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BTUI > SEC Filings for BTUI > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for BTU INTERNATIONAL INC

Form 10-Q for BTU INTERNATIONAL INC


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

BTU International, Inc. ("BTU"), founded in 1950 and headquartered in North Billerica, Massachusetts, is a global supplier and technology leader of advanced thermal processing equipment and processes to the electronic manufacturing and alternative energy markets. BTU equipment is used in the production of printed circuit board assemblies and semiconductor packaging as well as in solar cell, nuclear fuel and fuel cell manufacturing.

Our customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. In the solar market, BTU offers processing equipment for both silicon and thin film photovoltaics. Also in alternative energy, our customers use our thermal systems for the processing of nuclear fuel. Our convection solder reflow systems are used to attach electronic components to the printed circuit boards, primarily in the advanced, high-density, surface mount segments of this market. In the semiconductor market, we participate in both wafer level and die level packaging, where our thermal processing systems are used to connect and seal integrated circuits into a package.

In 2004, we began manufacturing and material sourcing operations in leased facilities in Shanghai, China. In addition, we expanded our product development capability in China, creating a global engineering team. This team commercially introduced our latest PYRAMAX™ and TRITAN™ products and continues to collaborate with our U.S. headquarters on additional product initiatives.

RESULTS OF OPERATIONS

Three months ended September 30, 2012 compared to the three months ended October 2, 2011.

The following table sets forth, for the periods indicated selected items in our condensed consolidated statements of operations expressed as a percentage of net sales.

Summary Condensed Consolidated Statements of Operations



                                                            Three Months Ended
                                            September 30, 2012                 October 2, 2011
                                                             ( $ in thousands)
                                                           % of                            % of           Percent
                                                         Net Sales                       Net Sales         Change
Net sales                               $   14,137            100.0 %     $ 16,865            100.0 %        (16.2 )%
Cost of goods sold                          10,018             70.9 %       10,506             62.3 %         (4.6 )%

Gross profit                                 4,119             29.1 %        6,359             37.7 %        (35.2 )%

Selling, general and administrative
expenses                                     4,925             34.8 %        6,013             35.7 %        (18.1 )%
Research, development and engineering
expenses                                     1,333              9.4 %        1,914             11.3 %        (30.4 )%
Restructuring                                   -               0.0 %          352              2.1 %       (100.0 )%

Operating loss                              (2,139 )          (15.1 )%      (1,920 )          (11.4 )%        11.4 %
Loss before provision for income
taxes                                       (2,245 )          (15.9 )%      (2,035 )          (12.1 )%        10.3 %
Provision for income taxes                     153              1.1 %          179              1.1 %        (14.5 )%

Net loss                                $   (2,398 )          (17.0 )%    $ (2,214 )          (13.1 )%         8.3 %

Net Sales. Net sales for the third quarter of 2012 were $14.1 million representing a decrease of $2.7 million, or 16.2%, as compared to the same period in the prior year. Net sales for the Company's electronic market systems increased by $0.7 million, or 7.0%, as compared to the same period in the prior year. Net sales for the Company's alternative energy systems decreased by $2.5 million, or 52.5%, as compared to the same period in the prior year. Net sales for the Company's other market systems, parts and service sales decreased by $0.9 million, or 34.0%. The electronic market systems increase represents an increase in demand for Surface Mount Technology systems and the recognition of $0.8 million under the percentage of completion method. The Company's alternative energy systems third quarter 2012 sales decrease as compared to the same period in the prior year is due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The decrease in sales in the other market systems and parts and service is due to the cyclical nature of the parts and service business.

As a result of the weakness in capital spending in the solar industry, we expect minimal revenue from solar products over the immediate future.

The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed in thousands of dollars and as a percentage of total revenues. The values shown represent the amount sold into each of the listed geographical areas.


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                                               Three Months Ended
                                September 30, 2012               October 2, 2011
                                                ($ in thousands)
                                                % of                          % of
                                 $            Revenues           $          Revenues
        United States       $     1,377             9.8 %    $   2,084           12.4 %
        Europe, Near East         3,355            23.7 %        2,393           14.2 %
        Asia Pacific              9,107            64.4 %       11,289           66.9 %
        Other Americas              298             2.1 %        1,099            6.5 %

        Total Revenue       $    14,137                      $  16,865

Gross Profit. The third quarter of 2012 gross profit of $4.1 million decreased by $2.2 million compared to the third quarter of 2011 due primarily to the 16.2% decrease in net sales. In the third quarter of 2012, gross profit as a percentage of sales decreased to 29.1% as compared to 37.7% in the same period in 2011, due primarily to lower volume, product mix and overhead under absorption at our factories combined with higher inventory reserves. Our results of operations in future quarters could also be affected by further inventory write-downs. The Company assesses inventory at each period end and records inventory write-downs as appropriate based on market conditions.

Selling, General and Administrative (SG&A). SG&A third quarter 2012 expenses of $4.9 million decreased by $1.1 million compared to the same period in the prior year. The decrease is primarily due to the lower commission on reduced sales and cost reduction actions taken in the Company's service, marketing and administrative functions. Our results of operations in future quarters could also be affected by further reductions in operating expenses.

Research, Development and Engineering (RD&E). RD&E third quarter 2012 expenses of $1.3 million decreased by $0.6 million, or 30.4%, from the same period in the prior year as a result of headcount reductions and expense reductions in the Company's RD&E functions.

Restructuring. The Company recorded a restructuring charge of $352,000 in the three months ended October 2, 2011. This restructuring action was taken due to the slowdown in the Company's solar market product line. No such restructuring charge occurred in the third quarter 2012.

Operating Loss. The 16.2% net sales decrease and its associated negative effect on gross profit combined with higher inventory reserves resulted in an operating loss in the third quarter of 2012 of $2.1 million as compared to an operating loss of $1.9 million for the same period in 2011, although the Company recorded a restructuring charge subsequent to quarter end that will have an impact of approximately $250,000 in the fourth quarter.

Interest Income (Expense). In the third quarter of 2012 as compared to the same period in 2011, net interest expense remained relatively flat at $0.1 million.

Foreign Exchange Loss. The foreign exchange loss in the third quarter of 2012 was $3,000 as compared to a loss of $23,000 in the same period in the prior year. The net exchange loss is primarily the result of foreign currency exposure in the Company's foreign operations.

Income Taxes. For the three months ended September 30, 2012 and October 2, 2011, the Company recorded an income tax provision of $0.2 million. The Company's income tax provision primarily relates to withholding taxes generated from activities in our China operations.

The significant fluctuations in the Company's quarterly tax rate, as a percent of consolidated pre-tax income or loss, are the result of the different statutory tax rates in each of the Company's non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. China withholding taxes primarily result from corporate royalty charges based on our China manufacturing subsidiary net sales. U.S. taxes have had no impact to the rate fluctuation as the U.S. Company operates at a loss.


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RESULTS OF OPERATIONS

Nine months ended September 30, 2012 compared to the nine months ended October 2, 2011.

The following table sets forth, for the periods indicated selected items in our consolidated statements of operations expressed as a percentage of net sales.

Summary Consolidated Statements of Operations



                                                            Nine Months Ended
                                           September 30, 2012                 October 2, 2011
                                                           ( $ in thousands)
                                                          % of                            % of            Percent
                                                        net sales                       net sales         change
Net sales                              $   45,007            100.0 %     $ 61,250            100.0 %         (26.5 )%
Cost of goods sold                         30,903             68.7 %       36,509             59.6 %         (15.4 )%

Gross profit                               14,104             31.3 %       24,741             40.4 %         (43.0 )%

Selling, general and administrative
expenses                                   15,578             34.6 %       17,921             29.3 %         (13.1 )%
Research, development and
engineering expenses                        4,121              9.2 %        5,545              9.1 %         (25.7 )%
Restructuring                                 176              0.4 %          352              0.6 %         (50.0 )%

Operating income (loss)                    (5,771 )          (12.8 )%         923              1.5 %        (725.2 )%
Income (loss) before provision for
income taxes                               (6,124 )          (13.6 )%         664              1.1 %       (1022.3 )%
Provision for income taxes                    430              1.0 %        1,063              1.7 %         (59.5 )%

Net loss                               $   (6,554 )          (14.6 )%    $   (399 )           (0.7 )%       1542.6 %

Net Sales. Net sales decreased $16.2 million, or 26.5%, in the first nine months as compared to the same period in the prior year. Net sales for the Company's electronics systems increased $5.1 million, or 18.4% as compared to the same period in the prior year. The Company's alternative energy market systems net sales decreased $18.9 million, or 75.6% as compared to the same period in the prior year. Net sales for the Company's other market systems, parts and service sales decreased by $2.4 million, or 28.1%. The electronic market systems increase represents an increase in demand for Surface Mount Technology and semiconductor packaging systems in addition to recognizing $0.9 million revenue under the percentage of completion method. The Company's alternative energy systems third quarter 2012 sales decrease as compared to the same period in the prior year is due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The decrease in sales in the other market systems and parts and service was the result of two large systems orders in the nine months ended October 2, 2011 and no similar market system orders in the comparable 2012 period. We expect the solar market slowdown to continue into 2013.

The following table sets forth, for the periods indicated, revenues from sales into select geographies expressed in thousands of dollars and as a percentage of total revenue. The values shown represent the amount sold into each of the listed geographical areas.

                                                Nine Months Ended
                                September 30, 2012               October 2, 2011
                                                ($ in thousands)
                                                % of                          % of
                                 $            revenues           $          revenues
        United States       $     6,008            13.3 %    $   8,290           13.5 %
        Europe, Near East         6,673            14.8 %        4,406            7.2 %
        Asia Pacific             31,133            69.2 %       45,424           74.2 %
        Other Americas            1,193             2.7 %        3,130            5.1 %

        Total Revenue       $    45,007                      $  61,250

Gross Profit . The gross profit of $14.1 million for the first nine months of 2012 decreased $10.6 million, or 43.0%, as compared to the same period in the prior year. The gross profit as a percentage of sales for the first nine months of 2012 decreased to 31.3% from 40.4% for the first nine months of 2011. The gross margin percentage in the first nine months of 2012 was negatively impacted by lower volume, product mix and overhead under absorption at our factories combined with higher inventory reserves.


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Selling, General and Administrative (SG&A). SG&A expenses of $15.6 million for the first nine months of 2012 decreased by $2.3 million, or 13.1%, as compared to the same period in the prior year. The decrease is primarily due to the lower commission on reduced sales and cost reduction actions taken in the Company's service, marketing and administrative functions.

Research, Development and Engineering (RD&E). RD&E expenses of $4.1 million for the first nine months of 2012 decreased by $1.4 million, or 25.7%, as compared to the same period in the prior year. The decreases are the result of headcount reductions and expense reductions in the Company's RD&E functions.

Restructuring. The Company recorded a restructuring charge of $176,000 for the first nine months of 2012 compared to $352,000 for the same period in 2011. Similar to 2011, the restructuring action taken in 2012 is related to severance and benefit charges due to the continued decline in the Company's solar market product sales.

Operating Income(Loss). The impact of the revenue decreases and its associated negative impact on gross margins, as well as inventory reserves, in the first nine months of 2012 resulted in operating loss of $5.8 million as compared to operating income of $0.9 million in the same period in 2011.

Interest Income (Expense). For the first nine months of 2012 as compared to the same period in 2011, net interest expense remained relatively stable at $0.3 million.

Foreign Exchange Loss. The foreign exchange loss for the first nine months of 2012 was $56,000 as compared to a loss of $172,000 for the same period in 2011. The net exchange loss is primarily the result of foreign currency exposure in the Company's foreign operations.

Income Taxes. During the nine months ended September 30, 2012, the Company recorded an income tax provision of $0.4 million as compared to $1.1 million for the nine months ended October 2, 2011. The Company's income tax provision primarily relates to withholding taxes related to our China operations.

The significant fluctuation in the Company's quarterly tax rate, as a percent of consolidated pre-tax income or loss, is the result of the different statutory tax rates in each of the Company's non-U.S. locations and the fluctuations of pre-tax income (loss) generated in these jurisdictions. A portion of the consolidated annual tax provision relates to Chinese withholding taxes which are not directly related to pre-tax income in China. China withholding taxes primarily result from corporate royalty charges based on our China manufacturing subsidiary net sales. U.S. taxes have had no impact to the rate fluctuation as the U.S. Company operates at a loss.

Our statutory federal income tax rate is 34.0%. The Company's statutory income tax rate for its China manufacturing subsidiary is 25.0% in 2012 and 24% in 2011.

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2012, we had $21.0 million in cash and cash equivalents, an increase of $2.1 million, compared to $18.9 million at December 31, 2011.

During the nine months ended September 30, 2012, the Company generated net cash of approximately $2.4 million from operating activities. This generation of cash was the result of an increase in accounts payable of $3.2 million, a decrease in net accounts receivable of $2.0 million, a decrease in net inventory of $3.4 million, an increase in deferred revenue of $0.7 million, non-cash expenses for depreciation and amortization of $1.3 million, stock-based compensation of $0.7 million, offset by a net loss of $6.6 million, an increase in other current assets of $1.6 million and a decrease in accrued expenses of $0.6 million.

On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank. The bank agrees, at the Company's request, to issue letters of credit in the bank's name and the Company agrees to cash collateralize the letters of credit via restricted cash deposits at the bank. As of September 30, 2012, the value of the outstanding letters of credit issued by the bank for the Company and cash collateralized by the Company was $225,140. This restricted cash value is included in the Company's balance sheet in other current assets.

The Company has a mortgage note that is secured by its real property in Billerica, MA. The original amount of the note was $10 million. This mortgage note has a balloon payment of $6.7 million due and payable at maturity on December 23, 2015. On September 9, 2010, the Company signed a Loan Modification Agreement relating to the mortgage note. The modification resulted in lowering the annual interest rate from 6.84% to 5.50%, and lowering the monthly payment from $76,280 to $69,000. The mortgage note had an outstanding balance on September 30, 2012, of approximately $8.1 million.

As of September 30, 2012, the Company has no material commitments relating to capital expenditures. There were no significant changes in the Company's commitments from those that were outlined in the "Contractual Obligations" section of the Company's 2011 annual report on Form 10-K.

At the end of the third quarter, approximately 11% of our outstanding receivables were from Chinese solar cell manufacturers. This industry has been significantly affected by the global downturn in the solar sector and by issues such as manufacturing overcapacity and the potential


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imposition of U. S. tariffs. Substantially all of our receivables from these customers are backed by letters of credit from Chinese banks and we believe we are due payment. If we are unable to realize on the letters of credit, it could have a material adverse effect on the collectability of these receivables.

The Company's business forecasts project that our cash position and cash flow will be sufficient to meet our corporate, operating and capital requirements for the next twelve months.

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

During the nine months ended September 30, 2012, there have been no significant changes to the items that we disclosed as our critical accounting policies and estimates in the "Critical Accounting Policies and Significant Estimates" section of Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

RISK FACTOR

During the nine months ended September 30, 2012, there have been no significant changes to the items that we disclosed as risk factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

FORWARD LOOKING STATEMENTS

This Report contains forward-looking statements about the sufficiency of our cash position and cash flows. The words or phrases "will likely result," "are expected to," "will continue," "is anticipated," "may," "intends," "believes," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are neither promises nor guarantees but rather are subject to risks and uncertainties described in this report and other reports we have filed with the SEC, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements are made pursuant to the "safe harbor" provisions established by the federal securities laws, and are based on the assumptions and expectations of our management at the time such statements are made. Important factors that could cause actual results to differ include, but are not limited to, the condition of the world economy, the timely availability and acceptance of new products in the electronics, semiconductor and alternative energy generation industries, manufacturing problems with our foreign operations in China, the impact of competitive products and pricing, particularly from companies in Asia, and other risks detailed under the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission. Actual results may vary materially. Unless otherwise required by law, we disclaim any obligation to revise or update this information in order to reflect future events or developments, whether or not anticipated. Accordingly, you should not place undue reliance on any forward-looking statements, which speak only as of the date made.

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