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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 September 2, 2000
/ / 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 0-26784
SPEEDFAM-IPEC, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
ILLINOIS 36-2421613
(State Or Other Jurisdiction Of Incorporation Or Organization) (I.R.S. Employer
Identification Number)
305 North 54th Street, Chandler, Arizona 85226
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (480) 705-2100
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES /x/ No / /
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date (September 29, 2000).
Common Stock, no par value: 29,912,569 shares
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SPEEDFAM-IPEC, INC.
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
September 2, 2000 and June 3, 2000..................................................... 2
Condensed Consolidated Statements of Operations
Quarter Ended September 2, 2000 and August 31, 1999..................................... 3
Condensed Consolidated Statements of Cash Flows
Quarter Ended September 2, 2000 and August 31, 1999..................................... 4
Notes to Condensed Consolidated Financial Statements........................................ 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................ 20
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................... 20
SIGNATURE............................................................................................................... 21
EXHIBIT INDEX
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PART I - FINANCIAL INFORMATION
SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
September 2, June 3,
2000 2000
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 81,800 $ 72,060
Short-term investments 35,723 28,236
Trade accounts receivable, net 106,053 129,102
Inventories 100,572 81,192
Other current assets 7,223 3,301
--------- ---------
Total current assets 331,371 313,891
Investments in affiliates -- 19,810
Property, plant and equipment, net 84,862 87,913
Other assets 11,136 13,466
--------- ---------
Total assets $ 427,369 $ 435,080
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,288 $ 1,077
Accounts payable and due to affiliates 54,288 51,354
Accrued liabilities 38,233 23,264
--------- ---------
Total current liabilities 93,809 75,695
--------- ---------
Long-term liabilities:
Long-term debt 115,449 115,162
Other liabilities 7,138 7,253
--------- ---------
Total long-term liabilities 122,587 122,415
--------- ---------
Stockholders' equity:
Common stock, no par value, 96,000 shares authorized, 29,911 and 29,703
shares issued and outstanding at September 2, 2000
and June 3, 2000, respectively 1 1
Additional paid-in capital 433,413 430,706
Retained earnings (deficit) (223,675) (194,489)
Accumulated other comprehensive income 1,234 752
--------- ---------
Total stockholders' equity 210,973 236,970
--------- ---------
Total liabilities and stockholders' equity $ 427,369 $ 435,080
========= =========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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SPEEDFAM-IPEC, INC. AND CONSOLIDATED SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Quarter Ended September 2, 2000 and August 31, 1999
(dollars and shares in thousands, except per share data)
Quarter Ended
September 2, August 31,
------------ ----------
2000 1999
-------- --------
Net sales $ 74,707 $ 50,327
Cost of sales 54,988 35,160
-------- --------
Gross margin 19,719 15,167
-------- --------
Operating expenses:
Research and development 16,557 12,890
Selling, general and administrative 16,453 12,260
Restructuring charges 5,123 --
-------- --------
Total operating expenses 38,133 25,150
Operating loss (18,414) (9,983)
Other expense, net (121) (88)
-------- --------
Loss before income taxes and equity earnings (loss) (18,535) (10,071)
Income taxes -- --
-------- --------
Loss before equity earnings (loss) (18,535) (10,071)
Loss on disposal of investment in affiliate (10,763) --
Equity in net earnings (loss) of affiliates
110 (892)
-------- --------
Net loss attributable to common stockholders $(29,188) $(10,963)
======== ========
Net loss per share - basic and diluted $ (0.98) $ (0.37)
======== ========
Weighted average number of shares - basic and diluted 29,818 29,404
======== ========
See Accompanying Notes to Condensed Consolidated Financial Statements.
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SPEEDFAM-IPEC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Quarter Ended September 2, 2000 and August 31, 1999
(dollars in thousands)
Quarter Ended
September 2, August 31,
2000 1999
------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(29,188) $(10,963)
Adjustments to reconcile net loss to net cash used
in operating activities:
Equity in net (earnings) loss of affiliates (110) 892
Depreciation and amortization 4,523 4,421
Loss on disposal of investment in affiliate 10,763 --
Fixed asset impairments 2,391 --
Restructuring charges 8,474 --
Changes in operating assets and liabilities:
(Increase) decrease in trade accounts receivable 28,699 (1,587)
(Increase) decrease in inventories (21,614) 697
(Increase) decrease in other current assets (1,843) 175
Increase (decrease) in accounts payable and due to affiliates 8,493 (1,170)
Increase (decrease) in customer deposits and accrued expenses 9,242 (7,348)
-------- --------
Net cash provided by (used in) operating activities 19,830 (14,883)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term
investments (7,268) (26,024)
Maturities of short-term investments -- 10,918
Proceeds from licensing technology and transfer of associated assets -- 2,335
Capital expenditures (3,596) (2,233)
Other investing activities (1,497) 603
-------- --------
Net cash provided by (used in) investing activities (12,361) (14,401)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES;
Proceeds from exercise of stock options and employee stock
purchases 2,710 123
Principal payments on long-term debt (285) (169)
-------- --------
Net cash provided by (used in) financing activities 2,425 (46)
Effects of foreign currency rate changes on cash (154) 28
-------- --------
Net increase (decrease) in cash and cash equivalents 9,740 (29,302)
-------- --------
Cash and cash equivalents at beginning of the year 72,060 97,003
-------- --------
Cash and cash equivalents at end of period $ 81,800 $ 67,701
======== ========
Supplemental cash flow information:
Unrealized gain on securities $ 220 $ --
See Accompanying Notes to Condensed Consolidated Financial Statements.
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SPEEDFAM-IPEC, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with
the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring items) considered necessary for
a fair presentation have been included. Actual results may differ from
these estimates. Operating results for the quarter ended September 2, 2000
are not necessarily indicative of the results that may be expected for the
year ending June 2, 2001. For further information, refer to the
consolidated financial statements and notes thereto included in the
Company's annual Report on Form 10-K for the year ended June 3, 2000.
The Company has changed its fiscal year from the twelve-month period
ended May 31 to a 52 or 53 week period ending on the Saturday nearest May
31. Accordingly, the 2001 fiscal year ends on June 2, 2001 and contains 52
weeks whereas the 2000 fiscal year ended on June 3, 2000 and contained 53
weeks. All references to years relate to fiscal years unless otherwise
noted.
Since 1971, the Company had owned a 50% interest in SpeedFam-IPEC Co.,
Ltd. (together with its subsidiaries and joint ventures, also known as the
Far East Joint Venture) which was accounted for using the equity method of
accounting. The remaining 50% was owned by Obara Corporation, a publicly
traded Japanese company that supplies products to the automotive industry.
On August 30, 2000, the Far East Joint Venture between the Company and
Obara Corporation was officially dissolved. Under the terms of the Master
Reorganization Agreement, ownership of the CMP operations of the Far East
Joint Venture was transferred to the Company. The CMP operations, as of the
date of acquisition, have been consolidated in the accompanying unaudited
condensed consolidated financial statements.
(2) INVENTORIES
The components of inventory were (in thousands):
September 2, 2000 June 3, 2000
----------------- ------------
Raw materials $ 54,177 $ 54,058
Work-in-process 35,510 21,396
Finished goods 10,885 5,738
-------- --------
$100,572 $ 81,192
======== ========
(3) SHORT-TERM INVESTMENTS
The Company's short-term investments are classified as
available-for-sale and recorded at their fair market value. An
unrealized loss of approximately $0.3 million and $0.5 million is
included as part of accumulated other comprehensive income within
stockholders' equity at September 2, 2000 and June 3, 2000,
respectively.
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(4) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows (in thousands):
September 2, 2000 June 3, 2000
----------------- ------------
Accrued warranty and installation costs $13,141 $ 8,665
Accrued payroll and benefits 5,850 4,588
Accrued merger, integration, and restructuring costs 4,678 1,952
Other accrued liabilities 14,564 8,059
------- -------
$38,233 $23,264
======= =======
(5) COMPREHENSIVE LOSS
The Company's comprehensive loss was as follows (in thousands):
Quarter Ended
September 2, 2000 August 31, 1999
----------------- ---------------
Net loss $(29,188) $(10,963)
Other comprehensive income (loss):
Unrealized gain on securities 220 --
Foreign currency translation adjustments 262 933
-------- --------
Comprehensive loss $(28,706) $(10,030)
======== ========
Accumulated Other Comprehensive Income
Unrealized
Foreign Currency Gain (Loss) on Accumulated Other
Translation Securities Comprehensive Income (Loss)
---------------- -------------- --------------------------
Balance at June 3, 2000 $ 1,239 $ (487) $ 752
Three month period change 262 220 482
------- ------- -------
Balance at September 2, 2000 $ 1,501 $ (267) $ 1,234
======= ======= =======
Balance at May 31, 1999 $ 22 $ (252) $ (230)
Three month period change 933 -- 933
------- ------- -------
Balance at August 31, 1999 $ 955 $ (252) $ 703
======= ======= =======
(6) RESTRUCTURING AND OTHER CHARGES ASSOCIATED WITH THE DISPOSAL OF THE FAR
EAST JOINT VENTURE
On August 30, 2000, the Far East Joint Venture was officially
dissolved. Under the terms of the Master Reorganization Agreement with
Obara Corporation (Obara), ownership of the CMP operations of the Far East
Joint Venture was transferred to the Company and specific personnel
involved in CMP efforts became employees of the Company. Obara will
continue the non-CMP activities of the Joint Venture which include the
manufacture of silicon wafer and thin film memory disk polishing products.
Under the terms of a distributor agreement signed on August 31, 2000, the
Company will continue to act as
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a direct distributor in the United States and Europe for the wafer and disk
polishing products manufactured by Obara and is prohibited from
manufacturing these products.
The Company recorded charges totaling $10.8 million related to the loss
on disposal of the Company's 50% investment interest in the Far East Joint
Venture and $8.4 million related to the Company's exit from the
manufacturing of wafer and disk polishing products as the Company is
prohibited from manufacturing these products. The $8.4 million is comprised
of inventory write-offs of raw materials and spare parts related to silicon
wafer and thin film memory disk polishing products; impairment of fixed
assets of the exited operations; severance costs for three employees
including a former executive of the Far East Joint Venture and other charges
associated with the Company's plan to exit the manufacturing of wafer and
disk polishing products. As of September 2, 2000, no expenses had been paid
or charged to the liability. The following table summarizes the components
of the restructuring and other charges (in thousands):
September 2, 2000
-----------------
Loss on disposal of investment in affiliate $10,763
Inventory write-offs 3,351
Fixed asset impairments 2,700
Severance costs 1,191
Other costs 1,232
-------
Total $19,237
=======
These costs are classified in the statement of operations for the
quarter ended September 2, 2000 in cost of sales, loss on disposal of
investment in affiliate and operating expenses. The following table
summarizes the classification of the restructuring and other charges (in
thousands):
Cost of sales $ 3,351
Restructuring charges 5,123
Loss on disposal of investment in affiliate 10,763
-------
Total $19,237
=======
In addition, the Company recorded $2.4 million of asset impairment
charges for CMP equipment that was designed by the Far East Joint Venture
that will no longer be used in ongoing research and development programs.
These charges were classified in the statement of operations for the quarter
ended September 2, 2000 as research and development expenses.
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(7) MERGER, INTEGRATION, AND RESTRUCTURING COSTS ASSOCIATED WITH THE 1999
MERGER
In connection with the merger of SpeedFam International, Inc. and
Integrated Process Equipment Corp. in April 1999, the Company recorded
various merger, integration and restructuring costs. Direct merger costs
primarily consisted of professional fees related to investment banking,
legal and accounting services incurred through the date of the merger.
The Company recorded integration and restructuring costs for lease
terminations, the write-off of duplicative equipment previously used for
demonstration purposes, the write-down of inventory and equipment related
to product lines that will no longer be supported, and severance costs
resulting from workforce reductions.
The severance and other related employee costs provided for the
reduction of approximately 70 employment positions resulting from
facility closures, and the elimination of duplicate positions or
positions no longer necessary due to the streamlining of operations.
Through September 2, 2000, the Company incurred $27.0 million in
asset write-downs and paid and charged to the liability $18.6 million.
The remaining restructuring accrual for lease termination, severance and
other expenses associated with the merger is approximately $8.3 million
which the Company believes is adequate to cover the remaining
liabilities. Lease termination costs on certain vacated facilities (which
were included in the restructuring charge) primarily related to remaining
rent, related utilities and common area maintenance on the closed
Phoenix, Arizona manufacturing and administrative facility not
recoverable through sublease income. Sublease activity began in May 2000
(as reflected in the remaining accrual) and is projected to be carried
out through the end of the Company's lease term. The Company's management
has been and is currently in the process of securing additional subleases
or other negotiated agreements for the Phoenix, Arizona manufacturing and
administrative facility. The following table summarizes the components of
the merger, integration, and restructuring costs (in thousands):
Quarter Activity
Accrued ------------------------------ Accrued
Liability at Cash Liability at
June 3, 2000 Expenditures September 2, 2000
------------ ------------ -----------------
Lease termination costs $ 8,565 (651) $ 7,914
Severance costs 372 (213) 159
Other costs 264 -- 264
------- ---- -------
$ 9,201 (864) $ 8,337
======= ==== =======
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(8) BUSINESS SEGMENT INFORMATION
The Company classifies its products into three core business
segments: (i) the CMP Group, which is comprised of the Company's
development and production of chemical mechanical planarization systems;
(ii) the Surface Technology Group, which is comprised of the distribution
of high-throughput precision surface processing equipment used in thin
film memory disk media and silicon wafer industries and the manufacture
of polyvinyl alcohol products; and (iii) the Industrial Applications
Group, which is comprised of the development and production of
high-throughput precision surface processing equipment used in general
industrial applications. Information concerning the Company's business
segments during the quarter ended September 2, 2000 and August 31, 1999
is as follows (in thousands):
Quarter Ended
September 2, August 31,
2000 1999
------------ ----------
Net sales:
CMP Group $ 65,305 $ 39,784
Surface Technology Group 5,534 7,694
Industrial Applications Group 3,868 2,849
-------- --------
Total net sales to unaffiliated customers 74,707 50,327
-------- --------
Segment operating profit (loss):
CMP Group (4,452) (5,339)
Surface Technology Group (3,112) (400)
Industrial Applications Group 929 230
-------- --------
Total segment operating loss (6,635) (5,509)
General corporate expense, net (11,556) (4,303)
Interest expense, net (344) (259)
-------- --------
Loss before income taxes and equity earnings (loss) $(18,535) $(10,071)
======== ========
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company sells its products and services to three market
segments: (1) semiconductor device manufacturers (CMP Group), (2) thin film
memory disk media and silicon wafer manufacturers (Surface Technology
Group), and (3) manufacturers of general industrial components (Industrial
Applications Group).
On August 30, 2000, the 30-year-old Far East Joint Venture
between the Company and Obara Corporation was officially dissolved. Under
the terms of the Master Reorganization Agreement with Obara Corporation,
ownership of the CMP sales and service operations of the Far East Joint
Venture was transferred to the Company and specific personnel involved in
CMP efforts became employees of the Company. Obara Corporation will
continue the non-CMP activities of the former Joint Venture, which include
the manufacturing of silicon wafer and thin film memory disk polishing
products. The Company will not compete with the non-CMP business and Obara
will not compete with the CMP business for an initial period of five (5)
years. The Company will indemnify Obara for any claims relating to the CMP
business and Obara will indemnify the Company for any claims relating to
the non-CMP business. Under the terms of a distributor agreement signed on
August 31, 2000, the Company will continue to act as a direct distributor
in the United States and Europe for the wafer and disk polishing products
manufactured by Obara Corporation and is prohibited from manufacturing
these products.
The Company has changed its fiscal year from the twelve-month
period ended May 31 to a 52 or 53 week period ending on the Saturday
nearest May 31. Accordingly, the 2001 fiscal year ends on June 2, 2001 and
contains 52 weeks whereas the 2000 fiscal year ended on June 3, 2000 and
contained 53 weeks. All references to years relate to fiscal years unless
otherwise noted.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statements of
operations data for the periods indicated as a percentage of total revenue:
Quarter Ended
September 2, 2000 August 31, 1999
----------------- ---------------
Net sales 100.0% 100.0%
Cost of sales 73.6 69.9
----- -----
Gross margin 26.4 30.1
Research and development 22.1 25.6
Selling, general and administrative 22.0 24.3
Restructuring charges 6.9 --
----- -----
Operating loss (24.6) (19.8)
Other expense, net (0.2) (0.2)
----- -----
Loss from consolidated companies before income (24.8) (20.0)
taxes
Income taxes 0.0 0.0
----- -----
Loss from consolidated companies (24.8) (20.0)
Loss on disposal of investment in affiliate (14.3) --
Equity in net earnings (loss) of affiliates 0.1 (1.8)
----- -----
Net loss (39.0)% (21.8)%
===== =====
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Net Sales. Net sales for the first quarter of 2001 were $74.7
million, up 48.5% from net sales of $50.3 million in the first quarter of
2000. Net sales of CMP systems for the first quarter of 2001 totaled $65.3
million or 87.4% of total net sales compared to $39.8 million or 79.0% of
total net sales in the first quarter of 2000. Net sales for the first
quarter of 2001 increased compared to the same quarter last year due to
strong demand for semiconductor manufacturing equipment as the semiconductor
manufacturing industry continued to recover from an industry downturn.
Increased sales volume was driven by customer investments in both capacity
and advanced technology to meet rising demand. Moreover, the increase in CMP
system sales to almost 88% of total net sales signifies the Company's focus
on the CMP market. In addition, the Company's recent agreement with Obara
Corporation to transfer full ownership of the CMP sales and services of the
former Far East Joint Venture to the Company will allow the Company to have
direct control and tailor regional staffing to more aggressively take
advantage of opportunities in the CMP markets of the Far East. From a
geographic standpoint, for the first quarter of 2001, over 60% of the CMP
revenue was generated in the Far East with just under 20% of CMP revenue
each in Europe and the United States.
Net sales of the Surface Technology Group in the first quarter of
2001 accounted for $5.5 million, or 7.3% of total net sales, as compared to
$7.7 million, or 15.2% of total net sales in the first quarter of 2000.
During the first quarter of 2001, thin film memory disk manufacturers
continued to experience manufacturing over-capacity which in turn reduced
capital spending. The thin film memory disk industry continues to feel
"price per unit" pressures which in turn has forced a reduction in capital
spending for equipment the Company supplies from its U.S. operations. With
the dissolution of the Far East Joint Venture, the Company has exited from
the manufacturing of silicon wafer and thin film memory disk polishing
equipment, as required by the agreement with Obara Corporation. However, the
Company does not anticipate any significant changes in financial reporting
and trends as it will continue to act as a direct distributor in the United
States and Europe for the wafer and disk polishing products manufactured by
Obara Corporation.
Net sales of the Industrial Applications Group in the first
quarter of 2001 increased to $3.9 million or 5.2% of total net sales
compared to $2.8 million or 5.8% of total net sales for the same period last
year due to increased shipments in European markets.
Included in net sales for the first quarter of 2001 are
commissions from affiliates totaling $0.6 million. No commissions were
recorded in the first quarter of 2000 due to the slowdown in the thin film
memory and silicon wafer markets.
In December 1999, the Staff of the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements". SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
of all publicly held companies. The semiconductor capital equipment industry
association and a number of association members have met with the Staff of
the SEC to discuss and evaluate the applicability of SAB 101 and various
practical implementation considerations. On June 26, 2000, the Staff of the
SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted
the delay in the Company's implementation date of SAB 101 until the fourth
quarter of 2001. Accordingly, any shipments previously reported as revenue,
including revenue reported during the first nine months of 2001, which do
not meet SAB 101's guidance will be recorded as revenue in future periods.
Changes in our revenue recognition policy resulting from the interpretation
of SAB 101 and SAB 101B would not involve the restatement of prior financial
statements, but would, to the extent applicable, be reported as a change in
accounting principle at the end of 2001.
Management believes that SAB 101 and SAB 101B, to the extent that
they impact the Company, will not affect the underlying strength or weakness
of the business operations as measured by the dollar value of the Company's
product shipments and cash flows.
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Gross Margin. In the first quarter of 2001, gross margin was $19.7
million, or 26.4% of net sales, compared to $15.2 million, or 30.1% of net
sales in the first quarter of 2000. Included in gross margin for the first
quarter of 2001 is $3.4 million of inventory write-offs associated with the
Company's exit from the manufacturing of wafer and disk polishing
equipment. Excluding these restructuring charges, gross margin in dollars
and as a percentage of net sales increased primarily due to the increase in
total sales volume in the first quarter of 2001 compared to the prior year
period.
Research and Development. In the first quarter of 2001, research
and development expense increased to $16.6 million, or 22.1% of net sales,
compared to $12.9 million, or 25.6% of net sales in the first quarter of
2000. The increase primarily results from $2.4 million of asset impairment
charges for CMP equipment that was designed by the Far East Joint Venture
that will no longer be used in ongoing research and development programs.
Selling, General and Administrative. In the first quarter of 2001,
selling, general and administrative expenses increased to $16.5 million, or
22.0% of net sales, from $12.3 million, or 24.3% of total net sales in the
first quarter of 2000. The dollar amount increase in selling, general and
administrative expenses primarily results from significant marketing and
promotional costs incurred in connection with product launch activities
related to the introduction of the Company's new products, the Momentum
(TM) and the Auriga Vision. (TM)
Restructuring Charges. During the quarter ended September 2, 2000,
the Company recorded charges of $5.1 million that primarily related to
restructuring associated with the Company's plan to exit from the
manufacturing of silicon wafer and thin film memory disk polishing
equipment, as required by the distribution agreement with Obara
Corporation. Approximately $2.7 million related to the impairment of fixed
assets of the exited operations; $1.2 million related to severance costs
for three employees including a former executive of the Far East Joint
Venture; $1.2 million related to other restructuring charges associated
with the Company's plan to exit the manufacturing of wafer and disk
polishing products.
Provision for Income Taxes. At the end of the first quarter of
2001 and 2000, the Company established a valuation allowance for deferred
tax assets generated by its operating losses and is in a net operating loss
carryforward position. As a result, the effective tax rate for the first
quarter of 2001 and 2000 was zero. While the Company will reassess its tax
situation each quarter, the Company expects that its effective tax rate
will approximate zero throughout 2001.
Loss on Disposal of Investment in Affiliate and Equity in Net
Earnings (Loss) of Affiliates. At the end of the first quarter of 2001, the
Company reported a $10.8 million loss on disposal of investment in
affiliate in connection with the dissolution of the Far East Joint Venture.
The 30-year-old Far East Joint Venture between the Company and Obara
Corporation was officially dissolved on August 30, 2000. Under the terms of
the Master Reorganization Agreement with Obara Corporation, ownership of
the CMP sales and service operations of the Far East Joint Venture was
transferred to the Company and specific personnel involved in CMP efforts
became employees of the Company. Obara Corporation will continue the
non-CMP activities of the former Joint Venture, which includes the
manufacturing of wafer and disk polishing products. The Company will
continue to act as a direct distributor in the United States and Europe for
the wafer and disk polishing products manufactured by Obara Corporation.
For the first quarter of 2001, equity in net earnings (loss) of
affiliates increased to $0.1 million compared to ($0.9 million) in the
first quarter of 2000. This increase was due to increased sales revenue of
the Far East Joint Venture. With the integration of the former Far East
Joint Venture's CMP operations into current operations, the Company does
not anticipate any significant changes in financial reporting and trends.
Historically, the Company recorded the CMP costs of the joint venture in
operating expenses under
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a cost-plus arrangement. With the integration of CMP operations related to
the previous Far East Joint Venture, the Company will incur these same costs
as direct expenses and will no longer be reporting equity in net earnings
(loss) of affiliates on the income statement.
LIQUIDITY AND CAPITAL RESOURCES
As of September 2, 2000, the Company had $117.5 million in cash,
cash equivalents and short-term investments, compared to $100.3 million at
June 3, 2000. During the first quarter of 2001, the Company had $19.8
million of cash provided by operating activities compared to cash used of
$14.9 million in operating activities during the same period in 2000.
Approximately, $23.0 million in cash was provided due to a decrease in
working capital. Cash provided by operations in the first quarter of 2001
also included the net loss of $29.2 million adjusted for non-cash items
totaling $21.6 million: $10.8 million related to the loss on disposal of
investment in affiliate; $8.4 million primarily related to non-cash
restructuring charges incurred in connection with the Company's plan to exit
the manufacturing of wafer and disk polishing products and $2.4 million
related to fixed asset impairments. In addition, $4.5 million related to
depreciation and amortization expense.
Net cash used in investing activities totaled $12.4 million in the
first quarter of 2001 compared with net cash used of $14.4 million during
the same period in 2000. Cash was primarily used to purchase short-term
investments totaling approximately $7.3 million. In addition, there were
capital expenditures of $3.6 million in the first quarter of 2001. The
majority of the cash expenditures was used to fund additional building
construction, software and equipment purchases.
Financing activities provided cash of $2.4 million during the
first quarter of 2001 compared with cash used in financing activities of
approximately $0.1 million during the same period of 2000. The sale of
stock to employees and the exercise of stock options generated proceeds of
$2.7 million during the first quarter of 2001. Principal payments on
capital lease obligations amounted to $0.3 million during the first quarter
of 2001.
The Company believes that its current cash, cash equivalents and
short-term investments will be sufficient to meet the Company's cash needs
during the next 12 months.
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities", established accounting and reporting standards for derivative
financial instruments and hedging activities. These statements require that
the Company recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Derivatives that
are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives will either be offset against changes in the fair
value of the hedged assets, liabilities, or firm commitments through
earnings or recognized in other comprehensive income until the hedged item
is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. The Company will
adopt SFAS No. 133 and No. 138 in the first quarter of 2002, and does not
expect the adoption to have a material effect on its financial condition or
results of operations.
In December 1999, the Staff of the Securities and Exchange
Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 101, "Revenue
Recognition in Financial Statements". SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
of all publicly held companies. The semiconductor capital equipment industry
association and a number of association members have met with the Staff of
the SEC to discuss and evaluate the applicability of SAB 101 and various
practical implementation considerations. On June 26, 2000, the Staff of the
SEC issued Staff Accounting Bulletin No. 101B (SAB 101B), which permitted
the delay in the Company's implementation date of SAB 101 until the fourth
quarter of 2001. Accordingly, any shipments previously reported as
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revenue, including revenue reported during the first nine months of 2001,
which do not meet SAB 101's guidance will be recorded as revenue in future
periods. Changes in our revenue recognition policy resulting from the
interpretation of SAB 101 and SAB 101B would not involve the restatement of
prior financial statements, but would, to the extent applicable, be reported
as a change in accounting principle at the end of 2001.
Management believes that SAB 101 and SAB 101B, to the extent that
they impact the Company, will not affect the underlying strength or weakness
of the business operations as measured by the dollar value of the Company's
product shipments and cash flows.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual results could differ materially from
those projected in the forward-looking statements because of a number of
factors, risks and uncertainties, including the risk factors described in
this discussion and elsewhere in this report. Such forward-looking
statements include, but are not limited to, statements that relate to the
Company's future revenue, product development, product backlog, customers,
demand, acceptance and market share, competitiveness, gross margins, levels
of research and development and operating expenses, intellectual property,
management's plans and objectives for current and future operations of the
Company, the effects of the Company's reorganization of the Far East Joint
Venture, and the markets in which the Company does business. In addition,
the words "anticipate", "expect", "intend", "believe" and similar
expressions generally identify forward-looking statements. The information
included in this report is as of the filing date with the Securities and
Exchange Commission and future events or circumstances could differ
significantly from the forward-looking statements included herein.
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CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
The Company's business is subject to numerous risks, including
those discussed below. If any of the events described in these risks occurs,
the Company's business, financial condition and results of operations could
be seriously harmed.
The Company depends on selling a small number of high-priced
machines. The Company derives a significant portion of its revenue from the
sale of a relatively small number of CMP systems. Thus, order and delivery
delays and cancellations, even of one or two systems, may cause the Company
to miss quarterly revenue and profit expectations.
The Company's quarterly operating results may fluctuate for
reasons not within its control, which may affect the Company's stock price.
The Company's quarterly operating results may fluctuate due to a variety of
factors, including:
- industry demand for capital equipment, which depends on economic
conditions in the semiconductor, memory disk and silicon wafer markets
- timing of new product introductions
- ability to develop and implement new technologies
- timing, cancellation or delay of customer orders and shipments
- unexpected costs associated with sales and service of the CMP tools and
processes
- foreign currency exchange rates
- changes in analysts' earnings estimates
- announcements regarding restructurings, technological innovations,
departures of key officers or employees, or the introduction of new
products
Results of operations in any period are not an indication of
future results. Fluctuations in the Company's operating results may also
result in fluctuations in the Company's common stock price. The Company's
stock price may also fluctuate due to factors specific to the semiconductor
industry, which has experienced significant price fluctuations in recent
years. Investors in the Company's stock should be willing to incur the risk
of such price fluctuations.
If the market price of the Company's stock is adversely affected,
the Company may experience difficulty in raising capital or making
acquisitions. In addition, the Company may become the object of securities
class action litigation. If the Company is sued in a securities class
action, the Company may incur substantial costs and management's attention
and resources may be diverted.
The Company's current business model is predicated on closing and
fulfilling expected orders for its Momentum product. A significant portion
of the Company's projected revenue for the fiscal year ending June 2, 2001
depends on sales of its Momentum product. If the Company is unable to close
anticipated orders for the Momentum product or fulfill orders for the
Momentum product in its fiscal year ending June 2, 2001, the Company's
revenue for that period will be adversely affected.
The Company must succeed in selling CMP equipment for 300
millimeter and copper applications in order to increase its revenue and
maintain market share. Semiconductor manufacturers currently purchase CMP
equipment predominantly to manufacture 200 millimeter wafers, using CMP to
polish the tungsten and oxide layers of these wafers. Many of those same
manufacturers are now beginning to develop the ability to make 300
millimeter wafers and to process copper layers for both 200 millimeter and
300 millimeter wafers. Many of these manufacturers are currently qualifying
CMP equipment for 300 millimeter tungsten, 300 millimeter oxide and for
copper layers for both the 200 millimeter and 300 millimeter wafers. In the
future, it is anticipated that semiconductor manufacturers will purchase
CMP equipment for volume production of 300 millimeter and/or copper-based
wafers. If the Company does not win qualification contests for 300
millimeter and/or copper-based wafers, it may experience difficulty
achieving volume sales of this next-generation equipment to semiconductor
manufacturers, which could result in declining revenues.
The Company faces intense competition, including from companies
with greater resources. Several companies currently market CMP systems that
directly compete with the Company's products, including Applied Materials,
Inc. and Ebara Corporation. For several reasons, the Company may not
compete effectively with competitors. These reasons include:
- Some competitors may have greater financial resources than the Company.
They also may have more extensive engineering, manufacturing, marketing
and customer service and support capabilities.
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- Some competitors may supply a broader range of semiconductor capital
equipment than the Company. As a result, these competitors may have
better relationships with semiconductor manufacturers, including current
and potential customers of the Company.
- The Company expects competitors to continue to improve their existing
technology and introduce new products. This could cause a decline in the
Company's sales or lead to intensified price-based competition.
- Other capital equipment manufacturers not currently involved in the
development of CMP systems may enter the market or develop technology
that reduces the need for the Company's products.
- Once a semiconductor manufacturer commits to purchase a competitor's
equipment, the manufacturer generally relies on that equipment for an
entire production line and continues to purchase that equipment
exclusively for an extended period of time.
Increased competitive pressure could lead to lower prices for the
Company's products, thereby damaging the Company's business. There can be no
assurance that the Company will be able to compete successfully in the
future.
The Company may not develop products in time to meet changing
technologies. Semiconductor manufacturing equipment and processes are
subject to rapid technological changes and product obsolescence. The success
of the Company in developing, introducing and selling new and enhanced
systems depends upon a variety of factors including:
- product selection
- timely and efficient completion of product design and development
- timely and efficient implementation of manufacturing and assembly
processes
- product performance in the field
- effective sales and marketing
The Company's business is highly cyclical. The Company's business
depends substantially on the capital expenditures of semiconductor
manufacturers and, to a lesser extent, thin film memory disk and silicon
wafer manufacturers. These industries are highly cyclical and have
historically experienced periodic downturns, which have had a material
adverse effect on the acquisition of capital equipment and other products
used in the manufacturing process, including products offered by the
Company. These downturns have in the past and are expected in the future to
materially adversely affect the business and operating results of the
Company. The semiconductor device industry has recently experienced a
slowdown and the memory disk and silicon wafer industries are currently
experiencing a slowdown. These events have negatively impacted the Company's
results of operations.
Product or process development problems could harm the Company's
results of operations. The Company's products are complex, and from time to
time have defects or bugs that are difficult and costly to fix. This can
harm results of operations for the Company, in two ways:
- The Company incurs substantial costs to ensure the functionality and
reliability of products earlier in their life cycle. This can reduce
orders, increase manufacturing costs, adversely impact working capital
and increase service and warranty expenses.
- The Company requires significant lead-times between product introduction
and commercial shipment. As a result, the Company may have to write off
inventory and other assets related to products and could lose
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customers and revenue.
There can be no assurance that the Company will be successful in
preventing product and process development problems that could potentially
harm the Company's results of operations.
The Company depends on a small number of major customers.
Currently, and for the foreseeable future, the Company expects that it will
sell machines to a limited number of major customers. To date, the CMP
process has been used primarily to fabricate advanced semiconductors, which
accounts for only a portion of the overall semiconductor market. The loss of
a significant customer or a substantial reduction in orders by any
significant customer, including reductions due to customer departures from
recent buying patterns, market, economic or competitive conditions in the
semiconductor industry, could damage the Company's business.
Orders in backlog may not result in future revenue if customers
cancel or reschedule orders. The Company includes in backlog only those
customer orders for which it has accepted purchase orders. Expected revenue
may be lower if customers cancel or reschedule orders, which they can
generally do without penalty.
The Company's success depends on international sales, particularly
in Asia and Europe. International sales accounted for 67.9% of the
Company's total revenue for the first quarter of 2001, 69.6% for 2000, and
37.4% for 1999. The Company expects that international sales will continue
to account for a significant portion of total revenue in future periods.
International sales are subject to risks, including:
- foreign exchange issues
- political, economic and regulatory environment of the countries where
customers are located
- collectibility of accounts receivable
- inadequate intellectual property protection
- intense price competition
The Company derives a substantial portion of its revenues from
customers in Asian countries particularly Taiwan and Korea. Economic
developments in late 1997 and early 1998 resulted in decreased capital
investments by Asian customers. Recent economic developments indicate that
the economies of Taiwan, Korea and other Asian countries have recovered
somewhat from 1997 and 1998 levels. Any negative economic developments or
delays in the economic recovery of Asian countries could result in the
cancellation or delay of orders for the Company's products from Asian
customers, thus damaging the Company's business.
The Company may not realize the potential benefits of the
reorganization of the Far East Joint Venture. The reorganization of the Far
East Joint Venture makes the Company more dependent on the CMP business. If
this market fails to continue to develop, the Company will suffer.
Also, the success of the Company's CMP operations in Asia after
the reorganization depends upon its ability to retain key employees. None of
the key employees in Asia have long-term employment contracts. The Company
does not have any direct experience managing operations in Asia. Some
employees may decide to leave after the reorganization for this and other
reasons. This may negatively affect the Company's operations in Asia, which
represent a large portion of the Company's total revenue.
If the Company is unable to protect its intellectual property, its
business could suffer. The Company's intellectual property portfolio is very
important to its success. However, the Company may not be
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able to protect its technology because:
- pending and new patent applications may not be approved in a timely
manner or approved at all
- third parties may try to challenge or invalidate existing patents and new
patents
- policing unauthorized use of intellectual property is difficult and
expensive
- the laws of some foreign countries do not protect intellectual property
rights as much as U.S. laws
- competitors may independently develop similar technology or design around
intellectual property owned by the Company
The Company's growth depends on continued and increased acceptance
of CMP among semiconductor manufacturers. While CMP is used by a number of
advanced logic semiconductor manufacturers, CMP has been used to manufacture
advanced memory devices only in the past 3 years. Continued and increased
acceptance of CMP systems depends on many factors considered by potential
customers, including:
- cost of ownership
- throughput
- process flexibility
- performance
- reliability
- customer support
Failure to adequately meet potential customers' needs with respect
to one or more of these factors may result in decreased acceptance of CMP
and, therefore, the Company's CMP systems, which may in turn negatively
impact the Company's profitability.
Third parties may prevent the Company from selling products that
allegedly infringe on those third parties' intellectual property rights. The
Company cannot be certain that third parties will not in the future claim
that its products infringe their intellectual property rights. Third parties
may
- bring claims of patent, copyright or trademark infringement
- obtain patents or other intellectual property rights that limit the
Company's ability to do business or require the Company to license or
cross-license technology
- bring costly, time consuming lawsuits
Third parties hold many patents relating to CMP machines and
processes. In the event the Company loses any of its intellectual property
rights or otherwise determines that it needs to obtain licenses to third
party intellectual property, there is no assurance that the Company will be
able to obtain such licenses on reasonable terms, if at all. The Company
currently licenses the right to manufacture CMP machines employing an
orbital motion in its Avant Gaard 676, 776, 876 and Momentum (TM) from a
semiconductor manufacturer.
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The Company may be subject to risks associated with acquisitions
and dispositions. The Company continually evaluates strategic acquisitions
of other businesses and dispositions of portions of its business that it
determines are not complementary to its strategy. If the Company were to
consummate an acquisition, the Company would be subject to a number risks,
including the following:
- difficulty in assimilating the acquired operations and retaining acquired
personnel
- limits on the Company's ability to retain acquired distribution channels
and customers
- disruption of the Company's ongoing business
- limits on the Company's ability to successfully incorporate acquired
technology and rights into its service offerings
- maintenance of uniform standards, controls, procedures and policies
The Company is dependent on key management and technical
personnel. The Company's performance and ability to execute is substantially
dependent on the performance of the Company's executive officers and key
technical and engineering employees. The loss of the services of any of
these executive officers or key employees could damage the Company's
business.
The Company's future success also depends on its ability to
identify, hire, train and retain other highly qualified managerial and
technical personnel. Competition for such personnel is intense. If the
Company is not successful in identifying, hiring, training and retaining
such personnel, it could damage the Company's business.
The Company uses financial instruments that potentially subject it
to concentrations of credit risk. The Company enters into foreign exchange
contracts to hedge certain firm commitments denominated in foreign
currencies, principally Japanese Yen. The Company also invests its cash in
deposits in banks, money market funds, government and corporate debt
securities. The Company does not use derivative financial instruments in its
investment portfolio. The Company places its investments with high credit
quality issuers and by policy, limits the amount of credit exposure to any
one issuer. The Company mitigates default risk by investing in only the
safest and highest credit quality securities and by monitoring the credit
rating of investment issuers. The portfolio includes only marketable
securities with active secondary or resale markets to ensure portfolio
liquidity. To date, the Company has not experienced material losses on these
investments. However, there can be no assurance that the Company will not in
the future experience losses that could damage the Company's business.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
For financial market risks related to changes in interest rates and
foreign currency exchange rates, refer to Part II, Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in the Company's Annual Report on
Form 10-K for the year ended June 3, 2000.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None
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SPEEDFAM-IPEC, INC.
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.
SPEEDFAM-IPEC, INC.
Date: October 17, 2000 /s/ J. Michael Dodson
-------------------- ----------------------
J. Michael Dodson
Secretary and Chief Financial Officer
(Principal Financial Officer)
Date: October 17, 2000 /s/ G. Michael Latta
-------------------- ---------------------
G. Michael Latta
Corporate Controller
(Principal Accounting Officer)
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EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
27.1 Financial Data Schedule
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