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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 000-17297

 

 

BTU INTERNATIONAL, INC.

(Exact name of Registrant as specified in its charter)

 

 

 

DELAWARE		04-2781248
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification Number)
23 Esquire Road, North Billerica, Massachusetts		01862-2596
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (978) 667-4111

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every interactive data file required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files.)    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large Accelerated Filer		¨		Accelerated Filer		¨
Non-Accelerated Filer		¨		Smaller Reporting Company		x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of the Registrant’s Common Stock, par value $0.01 per share, as of the latest practicable date: As of October 29, 2012: 9,515,967 shares.

 

 

 

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BTU INTERNATIONAL, INC.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Unaudited Condensed Consolidated Balance Sheets			1
Unaudited Condensed Consolidated Statements of Operations			2
Unaudited Condensed Consolidated Statements of Comprehensive Loss			3
Unaudited Condensed Consolidated Statement of Stockholders’ Equity			3
Unaudited Condensed Consolidated Statements of Cash Flows			4
Notes to Unaudited Condensed Consolidated Financial Statements			5-9
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10-14
Item 3. Quantitative and Qualitative Disclosures About Market Risk			14
Item 4. Controls and Procedures			14
PART II. OTHER INFORMATION
Item 6. Exhibits			15
Signatures			16

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PART I. FINANCIAL STATEMENTS

 

Item 1.

Financial Statements

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

		September 30, 2012				December 31, 2011
Assets
Current assets
Cash and cash equivalents		$	21,029			$	18,948
Accounts receivable, net			10,425				12,422
Inventories			13,783				17,510
Other current assets			3,771				2,064
Total current assets			49,008				50,944
Property, plant and equipment, net			4,973				5,650
Other assets, net			81				124
Total assets		$	54,062			$	56,718
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt		$	395			$	379
Accounts payable			6,737				3,527
Deferred revenue			1,237				494
Accrued expenses			4,347				4,910
Total current liabilities			12,716				9,310
Long-term debt, less current portion			7,663				7,956
Total liabilities			20,379				17,266
Commitments and contingencies
Stockholders’ equity
Preferred stock, $1.00 par value - 5,000,000 shares authorized; no shares issued or outstanding			—				—
Common stock, $0.01 par value - 25,000,000 shares authorized; 10,883,934 shares issued and 9,515,967 shares outstanding at September 30, 2012 and 10,867,778 shares issued and 9,499,811 shares outstanding at December 31, 2011			109				109
Additional paid in capital			51,382				50,646
Accumulated deficit			(14,942	)			(8,388	)
Treasury stock, at cost, 1,367,967 shares at September 30, 2012 and December 31, 2011			(4,990	)			(4,990	)
Accumulated other comprehensive income			2,124				2,075
Total stockholders’ equity			33,683				39,452
Total liabilities and stockholders’ equity		$	54,062			$	56,718

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30, 2012				October 2, 2011				September 30, 2012				October 2, 2011
Net sales		$	14,137			$	16,865			$	45,007			$	61,250
Costs of goods sold			10,018				10,506				30,903				36,509
Gross profit			4,119				6,359				14,104				24,741
Operating expenses:
Selling, general and administrative			4,925				6,013				15,578				17,921
Research, development and engineering			1,333				1,914				4,121				5,545
Restructuring			—				352				176				352
Operating income (loss)			(2,139	)			(1,920	)			(5,771	)			923
Interest income			10				21				47				54
Interest expense			(114	)			(119	)			(346	)			(372	)
Foreign exchange loss			(3	)			(23	)			(56	)			(172	)
Other income			1				6				2				231
Income (loss) before provision for income taxes			(2,245	)			(2,035	)			(6,124	)			664
Provision for income taxes			153				179				430				1,063
Net loss		$	(2,398	)		$	(2,214	)		$	(6,554	)		$	(399	)
Loss per share:
Basic		$	(0.25	)		$	(0.23	)		$	(0.69	)		$	(0.04	)
Diluted		$	(0.25	)		$	(0.23	)		$	(0.69	)		$	(0.04	)
Weighted average number of shares outstanding:
Basic shares			9,515,967				9,462,281				9,506,926				9,418,708
Effect of dilutive options			—				—				—				—
Diluted shares			9,515,967				9,462,281				9,506,926				9,418,708

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 

		Three Months Ended								Nine Months Ended
		September 30,				October 2,				September 30,				October 2,
		2012				2011				2012				2011
Comprehensive loss is calculated as follows:
Net loss		$	(2,398	)		$	(2,214	)		$	(6,554	)		$	(399	)
Other comprehensive income:
Foreign currency translation adjustment			47				71				49				364
Comprehensive loss		$	(2,351	)		$	(2,143	)		$	(6,505	)		$	(35	)

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012

(in thousands)

(unaudited)

 

										Additional																Accumulated Other
		Common Stock								Paid-In				Accumulated				Treasury Stock								Comprehensive
		shares				$				Capital				Deficit				shares				$				Income				Total
Balance at December 31, 2011			10,868			$	109			$	50,646			$	(8,388	)			1,368			$	(4,990	)		$	2,075			$	39,452
Net loss			—				—				—				(6,554	)			—				—				—				(6,554	)
Exercise of stock options			3				—				9				—				—				—				—				9
Issuance of common stock			13				—				29				—				—				—				—				29
Stock-based compensation			—				—				698				—				—				—				—				698
Translation adjustment			—				—				—				—				—				—				49				49
Balance at September 30, 2012			10,884			$	109			$	51,382			$	(14,942	)			1,368			$	(4,990	)		$	2,124			$	33,683

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND OCTOBER 2, 2011

($ in thousands)

(unaudited)

 

		September 30, 2012				October 2, 2011
Cash flows from operating activities:
Net loss		$	(6,554	)		$	(399	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization			1,255				1,377
Provision for bad debts			339				155
Provision for inventory obsolescence			2,718				685
Stock-based compensation			698				975
Deferred taxes			(143	)			—
Net change in operating assets and liabilities:
Accounts receivable			1,659				3,628
Inventories			651				(3,906	)
Other current assets			(1,579	)			(135	)
Deferred revenue			743				(710	)
Other assets			—				200
Accounts payable			3,212				(3,934	)
Accrued expenses			(566	)			(1,115	)
Net cash provided by (used in) operating activities			2,433				(3,179	)
Cash flows used in investing activities:
Purchases of property, plant and equipment			(198	)			(620	)
Net cash used in investing activities			(198	)			(620	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements			(277	)			(264	)
Issuance of common stock			29				50
Proceeds from the exercise of stock options			9				520
Net cash provided by (used in) financing activities			(239	)			306
Effects of exchange rates on cash			85				129
Net increase (decrease) in cash and cash equivalents			2,081				(3,364	)
Cash and cash equivalents, beginning of period			18,948				22,753
Cash and cash equivalents, end of period		$	21,029			$	19,389
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		$	299			$	307
Income taxes			230				1,213

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

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BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

(1) Basis of Presentation

The condensed consolidated balance sheet, financial information and related disclosures as of and for the year ended December 31, 2011 have been derived from our consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of September 30, 2012 and the related condensed statements of operations and comprehensive loss for the three and nine months ended September 30, 2012 and October 2, 2011 are unaudited. The condensed consolidated statement of stockholders’ equity and consolidated cash flows for the nine months ended September 30, 2012 and October 2, 2011 are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of such financial statements have been included. Such adjustments consisted only of normal recurring items. Interim results are not necessarily indicative of results for any other period or for the full year. These financial statements do not include all disclosures associated with annual financial statements and, accordingly, should be read in conjunction with the footnotes contained in the Company’s consolidated financial statements as of and for the year ended December 31, 2011, together with the auditors’ report, included in the Company’s Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC).

(2) Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited condensed consolidated financial statements are those set forth in Note 1 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 as filed with the SEC.

In June 2011, the Financial Accounting Standards Board (FASB) issued guidance amending the presentation requirements for comprehensive income. For public entities, this guidance was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011 with early adoption permitted. Subsequently, in December 2011, the FASB deferred the effective date of the portion of the June 2011 accounting standards update requiring separate presentation of reclassifications out of accumulated other comprehensive income. Upon adoption on January 1, 2012, we had the option to report total comprehensive income, including components of net income and components of other comprehensive income, as a single continuous statement or in two separate but consecutive statements. We elected to present comprehensive income in two separate but consecutive statements as part of the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Other than a change in presentation, the implementation of this accounting pronouncement did not have a material impact on our financial statements.

Subsequent Events – The Company evaluated subsequent events through the time of issuance of these condensed consolidated financial statements. In October 2012, the Company eliminated 13 positions due to the continued slowdown in orders from customers in the solar industry. The Company expects to incur $250,000 in charges in the fourth quarter of 2012 related to this restructuring action, primarily for severance and benefits. We are not aware of any significant events that occurred subsequent to the balance sheet date, but prior to the filing of this report that would have a material impact on our condensed consolidated financial statements.

(3) Inventories

 

		September 30, 2012				December 31, 2011
		($ in thousands)
Raw materials and manufactured components		$	6,922			$	7,614
Work-in-process			2,277				5,363
Finished goods			4,584				4,533
Total inventory		$	13,783			$	17,510

 

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BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(4) Accrued Expenses

 

		September 30, 2012				December 31, 2011
		( $ in thousands)
Accrued commissions		$	968			$	1,194
Accrued warranty			428				497
Accrued taxes			1,467				1,175
Accrued audit			344				373
Accrued legal			240				246
Accrued bonus			52				167
Payroll and payroll taxes			494				764
Accrued cost of sales			266				216
Accrued restructuring costs			24				192
Other			64				86
		$	4,347			$	4,910

Warranty

The Company provides standard warranty coverage for labor for 12 months and special extended material-only coverage on certain products. The Company estimates and records an accrual for anticipated warranty claims based on sales. The accrual for warranty covers the estimated costs of material, labor and travel. Actual warranty claims incurred are charged to the accrual. Factors that affect the Company’s product warranty liability include the number of installed units, the anticipated cost of warranty repairs and historical and anticipated rates of warranty claims.

The following table reflects changes in the Company’s accrued warranty account during the nine months ended September 30, 2012 (in thousands):

 

		Nine Months Ended
		September 30, 2012
Beginning balance, December 31, 2011		$	497
Plus: accruals related to new sales			433
Less: warranty claims incurred and reserve adjustment			(502	)
Ending balance, September 30, 2012		$	428

Restructuring

In September 2011, the Company eliminated 17 positions and recorded restructuring charges of $401,000 in the year ended December 31, 2011. The decision to eliminate 17 positions was made due to the slowdown in orders from customers in the solar industry. Due to the continued slowdown in the solar industry, the Company eliminated a combined 18 positions and recorded restructuring charges of $176,000 during the nine months ended September 30, 2012.

The restructuring charge consisted of primarily severance and benefits.

 

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The following table reflects changes in the reserves for restructuring charges for the nine months ended September 30, 2012 (in thousands):

 

		Nine Months Ended
		September 30, 2012
Beginning balance, December 31, 2011		$	192
Plus: charges to costs and expenses			176
Less: cash payments			(344	)
Ending balance, September 30, 2012		$	24

(5) Debt

Long-term debt at September 30, 2012 and December 31, 2011 consisted of:

 

		September 30, 2012				December 31, 2011
		($ in thousands)
Mortgage note payable, interest rate of 5.50%		$	8,058			$	8,335
Less - current portion of long-term debt			395				379
Long-Term debt, less current portion		$	7,663			$	7,956

On March 30, 2006, the Company entered into a mortgage note that is secured by our real property in Billerica, Massachusetts, in the amount of $10 million. This mortgage note payable has a balloon payment of $6.7 million due and payable at maturity on December 23, 2015. On September 9, 2010, the Company signed a Loan Modification Agreement relating to the mortgage note. The modification resulted in a reduction of the annual interest rate from 6.84% to 5.50% and a reduction in the monthly payment from $76,280 to $69,000.

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

(6) Net Loss Per Share

Basic EPS is computed by dividing net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS is computed using the weighted average number of common and dilutive potential common shares outstanding during the period, using the treasury stock method. Potentially dilutive securities include outstanding stock options and unvested restricted stock units (RSUs). Diluted EPS equals basic EPS when the Company reports a net loss because the assumed exercise or conversion of potentially dilutive securities would be anti-dilutive. Due to their anti-dilutive effect, approximately 1,308,864 and 1,277,016 potentially dilutive securities were excluded from the calculation of diluted income (loss) per share for the three and nine months ended September 30, 2012, respectively, and 681,605 and 331,900 were excluded for the three and nine months ended October 2, 2011, respectively. These potentially dilutive securities could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

The Company’s stock option compensation expense was $180,321 and $678,577 for the three and nine months ended September 30, 2012, respectively and $305,969 and $948,195 for the three and nine months ended October 2, 2011, respectively. These amounts do not include expense related to restricted stock awards or the employee stock purchase plan.

The fair value of each option is estimated on the date of grant using the Black-Scholes option-pricing model. This model incorporates certain assumptions for inputs including a risk-free market interest rate, expected dividend yield of the underlying common stock, expected option life and expected volatility in the market value of the underlying common stock. The Company is also required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. Historical data was used to estimate pre-vesting forfeitures and stock-based compensation expense was recorded only for those awards that are expected to vest. Accordingly, awards ultimately expected to vest have been reduced by an annualized estimated forfeiture rate of 4%.

 

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Calculation of Fair Value - Assumptions Used:

 

		Nine months ended
		September 30, 2012				October 2, 2011
Expected Volatility			66.85	%			63.03	%
Expected Life (in years)			4.21				4.53
Risk-Free Interest Rate			0.59	%			1.58	%
Expected Dividend Yield			0				0

Expected volatilities are based on the historical volatility of the Company’s common stock. The Company had used significant historical data to help evaluate the expected lives of options in developing its assumption. The risk-free interest rate is based upon quoted market yields for United States Treasury debt securities. The expected dividend yield is based upon the Company’s history of having never paid a dividend and management’s current expectation to retain any excess cash for use in the business.

The following table summarizes the stock option activity during the nine months ended September 30, 2012:

 

						Weighted-				Average
						Average				Remaining				Aggregate
						Exercise				Contractual				Intrinsic
		Shares				Price				Term				Value
Options
Outstanding at December 31, 2011			1,299,358			$	6.72
Granted			112,335			$	3.01
Exercised			(3,250	)		$	3.00
Forfeited/Cancelled			(117,117	)		$	5.48
Outstanding at September 30, 2012			1,291,326			$	6.52				3.93			$	—
Exercisable at September 30, 2012			757,066			$	7.44				3.06			$	—

The weighted-average grant date fair values of options granted during the nine-month periods ended September 30, 2012 and October 2, 2011 were $1.54 and $4.49, respectively. The aggregate fair value of options exercised during the nine-month periods ended September 30, 2012 and October 2, 2011 was $6,179 and $381,534, respectively.

As of September 30, 2012, there was $1,051,630 of total unrecognized compensation cost related to non-vested options granted under the Company’s option plans. That cost is expected to be recognized over a weighted-average period of 1.98 years. The total fair value of options vested during the nine-month period ended September 30, 2012 was $801,779.

In June 2012, the Company granted 10,200 restricted stock units to various employees. The fair value of the restricted stock units at the date of the grant was $3.03. These stock units vest over a two-year term. The Company has recorded compensation expense of $4,633 during the nine-month period ended September 30, 2012 related to this grant. As of September 30, 2012, there was $23,801 of unrecognized compensation costs related to these grants. These grants have a remaining life of 1.68 years.

(8) Revenue Recognition

For the three and nine months ended September 30, 2012, there was $794,990 and $1,173,427, respectively, of revenue recognized using the percentage of completion method. For the three and nine months ended October 2, 2011, there was $831,179 and $2,285,094, respectively, of revenue recognized using the percentage of completion method.

(9) Fair Value of Financial Instruments

In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB Accounting Standards Codification (ASC), the Company groups its financial assets and liabilities measured at fair value on a recurring basis in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:

 

•

Level 1 – Valuation is based upon quoted market price for identical instruments traded in active markets.

 

•

Level 2 – Valuation is based on quoted market prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

•

Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. Valuation techniques include use of discounted cash flow models and similar techniques.

 

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In accordance with the requirements of the Fair Value Measurements and Disclosures Topic of the FASB ASC, it is the Company’s policy to maximize the use of observable inputs and minimize the use of unobservable inputs when developing fair value measurements. When available, the Company uses quoted market prices to measure fair value. If market prices are not available, the fair value measurement is based on models that use primarily market based parameters including interest rate yield curves, option volatilities and currency rates. In certain cases, where market rate assumptions are not available, the Company is required to make judgments about assumptions market participants would use to estimate the fair value of a financial instrument. Changes in the underlying assumptions used, including discount rates and estimates of future cash flows, could significantly affect the results of current or future values.

The carrying amounts of the Company’s cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair value due to the instruments’ short-term nature. Long-term debt is also reported at carrying value and approximates fair value as the interest rate on the mortgage note payable of 5.5% approximates the current market interest rate.

(10) Segment Reporting

Segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company operates as a single business segment called the Thermal Processing Capital Equipment.

The Thermal Processing Capital Equipment segment consists of the designing, manufacturing, selling and servicing of thermal processing equipment and related process controls for use in the electronics, alternative energy, automotive and other industries. This business segment includes the supply of solder reflow systems used for surface mount applications in printed circuit board assembly. Thermal processing equipment is used in low temperature curing/encapsulation, hybrid integrated circuit manufacturing, integrated circuit packaging and sealing, and processing multi-chip modules. In addition, the thermal process equipment is used for solar cell processing, sintering nuclear fuel for commercial power generation, as well as brazing and the sintering of ceramics and powdered metals, and the deposition of precise thin film coatings. The business segment’s customers are multinational original equipment manufacturers and contract manufacturing companies.

Tangible long-lived assets by geographic location are as follows:

 

		September 30, 2012				December 31, 2011
		($ in thousands)
United States		$	4,150			$	4,741
Asia Pacific			823				909
		$	4,973			$	5,650

(11) Legal Proceedings

On October 25, 2011, one of the Company’s overseas customers filed an appeal with the Grenoble Court of Appeals, Grenoble, France, seeking to overturn a decision of the lower court denying its request to nominate an expert to examine allegations that furnaces it had purchased from the Company in 2006 had not functioned properly. The Company is preparing a response to deny this customer’s allegations and is vigorously contesting this matter. On July 6, 2011, in a separate proceeding involving this customer, the Company filed a request for arbitration with the International Court of Arbitration of the International Chamber of Commerce in Paris, France asking the arbitrators to certify that the customer is barred from receiving any remedy. In addition the Company has filed claims for reimbursements of work performed, as well as reimbursements of legal costs related to the arbitration proceedings. The customer has filed a counterclaim for damages. Each party has nominated an arbitrator and these two arbitrators have selected a neutral arbitrator who will act as the chairman of the tribunal. The Company strongly believes that the equipment the customer purchased met all applicable specifications, that there is no basis for a valid warranty claim and that the risk that a loss has occurred with respect to this matter although reasonably possible, is not material to the Company’s consolidated financial statements. An estimate or a range of any possible loss cannot be made at this juncture due to the early stage of the proceedings. However, because litigation is inherently uncertain and unpredictable and excessive outcomes do occur, we could incur a judgment or enter into a settlement or revise our estimate of the outcome of this matter in a way that could result in a material adverse effect on the Company’s results of operations and financial condition.

 

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

RESULTS OF OPERATIONS

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

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

Summary Condensed Consolidated Statements of Operations

 

		Three Months Ended
		September 30, 2012								October 2, 2011
		( $ in thousands)
						% of								% of				Percent
						Net Sales								Net Sales				Change
Net sales		$	14,137				100.0	%		$	16,865				100.0	%			(16.2	)%
Cost of goods sold			10,018				70.9	%			10,506				62.3	%			(4.6	)%
Gross profit			4,119				29.1	%			6,359				37.7	%			(35.2	)%
Selling, general and administrative expenses			4,925				34.8	%			6,013				35.7	%			(18.1	)%
Research, development and engineering expenses			1,333				9.4	%			1,914				11.3	%			(30.4	)%
Restructuring			—				0.0	%			352				2.1	%			(100.0	)%
Operating loss			(2,139	)			(15.1	)%			(1,920	)			(11.4	)%			11.4	%
Loss before provision for income taxes			(2,245	)			(15.9	)%			(2,035	)			(12.1	)%			10.3	%
Provision for income taxes			153				1.1	%			179				1.1	%			(14.5	)%
Net loss		$	(2,398	)			(17.0	)%		$	(2,214	)			(13.1	)%			8.3	%

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

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

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

 

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		Three Months Ended
		September 30, 2012								October 2, 2011
		($ in thousands)
						% of								% of
		$				Revenues				$				Revenues
United States		$	1,377				9.8	%		$	2,084				12.4	%
Europe, Near East			3,355				23.7	%			2,393				14.2	%
Asia Pacific			9,107				64.4	%			11,289				66.9	%
Other Americas			298				2.1	%			1,099				6.5	%
Total Revenue		$	14,137							$	16,865

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

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

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

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

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

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

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

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

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

 

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RESULTS OF OPERATIONS

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

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

Summary Consolidated Statements of Operations

 

		Nine Months Ended
		September 30, 2012								October 2, 2011
						( $ in thousands)
						% of								% of				Percent
						net sales								net sales				change
Net sales		$	45,007				100.0	%		$	61,250				100.0	%			(26.5	)%
Cost of goods sold			30,903				68.7	%			36,509				59.6	%			(15.4	)%
Gross profit			14,104				31.3	%			24,741				40.4	%			(43.0	)%
Selling, general and administrative expenses			15,578				34.6	%			17,921				29.3	%			(13.1	)%
Research, development and engineering expenses			4,121				9.2	%			5,545				9.1	%			(25.7	)%
Restructuring			176				0.4	%			352				0.6	%			(50.0	)%
Operating income (loss)			(5,771	)			(12.8	)%			923				1.5	%			(725.2	)%
Income (loss) before provision for income taxes			(6,124	)			(13.6	)%			664				1.1	%			(1022.3	)%
Provision for income taxes			430				1.0	%			1,063				1.7	%			(59.5	)%
Net loss		$	(6,554	)			(14.6	)%		$	(399	)			(0.7	)%			1542.6	%

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

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

 

		Nine Months Ended
		September 30, 2012								October 2, 2011
		($ in thousands)
						% of								% of
		$				revenues				$				revenues
United States		$	6,008				13.3	%		$	8,290				13.5	%
Europe, Near East			6,673				14.8	%			4,406				7.2	%
Asia Pacific			31,133				69.2	%			45,424				74.2	%
Other Americas			1,193				2.7	%			3,130				5.1	%
Total Revenue		$	45,007							$	61,250

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

 

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

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

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

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

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

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

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

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

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

LIQUIDITY AND CAPITAL RESOURCES

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

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

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

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

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

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

 

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

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

CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

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

RISK FACTOR

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

FORWARD LOOKING STATEMENTS

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

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We have international subsidiaries in China, the United Kingdom, Singapore, and Malaysia. These subsidiaries transact business in their functional or local currency. Therefore, we are exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which we operate, all of which could adversely impact our results of operations and financial condition.

As of September 30, 2012 and December 31, 2011, all of our long-term debt obligations are fixed rate financial instruments. Therefore, we are not exposed to interest rate risk resulting from the variable interest rates.

 

Item 4.

Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting (as defined by Rule 13a-15(f)), that occurred during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Item 6.

Exhibits

(a) Exhibits

Exhibit 31.1 - Section 302 Certification

Exhibit 31.2 - Section 302 Certification

Exhibit 32.1 - Section 906 Certification

Exhibit 32.2 - Section 906 Certification

Exhibit 101.INS - XBRL Instance Document.

Exhibit 101.SCH - XBRL Taxonomy Extension Schema Document.

Exhibit 101.CAL - XBRL Taxonomy Calculation Linkbase Document.

Exhibit 101.DEF - XBRL Taxonomy Extension Definition Linkbase Document.

Exhibit 101.LAB - XBRL Taxonomy Label Linkbase Document.

Exhibit 101.PRE - XBRL Taxonomy Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements 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.

 

				BTU INTERNATIONAL, INC.
DATE: November 5, 2012				BY:		/S/    PAUL J. VAN DER WANSEM
						Paul J. van der Wansem
						President, Chief Executive Officer (principal executive officer) and Chairman of the Board of Directors
DATE: November 5, 2012				BY:		/S/    PETER J. TALLIAN
						Peter J. Tallian
						Chief Financial Officer and Principal Accounting Officer (principal financial and accounting officer)

 

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