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| ATRM > SEC Filings for ATRM > Form 10-Q on 4-Aug-2009 | All Recent SEC Filings |
4-Aug-2009
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 and on the latest IC package designs. 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.
Business conditions in the TAP segment of the semiconductor equipment industry were generally weak in the first half of 2008 and deteriorated significantly in the second half of the year as the current global economic crisis evolved. As the end of the year approached, many IC manufacturers, including Aetrium's primary customers, made significant adjustments to their operations and reduced their capital expenditure plans in anticipation of significantly declining demand for ICs. In fourth quarter 2008, as it became clear that general economic and semiconductor industry business conditions may be weak for an extended period of time, we immediately took steps to reduce our expenses accordingly. We eliminated contract workers, terminated twelve employees, or 15% of our regular workforce, and reduced other operating expenses as well. In January 2009 we implemented wage reductions of 10% for all employees and up to 25% for our executive officers.
As expected, very weak general economic conditions and the semiconductor equipment industry slowdown continued into fiscal year 2009 and Aetrium's operating results have been affected accordingly. In each of the last three fiscal quarters, we experienced declining net sales and increasing losses. Although it appears that industry conditions have shown some improvement recently, we expect business conditions to be challenging through the remainder of fiscal year 2009. Any prolonged continuation or worsening of the industry slowdown will likely adversely impact our longer term operating results as well.
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, 2008.
Results of Operations
Net Sales. Net sales for the six months ended June 30, 2009 were $2.9 million compared with $8.9 million for the same period in 2008, a 67% decrease. Net sales for the three months ended June 30, 2009 were $1.2 million compared with $3.2 million for the same period in 2008, a 63% decrease. Net sales in 2009 decreased across all our product lines as a result of the weak economic conditions and semiconductor equipment industry slowdown that began in 2008 and continued into 2009. Sales of test handlers were $1.2 million in the first six months of 2009 compared with $5.3 million for the same period in 2008, a decrease of 78%. Sales of reliability test equipment were $0.7 million in the first six months of 2009 compared with $1.0 million in the same period in 2008, a decrease of 35%. Sales of change kits and spare parts were $1.1 million in the first six months of 2009 compared with $2.5 million for the same period in 2008, a decrease of 56%.
Gross Profit. Aetrium's gross profit as a percentage of net sales can fluctuate based on a number of factors, including but not limited to the mix of products sold, distribution channel mix, price discounting, product maturity, inventory writedowns, and the utilization of manufacturing capacity associated with varying production levels. Gross profit was 28.5% of net sales in the six months ended June 30, 2009 compared with 47.8% for the same period in 2008. Gross profit was 28.4% of net sales in the three months ended June 30, 2009 compared with 45.3% for the same period in 2008. Our gross margin decreased in 2009 primarily due to inefficiencies associated with significantly lower production and net sales levels.
Selling, General and Administrative. Selling, general and administrative expenses for the six months ended June 30, 2009 were $2.3 million compared with $3.2 million for the comparable period in 2008, a 27% decrease. Compensation costs decreased $0.4 million in 2009 primarily due to a workforce reduction implemented in December 2008, wage reductions for all employees implemented in January 2009 and the elimination of all profit-related incentives. Travel expenses and warranty/no-charge equipment improvement costs each decreased $0.2 million in 2009 due primarily to lower sales and reduced sales and service activities. Selling, general and administrative expenses for the three months ended June 30, 2009 were $1.1 million compared with $1.5 million for the comparable period in 2008, a 24% decrease. The decrease in 2009 was due primarily to lower wages, travel and warranty/no-charge equipment improvement costs.
Research and Development. Research and development expenses for the six months ended June 30, 2009 were $1.0 million compared with $1.5 million for the comparable period in 2008, a 34% decrease. Compensation costs decreased $0.1 million in 2009 primarily due to a workforce reduction implemented in December 2008, wage reductions for all employees implemented in January 2009 and the elimination of all profit-related incentives. Contract services decreased $0.3 million as such costs were reduced in response to lower sales levels. Materials expenses decreased $0.1 million due to cost containment efforts. Research and development expenses for the three months ended June 30, 2009 were $0.5 million compared with $0.7 million for the comparable period in 2008, a 29% decrease. The decrease in 2009 was due primarily to lower wages, contract services and materials expenses. Research and development expenses represented 34.2% of total net sales for the six month period ended June 30, 2009 compared with 17.2% of total net sales for the comparable period in 2008. 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 fiscal year 2008 and the first half of 2009.
Interest Income, net. Interest income, net, amounted to $84,000 and $203,000 for the six-month periods ended June 30, 2009 and 2008, respectively, and amounted to $46,000 and $83,000 for the three-month periods ended June 30, 2009 and 2008, respectively. Interest income was lower in 2009 due to lower average invested cash balances and generally lower interest rates.
Income Taxes. We recorded an income tax benefit of $841,000 and $105,000 for the six months ended June 30, 2009 and 2008, respectively, and a benefit of $444,000 and $260,000 for the three months ended June 30, 2009 and 2008, respectively. The effective tax rates of approximately 35% and 37% for 2009 and 2008, respectively, were based on the estimated annual effective tax rate for the entire year and reflect primarily the federal statutory rate of 34% plus estimated net state income taxes. The tax rate used in future periods may change based on our estimates of future pretax income or loss and other factors.
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 these assets. At December 31, 2007, we reduced the valuation allowance from approximately $25.6 million to $21.7 million based on our assessment of the realizability of our deferred tax assets at that date. Our recent operating results have been adversely impacted by the global economic crisis and semiconductor industry downturn that began in the second half of fiscal year 2008 and have continued into fiscal year 2009. We incurred an operating loss in the first half of 2009 and it is likely we will continue to be unprofitable through at least the third quarter of 2009. Our assessment of the realizability of our deferred tax assets at June 30, 2009 considered our future profit potential and other relevant factors, including our positive cumulative profit over the prior three years. Based on this assessment, we determined that there was not sufficient negative evidence to warrant an increase in the amount of the valuation allowance at June 30, 2009. We will continue to assess the assumptions used to determine the amount of our valuation allowance in future periods. If we continue to incur losses and our operations and future outlook do not show sufficient signs of improvement, we may have to increase the valuation allowance, which could have a material impact on our results of operations in the period in which it is adjusted.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $1.3 million in the six months ended June 30, 2009. We used $1.3 million in cash to fund operating activities during this period. The major components of cash flows from operating activities were our net loss of $1.6 million, a $0.8 million increase in deferred income taxes, a $0.2 million decrease in accounts payable and a $0.2 million decrease in other accrued liabilities, partially offset by $0.4 million in non-cash depreciation and share-based compensation expense, a $0.9 million decrease in accounts receivable, and a $0.5 million decrease in inventories. Inventories and accounts payable decreased primarily due to significantly reduced inventory purchases in 2009 compared with the fourth quarter of 2008 in response to lower sales levels. The decrease in other accrued liabilities includes the payment of benefits associated with a workforce reduction we implemented in December 2008 and a reduction in accrued warranty and accrued commissions due to lower sales volume. Accounts receivable decreased primarily due to a significant decrease in net sales in the second quarter of 2009 compared with the fourth quarter of 2008. Net cash flows from investing activities and financing activities in the six months ended June 30, 2009 were not significant.
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.
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 $10.4 million at June 30, 2009 will be sufficient to meet capital expenditure and working capital needs for at least the next twelve months. We have a revolving credit line agreement with a bank that provides for borrowings up to $2.0 million. However, as of June 30, 2009, we were not in compliance with a net income covenant under the agreement. We are currently in discussions with the bank and anticipate that a new agreement will be finalized in August 2009.
As discussed above, worldwide economic conditions are very weak and it is not known how long the current downturn in the semiconductor industry may last. Although it appears that industry conditions have shown some improvement recently, a worsening or prolonged continuation of the current slowdown in our industry would likely adversely 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 June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" (SFAS 168). SFAS 168 establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles in the United States. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. We do not expect the adoption of SFAS 168 will have a material impact on our consolidated financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165). SFAS 165 establishes general standards of accounting for and disclosure of events or transactions occurring after the balance sheet date. In addition, it requires disclosure of the date through which subsequent events have been evaluated. We adopted SFAS 165 as of June 30, 2009, which was the required effective date.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" (SFAS 161). This statement is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. SFAS 161 became effective for Aetrium at the beginning of fiscal year 2009 and had no impact on our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements" (SFAS 160). This statement amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 became effective for Aetrium at the beginning of fiscal year 2009 and had no impact on our consolidated financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(Revised 2007), "Business Combinations" (SFAS 141R). SFAS 141R establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the fair value of identifiable assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date. SFAS 141R determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141R became effective for Aetrium at the beginning of fiscal year 2009 and had no impact on our consolidated financial position, results of operations or cash flows.
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