------
Total current liabilities 14,196 10,606
Long-term debt, less current portion 5,153 5,289
Long-term deferred compensation 283 512
------- -------
Total liabilities 19,632 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; 8,582,155 shares issued and 7,433,145
shares outstanding at October 2, 2005 and 8,356,448
shares issued and 7,207,438 shares outstanding at
December 31, 2004 86 83
Additional paid in capital 23,226 22,529
Deferred compensation (53) --
Accumulated deficit (5,447) (7,975)
Treasury stock, at cost (4,177) (4,177)
Accumulated other comprehensive income 119 191
------- -------
Total stockholders' equity 13,754 10,651
------- -------
Total liabilities and stockholders' equity $33,386 $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 Nine Months Ended
--------------------------------- ---------------------------------
October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004
--------------- --------------- --------------- ---------------
Net sales $ 18,543 $ 15,419 $ 47,141 $ 41,014
Costs of goods sold 11,880 11,892 30,375 31,570
---------- ---------- ---------- ----------
Gross profit 6,663 3,527 16,766 9,444
Operating expenses:
Selling, general and administrative 4,031 3,228 11,288 8,965
Research, development and engineering 893 890 2,532 2,788
Restructuring charges -- 1,648 -- 1,648
---------- ---------- ---------- ----------
Operating income (loss) 1,739 (2,239) 2,946 (3,957)
Interest income -- 2 2 5
Interest expense (148) (142) (420) (302)
Other income, net -- -- -- 3
---------- ---------- ---------- ----------
Income (loss) before provision for income taxes 1,591 (2,379) 2,528 (4,251)
Provision for income taxes -- -- -- --
---------- ---------- ---------- ----------
Net income (loss) $ 1,591 $ (2,379) $ 2,528 $ (4,251)
========== ========== ========== ==========
Income (loss) per share:
Basic $ 0.22 $ (0.33) $ 0.35 $ (0.59)
Diluted $ 0.20 $ (0.33) $ 0.34 $ (0.59)
Weighted average number of shares outstanding:
Basic shares 7,383,503 7,196,023 7,282,603 7,181,381
Effect of dilutive options 395,873 -- 219,674 --
---------- ---------- ---------- ----------
Diluted shares 7,779,376 7,196,023 7,502,277 7,181,381
========== ========== ========== ==========
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
NINE MONTHS ENDED OCTOBER 2, 2005
(unaudited)
(in thousands)
Accumulated
Additional Other
Common Paid-In Deferred Retained Treasury Comprehensive
Stock Capital Comp. Deficit Stock Income Total
------ ---------- -------- -------- -------- ------------- -------
Nine months ended October 2, 2005
Balance at December 31, 2004 $83 $22,529 $ -- $(7,975) $(4,177) $191 $10,651
Net income -- -- -- 2,528 -- -- 2,528
Exercise of stock options 3 697 -- -- -- -- 700
Translation adjustment -- -- -- -- -- (72) (72)
Deferred compensation -- -- (53) -- -- -- (53)
--- ------- ---- ------- ------- ---- -------
Balance at October 2, 2005 $86 $23,226 $(53) $(5,447) $(4,177) $119 $13,754
=== ======= ==== ======= ======= ==== =======
Nine
Months
Ended
October 2, 2005
---------------
Comprehensive income is calculated as follows:
Net income $2,528
Other comprehensive gain (loss)
Foreign currency translation adjustment (72)
------
Comprehensive income $2,456
======
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
NINE MONTHS ENDED OCTOBER 3, 2004
(unaudited)
(in thousands)
Accumulated
Additional Other
Common Paid-In Deferred Retained Treasury Comprehensive
Stock Capital Comp. Deficit Stock Income Total
------ ---------- -------- -------- -------- ------------- -------
Nine months ended October 3, 2004
Balance at December 31, 2003 $83 $22,349 $(18) $(3,794) $(4,177) $ 377 $14,820
Net loss -- -- -- (4,251) -- -- (4,251)
Exercise of stock options -- 151 -- -- -- -- 151
Translation adjustment -- -- -- -- -- (156) (156)
Deferred compensation -- -- 18 -- -- -- 18
--- ------- ---- ------- ------- ----- -------
Balance at October 3, 2004 $83 $22,500 $ -- $(8,045) $(4,177) $ 221 $10,582
=== ======= ==== ======= ======= ===== =======
Nine
Months
Ended
October 3, 2004
---------------
Comprehensive loss is calculated as follows:
Net loss $(4,251)
Other comprehensive loss
Foreign currency translation adjustment (156)
-------
Comprehensive loss $(4,407)
=======
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 NINE MONTHS ENDED OCTOBER 2, 2005 AND OCTOBER 3, 2004
(unaudited)
(in thousands)
October 2, October 3,
2005 2004
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 2,528 $ (4,251)
Adjustments to reconcile net cash used in operating
activities:
Depreciation and amortization 731 694
Loss on disposal of fixed assets 19 --
Stock based compensation (53) 18
Net change in operating assets and liabilities:
Accounts receivable (6,584) (8,375)
Inventories (568) (6,703)
Other current assets (145) (217)
Other assets 611 520
Accounts payable 652 4,407
Accrued expenses 1,528 1,491
Deferred compensation (229) 321
------- --------
Net cash used in operating activities (1,510) (12,095)
------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment, net (183) (198)
------- --------
Net cash used in investing activities (183) (198)
------- --------
Cash flows from financing activities:
Principal payments under loan and capital lease
agreements (129) (96)
Net borrowings under revolving credit agreement 1,403 6,489
Proceeds from the exercise of stock options 700 151
------- --------
Net cash provided by financing activities 1,974 6,544
------- --------
Effects of exchange rates on cash (72) (156)
------- --------
Net increase (decrease) in cash and cash equivalents 209 (5,905)
Cash and cash equivalents, beginning of period 372 6,659
------- --------
Cash and cash equivalents, end of period $ 581 $ 754
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest $ 420 $ 302
Income taxes $ 67 $ --
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 derived from our consolidated
financial statements which have been audited as of that date. The condensed
consolidated balance sheet as of October 2, 2005 and the related condensed
consolidated statements of operations and the condensed consolidated statements
of stockholders' equity and comprehensive income for the three and nine months
ended October 2, 2005 and October 3, 2004 are unaudited. The condensed
consolidated statements of cash flows for the nine months ended October 2, 2005
and October 3, 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 year 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 October 2, 2005 and December 31, 2004 consisted of (in
thousands):
October 2, December 31,
2005 2004
---------- ------------
Raw materials and manufactured components $ 8,494 $ 7,972
Work-in-process 3,538 3,770
Finished goods 1,890 1,612
------- -------
$13,922 $13,354
======= =======
(3) Debt
Long-Term Debt at October 2, 2005 and December 31, 2004 consisted of (in
thousands):
October 2, December 31,
2005 2004
---------- ------------
Mortgage note payable $5,315 $5,440
Capital lease obligations, interest rate of 6.75% 18 22
------ ------
5,333 5,462
Less - current maturities 180 173
------ ------
$5,153 $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 $13 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 or LIBOR plus 2.25%. This loan agreement extends
to May 31, 2007 and is subject to maintaining certain financial covenants. At
October 2, 2005 borrowings outstanding under this agreement were $3.6 million
with the borrowing base formula permitting aggregate borrowings of approximately
$11.4 million.
(4) Earnings Per Share (EPS)
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 nine months ended October 3, 2004 because they
were anti-dilutive due to the Company reporting a loss, were 1,148,939. In
addition, for the three and nine months ended October 2, 2005, 144,484 and
176,989 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 Nine Months Ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
2005 2004 2005 2004
---------- ---------- ---------- ----------
Net income (loss):
As reported $1,591 $(2,379) $2,528 $(4,251)
Pro forma $1,477 $(2,472) $2,187 $(4,530)
Income (loss) per basic share
As reported $ 0.22 $ (0.33) $ 0.35 $ (0.59)
Pro forma $ 0.20 $ (0.34) $ 0.30 $ (0.63)
Income (loss) per diluted share
As reported $ 0.20 $ (0.33) $ 0.34 $ (0.59)
Pro forma $ 0.19 $ (0.34) $ 0.29 $ (0.63)
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, energy generation and other
industries. This business segment includes the supply of equipment used in a
number of process steps to produce electronic devices such as: solder reflow
systems used for surface mount applications in printed circuit board assembly,
integrated circuit packaging and sealing; and processing multi-chip modules. In
addition, the thermal process equipment is used in several process steps for
alternative energy generation such as: sintering nuclear fuel for commercial
power generation; metallization and diffusion of photovoltaic solar cells and
the doping and firing of solid oxide fuel cells (SOFC). 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 Nine Months Ended
----------------------- -----------------------
October 2, October 3, October 2, October 3,
2005 2004 2005 2004
---------- ---------- ---------- ----------
United States $ 2,647 $ 4,720 $ 7,975 $ 9,894
Europe 5,214 2,904 12,263 8,463
Asia Pacific 9,849 7,189 24,130 21,455
Other Americas 833 606 2,773 1,202
------- ------- ------- -------
$18,543 $15,419 $47,141 $41,014
======= ======= ======= =======
Long-lived assets by geographic location are as follows (in thousands):
October 2, December 31,
2005 2004
---------- ------------
North America $2,049 $3,364
Asia Pacific 289 152
------ ------
$2,338 $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 nine months ended October 2, 2005, there was $1,639,256 and
$2,338,046, respectively of revenue recognized using the percentage of
completion method. For the nine months ended October 3, 2004, there was
$1,570,165 of revenue recognized using the percentage of completion method.
At October 2, 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 nine months ended October 2, 2005 (in thousands):
2005
-----
Beginning balance, December 31, 2004 $ 635
Plus: accruals related to new sales 706
Less: warranty claims incurred (443)
Less: reversal of excess requirements (159)
-----
Balance, end of period $ 739
=====
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". Statement 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 our financial statements in the first quarter of fiscal
2006. The Company is currently evaluating the financial statement impact of the
adoption of Statement 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 Statement 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 printed circuit board (PCB)
assembly, semiconductor packaging 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
Surface Mount Technology (SMT) market, electronic components are attached to the
PCB through the reflow process using our convection soldering systems. 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 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 and nuclear applications. 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
-----------------------------------------------
October 2, 2005 October 3, 2004
---------------------- ----------------------
% of % of Percent
$ thousands revenues $ thousands revenues change
----------- -------- ----------- -------- -------
Total revenues $18,543 100.0% $15,419 100.0% 20.3%
Cost of goods sold 11,880 64.1% 11,892 77.1% (0.1)%
------- -------
Gross profit 6,663 35.9% 3,527 22.9% 88.9%
Selling, general and administrative expenses 4,031 21.7% 3,228 20.9% 24.9%
Research, development and engineering 893 4.8% 890 5.8% 0.3%
Restructuring charges -- 0.0% 1,648 10.7% (100.0)%
------- -------
Operating income (loss) 1,739 9.4% (2,239) (14.5)% 177.7%
Income (loss) before provision for income taxes $ 1,591 8.6% $(2,379) (15.4)% 166.9%
======= =======
Nine Months Ended
-----------------------------------------------
October 2, 2005 October 3, 2004
---------------------- ----------------------
% of % of Percent
$ thousands revenues $ thousands revenues change
----------- -------- ----------- -------- -------
Total revenues $47,141 100.0% $41,014 100.0% 14.9%
Cost of goods sold 30,375 64.4% 31,570 77.0% (3.8)%
------- -------
Gross profit 16,766 35.6% 9,444 23.0% 77.5%
Selling, general and administrative expenses 11,288 23.9% 8,965 21.9% 25.9%
Research, development and engineering 2,532 5.4% 2,788 6.8% (9.2)%
Restructuring charges -- 0.0% 1,648 4.0% (100.0)%
------- -------
Operating income (loss) 2,946 6.3% (3,957) (9.7)% 174.5%
Income (loss) before provision for income taxes $ 2,528 5.4% $(4,251) (10.4)% 159.5%
======= =======
11
Net Sales. The growth in total revenues in the third quarter was primarily due
to an increase in sales of our energy generation products. Year to date growth
in revenue has primarily been from the energy generation and surface mount
technology (SMT) products.
The following tables sets forth, for the periods indicated, select geographical
data (in thousands) expressed in dollars and as a percentage of total revenue.
Three Months Ended Nine Months Ended
--------------------------------------- ---------------------------------------
October 2, 2005 October 3, 2004 October 2, 2005 October 3, 2004
------------------ ------------------ ------------------ ------------------
% of % of % of % of
$ revenues $ revenues $ revenues $ revenues
------- -------- ------- -------- ------- -------- ------- --------
United States $ 2,647 14.3% $ 4,720 30.6% $ 7,975 16.9% $ 9,894 24.1%
Europe 5,214 28.1% 2,904 18.8% 12,263 26.0% 8,463 20.6%
Asia Pacific 9,849 53.1% 7,189 46.7% 24,130 51.2% 21,455 52.4%
Other Americas 833 4.5% 606 3.9% 2,773 5.9% 1,202 2.9%
------- ------- ------- -------
$18,543 $15,419 $47,141 $41,014
======= ======= ======= =======
The third quarter of 2005 showed a continued trend of a greater percentage of
sales in Asia Pacific. 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 established
furnace assembly operations in China to remain competitive in response to this
trend.
Gross Profit. The increase in the gross profit percentage for the third quarter
and the first nine months of 2005 was principally the result of lower costs in
our U.S. operations and due to improvements and expansion in our China assembly
and China material sourcing operations, combined with a favorable product mix.
Selling, General and Administrative. The increase in selling, general and
administrative expense in absolute dollars 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. In the third quarter of 2005, the Company
has increased its spending on RD&E versus the first half of 2005, although the
total spending is below 2004 levels.
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 nine months ended
October 2, 2005. The Company has recorded a full valuation allowance to offset
the deferred tax asset arising as a result of these loss carryforward because of
uncertainty surrounding realization. Our statutory federal income tax rate is
34.0%.
LIQUIDITY AND CAPITAL RESOURCES
As of October 2, 2005, the Company had $0.6 million in cash and cash
equivalents.
During the nine months ended October 2, 2005, the Company used net cash
resources of approximately $1.5 million for operating activities. This use of
cash was primarily the result of an increase in accounts receivable of $6.6
million, and an increase in inventory of $0.6 million; offset by an increase in
accounts payable of $0.7 million, adding back depreciation and amortization of
$0.7 million, an increase in current liabilities of $1.3 million, a decrease in
other assets of $0.5 million and a net profit of $2.5 million.
The Company's accounts receivable increased by $6.6 million or 72% in the nine
months ended October 2, 2005. The Company has increased its accounts receivable
reserves by a similar percentage.
12
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 $13 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 or LIBOR plus 2.25%. This loan agreement extends
to May 31, 2007 and is subject to maintaining certain financial covenants. At
October 2, 2005 borrowings outstanding under this agreement were $3.6 million
with the borrowing base formula permitting aggregate borrowings of approximately
$11.4 million.
We have a mortgage note that is secured by our real property in Billerica, MA.
The mortgage note had an outstanding balance at October 2, 2005 of approximately
$5.3 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 October 2,
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 through 2006.
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. 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 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 may fail 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.
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We have shifted a 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 has continued 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 operations, our business and profitability
will be adversely affected. During 2005, the Company began 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.
If we are unable to increase sales and reduce costs, our profitability may be
affected negatively.
During the first nine months of 2005, we generated net income of $2.5 million.
This compares to a loss of $4.3 million during the same period in 2004, which
included a restructuring charge of $1.6 million. Our increased net income was
mainly due to a combination of a 14.9% increase in net sales and an increase in
gross profit percentage from 23.0% to 35.6%, resulting in a 77.5% increase in
gross profit dollars. We attribute this increase in gross profit primarily to
reduced costs resulting from better procurement management in the U.S. and our
global sourcing of materials, as well as manufacturing efficiencies achieved
with the transition of a portion of production to China. We may not experience
comparable cost reductions in future periods.
In addition, our reported net income will be negatively impacted when we begin
to expense stock options pursuant to Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), "Share-Based Payment," which will increase our
reported operating expenses. We expect to recognize the effects of SFAS No.
123(R) in our financial statements beginning in the first quarter of 2006.
If we do not have access to additional credit, we may not be able to take
advantage of increased growth in the markets that we serve.
Historically, we have relied on access to credit to finance growth of our
business. Our bank imposes restrictions on our ability to borrow under our
credit agreement. Although we believe this line of credit provides us with
sufficient credit to finance our 2006 business plan, it may not be sufficient to
allow us to take full advantage of higher than anticipated 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.
If we do not generate positive cash flow from operations, we will need to incur
more debt or issue additional stock.
Over the past several years we have consistently used more cash in our
operations that we have generated from them and, as a result, have relied on
external financing to fund our operations. We will need to generate positive
cash flow from our operating activities for our business to be successful. We
had $0.6 million in cash as of October 2, 2005. If we borrow additional funds,
our level of indebtedness will rise which may harm our financial condition and
results of operations by increasing our vulnerability to adverse changes in
general economic and industry conditions and limiting our ability to obtain
additional financing for capital expenditures, acquisitions and general
corporate and other purposes. If, to fund our operations, we issue additional
shares of stock, our shareholders may be diluted. Furthermore, we may not be
able to obtain additional equity or debt financing on acceptable terms or at
all.
Our future success will depend on our ability to effectively develop and market
our products against those of our competitors.
The industry in which we compete is extremely competitive. Some of our
competitors have substantially greater financial, engineering, manufacturing and
customer support capabilities and offer more extensive product offerings. If
customers prefer products offered by our competitors, we will have difficulty
maintaining or increasing our revenue. Our principal competitors for advanced
semiconductor packaging are Sikama, Semigear and Heller Industries. Our
principal competitors for solder reflow systems are Vitronics-Soltec, Inc. (a
Dover Technologies Company), Heller Industries, Futakawa, ERSA, Rehm, and
Electrovert-Speedline Technologies. Our systems for the Energy generation
markets and other applications compete primarily against SierraTherm Production
Furnaces, Inc., RTC, Centrotherm and Harper International Corp. We expect our
competitors to continue to improve the design and performance of their current
products and to introduce new products with improved performance capabilities.
Our failure to introduce new products in a timely manner, or the introduction by
our competitors of products with perceived or actual advantages, could result in
reduced sales of, or lower margins on, our products. In future years, we expect
to face increased competition based on price, particularly from companies in
Asia. If we are unable to reduce the costs of our products or introduce new
lower cost products, we will lose sales to these competitors.
Our international sales and operations are subject to the economic, political,
legal and business environments of the countries in which we do business, and
our failure to operate successfully or adapt to
14
changes in these environments could cause our international sales and operations
to be limited or disrupted.
Our international sales accounted for approximately 83.1% of our consolidated
revenue for the nine months ended October 2, 2005. We expect to continue to
generate a significant percentage of our revenue outside the United States for
the foreseeable future. In addition, we have direct investments in a number of
subsidiaries outside of the United States, primarily in Asia and Europe. Our
international operations could be limited or disrupted, and the value of our
direct investments may be diminished, by any of the following:
- fluctuations in currency exchange rates;
- the imposition of governmental controls;
- import and export license requirements;
- political instability;
- difficulties enforcing contractual and intellectual property rights;
- terrorist activities and armed conflict;
- restrictions on direct investments by foreign entities and trade
restrictions;
- changes in tax laws and tariffs;
- costs and difficulties in staffing and managing international
operations; and
- longer payment cycles.
In addition, the Foreign Corrupt Practices Act prohibits U.S. companies and
their representatives from offering, promising, authorizing or making payments
to foreign officials for the purpose of obtaining or retaining business abroad.
Failure to comply with domestic or foreign laws could result in various adverse
consequences, including the imposition of civil or criminal sanctions.
We conduct a portion of our business in currencies other than the U.S. dollar.
We recognize foreign currency gains or losses arising from our operations in the
period in which we incur those gains or losses. As a result, currency
fluctuations among the U.S. dollar and the currencies in which we do business
have caused foreign currency transaction gains and losses in the past and will
likely do so in the future. Because of the number of currencies involved, the
variability of currency exposures and the potential volatility of currency
exchange rates, we may suffer foreign currency transaction losses in the future
due to the effect of exchange rate fluctuations.
Because a majority of our revenue is generated from sales in Asia, our
operations are particularly vulnerable to instability in that region and
competition from Asian organizations.
During the nine months ended October 2, 2005, approximately 51.2% of our revenue
was generated from sales in the Asia Pacific region of the world. Political or
economic instability in any of the major Asian economies may adversely impact
the demand for capital equipment, including equipment of the type we manufacture
and market. In addition, we face competition from a number of Asian suppliers
that have certain advantages over U.S. suppliers, including us. These advantages
include, among other things, proximity to customers, favorable tariffs and
affiliation with significantly larger organizations. In addition, changes in the
amount or price of electronics produced in Asia could negatively impact spending
by our customers.
The occurrence of natural disasters in Asia may adversely impact our operations
and sales.
We have an expanding engineering and manufacturing facility in China, and the
majority of our sales are made to destinations in Asia. Asia is known for being
vulnerable to natural disasters and other risks, such as earthquakes, floods and
avian (bird) flu, which at times have disrupted the local economies. A
significant earthquake or health crisis could materially affect operating
results. We are not insured for most losses and business interruptions of this
kind, and we do not have redundant, multiple site capacity in the event of a
natural disaster. In the event of such disaster, our business would suffer.
Failure of critical suppliers to deliver sufficient quantities of parts in a
timely and cost-effective manner would adversely impact our operations.
We use numerous vendors to supply components for the manufacture of our
products. We do not have multiple qualified suppliers for all of the parts we
use. Some key parts may only be available from a single supplier. Accordingly,
we may experience problems in obtaining adequate and reliable quantities of
various components. In addition, suppliers may cease manufacturing certain
components that are difficult to
15
replace without significant reengineering of our products. Our results of
operations will be materially adversely impacted if we are unable to obtain
adequate supplies of components in a timely and cost effective manner.
If we fail to maintain positive relationships with particular individuals, we
may be unable to successfully grow our business.
Our future operating results depend substantially upon the continued service of
our key personnel, some of whom are not bound by employment or non-competition
agreements. Our future operating results also depend in significant part upon
our ability to attract and retain qualified management, manufacturing,
technical, engineering, marketing, sales and support personnel. Competition for
qualified personnel, particularly those with technical skills, is intense, and
we may fail to attract and retain qualified personnel. Our business, financial
condition and results of operations could be materially adversely affected by
the loss of any of our key employees, by the failure of any key employee to
perform in his or her current position, or by our inability to attract and
retain skilled employees.
Because the emerging fuel cell technology for the energy generating market has
not been commercially proven yet, and we have limited experience in servicing
this customer base, we may not be able to successfully grow this business.
The developing fuel cell sector of the energy markets is in a stage of product
development without any guarantees of commercial success. There is therefore
considerable risk that this technology may not succeed and our business may not
develop. We have only recently expanded our product offerings to the fuel cell
sector of the energy market. Historically, we have focused on other sectors of
the energy markets. Given our limited experience in this segment of the energy
generation market, we may encounter problems growing this part of our business.
The market for nuclear fuel pellets used in power generation is dependent upon
the further growth in nuclear power production. Consequently, without growth in
the production of nuclear power, our opportunities to grow in this area will be
limited. In addition, we rely upon export licenses to supply this type of
equipment to several countries in the world. Failure to maintain such licenses
and obtain new licenses will limit our ability to expand our revenue from this
market.
The solar energy sector is dependent upon continuation of governmental
subsidies. A decline in these subsidies would reduce our ability to grow this
aspect of our business. The solar energy sector also depends on the availability
of raw materials such as silicon. Limits in the supply of these raw materials
will constrain growth in this sector and, therefore, limit our prospects for
increasing sales in this area.
Because our primary computer business system is outdated, a significant
malfunction could disrupt the activities of the Company.
Our manufacturing business system is at the end of its life, potentially posing
a risk to the operation of our 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 include: a disaster
recovery plan; hardware and software replacement; and a new enterprise business
system being developed, but may not be developed in time. Even if this system
does not malfunction, it will not be sufficient to continue to support our
operations.
Some of the requirements of Sarbanes-Oxley affect us as a small company
disproportionately, and we may not be able to comply despite substantial 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
reporting of the effectiveness 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 have already begun documenting and testing our
internal controls in a way that we have never before been required to do. 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. In connection with our
efforts to date, we have reviewed various significant control deficiencies that
have been identified by our registered public accounting firm. The issues
involved, among other things, include a computer accounting system that does not
meet our current and future needs, the lack of a well defined and documented
disaster recovery system and the need to improve and update the documentation of
our policies, procedures, and related internal controls surrounding our
accounting and financial reporting functions. Although we are not yet required
to report on our assessment of the effectiveness of our internal control over
financial reporting, and provide the required auditor attestation, until at
least the end of the next fiscal year, there is more than a remote likelihood
that our registered public accounting firm could inform us of one or more
material weaknesses before we complete our compliance and remediation efforts.
We are working to address the issues raised by these control deficiencies, but
we may not be successful in remediating them within the required time frame.
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.
16
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. However, the Company has begun the process of preparing for the
eventual reporting of the effectiveness of its internal controls over financial
reporting required by the Sarbanes-Oxley Act. In connection therewith,
management has reviewed various significant control deficiencies that have been
identified by its registered public accounting firm. The issues involved, among
other things, include a computer accounting system that does not meet the
Company's current and future needs, the lack of a well defined and documented
disaster recovery system and the need to improve and update the Company's
documentation of the policies, procedures and related internal controls
surrounding the accounting and financial reporting functions of the Company.
Although the Company is not required to report on its assessment of the
effectiveness of its internal control over financial reporting, and provide the
required auditor attestation, until at least the end of the next fiscal year,
there is more than a remote likelihood that its registered public accounting
firm could inform the Company of one or more material weaknesses before the
Company has completed its compliance and remediation efforts. The Company is
working to address the issues raised by these control deficiencies, but it may
not be successful in remediating them within the required timeframe.
17
PART II. OTHER INFORMATION
Item 6. Exhibits
(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
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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: November 16, 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: November 16, 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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