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| ATRM > SEC Filings for ATRM > Form 10-Q on 8-Aug-2008 | All Recent SEC Filings |
8-Aug-2008
Quarterly Report
Overview
Aetrium designs, manufactures and markets a variety of electromechanical equipment used in the handling and testing of integrated circuits, or ICs, which constitute the highest revenue component of the semiconductor industry. Our primary focus is on high volume ICs, the latest IC package designs, and the latest IC manufacturing processes. Our test handler products are purchased primarily by semiconductor manufacturers and their assembly and test subcontractors and are used in the test, assembly and packaging, or TAP, segment of semiconductor manufacturing. Our reliability test products are used to validate IC designs and monitor semiconductor wafer fabrication processes. Our products automate critical functions to improve manufacturing yield, raise quality levels, increase product reliability and reduce manufacturing costs.
As an equipment supplier to the semiconductor industry, Aetrium's results are driven primarily by worldwide demand for ICs, which in turn depends on end-user demand for electronic products. The demand for our products can fluctuate significantly from period to period due to the direct or indirect impact of numerous factors, including but not limited to changes in the supply and demand for ICs, changes in IC manufacturing capacity, advancements in industry technologies, changes in U.S. and worldwide economic conditions and competitive factors.
Semiconductor industry conditions were generally favorable in 2006 but weakened significantly in the second half of the year. Industry conditions in general continued to be relatively weak in 2007 although conditions improved for some segments where the demand for certain IC device types increased. Aetrium experienced increasing order activity in the first three quarters of 2007 for some of our test handler models, particularly those that are used in analog device-type applications. This led to sequential increases in quarterly net sales in 2007 to $5.1 million, $5.9 million, $7.7 million and $9.3 million, respectively. Although our revenues increased sequentially to $9.3 million in the fourth quarter of 2007, new orders decreased significantly from third quarter levels, consistent with generally weakening demand for equipment in the TAP segment of the semiconductor equipment industry.
Amid general economic concerns, semiconductor and semiconductor equipment industry conditions continued to be weak through the first half of 2008. In the first quarter of 2008, Aetrium's orders decreased sequentially and our net sales decreased to $5.6 million compared with $9.3 million in the fourth quarter of 2007. In the second quarter of 2008, our orders increased over first quarter levels. However, a significant portion of the orders were received late in the quarter and our net sales decreased further to $3.2 million. Although the recent improvement in order activity has continued into the third quarter and we believe our net sales will increase in the second half of 2008, we expect semiconductor manufacturers will continue to be cautious regarding capital expenditures and there can be no assurance that changes in semiconductor industry conditions, general domestic and global economic conditions and/or other factors will not adversely impact our future operating results.
Critical Accounting Policies
Aetrium's critical accounting policies are discussed in our most recent Annual Report on Form 10-K for the year ended December 31, 2007.
Results of Operations
Net Sales. Total net sales for the six months ended June 30, 2008 were $8.9 million compared with $11.0 million for the same period in 2007, a 19% decrease. Total net sales for the three months ended June 30, 2008 were $3.2 million compared with $5.9 million for the same period in 2007, a 45% decrease. Net sales of test handlers were $5.3 million and net sales of reliability test equipment were $1.0 million in the first six months of 2008, decreases of 22% and 53%, respectively, from the same period in 2007. The decrease in test handler and reliability test equipment sales in 2008 is attributed to a general weakness in the semiconductor equipment industry that developed late in 2007 and continued into the first half of 2008. Sales of change kits and spare parts were $2.5 million in the first six months of 2008 compared with $1.9 million for the same period in 2007, an increase of 30%. Sales of change kits and spare parts can increase prior to an anticipated industry upturn as some customers strive to improve the utilization of existing equipment before buying new equipment, which we believe occurred to some extent in the first half of 2008.
Gross Profit. Gross profit was 47.8% of net sales for the six months ended June 30, 2008 compared with 51.4% of net sales for the comparable period in 2007. Our gross margin decreased in 2008 primarily due to inefficiencies associated with lower production and net sales levels and to a less favorable distribution mix. Discounted sales to distributors represented 59% of total net sales in the first half of 2008 compared with 38% for the comparable period in 2007. Gross profit was 45.3% of net sales for the three months ended June 30, 2008 compared with 50.4 of net sales for the comparable period in 2007. The decrease in gross margin was primarily attributable to inefficiencies associated with lower production and net sales levels partially offset by a more favorable product mix.
Selling, General and Administrative. Selling, general and administrative expenses for the six months ended June 30, 2008 were $3.2 million compared with $2.8 million for the comparable period in 2007, a 15% increase. Wages and related costs increased $0.2 million primarily due to wage increases and additional personnel hired for field service and sales support activities. Travel and equipment demonstration expenses increased $0.1 million to support increased field service activities and sales efforts to expand our customer base. Warranty and no-charge equipment improvement costs increased $0.1 million. Selling, general and administrative expenses for the three months ended June 30, 2008 were $1.5 million, approximately the same as the comparable period in 2007. Slightly higher wages and other costs related to service and sales support activities were offset by lower commission expense on reduced sales and the elimination of profit-related incentives.
Research and Development. Research and development expenses were $1.5 million for the six months ended June 30, 2008, compared with $1.9 million for the same period in 2007, a decrease of 19%. Research and development expenses were $0.7 million for the three months ended June 30, 2008, compared with $0.9 million for the same period in 2007, a decrease of 18%. The decreases in 2008 were primarily attributable to reductions in contract services and travel costs. Research and development expenses represented 17.2% of total net sales for the six month period ended June 30, 2008 compared with 12.6% of total net sales for fiscal year 2007. New product development is an essential part of our strategy to gain market share. Over time, we expect to invest approximately 12% to 15% of our revenues in research and development although we may exceed this range in periods of reduced revenues as was the case in the first half of 2008.
Interest Income, net. Interest income, net, amounted to $203,000 for each of the six-month periods ended June 30, 2008 and 2007 and amounted to $83,000 and $102,000 for the three-month periods ended June 30, 2008 and 2007, respectively. These amounts consisted primarily of interest income from the investment of excess funds and, since early 2007, reflect generally increasing average invested cash balances offset by declining interest rates.
Income Taxes. We recorded an income tax benefit of $260,000 and $105,000 for the three and six months ended June 30, 2008, respectively, which reflects a 37% effective tax rate. The tax rate was based on our estimated annual effective tax rate for the full year and included the federal statutory rate and estimated net state income taxes, but did not reflect any tax benefit from the federal research credit, which expired on December 31, 2007. The estimated effective tax rate used in future periods may change based on updates to our estimates of pretax income or loss for the year and for changes in legislation.
We record the benefit we will derive in future accounting periods from tax losses and credits and deductible temporary differences as "deferred tax assets," which are included in the caption "Deferred income taxes" on our consolidated balance sheet. In accordance with Statement of Financial Accounting Standards No. 109 (SFAS 109), we record a valuation allowance to reduce the carrying value of our deferred tax assets if, based on all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Prior to fiscal year 2007, we had provided a valuation allowance to fully reserve our deferred tax assets. At December 31, 2007, we had approximately $25.1 million in deferred tax assets and estimated the realizable amount to be approximately $2.3 million. Accordingly, we reduced the valuation allowance to approximately $22.8 million and reflected net deferred tax assets of $2.3 million on our consolidated balance sheet at that date. At June 30, 2008, deferred tax assets reflected on our consolidated balance sheet amounted to approximately $2.4 million (net of the $22.8 million valuation allowance). We determined that it is more likely than not that this amount will be realized in the future. We will continue to assess the assumptions used to determine the amount of our valuation allowance and may adjust the valuation allowance in future periods based on changes in assumptions of estimated future income and other factors. If the valuation allowance is reduced, we would record an income tax benefit and, for any portion related to deductions for stock option exercises, an increase in shareholders' equity. If the valuation allowance is increased, we would record additional income tax expense.
We recorded income tax expense of $9,000 and $14,000 for the three and six months ended June 30, 2007, respectively, primarily for estimated federal alternative minimum tax and certain state minimum fees.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $0.1 million in the six months ended June 30, 2008. We used $0.1 million in cash to fund operating activities during this period. The major components of cash flows from operating activities were our net loss of $0.2 million, a $1.2 million increase in inventories, a $0.3 million decrease in accrued compensation, a $0.2 million decrease in deferred revenue, and a $0.1 million increase in deferred income taxes, partially offset by $0.3 million in non-cash depreciation and share-based compensation expense, a $1.5 million decrease in accounts receivable, and a $0.3 million increase in accounts payable. Inventories increased due to selective increases of certain inventories to meet anticipated customer delivery requirements, an increase in the number of demonstration equipment units used for new customer evaluations, and lower-than-anticipated net sales. Accrued compensation decreased primarily due to lower profit-related incentives. Deferred revenue decreased as revenue recognition criteria were satisfied for items that had been deferred at December 31, 2007. Accounts receivable decreased primarily due to the significant decrease in net sales in the second quarter of 2008 compared with the fourth quarter of 2007. Net cash provided by investing activities in the six months ended June 30, 2008 was not significant. Net cash used in financing activities in the six months ended June 30, 2008 amounted to $0.1 million, primarily related to the repurchase of shares of common stock in connection with stock option exercises.
Cash and cash equivalents increased by approximately $0.3 million in the six months ended June 30, 2007. We used $0.1 million to fund operating activities during this period. The major components of cash flows used by operating activities were a $0.9 million increase in accounts receivable, a $0.5 million increase in inventories, a $0.1 million
increase in other assets, and a $0.7 million decrease in accrued liabilities, partially offset by net income of $1.2 million, $0.2 million in non-cash depreciation and share-based compensation expense, and a $0.8 million increase in accounts payable. Accounts receivable increased primarily due to the higher net sales level in the second quarter of 2007 compared with the fourth quarter of 2006. Inventories and accounts payable increased as we increased purchases to support anticipated sales levels, demo equipment needs, and customer delivery requirements. The decrease in other accrued liabilities included the payment of $0.5 million in severance and related costs associated with the sale of our Dallas operations in late 2006, a $0.2 million decrease in accrued warranty and no-charge equipment improvements expense, and a $0.2 million decrease in deferred revenue. Net cash generated by investing activities in the six months ended June 30, 2007 was not significant. Net cash provided by financing activities in the six months ended June 30, 2007 amounted to $0.3 million, consisting primarily of proceeds from employee stock option exercises.
Historically we have supported our capital expenditure and working capital needs with cash generated from operations and our existing cash and cash equivalents. We believe our cash and cash equivalents of $12.0 million at June 30, 2008 will be sufficient to meet capital expenditure and working capital needs for at least the next twelve months. In addition, we have a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million. The credit agreement expires in October 2008. We believe we will be able to extend the agreement at that time or obtain similar financing, if needed. However, there can be no assurance that such financing will be available with terms favorable to us or at all. In addition, a prolonged continuation of the generally weak business conditions in our industry or future industry downturns could negatively impact the demand for and prices of our products and adversely affect future cash flows. Also, we may acquire other companies, product lines or technologies that are complementary to our business, and our working capital needs may change as a result of such acquisitions.
Recent Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" (SFAS 159). This pronouncement permits entities to choose to measure many financial instruments and certain other items at fair value that were not previously required to be measured at fair value. SFAS 159 became effective for Aetrium at the beginning of fiscal year 2008, and its implementation had no impact on our financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value" (SFAS 157). SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 became effective for Aetrium at the beginning of fiscal year 2008, and its implementation had no impact on our financial position or results of operations.
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