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| ATRM > SEC Filings for ATRM > Form 10-Q on 27-Oct-2009 | All Recent SEC Filings |
27-Oct-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, weak economic conditions and the semiconductor equipment industry slowdown continued into fiscal year 2009 and Aetrium's operating results have been affected accordingly. We experienced declining net sales and increasing losses in the first two quarters of the year. General economic and industry conditions appear to have improved somewhat in the third quarter of 2009 with signs of improving demand for our customers' products and improving equipment utilization, although it is not clear how much of this is due to a seasonal, pre-holiday pickup as opposed to a longer term positive trend. Our net sales increased to $3.0 million in the quarter ended September 30, 2009 compared with $1.2 million in the previous quarter. However, we expect business conditions to continue to be challenging through at least the remainder of the year. 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 nine months ended September 30, 2009 were $6.0 million compared with $14.4 million for the same period in 2008, a 58% decrease. Net sales for the three months ended September 30, 2009 were $3.0 million compared with $5.5 million for the same period in 2008, a 45% 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 $2.9 million in the first nine months of 2009 compared with $9.2 million for the same period in 2008, a decrease of 69%. Sales of reliability test equipment products were $1.2 million in the first nine months of 2009 compared with $1.5 million in the same period in 2008, a decrease of 19%. Sales of change kits and spare parts were $1.9 million in the first nine months of 2009 compared with $3.6 million for the same period in 2008, a decrease of 49%.
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 37.2% of net sales in the nine months ended September 30, 2009 compared with 49.3% for the same period in 2008. Gross profit was 45.6% of net sales in the three months ended September 30, 2009 compared with 51.6% 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 nine months ended September 30, 2009 were $3.6 million compared with $5.0 million for the comparable period in 2008, a 27% decrease. Compensation costs decreased $0.7 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. Commissions expense, warranty expense and travel costs decreased $0.1 million, $0.2 million, and $0.3 million, respectively, due primarily to lower sales and reduced sales and service activities. Selling, general and administrative expenses for the three months ended September 30, 2009 were $1.3 million compared with $1.8 million for the comparable period in 2008, a 27% decrease. The decrease in 2009 was due primarily to lower wages, commissions and travel costs.
Research and Development. Research and development expenses for the nine months ended September 30, 2009 were $1.7 million compared with $2.3 million for the comparable period in 2008, a 27% decrease. Compensation costs decreased $0.2 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. Travel expenses decreased $0.1 million due to cost containment efforts. Research and development expenses for the three months ended September 30, 2009 were $0.6 million compared with $0.8 million for the comparable period in 2008, a 14% decrease. The decrease in 2009 was due primarily to lower wages and travel costs. Research and development expenses represented 27.7% of total net sales for the nine month period ended September 30, 2009 compared with 15.8% 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 nine months of 2009.
Interest Income, net. Interest income, net, amounted to $113,000 and $274,000 for the nine-month periods ended September 30, 2009 and 2008, respectively, and amounted to $29,000 and $71,000 for the three-month periods ended September 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 $182,000 and $1,023,000 for the three and nine months ended September 30, 2009, respectively, and income tax expense of $148,000 and $43,000 for the three and nine months ended September 30, 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. 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 continued into fiscal year 2009. We incurred operating losses in the fourth quarter of fiscal year 2008 and in each of the first three quarters of fiscal year 2009. Accordingly, our net deferred tax assets increased from approximately $2.3 million at September 30, 2008 to approximately $3.6 million at September 30, 2009. Our assessment of the realizability of our net deferred tax assets at September 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 September 30, 2009.
We will continue to assess the assumptions used to determine the amount of our valuation allowance in future periods. Although business conditions appear to have improved slightly and our operating loss decreased sequentially in the third quarter of 2009, the outlook for the remainder of the year is uncertain. Depending upon our fourth quarter 2009 operating results and our future outlook as of the end of 2009, we may have to increase our valuation allowance, which could have a material adverse impact on our results of operations. If we increase the valuation allowance, we would record additional income tax expense for an amount up to as much as the full carrying value of our net deferred tax assets.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents decreased by approximately $1.2 million in the nine months ended September 30, 2009. We used $1.2 million in cash to fund operating activities during this period. The major components of cash flows from operating activities were our net loss of $1.9 million, a $1.0 million increase in deferred income taxes, a $0.3 million increase in other current assets, a $0.2 million decrease in accounts payable and a $0.2 million decrease in other accrued liabilities, partially offset by $0.5 million in non-cash depreciation and share-based compensation expense, a $0.7 million decrease in accounts receivable, and a $1.2 million decrease in inventories. The increase in other current assets consists primarily of past due rents owing from a subtenant as described in Note 9 to our consolidated financial statements. 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 severance costs associated with a workforce reduction we implemented in December 2008 and a reduction in accrued warranty due to lower sales volume. Accounts receivable decreased primarily due to a significant decrease in net sales in the third quarter of 2009 compared with the fourth quarter of
2008. Net cash flows from investing activities and financing activities in the nine months ended September 30, 2009 were not significant.
Cash and cash equivalents increased by approximately $0.4 million in the nine months ended September 30, 2008. We generated $0.5 million in cash from operating activities during this period. The major components of cash flows from operating activities were our net income of $0.1 million, $0.4 million in non-cash depreciation and share-based compensation expense, and a $2.1 million decrease in accounts receivable, partially offset by a $1.3 million increase in inventories, a $0.3 million decrease in accounts payable, a $0.2 million decrease in accrued compensation, a $0.2 million decrease in deferred revenue, and a $0.1 million decrease in accrued no-charge equipment improvements. Accounts receivable decreased primarily due to a significant decrease in net sales in the third quarter of 2008 compared with the fourth quarter of 2007. Inventories increased due to selective increases of certain inventories in 2008 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. Accounts payable decreased primarily due to reduced inventory purchases in the third quarter of 2008 compared with the fourth quarter of 2007. Accrued compensation decreased primarily due to lower profit-related incentives. Deferred revenue decreased to zero as revenue recognition criteria were satisfied for items that had been deferred at December 31, 2007 and there were no deferred revenue items at September 30, 2008. Accrued no-charge equipment improvements decreased due to the shipment of certain items accrued in prior periods. Net cash provided by investing activities in the nine months ended September 30, 2008 was not significant. Net cash used in financing activities in the nine months ended September 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 September 30, 2009 will be sufficient to meet capital expenditure and working capital needs for at least the next twelve months. Our $2 million revolving credit line agreement with a bank expired on October 23, 2009. We are presently in discussions with the bank regarding a new line of credit agreement. However, there can be no assurances that we will be able to negotiate a new agreement with terms that are favorable to Aetrium or at all.
As discussed above, worldwide economic conditions continue to be 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
Effective with the quarter ended September 30, 2009, Aetrium adopted the Financial Accounting Standards Board (FASB) Accounting Standards Codification Topic 105, "Generally Accepted Accounting Principles" (ASC 105). ASC 105 establishes the FASB Accounting Standards Codification ("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 (GAAP) in the United States. The FASB will make all future changes to guidance in the Codification by issuing Accounting Standards Updates. The Codification also provides that rules and interpretive releases of the U. S. Securities and Exchange Commission (SEC) issued under the authority of federal securities laws will continue to be sources of authoritative GAAP for SEC registrants. The Codification does not create any new GAAP standards but incorporates existing accounting and reporting standards into a new topical structure so that users can more easily access authoritative accounting
guidance. Therefore, we have updated all references to authoritative standards to be consistent with those set forth in the Codification. The adoption of ASC 105 had no impact on our consolidated financial position, results of operations or cash flows.
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