UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 2, 2002 Commission File Number 000-30789
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ENTEGRIS, INC.
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(Exact name of registrant as specified in charter)
Minnesota 41-1941551
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(State or other jurisdiction of incorporation) (IRS Employer ID No.)
3500 Lyman Boulevard, Chaska, Minnesota 55318
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(Address of Principal Executive Offices)
Registrant's Telephone Number (952) 556-3131
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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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at March 31, 2002
- ------------------------------ -----------------------------
Common Stock, $0.01 Par Value 70,241,239
ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED MARCH 2, 2002
Description Page
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PART I
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Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 2, 2002
and August 25, 2001 3
Consolidated Statements of Operations for the Three Months
and Six Months Ended March 2, 2002 and February 24, 2001 4
Consolidated Statements of Cash Flows for the
Six Months Ended March 2, 2002 and February 24, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II Other Information
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Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
2
Item 1. Financial Statements
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ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
March 2, August 25,
2002 2001
-------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 66,663 $ 74,451
Short-term investments 39,757 36,628
Trade accounts receivable, net of allowance for doubtful accounts 29,343 36,303
Trade accounts receivable due from affiliates 2,655 7,171
Inventories 39,010 47,202
Deferred tax assets and refundable income taxes 10,192 10,424
Other current assets 6,607 7,858
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Total current assets 194,227 220,037
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Property, plant and equipment, net 100,098 109,131
Other assets
Investments 15,196 12,295
Intangible assets, net 53,055 51,766
Other 2,899 2,449
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Total assets $365,475 $395,678
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,798 $ 2,238
Short-term borrowings 7,953 8,813
Accounts payable 9,719 16,572
Accrued liabilities 21,658 33,630
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Total current liabilities 41,128 61,253
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Long-term debt, less current maturities 12,579 13,101
Deferred tax liabilities 5,095 3,950
Minority interest in subsidiaries 69 5,067
Commitments and contingencies -- --
Shareholders' equity
Common stock, $0.01 par value; 200,000,000 authorized; issued
and outstanding shares: 70,077,039 and 69,729,821, respectively 701 697
Additional paid-in capital 122,716 121,449
Retained earnings 180,854 188,156
Accumulated other comprehensive income 2,333 2,005
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Total shareholders' equity 306,604 312,307
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Total liabilities and shareholders' equity $365,475 $395,678
======== ========
See accompanying notes to consolidated financial statements.
3
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
--------------------------- --------------------------
March 2, February 24, March 2, February 24,
2002 2001 2002 2001
--------- ------------- --------- ------------
Sales to non-affiliates $ 45,513 $ 70,515 $ 86,015 $ 139,117
Sales to affiliates 5,189 35,197 10,539 69,234
--------- --------- --------- ---------
Net sales 50,702 105,712 96,554 208,351
Cost of sales 33,764 52,111 64,421 102,198
--------- --------- --------- ---------
Gross profit 16,938 53,601 32,133 106,153
Selling, general and administrative expenses 17,192 19,727 34,551 40,962
Nonrecurring charges -- 8,210 4,001 8,210
Engineering, research and development expenses 4,849 4,035 9,161 7,568
--------- --------- --------- ---------
Operating (loss) profit (5,103) 21,629 (15,580) 49,413
Interest income, net (365) (1,408) (816) (2,867)
Other (income) expense, net (1,450) 934 (1,739) 1,014
--------- --------- --------- ---------
(Loss) income before income taxes and other
items below (3,288) 22,103 (13,025) 51,266
Income tax (benefit) expense (1,249) 8,402 (4,949) 19,483
Equity in net income of affiliates -- (750) -- (1,488)
Minority interest in subsidiaries' net (loss) income (653) 667 (774) 1,375
--------- --------- --------- ---------
Net (loss) income $ (1,386) $ 13,784 $ (7,302) $ 31,896
========= ========= ========= =========
(Loss) earnings per common share:
Basic $ (0.02) $ 0.20 $ (0.10) $ 0.47
Diluted $ (0.02) $ 0.19 $ (0.10) $ 0.44
Weighted shares outstanding:
Basic 69,976 68,526 69,859 68,444
Diluted 69,976 72,554 69,859 72,696
See accompanying notes to consolidated financial statements.
4
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Six months ended
--------------------------
March 2, February 24,
2002 2001
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OPERATING ACTIVITIES
Net (loss) income $ (7,302) $ 31,896
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization 14,177 11,992
Asset impairment 2,300 3,400
Provision for doubtful accounts (318) 716
Provision for deferred income taxes 1,142 (2,694)
Equity in net income of affiliates -- (1,488)
Loss on sale of property and equipment 560 181
Minority interest in subsidiaries' net (loss) income (774) 1,375
Changes in operating assets and liabilities:
Trade accounts receivable 7,276 (8,077)
Trade accounts receivable due from affiliates 4,517 (3,520)
Inventories 8,192 (9,550)
Accounts payable and accrued liabilities (18,825) 5,375
Other current assets 1,250 (809)
Refundable income taxes and accrued income taxes 236 (1,705)
Other (1,937) (1,008)
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Net cash provided by operating activities 10,494 26,084
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INVESTING ACTIVITIES
Acquisition of property and equipment (7,637) (11,615)
Acquisition of businesses, net of cash acquired (6,663) --
Purchases of intangible assets (354) (38)
Proceeds from sales of property and equipment 292 119
Purchases of short-term investments (49,878) (16,053)
Maturities of short-term investments 46,749 --
Other 259 1,486
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Net cash used in investing activities (17,232) (26,101)
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FINANCING ACTIVITIES
Principal payments on short-term borrowings and long-term debt (7,445) (1,049)
Proceeds from issuance of debt 5,622 1,151
Issuance of common stock 1,271 1,424
Repurchase of common stock -- (722)
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Net cash (used in) provided by financing activities (552) 804
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Effect of exchange rate changes on cash and cash equivalents (498) (240)
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(Decrease ) increase in cash and cash equivalents (7,788) 547
Cash and cash equivalents at beginning of period 74,451 102,973
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Cash and cash equivalents at end of period $ 66,663 $ 103,520
========= =========
See accompanying notes to consolidated financial statements.
5
ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of March 2, 2002 and August 25, 2001, the results of operations for the
three months and six months ended March 2, 2002 and February 24, 2001 and
cash flows for the six months ended March 2, 2002 and February 24, 2001.
Certain prior year amounts have been reclassified to conform to the current
period presentation.
The financial statements and notes are presented as permitted by Form 10-Q
and do not contain certain information included in the Company's annual
consolidated financial statements and notes. The information included in
this Form 10-Q should be read in conjunction with Management's Discussion
and Analysis and financial statements and notes thereto included in the
Company's Form 10-K for the year ended August 25, 2001. The results of
operations for the three months and six months ended March 2, 2002 and
February 24, 2001 are not necessarily indicative of the results to be
expected for the full year.
The Company's fiscal year ends on the last Saturday of August. In fiscal
2002, the Company's interim quarters end on November 24, 2001, March 2,
2002 and June 1, 2002. Fiscal 2002's second quarter ended March 2, 2002
included fourteen weeks with fiscal 2002 containing 53 weeks.
2. Earnings per share
------------------
The following table presents a reconciliation of the denominators used in
the computation of basic and diluted earnings per share.
Three Months Ended Six Months Ended
-------------------------- --------------------------
March 2, February 24, March 2, February 24,
2002 2001 2002 2001
---------- ------------ ---------- ------------
Basic earnings per share-weighted
common shares outstanding 69,976,000 68,526,000 69,859,000 68,444,000
Weighted common shares assumed upon
exercise of stock options -- 4,028,000 -- 4,252,000
---------- ---------- ---------- ----------
Diluted earnings per share-weighted
common shares and common shares
equivalent outstanding 69,976,000 72,554,000 69,859,000 72,696,000
========== ========== ========== ==========
Since basic EPS for the three-month and six-month periods ended March 2,
2002 represents a loss per share of common stock, the effect of including
the incremental shares of common stock from assumed exercise of options in
EPS computation is anti-dilutive, and, accordingly, basic and diluted EPS
are the same.
6
3. Inventories
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Inventories consist of the following:
March 2, August 25,
2002 2001
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Raw materials $13,242 $15,167
Work-in process 1,615 1,451
Finished goods 23,563 29,971
Supplies 590 613
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Total inventories $39,010 $47,202
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4. Comprehensive Income (Loss)
---------------------------
For the three months and six months ended March 2, 2002 and February 24,
2001 net income, items of other comprehensive income (loss) and
comprehensive income (loss) are as follows:
Three months ended Six months ended
------------------------ -------------------------
March 2, February 24, March 2, February 24,
2002 2001 2002 2001
-------- ------------ -------- -----------
Net (loss) income $ (1,386) $ 13,784 $ (7,302) $ 31,896
Items of other comprehensive income (loss)
Foreign currency translation loss (1,085) (291) (1,461) (892)
Unrealized gain (loss) in marketable
securities 2,320 (86) 1,789 (429)
-------- -------- -------- --------
Comprehensive (loss) income $ (151) $ 13,407 $ (6,974) $ 30,575
======== ======== ======== ========
5. Recently Issued Accounting Pronouncements
-----------------------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be
used for all business combinations initiated after June 30, 2001. Under the
provisions of SFAS No.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 No. 142 as of August 26, 2001. As required by SFAS
142, the Company performed an assessment of whether there was an indication
that goodwill was impaired at the date of adoption. In connection
therewith, the Company determined that it consisted of a single reporting
unit and determined the Company's fair value and compared it to the
reporting unit's carrying amount. As of August 26, 2001, the Company's fair
value exceeded its carrying amount, and therefore there was no indication
that goodwill was impaired. Accordingly, the Company was not required to
perform the second step of the transitional impairment test.
In the second step, the Company would be required to compare the implied
fair value of goodwill, determined by allocating the reporting unit's fair
value to all of its assets and liabilities to its carrying amount, both of
which would be measured as of the date of adoption. The Company did not
record any transitional impairment loss.
7
Goodwill amortization expense was $0.2 million for the second quarter of
fiscal 2001 and $0.4 million for the first six months of fiscal 2001. The
Company estimates that goodwill amortization expense would have been
approximately $0.6 million in the second quarter of fiscal 2002 and $1.2
million for the first six months of fiscal 2002. The following table
presents a reconciliation of net (loss) income and (loss) earnings per
share adjusted for the exclusion of goodwill, net of income taxes (in
thousands, except per share figures):
Three months ended Six months ended
--------------------------------------- ---------------------------------------
March 2, February 24, February 26, March 2, February 24, February 26,
2002 2001 2000 2002 2001 2000
--------- ------------ ------------ --------- ------------ ------------
Net income (loss):
Reported net (loss) income $ (1,386) $ 13,784 $ 10,330 $ (7,302) $ 31,896 $ 22,384
Add: Goodwill amortization, net
of tax -- 162 162 -- 354 345
--------- ---------- ---------- --------- ---------- ----------
Adjusted net (loss) income $ (1,386) $ 13,946 $ 10,492 $ (7,302) $ 32,250 $ 22,729
========= ========== ========== ========= ========== ==========
Three months ended Six months ended
--------------------------------------- ---------------------------------------
March 2, February 24, February 26, March 2, February 24, February 26,
2002 2001 2000 2002 2001 2000
--------- ------------ ------------ --------- ------------ ------------
Basic (loss) earnings per share:
Reported basic (loss) earnings per share $ (0.02) $ 0.20 $ (0.60) $ (0.10) $ 0.47 $ (1.15)
Add: Goodwill amortization, net of tax -- -- -- -- -- --
--------- ---------- ---------- --------- ---------- ----------
Adjusted basic (loss) earnings per share $ (0.02) $ 0.20 $ (0.60) $ (0.10) $ 0.47 $ (1.15)
========= ========== ========== ========= ========== ==========
Three months ended Six months ended
--------------------------------------- ---------------------------------------
March 2, February 24, February 26, March 2, February 24, February 26,
2002 2001 2000 2002 2001 2000
--------- ------------ ------------ --------- ------------ ------------
Diluted (loss) earnings per share:
Reported diluted (loss) earnings per share $ (0.02) $ 0.19 $ (0.60) $ (0.10) $ 0.44 $ (1.15)
Add: Goodwill amortization, net of tax -- -- -- -- -- --
--------- ---------- ---------- --------- ---------- ----------
Adjusted diluted (loss) earnings per share $ (0.02) $ 0.19 $ (0.60) $ (0.10) $ 0.44 $ (1.15)
========= ========== ========== ========= ========== ==========
As of March 2, 2002, goodwill amounted to $21.9 million, which included
$1.8 million added during the second quarter of fiscal 2002 associated with
contingent consideration for an acquisition originally recorded in fiscal
2001. Other intangible assets, which include patents and other identifiable
intangible assets, net of amortization, of $31.2 million as of March 2,
2002, are being amortized over useful lives ranging from 3 to 17 years and
are as follows (in thousands):
As of March 2, 2002
-----------------------
Gross
carrying Accumulated
Amortized intangible assets: amount amortization
---------------------------- -------- ------------
Patents $14,647 $ 2,584
Unpatented technology 9,844 710
Employment and noncompete agreements 6,211 419
Other 4,768 553
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$35,470 $ 4,266
======= =======
Aggregate amortization expense for the first and second quarters of fiscal
2002 amounted to $1.0 million and $0.9 million, respectively. Estimated
amortization expense for the fiscal years 2002 to 2006 is $3.8 million,
$3.8 million, $3.7 million, $3.7 million and $3.6 million, respectively.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS No. 144 supersedes SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of the fundamental provisions of that Statement. SFAS
No. 144 becomes effective for fiscal years beginning after December 15,
2001. The Company is evaluating SFAS No. 144 to determine the impact on its
financial condition and results of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------- ----------------------------------------------------------------
Results of Operations
---------------------
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. At each balance sheet date, management evaluates its
estimates, including, but not limited to, those related to accounts receivable,
inventories, long-lived assets, warranty and sales return obligations, and
income taxes. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. The critical accounting policies that are most
important in fully understanding and evaluating the Company's financial
condition and results of operations are discussed below.
Allowance for Doubtful Accounts and Other Accounts Receivable-Related Valuation
Accounts The Company maintains an allowance for doubtful accounts as well as
reserves for sales returns and allowances, and warranty claims. Significant
management judgments and estimates must be made and used in connection with
establishing these valuation accounts. Material differences could result in the
amount and timing of the Company's results of operations for any period if we
made different judgments or utilized different estimates. In addition, actual
results could be different from the Company's current estimates, possibly
resulting in increased future charges to earnings.
The Company provides an allowance for doubtful accounts for all individual
receivables judged to be unlikely for collection. For all other accounts
receivable, the Company records an allowance for doubtful accounts based on a
combination of factors. Specifically, management analyzes the age of receivable
balances, historical bad debts write-off experience, customer concentrations,
general customer creditworthiness and current economic trends when determining
its allowance for doubtful accounts. At March 2, 2002, the Company's allowance
for doubtful accounts was $1.3 million.
A reserve for sales returns and allowances is established based on historical
trends and current trends in product returns. At March 2, 2002, the Company's
reserve for sales returns and allowances was $1.3 million.
The Company records a liability for estimated warranty claims. The amount of the
accrual is based on historical claims data by product group and other factors.
Claims could be materially different from actual results for a variety of
reasons, including a change in the Company's warranty policy in response to
industry trends, competition or other external forces, manufacturing changes
that could impact product quality, or as yet unrecognized defects in products
sold. As of March 2, 2002, the Company's accrual for estimated future warranty
costs was $1.3 million.
Inventory Valuation The Company uses certain estimates and judgments to properly
value inventory. In general, the Company's inventories are recorded at the lower
of standard manufacturing cost or market value. Each quarter, the Company
evaluates its ending inventories for obsolescence and excess quantities. This
evaluation includes analyses of inventory levels, historical loss trends,
expected product lives, sales levels by product and projections of future sales
demand. Inventories that are considered obsolete are written off. In addition,
reserves are established for inventory quantities in excess of forecasted
demand, generally twelve months or less. Inventory reserves were $6.5 million at
March 2, 2002.
The Company's inventories comprise materials and products subject to
technological obsolescence and which are sold in a highly competitive industry.
If future demand or market conditions are less favorable than current analyses,
additional inventory write-downs or reserves may be required and would be
reflected in cost of sales in the period the revision is made.
9
Impairment of Long-Lived Assets The Company routinely considers whether
indicators of impairment of its property and equipment assets, particularly its
molding equipment, are present. If such indicators are present, it is determined
whether the sum of the estimated undiscounted cash flows attributable to the
assets in question is less than their carrying value. If less, an impairment
loss is recognized based on the excess of the carrying amount of the assets over
their respective fair values. Fair value is determined by discounted estimated
future cash flows, appraisals or other methods deemed appropriate. If the assets
determined to be impaired are to be held and used, the Company recognizes an
impairment charge to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset's carrying value. The fair
value of the asset then becomes the asset's new carrying value, which we
depreciate over the remaining estimated useful life of the asset.
The Company's other long-lived assets are principally comprised of identifiable
intangible assets and related goodwill. The Company assesses the impairment of
these assets at least annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered
important which could trigger an impairment review, and potentially an
impairment charge, include the following:
o significant underperformance relative to historical or projected future
operating results;
o significant changes in the manner of use of the acquired assets or the
Company's overall business strategy;
o significant negative industry or economic trends; and
o significant decline in the Company's stock price for a sustained period
changing the Company's market capitalization relative to its net book
value.
Income Taxes In the preparation of the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
actual current tax exposures together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the Company's consolidated balance sheet.
The Company has significant amounts of deferred tax assets that are reviewed for
recoverability and valued accordingly. Management evaluates the realizability of
the deferred tax assets on a quarterly basis and assesses the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of
tax planning strategies. A valuation allowance is recorded to reduce deferred
tax assets when it is determined that the Company would not be able to realize
all or part of its deferred tax assets.
The Company carried no valuation allowance against its net deferred tax assets
at March 2, 2002. In the event it was determined that the Company would not be
able to realize all or part of the deferred tax assets in the future, an
adjustment to record a deferred tax asset valuation allowance would be charged
to income in the period such determination would be made.
10
Three Months and Six Months Ended March 2, 2002 Compared to Three Months and Six
Months Ended February 24, 2001
The following table compares quarterly results with year-ago results, as a
percentage of sales, for each caption.
Three Months Ended Six Months Ended
---------------------------------------------------
March 2, February 24, March 2, February 24,
2002 2001 2002 2001
---------------------------------------------------
Net sales 100.0 100.0 100.0 100.0
Cost of sales 66.6 49.3 66.7 49.1
---------------------------------------------------
Gross profit 33.4 50.7 33.3 50.9
Selling, general and administrative expenses 33.9 18.7 35.8 19.7
Nonrecurring charges - 7.8 4.1 3.9
Engineering, research and development
expenses 9.6 3.8 9.5 3.6
---------------------------------------------------
Operating (loss) profit (10.1) 20.5 (16.1) 23.7
Interest income, net (0.7) (1.3) (0.8) (1.4)
Other expense (income), net (2.9) 0.9 (1.8) 0.5
---------------------------------------------------
(Loss) income before income taxes and other
items below (6.5) 20.9 (13.5) 24.6
Income tax (benefit) expense (2.5) 7.9 (5.1) 9.4
Equity in net income of affiliated companies - (0.7) - (0.7)
Minority interest in subsidiaries' net (loss)
income (1.3) 0.6 (0.8) 0.7
---------------------------------------------------
Net (loss) income (2.7) 13.0 (7.6) 15.3
===================================================
Effective tax rate 38.0% 38.0% 38.0% 38.0%
Net sales Net sales decreased 52.0% to $50.7 million in the second quarter of
fiscal 2002, compared to $105.7 million in the second quarter of fiscal 2001.
The sharp decline reflected the severe downturn in the semiconductor industry,
which began in the second half of fiscal 2001. However, second quarter sales for
fiscal 2002 improved 11% from the $45.9 million recorded in the first quarter of
the fiscal year. Fiscal 2002's second quarter included fourteen weeks as fiscal
2002 contains 53 weeks. Ordinarily the extra week would account for about an 8%
increase in sales. However due to the relative slowdown experienced by the
industry, most of the Company's operations were essentially shut down for two
weeks over the holiday season, essentially mitigating the effect of the
additional week in the quarter.
Sales of unit driven products, associated with wafer starts and chemical
consumption, began to show signs of improvement. For example, sales for
containers, in which chemicals are moved from the chemical manufacturing
facilities to the fabs, increased by over 50 percent over first quarter levels.
Also during the second quarter, wafer shipping product sales increased by over
40 percent. There was also slight improvement in the sale of certain products
driven by customer capital spending for the first time in the last four
quarters.
Overall, second quarter sales of the Company's Microelectronics Group, which
accounted for about 79% of total sales, were down 44% from the comparable period
a year ago, but increased 6% from the first quarter. Fluid Handling sales in the
second quarter were down 70% from a year ago, but improved by 26% from the first
quarter, making up 21% of total sales during the second quarter.
From a geographical perspective, sales decreased from the first quarter to the
second quarter fiscal 2002 only in Japan, reflecting difficult economic
conditions in Japan. We saw the largest increases in sales in Europe and Asia
Pacific. Overall, second quarter fiscal 2002 sales were 46% to North America,
20% to Asia Pacific, 19% to Europe and 15% to Japan.
11
Net sales for the first six months of fiscal 2002 were $96.6 million, down 53.7%
from $208.4 million in the comparable year-ago period. Revenue declines were
recorded in all geographic regions. Fluid handling product and microelectronics
sales declined 45% and 73%, respectively, compared to first six months of fiscal
2001.
Based on current information from incoming order rates, management expects that
sales for the third quarter of fiscal 2002 will improve - by about 10% - from
the sales levels experienced in the second quarter.
Gross profit Gross profit in the second quarter of fiscal 2002 decreased 68.5%
to $16.9 million, compared to $53.6 million reported in the second quarter of
fiscal 2001. For the first six months of fiscal 2002, gross profit was $32.1
million, down 69.8% from $106.2 million recorded in the first six months of
fiscal 2001. As a percentage of net sales, gross margins for the second quarter
and first six months of the fiscal year were 33.4% and 33.3%, respectively,
compared to 50.7% and 50.9%, respectively, in the comparable periods a year ago.
Gross margin and gross profit declines were reported by both domestic and
international operations. The drops in fiscal 2002 figures were primarily caused
by the lower sales levels noted above, which resulted in lower production
levels. In addition, we recorded higher than normal inventory reserves
associated with the Company's Japanese operations. Partly offsetting the
declines was the reversal in the first quarter of fiscal 2002 of profit-sharing
accruals of $0.4 million (of a Company total of $0.8 million, the remainder
being included in selling, general and administrative, and engineering, research
and development expenses) originally recorded in calendar 2001 while the Company
generated net earnings. The first half of fiscal 2001 also included asset
impairment charges of $3.4 million mainly for asset write-offs of molds that
were determined to have no future use.
As discussed above, management expects sales levels to improve slightly in the
third quarter. The corresponding increase in factory utilization is expected to
result in improved gross profits with an expected gross margin of approximately
37%.
Selling, general and administrative expenses Selling, general and administrative
(SG&A) expenses decreased 13% to $17.2 million in the second quarter of fiscal
2002 from $19.7 in the second quarter of fiscal 2001. SG&A expenses for the
second quarter were down nominally from the $17.4 million expended in the first
quarter of fiscal 2002. On a year-to-year basis, SG&A expenses shrank 16% to
$34.6 million compared to $41.0 million a year earlier. The declines are
primarily due to significantly lower bonus and charitable contribution accruals,
which are based on company profitability. On a year-to-date basis, SG&A costs,
as a percent of net sales, increased to 35.8% from 19.7% a year ago.
Nonrecurring charges The Company recorded no nonrecurring charges in the second
quarter of fiscal 2002. During the second quarter of fiscal 2001, the Company
recorded a one-time charge of $8.2 million related to the early termination of a
distribution agreement for the Microelectronics Group with its affiliate Metron
Technology N.V. (Metron). In the first quarter of 2002, the Company's results
included a nonrecurring charge of $4.0 million in connection with the closures
of the Company's Chanhassen, MN and one of its Chaska, MN plants. The charge
included $1.5 million in termination costs related to a workforce reduction of
230 employees and $2.3 million for estimated losses for asset impairment.
Engineering, research and development expenses Engineering, research and
development (ER&D) expenses increased 20.2% to $4.8 million, or 9.6% of net
sales, in the second quarter of fiscal 2002 as compared to $4.0 million, or 3.8%
of net sales, for the same period in fiscal 2001. ER&D expenses increased 21.0%
to $9.2 million, or 9.5% of net sales, in the first six months of fiscal 2002 as
compared to $7.6 million, or 3.6% of net sales, a year-ago period, reflecting
both higher ER&D expenditures and lower net sales as the Company continued to
focus on supporting current product lines, developing new manufacturing
technologies and developing next generation products.
12
Interest income, net Net interest income was $0.4 million in the second quarter
of fiscal 2002 compared to $1.4 million in the year-ago period. Net interest
income was $0.8 million in the first half of fiscal 2002 compared to $2.9
million for the same period in fiscal 2001. The change reflects the
significantly lower rates of interest on marketable securities and a shift in
the mix of the Company's investments towards tax-exempt securities.
Other (income) expense, net Other income was $1.5 million in the second quarter
of fiscal 2002 as compared to other expense of $0.9 million a year ago. Other
income was $1.7 million in the first half of fiscal 2002 compared to other
expense of $1.0 million in the first half of fiscal 2001. Other income in the
second quarter of fiscal 2002 consisted primarily of the foreign currency gains,
with about $0.7 million associated with the realization of translation gains
from our liquidated Korean entity.
Income tax (benefit) expense The Company recorded an income tax benefit of $1.2
million for the second quarter of fiscal 2002 compared to income tax expense of
$8.4 million in the second quarter a year ago. For the first half of fiscal
2002, the Company booked an income tax benefit of $4.9 million compared to
income tax expense of $19.5 million in the first six months of fiscal 2001. The
variances reflected the differences in the Company's pre-tax operating results.
The effective tax rate was 38% in the first half of both fiscal 2002 and fiscal
2001.
Equity in net income of affiliates No equity in the net income of affiliates was
recorded in the second quarter of fiscal 2002 compared to $0.8 million in the
second quarter a year earlier, with no equity in the net income of affiliates
being recorded in the first half of fiscal 2002 compared to $1.5 million for the
same period a year ago. This reflects the change in accounting for the Company's
investment in Metron, which was recorded under the equity method of accounting
through the second quarter of fiscal 2001 at which time the Company began
accounting for its remaining investment as an available-for-sale security, as
our percentage ownership was reduced signifcantly.
Minority interest For the six months ended March 2, 2002, the minority interest
in subsidiaries' net loss was $1.4 million, reflecting the declining financial
performance of the Company's former 51%-owned Japanese subsidiaries (now
100%-owned), particularly in the second quarter of fiscal 2002, due to lower
sales and the inventory write-down noted above. This compares to minority
interest in subsidiaries' net income of $0.8 million a year ago.
Net (loss) income The Company recorded a net loss of $1.4 million, or $0.02 per
diluted share, in the second quarter of fiscal 2002, compared to net income of
$13.8 million, or $0.19 per diluted share, in the year-ago period. For the first
six months of fiscal 2002, Entegris recorded a net loss of $7.3 million, or
$0.10 per diluted share, compared to net income of $31.9 million, or $0.44 per
diluted share, in the comparable period a year earlier.
Liquidity and Capital Resources
Operating activities Cash flow provided by operating activities totaled $10.5
million in the first half of fiscal 2002. Noncash charges, such as depreciation
and amortization of $14.2 million, as well as decreases in inventory of $8.2
million and accounts receivable of $11.8 million were partly offset by the
Company's net loss and a $18.8 reduction in accounts payable and accruals.
Working capital at March 2, 2002 stood at $153.1 million, including $106.4
million in cash, cash equivalents and short-term investments.
Investing activities Cash flow used in investing activities totaled $17.2
million in the first half of fiscal 2002. Acquisition of property and equipment
totaled $7.6 million, primarily related to a facility expansion in California,
site of the Company's cleaning service business, as well as expenditures for
manufacturing equipment and information systems. The Company expects capital
expenditures for fiscal 2002 to total approximately $20 to $25 million. The
company had purchases of short-term investments, net of maturities, of $3.1
million during the first half of fiscal 2002. Late in the second quarter of
fiscal 2002, the Company purchased the 49% minority interests held in its
Fluoroware Valqua Japan K.K. and Nippon Fluoroware K.K subsidiaries for $4.9
million. The excess of purchase price over net assets acquired was approximately
$1.1 million.
13
Financing activities Cash used by financing activities totaled $0.6 million
during the first half of fiscal 2002. The company made scheduled payments $7.4
million on borrowings, while proceeds from borrowings were $5.6 million. The
Company received $1.3 million in connection with common shares issued under the
Company's stock option and stock purchase plans.
As of March 2, 2002, our sources of available funds comprised $106.4 million in
cash, cash equivalents, short-term investments plus various credit facilities.
We have unsecured revolving commitments with two commercial banks with aggregate
borrowing capacity of $20 million, with no borrowings outstanding at March 2,
2002. We also have lines of credit, equivalent to an aggregate of approximately
$9 million with six international banks, which provide for borrowings of the
European Euro, Malaysian ringgits and Japanese yen for our overseas
subsidiaries. Borrowings outstanding on these lines of credit were $8.0 million
at March 2, 2002.
At March 2, 2002, the Company's shareholders' equity stood at $306.6 million.
Book value per share was $4.38, down from $4.48 per share at the end of fiscal
2001. The six months' net loss accounted for the decrease.
The Company believes that its cash and cash equivalents, cash flow from
operations and available credit facilities will be sufficient to meet its
working capital and investment requirements for the next twelve months. However,
future growth, including potential acquisitions, may require additional funding,
and from time to time the Company may need to raise capital through additional
equity or debt financing.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under the provisions of
SFAS No.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 No. 142 as of August 26, 2001. As required by SFAS 142,
the Company performed an assessment of whether there was an indication that
goodwill was impaired at the date of adoption. In connection therewith, the
Company determined that it consisted of a single reporting unit and determined
the Company's fair value and compared it to the reporting unit's carrying
amount. As of August 26, 2001, the Company's fair value exceeded its carrying
amount, and therefore there was no indication that goodwill was impaired.
Accordingly, the Company was not required to perform the second step of the
transitional impairment test.
In the second step, the Company would be required to compare the implied fair
value of goodwill, determined by allocating the reporting unit's fair value to
all of its assets and liabilities to its carrying amount, both of which would be
measured as of the date of adoption. The Company did not record any transitional
impairment loss.
Goodwill amortization expense was $0.2 million for the second quarter of fiscal
2001 and $0.3 million fiscal year-to-date 2001. The Company estimates that
goodwill amortization expense would have been approximately $0.6 million in the
second quarter of fiscal 2002 and $1.2 million for fiscal year-to-date 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No.121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that
14
Statement. SFAS No. 144 becomes effective for fiscal years beginning after
December 15, 2001. The Company is evaluating SFAS No. 144 to determine the
impact on its financial condition and results of operations.
Cautionary Statements This report contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"
"should" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forecasts and projections in this document are "forward-looking
statements," and are based on management's current expectations of the Company's
near-term results, based on current information available pertaining to the
Company, including the risk factors identified in the Company's Annual Report on
Form 10-K for the fiscal year ended August 25, 2001. Among these risks and
uncertainties are general economic conditions, the cyclical nature of the
semiconductor industry, the risks associated with the acceptance of new products
and services and the successful integration of acquisitions. Other factors could
also cause the Company's results to differ materially from those contained in
its forward-looking statements.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
Entegris's principal market risks are sensitivities to interest rates and
foreign currency exchange rates. The Company's current exposure to interest rate
fluctuations is not significant. Most of its outstanding debt at March 2, 2002
carried fixed rates of interest. All of the Company's cash equivalents and
short-term investments are debt instruments with remaining maturities of 12
months or less.
The Company uses derivative financial instruments to manage foreign currency
exchange rate risk associated with the sale of products from the United States
when such sales are denominated in currencies other than the U.S. dollar. The
cash flows and earnings of foreign-based operations are also subject to
fluctuations in foreign exchange rates. A hypothetical 10% change in the foreign
currency exchange rates would potentially increase or decrease net income by
approximately $1 million.
Our investment in Metron is accounted for as an "available-for-sale security"
under the provisions of Statement of Financial Accounting Standards (SFAS) No.
115. The fair value of Metron is subject to stock market fluctuations. Based on
the closing stock price of Metron at March 2, 2002, the fair value of our
investment in Metron was approximately $14.3 million.
15
PART II
OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
The Entegris, Inc. Annual Meeting of Shareholders was held on January 22, 2002.
There were 69,822,615 outstanding shares of common stock on the record date for
the Annual Meeting. 64,062,053, or 91.7%, of the outstanding shares were
represented in person or by proxy at the meeting. The three candidates for
election as Class II directors listed in the proxy statement were elected to
serve three-year terms, expiring at the 2005 Annual Meeting of Shareholders. The
results of the vote of shareholders are shown below.
Number of Shares
------------------------
Withheld/
In Favor Against
---------- ---------
Election of Class II Directors:
Mark A. Bongard 63,012,183 1,049,870
Delmer M. Jensen 63,254,265 807,788
Daniel R. Quernemoen 63,305,066 756,987
ITEM 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
(a) Exhibits:
None
(b) Reports on Form 8-K
16
CONFORMED COPY
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.
ENTEGRIS, INC.
Date: April 16, 2002 /s/ James E. Dauwalter
James E. Dauwalter
President and Chief Executive Officer
Date: April 16, 2002 /s/ John D. Villas
John D. Villas
Executive Vice President and
Chief Financial Officer
17