ITEM 1. BUSINESS
Amtech was incorporated in Arizona in October 1981, under the name Quartz Engineering & Materials, Inc. We changed to our present name in 1987. We conduct operations through four wholly-owned subsidiaries: Tempress Systems, Inc., a Texas corporation with all of its operations in The Netherlands, acquired in 1994, also referred to herein as Tempress Systems or Tempress®; P.R. Hoffman Machine Products, Inc. (PR Hoffman), an Arizona corporation based in Carlisle, Pennsylvania, acquired in July 1997; Bruce Technologies, Inc. (Bruce Technologies®), a Massachusetts corporation based in Billerica, Massachusetts, acquired in July 2004, or Bruce Technologies; and R2D Automation SAS (R2D), a French corporation located near Montpellier, France, acquired in October 2007. See Exhibit 21.1 Subsidiaries for a complete list of our subsidiaries.
We are a leading supplier of horizontal diffusion furnace systems used for solar (photovoltaic) cell and semiconductor manufacturing, and are recognized in the markets we serve for our technology and our brands. We operate in two business segments: (i) solar and semiconductor equipment and (ii) polishing supplies. Our solar and semiconductor equipment is sold under the well-known and respected brand names of Tempress Systems and Bruce Technologies, which have customers in both the solar industry and the semiconductor industry. Within the solar industry, we provide diffusion and automation equipment to solar cell manufacturers. Within the semiconductor industry, we provide equipment to manufacturers of analog, power, automotive and microcontroller chips with geometries greater than 0.3 micron, a strategy we believe minimizes direct competition with significantly larger suppliers of semiconductor equipment. Under the PR Hoffman brand, we believe we are also a leading supplier of insert carriers to manufacturers of silicon wafers, and we provide lapping and polishing consumable products as well as equipment used in various industries.
We have been providing manufacturing solutions to the semiconductor industry for over 30 years and are leveraging our semiconductor technology and industry presence in an effort to capitalize on growth opportunities in the solar industry. Our customers use our furnaces to manufacture solar cells, semiconductors, silicon wafers and microelectromechanical systems (MEMS), which are used in end markets such as solar power, telecommunications, consumer electronics, computers, automotive and hand-held devices. To complement our research and development efforts, we also sell our furnaces to research institutes and universities.
For fiscal 2009, we recognized net revenue of $53.0 million, which included $34.8 million of solar revenue or approximately 66% of our total revenue. These results compare to $80.3 million of net revenue for fiscal 2008, which included $50.1 million of solar revenue or approximately 62% of our total revenue. Our order backlog as of September 30, 2009 and 2008 was $32.4 million and $46.7 million, respectively, a 31% decrease. Our backlog as of September 30, 2009 included approximately $27.9 million of orders from our solar industry customers compared to $36.7 million of orders from our solar industry customers as of September 30, 2008. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales in subsequent periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders.
Orders from the solar industry totaled $21.8 million during fiscal 2009, compared to $73.3 million and $20.5 million in fiscal 2008 and 2007, respectively.
For information regarding net revenue, operating income and identifiable assets attributable to each of our two business segments, see Note 9 of the Notes to Consolidated Financial Statements included herein and “ITEM 7, MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report. For information on the products of each segment, see “Solar and Semiconductor Equipment Segment Products” and “Polishing Supplies Segment Products” within this “ITEM 1. BUSINESS” section. For information regarding the impact of the worldwide economic downturn and other risks to our business, see “ITEM 1A.
ITEM 1A. RISK FACTORS
Because of the following factors, as well as other variables affecting our operating results and financial condition, past performance may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to our Business and Industry.
Recent deterioration in the global economy and credit markets may materially and adversely affect our future results of operations.
Our operations may be adversely affected by the recent deterioration in the global economy causing our customers to delay or cease spending on our products. The recent tightening of the credit markets may negatively impact our operations by affecting the liquidity and/or solvency of our customers and key suppliers and the ability of our customers to obtain credit to finance purchases of our products. If the global economy and credit markets continue to deteriorate, our financial condition and results of operations will likely be adversely impacted. We have no way of determining how long the global economic crisis, including the tightening of credit markets, will last.
If demand declines for horizontal diffusion furnaces and related equipment, or for solar industry products, our financial position and results of operations could be materially and adversely affected.
The revenue of our solar and semiconductor equipment segment, which accounted for approximately 89% of our consolidated net revenue as of September 30, 2009, is comprised primarily of sales of horizontal diffusion furnaces and our automation products. Our automation products are useable only with horizontal diffusion furnaces. There is a trend in the semiconductor industry, related to the trend to produce smaller chips on larger wafers, towards the use in semiconductor manufacturing facilities of newer technology, such as vertical diffusion furnaces. Vertical diffusion furnaces are more efficient than the horizontal diffusion furnaces in certain manufacturing processes for smaller chips on larger wafers. As early as 1994, we had expected that demand for our horizontal diffusion furnaces would decline as a result of this trend. We believe this trend has not yet adversely affected us to the extent originally expected. However, to the extent that the trend to use vertical diffusion furnaces over horizontal diffusion furnaces continues, our revenue may decline and our corresponding ability to generate income may be adversely affected. A significant part of our growth strategy involves expanding our sales to the solar industry. The solar industry is subject to risks relating to industry shortages of polysilicon, (which we discuss further below), the continuation of government incentives, the availability of specialized capital equipment, global energy prices and rapidly changing technologies offering alternative energy sources. If the demand for solar industry products declines, the demand by the solar industry for our products would also decline and our financial position and results of operations would be harmed.
We may not be able to increase or sustain our recent growth rate, and we may not be able to manage our future growth effectively.
We may be unable to continue to expand our business or manage future growth. Our recent expansion has placed, and our planned expansion and any other future expansion will continue to place, a significant strain on our management, personnel, systems and resources. In the past two years, we purchased additional equipment and real estate to significantly expand our manufacturing capacity and expect to hire additional employees to support an increase in manufacturing, research and development and sales and marketing efforts. To successfully manage our growth, we believe we must effectively:
hire, train, integrate and manage additional process engineers, field service engineers, sales and marketing personnel, and financial and information technology personnel;
retain key management and augment our management team, particularly if we lose key members;
continue to enhance our customer resource management and manufacturing management systems;
implement and improve additional and existing administrative, financial and operations systems, procedures and controls;
expand and upgrade our technological capabilities; and
manage multiple relationships with our customers, suppliers and other third parties.
We may encounter difficulties in effectively managing the budgeting, forecasting and other process control issues presented by rapid growth. If we are unable to manage our growth effectively, we may not be able to take advantage of market opportunities, develop new solar cells and other products, satisfy customer requirements, execute our business plan or respond to competitive pressures.
The ongoing volatility of the solar and semiconductor equipment industry may negatively impact our business and results of operations and our corresponding ability to efficiently budget our expenses.
The solar and semiconductor equipment industries are highly cyclical. As such, demand for and the profitability of our products can change significantly from period to period as a result of numerous factors, including, but not limited to, changes in:
global and regional economic conditions;
changes in capacity utilization and production volume of manufacturers of semiconductors, silicon wafers, solar cells and MEMS;
the shift of semiconductor production to Asia, where there often is increased price competition; and
the profitability and capital resources of those manufacturers.
For these and other reasons, our results of operations for past periods may not necessarily be indicative of future operating results.
Since our business has historically been subject to cyclical industry conditions, we have experienced significant fluctuations in our quarterly new orders and net revenue, both within and across years. Demand for solar semiconductor and silicon wafer manufacturing equipment and related consumable products has also been volatile as a result of sudden changes in solar and semiconductor supply and demand and other factors in both semiconductor devices and wafer fabrication processes. Our orders tend to be more volatile than our revenue, as any change in demand is reflected immediately in orders booked, which are net of cancellations, while revenue tends to be recognized over multiple quarters as a result of procurement and production lead times and the deferral of certain revenue under our revenue recognition policies. Customer delivery schedules on large system orders can also add to this volatility since we generally recognize revenue for new product sales on the date of customer acceptance or the date the contractual customer acceptance provisions lapse. As a result, the fiscal period in which we are able to recognize new products revenue is typically subject to the length of time that our customers require to evaluate the performance of our equipment after shipment and installation, which could cause our quarterly operating results to fluctuate.
The purchasing decisions of our customers are highly dependent on the economies of both their domestic markets and the worldwide semiconductor industry. The timing, length and severity of the up-and-down cycles in the semiconductor equipment industry are difficult to predict. The cyclical nature of our marketplace affects our ability to accurately budget our expense levels, which are based in part on our projections of future revenue.
When cyclical fluctuations result in lower than expected revenue levels, operating results may be adversely affected and cost reduction measures may be necessary in order for us to remain competitive and financially sound. During a down cycle, we must be able to make timely adjustments to our cost and expense structure to correspond to the prevailing market conditions. In addition, during periods of rapid growth, we must be able to increase manufacturing capacity and personnel to meet customer demand, which may require additional liquidity. We can provide no assurance that these objectives can be met in a timely manner in response to changes within the industry cycles. Our failure to respond to these cyclical changes could have a material adverse affect on our business.
During the most recent down cycle, beginning in the first half of 2001, the semiconductor industry experienced excess production capacity that caused semiconductor manufacturers to decrease capital spending. We do not have long-term volume production contracts with our customers and we do not control the timing or volume of orders placed by our customers. Whether and to what extent our customers place orders for any specific products and the mix and quantities of products included in those orders are factors beyond our control. Insufficient orders would result in under-utilization of our manufacturing facilities and infrastructure and will negatively affect our financial position and results of operations.
The Company has made substantial investments in its organization to develop new products for the solar industry. Sales of our products to the solar industry are subject to substantial risks.
The solar energy sector is partially dependent upon governmental subsidies that are not guaranteed to continue. A decline in these subsidies would reduce our ability to grow our business in this market.
The semiconductor equipment industry is competitive and we are relatively small in size and have fewer resources in comparison with our competitors.
Our industry includes large manufacturers with substantial resources to support customers worldwide. Our future performance depends, in part, upon our ability to continue to compete successfully worldwide. Some of our competitors are diversified companies having substantially greater financial resources and more extensive research, engineering, manufacturing, marketing and customer service and support capabilities than we can provide. We face competition from companies whose strategy is to provide a broad array of products, some of which compete with the products and services that we offer. These competitors may bundle their products in a manner that may discourage customers from purchasing our products. In addition, we face competition from smaller emerging semiconductor equipment companies whose strategy is to provide a portion of the products and services that we offer at often a lower price than ours, using innovative technology to sell products into specialized markets. Loss of competitive position could impair our prices, customer orders, revenue, gross margin and market share, any of which would negatively affect our financial position and results of operations. Our failure to compete successfully with these other companies would seriously harm our business. There is a risk that larger, better-financed competitors will develop and market more advanced products than those that we currently offer, or that competitors with greater financial resources may decrease prices thereby putting us under financial pressure. The occurrence of any of these events could have a negative impact on our revenue.
We are dependent on key personnel for our business and product development and sales, and any loss of our key personnel to competitors or other industries could dramatically impact our ability to continue operations.
Historically, our product development has been accomplished through cooperative efforts with key customers. Our relationship with some customers is substantially dependent on personal relations established by our President and Chief Executive Officer. Furthermore, our relationship with a major European customer that has been instrumental in the development of our small batch vertical furnace is substantially dependent upon our European General Manager. We are also dependent upon our Technical Director of R2D for the development of our automation technology. While there can be no assurance that such relationships will continue, such cooperation is expected to continue to be a significant element in our future development efforts thereby continuing our reliance on certain of our key personnel.
We are the beneficiary of life insurance policies on the life of our President and Chief Executive Officer, Mr. J. S. Whang, in the amount of $2.0 million, but there is no assurance that such amount will be sufficient to cover the cost of finding and hiring a suitable replacement for Mr. Whang. It may not be feasible for any successor to maintain the same business relationships that Mr. Whang has established. If we were to lose the services of Mr. Whang for any reason, it could have a material adverse affect on our business.
We also depend on the management efforts of our officers and other key personnel and on our ability to attract and retain key personnel. During times of strong economic growth, competition is intense for highly skilled employees. There can be no assurance that we will be successful in attracting and retaining such personnel or that we can avoid increased costs in order to do so. There can be no assurance that employees will not leave Amtech or compete against us. Our failure to attract additional qualified employees, or to retain the services of key personnel, could negatively impact our financial position and results of operations.
We may not be able to keep pace with the rapid change in the technology we use in our products.
Success in the solar and semiconductor equipment industries depends, in part, on continual improvement of existing technologies and rapid innovation of new solutions. For example, the semiconductor industry continues to shrink the size of semiconductor devices. These and other evolving customer needs require us to respond with continued development programs.
Technical innovations are inherently complex and require long development cycles and appropriate professional staffing. Our future business success depends on our ability to develop and introduce new products, or new uses for existing products, that successfully address changing customer needs, win market acceptance of these new products or uses and manufacture any new products in a timely and cost-effective manner. To realize future growth through technical innovations in the solar and semiconductor industries, we must either acquire the technology through merger and acquisition activity or through the licensing of products from our technology partners. Our failure to develop and introduce new products, technologies or uses for existing products in a timely manner and continually find ways of reducing the cost to produce them in response to changing market conditions or customer requirements, could have a material adverse affect on our business.
Acquisitions can result in an increase in our operating costs, divert management’s attention away from other operational matters and expose us to other risks associated with acquisitions.
We continually evaluate potential acquisitions and consider acquisitions an important part of our future growth strategy. In the past, we have made acquisitions of, or significant investments in, other businesses with synergistic products, services and technologies and plan to continue to do so in the future. Acquisitions, including our recent acquisition of R2D, involve numerous risks, including, but not limited to:
difficulties and increased costs in connection with integration of geographically diverse personnel, operations, technologies and products of acquired companies;
diversion of management’s attention from other operational matters;
the potential loss of key employees of acquired companies;
lack of synergy, or inability to realize expected synergies, resulting from the acquisition;
the risk that the issuance of our common stock, if any, in an acquisition or merger could be dilutive to our shareholders, if anticipated synergies are not realized; and
acquired assets becoming impaired as a result of technological advancements or worse-than-expected performance of the acquired company.
Our financial position and results of operations may be materially harmed if we are unable to recoup our investment in research and development.
The rapid change in technology in our industry requires that we continue to make investments in research and development in order to enhance the performance and functionality of our products, to keep pace with competitive products and to satisfy customer demands for improved performance, features and functionality. There can be no assurance that revenue from future products or enhancements will be sufficient to recover the development costs associated with such products or enhancements, or that we will be able to secure the financial resources necessary to fund future development. Research and development costs are typically incurred before we confirm the technical feasibility and commercial viability of a product, and not all development activities result in commercially viable products. In addition, we cannot ensure that products or enhancements will receive market acceptance, or that we will be able to sell these products at prices that are favorable to us. If we are unable to sell our products at favorable prices, or if our products are not accepted by the markets in which we operate, it could have a material adverse affect on our business.
If third parties violate our proprietary rights, in which we have made significant investments, such events could result in a loss of value of some of our intellectual property or costly litigation.
Our success is dependent in part on our technology and other proprietary rights. We own various United States and international patents and have additional pending patent applications relating to some of our products and technologies. The process of seeking patent protection is lengthy and expensive, and we cannot be certain that pending or future applications will actually result in issued patents, or that issued patents will be of sufficient scope or strength to provide meaningful protection or commercial advantage to us. Other companies and individuals, including our larger competitors, may develop technologies that are similar or superior to our technology or design around the patents we own or license. We also maintain trademarks on certain of our products and claim copyright protection for certain proprietary software and documentation. However, we can give no assurance that our trademarks and copyrights will be upheld or successfully deter infringement by third parties. Recently, the patent covering technology that we license and use in our manufacture of insert carriers has expired, which may have the effect of diminishing or eliminating any competitive advantage we may have with respect to this manufacturing process.
While patent, copyright and trademark protection for our intellectual property is important, we believe our future success in highly dynamic markets is most dependent upon the technical competence and creative skills of our personnel. We attempt to protect our trade secrets and other proprietary information through confidentiality agreements with our customers, suppliers, employees and consultants and through other security measures. We also maintain exclusive and non-exclusive licenses with third parties for the technology used in certain products. However, these employees, consultants and third parties may breach these agreements, and we may not have adequate remedies for wrongdoing. In addition, the laws of certain territories in which we develop, manufacture or sell our products may not protect our intellectual property rights to the same extent as do the laws of the United States.
We may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in our loss of significant rights and the assessment of treble damages.
From time to time, we have received communications from other parties asserting the existence of patent rights or other intellectual property rights that they believe cover certain of our products, processes, technologies or information. In such cases, we evaluate our position and consider the available alternatives, which may include seeking licenses to use the technology in question on commercially reasonable terms or defending our position. We cannot ensure that licenses can be obtained, or if obtained will be on acceptable terms, or that litigation or other administrative proceedings will not occur.
Some of these claims may lead to litigation. We cannot assure you that we will prevail in these actions, or that other actions alleging misappropriation or misuse by us of third-party trade secrets, infringement by us of third-party patents and trademarks or the validity of our patents, will not be asserted or prosecuted against us. Intellectual property litigation, regardless of outcome, is expensive and time-consuming, could divert management’s attention from our business and have a material negative effect on our business, operating results or financial condition. If there is a successful claim of infringement against us, we may be required to pay substantial damages (including treble damages if we were to be found to have willfully infringed a third party’s patent) to the party claiming infringement, develop non-infringing technology, stop selling or using technology that contains the allegedly infringing intellectual property or enter into royalty or license agreements that may not be available on acceptable or commercially practical terms, if at all. Our failure to develop non-infringing technologies or license the proprietary rights on a timely basis could harm our business. Parties making infringement claims on future issued patents may be able to obtain an injunction that would prevent us from selling or using our technology that contains the allegedly infringing intellectual property, which could harm our business.
Our reliance on sales to a few major customers and granting credit to those customers places us at financial risk.
We currently sell to a relatively small number of customers, and we expect our operating results will likely continue to depend on sales to a relatively small number of customers for the foreseeable future, as well as the ability of these customers to sell products that require our products in their manufacture. During fiscal 2009 16% of net revenue was generated by one customer, E-Ton Solar Tech. E-Ton Solar Tech was also our largest customer in fiscal 2007. At the end of fiscal 2009 and 2008, 31% and 40% of our backlog consists of open sales orders and deferred revenue from E-Ton Solar Tech, respectively. Many of our customer relationships have been developed over a short period of time and certain customers are in their preliminary stages of development. The loss of sales to any of these customers would have a significant negative impact on our business. Our agreements with these customers may be cancelled if we fail to meet certain product specifications, materially breach the agreement or in the event of bankruptcy, and our customers may seek to renegotiate the terms of current agreements or renewals. We cannot be certain that these customers will generate significant revenue for us in the future nor that these customer relationships will continue to develop. If our relationships with our other customers do not continue to develop, we may not be able to expand our customer base or maintain or increase our revenue.
As of September 30, 2009, accounts receivable from three customers each exceeded 10% of accounts receivable; these three customers accounted for 19%, 11% and 10% of total accounts receivable, respectively. A concentration of our receivables from one or a small number of customers places us at risk. If any one or more of our major customers does not pay us it could adversely affect our financial position and results of operations. We attempt to manage this credit risk by performing credit checks, by requiring significant partial payments prior to shipment where appropriate and by actively monitoring collections. We also require letters of credit of certain customers depending on the size of the order, type of customer or its creditworthiness and its country of domicile.
If any of our customers cancels or fails to accept a large system order, our financial position and results of operations could be materially and adversely affected.
Our backlog includes orders for large systems, such as our diffusion furnaces, with system prices of up to and in excess of $1.0 million depending on the system configuration, options included and any special requirements of the customer. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders. Our financial position and results of operations could be materially and adversely affected should any large systems order be cancelled prior to shipment, or not be accepted by the customer. We have experienced significant cancellations in the past, including $1.2 million in fiscal 1999, $3.5 million in 2001, and $1.2 million in 2002. We have not experienced any significant cancellations since 2002. Likewise, a significant change in the liquidity or financial position of any of our customers that purchase large systems could have a material impact on the collectability of our accounts receivable and our future operating results. Our backlog does not provide any assurance that we will realize revenue or profit from those orders or indicate in which period net revenue will be recognized, if ever.
Our business might be adversely affected by a decline in our sales to foreign customers, significant exchange rate fluctuations and foreign laws.
During fiscal 2008, 84% of our net revenue came from customers outside of North America. During fiscal 2009, 82% of our net revenue came from customers outside of North America as follows:
Asia - 68% (includes 39% to China and 22% to Taiwan); and
Europe - 14%.
Because of our significant dependence on revenue from international customers, our operating results could be negatively affected by a decline in the economies of any of the countries or regions in which we do business. Each region in the global semiconductor equipment market exhibits unique characteristics that can cause capital equipment investment patterns to vary significantly from period to period. Periodic local or international economic downturns, trade balance issues, political instability and fluctuations in interest and currency exchange rates could negatively affect our business and results of operations. In addition, we face competition from a number of suppliers based in Asia that have certain advantages over suppliers from outside of Asia. These advantages include lower operating and regulatory costs, proximity to customers and favorable tariffs.
We recorded foreign currency transaction losses of $0.01 million during fiscal 2009, 2008 and 2007. While our business has not been materially affected in the past by currency fluctuations, there is a risk that it may be materially adversely affected in the future. Such risk includes possible losses due to currency exchange rate fluctuations, possible future prohibitions against repatriation of earnings, or proceeds from disposition of investments, and from possible social and military instability in the case of India, South Korea, Taiwan and possibly elsewhere. Our wholly-owned subsidiary, Tempress Systems, has conducted its operations in The Netherlands since 1995 and during 2005 we established a subsidiary in Germany to conduct the European sales of our Bruce Technologies product line. In October 2007 we completed our acquisition of R2D, a French company. As a result, such operations are subject to the taxation policies, employment and labor laws, transportation regulations, import and export regulations and tariffs, possible foreign exchange restrictions, international monetary fluctuations, and other political, economic and legal policies of that nation, the European Economic Union and the other European nations in which it conducts business. Consequently, we might encounter unforeseen or unfamiliar difficulties in conducting our European operations. Changes in such laws and regulations may have a material adverse effect on our revenue and costs. We are subject to the Foreign Corrupt Practices Act, which may place us at a competitive disadvantage to foreign companies that are not subject to similar regulations.
If our critical suppliers fail to deliver sufficient quantities of quality product in a timely and cost-effective manner, it could negatively affect our business.
We use a wide range of materials and services in the production of our products including custom electronic and mechanical components, and we use numerous suppliers of materials. We generally do not have guaranteed supply arrangements with our suppliers. Because of the variability and uniqueness of customer orders, we try to avoid maintaining an extensive inventory of materials for manufacturing. Key suppliers include two steel mills capable of producing the types of steel to the tolerances needed for our wafer carriers, an injection molder that molds plastic inserts into our steel carriers, an adhesive manufacturer that supplies the critical glue used in the production of the semiconductor polishing templates and a pad supplier that produces a unique material used to attach semiconductor wafers to the polishing template. We also rely on third parties for certain machined parts, steel frames and metal panels and other components used particularly in the assembly of semiconductor production equipment.
Although we make what we believe are reasonable efforts to ensure that parts are available from multiple suppliers, this is not always practical or even possible; accordingly, some key parts are being procured from a single supplier or a limited group of suppliers. During the semiconductor industry peak years, increases in demand for capital equipment resulted in longer lead-times for many important system components. Future increases in demand could cause delays in meeting shipments to our customers. Because the selling price of some of our systems exceeds $1.0 million, the delay in the shipment of even a single system could cause significant variations in our quarterly revenue. There can be no assurance that our financial position and results of operations will not be materially and adversely affected if, in the future, we do not receive in a timely and cost-effective manner a sufficient quantity and quality of parts to meet our production requirements.
We may not be able to generate sufficient cash flows or obtain access to external financing necessary to fund and expand our operations as planned.
We believe that current cash balances, our existing line of credit, cash flows generated from our operations and additional available financing will provide adequate working capital for at least the next twelve months. However, cash flows may be insufficient for such purposes in the future and we may require additional financing for further implementation of our growth plans. There is no assurance that any additional financing will be available if and when required, or, even if available, that it would not materially dilute the ownership percentage of the then existing shareholders, result in increased expenses or result in covenants or special rights that would restrict our operations.
We are exposed to risks from legislation requiring companies to evaluate their internal control over financial reporting.
Section 404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the effectiveness of our internal control over financial reporting. Our independent registered public accounting firm is required to attest to the effectiveness of our internal control over financial reporting beginning in fiscal 2010. We have an ongoing program to perform the system and process evaluation and testing necessary to comply with these requirements. We have incurred increased expense and have devoted additional management resources to Section 404 compliance and we expect that some increased expense and use of management resources will continue in the future. If, in the future, our CEO, chief financial officer or independent registered public accounting firm determine that our internal control over financial reporting is not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock.
Terrorist attacks and threats or actual war may negatively impact all aspects of our operations, revenue, costs and stock price.
The 2001 terrorist attacks in the United States, as well as events occurring in response or connection to them, including future terrorist attacks against United States’ targets, rumors or threats of war, actual conflicts involving the United States or its allies or military or trade disruptions impacting our domestic or foreign suppliers of parts, components and subassemblies, may impact our operations, including, among other things, by causing delays or losses in the delivery of supplies or finished goods and decreased sales of our products. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the United States and worldwide financial markets and economy. They could also result in economic recession in the United States or abroad. Any of these occurrences could have a significant adverse impact on our financial position and results of operations.
We may experience higher than expected warranty claims and we face the risk of product liability claims or other litigation, which could be expensive and divert management from running our business.
The manufacture and sale of our products, which in operation involve toxic materials, involve the risk of product liability claims. In addition, a failure of one of our products at a customer site could interrupt the business operations of our customer. Our existing insurance coverage limits may not be adequate to protect us from all liabilities that we might incur in connection with the manufacture and sale of our products if a successful product liability claim or series of product liability claims were brought against us. We may also be involved in other legal proceedings or claims and experience threats of legal action from time to time in the ordinary course of our business.
Where appropriate, we intend to vigorously defend all claims. However, any actual or threatened claims, even if not meritorious or material, could result in the expenditure of significant financial and managerial resources. The continued defense of these claims and other types of lawsuits could divert management’s attention away from running our business. In addition, required amounts to be paid in settlement of any claims, and the legal fees and other costs associated with such settlement, cannot be estimated and could, individually or in the aggregate, materially harm our financial condition.
We provide a limited warranty to our customers as described in more detail under Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We may experience higher than expected warranty claims, which could materially harm our financial condition.
We are subject to environmental regulations, and our inability or failure to comply with these regulations could result in significant costs or the suspension of our ability to operate segments of our business.
We are subject to environmental regulations in connection with our business operations, including regulations related to manufacturing and our customers’ use of our products. From time to time, we receive notices regarding these regulations. It is our policy to respond promptly to these notices and to take any necessary corrective action. Our failure or inability to comply with existing or future environmental regulations could result in significant remediation liabilities, the imposition of fines and/or the suspension or termination of development, manufacturing or use of certain of our products, each of which could damage our financial position and results of operations.
The Company’s income taxes are subject to variables beyond our control.
The Company’s net income and cash flow may be adversely affected by conditions affecting income taxes which are outside the Company’s control. Examples of the potential uncontrollable circumstances that could affect our tax rate:
The Company sells and operates globally in the United States, Europe and Asia. Disagreement could occur on the jurisdiction of income and taxation among different governmental tax authorities. Potential areas of dispute may include transfer pricing, intercompany charges and intercompany balances.
Tax rates may increase and, therefore, have a material adverse affect on our earnings and cash flows.
Sustained operating losses resulting from the occurrence of any of the risk factors could result in the write-off of deferred tax assets.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
We believe that our properties are adequate for our current needs. In addition, we believe that adequate space can be obtained to meet our foreseeable business needs. The following chart identifies the principal properties which we own or lease.
____________________
(1)
We are currently leasing this property on a month to month basis.
(2)
Services are performed in customer's facilities.
(3)
This lease can be cancelled by the company with six months notice beginning October 1, 2010.
(4)
We are currently leasing this property on a month to month basis. We are required to give six months notice of cancellation.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Our common stock, par value $0.01 per share (“Common Stock”), began trading on the NASDAQ Global Market (formerly the NASDAQ National Market), under the symbol “ASYS,” on April 18, 2001. From 1983 to 2001, our Common Stock was traded on the NASDAQ SmallCap Market. On November 18, 2009, the closing price of our Common Stock as reported on the NASDAQ Global Market was $6.50 per share. The following table sets forth the high and low bid price at which the shares of our Common Stock traded for each quarter of fiscal 2009 and 2008, as reported by the NASDAQ Global Market.
COMPARISON OF STOCK PERFORMANCE
The following line graph compares cumulative total shareholder return, assuming reinvestment of dividends, for: the Company’s Common Stock, the NASDAQ Composite Index and the NASDAQ Industrial Index. Because the Company did not pay dividends on its Common Stock during the measurement period, the calculation of the cumulative total shareholder return on the Company’s Common Stock did not include dividends. The following graph assumes that $100 was invested on October 1, 2004.
HOLDERS
As of November 18, 2009, there were 149 shareholders of record of our Common Stock. Based upon a recent survey of brokers, we estimate there were approximately an additional 1,784 beneficial shareholders who held shares in brokerage or other investment accounts as of that date.
DIVIDENDS
We have never paid dividends on our Common Stock. Our present policy is to apply cash to investment in product development, acquisition or expansion; consequently, we do not expect to pay dividends on Common Stock in the foreseeable future.
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth certain information, as of September 30, 2009, concerning outstanding options and rights to purchase Common Stock granted to participants in all of the Company’s equity compensation plans and the number of shares of Common Stock remaining available for issuance under such equity compensation plans.
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ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
This selected financial data should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements (including the related notes thereto) contained elsewhere in this report.
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ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the related notes included in Item 8, “Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. This discussion contains forward-looking statements, which involve risk and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors including, but not limited to, those discussed in “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Introduction
Management’s Discussion and Analysis (“MD&A”) is intended to facilitate an understanding of our business and results of operations. MD&A consists of the following sections:
Overview: a summary of our business.
Results of Operations: a discussion of operating results.
Liquidity and Capital Resources: an analysis of cash flows, sources and uses of cash and financial position.
Contractual Obligations and Commercial Commitments
Critical Accounting Policies: a discussion of critical accounting policies that require the exercise of judgments and estimates.
Impact of Recently Issued Accounting Pronouncements: a discussion of how we are affected by recent pronouncements.
Overview
We operate in two segments: the solar and semiconductor equipment segment and the polishing supplies segment. Our solar and semiconductor equipment segment is a leading supplier of thermal processing systems, including related automation, parts and services, to the solar/photovoltaic, semiconductor, silicon wafer and MEMS industries.
Our polishing supplies segment is a leading supplier of wafer carriers to manufacturers of silicon wafers. The polishing segment also manufacturers polishing templates, steel carriers and double-sided polishing and lapping machines to fabricators of optics, quartz, ceramics and metal parts, and to manufacturers of medical equipment components.
Our customers are primarily manufacturers of solar cells and integrated circuits. The solar cell and semiconductor industries are cyclical and historically have experienced significant fluctuations. Our revenue is impacted by these broad industry trends.
In October 2007, we acquired 100% of the equity of R2D Automation (R2D), a solar cell and semiconductor automation equipment manufacturing company. The purpose of the acquisition was to expand our automation products which are used in solar diffusion and semiconductor manufacturing processes. The acquisition of the technology and business of R2D enhances the growth strategy by allowing us to increase revenue by offering to the solar industry an integrated system under the Tempress® brand.
In the third quarter of fiscal 2008, we reorganized the Bruce Technologies® operations to better position the company for profitability in light of lower plant utilization resulting from a slowdown in the semiconductor industry. As a result of this reorganization, we reduced the number of personnel and recorded a charge of $0.4 million in the third quarter of fiscal 2008.
In the second quarter of fiscal 2009, the Bruce Technologies® operations were further restructured to focus on the parts supply business. The restructuring included a reduction in the number of employees and a reduction in the amount of space required to operate the business. The restructuring resulted in a charge of $0.6 million. Also, due to the downturn in the semiconductor industry and deterioration in forecasted revenue and earnings at Bruce Technologies®, an impairment charge of $1.1 million was recorded in the second quarter of fiscal 2009.
Results of Operations
The following table sets forth certain operational data as a percentage of net revenue for the periods indicated:
Fiscal 2009 compared to Fiscal
Net Revenue
Net revenue consists of revenue recognized upon shipment or installation of products using proven technology and upon acceptance of products using new technology. In addition, spare parts sales are recognized upon shipment. Service revenue is recognized upon completion of the service activity or ratably over the term of the service contract. The majority of our revenue is generated from large furnace systems sales which, depending on the timing of shipment and installation, can have a significant impact on our revenue, gross margins and earnings in any given period. See Critical Accounting Policies - Revenue Recognition.
Net revenue for the year ended September 30, 2009 decreased $27.3 million or 34% compared to the year ended September 30, 2008. Revenue from the Solar and Semiconductor Equipment Segment decreased $24.7 million or 34% due to significantly lower shipments to both the solar and the semiconductor industries, partially offset by a decrease in the amount of revenue deferred. The decrease in shipments was caused by lower sales volumes driven primarily by over-supply in the solar market and the global economic downturn and credit crisis. Within the solar and semiconductor equipment segment, net revenue from the solar market was $34.8 million and $50.1 million in fiscal 2009 and 2008, respectively. Net revenue from the semiconductor market was $12.5 million in fiscal 2009 compared to $21.9 million in fiscal 2008, a decrease of 43% due primarily to the downturn in the semiconductor industry. Revenue in the polishing supplies segment was $5.7 million and $8.3 million for the fiscal years ended September 30, 2009 and 2008, respectively. The decrease of $2.6 million, or 31%, in net revenue from the Polishing Supplies Segment is also due to the economic downturn and the downturn in the semiconductor industry as described above.
The supply-demand imbalance within the solar market, the downturn in the global economy, and the related credit crisis have caused some of our customers to delay or suspend their capacity expansion plans, which has resulted in lower orders. In addition, some of our customers have, and others may, request delays or cancellations in the shipment of their orders. A continuation of the global credit crisis and related downturn in the global economy is likely to negatively impact future revenues from both solar and semiconductor markets and could have a significant adverse affect on our results of operations and financial condition.
Backlog
Our backlog as of September 30, 2009 and 2008 was $32.4 million and $46.7 million, respectively, a 31% decrease. Our backlog as of September 30, 2009 included approximately $27.9 million of orders from our solar industry customers compared to $36.7 million of orders from solar industry customers as of September 30, 2008. The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders. The recent global credit crisis and related downturn in the global economy has caused many of our customers to delay or suspend their capacity expansion plans. As a result, the delivery times of many of the orders in our backlog may be delayed or even cancelled by our customers. Our backlog also includes revenue deferred pursuant to our revenue recognition policy, derived from orders that have already been shipped but which have not met the criteria for revenue recognition. The backlog as of September 30, 2009 and 2008 includes $1.2 million and $1.3 million, respectively, of open orders or deferred revenue on which we anticipate no gross margin. At the end of fiscal 2009 and 2008, 31% and 40% of our backlog consisted of open sales orders and deferred revenue from one customer, E-Ton Solar Tech, respectively.
Gross Profit
Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment or spare parts and the cost of service and support to customers for warranty, installation and paid service calls. Gross margin is gross profit as a percentage of net revenue.
The timing of revenue recognition can have a particularly significant effect on gross margin when the equipment revenue of an order is recognized in one period and the remainder of the revenue attributed to holdbacks is recognized in a later period. The portion of revenue attributed to the holdbacks generally comprises 10-20% of an order and has a significantly higher gross margin percentage.
Gross profit for fiscal 2009 decreased $7.9 million, or 35%, to $15.0 million in fiscal 2009 from $23.0 million in fiscal 2008. Gross margin decreased slightly to 28% in fiscal 2009 from 29% in fiscal 2008. We recognized $0.6 million of previously deferred profit in fiscal 2009, net of deferrals, compared to a net deferral of $2.9 million of profit in fiscal 2008. Excluding the impact of the change in deferred profit, gross margin in the solar and semiconductor equipment segment decreased due primarily to lower sales volumes resulting in underutilization of existing plant capacity. Gross profit and gross margin in the polishing supplies segment were lower in fiscal 2009 as compared to fiscal 2008 due to lower sales volumes of polishing machines, carriers and templates.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the cost of employees, consultants and contractors, as well as facility costs, sales commissions, legal and accounting fees and promotional marketing expenses.
Total selling, general and administrative (SG&A) expenses decreased $2.9 million or 17% in fiscal 2009 from fiscal 2008. SG&A expenses include $0.7 million and $0.5 million of stock-based compensation expense for fiscal 2009 and 2008, respectively. SG&A expenses for fiscal 2009 and 2008 include $0.2 million and $0.3 million, respectively, of costs related to compliance with the provisions of the Sarbanes-Oxley Act. The decrease in SG&A expenses was primarily due to decreased commissions on sales due to lower revenue generated in geographic regions where third-party sales representatives are utilized; primarily Asia. Additionally, other SG&A costs decreased in fiscal 2009 due to decreased shipping volumes and reduced costs related to reductions in workforce, mainly at our Bruce Technologies operation. Also, a $0.5 million provision was recorded in fiscal 2008 as an allowance for doubtful accounts for which there were no comparable expenses in fiscal 2009.
Impairment and Restructuring Charges
The Bruce Technologies operations are primarily dependent upon a mature segment of the semiconductor industry which is experiencing a significant downturn. The industry downturn resulted in recent operating losses and deterioration in forecasted revenue and earnings at Bruce Technologies. It is uncertain when, and to what extent, the markets served by Bruce Technologies will recover. Therefore, the Bruce Technologies operations were restructured in the second quarter of fiscal 2009 to focus on the parts supply business. The restructuring included a reduction in the number of employees and a reduction in the amount of space required to operate the business. The restructuring resulted in a charge of $0.6 million in the second quarter of fiscal 2009, which includes a $0.3 million charge for unutilized leased space, a $0.2 million write-off of furnace-related inventory parts that are not expected to be utilized in the future and $0.1 million of severance and outplacement costs. Our Bruce Technologies operations were also reorganized in the third quarter of fiscal 2008, which resulted in a restructuring charge of $0.4 million, consisting mainly of severance and outplacement costs for affected personnel.
Due to the circumstances related to the Bruce Technologies operations discussed above, the Company determined it was necessary to conduct an assessment of the ability to recover the carrying amount of long-lived assets of the Bruce Technologies operations. The amount estimated to be recoverable is based upon the Company’s judgments and estimates of undiscounted cash flows during the estimated remaining useful life of the assets. It was determined that the carrying value of the net assets was not fully recoverable; therefore, an impairment charge of $0.4 million was recorded in the second quarter of fiscal 2009 for the excess of carrying value over the fair value of the customer list and non-compete agreement. Future adverse changes could be caused by, among other factors, a downturn in the industries served, a general economic slowdown, reduced demand for our products in the marketplace, poor operating results, the inability to protect intellectual property or changing technologies and product obsolescence.
As a result of the impairment of long-lived assets described above, it was necessary to conduct an interim review of the goodwill and Bruce Technologies trademark for impairment. The fair value of the assets group was determined through estimates of the present value of future cash flows based upon the anticipated future use of the assets. As the carrying value of the Bruce Technologies assets exceeded their estimated fair value, the carrying values of goodwill ($0.1 million) and the Bruce Technologies trademark ($0.6 million) were also recorded as an impairment charge in the second quarter of fiscal 2009.
The total amount of the impairment charge was $1.1 million. Details of the impairment charge are as follows:
Research and Development
Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes and the materials used in those processes and producing prototypes. Reimbursements of research and development costs in the form of governmental research and development grants are netted against these expenses.
Research and development expenses decreased primarily due to increases in the amount of reimbursement of research and development costs. In fiscal 2009 and 2008, we recognized $0.5 million and $0.1 million of reimbursements of our research and development costs from governmental grants. The remainder of the decrease in research and development expenses relate to a specific customer development program in fiscal 2008 that did not repeat in fiscal 2009.
Income Tax Provision
Our effective tax rate was 20.9% in fiscal 2009 and 37.1% in 2008. In fiscal 2009, we incurred operating losses which resulted in the recording of a tax benefit equal to 20.9% of our pretax loss. The effective tax rate was negatively impacted by higher permanent book-to-tax differences as a percentage of our pretax loss and recording of additional valuation allowance on certain state deferred tax assets, including state net operating losses.
Our future effective income tax rate depends on various factors, such as the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses incurred and the effectiveness of our tax planning strategies.
Fiscal 2008 compared to Fiscal 2007
Net Revenue
Net revenue consists of revenue recognized upon shipment or installation of products using proven technology and upon acceptance of products using new technology. In addition, spare parts sales are recognized upon shipment. Service revenue is recognized upon completion of the service activity or ratably over the term of the service contract. The majority of our revenue is generated from large furnace systems sales which, depending on the timing of shipment and installation, can have a significant impact on our revenue, gross margins and earnings in any given period. See Critical Accounting Policies - Revenue Recognition.
Net revenue for the year ended September 30, 2008 increased $34.3 million or 75% compared to the year ended September 30, 2007. Overall growth in net revenue in fiscal 2008 was driven primarily by our continued penetration of the solar market where revenue increased $37.6 million or more than 300% compared to fiscal 2007. Within the solar and semiconductor equipment segment, net revenue from the solar market was $50.1 million and $12.5 million in fiscal 2008 and 2007, respectively, while net revenue from the semiconductor market was $21.9 million in fiscal 2008 compared to $25.2 million in fiscal 2007 a decrease of 13% due primarily to the downturn in the semiconductor industry. R2D generated $3.2 million of semiconductor equipment revenue in fiscal 2008 for which there were no comparable revenues in fiscal 2007. Revenue in the polishing supplies segment was $8.3 million for the fiscal years ended September 30, 2008 and 2007. Increased demand for our polishing machines was offset by lower shipments of insert carriers caused by increased competition in the insert carrier market as well as the downturn in the semiconductor industry. The recent global credit crisis and related downturn in the global economy have caused many of our customers to delay or suspend their capacity expansion plans. Some customers have and other may request delays in the shipment of their orders. As a result, future revenues from both the solar and semiconductor markets are likely to be negatively impacted by these recent events.
Backlog
Our backlog as of September 30, 2008 and 2007 was $46.7 million and $22.9 million, respectively, a 104% increase. Our backlog as of September 30, 2008 included approximately $36.7 million of orders from our solar industry customers compared to $17.4 million of orders from solar industry customers as of September 30, 2007. The orders included in our backlog are generally credit approved customer purchase orders expected to ship within the next twelve months. Because our orders are typically subject to cancellation or delay by the customer, our backlog at any particular point in time is not necessarily representative of actual sales for succeeding periods, nor is backlog any assurance that we will realize revenue or profit from completing these orders. The recent global credit crisis and related downturn in the global economy has caused many of our customers to delay or suspend their capacity expansion plans. As a result, the delivery times of many of the orders in our backlog may be delayed or even cancelled by our customers. Our backlog also includes revenue deferred pursuant to our revenue recognition policy, derived from orders that have already been shipped but which have not met the criteria for revenue recognition. The backlog as of September 30, 2008 and 2007 includes $1.3 million and $0.9 million, respectively, of open orders or deferred revenue on which we anticipate no gross margin.
Gross Profit
Gross profit is the difference between net revenue and cost of goods sold. Cost of goods sold consists of purchased material, labor and overhead to manufacture equipment or spare parts and the cost of service and support to customers for warranty, installation and paid service calls. Gross margin is gross profit as a percentage of net revenue.
Gross profit increased in fiscal 2008 by $10.2 million, or 79%, over fiscal 2007. The increase was driven by higher shipments during the year as well as improved margin percentage. Gross margin improved to 29% in fiscal 2008 from 28% in fiscal 2007. Gross margin in the solar and semiconductor equipment segment improved primarily due to realizing economies of scale. Increased volume resulted in improved capacity utilization, increased purchasing power and improved labor efficiencies in the solar and semiconductor equipment segment. Increases in gross margin were partially offset by higher warranty costs and higher deferred profit. We deferred $2.9 million of profit in fiscal 2008, net of acceptances, compared to a net deferral of $1.0 million in fiscal 2007. Gross profit and gross margin in the polishing supplies segment were lower in fiscal 2008 as compared to fiscal 2007 due mainly to changes in product mix. We sold higher volumes of polishing machines at a relatively low margin as compared to margins on insert carriers. Increased competition in the insert carrier market resulted in lower volumes in this market.
The timing of revenue recognition can have a particularly significant effect on gross margin when the equipment revenue of an order is recognized in one period and the remainder of the revenue attributed to holdbacks is recognized in a later period. The portion of revenue attributed to the holdbacks generally comprises 10-20% of an order and has a significantly higher gross margin percentage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of the cost of employees, consultants and contractors, as well as facility costs, sales commissions, legal and accounting fees and promotional marketing expenses.
Total selling, general and administrative (SG&A) expenses increased $7.2 million or 69% in fiscal 2008 from fiscal 2007. SG&A expenses include $0.5 million and $0.3 million of stock-based compensation expense for fiscal 2008 and 2007, respectively. SG&A expenses for fiscal 2008 include $0.3 million of costs related to compliance with the provisions of the Sarbanes-Oxley Act and a $0.5 million provision was recorded in fiscal 2008 as an allowance for doubtful accounts for which there were no comparable expenses in fiscal 2007. The increased SG&A also reflects $1.4 million of costs incurred by R2D in fiscal 2008 for which there were no comparable expenses in fiscal 2007. Commissions on sales increased approximately $2.0 million due to increased revenue generated in geographic regions, primarily Asia, where third-party sales representatives are utilized. Other selling costs increased $1.2 million in fiscal 2008 due to increased shipping volumes and increased marketing activities. The remainder of the increase in SG&A expenses resulted from increased depreciation and operating costs for the new building in The Netherlands and increased personnel, travel and consulting costs. The increased personnel and consulting costs include increased incentive compensation costs and administrative costs incurred to improve internal financial and operational reporting and implement improvements in operational efficiencies.
Restructuring Charges
In June 2008, we recorded a charge of $0.4 million resulting from the reorganization of the Bruce Technologies operations. The charge consisted mainly of severance and placement costs for personnel affected by the reduction in workforce. We incurred no comparable costs in fiscal 2007.
Research and Development
Research and development expenses consist of the cost of employees, consultants and contractors who design, engineer and develop new products and processes and the materials used in those processes and producing prototypes.
Increased investment in research and development resulted mainly from activity in the development of products and processes to meet the needs of the solar market. Reimbursements of research and development costs in the form of governmental research and development grants amounted to $0.1 million in fiscal 2008 and 2007, respectively, and are netted against these expenses.
Income Tax Provision
Our effective tax rate was 37.1% in fiscal 2008 and 17.5% in 2007. Between September 30, 2004 and September 30, 2006, we maintained a valuation allowance equal to the total of our deferred tax assets. Our effective tax rate was reduced by sixteen percentage points in fiscal 2007, as a result of the reduction in our valuation allowance. During fiscal year 2008, 2007 and 2006, we recorded reductions in the valuation allowance on deferred tax assets of $0.2 million, $1.2 million, and $0.2 million, respectively. The reduction in fiscal years 2008 and 2007 were based upon the profitability in the three most recent fiscal years, as well as our projected future profitability, strong cash position and strong order backlog. Because of this, we determined that it is more likely than not that we would realize the future tax benefit of a significant portion of our deferred tax assets. In fiscal 2006, the reduction in our valuation allowance resulted from a decline in our deferred tax assets. These changes in our valuation allowance had a favorable effect on our effective tax rates.
Our future effective income tax rate depends on various factors, such as the geographic composition of worldwide earnings, tax regulations governing each region, non-tax deductible expenses incurred and the effectiveness of our tax planning strategies.
Liquidity and Capital Resources
In November 2007 (fiscal 2008), we completed the sale of 2.5 million shares of Common Stock in a public offering for $14.41 per share. The net proceeds of the sale of Common Stock after offering expenses and underwriting fees was approximately $33.6 million. In February 2007 (fiscal 2007), we completed the sale of approximately 3 million shares of Common Stock in a public offering for $7.05 per share. The net proceeds of the sale of Common Stock after offering expenses and underwriting fees was approximately $19.4 million.
As of September 30, 2009, and 2008, cash, cash equivalents and current restricted cash were $43.8 million and $39.5 million, respectively. Our working capital decreased $2.4 million to $55.9 million as of September 30, 2009, compared to $58.3 million as of September 30, 2008. Our ratio of current assets to current liabilities increased to 4.1:1 as of September 30, 2009 from 3.2:1 as of September 30, 2008. The increase in cash during fiscal 2009 resulted primarily from significant collections of accounts receivable during fiscal 2009. Decreased working capital resulted primarily from fiscal 2009 operational losses.
As of September 30, 2009, our principal sources of liquidity consisted of $42.3 million of cash and cash equivalents and $1.5 million of restricted cash. Restricted cash consists of $1.0 million of bank guarantees in excess of our European overdraft facility and $0.5 million of cash in escrow to be paid to the sellers of R2D based upon fulfillment of their remaining contractual requirements. Bank guarantees are required by certain customers from whom deposits have been received in advance of shipment. The table below provides selected consolidated cash flow information for the periods indicated:
Cash Flows from Operating Activities
Cash provided by our operating activities was $7.6 million in fiscal 2009 compared to cash used in operating activities of $2.6 million and $2.7 million in fiscal 2008 and 2007 respectively. During fiscal 2009, cash was generated primarily from collection of accounts receivable and reductions in inventory. This generation of cash was partially offset by decreases in accrued liabilities and customer deposits, accounts payable and deferred profit. During fiscal 2008 and 2007, cash was primarily used to finance business growth, including increases in accounts receivable and inventory. This use of cash was partially offset each fiscal year by increases in accrued liabilities and customer deposits, deferred profit and accounts payable.
Cash Flows from Investing Activities
Our investing activities for fiscal 2009, 2008 and 2007 used cash of $1.9 million, $11.7 million and $4.4 million, respectively. During fiscal 2009, we invested primarily in manufacturing equipment, research and development equipment and building improvements ($1.1 million). In addition, we invested $0.5 million for a license to certain solar etching technology for the removal of PSG or phosphorus silica glass and $0.3 million, the remaining installment for the license of certain solar PECVD technology. During fiscal 2008 and 2007, the most significant investments were the fiscal 2008 acquisition of R2D ($7.4 million), approximately $3.7 million in fiscal 2007 for the purchase of and improvements to a 54,000 sq. ft. manufacturing facility located in Vaassen, The Netherlands and $1.5 million for additional improvements in fiscal 2008 to the manufacturing facility in The Netherlands. Another significant investment in fiscal 2007 and 2008 was $0.3 million and $0.4 million, respectively, paid for a license to the above-mentioned solar PECVD technology. Other investments in fiscal 2008 and 2007 consisted primarily of purchases of manufacturing equipment and research and development equipment and upgrades to information systems.
Cash Flows from Financing Activities
Cash used in financing activities was $0.6 million in fiscal 2009, which primarily consists of $0.5 million to purchase our common stock under the fiscal 2009 repurchase program and $0.1 million in payments on long-term debt. Cash provided by our financing activities for fiscal 2008 and 2007 was $33.3 million and $19.6 million, respectively, which primarily consists of the $33.6 million and $19.4 million raised in our Common Stock offerings, net of expenses. Other financing activities during fiscal 2008 and 2007 were mainly payments on debt of $0.8 million and $0.3 million, respectively.
We currently anticipate that our existing cash balances will be sufficient to meet our anticipated cash needs for current operations for at least the next 12 months.
Off-Balance Sheet Arrangements
As of September 30, 2009, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated by the Securities and Exchange Commission.
Contractual Obligations and Commercial Commitments
We had the following contractual obligations and commercial commitments as of September 30, 2009:
As of September 30, 2009, we had $4.7 million in purchase obligations compared to $8.5 million and $7.2 million as of September 30, 2008 and 2007, respectively. The decrease in purchase obligations is mainly a result of lower business volume which requires lower inventories and fewer purchase commitments.
Critical Accounting Policies
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the consolidated financial statements, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period.
On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, inventory valuation, accounts receivable collectability, warranty and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. The results of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A critical accounting policy is one that is both important to the presentation of our financial position and results of operations, and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. These uncertainties are discussed in “ITEM 1A. RISK FACTORS.” We believe the following critical accounting policies affect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Revenue Recognition. We review product and service sales contracts with multiple deliverables to determine if separate units of accounting are present in the arrangements. Where separate units of accounting exist, revenue is allocated to delivered items equal to the total sales price less the greater of (1) the relative fair value of the undelivered items, and (2) all contingent portions of the sales arrangement.
We recognize revenue when persuasive evidence of an arrangement exists; the product has been delivered and title has transferred, or services have been rendered; the seller’s price to the buyer is fixed or determinable and collectability is reasonably assured. For us, this policy generally results in revenue recognition at the following points:
(1) For the solar and semiconductor equipment segment, transactions where legal title passes to the customer upon shipment, we recognize revenue upon shipment for those products where the customer’s defined specifications have been met with at least two similarly configured systems and processes for a comparably situated customer. However, a portion of the revenue associated with certain installation-related tasks, equal to the greater of the relative fair value of those tasks or the portion of the contract price contingent upon their completion, generally 10%-20% of the system’s selling price (the “holdback”), and directly related costs, if any, are deferred and recognized into income when the tasks are completed. Since we defer only those costs directly related to installation or other unit of accounting not yet delivered and the portion of the contract price is often considerably greater than the fair market value of those items, our policy at times will result in deferral of profit that is disproportionate in relation to the deferred revenue. When this is the case, the gross margin recognized in one period will be lower and the gross margin reported in a subsequent period will improve.
(2) For products where the customer’s defined specifications have not been met with at least two similarly configured systems and processes, the revenue and directly related costs are deferred at the time of shipment and later recognized at the time of customer acceptance or when this criterion has been met. We have, on occasion, experienced longer than expected delays in receiving cash from certain customers pending final installation or system acceptance. If some of our customers refuse to pay the final payment, or otherwise delay final acceptance or installation, the deferred revenue would not be recognized, adversely affecting our future operating results.
(3) Equipment sold by the polishing supplies segment generally does not include process guarantees, acceptance criteria or holdbacks; therefore, the related revenue is generally recorded upon transfer of title which is generally at time of shipment.
(4) For all segments, sales of spare parts and consumables are recognized upon shipment, as there are no post shipment obligations other than standard warranties.
(5) Service revenue is recognized upon performance of the services requested by the customer. Revenue related to service contracts is recognized ratably over the period of the contract or in accordance with the terms of the contract, which generally coincides with the performance of the services requested by the customer.
Income taxes. We estimate our liability for income taxes based on the various jurisdictions where we conduct business. This requires us to estimate our (i) current tax exposure; (ii) temporary differences that result from differing treatment of certain items for tax and accounting purposes and (iii) unrecognized tax benefits. Temporary differences result in deferred tax assets and liabilities that are reflected in the consolidated balance sheet. The net deferred tax assets are reduced by a valuation allowance if, based upon all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. Establishing, reducing or increasing a valuation allowance in an accounting period results in an increase or decrease in tax expense in the statement of operations. We must make significant judgments to determine the provision for income taxes, deferred tax assets and liabilities, unrecognized tax benefits and any valuation allowance to be recorded against net deferred tax assets.
We are required to apply a more likely than not threshold to the recognition and derecognition of uncertain tax positions. We are required to recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. It further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change. Prior to adoption, our policy was to establish reserves that reflected the probable outcome of known tax contingencies.
Inventory Valuation. We value our inventory at the lower of cost or net realizable value. Costs for approximately 85% of inventory are determined on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. We regularly review inventory quantities and record a write-down for excess and obsolete inventory. The write-down is primarily based on historical inventory usage adjusted for expected changes in product demand and production requirements. However, our industry is characterized by customers in highly cyclical industries, rapid technological changes, frequent new product developments and rapid product obsolescence. Changes in demand for our products and product mix could result in further write-downs.
Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability or unwillingness of our customers to make required payments. This allowance is based on historical experience, credit evaluations, specific customer collection history and any customer-specific issues we have identified. Since a significant portion of our revenue is derived from the sale of high-value systems, our accounts receivable are often concentrated in a relatively few number of customers. A significant change in the liquidity or financial position of any one of these customers could have a material adverse impact on the collectability of our accounts receivable and our future operating results.
Warranty. We provide a limited warranty, generally for 12 to 24 months, to our customers. A provision for the estimated cost of providing warranty coverage is recorded upon acceptance of all systems. On occasion, we have been required and may be required in the future to provide additional warranty coverage to ensure that the systems are ultimately accepted or to maintain customer goodwill. While our warranty costs have historically been within our expectations and we believe that the amounts accrued for warranty expenditures are sufficient for all systems sold through September 30, 2009, we cannot guarantee that we will continue to experience a similar level of predictability with regard to warranty costs. In addition, technological changes or previously unknown defects in raw materials or components may result in more extensive and frequent warranty service than anticipated, which could result in an increase in our warranty expense.
Impairment of Long-lived Assets. We periodically evaluate whether events and circumstances have occurred that indicate the estimated useful lives of long-lived assets or intangible assets may warrant revision or that the remaining balance may not be recoverable. Goodwill and indefinite-lived intangibles are also tested for impairment at least annually. When factors indicate that an asset should be evaluated for possible impairment, we use an estimate of the related undiscounted net cash flows generated by the asset over the remaining estimated life of the asset in measuring whether the asset is recoverable. We make judgments and estimates used in establishing the carrying value of long-lived or intangible assets. Those judgments and estimates could be modified if adverse changes occurred in the future resulting in an inability to recover the carrying value of these assets. Below is a more detailed explanation of the procedures we perform.
We perform a two-step impairment test. In the first step, we estimate the fair value of the reporting unit and compare it to the carrying value of the reporting unit. Most of our reporting units are operating segments that are one level below the reportable segment into which they are aggregated. The one exception is P.R. Hoffman Machine Products, Inc. which is a reportable segment. When the carrying value exceeds the fair value of the reporting unit, the second step is performed to measure the amount of the impairment loss, if any. In the second step, the amount of the impairment loss is the excess of the carrying amount of the goodwill and other intangibles not subject to amortization over their implied fair value.
The methods used to estimate fair value of the reporting unit for the purpose of determining the implied fair value of goodwill include the market approach and discounted cash flows, as follows:
i.
One valuation methodology used is to determine the multiples of market value of invested capital (“MVIC”) of similar public companies to their revenue for the last twelve months (“LTM”) and next twelve months (“NTM”), and apply those multiples to the revenue for the comparable periods of the reporting unit being tested for impairment. One benefit of this approach is it is the closest to quoted market prices that are readily available. However, we generally give less weight to this method, because the market value of the minority interest of public companies may not be that relevant to the fair value of our wholly-owned reporting units, which are not public companies. Also, MVIC to revenue for the LTM uses a historical value in the denominator, while the market values tend to be forward looking; and MVIC of revenue for the NTM involves the use of projections for both the comparable companies and the reporting unit.
ii.
Another market approach that we sometimes use is based upon prices paid in merger and acquisition transactions for other companies in the same industry, again applying the MVIC to revenue of those companies to the historical and projected revenue of the reporting unit. When we use both market prices determined as described in (i), above, and prices paid in merger and acquisition transactions, we weight them to determine an indicated value under the market approach.
iii. As stated, we also use discounted cash flows as an indication of what a third-party would pay for the reporting unit in an arms-length transaction. This method requires projections of EBITDA (earnings before interest, taxes, depreciation and amortization) and applying an appropriate discount rate based on the weighted average cost of capital for the reporting unit.
We generally give the greatest weight, often 75% or more, to the discounted cash flow method, due to difficulty in identifying a sufficient number of companies that are truly comparable to a given reporting unit. This is because two of our three reporting units are relatively small businesses serving niche markets.
The material estimates and assumptions used in the discounted cash flows method of determining fair value include (i) the appropriate discount rate, given the risk-free rate of return and various risk premiums, (ii) projected revenues, (iii) projected material cost as a percentage of revenue, and (iv) the rate of increase in payroll and other expense. Quantitatively, the discount rate is the assumption that has the most pervasive effect on the discounted cash flows. We determine the discount rate used based on input from a valuation firm, which applies various approaches taking into account the particular circumstances of the reporting unit in arriving at a recommendation. For annual valuations, we test the sensitivity of the assumptions used in our discounted cash flow projection with the aid of a valuation firm, which utilizes a Monte Carlo simulation model, wherein various probabilities are assigned to the key assumptions.
In the current year, we performed a mid-year test of the impairment of the goodwill and other intangibles due to changing circumstances regarding the Bruce Technologies reporting unit. This test required us to use judgments and estimates that could be materially different than actual results. Bruce Technologies continued to incur losses after a restructuring and cost reductions put into place during the prior fiscal year and expectations that semiconductor customers served by this reporting unit would not in the future achieve the kinds of growth rates they had in the past due to increased maturity of that industry. We used the same discount rate as used in the prior annual impairment test of this reporting unit, but the other assumptions became more conservative due to the changing circumstances. It was primarily the lowered projections of future revenue that resulted in a lower estimate of fair value and the impairment loss. The payroll and certain expense assumptions, however, were lowered to take into account a second restructuring of the reporting unit, which involved a significant reduction in the number of employees. The material cost assumption was also lowered to take into account a change in product mix.
Stock-Based Compensation. The Company measures compensation costs relating to share-based payment transactions based upon the grant-date fair value of the award. Those costs are recognized as expense over the requisite service period, which is generally the vesting period. The benefits of tax deductions in excess of recognized compensation cost are reported as cash flow from financing activities rather than as cash flow from operating activities.
Impact of Recently Issued Accounting Pronouncements
For discussion of the impact of recently issued accounting pronouncements, see “Item 8: Financial Statements and Supplementary Data” under Footnote 1 “Summary of Significant Accounting Policies” under “Impact of Recently Issued Accounting Pronouncements”.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Foreign Currency Risk
We are exposed to foreign currency exchange rates to the extent sales contracts, purchase contracts, assets or liabilities of our European operations are denominated in currencies other than their functional currency, Our operations in Europe, a component of the solar and semiconductor equipment segment, conduct business primarily in their functional currency, the Euro, and the U.S. dollar. Nearly all of the transactions, assets and liabilities of all other operating units are denominated in the U.S. dollar, their functional currency. In fiscal 2009, the U.S. dollar, on average, strengthened relative to the Euro by 10% and, in fiscal 2008, weakened relative to the Euro by 13%. It is highly uncertain how currency exchange rates will fluctuate in the future. Actual changes in foreign exchange rates could adversely affect our operating results or financial condition.
As of September 30, 2009, we did not hold any stand-alone or separate derivative instruments. We incurred net foreign currency transaction losses of less than $0.1 million in fiscal 2009 and fiscal 2008. As of September 30, 2009, our foreign subsidiaries had $0.4 million of assets (cash and receivables) denominated in U.S. dollars, rather than Euros, which is their functional currency. A 10% change in the value of the functional currency relative to the non-functional currency would result in a gain or loss of less than $0.1 million. As of the end of fiscal 2009, we had $1.3 million of accounts payable, consisting primarily of amounts owed by foreign subsidiaries to our U.S. companies, denominated in U.S. dollars. Even though the intercompany accounts are eliminated in consolidation, a 10% change in the value of the Euro relative to the U.S. dollar would result in a gain or loss of $0.1 million. Our net investment in and long-term advances to our foreign operations totaled $44.4 million as of September 30, 2009. A 10% change in the value of the Euro relative to the U.S. dollar would cause an approximately $4.4 million foreign currency translation adjustment, a type of other comprehensive income (loss), which would be a direct adjustment to our stockholders’ equity. In fiscal 2009, we recognized net other comprehensive income of $0.6 million from translation adjustments.
During fiscal 2009 and 2008, U.S. dollar denominated sales of our European operations were $4.0 million and $4.1 million, respectively. As of September 30, 2009, sales commitments denominated in a currency other than the functional currency of our transacting operation were less than $0.1 million.
All operations become less competitive relative to foreign suppliers when their functional currency strengthens relative to that of the foreign supplier. Our European operations are particularly affected when selling to customers in Asia when such customers require a purchase price in U.S. dollars. If the value of the U.S. dollar has strengthened or weakened relative to the Euro our gross margin will be reduced or increased, respectively, relative to prior transactions unless we and our customers agree to a commensurate increase or decrease, respectively, in our selling price.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following documents are filed as part of this Annual Report on Form 10-K:
Report of Independent Registered Public Accounting Firm
To the Stockholders of
Amtech Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Amtech Systems, Inc. as of September 30, 2009 and 2008, and the related consolidated statements of operations, stockholders’ equity and comprehensive income and cash flows for each of the years in the three year period ended September 30, 2009. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amtech Systems, Inc. as of September 30, 2009 and 2008, and the results of their operations and their cash flows for each of the years in the three years ended September 30, 2009, in conformity with accounting principles generally accepted in the United States of America.
/s/ Mayer Hoffman McCann P.C.
Phoenix, Arizona
November 24,
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands except share data)
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(in thousands, except per share data)
The accompanying notes are an integral part of these consolidated financial statements.
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements Of Stockholders' Equity
And Comprehensive Income (Loss)
The accompanying notes are an integral part of these consolidated financial statements.
AMTECH SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash Flows
(in thousands)
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements
For the Years Ended September 30, 2009, 2008 and 2007
1. Summary of Significant Accounting Policies
Nature of Operations and Basis of Presentation - Amtech Systems, Inc. (the “Company”) designs, assembles, sells and installs capital equipment and related consumables used in the manufacture of wafers, primarily for the solar and semiconductor industries. The Company sells these products to manufacturers of solar cells, silicon wafers, and semiconductors worldwide, particularly in the Asia, United States and northern Europe. In addition, the Company provided semiconductor manufacturing support services through fiscal 2009.
The Company serves niche markets in industries that are experiencing rapid technological advances, and which historically have been very cyclical. Therefore, future profitability and growth depend on the Company’s ability to develop or acquire and market profitable new products, and on its ability to adapt to cyclical trends.
Principles of Consolidation - The consolidated financial statements include the accounts of Amtech and its wholly owned subsidiaries. All material intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates - The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition - Revenue is recognized upon shipment of the Company’s proven technology equal to the sales price less the greater of (i) the fair value of undelivered services or (ii) the contingent portion of the sales price, which is generally 10-20% of the total contract price. The entire cost of the equipment relating to proven technology is recorded upon shipment. The remaining contractual revenue, deferred costs, and installation costs are recorded upon successful installation of the product.
For purposes of revenue recognition, proven technology means that the Company has a history of at least two successful installations. New technology systems are those systems with respect to which the Company cannot demonstrate that it can meet the provisions of customer acceptance at the time of shipment.
Revenue on new technology is deferred until installation and acceptance at the customer’s premises is completed, as these sales do not meet the provisions of customer acceptance at the time of shipment. Cost of the equipment relating to new technology is recorded against deferred profit and then recorded in cost of sales upon customer acceptance.
Revenue from services is recognized as the services are performed. Revenue from prepaid service contracts is recognized ratably over the life of the contract. Revenue from spare parts is recorded upon shipment.
Deferred Profit - Revenue deferred pursuant to our revenue policy, net of the related deferred costs, if any, is recorded as deferred profit in current liabilities. The components of deferred profit are as follows:
Cash Equivalents - Cash equivalents consist of mutual funds invested in securities issued by the U.S. Government and its agencies and time certificates of deposit.
Restricted Cash - Current restricted cash of $1.5 million as of September 30, 2009 consists of bank guarantees of $1.0 million required by certain customers from whom deposits have been received in advance of shipment and cash in an escrow account related to contingent payments of $0.5 million to be paid to the sellers of R2D due to the fulfillment of certain requirements. Restricted cash - current of $2.0 million as of September 30, 2008 consisted of bank guarantees of $1.0 million in excess of our European overdraft facility that was terminated in the first quarter of fiscal 2009 and cash in an escrow account related to contingent payments paid in the first quarter of fiscal 2009 to the sellers of R2D due to the fulfillment of certain requirements.
Accounts receivable and allowance for doubtful accounts - Accounts receivable are recorded at the gross sales price of products sold to customers on trade credit terms. Accounts receivable are considered past due when payment has not been received from the customer within the normal credit terms extended to that customer. A valuation allowance is established for accounts when collection is no longer probable. Accounts are written off against the allowance when the probability of collection is remote.
The following is a summary of the activity in the Company’s allowance for doubtful accounts:
Accounts Receivable - Unbilled and Other - Unbilled and other accounts receivable consist mainly of the contingent portion of the sales price that is not collectible until successful installation of the product. These amounts are generally billed upon final acceptance by our customers. The majority of these amounts are offset by balances included in deferred profit.
Concentrations of Credit Risk - Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. The Company’s customers consist of manufacturers of solar cells, semiconductors, semiconductor wafers, and MEMS located throughout the world. Credit risk is managed by performing ongoing credit evaluations of the customers’ financial condition, by requiring significant deposits where appropriate, and by actively monitoring collections. Letters of credit are required of certain customers depending on the size of the order, type of customer or its creditworthiness, and its country of domicile. Reserves for potentially uncollectible receivables are maintained based on an assessment of collectability.
As of September 30, 2009, receivables from three customers individually represented 19%, 11%, and 10% of accounts receivable, respectively. As of September 30, 2008, receivables from two customers individually represented 22% and 20% of accounts receivable.
Refer to Note 9, Business Segment Information, for information regarding revenue and assets in other countries subject to fluctuation in foreign currency exchange rates.
Inventories - We value our inventory at the lower of cost or net realizable value. Costs for approximately 85% of inventory are determined on an average cost basis with the remainder determined on a first-in, first-out (FIFO) basis. The components of inventories are as follows:
Property, Plant and Equipment - Property plant, and equipment are recorded at cost. Maintenance and repairs are charged to expense as incurred. The cost of property retired or sold and the related accumulated depreciation are removed from the applicable accounts when disposition occurs and any gain or loss is recognized. Depreciation is computed using the straight-line method. Depreciation expense was $1.1 million, $1.0 million and $0.6 million in fiscal 2009, 2008 and 2007, respectively. Useful lives for equipment, machinery and leasehold improvements range from three to seven years; for furniture and fixtures from five to ten years; and for buildings twenty years.
The following is a summary of property, plant and equipment:
Goodwill - Goodwill and intangible assets with indefinite lives are not subject to amortization, but are tested for impairment at least annually. Goodwill is reviewed for impairment on an annual basis, typically at the end of the fiscal year, or more frequently if circumstances dictate. Circumstances in the quarter ended March 31, 2009 required the Company to test long-lived assets for recoverability and impairment. See Note 11, “Impairment and Restructuring Charge” for a description of the facts and circumstances leading to the interim impairment test and the amount and method of calculating the impairment charge.
In October 2007, the Company acquired the R2D Automation business (“R2D”), a solar cell and semiconductor automation equipment manufacturing company located near Montpellier, France. Cash contingent payments of approximately $1.6 million were deposited in an escrow account with the agreement to pay the sellers upon fulfillment of certain requirements. As of September 30, 2009, approximately $1.1 million of the $1.6 million has been paid to the sellers and $0.5 million was accrued for payment in recognition of fulfilling certain requirements. The amount of contingent payments earned was allocated to goodwill in fiscal 2009.
Intangibles - Intangible assets are capitalized and amortized over their useful life if the life is determinable. If the life is not determinable, amortization is not recorded. Amortization expense related to intangible assets was $0.5 million, $0.4 million and $0.1 million in fiscal 2009, 2008 and 2007, respectively. The aggregate amortization expense for the intangible assets for each of the five succeeding fiscal years is estimated to be $0.5 million in 2010, 2011, 2012, 2013 and 2014 and $1.4 million, thereafter.
Long-lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Circumstances in the quarter ended March 31, 2009 required the Company to test long-lived assets for recoverability and impairment. See Note 11, “Impairment and Restructuring Charge” for a description of the facts and circumstances leading to the interim impairment test and the amount and method of calculating the impairment charge.
In April 2007, the Company entered into a license agreement with PST Co., LTD (PST) to market, sell, install, service and manufacture machinery and equipment for the manufacturing of photovoltaic cells that employs PECVD Technology (Licensed Product) developed by PST. Under the terms of this agreement the Company paid $1.0 million to PST. The license agreement expires in April 2017. These payments are being amortized over the life of the agreement beginning in the first quarter of Fiscal 2009. The Company may be required to pay additional license fees in the future if the profitability of the Licensed Product surpasses certain thresholds.
In November 2008, the Company entered into a license agreement with PST to market PST’s existing and future proprietary PSG (phosphorus silicate glass) dry etch systems for the manufacture of photovoltaic cells. The royalty-free, 10-year license agreement grants Amtech exclusive marketing rights throughout the world, with the exception of Korea and one Japanese customer with respect to which PST retains marketing rights. In consideration for the licensed rights, the Company paid $0.5 million.
On April 9, 2009, the Company entered into amendments with PST to both the PSG license and the PECVD license to expand the licenses to include one future model of the PSG dry etch systems and three future models of the PECVD system. These amendments to the licenses require the Company to pay additional license fees upon successful achievement of the agreed upon specifications of each of the four new models. The four payments range from three hundred million South Korean Won (KRW), approximately $0.2 million, to one billion KRW, approximately $0.8 million, for maximum total payments of approximately $1.4 million. Such payments will be recorded as additional intangibles, the cost of which will be amortized over the life of the license. As of September 30, 2009, the Company has not made any payments related to the amendments of these license agreements.
In October 2007, the Company acquired the operations of R2D. The intangible assets of R2D consist principally of intellectual property and technology, customer lists, customer contracts, trademarks and non-compete agreements totaling $3.0 million. The fair value of intangible assets was determined by a valuation approach that estimates the future economic benefit stream of the asset determined with the assistance of an independent third-party consultant. This benefit stream was then discounted to present value with an appropriate risk-adjusted discount rate. See Note 12, “Acquisition,” for detail of the intangible assets acquired.
The following is a summary of intangibles:
Restricted Cash - Non-current - Restricted cash - non-current as of September 30, 2008, consisted of cash in an escrow account related to contingent payments to be paid to the sellers of R2D upon fulfillment of certain requirements. As of September 30, 2009 all requirements had been fulfilled and the Company paid $1.1 million to the sellers and accrued the final payment of $0.5 million. These amounts were allocated to goodwill in fiscal 2009.
Warranty - A limited warranty is provided free of charge, generally for periods of 12 to 24 months to all purchasers of the Company’s new products and systems. Accruals are recorded for estimated warranty costs at the time revenue is recognized. The following is a summary of activity in accrued warranty expense:
Research and Development Expenses - Product development costs are expensed as incurred.
Shipping expense - Shipping expenses of $0.7 million, $1.0 million and $0.3 million for fiscal 2009, 2008 and 2007 are included in selling, general and administrative expenses.
Foreign Currency Transactions and Translation - The functional currency of the Company’s European operations is the Euro. Net income includes pretax net losses from foreign currency transactions of $0.1 million in fiscal 2009, 2008 and 2007, respectively. The gains or losses resulting from the translation of foreign financial statements have been included in other comprehensive income (loss).
Income Taxes - The Company files consolidated federal income tax returns and computes deferred income tax assets and liabilities based upon cumulative temporary differences between financial reporting and taxable income, carryforwards available and enacted tax laws.
Deferred tax assets reflect the tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management and based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Each quarter the valuation allowance is re-evaluated.
Stock-Based Compensation - The Company measures compensation costs relating to share-based payment transactions based upon the grant-date fair value of the award. Those costs are recognized as expense over the requisite service period, which is generally the vesting period. The benefits of tax deductions in excess of recognized compensation cost are reported as cash flow from financing activities rather than as cash flow from operating activities.
Stock-based compensation expense for the fiscal years ended September 30, 2009, 2008 and 2007 reduced the Company’s results of operations as follows:
Qualified stock options issued under the terms of the plans have, or will have, an exercise price equal to, or greater than, the fair market value of the common stock at the date of the option grant, and expire no later than ten years from the date of grant, with the most recent grant expiring in 2019. Options vest over 1 to 5 years. The Company estimates the fair value of awards on the date of grant using the Black-Scholes option pricing model using the following assumptions:
To estimate expected lives for this valuation, it was assumed that options will be exercised at varying schedules after becoming fully vested. Forfeitures have been estimated at the time of grant and will be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based upon historical experience. Fair value computations are highly sensitive to the volatility factor assumed; the greater the volatility, the higher the computed fair value of the options granted. The Company uses historical stock prices to determine the volatility factor.
Fair Value of Financial Instruments - The carrying values of the Company’s current financial instruments approximate fair value due to the short term in which these instruments mature. The carrying values of the Company’s long-term debt (see Note 5) approximate fair value because their variable interest rates approximate the prevailing interest rates for similar debt instruments.
Impact of Recently Issued Accounting Pronouncements
In October 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-13, Revenue Recognition-Multiple Deliverable Revenue Arrangements. This guidance updates the existing multiple-element revenue arrangements guidance currently included in FASB ASC 605-25, Revenue Recognition-Multiple-Element Arrangements. The revised guidance provides for two significant changes to the existing multiple element revenue arrangements guidance. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. This guidance also significantly expands the disclosures required for multiple-element revenue arrangements. The revised multiple-element revenue arrangements guidance will be effective the fiscal year ending September 30, 2011, however, early adoption is permitted, provided that the revised guidance is retroactively applied to the beginning of the year of adoption. The Company is not planning to adopt this guidance early and the Company has not yet determined the impact, if any, the adoption of this guidance will have on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-5 Fair Values Measurements and Disclosures, Measuring Liabilities at Fair Value. The revised authoritative guidance provides clarification for the valuation of certain liabilities at fair value. This statement becomes effective for the first reporting period (including interim periods) beginning after issuance, which is the first quarter of fiscal 2010 for the Company. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
In May 2009, the FASB issued authoritative guidance included in FASB ASC 855-10 Subsequent Events-Overall. The guidance redefines the types of subsequent events and requires the Company to disclose the date through which subsequent events have been evaluated. The requirements are effective for interim or annual financial periods ending after June 15, 2009. The Company adopted this statement and has included the required disclosures in Note 14.
In October 2008, the FASB revised the authoritative guidance for determining the fair value of a financial asset in a market that is not active. The revisions are included in FASB ASC 320-10-35-55A, Fair Value Measurement and Disclosures-Overall-Subsequent Measurement-Financial Assets in a Market That is Not Active. This guidance is effective immediately and management notes that there is no impact on the Company’s consolidated financial statements.
In February 2008, the FASB issued revised authoritative guidance for nonfinancial assets and nonfinancial liabilities, which defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. The guidance is included in FASB ASC 820-10-65, Fair Value Measurements and Disclosures-Overall-Transition and Open Effective Date Information. This revised guidance is effective for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years, which would be the quarter ending December 31, 2009 for the Company. The Company does not believe that this revised guidance will have a material impact on its consolidated financial statements.
In December 2007, the FASB revised the authoritative guidance for business combinations, which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. This guidance is included in FASB ASC 805, Business Combinations. It also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. This guidance applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning December 15, 2008, which is October 1, 2009 for the Company. The Company does not believe that this guidance will have a material impact on its consolidated financial statements.
2. Stock-Based Compensation
Stock Option Plans -The 2007 Employee Stock Option Plan (the “2007 Plan), under which 500,000 shares could be granted, was adopted by the Board of Directors in April 2007, and approved by the shareholders in May 2007. The 1998 Employee Stock Option Plan (the “1998 Plan”), under which 50,000 shares could be granted, was adopted by the Board of Directors in January 1998, and approved by shareholders in March 1998. The number of shares available for options under the 1998 Plan has since been increased to 500,000 shares through authorization by the Board of Directors and approval of shareholders. The 1998 Plan expired in January 2008. The Non-Employee Directors Stock Option Plan was approved by the shareholders in 1996 for issuance of up to 100,000 shares of Common Stock to directors. In July 2005, the Board of Directors authorized, and shareholders approved, an increase in the number of shares available for options under the Non-Employee Directors Stock Option Plan to 200,000 shares.
Stock options issued under the terms of the plans have, or will have, an exercise price equal to or greater than the fair market value of the Common Stock at the date of the option grant and expire no later than 10 years from the date of grant, with the most recent grant expiring in 2019. Options issued by the Company vest over one to five years. The Company may also grant restricted stock awards under the 2007 Plan.
In December 2007, the Company awarded restricted shares under the existing share-based compensation plans, which vest in equal annual installments over a four-year period. The total value of these awards is expensed on a ratable basis over the service period of the employees receiving the grants. The “service period” is the time during which the employees receiving grants must remain employees for the shares granted to fully vest. As of September 30, 2009, the unamortized expense related to restricted shares was $0.4 million and it is expected to be recognized over three years.
Restricted stock transactions and outstanding are summarized as follows:
In Fiscal 2009, the Company awarded 30,000 stock options at a price of $5.20 with vesting subject to performance conditions. Vesting of these options is dependent upon the employee fulfilling the service period requirements as well as the meeting the performance criteria within one year from the date of grant and two years from the date of the grant. The Company is required to assess the probability that the performance conditions will be met. As of September 30, 2009 the Company expects that it is probable that the performance conditions will be met and these options are being expensed over the period from the date of grant through the expected date of the performance criteria being met. Currently, the Company expects performance criteria to me met within six months of the grant date and eighteen months of the grant date. Each quarter, the Company will reassess the probability of meeting the performance conditions and the period in which they will be met. Stock compensation expense related to the performance conditions will be adjusted if necessary.
Stock-based compensation plans are summarized in the table below:
Stock options were valued using the Black-Scholes option pricing model. See Note 1 for further discussion. Stock option transactions and the options outstanding are summarized as follows:
The following tables summarize information for stock options outstanding and exercisable as of September 30, 2009:
The aggregate intrinsic value in the tables above represents the total pretax intrinsic value, based on the Company’s closing stock price of $5.30 per share as of September 30, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. The total intrinsic value of stock options exercised during the fiscal years ended September 30, 2008 and 2007 was $0.6 million and $0.1 million, respectively. The total intrinsic value of stock options exercised during the fiscal year ended September 30, 2009 was less than ten thousand dollars.
3. Earnings Per Share
Basic earnings per share is computed by dividing net income (loss) available to common stockholders (net income less accrued preferred stock dividends) by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed similarly to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued, and the numerator is based on net income (loss). In the case of a net loss, diluted earnings per share is calculated in the same manner as basic earnings per share. Options and restricted stock of approximately 721,500, 160,500 and 196,000 shares are excluded from the fiscal 2009, 2008 and 2007 earnings per share calculations as they are anti-dilutive.
4. Line of Credit
In the first quarter of fiscal 2009 we terminated our line of credit in the amount of Euro 1.0 million (approximately $1.3 million). The line of credit was secured by a lien on the Company’s land and buildings and on trade accounts receivable in The Netherlands. As of September 30, 2008, there were no borrowings on the line of credit.
5. Other Long-Term Obligations
In December 2004, the Company financed a laser cutting tool purchased in the fourth quarter of fiscal 2004. The Company financed $0.5 million at an interest rate of 6.55% with 48 equal monthly payments of $12,000, including principal and interest. The outstanding principal balance of this loan was less than $0.1 million as of September 30, 2008. This loan was paid off in fiscal 2009.
In October 2006, the Company financed a de-burring machine purchased in the fourth quarter of fiscal 2006. The Company financed $0.4 million at an interest rate of 7.43% with 60 equal monthly payments of $7,000, including principal and interest. The outstanding principal balance of this loan was $0.2 million as of September 30, 2009 and 2008, respectively.
In October 2007, the Company acquired, through the acquisition of R2D, a CNC machine purchased in the 3rd quarter of fiscal 2007. The amount originally financed was $0.1 million at an interest rate of 5.1% with 60 equal monthly payments of $2,000, including principal and interest. The outstanding balance at the time of the acquisition was $0.1 million. The outstanding principal balance of this loan was $0.1 million as of September 30, 2009 and 2008, respectively.
In October 2007, the Company acquired, through the acquisition of R2D, a CNC machine purchased in the 4th quarter of fiscal 2007. The amount originally financed was $0.1 million at an interest rate of 5.2% with 60 equal monthly payments of $2,000, including principal and interest. The outstanding balance at the time of the acquisition was $0.1 million. The outstanding principal balance of this loan was $0.1 million as of September 30, 2009 and 2008, respectively.
Total maturities of long term debt are $0.1 million in 2010, $0.1 million in 2011, less than $0.1 million in 2012 and zero, thereafter. Interest expense was $0.1 million, $0.2 million, and $0.3 million for fiscal 2009, 2008, and 2007, respectively.
6. Stockholders’ Equity
Stock Repurchase Program - In December 2008, the Board of Directors approved a stock repurchase program authorizing the repurchase of up to $4 million of its common stock. Under the program, shares may be repurchased from time to time in open market transactions at prevailing market prices or in privately negotiated purchases. The timing and actual number of shares purchased will depend on a variety of factors, such as price, corporate and regulatory requirements, alternative investment opportunities, and other market and economic conditions. The program may be commenced, suspended or terminated at any time, or from time-to-time at management’s discretion without prior notice. During fiscal 2009, the Company repurchased 144,000 shares for $0.4 million in cash at an average cost of $3.09 per share. The repurchased shares were retired immediately after the repurchases were complete. Retirement of the repurchased shares is recorded as a reduction of common stock and additional paid-in-capital.
Shareholder Rights Plan - On December 15, 2008, the Company and Computershare Trust Company, N.A., as Rights Agent (the “Rights Agent”), entered into an Amended and Restated Rights Agreement (the “Restated Rights Agreement”) which amends and restates the terms governing the previously authorized shareholder rights (each a “Right”) to purchase fractional shares of the Company’s Series A Participating Preferred Stock (“Series A Preferred”) currently attached to each of the Company’s outstanding Common Shares, par value $0.01 per share (“Common Shares”). As amended, each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred at an exercise price of $51.60 (the “Exercise Price”), subject to adjustment. The Final Expiration Date (as defined in the Restated Rights Agreement) is December 14, 2018.
Other than extending the Final Expiration Date (as defined in the Restated Rights Agreement) of the Rights to December 14, 2018 and adjusting the Exercise Price, there were no material changes to the principal terms of the Rights. The Restated Rights Agreement also contains certain other changes in order to address current law and practice with respect to shareholder rights plans.
Public Offerings - In November 2007, the Company completed an underwritten public offering of 2,500,000 shares of its common stock in an underwritten public offering at a price to the public of $14.41 per share. Net proceeds to the Company were approximately $33.6 million, net of approximately $0.3 million of offering expenses and $2.2 million of underwriting commissions. The Company intends to use the net proceeds from this offering for working capital and other general corporate purposes. Pending application of these proceeds, the Company will invest the net proceeds in short-term, interest bearing investment grade securities.
In February 2007, the Company filed registration statements on Form S-1 with the Securities and Exchange Commission for the sale of 2,625,000 shares of its common stock in an underwritten public offering at a price to the public of $7.05 per share. The Company also granted the underwriters a 30-day option to purchase up to 393,750 additional shares of common stock to cover over-allotments. Net proceeds to the Company were approximately $19.4 million including the exercise of the over-allotment, net of $0.4 million of offering expenses and $1.5 million of underwriting commissions.
7. Commitments and Contingencies
Purchase Obligations - As of September 30, 2009, we had unrecorded purchase obligations in the amount of $4.7 million. These purchase obligations consist of outstanding purchase orders for goods and services. While the amount represents purchase agreements, the actual amounts to be paid may be less in the event that any agreements are renegotiated, cancelled or terminated.
Legal Proceedings - The Company and its subsidiaries are defendants from time to time in actions for matters arising out of their business operations. The Company does not believe that any matters or proceedings presently pending will have a material adverse effect on its consolidated financial position, results of operations or liquidity.
Operating Leases - The Company leases buildings, vehicles and equipment under operating leases. Rental expense under such operating leases was $0.9 million in fiscal 2009, 2008 and 2007, respectively. As of September 30, 2009, future minimum rental commitments under non-cancelable operating leases with initial or remaining terms of one year or more totaled $3.4 million, of which $0.7 million, $0.7 million, $0.4 million, $0.3 million and $0.3 million is payable in fiscal 2010, 2011, 2012, 2013 and 2014, respectively, and $1.0 million, thereafter.
8. Major Customers and Foreign Sales
One customer individually accounted for 16%, 20% and 13% of net revenue during fiscal 2009, 2008 and 2007, respectively. E-Ton Solar Tech accounted for 16%, 4% and 13% in fiscal 2009, 2008 and 2007. At the end of fiscal 2009 and 2008, 31% and 40%, respectively, of our backlog consists of open sales orders and deferred revenue from E-Ton Solar Tech.
Our net revenues for fiscal 2009, 2008 and 2007 were to customers in the following geographic regions:
9. Business Segment Information
The Company’s products are classified into two core business segments. The solar and semiconductor equipment segment designs, manufactures and markets semiconductor wafer processing and handling equipment used in the fabrication of integrated circuits, solar cells and MEMS. Also included in the solar and semiconductor equipment segment are the manufacturing support service operations and corporate expenses, except for a small portion that is allocated to the polishing supplies segment. The polishing supplies segment designs, manufactures and markets carriers, templates and equipment used in the lapping and polishing of wafer-thin materials, including silicon wafers used in the production of semiconductors.
Information concerning our business segments is as follows:
The Company has manufacturing operations in The Netherlands, United States and France. Revenues, operating income (loss) and identifiable assets by geographic region are as follows:
10. Income Taxes
The components of the provision (benefit) for income taxes are as follows:
A reconciliation of actual income taxes to income taxes at the expected United States federal corporate income tax rate of 34 percent is as follows:
Deferred income taxes reflect the tax effects of temporary differences between the carrying value of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary book-tax differences that give rise to significant portions of the deferred tax assets and deferred tax liability are as follows:
Changes in the deferred tax valuation allowance are as follows:
The Company has net operating losses in some states at September 30, 2009 which expire in varying amounts between 2010 and 2014. These operating losses have been fully reserved in those states where we determined that we will not be able to utilize those net operating losses.
The Company has foreign tax credit carryforwards that expire in varying amounts in 2018 and 2019.
Proper accounting for income taxes requires that a valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. Each quarter the valuation allowance is re-evaluated. Tax payments of $1.7 million were made and tax refunds of $1.5 million were received during fiscal 2009.
We adopted, as of the beginning of fiscal 2008, the standards required for accounting for uncertainty in income taxes. Prior to the adoption of these standards, our policy was to establish reserves that reflected the probable outcome of known tax contingencies. The effects of final resolution, if any, were recognized as changes to the effective income tax rate in the period of resolution. The standards adopted at the beginning of fiscal 2008 require application of a “more likely than not” threshold to the recognition and derecognition of uncertain tax positions. We currently recognize the amount of tax benefit that has a greater than 50 percent likelihood of being ultimately realized upon settlement. The standards further require that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter of such change.
As a result of adoption, we recorded a $0.3 million increase to tax liabilities, and a $0.3 million decrease to retained earnings at the beginning of fiscal 2008.
The following table sets forth changes in our total gross unrecognized tax benefit liabilities for fiscal 2009. Approximately $0.5 million of this total represents the amount that, if recognized would favorably affect our effective income tax rate in future periods.
We have classified all of our liabilities for uncertain tax positions as income taxes payable long-term.
We report accrued interest and penalties related to unrecognized tax benefits in income tax expense. For fiscal 2009, we recognized a net expense for interest and penalties of $0.1 million resulting in an accrual of $0.1 million for potential accrued interest and penalties as of September 30, 2009.
We do not expect that the amount of our tax reserves will materially change in the next 12 months other than the continued accrual of interest and penalties.
We have not signed any agreements with the Internal Revenue Service, any state or foreign jurisdiction to extend the statute of limitations for any fiscal year. As such, the number of open years is the number of years dictated by statute in each of the respective taxing jurisdictions, but generally is from 3 to 5 years.
During the current fiscal year, we recorded a benefit of less than $0.1 million, resulting from the reversal of liabilities in taxing jurisdictions where the statute of limitations had expired.
Various examinations by United States, state or foreign tax authorities could be conducted for any open tax year.
11. Impairment and Restructuring Charge
The Bruce Technologies operations are primarily dependent upon a mature segment of the semiconductor industry which has been experiencing a significant downturn. The industry downturn resulted in recent operating losses and deterioration in forecasted revenue and earnings at Bruce Technologies. It is uncertain when, and to what extent, the markets served by Bruce Technologies will recover. Therefore, the Bruce Technologies operations were restructured in the second quarter of fiscal 2009 to focus on the parts supply business. The restructuring included a reduction in the number of employees and a reduction in the amount of space required to operate the business. The restructuring resulted in a charge of $0.6 million, which includes a $0.3 million charge for unutilized leased space, a $0.2 million write-off of furnace-related inventory parts that are not expected to be utilized in the future and $0.1 million of severance and outplacement costs.
Due to the circumstances related to the Bruce Technologies operations discussed above, the Company determined it was necessary to conduct an assessment of the ability to recover the carrying amount of long-lived assets of the Bruce Technologies operations. Recoverability is based upon the Company’s judgments and estimates of undiscounted cash flows during the estimated remaining useful life of the assets. It was determined that the carrying value of the net assets subject to amortization or depreciation was not fully recoverable; therefore, an impairment charge of $0.4 million was recorded for the excess of carrying value over the fair value of the customer list and non-compete agreement.
As a result of the impairment of long-lived assets described above, it was necessary to conduct an interim review of the goodwill and Bruce Technologies trademark for impairment. The fair value of the assets group was determined through estimates of the present value of future cash flows based upon the anticipated future use of the assets. As the carrying value of the Bruce Technologies assets exceeded their estimated fair value, the carrying values of goodwill ($0.1 million) and the Bruce Technologies trademark ($0.6 million) were also recorded as an impairment charge in the second quarter of fiscal 2009.
The total amount of the impairment charge was $1.1 million. Details of the impairment charge are as follows:
In the third quarter of fiscal 2008, Bruce Technologies operations were reorganized to better position the Company for profitability in light of lower plant utilization resulting from a slowdown in the semiconductor industry. As a result of this reorganization, the Company notified certain personnel of their termination date and severance and recorded a restructuring charge of $0.4 million. All amounts had been paid as of September 30, 2008. These charges are presented as a separate line item on the Consolidated Statements of Operations.
12. Acquisition
On October 8, 2007, the Company acquired, through its wholly-owned subsidiary, Tempress Holding B.V., 100% of the equity of R2D, a solar cell and semiconductor automation equipment manufacturing company, located near Montpellier, France. R2D provides solutions to the solar and semiconductor industries. The purpose of the acquisition was to expand the Company’s automation products which are used in the semiconductor manufacturing and solar diffusion processes. The acquisition of the technology and business of R2D enhances the growth strategy by allowing the Company to increase sales by offering an integrated system under the Tempress brand to the solar industry.
The aggregate purchase price is based on the cash consideration paid at closing of $5.5 million plus acquisition costs of $1.0 million, including cost of legal representation and due diligence. Contingent payments of $1.6 million to be paid to sellers upon fulfillment of certain requirements were deposited in an escrow account. Milestone payments of $1.6 million have been paid or accrued as of September 30, 2009. These payments were allocated to goodwill. Goodwill increased $0.7 million in fiscal 2009 related to these contingent payments. The assets of R2D principally consist of intellectual property and technology, reseller relationships, customer contracts, trademarks, non-compete agreements, inventories and other tangible property used in connection with the acquired business. Liabilities assumed include current liabilities, loans, obligations under certain contracts, leases, purchase orders and warranty claims for certain products and services under warranty as of the date of the acquisition.
The valuation of acquired assets was determined with the assistance of an independent third-party consultant. The fair value of intangible assets was determined by a valuation approach that estimates the future economic benefit stream of the asset. This benefit stream was then discounted to present value with an appropriate risk-adjusted discount rate.
The allocation of the purchase price to the fair value of the assets acquired and liabilities assumed at the date of acquisition is as follows (dollars in thousands):
The following consolidated pro forma financial information was prepared assuming that the acquisition had occurred at the beginning of the fiscal 2007. This pro forma information does not necessarily reflect the results of operations that would have occurred had the acquisition taken place at the beginning of the period and is not necessarily indicative of results that may be obtained in the future (unaudited):
For purposes of the above pro forma presentation, the historical revenues and earnings of R2D for fiscal 2007 have been combined with the revenues and earnings of Amtech for fiscal 2007.
13. Selected Quarterly Data (Unaudited)
14. Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through November 24, 2009, the date these consolidated financial statements on this Form 10-K were filed with the Securities and Exchange Commission. Through that date, there were no events requiring adjustment to or disclosure in these consolidated financial statements.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has carried out an evaluation of the effectiveness of our disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e). Based upon that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures in place were effective as of September 30, 2009.
Management’s Report on Internal Control Over Financial Reporting
To the Shareholders of Amtech Systems, Inc.,
The management of Amtech Systems, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, our controls and procedures may not prevent or detect misstatements. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the controls system are met. Because of the inherent limitations in all controls systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
The management assessed the effectiveness of our internal control over financial reporting based on the criteria in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on its evaluation under the criteria in Internal Control - Integrated Framework, the management concluded that our internal control over financial reporting was effective as of September 30, 2009.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only Management’s report in this Annual Report.
There were no changes in our internal controls over financial reporting that occurred during the year ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
Pursuant to Paragraph G(3) of the General Instructions to Form 10-K, the information required by Part III of Form 10-K are incorporated by reference to Amtech’s Definitive Proxy Statement to be filed with the Securities and Exchange Commission in connection with its 2010 Annual Meeting of Stockholders (the “Proxy Statement”).
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND GOVERNANCE
The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference the Proxy Statement, which will be filed with the Securities and Exchange Commission within 120 days of the end of our fiscal year.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1)
The consolidated financial statements required by this item are set forth on the pages indicated at Item 8.
(2)
All financial statement schedules are omitted because they are either not applicable, or because the required information is shown in the consolidated financial statements or notes thereto.
(3)
Exhibits: The response to this section of Item 15 is included in the Exhibit Index of this Annual Report on Form 10-K and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
EXHIBIT INDEX
____________________
*
Filed herewith.
+
Indicates management contract or compensatory plan or arrangement.
A
Incorporated by reference to Amtech’s Form S-1 Registration Statement No. 2-83934-LA.
B
Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1987.
C
Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1988.
D
Incorporated by reference to Amtech’s Form S-1 Registration Statement (File No. 33-77368).
E
Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1999.
F
Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 8, 2008.
G
Incorporated by reference to Amtech’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on December 15, 2008.
H
Incorporated by reference to Amtech’s Form S-8 Registration Statement (related to the Amended and Restated 1995 Stock Option Plan), filed with the Securities and Exchange Commission on August 9, 1996.
I
Incorporated by reference to Amtech’s Form S-8 Registration Statement (related to the Non-Employee Director Stock Option Plan), filed with the Securities and Exchange Commission on August 9, 1996.
J
Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 1993.
K
Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 28, 2005.
L
Incorporated by reference to Amtech’s Annual Report on Form 10-K for the year ended September 30, 2005.
M
Incorporated by reference to Amtech’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 12, 2006.
N
Incorporated by reference to Amtech’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2006.
O
Incorporated by reference to Amtech’s Proxy Statement for its 2007 Annual Shareholders’ Meeting, filed with the Securities and Exchange Commission on April 24, 2007.
P
Incorporated by reference to Amtech’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2007.
Q
Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 11, 2007.
R
Incorporated by reference to Amtech’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 11, 2008.