UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark 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, 1997
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: 1-13828
MEMC ELECTRONIC MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Delaware 56-1505767
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
501 Pearl Drive (City of O'Fallon), St. Peters, Missouri 63376
(Address of principal executive offices) (Zip Code)
(314) 279-5500
(Registrant's telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last
report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. |X| Yes | | No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock outstanding at June 30, 1997: 41,442,553 shares
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited; Dollars in thousands, except share data)
Three-Months Ended Six-Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Net sales $ 245,780 $ 324,331 $ 468,064 $ 614,142
Cost of goods sold 214,948 233,498 409,163 443,987
------- ------- ------- -------
Gross margin 30,832 90,833 58,901 170,155
Marketing, administration and
technology expenses 32,647 33,195 64,035 60,107
------- ------- ------- -------
Operating profit (1,815) 57,638 (5,134) 110,048
------- ------- ------- -------
Nonoperating (income) expense:
Interest expense 1,256 98 1,256 494
Interest income (190) (1,717) (783) (3,735)
Royalty income (2,205) (1,540) (4,292) (3,337)
Other, net (8,248) 396 (6,541) 2,505
------- ------- ------- -------
Total nonoperating income (9,387) (2,763) (10,360) (4,073)
------- ------- ------- -------
Earnings before income taxes,
equity in income (loss) of
joint ventures and minority
interests 7,572 60,401 5,226 114,121
Income taxes 3,257 24,159 2,248 45,649
------- ------- ------- -------
Earnings before equity in
income (loss) of joint
ventures and minority
interests 4,315 36,242 2,978 68,472
Equity in income (loss) of joint
ventures (1,671) 11,134 (3,444) 20,045
Minority interests 1,109 (890) 1,442 (2,405)
-------- -------- ------ --------
Net earnings $ 3,753 $ 46,486 $ 976 $ 86,112
======== ======== ====== ========
Net earnings per share $ 0.09 $ 1.12 $ 0.02 $ 2.08
======== ======== ====== ========
Weighted average shares used
in computing net earnings
per share (in thousands) 41,438 41,405 41,437 41,411
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(Unaudited)
June 30, December 31,
1997 1996
---- ----
ASSETS
Current assets:
Cash and cash equivalents $ 23,869 $ 35,096
Accounts receivable, less allowance for
doubtful accounts of $2,368 and $2,299
in 1997 and 1996, respectively 154,077 129,325
Inventories 116,618 100,505
Prepaid and other current assets 46,346 49,329
----------- -----------
Total current assets 340,910 314,255
Property, plant and equipment, net of
accumulated depreciation of $408,118
and $372,680 in 1997 and 1996,
respectively 1,117,322 1,015,145
Investment in joint ventures 86,397 101,103
Excess of cost over net assets acquired,
net of accumulated amortization of
$3,064 and $2,376 in 1997 and 1996,
respectively 50,460 51,148
Other assets 30,303 27,324
----------- -----------
Total assets $ 1,625,392 $ 1,508,975
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 95,033 $ 47,130
Accounts payable 131,775 156,841
Accrued liabilities 51,892 45,386
Accrued wages and salaries 21,093 25,975
Income taxes payable (16,657) (3,882)
----------- -----------
Total current liabilities 283,136 271,450
Long-term debt, less current portion 376,865 284,701
Pension and similar liabilities 70,200 70,232
Customer deposits 62,877 48,174
Other liabilities 37,230 28,923
----------- -----------
Total liabilities 830,308 703,480
----------- -----------
Minority interests 62,510 63,527
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value,
50,000,000 shares authorized, none
issued or outstanding in 1997 or 1996 -- --
Common stock, $.01 par value,
200,000,000 shares authorized,
41,478,758 and 41,470,971 issued
and outstanding in 1997 and 1996,
respectively 415 415
Additional paid-in capital 574,378 573,351
Retained earnings 172,119 171,143
Cumulative translation adjustment (11,982) (396)
Unearned restricted stock awards (1,028) (1,217)
Treasury stock, at cost:
36,205 shares in 1997 and 1996 (1,328) (1,328)
----------- -----------
Total stockholders' equity 732,574 741,968
----------- -----------
Total liabilities and stockholders'
equity $ 1,625,392 $ 1,508,975
=========== ===========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited; Dollars in thousands)
Six-Months Ended
June 30,
1997 1996
---- ----
Cash flows from operating activities:
Net earnings $ 976 $ 86,112
Adjustments to reconcile net earnings to
net cash provided by (used in) operating
activities:
Depreciation and amortization 56,588 44,506
Gain on sale of property, plant and equipment (6,831) --
Minority interests (1,442) 2,405
Equity in (income) loss of joint ventures 3,444 (20,045)
Working capital and other (55,643) (2,032)
--------- ---------
Net cash provided by (used in)
operating activities (2,908) 110,946
--------- ---------
Cash flows from investing activities:
Additions to property, plant, and equipment (175,105) (219,078)
Proceeds from sale of property, plant and
equipment 12,284 --
Dividend received from joint venture 11,262 --
Equity infusions in joint ventures -- (8,213)
Deposit with affiliate, net -- 16,000
Notes receivable from affiliates, net 809 3,188
Other -- 48
--------- ---------
Net cash used in investing activities (150,750) (208,055)
--------- ---------
Cash flows from financing activities:
Net short-term borrowings 40,509 (71)
Proceeds from issuance of long-term debt 103,347 50,560
Principal payments on long-term debt (1,368) (204)
Contributions from minority interest -- 1,732
Stock options exercised 156 --
Repurchase of common stock -- (1,328)
--------- ---------
Net cash provided by financing activities 142,644 50,689
--------- ---------
Effect of exchange rate changes on cash (213) 145
--------- ---------
Net decrease in cash and cash equivalents (11,227) (46,275)
Cash and cash equivalents at beginning of period 35,096 77,192
--------- ---------
Cash and cash equivalents at end of period $ 23,869 $ 30,917
========= =========
See accompanying notes to consolidated financial statements.
MEMC ELECTRONIC MATERIALS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements of MEMC
Electronic Materials, Inc. and Subsidiaries (the Company), in the opinion of
management, include all adjustments (consisting of normal, recurring items)
necessary to present fairly the Company's financial position and results of
operations and cash flows for the periods presented. The consolidated
financial statements are presented in accordance with the requirements of
Regulation S-X and consequently do not include all disclosures required by
generally accepted accounting principles. Operating results for the
three-month and six-month periods ended June 30, 1997 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1997.
(2) Sale of Santa Clara, California Assets
On May 30, 1997, the Company sold certain assets of the Santa Clara,
California wafer facility to UniSil Corporation for approximately $14.0
million. The divestiture resulted in the recognition of a pretax gain of
$6.0 million or $0.14 per share. This gain has been reflected as part of
other nonoperating income.
(3) Inventories
Inventories consist of the following:
June 30, December 31,
1997 1996
---- ----
Raw materials and supplies $ 58,627 $ 47,209
Goods in process 30,334 27,411
Finished goods 27,657 25,885
--------- ---------
$ 116,618 $ 100,505
========= =========
(4) Earnings per Share (EPS)
Net EPS for the three-month and six-month periods ended June 30, 1997 and
1996 were calculated based on the weighted average shares outstanding during
each respective period.
(5) Derivative Financial Instruments
The Company enters into forward exchange contracts to manage foreign
currency exchange risk relating to current trade receivables with its
foreign subsidiaries and current trade receivables with its customers
denominated in foreign currencies (primarily Japanese yen and German marks).
The purpose of the Company's foreign currency hedging activities is to
protect the Company from the risk that the eventual dollar net cash flows
resulting from foreign currency transactions will be adversely affected by
changes in exchange rates. The Company does not hold or issue financial
instruments for trading purposes.
The Company's forward exchange contracts are accounted for as hedges and,
accordingly, gains and losses on those contracts are deferred and recognized
at the time of settlement of the related receivables. Deferred gains and
losses are included on a net basis in the consolidated balance sheet as
either other assets or other liabilities. Upon termination, gains and losses
are included in the consolidated statement of earnings as other income or
expense. If a forward exchange contract is designated as a hedge but is no
longer effective, it is marked to market and included in other income or
expense in the consolidated statement of earnings. A payment or receipt
arising from the termination of a foreign currency contract that is
effective as a hedge is included in other income or expense in the
consolidated statement of earnings.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Net Sales. Net sales decreased 24.2% to $245.8 million for the three months
ended June 30, 1997 from $324.3 million for the three months ended June 30,
1996. Net sales for the six month period ended June 30, 1997 decreased 23.8% to
$468.1 million from $614.1 million for the comparable period. The declines on
both a quarter and year-to-date basis were caused by lower product volumes and
average selling prices, offset partially by improved product mix. Net sales were
lower for all wafer diameters and geographic areas in the three and six month
periods, reflecting the inventory correction in the semiconductor industry which
began in the second half of 1996.
On a sequential basis, however, net sales increased 10.6% over first quarter
1997 net sales of $222.3 million. This increase was due to improved product
volumes and mix, offset by lower average selling prices. Net sales improved most
significantly in Asia Pacific and North America, but declined in Europe. From a
product standpoint, the improvement in net sales was led by increasing demand
for 8 inch prime and epitaxial wafers, and 6 inch wafers.
The Company anticipates a continuation of the downward pressure on wafer prices
that has affected this industry since the third quarter of last year. Although
the Company believes that industry wide capacity exceeds demand for all diameter
wafers, the pricing pressure is greatest for 8 inch wafers, where the most
recent capacity additions in the wafer industry have occurred. Average selling
prices are now anticipated to decline by approximately 10% from comparable 1996
levels. However, the Company anticipates modest sequential sales growth over the
remaining quarters of 1997, reflecting product volume increases related to the
continuing recovery in the semiconductor industry, and as additional capacity
for advanced large diameter and epitaxial wafers becomes available.
Gross Margin. For the quarter ended June 30, 1997, gross margin decreased to
12.5% from 28.0% for the year-ago quarter. For the six months ended June 30,
1997, gross margin was 12.6% as compared to 27.7% for the same period of 1996.
The decreases in gross margin for both the three and six month periods resulted
from lower prices, the start-up of the MEMC St. Peters epitaxial facility and
the MEMC Southwest 8 inch facility, and operating at a lower rate of capacity
utilization.
As compared to the first quarter of 1997, gross margin remained essentially flat
as higher rates of capacity utilization and product mix were offset by lower
prices. Advanced large diameter and epitaxial products represented 39% of
product volume for the 1997 second quarter, compared to 35% in the first quarter
of 1997.
Marketing, Administration and Technology Expenses. Marketing, administration and
technology expenses for the quarter ended June 30, 1997 decreased to $32.6
million from $33.2 million for the same 1996 quarter. However, for the six
months ended June 30, marketing, administrative and technology expenses
increased to $64.0 million from $60.1 million. The decrease in expenses for the
three month period was attributable to lower administration costs, offset by
higher technology costs. Technology costs rose 46% and 43% for the three and six
month periods, respectively, related to higher investment in 300mm research and
development, and crystal and wafering process improvements in the United States,
Italy and Japan. Technology costs are anticipated to continue to rise during the
second half of 1997.
Interest Expense. Increases in interest expense for the quarter and year to date
compared to the prior year are due to the completion of capital projects for
which interest was previously capitalized. The Company expects interest expense
to continue to increase as other capital projects are completed. Based upon the
projects completed and those anticipated to be completed during the next
quarter, interest expense will likely exceed $6 million for the third quarter of
1997.
Other(Income) Expense. Other income for the second quarter of 1997 increased to
$8.2 million from expense of $0.4 million for the same period of 1996, due
primarily to the divestiture of the Company's Santa Clara wafer facility that
resulted in a pretax gain of $6.0 million. Comparing the six month period ended
June 30, 1997, to the same period of the prior year, other (income) expense
improved $9.0 million mainly as a result of the Santa Clara divestiture.
Income Taxes. The Company's effective tax rate was 43% for both the three and
six month periods ended June 30, 1997, compared to 40% for the comparable 1996
periods. The 1997 effective tax rate may increase due to changes in the
composition of the Company's worldwide pretax income.
Joint Ventures. Equity in income (loss) of joint ventures decreased to a loss of
$1.7 million for the quarter ended June 30, 1997 from income of $11.1 million
for the year-ago period. For the 1997 period, the Company's share of income of
$3.0 million at PHC, the Company's Korean joint venture, was more than offset by
the Company's share of losses of $4.7 million at Taisil, the Company's Taiwanese
joint venture. For the second quarter of 1996, the Company's share of earnings
from PHC and Taisil were $11.0 million and $0.1 million, respectively. PHC's
decrease in contribution to the Company's results of operations was attributable
to the decline in product volumes and average selling prices, predominantly to
customers competing in the DRAM market. Taisil's operating losses reflect higher
expenses associated with its continuing qualification process.
Subsequent to the completion of the 1997 second quarter, the labor unrest that
has affected Korean industry in general impacted PHC. The labor disruption was
settled quickly and production was reduced for less than three weeks. The impact
of the labor disruption on PHC is expected to be minimal, as the joint venture
had anticipated the disruption and had taken steps to ensure a continuous supply
of products to its customers.
Minority Interests. Minority interests in net losses of consolidated
subsidiaries were $1.1 million for the three month period ended June 30, 1997 as
compared to interests in income of $0.9 million for same period of 1996. On a
year-to-date basis, 1997 minority interests in net losses of consolidated
subsidiaries were $1.4 million compared to interests in income of consolidated
subsidiaries of $2.4 million. In both the quarter and year to date periods, the
decreases are primarily due to MEMC Southwest's 5 and 6 inch facility operating
at a lower rate of capacity utilization, lower prices and its new 8 inch
facility incurring higher start-up costs as it continues its qualification.
Liquidity and Capital Resources. At June 30, 1997, the Company had cash and cash
equivalents of $23.9 million. The Company's borrowings against its $793.7
million of credit facilities were $471.9 million at June 30, 1997. Outstanding
borrowings increased $140.1 million from December 31, 1996 to June 30, 1997, the
proceeds of which have been used to finance the Company's expansion efforts.
A comparison of the components of the Company's financial condition follows
(dollars in millions):
June 30, December 31,
1997 1996
---- ----
Working capital $ 57.8 $ 42.8
Current ratio 1.20 to 1 1.16 to 1
Stockholder's equity $732.6 $742.0
Total debt to total capitalization 37.2% 29.2%
Cash flows used in operating activities were $2.9 million for the six months
ended June 30, 1997 compared to $110.9 million of cash flows generated for the
comparable 1996 period. The decrease is primarily attributable to lower net
earnings, higher accounts receivable, increased inventories, decreased accounts
payable and lower income taxes payable, offset by higher depreciation.
Cash flows used in investing activities for the six months ended June 30, 1997
included capital expenditures of $175.1 million which represent a $44.0 million
reduction from the first six months of 1996. The Company had $129.5 million of
committed capital expenditures as of June 30, 1997. Capital expenditures in 1997
primarily relate to equipping the MEMC Southwest and St. Peters wafer
manufacturing facilities as well as the expansion of MEMC Pasadena. Also,
included in cash flows used in investing activities were $12.3 million of
proceeds from the sale of fixed assets primarily due to the sale of Santa Clara,
and an $11.3 million dividend received from PHC.
Cash flows from financing activities increased $92.0 million due to the issuance
of short-term and long-term debt to finance the Company's expansion efforts.
Other. In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 established standards for the computation and presentation
of earnings per share for entities with publicly held common stock or potential
common stock. The Statement is effective for financial statements issued for
periods ending after December 15, 1997 and requires retroactive restatement of
all prior period earnings per share data presented. The pro forma effect of SFAS
No. 128 on the financial periods presented is as follows:
Three-Months Ended Six-Months Ended
June 30, June 30,
1997 1996 1997 1996
---- ---- ---- ----
Earnings per share, as reported $ 0.09 $ 1.12 $ 0.02 $ 2.08
====== ====== ====== ======
Basic earnings per share $ 0.09 $ 1.13 $ 0.02 $ 2.09
====== ====== ====== ======
Diluted earnings per share $ 0.09 $ 1.12 $ 0.02 $ 2.07
====== ====== ====== ======
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income.
This Statement establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
All items that are required to be recognized under accounting standards as
components of comprehensive income must be reported in a financial statement
with the same prominence as other financial statements. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." This Statement establishes standards for
the manner in which public business enterprises report information about
operating segments in interim and annual financial statements, and the related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 is effective for periods beginning after December 15, 1997.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
- -- except for the historical information contained herein, the matters discussed
in this document regarding average selling prices for 1997, sales growth for the
remaining 1997 quarters, the rise in technology costs during the second half of
1997, interest expense for the third quarter, the 1997 effective tax rate and
the impact of the labor disruption on the results of operations of PHC are
forward looking statements. Such statements involve certain risks and
uncertainties that could cause actual results to differ materially from those in
the forward looking statements. Potential risks and uncertainties include such
factors as the demand for the Company's wafers, utilization of manufacturing
capacity, demand for semiconductors generally, competitors' actions, changes in
the pricing environment and other risks described in the Company's filings with
the Securities and Exchange Commission, including the report on Form 10-K for
the year ended December 31, 1996.
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Stockholders was held on May 14, 1997. The directors
listed in the Notice of Annual Meeting of Stockholders dated March 24, 1997 were
elected to terms expiring in 2000, with voting for each as follows:
Director For Withheld
-------- --- --------
Armin-Peter Bode 38,651,859 293,303
Dr. Robert M. Sandfort 38,695,246 249,916
Michael B. Smith 38,671,032 274,015
Messrs. Oberholz, Meyer-Galow, Viefhues, Biangardi, Maris and O'Brien are the
remaining board members who are expected to serve through the remainder of their
respective terms.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See the Exhibit Index at page 11 of this report.
(b) Reports on Form 8-K
None.
SIGNATURE
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.
MEMC Electronic Materials, Inc.
August 13, 1997 /s/ JAMES M. STOLZE
---------------------------------------------------
James M. Stolze
Executive Vice President and Chief Financial Officer
(on behalf of the registrant and as
principal financial and accounting officer)
EXHIBIT INDEX
The exhibits below are numbered in accordance with the Exhibit Table of
Item 601 of Regulation S-X.
Exhibit
Number Exhibit
- ------- -------
2 Omitted -- Inapplicable
3-a Omitted -- Inapplicable
3-b Omitted -- Inapplicable
4 Omitted -- Inapplicable
*10-i Amendment to TI Purchase Agreement dated as of June 30, 1995,
between the Company and MEMC Southwest Inc ("MEMC
Southwest"), and TI
10-qqq Five Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation
10-rrr Six Year Credit Agreement dated as of June 26, 1997, between the
Company and Huls Corporation
10-sss Seven Year Credit Agreement dated as of June 26, 1997,
between the Company and Huls Corporation
10-ttt Eight Year Credit Agreement dated as of June 26, 1997,
between the Company and Huls Corporation
11 Omitted -- Inapplicable
15 Omitted -- Inapplicable
18 Omitted -- Inapplicable
19 Omitted -- Inapplicable
22 Omitted -- Inapplicable
23 Omitted -- Inapplicable
24 Omitted -- Inapplicable
27 Financial Data Schedule (filed electronically with the SEC only)
99 Omitted -- Inapplicable
- ---------------
* Portions of this Exhibit have been deleted pursuant to a request for
Confidential Treatment filed separately with the Secretary of the
Securities and Exchange Commission