FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
QUARTERLY REPORT
For the quarterly period ended September 30, 2004
INFICON Holding AG
INFICON Holding Inc.
-----------------------------------------------
(Translation of Registrant's Name Into English)
INFICON Inc.
Two Technology Place
East Syracuse, New York 13057
----------------------------------------
(Address of Principal Executive Offices)
(Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F.)
Form 20-F |X| Form 40-F |_|
(Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of
1934.)
Yes |_| No |X|
(If "Yes" is marked, indicate below the file number assigned to the registrant
in connection with Rule 12g3-2(b): 82- )
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Table of Contents
INFICON Holding AG
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Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003.....3
Consolidated Statements of Income for the Three and Nine-Month Periods
Ended September 30, 2004 and September 30, 2003................................4
Consolidated Statements of Cash Flows for the Nine-Month Periods
Ended September 30, 2004 and September 30, 2003................................6
Condensed notes to consolidated financial statements...........................7
Operating and Financial Review and Prospects..................................19
Quantitative and Qualitative Disclosure of Market Risk........................27
Signature.....................................................................28
Statements Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.......................................................................29
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INFICON Holding AG
Consolidated Balance Sheets
(Unaudited)
(U.S. Dollars in thousands, except per share amounts)
September 30, December 31,
2004 2003
------------------------------
Assets
Current assets:
Cash and cash equivalents $ 52,066 $ 37,074
Trade accounts receivable, net 21,730 22,197
Accounts receivable - affiliates 466 94
Inventories, net 21,124 19,395
Deferred tax assets, net 2,185 3,161
Other current assets 3,828 2,950
--------- ---------
Total current assets 101,399 84,871
Property, plant and equipment, net 21,715 22,398
Intangibles, net 1,082 1,526
Deferred tax assets, net 36,979 39,293
Other assets 1,965 2,586
--------- ---------
Total non-current assets 61,741 65,803
Total assets $ 163,140 $ 150,674
========= =========
Liabilities and stockholders' equity
Current liabilities:
Trade accounts payable $ 7,477 $ 5,918
Accounts payable - affiliates 191 193
Accrued liabilities 14,591 12,911
Income taxes payable 1,043 962
Deferred tax liabilities, net 897 545
--------- ---------
Total current liabilities 24,199 20,529
Deferred tax liabilities, net 494 479
Other liabilities 5,262 3,907
--------- ---------
Total non-current liabilities 5,756 4,386
Total liabilities 29,955 24,915
Stockholders' equity:
Common stock (2,315,875 shares 2004 and 2,315,000
shares 2003 issued par value CHF 10 (U.S. $5.63) 13,040 13,033
Additional paid-in capital 94,051 94,024
Notes receivable from officers (383) (383)
Retained earnings 13,607 5,941
Accumulated other comprehensive income 12,870 13,144
--------- ---------
Total stockholders' equity 133,185 125,759
--------- ---------
Total liabilities and stockholders' equity $ 163,140 $ 150,674
========= =========
See condensed notes to consolidated financial statements.
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INFICON Holding AG
Consolidated Statements of Income
(Unaudited)
(U.S. Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-----------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------
Net sales $ 43,705 $ 37,891 $ 140,843 $ 113,025
Cost of sales 23,840 20,878 74,759 62,896
-----------------------------------------------------
Gross profit 19,865 17,013 66,084 50,129
Research and development 4,733 4,217 14,754 12,968
Selling, general and administrative 13,001 11,078 39,050 33,834
-----------------------------------------------------
Operating income from continuing operations 2,131 1,718 12,280 3,327
Interest (income), net (29) (22) (31) (184)
Other expense (income), net 62 (48) (1,066) (609)
-----------------------------------------------------
Income from continuing operations before income taxes 2,098 1,788 13,377 4,120
Provision for income taxes 534 799 3,520 1,164
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Income from continuing operations 1,564 989 9,857 2,956
Discontinued Operations (Note 7):
(Loss) from operations of discontinued Patterning
Solutions and Ultra Clean Operations (net of income tax
(benefit) of $(267) in Q3 2004 and $(1,388) in Q3 2003 and
$(1,104) YTD 2004 and $(2,543) in YTD 2003) (116) (7,002) (1,295) (10,486)
(Loss) on disposal of discontinued Patterning Solutions and
Ultra Clean Operations (net of income tax provision (benefit)
of $1,329 in Q3 2004 and $(392) in Q3 2003 and $1,379 YTD 2004
and $(392) in YTD 2003) (1,382) (2,623) (896) (2,623)
-----------------------------------------------------
(Loss) from discontinued operations (1,498) (9,625) (2,191) (13,109)
-----------------------------------------------------
Net income (loss) $ 66 $ (8,636) $ 7,666 $ (10,153)
=====================================================
Earnings (loss) per share:
Diluted:
Continuing operations $ 0.67 $ 0.43 $ 4.22 $ 1.28
Discontinued operations (0.64) (4.16) (0.94) (5.66)
-----------------------------------------------------
Total $ 0.03 $ (3.73) $ 3.29* $ (4.39)*
=====================================================
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Basic:
Continuing operations $ 0.68 $ 0.43 $ 4.26 $ 1.28
Discontinued operations (0.65) (4.16) (0.95) (5.66)
-----------------------------------------------------
Total $ 0.03 $ (3.73) $ 3.31 $ (4.39)*
=====================================================
* Figures do not total due to rounding
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding
Diluted shares 2,330,315 2,315,000 2,333,144 2,315,000
Basic shares 2,315,850 2,315,000 2,315,514 2,315,000
See condensed notes to consolidated financial statements.
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INFICON Holding AG
Consolidated Statements of Cash Flows
(Unaudited)
(U.S. Dollars in thousands)
Nine Months Ended
September 30,
2004 2003
----------------------
Cash flows from operating activities:
Net income (loss) $ 7,666 $(10,153)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,335 3,503
Gain on receipt and sale of marketable securities (1,038) --
Impairment of long-lived assets 341 7,370
Deferred taxes 3,575 (1,076)
Changes in operating assets and liabilities:
Trade accounts receivable 46 (2,293)
Inventories (1,783) 34
Other assets (125) 588
Accounts payable 1,576 (46)
Accrued liabilities 1,723 42
Income taxes payable 83 (1,943)
Other liabilities 1,356 1,275
----------------------
Net cash provided by (used in) operating activities 16,755 (2,699)
Cash flows from investing activities:
Purchases of property, plant and equipment (2,713) (1,747)
Purchase of Sentex Systems, Inc. -- (1,500)
Proceeds from sale of marketable securities 1,038 --
----------------------
Net cash (used in) investing activities (1,675) (3,247)
Cash flows from financing activities:
Proceeds from exercise of stock options 34 --
Payments on notes receivable from officers -- 208
----------------------
Net cash provided by financing activities 34 208
----------------------
Effect of exchange rate changes on cash and cash equivalents (122) 1,603
----------------------
Increase (Decrease) in cash and cash equivalents 14,992 (4,135)
Cash and cash equivalents at beginning of period 37,074 37,846
----------------------
Cash and cash equivalents at end of period $ 52,066 $ 33,711
======================
See condensed notes to consolidated financial statements.
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INFICON Holding AG
Condensed Notes to Consolidated Financial Statements
(unaudited)
Note 1--Description of Business
INFICON Holding AG (INFICON or the "Company") is a leading developer,
manufacturer and supplier of innovative vacuum instrumentation, critical sensor
technologies, and process control software for the semiconductor and other
industries. These analysis, measurement and control products are vital to
original equipment manufacturers (OEMs) and end-users in the complex
manufacturing of semiconductors, flat panel displays, magnetic and optical
storage media, and precision optics. The Company also provides essential
instrumentation for gas leak detection and toxic chemical analysis to the air
conditioning/refrigeration, emergency response, and industrial hygiene markets.
The Company's products include process knowledge and control instruments and
software, leak detectors, vacuum measurement and component products and
field-portable gas chromatograph/mass spectrometer instruments (instrumentation
for environmental health and safety). Headquartered in Syracuse, New York,
INFICON has manufacturing facilities in the United States and Europe and
operations in the United States, Liechtenstein, Switzerland, Germany, Finland,
Japan, United Kingdom, France, Korea, Singapore, Taiwan, China, and Hong Kong.
INFICON is subject to risks common to companies in the semiconductor industry
including, but not limited to, the highly cyclical nature of the semiconductor
industry leading to recurring periods of oversupply, development of
technological innovations by INFICON or its competitors, dependence on key
personnel and the protection of proprietary technology.
Note 2--Basis of Presentation
The accompanying interim financial statements as of September 30, 2004,
and for the three and nine months ended September 30, 2004 and 2003, have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements. While the quarterly financial information is unaudited,
the financial statements included in this report reflect all adjustments
(consisting of normal recurring accruals) the Company considers necessary for a
fair presentation of the results of operations for the interim periods covered
and the financial condition of the Company at the date of the interim balance
sheet. Operating results for the three and nine months ended September 30, 2004
are not necessarily indicative of the results that may be expected for the year
ended December 31, 2004.
The balance sheet as of December 31, 2003 has been derived from the
audited financial statements at that date but does not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The financial
statements should be read in conjunction with the consolidated financial
statements and footnotes thereto included in the Company's annual report on Form
20-F for the year ended December 31, 2003.
Note 3--Reclassification
Certain reclassifications have been made to the prior years' financial
statements to conform to the 2004 presentation.
Note 4--Critical Accounting Policies
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. On an on-going basis, management evaluates its estimates and
judgments, including, but not limited to, those related to revenue recognition,
pension actuarial assumptions and methods, reserves for obsolescence and excess
inventory, bad debt, warranty, goodwill and intangibles, and valuation
allowances for deferred tax assets. Management bases its estimates and judgments
on historical experience and on various other factors believed to be reasonable
under the circumstances that form the basis for making judgments about the
carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions. The following summarizes specific accounting
policies:
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Revenue Recognition - Revenue is recognized upon the transfer of title
that is generally upon shipment. When a customer's acceptance is required,
revenue is not recognized until the customer's acceptance is received. The
Company accrues for anticipated returns and warranty costs upon shipment.
Goodwill and Intangible Assets - The Company reviews goodwill and
intangible assets for impairment whenever events or changes in
circumstances indicate the carrying amount of these assets may not be
recoverable, and also reviews goodwill annually. Under the provisions of
SFAS 142, goodwill and intangible assets deemed to have indefinite lives
are no longer subject to amortization. All other identifiable intangibles
are amortized over their estimated useful life. Intangible assets, such as
purchased technology, are generally recorded in connection with the
acquisition of a business. The value assigned to intangible assets is
determined by or with assistance of an independent valuation firm based on
estimates and judgment regarding expectations for the success and life
cycle of products and technology acquired. If actual results differ
significantly from the estimates, or other indications are present, the
Company may be required to record an impairment charge to write down the
asset to its realizable value. In addition, SFAS No. 142 requires that
goodwill be tested annually using a two-step process. The first step is to
identify any potential impairment by comparing the carrying value of the
reporting unit to its fair value. If a potential impairment is identified,
the second step is to compare the implied fair value of goodwill with its
carrying amount to measure the impairment loss. A severe decline in fair
value could result in an impairment charge to goodwill, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company performs its impairment analysis under
SFAS 142 annually during the third quarter. As of September 30, 2004, the
Company has no goodwill asset remaining.
Bad Debts - The allowance for doubtful accounts is for estimated losses
resulting from a customer's inability to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Warranties - The accrual for the estimated cost of product warranties is
provided for at the time revenue is recognized. While we engage in
extensive product quality programs and processes, including actively
monitoring and evaluating the quality of our component suppliers, our
warranty obligation is affected by product failure rates, material usage,
and service delivery costs incurred in correcting a product failure.
Should actual product failure rates, material usage or service delivery
costs differ from our estimates, revisions to the estimated warranty
liability may be required.
Inventory - Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method. The reserve for estimated
obsolescence or unmarketable inventory is equal to the difference between
the cost of inventory and the estimated fair value based upon assumptions
about future demand and market conditions. If actual future demand or
market conditions are less favorable than those projected by management,
additional inventory write-downs may be required.
Pension Benefits - The pension benefit costs and credits are developed
from actuarial valuations. Inherent in these valuations are key
assumptions including discount rates and expected return on plan assets.
The Company considers current market conditions, including changes in
interest rates, in selecting these assumptions. Changes in the related
pension benefit costs or credits may occur in the future in addition to
changes resulting from fluctuations in our related headcount due to
changes in the assumptions.
Deferred Tax Assets - As of September 30, 2004, the Company had net
deferred tax assets of U.S.$37.8 million reflecting tax credit and loss
carry forwards, basis differences primarily from intangible assets, and
other deductions available to reduce taxable income in future years. A
majority of the net deferred tax assets balance of U.S.$37.8 million
resides in the United States. In assessing the realization of the
Company's deferred tax assets, we consider whether it is more likely than
not the deferred tax assets will be realized. The ultimate realization of
our deferred income tax assets depends upon our ability to generate future
taxable income, including the implementation of tax planning strategies,
during the periods in which our basis differences and other deductions
become deductible and prior to the expiration of our net operating loss
carry forwards. On a quarterly basis, the Company evaluates the
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recoverability of its deferred tax assets based upon historical results
and forecasted results over future years, considering tax planning
strategies, and matches this forecast against the basis differences,
deductions available in future years and the limitations allowed for net
operating loss carry forwards to ensure there is adequate support for the
realization of the deferred tax assets. While we have considered future
operating results, in conjunction with ongoing prudent and feasible tax
planning strategies in assessing the need for the valuation allowance, in
the event we were to determine that we would not be able to realize all or
part of our net deferred tax assets in the future, an adjustment to the
deferred tax assets would be charged as a reduction to income in the
period such determination was made. Likewise, should we determine that we
would be able to realize future deferred tax assets in excess of its net
recorded amount, an adjustment to the deferred tax assets would increase
income in the period such determination was made.
Although realization is not assured, the Company believes it is more
likely than not the net deferred tax asset balance as of September 30,
2004 will be realized. The Company supports this conclusion based upon
recent results, projections of future operating results and tax planning
strategies that support the realization of the deferred tax assets, and
other positive and negative evidence. Differences between forecasted and
actual future operating results could adversely impact our ability to
realize our deferred income tax assets; however, differences between
forecasted and actual future operating results are continually monitored
to ensure the Company has adequate support for the realization of the
deferred tax assets. The Company's analysis supporting the realization of
the deferred tax assets places careful consideration on the net operating
loss carry forward periods.
In recent years, the Company's U.S. operations have experienced losses
before income taxes for financial and tax reporting purposes; however, we
believe recent results, improvements in the order backlog, industry
projections as well as changes in our operations and tax planning that
occurred during the fourth quarter of 2003 and first three quarters of
2004, in addition to other improvements that will take place in future
periods, are sufficient to generate the minimum amounts of taxable income
to utilize our net operating loss carry forwards prior to their
expiration. The changes in the Company's operations include:
o Various cost saving and restructuring initiatives to reduce
manufacturing and overhead costs;
o Capitalization of the intercompany debt arrangement between INFICON
Inc. (US location) and INFICON GmbH (Switzerland);
o Review of R&D allocations between related parties to identify and
implement tax planning strategies to maximize the Company's U.S. tax
benefit;
o Other changes in an effort to increase the efficiency and
effectiveness of our business operations.
During the three months ended September 30, 2004, the Company wrote-down a
portion of its deferred tax asset relative to specific loss carryforwards
that were recorded as part of the acquisition of the patterning solutions
software business of U.S.$1.4 million, due to reduced expectations on the
proceeds from sale.
The Company believes it is more likely than not it will be able to
generate sufficient taxable income in the United States to absorb its net
operating loss carry forwards, which begin to expire in 2021, although
there can be no assurances. If the Company's expectations for future
operating results are not met due to general economic conditions or other
factors, the Company may need to establish additional valuation allowances
for all or a portion of its deferred tax assets primarily relating to its
U.S. operations. This could have a significant effect on our future
results of operations and financial position.
Impairment of Long-Lived Assets - SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," was early adopted by the
Company on January 1, 2002, and supersedes SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of," while retaining many of the requirements of SFAS No. 121. In
accordance with SFAS No. 144, long-lived assets to be held and used by an
entity are to be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be
recoverable. SFAS 144 defines a two-step testing process, the timing of
the steps and the general valuation methods to be used in the testing
process. The first step is a recoverability test, which compares the
carrying amount of a long-lived asset (asset group) to the sum of the
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undiscounted cash flows expected to result from the use and eventual
disposition of the asset (asset group). If the carrying amount is greater
than the sum of the undiscounted cash flows then the second step is
required. The second step is a fair value test in which the carrying value
of the asset (asset group) is compared to the fair value of the asset
(asset group). In estimating the fair value, the present value technique
is used. An impairment loss shall be measured as the amount by which the
carrying amount of a long-lived asset (asset group) exceeds its fair
value. During the first quarter of 2004, the Company recorded an
impairment on the remaining balance of identifiable intangibles associated
with its acquisition of New Vision Systems. The pre-tax charge for the
impairment charge is included in the discontinued operations net, on the
consolidated statements of income, and totaled $341 and $7,370 for the
nine months ended September 30, 2004 and 2003, respectively. The
impairment charge of U.S.$0.3 million, for the nine months ended September
30, 2004, was recorded during the three months ended March 31, 2004 and
was allocated to intangibles. An additional U.S.$45 was recorded as an
impairment for fixed assets relating to the patterning solutions business
product line for the three months ended September 30, 2004.
Disposal of Long-Lived Assets/Discontinued Operations - SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was
early adopted by the Company on January 1, 2002 and supersedes a portion
of Accounting Principle Board (APB) No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a
Business," relating to reporting the effects of disposal of a segment of a
business, while retaining many of the requirements of this statement.
Under SFAS No. 144, the definition of what constitutes a discontinued
operation is broader, discontinued operations are no longer measured on a
net realizable value basis, and future operating losses are no longer
recognized before they occur (see Note 7).
Stock Options
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and related interpretations
in accounting for its employee stock options. Under APB 25, because the exercise
price of the Company's employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recognized
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
(USD. in thousands, except per share amounts)
Three months ended Nine months ended
September 30 September 30
-----------------------------------------------------------
2004 2003 2004 2003
-----------------------------------------------------------
Net income (loss), as reported $ 66 $ (8,636) $ 7,666 $ (10,153)
Income from continuing operations 1,564 989 9,857 2,956
Less: Stock based compensation
expense, net of tax (293) (1,592) (831) (4,685)
-----------------------------------------------------------
Proforma income (loss) from
continuing operations 1,271 (603) 9,026 (1,729)
(Loss) from discontinued
operations (1,498) (9,625) (2,191) (13,109)
-----------------------------------------------------------
Pro forma net income (loss) $ (227) $ (10,228) $ 6,835 $ (14,838)
===========================================================
Earnings (loss) per share Diluted:
Continuing operations - as reported $ 0.67 $ 0.43 $ 4.22 $ 1.28
Discontinued operations - as reported (0.64) (4.16) (0.94) (5.66)
-----------------------------------------------------------
Total - as reported $ 0.03 $ (3.73) $ 3.29* $ (4.39)*
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Continuing operations - pro forma $ 0.55 $ (0.26) $ 3.87 $ (0.75)
Discontinued operations - pro forma (0.64) (4.16) (0.94) (5.66)
-----------------------------------------------------------
Total - proforma $ (0.09) $ (4.42) $ 2.93 $ (6.41)
Earnings (loss) per share Basic:
Continuing operations - as reported $ 0.68 $ 0.43 $ 4.26 $ 1.28
Discontinued operations - as reported (0.65) (4.16) (0.95) (5.66)
-----------------------------------------------------------
Total - as reported $ 0.03 $ (3.73) $ 3.31 $ (4.39)*
Continuing operations - pro forma $ 0.55 $ (0.26) $ 3.90 $ (0.75)
Discontinued operations - pro forma (0.65) (4.16) (0.95) (5.66)
-----------------------------------------------------------
Total - proforma $ (0.10) $ (4.42) $ 2.95 $ (6.41)
-----------------------------------------------------------
* figures do not total due to rounding
Note 5--Inventories
Inventories consist of the following (USD in thousands):
September 30, December 31,
2004 2003
--------------------------------
Raw material $15,087 $14,866
Work in process 1,115 1,054
Finished goods 4,922 3,475
--------------------------------
$21,124 $19,395
================================
Note 6--Investments (USD in thousands)
In April 2004 the Company became aware it owned 22,793 shares of
Prudential Financial, Inc. (Prudential) stock resulting from Prudential's
conversion from a mutual company to a public stock company in the fourth quarter
of 2001. Prudential had been the Company's insurance carrier for a number of
years and as a result the Company earned these shares in the conversion. In
considering the appropriate accounting for this event, the Company considered a
number of quantitative and qualitative factors and recorded the value of the
stock as other income in the quarter it became known. We recorded current income
for the value of the stock at the time the Company first became aware of the
shares. The effect on net income of this transaction was U.S.$454 and was
recorded as an increase in other income in the first quarter of 2004. The
unrealized change in value, which has not been material, of the shares
subsequent to the demutualization was recorded retroactively through equity as
the stock is classified as available-for-sale. In the second quarter of 2004,
the balance of the stock was sold. The effect on net income from the sale on the
balance of the stock was U.S.$158 and was recorded as an increase in other
income in the second quarter of 2004.
Note 7 - Discontinued Operations - Ultra Clean Processing & Patterning Solutions
For the three months ended September 30, 2004 and 2003, the Company
recorded losses from discontinued operations of U.S.$(1.5) million and
U.S.$(9.6) million, respectively, and for the nine months ended September 2004
and 2003 the Company recorded losses from discontinued operations of, U.S.$(2.2)
million and U.S.$(13.1) million, respectively, related to the divestment of its
ultra clean processing product line and disposal of its patterning solutions
product line.
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The divestment of the Company's ultra clean processing product line was
structured as a management buyout where the majority of the assets were
purchased for approximately U.S.$614, with the payment terms allowing the
Company the potential to recoup a portion of the divestment costs over the next
three years. The Company received a payment of approximately U.S.$78 during Q2
2004 and U.S.$123 during 2003. The remaining balance, resulting from the
management buyout, will be paid over the next three years. The Company's
decision to divest the ultra clean processing business unit was based upon its
long-term strategy of focusing on the Company's core competencies in the
front-end of the semiconductor manufacturing process. The divestment was
completed as of December 31, 2003. The ultra clean processing products service
the semiconductor market and were reported under the semiconductor vacuum
instrumentation segment. During the three and nine months ended September 30,
2004, the Company realized a net gain on the disposal of inventory and
collection of 3rd party receivables from the ultra clean processing product line
of U.S.$0.4 million and U.S.$0.5 million, respectively.
In March 2004, the Company retained the services of an investment bank in
connection with the disposal of its patterning solutions software business. The
Company's decision to pursue a sale of its patterning solutions software
business is based upon its decision to further focus its resources. There is no
assurance a sale will occur. Additionally, the Company recorded an impairment
loss of U.S.$0.3 million during the first quarter of 2004 on the balance of its
intangible asset. The Company's patterning solutions software business had
assets of U.S.$4.0 million and liabilities of U.S.$0.6 as of September 30, 2004
(excluding intercompany transactions). During the three months ended September
30, 2004, the Company wrote-down a portion of its deferred tax asset relative to
specific loss carryforwards that were recorded as part of the acquisition of the
patterning solutions software business of U.S.$1.4 million, due to reduced
expectations on the proceeds from sale. Additionally, the Company recorded an
impairment for fixed assets of U.S.$45 thousand for the three months ended
September 30, 2004. The patterning solutions software business services the
semiconductor market and were reported under the semiconductor vacuum
instrumentation segment.
Provided below is a summary of the discontinued operations for the ultra
clean processing and patterning solutions product line, net of tax.
Three Months Ended
September 30
(USD in Thousands)
2004 2003
-------------------------------------------- ---------------------------------------------
Total Ultra Clean Patterning Solutions Total Ultra Clean Patterning Solutions
Loss from operations $ (116) $ (74) $ (42) $(7,002) $ 152 $(7,154)
(Loss) on disposal $(1,382) $(1,382) $(2,623) $(2,623) $ --
-------------------------------------------- ---------------------------------------------
(Loss) from discontinued operations $(1,498) $ (74) $(1,424) $(9,625) $(2,471) $(7,154)
Nine Months Ended
September 30
(USD in Thousands)
2004 2003
-------------------------------------------- ---------------------------------------------
Total Ultra Clean Patterning Solutions Total Ultra Clean Patterning Solutions
Loss from operations $(1,295) $ (74) $(1,221) $(10,486) $(1,243) $(9,243)
Gain (loss) on disposal $ (896) $ 486 $(1,382) $ (2,623) $(2,623) $ --
-------------------------------------------- ---------------------------------------------
Income (loss) from discontinued
operations $(2,191) $ 412 $(2,603) $(13,109) $(3,866) $(9,243)
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Note 8--Warranty
Changes to warranty reserve during the first nine months of 2004 and 2003 were
as follows (USD in thousands):
Balance at Add: Deduct:
December 31 Warranty Warranty Balance at
of previous year Provisions Claims September 30
---------------- ---------- ------ ------------
2004 $ 2,514 $ 1,327 $ 1,491 $ 2,350
2003 $ 2,246 $ 1,115 $ 874 $ 2,487
Note 9--Derivative Financial Instruments
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards Board No. 133 ("SFAS 133"), Accounting for Certain Derivative
Instruments and Certain Hedging Activities. SFAS No. 133 requires that all
derivatives, including foreign currency exchange contracts, be recognized on the
balance sheet at fair value. Derivatives that are not determined to be hedges
must be recorded at fair value through earnings. The cumulative after tax effect
for the unrealized gains (losses) on foreign currency hedges recorded in
accumulated other comprehensive income was U.S.$(99) thousand and U.S.$2
thousand as of September 30, 2004 and December 31, 2003, respectively.
The Company maintains a foreign currency exchange risk management strategy
that uses derivative instruments, in the form of forward exchange contracts, to
hedge against future movements in foreign currency exchange rates that affect
certain foreign currency denominated sales and related purchase transactions,
caused by currency exchange rate volatility. These contracts are designated as
cash flow and fair value hedges and generally have durations of less than one
year. The Company attempts to match the forward contracts with the underlying
items being hedged in terms of currency, amount and maturity. The primary
currencies in which the Company has exposure are the Euro, Swiss franc and
Japanese yen. This exposure arises in certain locations from intercompany
purchases of inventory in foreign currency for resale in local currency.
The Company's accounting policy, for derivative financial instruments, is
based on its designation of such instruments as hedging transactions. An
instrument is designated as a hedge based in part on its effectiveness in risk
reduction and one-to-one matching of derivative instruments to underlying
transactions. The Company records all derivatives on the balance sheet at fair
value. For derivative instruments that are designated and qualify as cash flow
and fair value hedges, the effective portion of the gain or loss on the
derivative instrument is reported as a component of accumulated other
comprehensive income and reclassified into earnings in the same period or
periods during which the hedged transaction affects earnings. The Company did
not have any significant gains or losses from ineffective hedges for the three
and nine months ended September 30, 2004 and September 30, 2003.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This statement amends SFAS 133 to provide clarification on
the financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. The adoption of SFAS 149, which was effective for
contracts entered into or modified after September 30, 2003, did not have a
material effect on the Company's financial condition or results of operations.
Note 10--Recent Accounting Pronouncements
In January 2003 the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). In December 2003 , the FASB approved
a partial deferral of the adoption of the interpretation and issued FIN 46-R on
December 24, 2003. This interpretation clarifies existing accounting principles
related to the preparation of consolidated financial statements when the equity
investors in an entity do not have the characteristics of a controlling
financial interest or when the equity at risk is not sufficient for the entity
to finance its activities without additional subordinated financial support from
others parties. FIN No. 46-R requires a company to evaluate all existing
arrangements to identify situations where a company has a "variable interest"
(commonly evidenced by a guarantee arrangement or other commitment to provide
-13-
financial support) in a "variable interest entity" (commonly a thinly
capitalized entity) and further determine when such variable interests require a
company to consolidate the variable interest entities' financial statements with
its own. FIN No. 46-R is effective immediately for all variable interest
entities created after January 31, 2003, and is effective for all variable
interest entities created prior to that date beginning January 1, 2004. The
adoption of FIN No. 46-R did not have a material impact on the Company's
financial position or results of operations.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 (SFAS 149), "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." The summarization of this statement is addressed in Note 9.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150 (SFAS No. 150), "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity". SFAS No. 150 establishes
standards on the classification and measurement of financial instruments with
characteristics of both liabilities and equity. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003 and for all
financial instruments at the beginning of the first interim period beginning
after June 15, 2003. The adoption of SFAS No. 150 did not have an impact on the
Company's financial position or results of operations
In December 2003, the FASB issued Statement of Financial Accounting
Standards No. 132 (revised 2003) (SFAS 132), "Employers' Disclosures about
Pensions and Other Postretirement Benefits," that improves financial statement
disclosures for defined benefit plans. The change replaces existing SFAS 132
disclosure requirements for pensions and other postretirement benefits and
revised employers' disclosures about pension plans and other postretirement
benefit plans. It does not change the measurement or recognition of those plans
required by SFAS 87, "Employers' Accounting for Pensions," SFAS 88 and
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS 132 revised retains the
disclosure requirements contained in the original SFAS 132, but requires
additional disclosures about the plan assets, obligations, cash flows, and net
periodic benefit cost of defined benefit pension plans and other defined benefit
postretirement plans. SFAS 132 revised is effective, for the domestic plans of
publicly traded entities, for annual and interim periods with fiscal years
ending after December 15, 2003. Estimated future benefit payments, and all other
new disclosure requirements for foreign plans and nonpublic entities are
effective for years ending after June 15, 2004. We have adopted the revised
disclosure provisions in note 16.
Note 11--Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the total change in
stockholders' equity during the period other than from transactions with
stockholders. For the Company, comprehensive income (loss) consists of net
income plus the net change in accumulated other comprehensive income (loss), an
element of stockholders' equity. Accumulated other comprehensive income (loss)
consists of the net change in the accumulated foreign currency translation
adjustment account and the net change in unrealized gains and losses in hedging
activity.
The Company's comprehensive income (loss) for the nine months ended
September 30, 2004 and 2003 was:
Nine Months Ended
September 30
USD in thousands 2004 2003
---------------------
Net income (loss) $7,666 $(10,153)
Other Comprehensive Income (Loss) net of tax:
Unrealized gain on stock available for sale 158
Realized gain on stock available for sale (158)
Net foreign currency translation adjustments (175) 3,390
Unrealized gain (loss) on foreign currency Hedges (99) 44
---------------------
Other Comprehensive Income (loss) (274) 3,434
---------------------
Comprehensive Income $7,392 $(6,719)
=====================
-14-
Note 12-Segment Information
INFICON Holding AG (INFICON or the "Company") is a leading developer,
manufacturer and supplier of innovative vacuum instrumentation, critical sensor
technologies, and advanced process control software for the semiconductor and
other industries with headquarters in the United States, and administrative
offices and manufacturing in the United States, Germany, and Liechtenstein, in
addition to sales and service locations worldwide. INFICON operates in two
primary business segments: Semiconductor Vacuum Instrumentation and General
Vacuum Instrumentation.
The semiconductor vacuum instrumentation segment includes one product
line: process knowledge and control instruments and software (formerly in situ
analysis). The products in this segment are developed for use in various
semiconductor and other vacuum coating applications. The general vacuum
instrumentation segment includes three major product lines: leak detection,
vacuum measurement and components, and instrumentation for environmental health
and safety. These products are used in numerous markets including air
conditioning, refrigeration, automotive, emergency response, industrial hygiene
and semiconductor manufacturing.
Information on the Company's business segments on a continuing operations
basis, for net sales, gross profit, and earnings before interest and taxes was
as follows (USD in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
-------------------------------------------------
Net Sales:
Semiconductor vacuum instrumentation $ 11,915 $ 7,904 $ 35,156 $ 26,267
General vacuum instrumentation 31,790 29,987 105,687 86,758
-------------------------------------------------
Total net sales $ 43,705 $ 37,891 $ 140,843 $ 113,025
=================================================
Gross profit:
Semiconductor vacuum instrumentation $ 6,206 $ 3,989 $ 18,875 $ 12,872
General vacuum instrumentation 13,659 13,024 47,209 37,257
-------------------------------------------------
Total gross profit $ 19,865 $ 17,013 $ 66,084 $ 50,129
=================================================
Earnings (loss) before interest and taxes:
Semiconductor vacuum instrumentation $ 472 $ (943) $ 2,396 $ (2,631)
General vacuum instrumentation 1,597 2,709 10,950 6,567
-------------------------------------------------
Total earnings before interest and taxes $ 2,069 $ 1,766 $ 13,346 $ 3,936
=================================================
Depreciation and amortization:
Semiconductor vacuum instrumentation $ 337 $ 654 $ 1,036 $ 2,034
General vacuum instrumentation 688 587 2,299 1,469
-------------------------------------------------
Total depreciation and amortization $ 1,025 $ 1,241 $ 3,335 $ 3,503
=================================================
Capital expenditures:
Semiconductor vacuum instrumentation $ 141 $ 64 $ 817 $ 1,091
General vacuum instrumentation 490 393 1,896 2,156
-------------------------------------------------
Total capital expenditures $ 631 $ 457 $ 2,713 $ 3,247
=================================================
Sales by geographic location:(1)
United States $ 13,563 $ 15,123 $ 45,878 $ 40,943
Europe 20,768 16,870 65,750 50,251
Asia 9,374 5,898 29,215 21,831
-------------------------------------------------
Total sales $ 43,705 $ 37,891 $ 140,843 $ 113,025
=================================================
-15-
September 30, December 31,
2004 2003
------------------------------
Total assets:
Semiconductor vacuum instrumentation $ 75,567 $ 55,467
General vacuum instrumentation 87,573 95,207
--------------------------
Total assets $163,140 $150,674
==========================
September 30, December 31,
2004 2003
------------------------------
Long-lived assets (2):
Semiconductor vacuum instrumentation $ 8,970 $ 9,996
General vacuum instrumentation 15,792 16,514
--------------------------
Total long-lived assets $ 24,762 $ 26,510
==========================
(1) The geographic location of a sale is determined by the subsidiary that
recorded the sale, rather than customer location
(2) Long-lived assets excludes deferred taxes
Note 13--Earnings (Loss) Per Share
The Company computes basic and diluted earnings per share in accordance
with Statement of Financial Accounting Standards No. 128 ("SFAS 128") "Earnings
per Share". SFAS 128 requires both basic earnings per share, which is based on
the weighted average number of common shares outstanding, and diluted earnings
per share, which is based on the weighted average number of common shares
outstanding and all dilutive common equivalent shares outstanding. The dilutive
effect of options is determined under the treasury stock method using the
average market price for the period. Common equivalent shares are included in
the per share calculations where the effect of their inclusion would be
dilutive.
The following table sets forth the computation of basic and diluted earnings per
share (USD in thousands, except per share and per share amounts):
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------------------------------------
2004 2003 2004 2003
--------------------------------------------------------
Numerator:
Numerator for basic and diluted earnings per share:
Income from continuing operations $ 1,564 $ 989 $ 9,857 $ 2,956
(Loss) from discontinued operations (1,498) (9,625) (2,191) (13,109)
--------------------------------------------------------
Net income (loss) $ 66 $ (8,636) $ 7,666 $ (10,153)
Denominator:
Denominator for basic and diluted earnings per share:
Weighted average shares outstanding
Diluted shares 2,330,315 2,315,000 2,333,144 2,315,000
Basic shares 2,315,850 2,315,000 2,315,514 2,315,000
-16-
Earnings (loss) per share:
Diluted
Continuing Operations $ 0.67 $ 0.43 $ 4.22 $ 1.28
Discontinued Operations (0.64) (4.16) (0.94) (5.66)
--------------------------------------------------------
Total $ 0.03 $ (3.73) $ 3.29* $ (4.39)*
========================================================
Basic
Continuing Operations $ 0.68 $ 0.43 $ 4.26 $ 1.28
Discontinued Operations (0.65) (4.16) (0.95) (5.66)
--------------------------------------------------------
Total $ 0.03 $ (3.73) $ 3.31 $ (4.39)*
========================================================
* Figures do not total due to rounding
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123 (SFAS 123),"
which is effective for financial statements for fiscal years ending after
December 15, 2002, with early adoption permitted. SFAS 148 will enable companies
that choose to adopt the preferable fair value based method to report the full
effect of employee stock options in their financial statements immediately upon
adoption, and to make available to investors better and more frequent disclosure
about the cost of employee stock options. We will continue to apply the
disclosure only provisions of both SFAS 123 and SFAS 148.
Note 14--Acquisition of New Vision Systems (USD in thousands)
In January 2003, the Company acquired 100% of the stock of a
privately-held company, New Vision Systems, a leader in advanced process control
(APC) for patterning processes in semiconductor manufacturing pursuant to an
Agreement and Plan of Merger which closed on January 3. The acquisition of New
Vision Systems was intended to expand the Company's reach in the semiconductor
fab industry by extending its range of process capability in the advanced
process control (APC) market to include photolithography. Photolithography,
fundamental to creating the pattern of integrated circuits (IC) on a
semiconductor wafer, is the most challenging and strategically important process
in manufacturing semiconductor devices. New Vision Systems develops and deploys
a full suite of process control software compatible with tools from all major
photolithography and metrology equipment suppliers. These products improve
equipment productivity and chip yield in semiconductor fabrication.
In March 2004, the Company retained the services of an investment bank to
assist the Company with the disposal of its patterning solutions software
business. The Company's decision to pursue a sale of its patterning solutions
software business is based upon its decision to further focus its resources
coupled with its lower than expected financial performance. There is no
assurance a sale will occur. Based upon the Company's decision to pursue a sale
of its patterning solutions software business, the result of operations for this
business are reported as discontinued operations for the three and nine months
ended September 30, 2004 and 2003, respectively. Additionally, the Company
recorded an impairment loss of U.S.$0.3 million, for the nine months ended
September 30, 2004, on the balance of its intangible asset. The impairment
charge of U.S. $0.3 million, for the nine months ended September 30, 2004, was
recorded during the three months ended March 31, 2004 and was allocated to
intangibles. During the three months ended September 30, 2004, the Company
wrote-down a portion of its deferred tax asset relative to specific loss
carryforwards that were recorded as part of the acquisition of the patterning
solutions software business of U.S.$1.4 million, due to reduced expectations on
the proceeds from sale. Additionally, the Company recorded an impairment for
fixed assets of U.S.$45 thousand for the three months ended September 30, 2004.
The results of operations for INFICON LT (formerly New Vision Systems)
have been included in the Company's consolidated financial statements, and
reported as under discontinued operations, for the three and nine months ended
September 30, 2004 and 2003, respectively.
-17-
Note 15--Acquisition of Sentex Systems Inc. (USD in thousands)
In May 2003, the Company acquired 100% of the assets and assumed certain
liabilities of a privately-held company, Sentex Systems Inc. Sentex Systems,
founded in 1980, supplies sophisticated monitoring and analysis instruments
using gas chromatography (GC) technology to detect volatile organic compounds
(VOCs) for industrial and environmental monitoring, testing, and security.
Sentex product lines include continuous, on-line water monitors for applications
such as factory discharge water or water security, air monitors for spot
analysis or continuous on-site monitoring and explosives detectors for building
and site security and protection. Sentex products complement the HAPSITE fully
portable chemical identification systems (gas chromatograph/mass spectrometer or
GC/MS technology) used for fast on-scene detection and analysis of chemical
agents and toxic materials in air, soil and water. The financial results for
Sentex products are reported under the general vacuum instrumentation segment.
The transaction was accounted for under the purchase method of accounting
for business combinations, and the results of operations have been included in
the Company's consolidated financial statements as of the second quarter ending
June 30, 2003.
Pro forma results of operations:
The following unaudited pro forma information summarizes the Company's
consolidated results of operations as if Sentex Systems acquisition had taken
place at the beginning of 2003.
Three months ended Nine months ended
September 30 September 30
-------------------------------------------
2004 2003 2004 2003
-------------------------------------------
Net Sales $ 43,705 $ 38,170 $140,843 $113,862
Net income (loss) $ 66 $ (8,607) $ 7,666 $(10,067)
===========================================
Diluted net income per share $ 0.03 $ (3.72) $ 3.29 $ (4.35)
Basic net income per share $ 0.03 $ (3.72) $ 3.31 $ (4.35)
Note 16--Employee Benefit Plans
The Company's net pension cost included the following components (USD in
thousands):
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
-------- -------- -------- --------
Service cost $ 482 $ 498 $ 1,442 $ 1,502
Interest cost 531 486 1,588 1,464
Expected return on assets (515) (474) (1,538) (1,431)
Net amortization of:
Prior service cost 17 76 52 227
Net actuarial loss 261 283 780 858
-------- -------- -------- --------
Net periodic pension cost $ 776 $ 869 $ 2,324 $ 2,620
-18-
Operating and Financial Review and Prospects
Cautionary Note Regarding Forward - Looking Statements
Certain statements in this quarterly report on Form 6-K constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements include all statements
that do not relate solely to historical or current facts, and can be identified
by the use of words such as "may", "believe", "will", "expect", "project",
"assume", "estimate", "anticipate", "plan", "continue", "resumes",
"opportunity", "potential", "forecast", outlook, or "guidance". These
forward-looking statements address, among other things, our strategic
objectives, trends in vacuum technology and in the industries that employ vacuum
instrumentation, such as the semiconductor and related industries, and the
anticipated effects of these trends on our business. These forward-looking
statements are based on the current plans and expectations of our management and
are subject to a number of uncertainties and risks that could significantly
affect our current plans and expectations, as well as future results of
operations and financial condition. Some of these risks and uncertainties are
discussed under "Recent Developments" below and under "Key Information---Risk
Factors" in our most recent annual report on Form 20-F filed by us with the
Securities and Exchange Commission.
As a consequence, our current and anticipated plans and our future
prospects, results of operations and financial condition may differ from those
expressed in any forward-looking statements made by or on behalf of our company.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
Overview
INFICON Holding AG is a corporation (Aktiengesellschaft) organized under
the laws of Switzerland. In this quarterly report, "INFICON", the "INFICON
Group", "the Company", "we", "us" and "our" refer to INFICON Holding AG and its
consolidated subsidiaries. All references to "Unaxis" refer to our significant
shareholder, Unaxis Holding AG, a corporation (Aktiengesellschaft) organized
under the laws of Switzerland.
INFICON Holding AG is a leading developer, manufacturer and supplier of
vacuum instrumentation, critical sensor technologies, and process control
software for the semiconductor and other industries. The Company's products
include process knowledge and control instruments and software (formerly in situ
analysis), leak detectors, vacuum measurement and component products and
field-portable gas chromatograph/mass spectrometer instruments (instrumentation
for environmental health and safety). INFICON is subject to risks common to
companies in the semiconductor industry including, but not limited to, the
highly cyclical nature of the semiconductor industry leading to recurring
periods of oversupply, development of technological innovations by INFICON or
its competitors, dependence on key personnel, and the protection of proprietary
technology.
Semiconductor Industry
The semiconductor industry has historically experienced sudden changes
in supply and demand for semiconductors and is also subject to rapid
technological changes in semiconductor manufacturing processes. These factors
are generally the cause of strong volatility of demand for semiconductor capital
equipment. We believe that a global economic slowdown and a severe downturn in
the semiconductor and related industries could continue to have a negative
effect on our financial performance for the remainder of this year.
Deferred Tax Assets
Deferred Tax Assets - As of September 30, 2004, the Company had net
deferred tax assets of U.S.$37.8 million reflecting tax credit and loss carry
forwards, basis differences primarily from intangible assets, and other
deductions available to reduce taxable income in future years. A majority of the
net deferred tax assets balance of U.S.$37.8 million resides in the United
States. In assessing the realization of the Company's deferred tax assets, we
consider whether it is more likely than not the deferred tax assets will be
realized. The ultimate realization of our deferred income tax assets depends
upon our ability to generate future taxable income, including the implementation
of tax planning strategies, during the periods in which our basis differences
and other deductions become deductible and prior to the expiration of our net
-19-
operating loss carry forwards. On a quarterly basis, the Company evaluates the
recoverability of its deferred tax assets based upon historical results and
forecasted results over future years, considering tax planning strategies, and
matches this forecast against the basis differences, deductions available in
future years and the limitations allowed for net operating loss carry forwards
to ensure there is adequate support for the realization of the deferred tax
assets. While we have considered future operating results, in conjunction with
ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, in the event we were to determine that we would not be
able to realize all or part of our net deferred tax assets in the future, an
adjustment to the deferred tax assets would be charged as a reduction to income
in the period such determination was made. Likewise, should we determine that we
would be able to realize future deferred tax assets in excess of its net
recorded amount, an adjustment to the deferred tax assets would increase income
in the period such determination was made.
Although realization is not assured, the Company believes it is more
likely than not the net deferred tax asset balance as of September 30, 2004 will
be realized. The Company supports this conclusion based upon recent results,
projections of future operating results and tax planning strategies that support
the realization of the deferred tax assets, and other positive and negative
evidence. Differences between forecasted and actual future operating results
could adversely impact our ability to realize our deferred income tax assets;
however, differences between forecasted and actual future operating results are
continually monitored to ensure the Company has adequate support for the
realization of the deferred tax assets. The Company's analysis supporting the
realization of the deferred tax assets places careful consideration on the net
operating loss carry forward periods.
In recent years, the Company's U.S. operations have experienced losses
before income taxes for financial and tax reporting purposes; however, we
believe recent results, improvements in the order backlog, industry projections
as well as changes in our operations and tax planning that occurred during the
fourth quarter of 2003 and first three quarters of 2004, in addition to other
improvements that will take place in future periods, are sufficient to generate
the minimum amounts of taxable income to utilize our net operating loss carry
forwards prior to their expiration. The changes in the Company's operations
include:
o Various cost saving and restructuring initiatives to reduce manufacturing
and overhead costs;
o Capitalization of the intercompany debt arrangement between INFICON Inc.
(US location) and INFICON GmbH (Switzerland);
o Review of R&D allocations between related parties to identify and
implement tax planning strategies to maximize the Company's U.S. tax
benefit;
o Other changes in an effort to increase the efficiency and effectiveness of
our business operations.
During the three months ended September 30, 2004, the Company wrote-down a
portion of its deferred tax asset relative to specific loss carryforwards that
were recorded as part of the acquisition of the patterning solutions software
business of U.S.$1.4 million, due to reduced expectations on the proceeds from
sale.
The Company believes it is more likely than not it will be able to
generate sufficient taxable income in the United States to absorb its net
operating loss carry forwards, which begin to expire in 2021, although there can
be no assurances. If the Company's expectations for future operating results are
not met due to general economic conditions or other factors, the Company may
need to establish additional valuation allowances for all or a portion of its
deferred tax assets primarily relating to its U.S. operations. This could have a
significant effect on our future results of operations and financial position.
-20-
Results of Operations for the Three Months Ended September 30, 2004 and 2003
Net Sales
Net sales increased 15.3% to U.S.$43.7 million for the three months ended
September 30, 2004 from U.S.$37.9 million for the three months ended September
30, 2003. Excluding the impact of changes in currency exchange rates, sales grew
by 10.1%. The increase, excluding the impact of changes in currency exchange
rates, is primarily due to increased sales of the Company's private label
products, process knowledge and control sales to semiconductor device
manufacturers and data storage and flat panel display equipment manufacturers.
This increase was partially offset by lower Environmental Health & Safety
product sales.
Semiconductor Vacuum Instrumentation Segment. Net sales increased by 50.7%
to U.S.$11.9 million for the three months ended September 30, 2004 from U.S.$7.9
million for the three months ended September 30, 2003. This increase resulted
from improved demand and the timing of revenue recognition for process knowledge
and control instruments and software from semiconductor manufacturers in the
United States and Asia, primarily the result of larger sales to Samsung
Electronics Co. Ltd. in addition to favorable changes in foreign currency
exchange rates relative to the U.S. dollar of U.S.$0.4 million.
General Vacuum Instrumentation Segment. Net sales increased by 6.0% to
U.S.$31.8 million for the three months ended September 30, 2004 from U.S.$30.0
million for the three months ended September 30, 2003. This increase is the
result of favorable changes in foreign currency exchange rates relative to the
U.S. dollar of U.S.$1.6 million and improved demand for sales through
private-label distribution customers of major vacuum pump manufacturers who
resell our products coupled with higher sales from the leak detection product
line. This increase was partially offset by lower sales of our Environmental
Health & Safety product line.
Gross Profit
Gross profit increased by 16.8% to U.S.$19.9 million or 45.5% of net sales
for the three months ended September 30, 2004 from U.S.$17.0 million or 44.9% of
net sales for the three months ended September 30, 2003. The increase in gross
profit percentage is primarily due to favorable absorption of fixed
manufacturing costs for the vacuum control, leak detection, and process
knowledge and control product lines coupled with the effect of favorable foreign
currency exchange rates.
Research and Development
Research and development costs increased by 12.2% to U.S.$4.7 million, or
10.8% of net sales, for the three months ended September 30, 2004 from U.S.$4.2
million, or 11.1% of net sales, for the three months ended September 30, 2003.
This increase was driven primarily by changes in foreign currency exchange rates
relative to the U.S. dollar of U.S.$0.2 million and the addition of on-going
research and development expenses related to vacuum control, process knowledge
and control and leak detection products.
Selling, General and Administrative
Selling, general and administrative expenses increased by 17.4% to
U.S.$13.0 million, or 29.7% of net sales, for the three months ended September
30, 2004 from U.S.$11.1 million, or 29.2% of net sales, for the three months
ended September 30, 2003. This increase is the result of changes in foreign
currency exchange rates relative to the U.S. dollar of U.S.$0.6 million, coupled
with an increase in salaries and accruals for commissions and bonuses associated
with higher sales and profit for the three months ended September 30, 2004.
Operating Income (Loss) from Continuing Operations
For the reasons stated above, the operating income from continuing
operations was U.S.$2.1 million, or 4.9% of net sales, for the three months
ended September 30, 2004 from U.S.$1.7 million, or 4.5% of net sales, for the
three months ended September 30, 2003.
-21-
Other Expense (Income)
Other expense was U.S.$62 thousand, or 0.1% of net sales, for the three
months ended September 30, 2004 as compared to other income of U.S.$(48)
thousand, or (0.1)% of net sales, for the three months ended September 30, 2003.
The decrease in other income is primarily the result of higher foreign currency
gains recognized during the three months ended September 30, 2003.
Provision for Income Taxes
The income tax provision was U.S.$0.5 million, or 25.5% of income from
continuing operations before income taxes for the three months ended September
30, 2004 versus U.S.$0.8 million, or 44.7% of income before taxes, for the three
months ended September 30, 2003. This decrease was primarily the result of a
one-time non-cash tax charge of $1.1 million last year for the establishment of
a valuation allowance against deferred tax assets, and was partially offset by a
less favorable mix of taxable income towards higher taxed jurisdictions.
(Loss) from Discontinued Operations
For the three months ended September 30, 2004 and 2003, the Company
recorded net losses from discontinued operations of U.S.$(1.5) million and
U.S.$(9.6) million, respectively, related to the divestment of its ultra clean
processing product line that was structured as a management buyout and its plan
to sell its patterning solutions product line. The decrease in loss from
discontinued operations is primarily the result of the loss of the ultra clean
processing product line, of U.S.$(2.5) million, which was sold and divested by
December 31, 2003, and a decrease in the loss reported by the patterning
solutions product line which included a U.S.$6.2 million net of tax impairment
write-down of the Company's goodwill and intangibles. The decrease in the loss
reported between periods was offset by write-downs relative to specific deferred
tax assets, of U.S.$1.4 million, and fixed assets of U.S.$45 thousand associated
with the Company's patterning solutions software business.
Net Income (loss)
For the reasons stated above, net income was U.S.$66 thousand, or 0.2% of
net sales, for the three months ended September 30, 2004 from a net loss of
U.S.$(8.6) million, or (22.8)% of net sales, for the three months ended
September 30, 2003.
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Results of Operations for the Nine Months Ended September 30, 2004 and 2003
Net Sales
Net sales increased 24.6% to U.S.$140.8 million for the nine months ended
September 30, 2004 from U.S.$113.0 million for the nine months ended September
30, 2003. Excluding the impact of changes in currency exchange rates, sales grew
by 19.0%. The increase, excluding the impact of changes in currency exchange
rates, is primarily due to increased sales of the Company's private label
products, process knowledge and control sales to semiconductor device
manufacturers and data storage and flat panel display equipment manufacturers.
Semiconductor Vacuum Instrumentation Segment. Net sales increased by 33.8%
to U.S.$35.2 million for the nine months ended September 30, 2004 from U.S.$26.3
million for the nine months ended September 30, 2003. This increase resulted
from favorable changes in foreign currency exchange rates relative to the U.S.
dollar of U.S.$1.2 million, and improved demand and the timing of revenue
recognition for process knowledge and control instruments and software from
semiconductor manufacturers in the United States and Asia, primarily the result
of a large sales to Samsung Electronics Co. Ltd.
General Vacuum Instrumentation Segment. Net sales increased by 21.8% to
U.S.$105.7 million for the nine months ended September 30, 2004 from U.S.$86.8
million for the nine months ended September 30, 2003. This is mainly the result
of favorable changes in foreign currency exchange rates relative to the U.S.
dollar of U.S.$5.1 million and improved demand for sales through private-label
distribution customers of major vacuum pump manufacturers who resell our
products as well as higher sales from the leak detection product line.
Gross Profit
Gross profit increased by 31.8% to U.S.$66.1 million or 46.9% of net sales
for the nine months ended September 30, 2004 from U.S.$50.1 million or 44.4% of
net sales for the nine months ended September 30, 2003. The increase in gross
profit percentage is primarily due to favorable foreign currency exchange rates
coupled with the favorable absorption of fixed manufacturing costs on higher
sales.
Research and Development
Research and development costs increased by 13.8% to U.S.$14.8 million, or
10.5% of net sales, for the nine months ended September 30, 2004 from U.S.$13.0
million, or 11.5% of net sales, for the nine months ended September 30, 2003.
This increase was driven primarily by changes in foreign currency exchange rates
relative to the U.S. dollar of U.S.$0.7 million and the addition of on-going
research and development expenses related to vacuum control, process knowledge
and control, and leak detection products, as well as the acquisition of Sentex
Systems, Inc. in May 2003.
Selling, General and Administrative
Selling, general and administrative expenses increased by 15.4% to
U.S.$39.1 million, or 27.7% of net sales, for the nine months ended September
30, 2004 from U.S.$33.8 million, or 29.9% of net sales, for the nine months
ended September 30, 2003. This increase is the result of additional costs
following the acquisition of Sentex Systems, Inc. in May 2003, changes in
foreign currency exchange rates relative to the U.S. dollar of U.S.$1.6 million,
coupled with an increase in salaries and accruals for commissions and bonuses
associated with higher sales and profit for the nine months ended September 30,
2004.
Operating Income from Continuing Operations
For the reasons stated above, the operating income from continuing
operations was U.S.$12.3 million, or 8.7% of net sales, for the nine months
ended September 30, 2004 from U.S.$3.3 million, or 2.9% of net sales, for the
nine months ended September 30, 2003.
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Other (Income)
Other income was U.S.($1.1) million, or (0.8)% of net sales, for the nine
months ended September 30, 2004 as compared to other income of U.S.$(0.6)
million, or (0.5)% of net sales, for the nine months ended September 30, 2003.
The increase in other income is primarily the result of a gain on shares of
stock received from Prudential Financial, Inc.'s conversion from a mutual
company to a public stock company in the fourth quarter 2001 (see note 6) of
U.S.$(0.7) million that was partially offset by lower foreign currency gains
recognized during the nine months ended September 30, 2004.
Provision for Income Taxes
The income tax provision was U.S.$3.5 million, or 26.3% of income from
continuing operations before income taxes for the nine months ended September
30, 2004 versus an income tax provision of U.S.$1.2 million, or 28.3% of income
before taxes, for the nine months ended September 30, 2003. The increase in
income tax provision resulted mainly from higher taxable income of U.S.$13.4
million versus taxable income of U.S.$4.1 million for the nine months ended
September 30, 2004 and 2003, respectively. This increase was partially offset by
a one-time non-cash tax charge of $1.1 million last year for the establishment
of a valuation allowance against deferred tax assets. The effective tax rate has
changed due to a change in the earnings mix among tax jurisdictions.
(Loss) from Discontinued Operations
For the nine months ended September 30, 2004 and 2003, the Company
recorded net losses from discontinued operations of U.S.$(2.2) million and
U.S.$(13.1) million, respectively, related to the divestment of its ultra clean
processing product line that was structured as a management buyout and its plan
to sell its patterning solutions product line. The decrease in loss from
discontinued operations resulted from the loss of the ultra clean processing
product line, of U.S.$3.9 million, which was sold and divested by December 31,
2003 with a lower loss from the patterning solutions product line which was
U.S.$(9.2) million for the nine months ended September 30, 2003. The loss from
the patterning solutions product line included a U.S.$6.2 million net of tax
impairment write-down of the Company's goodwill and intangibles. The decrease in
the loss reported between periods was offset by write-downs relative to specific
deferred tax assets, of U.S.$1.4 million, and fixed assets of U.S.$45 thousand
associated with the Company's patterning solutions software business. During the
nine months ended September 30, 2004, the Company realized a net gain on the
disposal of inventory relative to the ultra clean processing product line of
U.S.$0.3 million.
Net Income (loss)
For the reasons stated above, net income was U.S.$7.7 million, or 5.4% of
net sales, for the nine months ended September 30, 2004 from a net loss of
U.S.$(10.2) million, or (9.0)% of net sales, for the nine months ended September
30, 2003.
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Liquidity and Capital Resources
Historically, we have been able to finance our operations and capital
requirements through cash provided by operations and accumulated cash balances.
Cash provided by (used in) operating activities was U.S.$16.8 million and
U.S.$(2.7) million for the nine months ended September 30, 2004 and 2003,
respectively. In 2004, cash provided by operating activities of U.S.$16.8
million consisted of net income of U.S.$7.7 million, depreciation, amortization
and impairment costs of U.S.$3.7 million, a net decrease in deferred taxes of
U.S.$3.6 million, and a net decrease in working capital of U.S.$1.8 million. In
2003, cash used in by operating activities of U.S.$(2.7) million consisted of a
net loss of U.S.$(10.2) million, depreciation, amortization and impairment costs
of U.S.$10.9 million, a net increase in deferred taxes of U.S.$1.1 million, and
a net increase in working capital of U.S.$2.3 million.
Working capital was U.S.$77.2 million as of September 30, 2004, compared
to U.S.$64.3 million as of December 31, 2003. The increase was due to increases
in cash of U.S.$15.0 million, inventories of U.S.$1.7 million, and other current
assets of U.S.$0.9 million. This was offset by decreases in accounts receivable
of U.S.$0.1 million, current deferred tax assets of U.S.$1.3 million, increases
in accounts payable of U.S.$1.6 million, accrued liabilities and income taxes
payable of U.S.$1.7.
Cash used in investing activities was U.S.$1.7 million and U.S.$3.2
million for the nine months ended September 30, 2004 and 2003, respectively,
primarily used for the purchase of property and equipment used in the Company's
operations and the purchase of Sentex Systems, Inc. in May 2003 for U.S$1.5
million. The cash used in investing activities for the nine months ended
September 30, 2004 was partially offset by the proceeds from the sale of
marketable securities of U.S.$1.0 million.
Credit facilities
The Company entered into a U.S.$30.0 million working capital financing
arrangement with Credit Suisse on November 23, 2000. The financing arrangement
can be either in the form of a current account overdraft facility, fixed
advances with a maximum maturity of twelve months, bid/advance
payment/performance bonds, issuance of letters of credit, or as margin coverage
for foreign currency exchange forward transactions. The working capital
financing was automatically extended for one year on November 23, 2003. The
Company has U.S.$0 outstanding under the financing arrangement as of September
30, 2004.
Additionally, the Company entered into two revolving credit facilities
with HypoVereinsbank on February 28, 2001. The credit facilities include a HKD
5.5 million (approximately U.S.$0.7 million) working capital financing
arrangement and a HKD 9.25 million (approximately U.S.$1.2 million) margin
coverage arrangement for foreign currency exchange forward transactions. The
working capital financing arrangement can be either in the form of a current
account overdraft facility, fixed advances with a maximum maturity of nine
months, short term trust receipt financing, issuance of letters of credit, or
issuance of bank guarantees. The working capital financing arrangement expires
on March 31, 2005 and has an option for extension. The Company has U.S.$0
million outstanding under the financing arrangement as of September 30, 2004.
We made full recourse loans available to our executive officers eligible
to participate in the leveraged share plan for the purpose of purchasing up to
80% of the shares allocated to them under the plan. Loans made to executive
officers have a term of 7 years and are on a recourse basis. The loans are
collateralized by all of the shares purchased under the leveraged share plan,
and we have either a first, or, if a portion of the shares are financed or
refinanced by another lender, a second lien on the shares. The loans have an
interest rate equal to 120% of the mid-term applicable federal rate (as defined
in the Internal Revenue Code) determined on the date the loans are made. The
balances of the loans payable to us are offset against the value of the shares
on our balance sheet. As of September 30, 2004, there is an outstanding balance
on the loans of U.S.$0.4 million
We currently believe the cash generated from operations, cash and cash
equivalents, and borrowings available under our financing arrangements and
credit facilities will continue to be sufficient to satisfy our working capital
and capital expenditure requirements.
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Risks Relating to Our Business and Financial Results
Provided below is a summarization of the risks and uncertainties that are
important for you to consider in evaluating historical and future results of the
Company. A detailed explanation of risk factors is also provided in our annual
report on form 20-F for the year ended December 31, 2003. Additional risks and
uncertainties not presently known to us, which we currently deem immaterial or
which are similar to those faced by other companies in our industry or business,
may also impair our business operations. If any of these risks or uncertainties
actually occur, our business, financial condition and operating results will
likely be affected.
>> Downturns in the semiconductor chip manufacturing industry have
historically, and may have in the future, a material adverse effect
on our sales and profitability. We cannot assure you that:
> the semiconductor chip manufacturing industry will stay
active;
> demand for capital equipment by the semiconductor chip
manufacturing industry will continue to increase;
>> The loss of sales to our major customers would likely have a
material adverse effect on the Company;
>> Some of our customers compete, or may in the future compete, with
Unaxis, and to the extent that we are perceived to be controlled by,
or under common control with Unaxis, we may lose their business;
>> Our future growth and competitiveness depends upon our ability to
develop new and enhanced products for industries we target and to
adapt rapidly to changing technologies. We cannot assure you that we
will be successful in our product development efforts or that our
new products will gain general market acceptance;
>> Changes or developments in the semiconductor industry could cause
shifts in our infrastructure and increase the competition for our
products;
>> The markets for our products are highly competitive. This
competition may cause us to reduce prices and may result in
decreases in market share of our products;
>> If our protection of our proprietary technology relating to vacuum
instrumentation fails, our competitive position may be impaired ,
which could result in a loss of revenues and profits;
>> Our inability to convince OEMs to use our products in their
manufacturing systems could weaken our competitive position;
>> There is no guarantee the Company will receive the full sales price
for the management buyout of its ultra clean processing business.
Terms of the agreement allow the Company to recoup a portion of its
divestment costs over the next three years;
>> We must compete intensively to attract and retain key technical
personnel to help maintain our current level of success and to
support our future growth;
>> Our ability to expand our manufacturing capacity may be limited by
our suppliers' ability to meet our requirements;
>> We have significant international sales to customers outside the
United States. A reduction in demand for our products resulting from
economic downturns in one or more of the markets we serve may have a
material adverse effect on our sales and profitability;
>> Unfavorable exchange rate fluctuations may harm our results of
operations;
>> We must make expenditures to comply with environmental laws and
regulations relating to the production of our vacuum instrumentation
products;
>> The effect of terrorist attacks or threats on the general economy
could decrease our revenues;
>> Future acquisitions could adversely affect our business;
>> Benefits from the net deferred tax asset may not be realized (for
additional discussion, see section on Deferred Tax Assets in Note 4,
Critical Accounting Policies and in the Overview section of
Operating and Financial Review and Prospects);
>> Financial performance for patterning solutions business does not
show improved financial performance and the Company is unable to
locate a buyer for this business;
>> Risk of impairment of intangible asset.
During the fourth quarter the Company will continue to review its cost
structure along with its negotiations with a potential buyer of its patterning
solution product line.
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Quantitative and Qualitative Disclosure of Market Risk
For the nine months ended September 30, 2004, we did not experience any
material change in the market risk exposures affecting the quantitative and
qualitative disclosures as presented in our annual report on Form 20-F for the
fiscal year ended December 31, 2003.
Interest Rate Exposure
Changes in interest rates could impact the Company's anticipated interest
income earned on its cash balances. Although interest income could be impacted,
the Company does not feel changes in interest rates, from their current levels,
would have a material effect on the Company's financial results.
Foreign Currency Exchange Rate Risk
We transact business in various foreign currencies. Our primary foreign
cash flows are generated in the countries of Asia and Europe. The principal
currencies creating foreign currency exchange rate risk for the Company are the
Euro, Swiss franc, and Japanese yen. The Company maintains a foreign currency
exchange risk management strategy that uses derivative instruments, in the form
of forward exchange contracts, to hedge against future movements in foreign
currency exchange rates that affect certain foreign currency denominated sales
and related purchase transactions, caused by currency exchange rate volatility.
These contracts are designated as cash flow hedges and generally have durations
of less than one year. The Company attempts to match the forward contracts with
the underlying items being hedged in terms of currency, amount and maturity.
This exposure arises in certain locations from the intercompany purchase of
inventory in foreign currency for resale in local currency.
Enclosures
Statements furnished under Section 906 of the Sarbanes-Oxley Act of 2002,
18 U.S.C. Section 1350, attached as Exhibit 32.1
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INFICON Holding AG
Date: November 10, 2004 By: /s/ Peter Maier
--------------------------------------
Name: Peter G. Maier
Title: Vice President and Chief Financial
Officer
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