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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 June 29, 2014

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 August 4, 2014: 9,574,343 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					3
Unaudited Condensed Consolidated Statements of Operations					4
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)					5
Unaudited Condensed Consolidated Statement of Stockholders’ Equity					5
Unaudited Condensed Consolidated Statements of Cash Flows					6
Notes to Unaudited Condensed Consolidated Financial Statements					7-11
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			12-16
Item 3.		Quantitative and Qualitative Disclosures About Market Risk			16
Item 4.		Controls and Procedures			16
PART II. OTHER INFORMATION
Item 1.		Legal Proceedings			17
Item 1A.		Risk Factors			17
Item 6.		Exhibits			17
Signatures					18

 

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Item 1.

Financial Statements

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

(unaudited)

 

		June 29, 2014				December 31, 2013
Assets
Current assets
Cash and cash equivalents		$	10,032			$	13,991
Accounts receivable, less allowance of $1,194 and $1,280 at June 29, 2014 and December 31, 2013			13,768				11,370
Inventories			11,875				9,831
Other current assets			937				1,126
Total current assets			36,612				36,318
Property, plant and equipment, net			2,860				3,386
Other assets, net			1,238				626
Total assets		$	40,710			$	40,330
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt		$	375			$	367
Accounts payable			8,428				5,408
Deferred revenue			1,142				2,052
Accrued expenses			5,730				6,361
Total current liabilities			15,675				14,188
Long-term debt, less current portion			7,030				7,219
Other long-term liabilities			2				14
Total liabilities			22,707				21,421
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; 10,942,310 shares issued and 9,574,343 shares outstanding at June 29, 2014 and 10,924,856 shares issued and 9,556,889 shares outstanding at December 31, 2013			109				109
Additional paid in capital			52,520				52,204
Accumulated deficit			(32,045	)			(30,853	)
Treasury stock, at cost, 1,367,967 shares at June 29, 2014 and December 31, 2013			(4,990	)			(4,990	)
Accumulated other comprehensive income			2,409				2,439
Total stockholders’ equity			18,003				18,909
Total liabilities and stockholders’ equity		$	40,710			$	40,330

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								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Net sales		$	16,435			$	14,244			$	28,120			$	24,747
Costs of goods sold			9,559				8,850				17,085				16,623
Gross profit			6,876				5,394				11,035				8,124
Operating expenses:
Selling, general and administrative			5,091				4,355				9,701				9,009
Research, development and engineering			1,029				1,017				2,240				2,151
Operating income (loss)			756				22				(906	)			(3,036	)
Interest income			7				11				18				23
Interest expense			(84	)			(107	)			(169	)			(220	)
Foreign exchange income (loss)			41				(38	)			56				(114	)
Other income			3				5				7				46
Income (loss) before provision for income taxes			723				(107	)			(994	)			(3,301	)
Provision for income taxes			129				154				198				85
Net income (loss)		$	594			$	(261	)		$	(1,192	)		$	(3,386	)
Income (loss) per share:
Basic		$	0.06			$	(0.03	)		$	(0.12	)		$	(0.36	)
Diluted		$	0.06			$	(0.03	)		$	(0.12	)		$	(0.36	)
Weighted average number of shares outstanding:
Basic shares			9,560,454				9,532,140				9,558,671				9,531,559
Effect of dilutive options			45,531				—				—				—
Diluted shares			9,605,985				9,532,140				9,558,671				9,531,559

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

 

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BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(in thousands)

(unaudited)

 

		Three Months Ended								Six Months Ended
		June 29, 2014				June 30, 2013				June 29, 2014				June 30, 2013
Comprehensive income (loss) is calculated as follows:
Net income (loss)		$	594			$	(261	)		$	(1,192	)		$	(3,386	)
Other comprehensive income (loss):
Foreign currency translation adjustment			3				59				(30	)			65
Comprehensive income (loss)		$	597			$	(202	)		$	(1,222	)		$	(3,321	)

BTU INTERNATIONAL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 29, 2014

(in thousands)

(unaudited)

 

		Common Stock								Additional Paid-In				Accumulated				Treasury Stock								Accumulated Other Comprehensive
		shares				$				Capital				Deficit				shares				$				Income				Total
Balance at December 31, 2013			10,925			$	109			$	52,204			$	(30,853	)			1,368			$	(4,990	)		$	2,439			$	18,909
Net loss			—				—				—				(1,192	)			—				—				—				(1,192	)
Exercise of stock options			1				—				1				—				—				—				—				1
Issuance of common stock			16				—				8				—				—				—				—				8
Stock-based compensation			—				—				307				—				—				—				—				307
Translation adjustment			—				—				—				—				—				—				(30	)			(30	)
Balance at June 29, 2014			10,942			$	109			$	52,520			$	(32,045	)			1,368			$	(4,990	)		$	2,409			$	18,003

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 SIX MONTHS ENDED JUNE 29, 2014 AND JUNE 30, 2013

($ in thousands)

(unaudited)

 

		June 29, 2014				June 30, 2013
Cash flows from operating activities:
Net loss		$	(1,192	)		$	(3,386	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			635				965
Provision (recovery) for bad debts			59				(188	)
Provision for inventory obsolescence			209				1,256
Gain on sale of property, plant and equipment			—				(51	)
Stock-based compensation			307				320
Deferred taxes			—				(64	)
Net change in operating assets and liabilities:
Accounts receivable			(2,497	)			(1,430	)
Inventories			(2,358	)			(2,245	)
Other current assets			171				(1,697	)
Deferred revenue			(909	)			483
Other assets			(623	)			(8	)
Other long-term liabilities			(12	)			—
Accounts payable			3,054				2,039
Accrued expenses			(613	)			(631	)
Net cash used in operating activities			(3,769	)			(4,637	)
Cash flows from investing activities:
Proceeds from sale of property, plant and equipment			—				57
Purchases of property, plant and equipment			(40	)			(125	)
Net cash used in investing activities			(40	)			(68	)
Cash flows from financing activities:
Principal payments under loan and capital lease agreements			(181	)			(196	)
Issuance of common stock			8				17
Proceeds from the exercise of stock options			1				—
Net cash used in financing activities			(172	)			(179	)
Effects of exchange rates on cash			22				(51	)
Net decrease in cash and cash equivalents			(3,959	)			(4,935	)
Cash and cash equivalents, beginning of period			13,991				20,218
Cash and cash equivalents, end of period		$	10,032			$	15,283
Supplemental disclosures of cash flow information:
Cash paid during the periods for:
Interest		$	154			$	196
Income taxes			408				428

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 December 31, 2013 have been derived from the Company’s consolidated financial statements, which have been audited as of that date. The condensed consolidated balance sheet as of June 29, 2014 and the related condensed consolidated statements of operations and comprehensive income (loss) for the three and six months ended June 29, 2014 and June 30, 2013 are unaudited. The condensed consolidated statement of stockholders’ equity and consolidated statements of cash flows for the six months ended June 29, 2014 and June 30, 2013 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, 2013, 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, 2013, as filed with the SEC.

Subsequent Events – The Company evaluated subsequent events through the time of issuance of these condensed consolidated financial statements. The Company is 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 its condensed consolidated financial statements.

(3) Inventories

 

		June 29, 2014				December 31, 2013
		($ in thousands)
Raw materials and manufactured components		$	5,990			$	6,010
Work-in-process			4,064				2,459
Finished goods			1,821				1,362
Total inventory		$	11,875			$	9,831

 

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BTU INTERNATIONAL, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

(4) Accrued Expenses

 

		June 29, 2014				December 31, 2013
		( $ in thousands)
Accrued commissions		$	785			$	1,086
Accrued warranty			420				379
Accrued taxes			1,751				1,858
Accrued audit			385				419
Accrued legal			838				1,430
Accrued bonus			—				85
Payroll and payroll taxes			604				688
Accrued cost of sales			424				142
Other			523				274
		$	5,730			$	6,361

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 claims 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 accrual 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 six months ended June 29, 2014 (in thousands):

 

		Six Months Ended June 29, 2014
Beginning balance, December 31, 2013		$	379
Plus: accruals related to new sales			258
Less: warranty claims incurred and reserve adjustment			(217	)
Ending balance, June 29, 2014		$	420

 

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(5) Debt

Long-term debt at June 29, 2014 and December 31, 2013 consisted of:

 

		June 29, 2014				December 31, 2013
		($ in thousands)
Mortgage note payable, interest rate of 4.43%		$	7,405			$	7,586
Less - current portion of long-term debt			375				367
Long-Term debt, less current portion		$	7,030			$	7,219

Mortgage Note

On March 30, 2006, the Company entered into a $10 million mortgage note secured by its real property in Billerica, Massachusetts, which had an initial maturity date of December 23, 2015. On September 9, 2010, the Company signed a First Loan Modification Agreement relating to the mortgage note, which reduced the annual interest rate from 6.84% to 5.50% and the monthly payment from $76,280 to $69,000.

On September 26, 2013, the Company signed a Second Loan Modification Agreement relating to the mortgage note, which extended the maturity date from December 23, 2015 to September 26, 2023. The modification also reduced the annual interest rate from 5.50% to 4.43% through September 26, 2018, at which time the interest rate will be adjusted to a per annum fixed rate equal to the aggregate of the Federal Home Loan Board (FHLB) Five Year Classic Advance Rate plus two hundred forty basis points. The current monthly payment was reduced from $69,000 to $57,997. The mortgage note had an outstanding balance on June 29, 2014 of approximately $7.4 million. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

Letters of Credit

On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank, pursuant to which the bank agreed to issue letters of credit which the Company will cash collateralize via restricted cash deposits at the bank. As of June 29, 2014, the value of the outstanding letters of credit issued by the bank for the Company was $254,084. This restricted cash value is included in the Company’s balance sheet in other current assets.

(6) Net Income (Loss) Per Share

Basic earnings per share (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 shares and potentially dilutive securities outstanding during the period, using the treasury stock method. Potentially dilutive securities include outstanding stock options and unvested restricted stock units (RSUs). Due to their anti-dilutive effect, approximately 1,208,627 and 1,335,721 securities to purchase common stock were excluded from the calculation of diluted loss per share for the three months ended June 29, 2014 and June 30, 2013, respectively. Due to their anti-dilutive effect, approximately 1,409,895 and 1,335,721 securities to purchase common stock were excluded from the calculation of diluted loss per share for the six months ended June 29, 2014 and June 30, 2013, respectively. However, these potentially dilutive securities could become dilutive in future periods.

(7) Accounting for Stock-Based Compensation

Stock Options

The Company accounts for share-based compensation in accordance with the provisions of SFAS No. 123R, Share-Based Payment (now codified as FASB ASC Topic 718, Compensation-Stock Compensation (“ASC 718”)). This statement establishes standards for accounting for transactions in which an entity exchanges its equity instruments for goods or services. The Company’s stock option compensation expense was $121,011 and $245,991 for the three and six months ended June 29, 2014, respectively and $137,764 and $296,957 for the three and six months ended June 30, 2013, 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 is used to estimate pre-vesting forfeitures and record stock-based compensation expense 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:		Six months ended
		June 29, 2014				June 30, 2013
Expected Volatility			64.88	%			66.84	%
Expected Life (in years)			4.10				4.21
Risk-Free Interest Rate			1.26	%			0.79	%
Expected Dividend Yield			—				—

Expected volatilities are based on the weighted average historical volatility of the Company’s common stock for the expected life of the option. The Company has 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 with a term approximating the expected life of the options. The expected dividend yield is based upon the Company’s history of not issuing dividends and management’s current expectation of the same.

The following table summarizes the stock option activity during the six months ended June 29, 2014:

 

		Shares				Weighted- Average Exercise Price				Average Remaining Contractual Term				Aggregate Intrinsic Value
Options
Outstanding at December 31, 2013			1,408,692			$	5.30
Granted			19,032			$	2.91
Exercised			(700	)		$	2.00
Forfeited/Cancelled			(110,654	)		$	9.78
Outstanding at June 29, 2014			1,316,370			$	4.89				3.34			$	322,439
Exercisable at June 29, 2014			1,020,986			$	5.28				2.74			$	174,458

The weighted-average grant date fair value of options granted during the six-month periods ended June 29, 2014 and June 30, 2013 were $1.44 and $1.21, respectively. The aggregate fair value of options exercised during the six-month periods ended June 29, 2014 and June 30, 2013 was $720 and $0, respectively.

As of June 29, 2014, there was $376,273 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 1.10 years. The total fair value of options vested during the six-month period ended June 29, 2014 was $282,460.

Restricted Stock Units

In April 2014, the Company granted 62,725 restricted stock units to various employees. The fair value of the restricted stock units at the date of the grant was $2.95. The Company recorded compensation expense of $56,039 and $15,599 during the six-month period ended June 29, 2014 and June 30, 2013, respectively, related to restricted stock units. As of June 29, 2014, there was $212,001 of unrecognized compensation costs related to grants of restricted stock units and these grants have a remaining life of 1.30 years.

(8) Fair Value of Financial Instruments

In accordance with the requirements of FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), 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.

 

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•

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.

In accordance with the requirements of ASC 820, 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 their 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 4.43% approximates the current market interest rate.

(9) 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 Thermal Processing Capital Equipment.

The Thermal Processing Capital Equipment segment consists of designing, manufacturing, selling and servicing 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, thermal processing equipment is used for solar cell processing, sintering nuclear fuel for commercial power generation, brazing and sintering of ceramics and powdered metals, and depositing 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:

 

		June 29, 2014				December 31, 2013
		($ in thousands)
United States		$	2,455			$	2,889
Asia Pacific			405				497
		$	2,860			$	3,386

 

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Item 2.

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

BTU International, Inc. (the “Company”), which was founded in 1950, was incorporated as a Delaware corporation in 1981 and is headquartered in North Billerica, Massachusetts. The Company operates as a single business segment called Thermal Processing Capital Equipment. The Company’s business consists of designing, manufacturing, selling and servicing thermal processing equipment and related process controls for use in the electronics, alternative energy, automotive and other industries. This includes the supply of solder reflow systems used for surface mount applications in printed circuit board assembly and semiconductor packaging applications. 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 equipment is used for solar cell processing, sintering nuclear fuel for commercial power generation, brazing and sintering of ceramics and powdered metals, and depositing precise thin film coatings. The Company’s customers are multinational original equipment manufacturers and contract manufacturing companies.

The Company’s customers require high throughput, high yield and highly reliable thermal processing systems with tightly controlled temperature and atmospheric parameters. In electronics assembly, the Company’s 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, the Company participates in both wafer level and die level packaging, where its thermal processing systems are used to connect and seal integrated circuits into a package. In the alternative energy market, the Company offers processing equipment for the production of both silicon solar cells and thin film photovoltaics. The Company is also the key provider for customers who use its thermal systems for the processing of nuclear fuel.

RESULTS OF OPERATIONS

Three months ended June 29, 2014 compared to the three months ended June 30, 2013.

The following table sets forth certain items in the Company’s Consolidated Statements of Operations as a percentage of net sales for the periods indicated.

Summary Condensed Consolidated Statements of Operations

 

		Three Months Ended
		June 29, 2014								June 30, 2013
		($ in thousands)
						% of Net Sales								% of Net Sales				Percent Change
Net sales		$	16,435				100.0	%		$	14,244				100.0	%			15.4	%
Cost of goods sold			9,559				58.2	%			8,850				62.1	%			8.0	%
Gross profit			6,876				41.8	%			5,394				37.9	%			27.5	%
Selling, general and administrative expenses			5,091				31.0	%			4,355				30.6	%			16.9	%
Research, development and engineering expenses			1,029				6.3	%			1,017				7.1	%			1.2	%
Operating income			756				4.6	%			22				0.2	%			3336.4	%
Income (loss) before provision for income taxes			723				4.4	%			(107	)			(0.8	)%			(775.7	)%
Provision for income taxes			129				0.8	%			154				1.1	%			(16.2	)%
Net income (loss)		$	594				3.6	%		$	(261	)			(1.8	)%			(327.6	)%

Net Sales. Net sales for the second quarter of 2014 were $16.4 million representing an increase of $2.2 million, or 15.4%, as compared to the same period in the prior year. Net sales of electronic market systems increased by $0.6 million, or 4.6%, as compared to the same period in the prior year. Net sales of alternative energy systems increased by $0.3 million, as compared to the same period in the prior year. Net sales for other market systems, parts and service increased by $1.3 million, or 93.2%, as compared to the same period in the prior year. The electronic market systems increase represents an increase in demand for Surface Mount Technology systems, particularly in Asia. The increase in alternative energy sales is mainly due to increased nuclear product sales. The Company’s overall alternative energy sales continue to be low due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The increase in sales in the other market systems, parts and service is primarily due to $1.1 million in other market custom sales in the second quarter of 2014 compared to no other market custom sales in the second quarter of 2013.

 

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

 

		Three Months Ended
		June 29, 2014								June 30, 2013
		($ in thousands)
		$				% of Revenues				$				% of Revenues
United States		$	2,255				13.7	%		$	1,836				12.9	%
Europe, Near East			1,994				12.1	%			867				6.1	%
Asia Pacific			10,569				64.3	%			10,810				75.9	%
Other Americas			1,617				9.9	%			731				5.1	%
Total Revenue		$	16,435							$	14,244

Gross Profit. In the second quarter of 2014, gross profit was $6.9 million, an increase of $1.5 million, as compared to the same period in the prior year due primarily to the 15.4% increase in net sales. In the second quarter of 2014, gross profit as a percentage of sales increased to 41.8% as compared to 37.9% in the same period in the prior year. This increase in the second quarter of 2014 was mainly the result of product sales mix, lower inventory reserves and lower under-absorption in the Company’s factories as compared to the same period in the prior year.

Selling, General and Administrative (SG&A). SG&A second quarter 2014 expenses of $5.1 million increased by $0.7 million as compared to the same period in the prior year. The prior year comparable period had bad debt recovery income, which did not occur in the second quarter of 2014. Additionally, compared to the prior year comparable period, there was an increase in legal expense as well as an increase in warranty expense due to increased sales volume for the second quarter of 2014.

Research, Development and Engineering (RD&E). RD&E second quarter 2014 expenses of $1.0 million remained relatively flat as compared to the same period in the prior year.

Interest Income (Expense). In the second quarter of 2014, net interest expense remained relatively flat at $0.1 million as compared to the same period in the prior year.

Foreign Exchange Income (Loss). The foreign exchange gain in the second quarter of 2014 was $41,000 as compared to a loss of $38,000 in the same period in the prior year. The net exchange gain or loss is primarily the result of foreign currency transactions in the Company’s foreign operations for the applicable period.

Income Taxes. For the three months ended June 29, 2014, the Company recorded an income tax provision of $129,000 as compared to an income tax provision of $154,000 for the same period in the prior year. The Company’s income tax provision primarily relates to withholding taxes. 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. Chinese withholding taxes primarily result from corporate royalty charges on net sales of the Company’s Chinese manufacturing subsidiary. U.S. taxes have had no impact on the rate fluctuation as the U.S. entity operates at a loss for which no benefit is recognized due to valuation allowance.

 

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RESULTS OF OPERATIONS

Six months ended June 29, 2014 compared to the six months ended June 30, 2013.

The following table sets forth certain items in the Company’s Consolidated Statements of Operations as a percentage of net sales for the periods indicated.

Summary Condensed Consolidated Statements of Operations

 

		Six Months Ended
		June 29, 2014								June 30, 2013
		($ in thousands)
						% of net sales								% of net sales				Percent change
Net sales		$	28,120				100.0	%		$	24,747				100.0	%			13.6	%
Cost of goods sold			17,085				60.8	%			16,623				67.2	%			2.8	%
Gross profit			11,035				39.2	%			8,124				32.8	%			35.8	%
Selling, general and administrative expenses			9,701				34.5	%			9,009				36.4	%			7.7	%
Research, development and engineering expenses			2,240				8.0	%			2,151				8.7	%			4.1	%
Operating loss			(906	)			(3.2	)%			(3,036	)			(12.3	)%			(70.2	)%
Loss before provision for income taxes			(994	)			(3.5	)%			(3,301	)			(13.3	)%			(69.9	)%
Provision for income taxes			198				0.7	%			85				0.3	%			132.9	%
Net loss		$	(1,192	)			(4.2	)%		$	(3,386	)			(13.7	)%			(64.8	)%

Net Sales. Net sales for the first six months of 2014 were $28.1 million representing an increase of $3.4 million, or 13.6%, as compared to the same period in the prior year. Net sales of electronic market systems increased by $1.4 million, or 6.8%, and net sales of alternative energy systems increased by $0.9 million, as compared to the same period in the prior year. Net sales for the Company’s other market systems, parts and service sales increased by $1.0 million, or 32.0%, as compared to the same period in the prior year. The electronic market systems increase represents an increase in demand for Surface Mount Technology systems, particularly in Asia. The increase in alternative energy sales is mainly due to increased nuclear product sales. The Company’s overall alternative energy sales continue to be low due to the continued weakness of the worldwide solar industry which started in the second quarter of 2011. The increase in sales in the other market systems and parts and service is primarily due to $1.1 million of other market custom sales in the first six months of 2014 compared to no other market custom sales in the first six months of 2013.

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

 

		Six Months Ended
		June 29, 2014								June 30, 2013
		($ in thousands)
		$				% of revenues				$				% of revenues
United States		$	4,429				15.8	%		$	3,976				16.1	%
Europe, Near East			4,917				17.5	%			2,688				10.8	%
Asia Pacific			16,426				58.4	%			16,449				66.5	%
Other Americas			2,348				8.3	%			1,634				6.6	%
Total Revenue		$	28,120							$	24,747

Gross Profit. The first six months of 2014 gross profit of $11.0 million increased by $2.9 million compared to the first six months of 2013 due primarily to the 13.6% increase in net sales. In the first six months of 2014, gross profit as a percentage of sales increased to 39.2% as compared to 32.8% in the same period in 2013, due primarily to product mix and improved overhead under absorption at our factories combined with lower 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 first six months of 2014 expenses of $9.7 million increased by $0.7 million compared to the same period in the prior year. The prior year comparable period had bad debt recovery income, which did not occur in the first six months of 2014. Additionally, compared to the prior year comparable period, there was an increase in legal expense as well as an increase in warranty expense due to increased sales volume for the first six months of 2014.

Research, Development and Engineering (RD&E). RD&E first six months of 2014 expenses of $2.2 million remained relatively flat as compared to the same period in the prior year.

 

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Interest Income (Expense). In the first six months of 2014, net interest expense remained relatively flat at $0.2 million as compared to the same period in 2013.

Foreign Exchange Income (Loss). The foreign exchange gain in the first six months of 2014 was $56,000 as compared to a loss of $114,000 in the same period in the prior year. The net exchange gain or loss is primarily the result of foreign currency transactions in the Company’s foreign operations in the applicable period.

Income Taxes. For the six months ended June 29, 2014, the Company recorded an income tax provision of $198,000 compared to a provision of $85,000 in the same period in the prior year. The Company’s income tax provision primarily relates to withholding taxes. 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. Chinese withholding taxes primarily result from corporate royalty charges on net sales of the Company’s Chinese manufacturing subsidiary. U.S. taxes have had no impact on the rate fluctuation as the U.S. entity operates at a loss for which no benefit is recognized due to valuation allowance.

LIQUIDITY AND CAPITAL RESOURCES

In 2013, the Company’s net cash used in operating activities was $5.8 million. In the first six months of 2014, the Company’s net cash used in operating activities was $3.8 million. We recorded an operating loss of $9.7 million in 2013. Our operating loss was $0.9 million in the first six months of 2014. On June 29, 2014, the Company had cash and cash equivalents of approximately $10.0 million, a decrease of $4.0 million, compared to $14.0 million at December 31, 2013.

During the six months ended June 29, 2014, the Company used net cash of approximately $3.8 million for operating activities. This use of cash was primarily the result of a net loss of $1.2 million, a decrease in deferred revenue of $0.9 million, an increase in accounts receivable of $2.5 million, an increase in inventory of $2.4 million, an increase in other assets of $0.6 million and a decrease in accrued expenses of $0.6 million; offset by an increase in accounts payable of $3.0 million, a decrease in other current assets of $0.2 million and the adding back of non-cash expenses for depreciation and amortization of $0.6 million, stock-based compensation of $0.3 million, and inventory provisions of $0.2 million.

In recent years, the Company’s sales have declined as we continue to experience a significant downturn in the solar industry. The electronics and semiconductor industries have historically been cyclical and have experienced periodic downturns which affect the demand for equipment that we manufacture and market. If the solar market does not improve, or if our products do not gain the acceptance we have planned, our cash resources will not allow us to continue making investments in the solar market and we will need to take action to restructure the Company. To conserve cash and manage the Company’s liquidity, the Company has implemented certain expense reductions throughout 2013 and 2014. The Company will continue to assess its cost structure as it relates to its revenues and cash position in 2014, and may take further actions as it deems necessary.

As of June 29, 2014, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The Company’s total current assets at June 29, 2014 were $36.6 million, current liabilities were $15.7 million and long-term debt was $7.0 million. Management believes it has sufficient resources to fund its planned operations over the next 12 months.

Mortgage Note

On March 30, 2006, the Company entered into a $10 million mortgage note secured by its real property in Billerica, Massachusetts, which had an initial maturity date of December 23, 2015. On September 9, 2010, the Company signed a First Loan Modification Agreement relating to the mortgage note, which reduced the annual interest rate from 6.84% to 5.50% and the monthly payment from $76,280 to $69,000

On September 26, 2013, the Company signed a Second Loan Modification Agreement relating to the mortgage note, which extended the maturity date from December 23, 2015 to September 26, 2023. The modification also reduced the annual interest rate from 5.50% to 4.43% through September 26, 2018, at which time the interest rate will be adjusted to a per annum fixed rate equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points. The current monthly payment was reduced from $69,000 to $57,997. The mortgage note had an outstanding balance on June 29, 2014 of approximately $7.4 million. All outstanding principal and accrued and unpaid interest will be due and payable on the maturity date.

Letters of Credit

On August 31, 2009, the Company entered into a pledge and assignment agreement with a bank, pursuant to which the bank agreed to issue letters of credit which the Company will cash collateralize via restricted cash deposits at the bank. As of June 29, 2014, the value of the outstanding letters of credit issued by the bank for the Company was $254,084. This restricted cash value is included in the Company’s balance sheet in other current assets.

 

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CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES

During the six months ended June 29, 2014, there have been no significant changes to the items disclosed as the Company’s 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 the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

FORWARD LOOKING STATEMENTS

This report contains forward-looking statements, including without limitation statements about the Company’s expectation for minimal revenue from solar equipment in 2014 and the sufficiency of its 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 the Company has 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 the Company’s 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 the Company’s 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 the Company’s 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, the Company disclaims 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

The Company has international subsidiaries in China, the United Kingdom, Singapore, and Malaysia. These subsidiaries transact business in their functional or local currency. Therefore, the Company is exposed to foreign currency exchange risks and fluctuations in foreign currencies, along with economic and political instability in the foreign countries in which it operates, all of which could adversely impact its results of operations and financial condition.

As of June 29, 2014 and December 31, 2013, all of the Company’s long-term debt obligations were fixed rate financial instruments. However, on September 26, 2018, the interest rate related to the mortgage note will be adjusted to a per annum fixed rate, to be applicable until the maturity date of September 26, 2023, equal to the aggregate of the FHLB Five Year Classic Advance Rate plus two hundred forty basis points.

 

Item 4.

Controls and Procedures

The Company’s management, with the participation of its Chief Executive Officer and its Chief Operating Officer and Principal Financial and Accounting Officer, evaluated the effectiveness of its 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, the Company’s Chief Executive Officer and its Chief Operating Officer and Principal Financial and Accounting Officer concluded that its 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 the Company in reports that it files or submits 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 the Company’s management, including its Chief Executive Officer and its Chief Operating Officer and Principal Financial and Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

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

PART II. OTHER INFORMATION

 

Item 1.

Legal Proceedings

On October 4, 2013, the Company settled previously disclosed litigation regarding allegations made by one of its overseas customers that furnaces such customer had purchased from the Company in 2006 had not functioned properly. The settlement constitutes a full and final settlement and release of all rights and obligations of each party. The $1.5 million payable as a result of the settlement has been recognized in the Company’s consolidated statement of operations for the three months ended September 29, 2013. The payment balance of this settlement as of June 29, 2014 was $0.6 million.

 

Item 1A.

Risk Factors

During the six months ended June 29, 2014, there have been no material changes to the items disclosed as risk factors in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

 

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: August 12, 2014				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: August 12, 2014				BY:		/S/    PETER J. TALLIAN
						Peter J. Tallian
						Chief Operating Officer and Principal Financial and Accounting Officer (principal financial and accounting officer)

 

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