cyberoptics103872_10q.htm - Generated by SEC Publisher for SEC Filing

 

 

 



SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q


 

(Check One)

 

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

 

For the quarterly period ended June 30, 2010

 

o TRANSITION PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT

 

For the transition period from ______ to ______

COMMISSION FILE NO. (0-16577)


CYBEROPTICS CORPORATION

(Exact name of registrant as specified in its charter)

 

Minnesota

41-1472057

(State or other jurisdiction of
incorporation or organization)

(I.R.S. Employer
 Identification No.)

 

 

5900 Golden Hills Drive
MINNEAPOLIS, MINNESOTA

55416

(Address of principal executive offices)

(Zip Code)

 

(763) 542-5000

(Registrant’s telephone number, including area code)


 

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 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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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 that the registrant was required to submit and post such files).
Yes
o    No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” or “large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer  o

 

Non-accelerated filer o

 

Smaller Reporting Company x

 

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

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.  At July 31, 2010, there were 6,880,049 shares of the registrant’s Common Stock, no par value, issued and outstanding. 

 



 


 

PART I.  FINANCIAL INFORMATION

 

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

CONDENSED CONSOLIDATED BALANCE SHEETS
CYBEROPTICS CORPORATION

 

(In thousands except share information)

 

(Unaudited)
June 30,
2010

 

(Audited)
December 31,
2009

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,170

 

$

4,177

 

Marketable securities

 

 

8,148

 

 

14,557

 

Accounts receivable, less allowance for doubtful accounts of $1,045 at June 30, 2010 and $1,049 at December 31, 2009

 

 

14,751

 

 

8,389

 

Inventories

 

 

12,371

 

 

7,745

 

Income tax refunds and deposits

 

 

2,694

 

 

2,499

 

Other current assets

 

 

1,471

 

 

1,130

 

Deferred tax assets

 

 

2,040

 

 

2,040

 

Total current assets

 

 

47,645

 

 

40,537

 

 

 

 

 

 

 

 

 

Marketable securities

 

 

4,133

 

 

3,145

 

Equipment and leasehold improvements, net

 

 

2,076

 

 

1,921

 

Intangible and other assets, net

 

 

524

 

 

642

 

Goodwill

 

 

569

 

 

569

 

Other assets

 

 

163

 

 

163

 

Deferred tax assets

 

 

4,099

 

 

4,160

 

Total assets

 

$

59,209

 

$

51,137

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

9,231

 

$

3,652

 

Advance customer payments

 

 

875

 

 

657

 

Accrued expenses

 

 

2,725

 

 

1,880

 

Total current liabilities

 

 

12,831

 

 

6,189

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

573

 

 

546

 

Total liabilities

 

 

13,404

 

 

6,735

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, no par value, 5,000,000 shares authorized, none outstanding

 

 

 

 

 

Common stock, no par value, 25,000,000 shares authorized, 6,849,391 shares issued
and outstanding at June 30, 2010 and 6,828,616 at December 31, 2009   

 

 

29,951

 

 

29,732

 

Accumulated other comprehensive loss

 

 

(800

)

 

(768

)

Retained earnings

 

 

16,654

 

 

15,438

 

 

 

 

 

 

 

 

 

Total stockholders’ equity

 

 

45,805

 

 

44,402

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

59,209

 

$

51,137

 

 

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

1


 

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
CYBEROPTICS CORPORATION
(Unaudited)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands, except per share amounts)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

16,499

 

$

5,179

 

$

28,840

 

$

9,541

 

Cost of revenues

 

 

9,843

 

 

3,581

 

 

16,928

 

 

6,565

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

 

6,656

 

 

1,598

 

 

11,912

 

 

2,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

1,707

 

 

1,730

 

 

3,484

 

 

3,807

 

Selling, general and administrative expenses

 

 

3,714

 

 

3,702

 

 

6,891

 

 

6,634

 

Severance

 

 

 

 

90

 

 

 

 

395

 

Amortization of intangibles

 

 

46

 

 

46

 

 

91

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

1,189

 

 

(3,970

)

 

1,446

 

 

(7,951

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other

 

 

13

 

 

150

 

 

90

 

 

358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

1,202

 

 

(3,820

)

 

1,536

 

 

(7,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)  

 

 

233

 

 

(1,897

)

 

320

 

 

(3,237

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

969

 

$

(1,923

)

$

1,216

 

$

(4,356

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – Basic

 

 

$0.14

 

 

($0.28

)

 

$0.18

 

 

($0.64

)

Net income (loss) per share – Diluted

 

 

$0.14

 

 

($0.28

)

 

$0.18

 

 

($0.64

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding – Basic

 

 

6,847

 

 

6,781

 

 

6,843

 

 

6,776

 

Weighted average shares outstanding – Diluted

 

 

6,914

 

 

6,781

 

 

6,892

 

 

6,776

 

 

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

2


 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CYBEROPTICS CORPORATION
(Unaudited)

 

 

 

Six Months Ended June 30,

 

(In thousands)

 

2010

 

2009

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

1,216

 

$

(4,356

)

Adjustments to reconcile net income (loss) to net cash used by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,036

 

 

1,161

 

Provision for doubtful accounts

 

 

14

 

 

804

 

Deferred taxes

 

 

99

 

 

(1,351

)

Foreign currency transaction (gains) losses

 

 

55

 

 

(145

)

Stock compensation costs

 

 

194

 

 

262

 

Realized gains on available for sale marketable securities

 

 

 

 

(24

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(6,376

)

 

1,354

 

Inventories

 

 

(4,906

)

 

(678

)

Income tax refunds and deposits

 

 

(195

)

 

(1,403

)

Other current assets

 

 

(274

)

 

161

 

Accounts payable

 

 

5,577

 

 

(427

)

Advance customer payments

 

 

218

 

 

82

 

Accrued expenses

 

 

874

 

 

(1,101

)

Net cash used by operating activities

 

 

(2,468

)

 

(5,661

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from maturities of available for sale marketable securities

 

 

10,031

 

 

5,612

 

Proceeds from sales of available for sale marketable securities

 

 

2,644

 

 

2,478

 

Purchases of available for sale marketable securities

 

 

(7,429

)

 

(4,759

)

Additions to equipment and leasehold improvements

 

 

(692

)

 

(296

)

Additions to patents

 

 

(87

)

 

(184

)

Net cash provided by investing activities

 

 

4,467

 

 

2,851

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from exercise of stock options

 

 

25

 

 

 

Net cash provided by financing activities

 

 

25

 

 

 

 

 

 

 

 

 

 

 

Effects of exchange rate changes on cash and cash equivalents

 

 

(31

)

 

13

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

1,993

 

 

(2,797

)

 

 

 

 

 

 

 

 

Cash and cash equivalents – beginning of period

 

 

4,177

 

 

4,516

 

 

 

 

 

 

 

 

 

Cash and cash equivalents – end of period

 

$

6,170

 

$

1,719

 

 

SEE THE ACCOMPANYING NOTES TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

 

 

3


 

 

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CYBEROPTICS CORPORATION

 

1.  INTERIM REPORTING:

 

The interim condensed consolidated financial statements presented herein as of June 30, 2010, and for the three and six month periods ended June 30, 2010 and 2009, are unaudited, but in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the periods presented. 

 

The results of operations for the three and six month periods ended June 30, 2010 do not necessarily indicate the results to be expected for the full year. The December 31, 2009 consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. These unaudited interim condensed consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto, contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

2.  MARKETABLE SECURITIES:

 

Our investments in marketable securities are classified as available for sale and consist of the following:

 

 

 

June 30, 2010

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value


Short Term

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

6,758

 

66

 

 

6,824

Corporate debt securities and certificates of deposit

 

 

1,317

 

7

 

 

1,324

Marketable securities – short term

 

$

8,075

 

73

 

 

8,148

 

Long Term

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

3,042

 

16

 

 

3,058

Corporate debt securities and certificates of deposit

 

 

807

 

2

 

 

809

Asset backed securities

 

 

200

 

8

 

 

208

Equity securities

 

 

84

 

 

(26

)

58

Marketable securities – long term

 

$

4,133

 

26

 

(26

)

4,133

 

 

4


 

 

 

 

December 31, 2009

(In thousands)

 

Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair Value

 

Short Term

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

11,199

 

158

 

 

11,357

Corporate debt securities and certificates of deposit

 

 

3,180

 

20

 

 

3,200

Marketable securities – short term

 

$

14,379

 

178

 

 

14,557


Long Term

 

 

 

 

 

 

 

 

 

U.S. government and agency obligations

 

$

2,757

 

47

 

 

2,804

Corporate debt securities

 

 

101

 

 

 

101

Asset backed securities

 

 

200

 

10

 

 

210

Equity securities

 

 

84

 

 

(54

)

30

Marketable securities – long term

 

$

3,142

 

57

 

(54

)

3,145

 

Our investment in equity securities was in a $26,000 unrealized loss position at June 30, 2010 and a $54,000 unrealized loss position at December 31, 2009 due to weak economic and stock market conditions.  We intend to hold this security indefinitely and expect its value to recover given improved economic and market conditions. 

 

Our investments in marketable debt securities all have maturities of less than five years. At June 30, 2010, marketable debt securities valued at $12,223,000 were in an unrealized gain position totaling $99,000.  At December 31, 2009, marketable debt securities valued at $16,463,000 were in an unrealized gain position totaling $235,000 and marketable debt securities valued at $1,209,000 were in an insignificant unrealized loss position totaling several hundred dollars (all had been in an unrealized loss position for less than twelve months).

 

Net pre-tax unrealized gains for marketable securities of $73,000 at June 30, 2010 and $182,000 at December 31, 2009 were recorded as a component of accumulated other comprehensive income (loss) in stockholders’ equity.  In the three months ended June 30, 2010 we received proceeds of $1,500,000 from the sale of marketable securities.  In the six months ended June 30, 2010 we received proceeds of $2,644,000 from the sale of marketable securities.  No gain or loss was recognized on any of the sales in 2010.  In the three months ended June 30, 2009 we received proceeds of $660,000 from the sale of marketable securities and recognized a gain of $13,000 from the sales.  In the six months ended June 30, 2009, we received proceeds of $2,478,000 from the sale of marketable securities and recognized a gain of $24,000 from the sales.

 

3.  FAIR VALUE MEASUREMENTS:

 

We determine the fair value of our assets and liabilities based on the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. We use a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value: The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1).  The next highest priority is based on quoted prices for similar assets or liabilities in active markets or quoted prices for identical or similar assets or liabilities in non-active markets or other observable inputs (Level 2).   The lowest priority is given to unobservable inputs (Level 3). 

 

 

5


 

 

The following provides information regarding fair value measurements for our cash equivalents and marketable securities as of June 30, 2010 and December 31, 2009 according to the three-level fair value hierarchy:

 

 

 

 

 

 

Fair Value Measurements at June 30, 2010 Using

 

(In thousands)

 

Balance
June 30,
2010

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

      

$

3,809

      

$

        —

      

$

3,809

      

$

        —

   

U.S. government and agency
obligations

 

 

9,882

 

 

 

 

9,882

 

 

 

Corporate debt securities

 

 

2,133

 

 

 

 

2,133

 

 

 

Asset backed securities

 

 

208

 

 

 

 

208

 

 

 

Equity securities

 

 

58

 

 

58

 

 

 

 

 

Total

 

$

16,090

 

$

58

 

$

16,032

 

$

 

 

 

 

 

 

 

Fair Value Measurements at December 31, 2009 Using

 

(In thousands)

 

Balance
December 31,
2009

 

Quoted Prices in
Active Markets for
Identical Assets
(Level 1)

 

Significant Other
Observable
Inputs
(Level 2)

 

Significant
Unobservable
Inputs
(Level 3)

 

Cash equivalents

 

$

2,320

 

$

 

$

2,320

 

$

 

U.S. government and agency
obligations

 

 

14,161

 

 

 

 

 

14,161

 

 

 

Corporate debt securities

 

 

3,301

 

 

 

 

3,301

 

 

 

Asset backed securities

 

 

210

 

 

 

 

210

 

 

 

Equity securities

 

 

30

 

 

30

 

 

 

 

 

Total

 

$

20,022

 

$

30

 

$

19,992

 

$

 

 

During the six months ended June 30, 2010 there were no significant transfers to or from the three level hierarchy.  The carrying amounts of financial instruments such as cash equivalents, accounts receivable, income tax refunds receivable, other assets, accounts payable, accrued expenses and other current liabilities approximate the related fair values due to the short term maturities of these instruments.  Our foreign currency swap agreements are structured to mature on the last day of each quarter.  The fair value associated with these agreements is inconsequential and represents a Level 2 measurement.

 

We consider all highly liquid investments purchased with an original maturity of 90 days or less to be cash equivalents.  At June 30, 2010, cash and cash equivalents consist of funds maintained in demand deposit accounts, money market accounts, corporate debt instruments and U.S. government backed obligations.  Some cash and cash equivalent balances may exceed federally insured limits.  

 

4.  ACCOUNTING FOR STOCK-BASED COMPENSATION:

 

All equity-based payments to employees, including grants of employee stock options, are recognized as an expense in our consolidated statement of operations based on the grant date fair value of the award.  We utilize the straight-line method of expense recognition over the award’s service period for our graded vesting options.  The fair value of stock options granted has been determined using the Black-Scholes model.   The compensation expense recognized for all equity based awards is net of estimated forfeitures, which are based on historical data.  We have classified equity based compensation within our statement of operations in the same manner as our cash based employee compensation costs.

 

 

6


 

 

The fair value of the options granted to our employees was estimated on the date of grant using the Black-Scholes model.  Stock options for 47,000 shares of stock and restricted stock units for 350 shares of stock were granted in the six months ended June 30, 2010 to certain key employees.  We issued 4,000 shares of common stock under our stock grant plan for non-employee directors upon their re-election to the board of directors in May 2010.  These stock options, restricted stock units and share grants were valued at their fair market value on the date of grant, with recognition of compensation expense over the corresponding vesting period.

 

Equity based compensation expense in the three months ended June 30, 2010 totaled $121,000 and includes $46,000 for stock option awards, $18,000 for our employee stock purchase plan, $19,000 for unvested restricted stock units and $38,000 for shares issued to our non-employee directors upon their re-election to our board in May 2010. Equity based compensation expense in the six months ended June 30, 2010 totaled $195,000 and includes $83,000 for stock option awards, $36,000 for our employee stock purchase plan, $38,000 for unvested restricted stock units and $38,000 for shares issued to our non-employee directors upon their re-election to our board in May 2010.

 

Equity based compensation expense in the three months ended June 30, 2009 totaled $84,000 and includes $49,000 for stock option awards, $11,000 for our employee stock purchase plan, $10,000 for unvested restricted stock units and $14,000 for shares issued to our non-employee directors.  Equity based compensation expense in the six months ended June 30, 2009 totaled $262,000 and includes $141,000 for stock option awards, $27,000 for our employee stock purchase plan, $30,000 for unvested restricted stock units, $14,000 for shares issued to our non-employee directors and $50,000 for shares issued to an officer under an incentive compensation arrangement.

 

At June 30, 2010, the total unrecognized compensation cost related to non-vested equity based compensation arrangements was $616,000 and the related weighted average period over which it is expected to be recognized is 2.2 years. 

 

The Black Scholes valuation model incorporates ranges of assumptions that are disclosed in the table below. The risk-free interest rate is based on the United States Treasury yield curve at the time of grant with a remaining term equal to the expected life of the awards. We estimated the expected term for our graded vesting options, representing the length of time in years that the options are expected to be outstanding, using the simplified method.  We continued to use the simplified method in 2010 because our historical exercise experience is not expected to be representative of exercise patterns in the future, due to our recent restructuring activities.  Expected volatility was computed based on historical fluctuations in the daily price of our common stock.

 

For stock options granted during the six months ending June 30, 2010, we utilized the fair value of our common stock on the date of grant and employed the following key assumptions in computing fair value using the Black-Scholes option-pricing model:

 

Black Scholes Assumptions:

 

Six Months Ending
June 30, 2010

 

 

 

 

 

 

Risk-free interest rates

 

 

2.47% - 2.75%

 

Expected life in years

 

 

4.75

 

Expected volatility

 

 

50% - 52%

 

Expected dividends

 

 

None

 

Weighted average fair value on grant date

 

 

$4.80

 

 

Stock Options

 

We have three stock incentive plans that are administered under the supervision of the Compensation Committee of the Board of Directors.  There are 828,209 shares of common stock reserved in the aggregate for issuance of options and other stock based benefits under these plans, including restricted stock units and share grants to employees, officers, non-employee directors and others.  Reserved shares underlying canceled options are available for future grant under our active plans.  Options are granted at an option price per share equal to or greater than the market value on the date of grant.  Generally, options granted to employees vest over a four-year period and expire five, seven, or ten years after the date of grant.  Stock options for 47,000 shares of stock were granted during the six months ended June 30, 2010.   As of June 30, 2010, there were 336,445 shares of common stock available under these plans for future issuance to employees, officers and others. There are no options available under these plans for future issuance to non-employee directors. In addition, there are 50,000 shares reserved and included in the plan summaries below that are not part of the three stock incentive plans.

 

 

7


 

 

The following is a summary of stock option activity during the six months ended June 30, 2010:

 

Options
Outstanding

Weighted Average
Exercise Price Per
Share

Outstanding, December 31, 2009

549,095

$

10.04

Granted

47,000

10.70

Exercised

(64,000

)

6.02

Expired

 (13,500

)

24.83

Forfeited

 

 

Outstanding, June 30, 2010

 

518,595

$

10.21

Exercisable, June 30, 2010

 

343,578

$

11.66

 

The intrinsic value of an option is the amount by which the fair value of the underlying stock exceeds its exercise price.  The weighted average remaining contractual term and aggregate intrinsic value for all options outstanding at June 30, 2010 was 3.89 years and $705,000.  The weighted average remaining contractual term and aggregate intrinsic value of options that were exercisable at June 30, 2010 was 2.93 years and $187,000.  The aggregate intrinsic value of stock options that were exercised in the six months ended June 30, 2010 was $104,000.  During the six months ended June 30, 2010, we received total proceeds of $25,000 from the exercise of stock options.  The excess tax benefit associated with the exercise of stock options in the three and six months ended June 30, 2010 was inconsequential. 

 

Restricted Stock Units

 

Our 1998 Stock Incentive Plan also permits our Compensation Committee to grant other stock-based benefits, including restricted stock units.  Restricted stock units are valued at a price equal to the fair market value of our common stock on the date of grant, vest over a four year period and entitle the holders to one share of our common stock for each restricted stock unit.  The aggregate fair value of outstanding restricted stock units as of June 30, 2010 was $224,000. 

 

A summary of activity in non-vested restricted stock units for the six months ended June 30, 2010 is as follows:

 

Non vested restricted stock units

Shares

Weighted – Average
Grant Date Fair Value

Non vested at December 31, 2009

22,819

$

6.79

Granted

350

7.71

Vested

Forfeited

 

 

Non vested at June 30, 2010

 

23,169

$

6.80

 

Employee Stock Purchase Plan

 

We have an Employee Stock Purchase Plan available to eligible U.S. employees. Under terms of the plan, eligible employees may designate from 1% to 10% of their compensation to be withheld through payroll deductions, up to a maximum of $6,500 in each plan year, for the purchase of common stock at 85% of the lower of the market price on the first or last day of the offering period. There were no shares issued under this plan in the six months ended June 30, 2010 or the six months ended June 30, 2009. As of June 30, 2010, 92,002 shares remain available for future issuance under this plan.  

 

Stock Grant Plan for Non-Employee Directors

 

Our stock grant plan for non-employee directors provides for automatic grants of 1,000 shares of our common stock to each of our non-employee directors upon their re-election to the board of directors.  The plan provides for a total of 30,000 shares of our common stock for issuance to directors and will expire on May 19, 2018.  We issued a total of 4,000 shares of common stock under this plan in connection with our annual meeting in May 2010, resulting in $38,000 of stock compensation expense in the three and six months ended June 30, 2010.  There are presently 20,000 shares of common stock reserved in the aggregate for future issuance under this plan.

 

 

8


 

 

5.  INVENTORIES AND WARRANTIES:

 

Inventories consist of the following:

 

(In thousands)

 

June 30, 2010

 

December 31, 2009

 

 

 

 

 

 

 

 

 

Raw materials and purchased parts

 

$

6,159

 

$

3,312

 

Work in process

 

 

1,305

 

 

637

 

Finished goods

 

 

4,907

 

 

3,796

 

 

 

 

 

 

 

 

 

Total inventories

 

$

12,371

 

$

7,745

 

 

Warranty costs:

 

We provide for the estimated cost of product warranties at the time revenue is recognized, generally for one year. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of component suppliers, warranty obligations are affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be required.  Our warranty liability is included as a component of accrued expenses.  At the end of each reporting period we revise our estimated warranty liability based on these factors. A reconciliation of the changes in our estimated warranty liability is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

552

 

$

636

 

$

488

 

$

823

 

Accrual for warranties

 

 

324

 

 

114

 

 

505

 

 

198

 

Settlements made during the period

 

 

(269

)

 

(241

)

 

(386

)

 

(512

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

607

 

$

509

 

$

607

 

$

509

 

 

Extended warranty:

 

Our extended warranty liability is included as a component of advance customer payments.  A reconciliation of the changes in our extended warranty liability is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at beginning of period

 

$

697

 

$

608

 

$

636

 

$

605

 

Revenue deferrals

 

 

290

 

 

125

 

 

466

 

 

206

 

Amortization of deferred revenue

 

 

(112

)

 

(94

)

 

(227

)

 

(172

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at end of period

 

$

875

 

$

639

 

$

875

 

$

639

 

 

 

9


 

 

 

6.  INTANGIBLE ASSETS:

 

Intangible assets consist of the following:

 

 

 

As of June 30, 2010

 

As of December 31, 2009

 

(In thousands)

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Gross
Carrying
Amount

 

Accumulated
Amortization

 

Net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

7,775

 

$

(7,576

)

$

199

 

$

7,775

 

$

(7,485

)

$

290

 

Patents and trademarks

 

 

2,768

 

 

(2,443

)

 

325

 

 

2,681

 

 

(2,329

)

 

352

 

Total

 

$

10,543

 

$

(10,019

)

$

524

 

$

10,456

 

$

(9,814

)

$

642

 

 

Amortization expense for the three and six month periods ended June 30, 2010 and 2009 is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Developed technology

 

$

46

 

$

46

 

$

91

 

$

91

 

Patents and trademarks

 

 

56

 

 

80

 

 

114

 

 

156

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

102

 

$

126

 

$

205

 

$

247

 

 

Intangible and other long lived assets are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An impairment loss would be recognized when future undiscounted cash flows expected to result from use of the asset and eventual disposition are less than the carrying amount.

 

Amortization of patents and trademarks has been classified as research and development expense in the accompanying statement of operations.  Estimated aggregate amortization expense based on current intangibles for the next four years is expected to be as follows:  $203,000 for the remainder of 2010 and $244,000 in 2011, $66,000 in 2012, and $11,000 in 2013.

 

 

10


 

 

7.  BUSINESS SEGMENTS AND SIGNIFICANT CUSTOMERS:

 

Our electronic assembly segment is the design, manufacture and sale of optical process control sensors and inspection systems for the electronic assembly equipment market.  The semiconductor segment is the design, manufacture and sale of optical and other process control sensors and related equipment for the semiconductor capital equipment market.  Information regarding our segments is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic Assembly

 

 

 

 

 

 

 

 

 

 

 

 

 

OEM Sensors

 

$

6,485

 

$

1,204

 

$

11,604

 

$

2,644

 

SMT Systems

 

 

8,716

 

 

3,320

 

 

14,761

 

 

5,565

 

Total Electronic Assembly

 

 

15,201

 

 

4,524

 

 

26,365

 

 

8,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Semiconductor

 

 

1,298

 

 

655

 

 

2,475

 

 

1,332

 

Total

 

$

16,499

 

$

5,179

 

$

28,840

 

$

9,541

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic Assembly

 

$

887

 

$

(3,753

)

$

952

 

$

(7,377

)

Semiconductor

 

 

302

 

 

(217

)

 

494

 

 

(574

)

Total income (loss) from operations

 

 

1,189

 

 

(3,970

)

 

1,446

 

 

(7,951

)

Interest income and other

 

 

13

 

 

150

 

 

90

 

 

358

 

Income (loss) before taxes

 

$

1,202

 

$

(3,820

)

$

1,536

 

$

(7,593

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic Assembly

 

$

490

 

$

503

 

$

920

 

$

1,018

 

Semiconductor

 

 

59

 

 

71

 

 

116

 

 

143

 

Total

 

$

549

 

$

574

 

$

1,036

 

$

1,161

 

 

Export sales were 87% of revenue in the three months ended June 30, 2010 and 85% of revenue in the six months ended June 30, 2010.  Export sales were 76% of revenue in the three months ended June 30, 2009 and 74% of revenue in the six months ended June 30, 2009.  Virtually all of our export sales are negotiated, invoiced and paid in U.S. dollars. Export sales by geographic area are summarized as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

79

 

$

493

 

$

282

 

$

550

 

Europe

 

 

3,250

 

 

1,453

 

 

6,670

 

 

3,567

 

Asia

 

 

10,951

 

 

909

 

 

17,451

 

 

1,846

 

Other

 

 

56

 

 

1,099

 

 

86

 

 

1,099

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total export sales

 

$

14,336

 

$

3,954

 

$

24,489

 

$

7,062

 

 

Historically, we have been dependent upon two electronic assembly customers, Assembleon and Juki, for a significant portion of our revenue.  For the six months ended June 30, 2010, sales to Juki accounted for 20% of our total revenue and sales to Assembleon accounted for 11% of our total revenue. 

 

 

11


 

 

8.  NET INCOME (LOSS) PER SHARE:

 

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.  Net income (loss) per diluted share is computed by dividing net income (loss) by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares consist of common shares to be issued upon exercise of stock options, restricted stock units and from participation in our employee stock purchase plan, as calculated using the treasury stock method. All potentially dilutive common equivalent shares are excluded from the calculation of net loss per diluted share due to their anti-dilutive effect. As a result, no common equivalent shares were included in the calculations of net loss per diluted share for the three or six months ended June 30, 2009.  The components of net income (loss) per basic and diluted share are as follows:

 

(In thousands except per share amounts)

 

Net income
(loss)

 

Weighted Average
Shares Outstanding

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2010:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

969

 

 

6,847

 

$

0.14

 

Dilutive effect of common equivalent shares

 

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive

 

$

969

 

 

6,914

 

$

0.14

 

 

 

 

 

 

 

 

(In thousands except per share amounts)

 

Net income
(loss)

 

Weighted Average
Shares Outstanding

 

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(1,923

)

 

6,781

 

$

(0.28

)

Dilutive effect of common equivalent shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive

 

$

(1,923

)

 

6,781

 

$

(0.28

)

 

 

 

 

 

 

 

 

 

(In thousands except per share amounts)

 

Net income
(loss)

 

Weighted Average
Shares Outstanding

 

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2010:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1,216

 

 

6,843

 

$

0.18

 

Dilutive effect of common equivalent shares

 

 

 

 

49

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive

 

$

1,216

 

 

6,892

 

$

0.18

 

 

 

 

 

 

 

 

 

 

(In thousands except per share amounts)

 

Net income
(loss)

 

Weighted Average
Shares Outstanding

 

 

Per Share
Amount

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2009:

 

 

 

 

 

 

 

 

 

 

Basic

 

$

(4,356

)

 

6,776

 

$

(0.64

)

Dilutive effect of common equivalent shares

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive

 

$

(4,356

)

 

6,776

 

$

(0.64

)

 

 

12


 

 

 

 

 

The calculation of diluted net income (loss) per common share excludes 241,000 potentially dilutive shares for the three months ended June 30, 2010, 671,000 potentially dilutive shares for the three months ended June 30, 2009, 297,000 potentially dilutive shares for the six months ended June 30, 2010 and 739,000 potentially dilutive shares for the six months ended June 30, 2009, because their effect would be anti-dilutive. 

 

9.  COMPREHENSIVE INCOME (LOSS):

 

Components of comprehensive income (loss) include net income (loss), foreign-currency translation adjustments, unrealized gains and losses on available-for-sale securities and reclassification adjustments.  Total comprehensive income (loss) amounted to $940,000 for the three months ended June 30, 2010 and $(2,041,000) for the three months ended June 30, 2009.  Total comprehensive income (loss) amounted to $1,185,000 for the six months ended June 30, 2010 and $(4,659,000) for the six months ended June 30, 2009. 

 

At December 31, 2009 and June 30, 2010 components of accumulated other comprehensive loss is as follows:

 

(In thousands)

 

 

Foreign
Currency
Translation

 

 

Unrealized Gains
(Losses) on
Securities

 

 

Accumulated
Other
Comprehensive
 Loss

 

 

 

 

 

 

 

 

 

 

 

 

Balance December 31, 2009

 

$

(887

)

$

119

 

$

(768

)

Unrealized losses on securities, net of tax of $38

 

 

 

 

(71

)

 

(71

)

Translation adjustments

 

 

39

 

 

 

 

39

 

 

 

 

 

 

 

 

 

 

 

 

Balance June 30, 2010

 

$

(848

)

$

48

 

$

(800

)

 

10.  INCOME TAXES:

 

We recorded a provision for income tax expense in the six months ended June 30, 2010 at an effective tax rate of 20.8%, compared to an income tax benefit in the six months ended June 30, 2009 at an effective tax rate of 42.6%.  Our recorded income tax benefit for the three and six months ended June 30, 2009 includes a $537,000 discrete benefit from reversal of a portion of our reserve for income taxes resulting from settlement of Internal Revenue Service audits of our 2006 and 2007 federal income tax returns. Discrete items impacting the effective tax rate in the six months ended June 30, 2010 were inconsequential. Other items impacting the effective tax rate for 2010, compared to 2009, include the anticipated benefit from  the domestic manufacturer’s production incentive and additional tax expense in foreign tax jurisdictions with lower tax rates than the U.S federal statutory rate.  The effective tax rate for the six months ended June 30, 2010 was also favorably impacted by recognition of the benefit from the Minnesota state R&D tax credit.  No benefit from this credit was recognized in the first quarter of 2010 because the credit had not yet been signed into law.   

 

We currently have significant deferred tax assets as a result of temporary differences between taxable income on our tax returns and U.S. GAAP income, research and development tax credit carry forwards and foreign net operating loss carry forwards.  A deferred tax asset generally represents future tax benefits to be received when temporary differences previously reported in our financial statements become deductible for income tax purposes, or when net operating loss carry forwards or credits are applied against future taxable income, or when tax credit carry forwards are utilized on our tax returns. We assess the realizability of our deferred tax assets and the need for a valuation allowance based on the guidance provided in current financial accounting standards.

 

Significant judgment is required in determining the realizability of our deferred tax assets. The assessment of whether valuation allowances are required considers, among other matters, the nature, frequency and severity of any current and cumulative losses, forecasts of future profitability, the duration of statutory carry forward periods, our experience with loss carry forwards not expiring unused and tax planning alternatives.

 

 

13


 

 

In analyzing the need for valuation allowances, we first considered our history of cumulative losses for U.S. income tax purposes over the past three years and also gave significant consideration to our results for U.S. income tax purposes over the past five years, as the economic cycles in our industry have tended to average five years in length (from peak to trough).  We also considered our forecasts of future profitability, the duration of statutory carry forward periods and tax planning alternatives.  Finally, we considered the length and severity of the recent global economic crisis, the impact that it had on our operating results and our expectation for rebound given recent signs of recovery in the global economy and more specifically in our markets.  After considering all of these factors, and after considering other significant positive evidence, we concluded that a valuation allowance with respect to substantially all of our U.S. based deferred tax assets was not required at June 30, 2010.

 

Our results in both 2008 and 2009 were negatively impacted by the recent global economic slowdown, and we incurred a loss in the United States in both 2008 and 2009, where most of our net deferred tax assets are recorded. Therefore, achievement of profitability in the United States will be a significant factor in determining our continuing ability to carry these deferred tax assets without recording a valuation allowance.  If future results from our operations are less than projected, a valuation allowance may be required against virtually all of our deferred tax assets, which could have a material impact on our results of operations in the period in which it is recorded.  

 

Deferred tax assets at June 30, 2010, include net operating loss carry forwards incurred in the UK by CyberOptics Ltd., which was acquired in 1999. The utilization of these net operating loss carry forwards is dependent on CyberOptics Ltd.’s ability to generate sufficient UK taxable income during the carry forward period. 

 

11.  DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:

 

We enter into foreign currency swap agreements to hedge short term inter-company financing transactions with our subsidiaries in the United Kingdom and Singapore.  These currency swap agreements are structured to mature near the last day of each quarter, and are designated as cash flow hedges.  At June 30, 2010, we had two open swap agreements for £225,000 British Pounds Sterling and $1,000,000 Singapore dollars that were purchased on June 30, 2010, the fair value of which was inconsequential.  Gains and losses from foreign currency transactions and foreign currency swap agreements are recognized in interest income and other in our statement of operations.

 

In the three months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(3,500) in addition to foreign currency transaction gains (losses) on the underlying inter-company balances of $(7,000).  In the six months ended June 30, 2010, we recognized net gains (losses) from settlement of foreign currency swap agreements of $30,500 that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $(55,000).

 

In the three months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(192,000) that offset foreign currency transaction gains (losses) on the underlying inter-company balances of $188,000.  In the six months ended June 30, 2009, we recognized net gains (losses) from settlement of foreign currency swap agreements of $(182,000) that offset foreign currency transactions gains (losses) on the underlying inter-company balances of $145,000.

 

Our foreign currency swap agreements contain credit risk to the extent that our bank counter-parties may be unable to meet the terms of the agreements.  We minimize such risk by limiting our counter-parties to major financial institutions.  We do not expect material losses as a result of defaults by other parties.

 

12.  CONTINGENCIES:

 

In the ordinary course of business, we are a defendant in miscellaneous claims and disputes.  While the outcome of these matters cannot be predicted with certainty, management presently believes the disposition of these matters will not have a material effect on our financial position, results of operations or cash flows.

 

In the normal course of business to facilitate sales of our products and services, we at times indemnify other parties, including customers, with respect to certain matters.  In these instances, we have agreed to hold the other parties harmless against losses arising out of intellectual property infringement or other types of claims.  These agreements may limit the time within which an indemnification claim can be made, and almost always limit the amount of the claim.  It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.  Historically, payments made, if any, under these agreements have not had a material impact on our operating results, financial position or cash flows.

 

 

14


 

 

13.  SEVERANCE COSTS:

 

We started to incur severance costs in February 2008 in connection with our decision to move a significant portion of development and manufacturing for our systems products to Singapore.  The transition of systems-related product development was substantially complete by the end of the fourth quarter of 2008, and the transition of systems-related manufacturing was substantially complete by the end of the first quarter of 2009.  Severance costs incurred in connection with the February 2008 decision to move our systems related product development and manufacturing to Singapore totaled $29,000 in the three months ended June 30, 2009 and $80,000 in the six months ended June 30, 2009.  

 

In February 2009, we further reduced our workforce by 24 positions in response to the weakening global economy, our transition to Singapore and our decision to consolidate manufacturing for our semiconductor products in our Minneapolis facility.  Severance costs incurred in connection with the February 2009 workforce reduction totaled $61,000 in the three months ended June 30, 2009 and $315,000 in the six months ended June 30, 2009. 

 

All of the aforementioned severance costs incurred in 2009 were paid prior to December 31, 2009.  No severance costs were incurred in the six months ended June 30, 2010.  All of the severance costs related to the February 2008 transition to Singapore, and the February 2009 workforce reduction have been classified as severance in our statement of operations.

 

14.  RECENT ACCOUNTING DEVELOPMENTS:

 

Prior to January 1, 2010, we recognized revenue based on multiple element revenue guidance which required the existence of vendor specific objective evidence of fair value (VSOE) for the undelivered elements in an arrangement in order for us to account for the elements separately.  We utilized the residual method of allocation to account for delivered elements. 

 

In October 2009, the Financial Accounting Standards Board (FASB) amended guidance in FASB Accounting Standards CodificationTM (ASC) 605, Revenue Recognition, 25, “Multiple-Element Arrangements,” to (1) modify the separation criteria by eliminating the criterion that requires objective and reliable evidence of fair value for the undelivered item(s), and (2) eliminates the use of the residual method of allocation and instead requires that arrangement consideration be allocated, at the inception of the arrangement, to all deliverables based on their relative selling price.  The FASB also issued guidance to amend the scope of ASC 985, Software, 605, “Revenue Recognition,” to exclude arrangements with tangible products containing both software and non-software components that function together to deliver a product’s essential functionality. 

 

Under the amended guidance, consideration is allocated to the deliverables at inception of an arrangement using the relative selling price method. Selling price is determined based on a selling price hierarchy, consisting of VSOE, third party evidence or estimated selling price.  Under the amended guidance, we determined an estimated selling price for each of the elements in our multiple elements sales based on the selling price hierarchy and allocated consideration to the deliverables using the relative selling price method.  We have adopted the amended guidance effective January 1, 2010.  The impact of adopting the amended guidance had the effect of increasing our revenue by less than $30,000 in the three months ended June 30, 2010 and by less than $51,000 in the six months ended June 30, 2010. The impact of adopting the amended guidance on our results for 2009 would have been insignificant.

 

In January 2010, the FASB issued ASU No. 2010-06, “Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”). ASU No. 2010-06 requires new disclosures regarding significant transfers in and out of Levels 1 and 2, as well as information about activity in Level 3 fair value measurements, including presenting information about purchases, sales, issuances and settlements on a gross versus a net basis in the Level 3 activity roll forward. In addition, ASU No. 2010-06 clarifies existing disclosures regarding input and valuation techniques, as well as the level of disaggregation for each class of assets and liabilities. ASU No. 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for the disclosures pertaining to purchases, sales, issuances and settlements in the roll forward of Level 3 activity; those disclosures are effective for interim and annual periods beginning after December 15, 2010. Our adoption of ASU No. 2010-06 effective January 1, 2010 had no current impact on our consolidated financial position, results of operations or cash flows.

 

 

15


 

 

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES:

 

The preparation of the financial information contained in this 10-Q requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We evaluate these estimates on an ongoing basis, including those related to allowances for doubtful accounts and returns, warranty obligations, inventory valuation, the carrying value and any impairment of intangible assets, and income taxes. These critical accounting policies are discussed in more detail in the Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Form 10-K for the year ended December 31, 2009.

 

FORWARD LOOKING STATEMENTS:

 

The following management’s discussion and analysis contains a number of estimates and predictions that are forward looking rather than based on historical fact.  Among other matters, we discuss (i) our expectations regarding the transfer of our research and development and manufacturing operations for our systems products to Singapore; (ii) our level of anticipated revenues and net income for the third quarter of 2010; (iii) the potential margin improvements resulting from our next-generation solder paste and automated optical inspection (AOI) systems; (iv) the timing of initial revenue and margin improvements from other new products that we have under development or expect to introduce in 2010; (v) our expectations regarding market acceptance of WaferSenseÔ and our other semiconductor products; (vi) our beliefs regarding trends in the general economy and its impact on markets for our equipment; and (vii) the impact of currency fluctuations on our operations.  Although we have made these statements based on our experience and best estimate of future events, there may be events or factors that we have not anticipated, and the accuracy of our statements and estimates are subject to a number of risks, including those identified in our Annual Report on Form 10-K for the year ended December 31, 2009.

 

RESULTS OF OPERATIONS:

 

General

 

Our products are sold primarily into the electronics assembly, semiconductor DRAM memory, and semiconductor fabrication capital equipment markets, where we sell products both to original equipment manufacturers of production equipment and to end-user customers that produce circuit boards and semiconductor wafers and devices. Historically these markets have been very cyclical, with periods of rapid growth as worldwide capacity is added to support increased consumer demand for electronic products, and new capital equipment is purchased as a result of technology changes in electronics components, such as miniaturization, and changing production requirements. These periods of growth have historically been followed by periods of excess capacity and reduced capital spending. 

 

Our results were favorably impacted in 2006 and 2007 as the worldwide demand for cell phones, smart phones, laptops and other consumer electronics remained strong, driving the need for increased production of printed circuit boards and memory modules, and thereby increasing demand for our electronic assembly and semiconductor products.  After peaking in the third quarter of 2007, our revenue declined sequentially each quarter through the first quarter of 2009, as our results were negatively impacted by reduced levels of capital spending for electronics manufacturing capacity brought about by the deepening weakness in the global economy.  New orders dropped off sharply late in the fourth quarter of 2008 as the global economy fell into a severe recession, and our results for 2009 were adversely affected by the ongoing weakness in the global electronics market. 

 

Even before the recession, we worked to improve the efficiencies of our operations.  In February 2008, we commenced plans to move a significant portion of our systems-related product development and manufacturing to Singapore.  The transition of these functions to Singapore was substantially complete by the end of the first quarter of 2009 and has resulted in lower costs and a more focused R&D effort.  Further, in direct response to the recession, we implemented workforce reductions in November 2008 and February 2009, including consolidation of manufacturing operations for our semiconductor products into our Minneapolis, Minnesota headquarters facility.   Implementation of these cost reduction actions has not impacted any of our strategic growth programs. 

 

 

16


 

 

We believe that continued and timely development of new products and enhancements to existing products is essential to growing our position in the market. We commit substantial resources to research and development efforts, which play a critical role in maintaining and advancing our position as a leading provider of optical sensors and systems. During the past several years, research and development efforts have been focused on a number of development activities critical to our future growth and success, including the following:

 

Ÿ

Our stand alone next generation SE500 solder paste inspection system and our new next generation QX500 automated optical inspection (AOI) system.

 

 

Ÿ

A new mid-range SE350 solder paste inspection system based on the 3D inspection technology used in the SE500.  The SE350 is a lower cost system for customers that do not require the full inspection functionality of the SE500.

 

 

Ÿ

Our common hardware platforms and sensor technology utilized in both our new QX500 automated optical inspection (AOI) system and a new embedded inspection solution we have developed for DEK offering 100% 2D solder paste inspection with no cycle time penalty.

 

 

Ÿ

Our Embedded Process Verification (EPV®) technology.

 

 

Ÿ

A new solar wafer alignment camera capable of performing accurate high-speed alignment measurements within the wafer print nest, including traditional wafer edge alignment of both monocrystalline and polycrystalline wafer materials.

 

The global electronics market is starting to strengthen.  We are seeing significant demand from manufacturers of SMT assembly equipment who purchase our alignment sensor products, and for our stand alone solder paste inspection and AOI systems, particularly from large original design manufacturers in Asia.  We believe that these improving market conditions, the efficiencies in operations we have implemented, and the new products we have introduced and anticipate introducing in 2010, will lead to improved operating results and a return to profitability for the coming year.  For the quarter ending June 30, 2010, we generated a profit of $0.14 per share on revenue of $16.5 million, a significant improvement when compared to the quarter ending June 30, 2009.  In addition, we are forecasting a profit of $0.14 to $0.19 per share in the third quarter of 2010 on revenue of $15.0-$16.0 million. 

 

 

17


 

 

Segment Results

 

Operating results for our electronic assembly and semiconductor segments for the three and six month periods ended June 30, 2010 and 2009 are as follows:

 

 

 

Three months ended June 30, 2010

 

Three months ended June 30, 2009

 

(In thousands)

 

Electronic
Assembly

 

Semi-
Conductor

 

Total

 

Electronic
Assembly

 

Semi-
Conductor

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

15,201

 

$

1,298

 

$

16,499

 

$

4,524

 

$

655

 

$

5,179

 

Cost of revenues

 

 

9,455

 

 

388

 

 

9,843

 

 

3,304

 

 

277

 

 

3,581

 

Gross margin

 

 

5,746

 

 

910

 

 

6,656

 

 

1,220

 

 

378

 

 

1,598

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

1,460

 

 

247

 

 

1,707

 

 

1,484

 

 

246

 

 

1,730

 

Selling, general and administrative expenses

 

 

3,371

 

 

343

 

 

3,714

 

 

3,396

 

 

306

 

 

3,702

 

Severance

 

 

 

 

 

 

 

 

65

 

 

25

 

 

90

 

Amortization of intangibles

 

 

28

 

 

18

 

 

46

 

 

28

 

 

18

 

 

46

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from
operations

 

$

887

 

$

302

 

$

1,189

 

$

(3,753

)

$

(217

)

$

(3,970

)

 

 

 

Six months ended June 30, 2010

 

Six months ended June 30, 2009

 

(In thousands)

 

Electronic
Assembly

 

Semi-
Conductor

 

Total

 

Electronic
Assembly

 

Semi-
Conductor

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

26,365

 

$

2,475

 

$

28,840

 

$

8,209

 

$

1,332

 

$

9,541

 

Cost of revenue

 

 

16,197

 

 

731 

 

 

16,928

 

 

5,980

 

 

585 

 

 

6,565

 

Gross margin

 

 

10,168

 

 

1,744

 

 

11,912

 

 

2,229

 

 

747

 

 

2,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

2,965

 

 

519

 

 

3,484

 

 

3,270

 

 

537

 

 

3,807

 

Selling, general and administrative expenses

 

 

6,196

 

 

695

 

 

6,891

 

 

6,000

 

 

634

 

 

6,634

 

Severance

 

 

 

 

 

 

 

 

281

 

 

114

 

 

395

 

Amortization of intangibles

 

 

55

 

 

36

 

 

91

 

 

55

 

 

36

 

 

91

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from
operations

 

$

952

 

$

494

 

$

1,446

 

$

(7,377

)

$

(574

)

$

(7,951

)

 

 

18


 

 

Revenues

 

Our revenues increased by 219% to $16.5 million in the three months ended June 30, 2010 from $5.2 million in the three months ended June 30, 2009, and increased by 202% to $28.8 million in the six months ended June 30, 2010 from $9.5 million in the six months ended June 30, 2009. The following table sets forth revenues by product line for the three and six month periods ended June 30, 2010 and 2009:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

(In thousands)

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic Assembly

 

 

 

 

 

 

 

 

 

 

 

 

 

OEM Alignment Sensors

 

$

6,485

 

$

1,204

 

$

11,604

 

$

2,644

 

SMT Inspection Systems

 

 

8,716

 

 

3,320

 

 

14,761

 

 

5,565

 

Total Electronic Assembly

 

 

15,201

 

 

4,524

 

 

26,365

 

 

8,209

 

Semiconductor

 

 

1,298