U.S. 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 30, 2002
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 001-16611
Mykrolis Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
04-3536767
(I.R.S. Employer Identification No.)
129 Concord Road
Billerica, Massachusetts 01821
(Address of principal executive offices)
Registrant's telephone number, include area code (978) 436-6500
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 and 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 [_]
The Company had 39,655,352 shares of common stock outstanding as of August 1,
2002.
1
Mykrolis Corporation
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Statements of Operations -
Three and Six Months Ended June 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets -
June 30, 2002 and December 31, 2001 4
Condensed Consolidated and Combined Statements of Shareholders' Equity
and Comprehensive Income (Loss)- Six Months Ended June 30, 2002 and
December 31, 2001 5
Condensed Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2002 and 2001 6
Notes to Condensed Consolidated and Combined
Financial Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures about Market Risks 20
Part II. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Mykrolis Corporation
Condensed Consolidated Statements of Operations
(In thousands except per share data)
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales $ 48,537 $ 56,383 $ 84,245 $ 139,407
Cost of sales 32,463 36,636 57,080 80,145
-------- --------- --------- ----------
Gross profit 16,074 19,747 27,165 59,262
Selling, general & administrative expenses 16,902 20,265 34,748 45,541
Research & development expenses 5,182 5,560 9,520 11,412
Restructuring & other charges - - - 12,556
-------- --------- --------- ----------
Operating loss (6,010) (6,078) (17,103) (10,247)
Other income (expense), net 1,815 (715) 1,867 (1,018)
-------- --------- --------- ----------
Loss before income taxes (4,195) (6,793) (15,236) (11,265)
Income tax expense 2,570 20,580 3,970 22,150
-------- --------- --------- ----------
Net loss $ (6,765) $ (27,373) $ (19,206) $ (33,415)
======== ========= ========= ==========
Basic and diluted loss per share $ (0.17) $ (0.84) $ (0.49) $ (1.03)
Shares used in computing basic and diluted loss
per share: 39,629 32,500 39,565 32,500
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
3
Mykrolis Corporation
Condensed Consolidated Balance Sheets
(In thousands except share data)
June 30, 2002 December 31, 2001
------------- -----------------
ASSETS (Unaudited)
------
Current assets
Cash and cash equivalents $ 77,110 $ 82,831
Accounts receivable (less allowance for doubtful accounts of $1,427 at June
30, 2002 and $1,670 at December 31, 2001) 45,509 34,817
Inventories 53,549 60,436
Income tax receivable - 9,000
Deferred income taxes 924 924
Other current assets 3,017 1,348
--------- ---------
Total current assets 180,109 189,356
Restricted cash 1,482 -
Property, plant and equipment (less accumulated depreciation of $50,939 at June
30, 2002 and $44,392 at December 31, 2001) 70,510 69,100
Deferred income taxes 4,872 4,872
Goodwill (less accumulated amortization of $3,845 at December 31, 2001) 14,454 14,454
Other intangible assets (less accumulated amortization of $21,278 at June 30, 2002
and $20,417 at December 31, 2001) 6,705 7,288
Other assets 4,876 4,420
--------- ---------
Total assets $ 283,008 $ 289,490
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities
Current portion of capital lease obligations $ 78 $ -
Accounts payable - Millipore Corporation - 1,928
Accounts payable 14,109 5,402
Accrued income taxes 12,461 9,616
Accrued expenses 18,195 18,884
--------- ---------
Total current liabilities 44,843 35,830
Long-term liabilities
Long-term portion of capital lease obligations 156 -
Other liabilities 10,873 10,113
--------- ---------
Total long-term liabilities 11,029 10,113
--------- ---------
Total liabilities 55,872 45,943
Shareholders' equity
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
no shares outstanding - -
Common stock, par value $.01 per share, 250,000,000 shares authorized;
39,655,352 and 39,500,000 shares issued and outstanding 397 395
Additional paid-in capital 321,726 326,618
Accumulated deficit (80,796) (61,590)
Accumulated other comprehensive loss (14,191) (21,876)
--------- ---------
Total shareholders' equity 227,136 243,547
--------- ---------
Total liabilities and shareholders' equity $ 283,008 $ 289,490
========= =========
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
4
Mykrolis Corporation
Condensed Consolidated and Combined Statements of Shareholders' Equity
and Comprehensive Income (Loss)
(In thousands)
Accumulated
-----------
Additional Shareholder's Other Total
---------- ------------- ----- -----
Common Shares Paid-In Net Accumulated Comprehensive Shareholders' Comprehensive
------------- ------- --- ----------- ------------- ------------- -------------
Shares Amount Capital Investment Deficit Income (Loss) Equity Income (Loss)
------ ------ ------- ---------- ------- ------------- ------ -------------
Balance December 31, 2000............ -- -- 253,732 -- (7,243) 246,489
Net change in unearned compensation
and other stock-based
compensation...................... -- 503 3,240 -- -- 3,743
Net transfers from (to) Millipore
Corporation....................... -- 1,850 (1,141) -- -- 709
Payment of separation note to
Millipore Corporation ............ -- (19,095) -- -- -- (19,095)
Transfer to common stock and
additional Paid-in capital........ 32,500 325 249,469 (249,794) -- -- --
Issuance of common stock - net of
expenses.......................... 7,000 70 93,891 -- -- -- 93,961
Comprehensive loss:
Net loss.................. -- -- (6,037) (61,590) -- (67,627) (67,627)
Foreign currency
translations............ -- -- -- -- (14,633) (14,633) (14,633)
------ -------- --------- --------- ---------- --------- ---------
Comprehensive loss $ (82,260)
=========
Balance December 31, 2001............ 39,500 $ 395 $326,618 $ -- $ (61,590) $ (21,876) $ 243,547
====== ====== ======== ========= ========= ========== =========
Net change in unearned compensation
and other stock-based
compensation *.................... -- 1,103 -- -- -- 1,103
Net transfer to Millipore
Corporation*...................... -- (7,497) -- -- -- (7,497)
Issuance of common stock - employee
stock purchase plan and exercise
of stock options*................. 155 2 1,502 1,504
Comprehensive loss:
Net loss *................ -- -- -- (19,206) -- (19,206) (19,206)
Foreign currency
translations*........... -- -- -- -- 7,685 7,685 7,685
------ -------- --------- --------- ---------- --------- ---------
Comprehensive loss * ................ $ (11,521)
=========
Balance June 30, 2002 *.............. 39,655 $ 397 $321,726 $ -- $ (80,796) $ (14,191) $ 227,136
====== ====== ======== ========= ========= ========== =========
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
* unaudited
5
Mykrolis Corporation
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six months ended
June 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss ................................................................................. $ (19,206) $ (33,415)
Adjustments to reconcile net loss to net cash used in operating activities:
Income on investments ............................................................... -- (34)
Restructuring and other charges ..................................................... -- 12,556
Depreciation and amortization ....................................................... 5,385 7,982
Stock based compensation ............................................................ 1,103 215
Deferred income tax expense ......................................................... -- 25,000
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable ........................................ (7,551) 16,170
Decrease (increase) in inventories ................................................ 9,147 (13,478)
Decrease in accounts payable - Millipore Corporation .............................. (2,024) --
Increase (decrease) in accounts payable ........................................... 8,233 (9,804)
(Increase) decrease in other operating assets ..................................... (1,429) 1,047
Increase (decrease) in other operating liabilities ................................ 2,687 (14,582)
--------- ---------
Net cash used in operating activities .......................................... (3,655) (8,343)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment ............................................... (4,135) (4,331)
--------- ---------
Net cash used in investing activities .......................................... (4,135) (4,331)
--------- ---------
Cash flows from financing activities:
Assignment of restricted cash ............................................................ (1,607) --
Net borrowings under separation revolving credit agreement - Millipore Corporation........ -- 13,815
Net transfers from (to) Millipore Corporation ............................................ 1,503 (1,141)
Proceeds from issuance of common stock for employee stock purchase plan and
stock option exercises ................................................................... 1,502 --
--------- ---------
Net cash provided by financing activities ...................................... 1,398 12,674
--------- ---------
Effect of foreign exchange rates on cash and cash equivalents ............................... 671 --
--------- ---------
Net decrease in cash and cash equivalents ................................................... (5,721) --
Cash and cash equivalents at beginning of period ............................................ 82,831 --
--------- ---------
Cash and cash equivalents at end of period .................................................. $ 77,110 $ --
========= =========
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
6
Mykrolis Corporation
Notes to Condensed Consolidated and Combined Financial Statements
(In thousands except share and per share data)
1. Background and Basis of Presentation
Background
On October 3, 2000, Millipore Corporation ("Millipore") announced its plan to
spin-off its microelectronics business, which serves the semiconductor industry
and certain related industries with products needed to manufacture semiconductor
devices as well as a range of other products that now comprise Mykrolis
Corporation ("the Company"). On October 16, 2000, the Company was incorporated
in Delaware as a wholly-owned subsidiary of Millipore to receive Millipore's
microelectronics business and to be the spun off company. The Company's business
historically has been operated as a fully integrated business unit of Millipore.
On March 31, 2001, Millipore transferred to the Company substantially all of the
assets and liabilities associated with its microelectronics business (the
"Separation"). The Company completed its initial public offering ("IPO") of 7.0
million shares of common stock on August 9, 2001 receiving net proceeds of
approximately $94.1 million, after deducting underwriting commissions and
offering expenses. The Company retained $75.0 million of the net proceeds and
paid the balance to Millipore as repayment of amounts outstanding under
inter-company loans incurred by the Company in connection with the Separation.
After the initial public offering, Millipore owned 32.5 million shares or
approximately 82.3% of the Company's total outstanding common stock. On February
27, 2002 (the "Distribution Date"), Millipore completed the separation of the
Company through the distribution to its shareholders of all of the 32.5 million
shares of the Company's common stock owned by Millipore on that date. The
Company is now a fully independent company with 39.7 million shares outstanding
at June 30, 2002.
Basis of Presentation
The condensed combined financial statements include amounts prior to March 31,
2001 that have been derived from the consolidated financial statements and
accounting records of Millipore using the historical results of operations and
historical basis of assets and liabilities of the Company's business. Management
believes the assumptions underlying the combined financial statements are
reasonable. However, the condensed combined financial information included
herein may not necessarily reflect the Company's operating results, financial
position and cash flows in the future or what they would have been had the
Company been a separate, stand-alone entity during the period presented. The
Company began accumulating retained earnings (accumulated deficit) on April 1,
2001, following the effective date of the Separation Agreement with Millipore,
pursuant to which the assets and liabilities of the Company's business were
transferred to the Company. The Company's condensed consolidated financial
statements as of and for the quarter ended June 30, 2002 include all
wholly-owned subsidiaries and assets and liabilities of the Company. All
material intercompany transactions and balances between and among the Company's
subsidiaries have been eliminated.
Prior to March 31, 2001 Millipore allocated certain corporate expenses,
including centralized research and development, legal, accounting, employee
benefits, officers' salaries, facilities, insurance, information technology
services, distribution, treasury and other Millipore corporate and
infrastructure costs. These expense allocations were determined on a basis that
Millipore and the Company considered to be a reasonable assessment of the
utilization of services provided or the benefit received by the Company. At the
time of the Separation from Millipore, the Company and Millipore entered into
transition service agreements for Millipore to provide services with respect to
specified functions and for the Company to reimburse Millipore for the cost of
these services. The agreements do not necessarily reflect the costs of obtaining
the services from unrelated third parties or of the Company providing the
applicable services itself. However, management believes that purchasing these
services from Millipore provided the Company with an efficient means of
obtaining these services during the transition period. In addition, the Company
has agreed to provide transition services to Millipore, for which the Company
will be reimbursed at its cost.
Millipore used a centralized approach to cash management and the financing of
its operations. Prior to the Separation, cash deposits from the Company were
transferred to Millipore on a regular basis and netted against Millipore's net
investment. As a result, none of Millipore's cash, cash equivalents or debt at
the corporate level were allocated to the Company in the condensed combined
financial statements. Changes in Millipore's net investment include net earnings
of the Company plus net cash transfers to or from Millipore.
Interim Financial Statements
The accompanying unaudited interim condensed financial statements have been
prepared in accordance with the rules of the Securities and Exchange Commission
for interim financial statements and do not include all disclosures required by
generally accepted accounting principles. These financial statements should be
read in conjunction with the audited consolidated and
7
combined financial statements and notes thereto included in the Company's Form
10-K for the year ended December 31, 2001. The condensed financial information
as of June 30, 2002 and for the three and six month periods ended June 30, 2002
and 2001 is unaudited, but includes all adjustments that management considers
necessary for a fair presentation of the Company's condensed consolidated and
combined results of operations, financial position and cash flows. All of these
adjustments are of a normal recurring nature. Results for the six month period
ended June 30, 2002 are not necessarily indicative of results to be expected for
the full fiscal year 2002 or for any other future periods.
2. Restricted Cash
During the six months ended June 30, 2002 the Company was required to provide
cash collateratization totaling $1,607 related to a security deposit under a new
lease for its corporate headquarters, research and development and manufacturing
facility and other security deposits. At June 30, 2002, this cash collateral was
invested in U.S. federal agency securities and money market funds.
3. Stock Based Compensation
During the first quarter of 2002, the Company recognized $1,103 in stock based
compensation expense associated with the accelerated vesting of all restricted
shares of Millipore common stock held by certain of the Company's employees and
the termination of two executives.
4. Restructuring and Other Charges
During the first and third quarters of 2001, the Company recorded restructuring
and other charges of $12,556 and $4,922 in connection with the Company's
separation from Millipore and in response to the prolonged duration and severity
of the current semiconductor industry downturn. The two restructuring and other
charges included $13,755 of employee severance costs, $1,672 in write-offs of
equipment and leasehold improvements and $2,051 of net exit costs on leased
properties. Key initiatives of the restructurings included:
Consolidating manufacturing operations to eliminate redundant manufacturing
processes. The Company is in the process of relocating some of its
operations from two Millipore facilities in the U.S. In addition, the
Company closed its manufacturing facility in England. This consolidation of
the Company's manufacturing operations is expected to be completed by the
end of 2002.
Realigning the Company's European organizational structure to focus on the
Company's operating business units, thereby consolidating the Company's
sales and administrative activities into fewer locations that are closer to
the Company's customer base. The Company completed this realignment during
2001.
Reducing the Company's administrative and management infrastructure costs
in Asia by exiting facilities and eliminating administrative positions
during 2001.
Reducing the Company's workforce in the U.S. in response to lower demand
for the Company's products due to the current semiconductor industry
downturn. This action was completed during the second quarter of 2001.
Further reducing the Company's workforce in the U.S., Asia and Europe in
order to resize the Company. This action was completed during the third
quarter of 2001.
Discontinuation of the Company's plan to renovate leased office space in
Bedford, Massachusetts and instead exit that facility. This action was
completed during the third quarter of 2001.
These restructuring initiatives will result in the elimination of 358
positions worldwide. Notifications to employees were completed in the first
and third quarters of 2001, however, a number of these employees will
continue in their existing positions through the fourth quarter of 2002
with their related salary costs charged to operations as incurred. In the
first six months of 2002, approximately $1,640 of the restructuring charge
was utilized, consisting of $945 severance and associated benefits for 56
employees and $695 of leasehold write-offs and other exit costs.
8
Details of activities related to the restructuring and other charges recorded in
the first and third quarters of 2001 are as follows:
Employee Leasehold
severance and other
costs costs Total
Balance at January 1, 2001 $ - $ - $ -
Total restructuring and other charges 13,755 3,723 17,478
Cash activity (6,794) (475) (7,269)
Non-cash activity (3,148) (1,261) (4,409)
-------- -------- --------
Balance at December 31, 2001 $ 3,813 $ 1,987 $ 5,800
Cash activity (945) (695) (1,640)
Change in estimate (1,802) 1,802 -
-------- -------- --------
Balance at June 30, 2002 $ 1,066 $ 3,094 $ 4,160
======== ======== ========
During the first quarter of 2002, several changes to prior estimates occurred
resulting in the reversal of $1,802 in employee severance costs and a $1,802
increase in leasehold and other costs. These changes in estimate are primarily
due to the higher than expected level of attrition of 49 employees, lower than
expected severance benefits paid and continued deterioration in the real estate
market conditions that have shortened the potential sublease term of the
Company's office space in Bedford, Massachusetts. At June 30, 2002 the Company
believes that approximately $1,066 of accrued employee severance costs relating
to 30 employees will be substantially paid by the end of 2002. The Company
believes that accrued leasehold and other exit costs at June 30, 2002 of $3,094
will be substantially paid by the lease expiration date in 2005.
5. Income Taxes
Prior to the Distribution Date, the Company's operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if the Company filed tax returns
separately from Millipore. At December 31, 2001, the Company had a $9,000 income
tax receivable related to net operating loss carrybacks determined on a separate
return basis. In accordance with the tax sharing agreement, during the first
quarter of 2002, Millipore decided not to allow the Company to carryback these
net-operating losses. As a result, the receivable was transferred to Millipore
during the first quarter of 2002 and is reflected in the consolidated financial
statements as a reduction to additional paid in capital included in
shareholders' equity.
For the three months ended June 30, 2002, the Company recorded income tax
expense of $2,570 with respect to certain foreign operations on a consolidated
pre-tax loss of $4,195, yielding an effective tax rate of negative 61.3%. The
income tax expense includes anticipated settlements from foreign tax audits for
which the Company is responsible under its tax sharing agreement with Millipore.
For the six months ended June 30, 2002, the Company recorded income tax expense
of $3,970 with respect to foreign operations on a consolidated pre-tax loss of
$15,236, yielding an effective tax rate of negative 26.1%.
For the three months ended June 30, 2001, the Company recorded income tax
expense of $20,580 on a consolidated pre-tax loss of $6,793, yielding an
effective tax rate of negative 303%. The income tax expense is primarily
attributable to an increase in the valuation allowance or reserve against
foreign tax credits on unremitted earnings of our foreign subsidiaries of
approximately $18,000 and other U.S. deferred tax assets of approximately
$4,300. SFAS 109, "Accounting for Income Tax," requires that we establish a
valuation allowance or reserve when, based on an evaluation of objective
verifiable evidence, we believe there is likelihood that some portion or all of
the deferred tax assets will not be realized. For the six months ended June 30,
2001, the Company recorded income tax expense of $22,150 on a pre-tax loss of
$11,265, yielding an effective tax rate of negative 196.6%.
6. Supplementary Financial Information
Balance Sheet Information
June 30, 2002 December 31, 2001
(Unaudited)
Inventories
Raw materials $ 29,703 $39,294
Work in process 10,532 7,345
Finished goods 13,314 13,797
--------- -------
$ 53,549 $60,436
========= =======
9
7. Earnings Per Share
For the three and six months ended June 30, 2002 and 2001, basic and diluted
loss per common share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the period. The weighted average
basic and diluted shares outstanding calculation excludes those stock options
for which the impact would have been antidilutive based on the Company's net
loss. The number of options that were antidilutive for the three and six months
ended June 30, 2002 were 6,625,420. There were no options outstanding for the
three and six months ended June 30, 2001.
8. Business Segment Information
The Company operates in one reportable segment, the development, manufacture,
sale and support services of consumables and capital equipment to semiconductor
fabrication companies and to other companies using similar manufacturing
processes, as well as to OEM suppliers to those companies. The Company's
products include membrane and metal based filters, housings, precision liquid
dispense filtration pumps, resin based gas purifiers and mass flow and pressure
controllers. The products are used by customers in manufacturing operations to
remove contaminants in liquid and gas processes, to purify liquids and gases, to
measure and control flow rates and to control and monitor pressure and vacuum
levels during the manufacturing process. The Company's products are sold
worldwide through its direct sales force and through distributors in selected
regions.
The Company attributes net sales to different geographic areas as presented in
the table below.
Net sales
Three Months Ended June 30, Six Months Ended June 30,
(unaudited) (unaudited)
----------- -----------
2002 2001 2002 2001
---- ---- ---- ----
United States $15,839 $18,423 $28,926 $ 48,350
Japan 16,889 21,080 27,511 50,856
Asia 10,879 9,321 19,189 22,600
Europe 4,930 7,559 8,619 17,601
------- ------- ------- --------
Total net sales $48,537 $56,383 $84,245 $139,407
======= ======= ======= ========
9. Significant Customers and Concentration of Risk
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. For the three months ended June 30, 2002
and 2001, one customer represented 15.5% and 16.1% of revenues, respectively.
During the six months ended June 30, 2002 and 2001, one customer represented
11.8% and 16.8% of revenues, respectively.
10. Transactions with Millipore
For purposes of governing certain of the ongoing relationships between the
Company and Millipore at and after the Separation and to provide for an orderly
transition, the Company and Millipore entered into various agreements at the
Separation date. The Separation Revolving Credit Agreement (the "Credit
Agreement") provided for Millipore to lend the Company funds between the
Separation date and the date of the Company's IPO in order to fund the Company's
working capital needs and to settle any amounts payable by the Company related
to the retention by Millipore of specified assets and liabilities of the Company
and the retention by the Company of specified Millipore assets and liabilities
that could not be transferred at the Separation due to restrictions imposed by
foreign laws or because such transfer was not practical. The net outstanding
balance of $23,730 was paid to Millipore pursuant to the terms of this Credit
Agreement from proceeds generated from the IPO and cash generated from
operations between the Separation date and the IPO date. There was no interest
expense associated with the Credit Agreement.
Millipore contributed its microelectronics business to the Company in exchange
for shares of the Company's common stock plus a term note (the "Separation
Note"). The amount of the Separation Note was determined by agreement between
Millipore and the Company to ensure that all net proceeds of the IPO in excess
of $75,000 would be payable to Millipore. The principal balance of the
Separation Note was calculated by deducting from the net IPO proceeds (i) the
outstanding balance under the Credit Agreement as described above, and (ii) the
$75,000 retained by the Company for general corporate purposes from the IPO
proceeds. As a result, $22,877 was paid to Millipore as payment of the
Separation Note in August 2001. There was no interest expense associated with
the Separation Note.
10
During the three months ended June 30, 2002 and 2001, the Company purchased $846
and $750, respectively, of products from Millipore. Products sold to Millipore
were $396 for the quarter ended June 30, 2002 and were not material for the
quarter ended June 30, 2001. During the three months ended June 30, 2002 and
2001, $140 and $0, respectively, in royalty income from Millipore was recorded
as other income (expense), net. The consolidated and combined financial
statements include charges for services purchased under the transition service
agreements between Millipore and the Company. These expenses were $1,296 and
$3,537 for the three months ended June 30, 2002 and 2001, respectively. In
addition, services provided to Millipore under the transition service agreement
were $509 and $0 for the three months ended June 30, 2002 and 2001,
respectively.
During the six months ended June 30, 2002 and 2001, the Company purchased $1,391
and $1,807, respectively, of products from Millipore. Products sold to Millipore
were $901 for the six months ended June 30, 2002 and were not material for the
six months ended June 30, 2001. During the six months ended June 30, 2002 and
2001, $270 and $0, respectively in royalty income from Millipore was recorded as
other income (expense), net. The consolidated and combined financial statements
include charges for services purchased under the transition service agreements
between Millipore and the Company. These expenses were $2,814 and $13,799 for
the six months ended June 30, 2002 and 2001, respectively. In addition, services
provided to Millipore under the transition service agreement were $997 and $0
for the six months ended June 30, 2002 and 2001, respectively.
11. Commitments and Contingencies
The Company is also subject to a number of claims and legal proceedings which,
in the opinion of the Company's management, are incidental to the Company's
normal business operations. In the opinion of the Company, although final
settlement of these suits and claims may impact the Company's financial
statements in a particular period, they will not, in the aggregate, have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
On April 1, 2002 the Company entered into a 12-year lease for its new corporate
headquarters, research and development and manufacturing facility. Annual rental
payments under the lease are $2,451 for the first six years and $2,801 for the
remaining six years plus basic operating costs and real estate taxes. Upon
execution of the lease, the Company was required to issue an irrevocable standby
letter of credit in the initial amount of $1,000 to be reduced by $125 on each
of the first six anniversaries of commencement of the lease. This lease also
provides the Company with two 5-year renewal options at market rent.
12. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. Under the provisions of SFAS 142, goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually, or whenever there is an impairment indicator. In addition, upon
adoption of SFAS 142, all goodwill must be assigned to reporting units for
purposes of impairment testing and is no longer subject to amortization.
The Company adopted SFAS 142 as required on January 1, 2002. Accordingly, the
Company performed an assessment of whether goodwill was impaired at the date of
adoption. The Company determined that for purposes of this assessment, the
Company's business consists of liquid products and gas products reporting units,
and that the goodwill is attributable solely to the gas products reporting unit.
The Company further estimated the gas products reporting unit's fair value as
determined by an independent valuation service company and compared it to the
carrying value of the net assets of this reporting unit. As of January 1, 2002,
the gas reporting unit's fair value exceeded the value of its net assets, and
therefore goodwill was not impaired.
Goodwill amortization expense was $162 and $394 for the three months and six
months ended June 30, 2001, respectively. The Company estimates that goodwill
amortization expense would have been approximately $229 and $458 for the three
and six months ended June 30, 2002, respectively. The following table presents a
reconciliation of net loss and loss per share adjusted for the exclusion of
goodwill (in thousands, except per share figures):
11
Three months ended June 30, Six months ended June 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss $ (6,765) $ (27,373) $ (19,206) $ (33,415)
Add: Goodwill amortization -- 162 -- 394
--------- ---------- ---------- ----------
Adjusted net loss $ (6,765) $ (27,211) $ (19,206) $ (33,021)
========= ========== ========== ==========
Basic and diluted loss per share $ (0.17) $ (0.84) $ (0.49) $ (1.03)
Add: Goodwill amortization -- 0.01 -- 0.01
--------- ---------- ---------- ----------
Adjusted basic and diluted loss per share $ (0.17) $ (0.83) $ (0.49) $ (1.02)
========= ========== ========== ==========
As of June 30, 2002, goodwill amounted to $14,454 net of accumulated
amortization at December 31, 2001. Other identifiable intangible assets of
$6,705 (net of accumulated amortization) at June 30, 2002 are being amortized
over their estimated useful lives ranging from 5 to 15 years. The following
table summarizes other intangible assets by major intangible asset class.
As of June 30, 2002
Gross carrying Accumulated
amount amortization
Patents $16,121 $ 10,600
Unpatented technology 8,505 7,707
Trademarks / tradenames 2,906 2,891
Other 451 80
------- --------
$27,983 $ 21,278
======= ========
Total amortization expense for the three and six months ended June 30, 2002 was
$444 and $861, respectively. Estimated amortization expense for the fiscal years
2002 to 2006 is $1,725, $1,686, $1,241, $1,096 and $959, respectively.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from the definition
of long-lived assets goodwill and other intangibles that are not amortized in
accordance with SFAS 142. SFAS 144 requires that long-lived assets to be
disposed of by sale be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS 144 also expands the reporting of discontinued operations to
include components of an entity that have been or will be disposed of rather
than limiting such discontinuance to a segment of a business. This Statement is
effective for the Company's 2002 fiscal year. The adoption of SFAS 144 had no
impact on the Company's consolidated results of operations, financial position
or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue (EITF) No. 94-3. The Company will
adopt the provision of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
the Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
12
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
You should read the following discussion of the Company's financial condition
and results of operations along with the condensed consolidated and combined
financial statements and accompanying notes included herein. This discussion
contains forward-looking statements and involves numerous risks and
uncertainties, which are described under "Forward Looking Statements" below. The
Company's actual results may differ materially from those contained in any
forward-looking statements.
Overview and Financial Condition
Mykrolis Corporation is a worldwide developer, manufacturer and supplier of
liquid and gas delivery systems, components and consumables used to precisely
measure, deliver, control and purify the process liquids, gases and chemicals,
as well as the deionized water, photoresists and vacuum systems utilized in the
semiconductor manufacturing process. In addition, the Company's products are
used to manufacture a range of other products, such as flat panel displays, high
purity chemicals, photoresists, solar cells, gas lasers, optical disks and fiber
optic cables. Mykrolis was formerly the Microelectronics Division of Millipore
Corporation.
On October 3, 2000, Millipore Corporation ("Millipore") announced its plan to
spin-off its microelectronics business, which serves the semiconductor industry
and certain related industries with products needed to manufacture semiconductor
devices as well as a range of other products that now comprise the Company. On
October 16, 2000, Mykrolis Corporation was incorporated in Delaware as a
wholly-owned subsidiary of Millipore to receive Millipore's microelectronics
business and to be the spun off company. As used herein, terms the "Company",
"Mykrolis", "we", "us" and "our" each refer to Mykrolis Corporation and
subsidiaries and to the historical operations of the microelectronics business
of Millipore. Our business historically has been operated as a fully integrated
business unit of Millipore. On March 31, 2001, Millipore transferred to us
substantially all of the assets and liabilities associated with its
microelectronics business (the "Separation"). We completed our initial public
offering ("IPO") of 7 million shares of common stock on August 9, 2001 receiving
net proceeds of approximately $94.1 million, after deducting underwriting
commissions and offering expenses. We retained $75.0 million of the net proceeds
and paid the balance to Millipore as repayment of amounts outstanding under
inter-company loans incurred by Mykrolis in connection with the Separation.
After the initial public offering, Millipore owned 32.5 million shares or
approximately 82.3% of our total outstanding common stock. On February 27, 2002
(the "Distribution Date"), Millipore completed the separation of Mykrolis
through the distribution to its shareholders of all of the 32.5 million shares
of Mykrolis common stock owned by Millipore on that date. Mykrolis is now a
fully independent company with 39.7 million shares outstanding at June 30, 2002.
In connection with our separation from Millipore, we entered into agreements
with Millipore under which Millipore agreed to provide services to us during a
transition period after the Separation date. The agreements relate to facilities
services, information technology services, distribution, accounting, finance and
other services and arrangements. Under these agreements, we reimburse Millipore
for the cost of these services. The duration of each of the different transition
service agreements varied depending on the anticipated time it would take for us
to replace the service, but was generally for a one-year period. No agreement
has been extended beyond the mutually agreed upon initial transition period,
with the exception of the accounting and distribution services in Europe which
was extended by one additional quarter until the end of the second quarter 2002.
As most of these transition service agreements have expired without renewal, we
have been able to provide these services ourselves or negotiate new agreements
with various third parties as a separate stand-alone entity. We have been able
to do this at costs at least as favorable as those paid to Millipore for these
services. The last major step in our separation from Millipore will be
terminating the use of Millipore's Information Technology Data Center, which is
currently hosting our IT system operations. This last step will be completed
during the first quarter of 2003 in accordance with our original transition
service agreement. There can be no assurance that the terms we will be able to
negotiate for these information technology services will be as favorable as
those we had with Millipore. In addition, we have entered into agreements with
Millipore for membrane manufacturing and supply, research and development,
product distribution and contract manufacturing, generally for a five-year
period. The foregoing transition agreements do not necessarily reflect the costs
of obtaining the services from unrelated third parties or of our providing the
applicable services ourselves. However, we believe that purchasing these
services from Millipore provides us with an efficient means of obtaining these
services during the transition period. In addition, we have agreed to provide
transition services to Millipore, for which we will be reimbursed at our cost.
Basis of Presentation
Our condensed combined financial statements include amounts prior to March 31,
2001 that have been derived from the consolidated financial statements and
accounting records of Millipore using the historical results of operations and
historical basis of assets and liabilities of our business. We believe the
assumptions underlying the condensed combined financial statements are
reasonable. However, the condensed combined financial information included
herein may not necessarily reflect our operating
13
results, financial position and cash flows in the future or what they would have
been had we been a separate, stand-alone entity during the periods presented.
Because a direct ownership relationship did not exist among all our various
units, Millipore's net investment in us is shown in lieu of stockholders' equity
in the condensed combined financial statements prior to the Separation. We began
accumulating retained earnings (accumulated deficit) on April 1, 2001, following
the effective date of the Separation agreement with Millipore, pursuant to which
our assets and liabilities were transferred to us. Our condensed consolidated
financial statements as of and for the quarter ended June 30, 2002 include all
our wholly-owned subsidiaries and our assets and liabilities. All material
intercompany transactions and balances between and among our subsidiaries have
been eliminated. Prior to March 31, 2001 Millipore allocated certain corporate
expenses, including centralized research and development, legal, accounting,
employee benefits, officers' salaries, facilities, insurance, information
technology services, distribution, treasury and other Millipore corporate and
infrastructure costs. These expense allocations were determined on a basis that
Millipore and we consider to be a reasonable assessment of the utilization of
services provided or the benefit received by us. At the Separation date, we
entered into transition service agreements with Millipore for Millipore to
provide specified functions and for us to reimburse Millipore for the cost of
these functions. The agreements do not necessarily reflect the costs of
obtaining the services from unrelated third parties or of our providing the
applicable services ourselves. However, we believe that purchasing these
services from Millipore provides us with an efficient means of obtaining these
services during the transition period. In addition, we have agreed to provide
transition services to Millipore, for which we will be reimbursed at our cost.
Millipore used a centralized approach to cash management and the financing of
its operations. Prior to the Separation, our cash deposits were transferred to
Millipore on a regular basis and netted against Millipore's net investment. As a
result, none of Millipore's cash, cash equivalents or debt at the corporate
level were allocated to us in our combined financial statements through the
second quarter of 2001. Changes in Millipore's net investment include our net
earnings plus net cash transfers to or from Millipore. After the Separation but
prior to the initial public offering, cash deposits were netted against the
Separation Revolving Credit Agreement.
Restructuring and Other Charges
During the first and third quarters of 2001, we recorded restructuring and other
charges of $12.6 and $4.9 million in connection with our separation from
Millipore and in response to the prolonged duration and severity of the current
semiconductor industry downturn. The two restructuring and other charges
included $13.8 million of employee severance costs, $ 1.7 million in write-offs
of equipment and leasehold improvements and $2.0 million of net exit costs on
leased properties. Key initiatives of the restructurings included:
Consolidating manufacturing operations to eliminate redundant manufacturing
processes. We are in the process of relocating some of our operations from
two Millipore facilities in the U.S. In addition, we have closed our
manufacturing facility in England. This consolidation of our manufacturing
operations is expected to be completed by the end of 2002.
Realigning our European organizational structure to focus on operating
business units, thereby consolidating the sales and administrative
activities into fewer locations that are closer to our customer base. We
completed this realignment during 2001.
Reducing our administrative and management infrastructure costs in Asia by
exiting facilities and eliminating administrative positions during 2001.
Reducing our workforce in the U.S. in response to lower demand for our
products due to the current semiconductor industry downturn. This action
was completed during the second quarter of 2001.
Further reducing our workforce in the U.S., Asia and Europe in order to
resize the Company. This action was completed during the third quarter of
2001.
Discontinuation of our plan to renovate leased office space in Bedford,
Massachusetts and instead exit that facility. This action was completed
during the third quarter of 2001.
These restructuring initiatives resulted in the elimination of 358
positions worldwide. Notifications to employees were completed in the first
and third quarters of 2001, however a number of these employees will
continue in their existing positions through the fourth quarter of 2002
with their related salary costs charged to operations as incurred. In the
second quarter of 2002, approximately $0.6 million of the restructuring
charge was utilized, consisting of $0.3 million severance and associated
benefits for 9 employees and $0.3 million of leasehold write-offs and other
exit costs. At June 30, 2002 we believe that approximately $1.1 million of
employee severance costs relating to 30 employees will be substantially
paid by the end of 2002. We believe that accrued leasehold and other exit
costs at June 30, 2002 of $3.1 million will be substantially paid by the
lease expiration date in 2005.
14
Results of Operations
Operating trends and recent developments
The principal market we serve is the global semiconductor industry, a highly
cyclical business. As a result, we have experienced significant variations in
net sales and results of operations in the periods presented and such variations
are likely to continue. We generally have limited backlog. The business
environment continues to be uncertain, and there are no clear signs of a
sustained industry upturn in future periods. The impact of the severe downturn
in the semiconductor industry on our operations was mitigated slightly in the
second quarter by an increase in sales of our consumable purification products,
which depend upon the level of semiconductor device manufacturing activity
rather than expansion of plant capacity. However, there can be no assurance that
this increase in sales of consumable products will continue or as the to extent
or duration of this cyclical downturn and its impact on us.
During the first half of 2002, we continued to experience softer demand for our
liquid and gas delivery systems, components and consumables as compared to the
first half of 2001. A number of our large customers have placed fewer orders as
they attempted, we believe, to manage their demand and their inventories in
response to weakness in their market. We have taken actions to reduce capital
expenditures, operating costs and expenses in response to these adverse trends
that began in the first quarter of 2001. In addition to the restructuring
actions taken in 2001, during the fourth quarter of 2001 the top 150 employees
in the Company took a temporary reduction in their annual salaries based on a
sliding scale of up to 20 percent of annualized salary. Additionally, as of June
30, 2002 most employees have not and will not receive any salary increase for
2002.
Three months ended June 30, 2002 compared to three months ended June 30, 2001
Net Sales
Net sales were $48.5 million for the three months ended June 30, 2002, which
represented a 13.9%, or $7.9 million, decrease from the three months ended June
30, 2001. This decrease was due to lower sales volume as a result of the severe
downturn in the semiconductor industry, which began in the first quarter of
2001. Sales of microelectronics hardware have declined as new semiconductor
fabrication plant construction and upgrades have declined due to industry
over-capacity. In addition, sales of consumable purification products also
declined, although to a lesser extent, as semiconductor fabrication plants have
experienced lower manufacturing volumes and have focused on achieving
manufacturing efficiencies and reducing material costs.
Sales by geography are summarized in the table below.
Net Sales In millions of U.S. Dollars As a Percentage of Total Net Sales
--------------------------- ----------------------------------
Three Months Ended June 30,
(unaudited)
2002 2001 2002 2001
---- ---- ---- ----
United States $15.8 $18.4 32.6% 32.6%
Japan 16.9 21.1 34.9 37.4
Asia 10.9 9.3 22.5 16.5
Europe 4.9 7.6 10.0 13.5
----- ----- ----- -----
Total $48.5 $56.4 100.0% 100.0%
===== ===== ----- -----
Gross Profit
Our gross profit as a percentage of net sales was 33.1% for the three months
ended June 30, 2002 as compared to 35.0% for the three months ended June 30,
2001. The decrease was primarily due to reductions in product demand resulting
in reduced leverage on our manufacturing overhead from the lower production
volume. During the second quarter of 2002, manufacturing costs also increased by
$0.6 million for redundant facility and labor expenses in order to safeguard the
quality of our manufacturing processes while we transfer these processes into
our new Billerica facility. We expect to complete the manufacturing transfer in
the second half of 2002.
15
Operating Expenses
Selling, general and administrative expenses decreased 16.8% or $3.4 million,
from $20.3 million in the three months ended June 30, 2001 to $16.9 million for
the three months ended June 30, 2002. The decrease for the three months ended
June 30, 2002 was due to the reduction in selling, general and administrative
employees primarily as a result of the 2001 restructuring programs as well as
actions to reduce discretionary spending.
Research and development expenses were $5.2 million in the three months ended
June 30, 2002 a decrease of 7.1% or $.4 million compared to research and
development expense of $5.6 million for the three months ended June 30, 2001.
This decrease was due to reduced spending in response to the industry downturn.
We continue to fund key research and development programs in spite of the
current business environment uncertainties.
Other Income (Expense)-net
Other income (expense)-net increased $2.5 million from a net expense of $0.7
million for the three months ended June 30, 2001 to a net income of $1.8 million
for the same period in 2002. The increase was attributed primarily to favorable
unrealized foreign exchange gains of $1.6 million principally related to $12.4
million of temporary intercompany loans denominated in Euros. During the three
months ended June 30, 2002 the Euro strengthened against the United States
dollar by 12.2% versus, the same period in 2001 in which the Euro weakened
against the United States dollar by 3.3%. In addition, realized foreign exchange
gains in Asia increased $0.6 million. Interest income also increased by $0.2
million and royalty income from Millipore increased by $0.1 million during the
three months ended June 30, 2002 compared to the three months ended June 30,
2001.
Income Tax Expense
Prior to the Distribution Date, our operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if we filed tax returns separately from
Millipore. At December 31, 2001, we had a $9.0 million income tax receivable
related to net operating loss carrybacks determined on a separate return basis.
In accordance with the tax sharing agreement, during the first quarter of 2002,
Millipore decided not to allow us to carryback these net-operating losses. As a
result, the receivable was transferred to Millipore during the first quarter of
2002 and is reflected in the consolidated financial statements as a reduction to
additional paid in capital included in shareholders' equity.
For the three months ended June 30, 2002, we recorded income tax expense of $2.6
million with respect to certain foreign operations on a consolidated pre-tax
loss of $4.2 million, yielding an effective tax rate of negative 61.3%. The
income tax expense includes anticipated settlements of foreign tax audits for
which the Company is responsible under its tax sharing agreement with Millipore.
For the three months ended June 30, 2001, we recorded income tax expense of
$20.6 million on a consolidated pre-tax loss of $6.8 million, yielding an
effective tax rate of negative 303%. The income tax expense is primarily
attributable to an increase in the valuation allowance or reserve against
foreign tax credits on unremitted earnings of our foreign subsidiaries of
approximately $18.0 million and other U.S. deferred tax assets of approximately
$4.3 million. SFAS 109, "Accounting for Income Tax," requires that we establish
a valuation allowance or reserve when, based on an evaluation of objective
verifiable evidence, we believe there is likelihood that some portion or all of
the deferred tax assets will not be realized.
Six months ended June 30, 2002 compared to six months ended June 30, 2001.
Net Sales
Net sales were $84.2 million for the six months ended June 30, 2002, which
represented a decrease of 39.6%, or $55.2 million, from the six months ended
June 30, 2001. This decrease was due to lower sales volume as a result of the
severe downturn in the semiconductor industry, which began in the first quarter
of 2001. The decline in sales was significant in all geographic regions and
across nearly all product families. Sales of microelectronics hardware have
declined as new semiconductor fabrication plant construction and upgrades have
declined due to industry over-capacity. In addition, sales of consumable
purification products also declined, although to a lesser extent, as
semiconductor fabrication plants have experienced lower manufacturing volumes
and have focused on achieving manufacturing efficiencies and reducing material
costs.
16
Sales by geography are summarized in the table below.
Net Sales In millions of U.S. Dollars As a Percentage of Total Net Sales
--------------------------- ----------------------------------
Six Months Ended June 30,
(unaudited)
2002 2001 2002 2001
---- ---- ---- ----
United States $28.9 $ 48.3 34.3% 34.7%
Japan 27.5 50.9 32.7 36.5
Asia 19.2 22.6 22.8 16.2
Europe 8.6 17.6 10.2 12.6
----- ------ ----- -----
Total $84.2 $139.4 100.0% 100.0%
===== ====== ----- -----
Gross Profit
Our gross profit as a percentage of net sales was 32.3% for the six months ended
June 30, 2002 as compared to 42.5% for the six months ended June 30, 2001. The
decrease was primarily due to reductions in product demand resulting in reduced
leverage on our manufacturing overhead from the lower production volume. We did
respond to this change in demand during the first and third quarters of 2001 by
restructuring our manufacturing operations. During the second quarter of 2002,
manufacturing costs also increased by $0.6 million for redundant facility and
labor expenses in order to safeguard the quality of our manufacturing processes
while we transfer these processes into our new Billerica facility. This increase
in manufacturing costs related to non-recurring redundant facility and labor
expenses. We expect to complete the manufacturing transfer in the second half of
2002.
Operating Expenses
Selling, general and administrative expenses decreased 23.7% or $10.8 million,
from $45.5 million in the six months ended June 30, 2001 to $34.7 million for
the six months ended June 30, 2002. Excluding $1.1 million and $3.8 million of
non-recurring separation related costs and expenses for the six months ended
June 30, 2002 and June 30, 2001, respectively, selling, general and
administrative expenses decreased by 19.4% or $8.1 million. The decrease for the
six months ended June 30, 2002 was due to the reduction in selling, general and
administrative employees primarily as a result of the 2001 restructuring
programs as well as actions to reduce discretionary spending.
Research and development expenses were $9.5 million in the six months ended June
30, 2002 a decrease of 16.7% or $1.9 million compared to research and
development expense of $11.4 million for the six months ended June 30, 2001.
This decrease was due to reduced spending in response to the industry downturn.
We continue to fund key research and development programs in spite of the
current business environment uncertainties.
Restructuring and Other Charges
During the six months ended June 30, 2001, we recorded restructuring and other
charges of $12.6 million in connection with our separation from Millipore, to
improve our manufacturing asset utilization and to resize our overall cost
structure in response to the current semiconductor industry downturn. The
restructuring and other charges included $11.3 million of employee severance
costs, a $0.9 million write-off of equipment and leasehold improvements, $0.4
million of lease cancellation costs.
Other Income (Expense)-net
Other income (expense)-net increased $2.9 million from a net expense of $1.0
million for the six months ended June 30, 2001 to a net income of $1.9 million
for the same period in 2002. The increase was attributed primarily to favorable
unrealized foreign exchange gains of $1.3 million principally related to $12.4
million of temporary intercompany loans denominated in Euros. During the six
months ended June 30, 2002 the Euro strengthened against United States dollar by
10.3%, versus the same period in 2001 in which the Euro weakened against the
United States dollar by 11.0%. In addition, realized foreign exchange gains in
Asia increased $0.8 million. Interest income also increased by $0.6 million and
royalty income from Millipore increased by $0.2 million during the six months
ended June 30, 2002 compared to the six months ended June 30, 2001.
Income Tax Expense
Prior to the Distribution Date, our operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if we filed tax returns separately from
Millipore. At December 31, 2001, we had a $9.0 million income tax receivable
related to net operating loss carrybacks determined on a separate return basis.
In accordance with the tax sharing agreement, during the first
17
quarter of 2002, Millipore decided not to allow us to carryback these
net-operating losses. As a result, the receivable was transferred to Millipore
during the first quarter of 2002 and is reflected in the consolidated financial
statements as a reduction to additional paid in capital included in
shareholders' equity.
For the six months ended June 30, 2002, we recorded income tax expense of $4.0
million with respect to certain foreign operations on a consolidated pre-tax
loss of $15.2 million, yielding an effective tax rate of negative 26.1%. The
income tax expense includes anticipated settlements of foreign tax audits for
which the Company is responsible under its tax sharing agreement with Millipore.
For the six months ended June 30, 2001, the Company recorded income tax expense
of $22.2 million on a consolidated pre-tax loss of $11.3 million, yielding an
effective tax rate of negative 196.6%. The income tax expense is primarily
attributable to an increase in the valuation allowance or reserve against
foreign tax credits on unremitted earnings of our foreign subsidiaries of
approximately $18.0 million and other U.S. deferred tax assets of approximately
$4.3 million. SFAS 109, "Accounting for Income Tax," requires that we establish
a valuation allowance or reserve when, based on an evaluation of objective
verifiable evidence, we believe there is likelihood that some portion or all of
the deferred tax assets will not be realized.
Liquidity and Capital Resources
During the six months ended June 30, 2002, our net cash used in operating
activities was $3.6 million as compared to net cash used in operating activities
of $8.3 million during the six months ended June 30, 2001. The net cash used in
operating activities resulted primarily from the Company's net loss of $19.2
million, the increase in accounts receivable of $7.6 million, offset by the
decrease in inventory of $9.1 million, the increase in accounts payables of $8.2
million and depreciation and amortization of $5.4 million. Working capital at
June 30, 2002 totaled $135.3 million including $77.1 million in cash and cash
equivalents.
Our principal cash requirements have been to fund our operations and additions
to property, plant and equipment that support the separation of our business
from Millipore. In the six months ended June 30, 2002, cash flows used in
investing activities were $4.1 million, primarily used for the construction and
purchase of production and research and development equipment, and the transfer
of manufacturing operations from Millipore facilities pursuant to our separation
agreement. During the next three quarters we expect to spend an additional $15.0
million, of which we expect $5.0 to $10.0 million to be spent in the third
quarter of 2002. The majority of these expenditures relate to the consolidation
of manufacturing and research and development functions into the Billerica
facility in the second half of 2002. This will mark one of the last major
milestones in our separation from Millipore.
Cash flows provided by financing activities for the six months ended June 30,
2002 were $1.4 million and resulted from net transfers of $1.5 million from
Millipore as reimbursement of expenses and $1.5 million generated by the
issuance of 155,000 shares of common stock under our employee stock purchase and
stock option plans. This was offset by $1.6 million in cash collateratization
related to a security deposit under a new lease for our corporate headquarters,
research and development and manufacturing facility and other security deposits.
At June 30, 2002, this cash collateral was invested in U.S. federal agency
securities and money market funds.
Our liquidity is affected by many factors, some of which are based on the normal
ongoing operations of our business and some of which arise from uncertainties
related to global economies. We believe that our cash and cash equivalents
together with expected cash collections from existing trade receivables will be
sufficient to satisfy our working capital, capital expenditure, restructuring
and research and development requirements for the next twelve months. We expect
that our cash flow needs beyond this twelve-month period will be satisfied
through cash flow generated from operations. Pursuant to the terms of the lease
for our Bedford, Massachusetts facility, the landlord has an option to sell the
facility to us at any time prior to November 2005, the end of the lease term, at
90% of the then current fair market value excluding the value of our lease. We
estimate that the current fair market value of the facility is approximately
$15.8 million. In addition, we believe approximately $4.6 million of accrued
restructuring costs will be paid by 2005.
If our cash flows from operations are less than we expect, we may need to incur
debt or issue additional equity. Also, we may need to incur debt or issue equity
to make a strategic acquisition or investment. There can be no assurance that we
will be able to obtain necessary short-term or other financing on favorable
terms or at all. If we are unable to obtain necessary financing, we may not have
sufficient cash to operate our business.
Forward Looking Statement Disclaimer
The matters discussed herein, as well as in future oral and written statements
by management of Mykrolis Corporation that are forward-looking statements, are
based on current management expectations that involve substantial risks and
uncertainties which could cause actual results to differ materially from the
results expressed in, or implied by, these forward-looking statements.
18
When used herein or in such statements, the words "anticipate", "believe",
"estimate", "expect", "may", "will", "should" or the negative thereof and
similar expressions as they relate to Mykrolis or its management are intended to
identify such forward-looking statements. Potential risks and uncertainties that
could affect Mykrolis' future operating results include: further deterioration
in our revenues due to a prolonged downturn in the semiconductor industry; the
reduction in orders from our key customers, who are likewise adversely impacted
by the downturn in the semiconductor industry and which account for a large
percentage of our sales; delays or disruptions in the transfer of the production
of our products to our new manufacturing facility pursuant to the separation
from Millipore; increased competition in our industry resulting in downward
pressure on prices and reduced margins; increased costs associated with building
out our business infrastructure in connection with our separation from
Millipore; as well as those risks described under the headings "Risks Relating
to our Business and Industry", "Risks Related to our Separation from Millipore"
and "Risks Related to Securities Markets and Ownership of Our Common Stock" in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
Recently Issued Accounting Pronouncements
We adopted Financial Accounting Standards Board (the "FASB") Statement of
Financial Accounting Standards ("SFAS") No. 142 as required on January 1, 2002.
We performed an assessment of whether there was an indication that goodwill was
impaired at the date of adoption. We determined that, for purposes of this, our
business consists of liquid products and gas products reporting units and that
our goodwill is attributable solely to the gas products reporting unit. We
further estimated the gas products reporting unit's fair value, as determined by
an independent valuation services company and compared it to the carrying value
of the net assets of this reporting unit. As of January 1, 2002, the gas
reporting unit's fair value exceeded its value of the net assets, and therefore
goodwill was not impaired. Goodwill amortization expense was $0.2 million and
$0.4 million for the three and six months ended June 30, 2001, respectively. As
a result of our adoption of SFAS 142, we ceased our goodwill amortization
effective January 1, 2002. We estimate that goodwill amortization expense would
have been approximately $0.4 million for the six months ended June 30, 2002 and
$0.9 million for the full year 2002.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 is not expected to have a material impact on our
consolidated results of operations, financial position or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
effective January 1, 2002. SFAS 144 supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
provides a single accounting model for long-lived assets to be disposed of. The
adoption of SFAS 144 had no impact on our consolidated results of operations,
financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue (EITF) No. 94-3. We will adopt the
provision of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF No. 94-3, a liability for an exit cost was recognized at the date of the
Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
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Item 3. Quantative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the U.S. dollar. We sell our products in many countries
and a substantial portion of our net sales and a portion of our costs and
expenses are denominated in foreign currencies. Approximately 65.7% of our net
sales for the six months ended June 30, 2002 were derived from customers located
outside of the U.S., principally in Asia including Japan, where we also
manufacture. This exposes us to risks associated with changes in foreign
currency that can adversely impact revenues, net income and cash flow. In
addition, we are potentially subject to concentrations of credit risk,
principally in accounts receivable, as historically we have relied on a limited
number of customers for a substantial portion of our net sales. We perform
ongoing credit evaluations of our customers and we generally do not require
collateral. Our major customers are large, well-established microelectronics
companies that have historically paid their accounts receivable balances with
us. We do not currently hold derivative financial instruments and continue to
evaluate our future hedging strategy.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.1.1 Letter Agreement with Robert E. Caldwell
10.1.2 Letter Agreement with Thomas O. Pyle
99.1 Certification of C. William Zadel, Chief Executive Officer,
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification of Bertrand Loy, Chief Financial Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
b. Report on Form 8-K
No reports on Form 8-K have been filed by the Company during the fiscal quarter
ended June 30, 2002.
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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.
MYKROLIS CORPORATION
Registrant
Date August 14, 2002 /s/ Bertrand Loy
----------------
Bertrand Loy
Vice President and Chief Financial Officer
Date August 14, 2002 /s/ Donna Wargo
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Donna Wargo
Corporate Controller and Chief Accounting Officer
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