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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from to
COMMISSION FILE NUMBER 001-16611
Mykrolis Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
04-3536767
(I.R.S. Employer Identification No.)
129 Concord Road
Billerica, Massachusetts 01821
(Address of principal executive offices)
Registrant's telephone number, include area code: (978) 436 - 6500
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The Company had 39,723,648 shares of common stock outstanding as of November 1,
2002.
-1-
Mykrolis Corporation
INDEX TO FORM 10-Q
Page No.
Part I. Financial Information ...................................................................................... 3
Item 1. Financial Statements ....................................................................................... 3
Condensed Consolidated and Combined Statements of Operations -
Three and Nine Months Ended September 28, 2002 and September 30, 2001 ................................ 3
Condensed Consolidated Balance Sheets -
September 28, 2002 and December 31, 2001 ............................................................. 4
Condensed Consolidated and Combined Statements of Shareholders' Equity and Comprehensive
Income (Loss)- Nine Months Ended September 28, 2002 and December 31, 2001 ............................ 5
Condensed Consolidated and Combined Statements of Cash Flows -
Nine Months Ended September 28, 2002 and September 30, 2001 .......................................... 6
Notes to Condensed Consolidated and Combined
Financial Statements ................................................................................. 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations ..................................................... 14
Item 3. Quantitative and Qualitative Disclosures about Market Risks ................................................ 22
Item 4. Controls and Procedures .................................................................................... 22
Part II. Other Information .......................................................................................... 23
Item 6. Exhibits and Reports on Form 8-K ........................................................................... 23
Signatures ................................................................................................. 24
Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 ................................... 25
Certifications Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 ................................................................................. 27
-2-
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Mykrolis Corporation
Condensed Consolidated and Combined Statements of Operations
(In thousands except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
------------- ------------- ------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net sales ............................................ $47,740 $ 39,683 $131,985 $179,090
Cost of sales ........................................ 29,628 29,081 86,708 109,226
------- -------- -------- --------
Gross profit ......................................... 18,112 10,602 45,277 69,864
Selling, general & administrative expenses ........... 18,719 19,178 53,467 64,719
Research & development expenses ...................... 5,133 4,890 14,653 16,302
Restructuring & other charges ........................ - 4,922 - 17,478
------- -------- -------- --------
Operating loss ....................................... (5,740) (18,388) (22,843) (28,635)
Other income (expense), net .......................... 4 169 1,871 (849)
------- -------- -------- --------
Loss before income taxes ............................. (5,736) (18,219) (20,972) (29,484)
Income tax (benefit) expense ......................... (1,400) 1,500 2,570 23,645
------- -------- -------- --------
Net loss ............................................. $(4,336) $(19,719) $(23,542) $(53,129)
======= ======== ======== ========
Basic and diluted loss per share ..................... $(0.11) $ (0.54) $ (0.59) $ (1.57)
Shares used in computing basic and diluted loss
per share: ........................................ 39,655 36,423 39,595 33,813
The accompanying notes are an integral part of the condensed
consolidated and combined financial statements.
-3-
Mykrolis Corporation
Condensed Consolidated Balance Sheets
(In thousands except share data)
September 28, 2002 December 31, 2001
------------------ -----------------
ASSETS (Unaudited)
------
Current assets:
Cash and cash equivalents .......................................................... $ 80,154 $ 82,831
Accounts receivable (less allowance for doubtful accounts of $1,603 at September
28, 2002 and $1,670 at December 31, 2001) ........................................ 40,824 34,817
Inventories ........................................................................ 53,451 60,436
Income tax receivable .............................................................. - 9,000
Deferred income taxes .............................................................. 924 924
Assets held for sale ............................................................... 1,215 -
Other current assets ............................................................... 2,481 1,348
-------- --------
Total current assets ................................................ 179,049 189,356
Restricted cash ......................................................................... 1,483 -
Property, plant and equipment (less accumulated depreciation of $51,403 at September
28, 2002 and $44,392 at December 31, 2001) ............................................ 74,791 69,100
Deferred income taxes ................................................................... 4,872 4,872
Goodwill (less accumulated amortization of $3,845) 14,454 14,454
Other intangible assets (less accumulated amortization of $21,674 at September 28,
2002 and $20,417 at December 31, 2001) ................................................ 6,124 7,288
Other assets ............................................................................ 4,687 4,420
-------- --------
Total assets ............................................................................ $285,460 $289,490
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of capital lease obligations ....................................... $ 78 $ -
Accounts payable - Millipore Corporation ........................................... - 1,928
Accounts payable ................................................................... 19,178 5,402
Accrued income taxes ............................................................... 10,084 9,616
Accrued expenses ................................................................... 24,422 18,884
-------- --------
Total current liabilities ................................................ 53,762 35,830
Long-term portion of capital lease obligations .......................................... 150 -
Other long-term liabilities ............................................................. 11,068 10,113
-------- --------
Total liabilities ....................................................................... 64,980 45,943
Commitments and Contingencies ........................................................... - -
Shareholders' equity:
Preferred stock, par value $.01 per share, 5,000,000 shares authorized;
none issued ........................................................................ - -
Common stock, par value $.01 per share, 250,000,000 shares authorized;
39,655,352 and 39,500,000 shares issued and outstanding, respectively .............. 397 395
Additional paid-in capital ......................................................... 321,993 326,618
Accumulated deficit ................................................................ (85,132) (61,590)
Accumulated other comprehensive loss ............................................... (16,778) (21,876)
-------- --------
Total shareholders' equity ............................................... 220,480 243,547
-------- --------
Total liabilities and shareholders' equity .............................................. $285,460 $289,490
======== ========
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
-4-
Mykrolis Corporation
Condensed Consolidated and Combined Statements of Shareholders' Equity
and Comprehensive Income (Loss)
(In thousands)
Accumulated
Additional Shareholder's Other Total Total
Common Shares Paid-In Net Accumulated Comprehensive Shareholders' Comprehensive
Shares Amount Capital Investment Deficit Income (Loss) Equity Income (Loss)
------ ------ ------- ---------- ------- ------------- ------ -------------
Balance December 31, 2000 .......... - - 253,732 - (7,243) 246,489
Net change in unearned compensation
and other stock-based
compensation .................... - 503 3,240 - - 3,743
Net transfers from (to) Millipore
Corporation .................... - 1,850 (1,141) - - 709
Payment of separation note to
Millipore Corporation ........... - (19,095) - - - (19,095)
Transfer to common stock and
additional Paid-in capital ......32,500 325 249,469 (249,794) - - -
Issuance of common stock - net of
expenses ........................ 7,000 70 93,891 - - - 93,961
Comprehensive loss:
Net loss ................ - - (6,037) (61,590) - (67,627) (67,627)
Foreign currency
translations ........... - (14,633) (14,633) (14,633)
---- ------- -------- -------- -------- -------- --------
- - -
Comprehensive loss ................. $(82,260)
========
Balance December 31, 2001 ..........39,500 $395 $326,618 $ - $(61,590) $(21,876) $243,547
====== ==== ======== ========= ======== ======== ========
Stock - based compensation* ........ - 1,103 - - - 1,103
Net transfer to Millipore
Corporation* .................... - (7,230) - - - (7,230)
Issuance of common stock - employee
stock purchase plan and exercise
of stock options* ............... 155 2 1,502 1,504
Comprehensive loss:
Net loss* ............... - - - (23,542) - (23,542) (23,542)
Foreign currency
translations* .......... - - - - 5,098 5,098 5,098
---- ------- --------- -------- -------- -------- --------
Comprehensive loss* ................ $(18,444)
========
Balance September 28, 2002* ........39,655 $397 $321,993 $ - $(85,132) $(16,778) $220,480
====== ==== ======== ========= ======== ======== ========
* unaudited
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
-5-
Mykrolis Corporation
Condensed Consolidated and Combined Statements of Cash Flows
(In thousands)
(Unaudited)
Nine months ended
----------------------------
September 28, September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net loss ........................................................................................... $(23,542) $(53,129)
Adjustments to reconcile net loss to net cash used in operating activities:
(Income) loss on investments ............................................................... (58) 156
Restructuring and other charges ............................................................ - 17,478
Depreciation and amortization .............................................................. 9,066 11,625
Stock based compensation ................................................................... 1,103 276
Deferred income tax expense ................................................................ - 25,000
Change in operating assets and liabilities:
(Increase) decrease in accounts receivable .............................................. (3,897) 47,266
Decrease (increase) in inventories ...................................................... 8,514 (9,918)
Decrease in accounts payable - Millipore Corporation .................................... (1,929) -
Increase (decrease) in accounts payable ................................................. 13,560 (13,398)
(Increase) decrease in other operating assets ........................................... (951) 2,450
Increase (decrease) in other operating liabilities ...................................... 6,870 (10,449)
-------- --------
Net cash provided by operating activities ............................................ 8,736 17,357
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ......................................................... (13,313) (7,405)
------- --------
Net cash used in investing activities ................................................ (13,313) (7,405)
------- --------
Cash flows from financing activities:
Net proceeds from the issuance of common stock ..................................................... - 94,063
Payment of separation note to Millipore Corporation ................................................ - (22,877)
Net transfers from (to) Millipore Corporation ...................................................... 1,770 (1,141)
Assignment of restricted cash ...................................................................... (1,608) -
Payments under capital leases ...................................................................... (6) -
Proceeds from issuance of common stock for employee stock purchase plan and
stock option exercise ............................................................................ 1,504 -
------- --------
Net cash provided by financing activities ............................................ 1,660 70,045
------- --------
Effect of foreign exchange rates on cash and cash equivalents ......................................... 240 1,109
------- --------
Net (decrease) increase in cash and cash equivalents .................................................. (2,677) 81,106
Cash and cash equivalents at beginning of period ...................................................... 82,831 -
------- --------
Cash and cash equivalents at end of period ............................................................ $ 80,154 $ 81,106
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .......................................................................................... $ 2 $ -
Income taxes ...................................................................................... $ 2,013 -
Supplemental disclosure of non-cash activity:
A capital lease obligation of $234 was incurred when the Company entered into
a lease for phone equipment in June 2002
The accompanying notes are an integral part of the condensed consolidated and
combined financial statements.
-6-
Mykrolis Corporation
Notes to Condensed Consolidated and Combined Financial Statements
(In thousands except share and per share data)
1. Background and Basis of Presentation
Background
On October 3, 2000, Millipore Corporation ("Millipore") announced its plan to
spin-off its microelectronics business, which serves the semiconductor industry
and certain related industries with products needed to manufacture semiconductor
devices as well as a range of other products that now comprise Mykrolis
Corporation ("the Company"). On October 16, 2000, the Company was incorporated
in Delaware as a wholly-owned subsidiary of Millipore to receive Millipore's
microelectronics business and to be the spun-off company. Prior to March 2001,
the Company's business was operated as a fully integrated business unit of
Millipore. On March 31, 2001, Millipore transferred to the Company substantially
all of the assets and liabilities associated with its microelectronics business
(the "Separation"). The Company completed its initial public offering ("IPO") of
7.0 million shares of common stock on August 9, 2001 receiving net proceeds of
approximately $94.1 million, after deducting underwriting commissions and
offering expenses. The Company retained $75.0 million of the net proceeds and
paid the balance to Millipore as repayment of amounts outstanding under
inter-company loans incurred by the Company in connection with the Separation.
After the initial public offering, Millipore owned 32.5 million shares or
approximately 82.3% of the Company's total outstanding common stock. On February
27, 2002 (the "Distribution Date"), Millipore completed the spin-off of the
Company through the distribution to its shareholders of all of the 32.5 million
shares of the Company's common stock owned by Millipore on that date. The
Company is now a fully independent company with 39.7 million shares outstanding
at September 28, 2002.
Basis of Presentation
The condensed combined financial statements include amounts prior to March 31,
2001 that have been derived from the consolidated financial statements and
accounting records of Millipore using the historical results of operations and
historical basis of assets and liabilities of the Company's business. Management
believes the assumptions underlying the combined financial statements are
reasonable. However, the condensed combined financial information included
herein may not necessarily reflect the Company's operating results, financial
position and cash flows in the future or, what they would have been, had the
Company been a separate, stand-alone entity during the periods presented. The
Company began accumulating retained earnings (accumulated deficit) on April 1,
2001, following the effective date of the Separation Agreement with Millipore,
pursuant to which the assets and liabilities of the Company's business were
transferred to the Company. The Company's condensed consolidated financial
statements as of and for the quarter ended September 2002 include all
wholly-owned subsidiaries and assets and liabilities of the Company. All
material intercompany transactions and balances between and among the Company's
subsidiaries have been eliminated.
Prior to March 31, 2001 Millipore allocated certain corporate expenses,
including centralized research and development, legal, accounting, employee
benefits, officers' salaries, facilities, insurance, information technology
services, distribution, treasury and other Millipore corporate and
infrastructure costs. These expense allocations were determined on a basis that
Millipore and the Company considered to be a reasonable assessment of the
utilization of services provided or the benefit received by the Company. At the
time of the Separation from Millipore, the Company and Millipore entered into
transition service agreements for Millipore to provide services with respect to
specified functions and for the Company to reimburse Millipore for the cost of
these services. The agreements do not necessarily reflect the costs of obtaining
the services from unrelated third parties or of the Company providing the
applicable services itself. However, management believes that purchasing these
services from Millipore provided the Company with an efficient means of
obtaining these services during the transition period. In addition, the Company
has agreed to provide transition services to Millipore, for which the Company
will be reimbursed at its cost.
Millipore used a centralized approach to cash management and the financing of
its operations. Prior to the Separation, cash deposits from the Company were
transferred to Millipore on a regular basis and netted against Millipore's net
investment. As a result, none of Millipore's cash, cash equivalents or debt at
the corporate level were allocated to the Company in the consolidated combined
financial statements. Changes in Millipore's net investment include net earnings
of the Company plus net cash transfers to or from Millipore.
-7-
Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in
accordance with the rules of the Securities and Exchange Commission for interim
financial statements and do not include all disclosures required by generally
accepted accounting principles. These financial statements should be read in
conjunction with the audited consolidated and combined financial statements and
notes thereto included in the Company's Form 10-K for the year ended December
31, 2001. The financial information as of September 2002 and for the three and
nine month periods ended September 2002 and 2001 is unaudited, but includes all
adjustments that management considers necessary for a fair presentation of the
Company's consolidated and combined results of operations, financial position
and cash flows. All of these adjustments are of a normal recurring nature.
Results for the nine-month period ended September 2002 are not necessarily
indicative of results to be expected for the full fiscal year 2002 or for any
other future periods.
2. Restricted Cash
During the nine months ended September 2002 the Company was required to provide
cash collateratization totaling $1,608 related to a security deposit under a new
lease for its corporate headquarters, research and development and manufacturing
facility and other security deposits. At September 28, 2002, this cash
collateral was invested in U.S. federal agency securities and money market
funds.
3. Stock Based Compensation
During the first quarter of 2002, the Company recognized $1,103 in stock based
compensation expense associated with the accelerated vesting of all restricted
shares of Millipore common stock held by certain of the Company's employees and
the termination of two executives.
4. Restructuring and Other Charges
During the first and third quarters of 2001, the Company recorded restructuring
and other charges of $12,556 and $4,922, respectively, in connection with the
Company's separation from Millipore and in response to the prolonged duration
and severity of the current semiconductor industry downturn. The two
restructuring and other charges included $13,755 of employee severance costs,
$1,672 in write-offs of equipment and leasehold improvements and $2,051 of net
exit costs on leased properties. Key initiatives of the restructurings included:
Consolidating manufacturing operations to eliminate redundant
manufacturing processes. The Company is in the process of relocating some
of its operations from Millipore facilities in the U.S. In addition, the
Company closed its manufacturing facility in England. This consolidation
of the Company's manufacturing operations is expected to be completed by
the end of 2002.
Realigning the Company's European organizational structure to focus on
the Company's operating business units, thereby consolidating the
Company's sales and administrative activities into fewer locations that
are closer to the Company's customer base. The Company completed this
realignment during 2001.
Reducing the Company's administrative and management infrastructure costs
in Asia by exiting facilities and eliminating administrative positions
during 2001.
Reducing the Company's workforce in the U.S. in response to lower demand
for the Company's products due to the current semiconductor industry
downturn. This action was completed during the second quarter of 2001.
Further reducing the Company's workforce in the U.S., Asia and Europe in
order to resize the Company. This action was completed during the third
quarter of 2001.
Discontinuation of the Company's plan to renovate leased office space in
Bedford, Massachusetts and instead exit that facility. This action was
completed during the third quarter of 2001.
These restructuring initiatives resulted in the elimination of 358
positions worldwide. Notifications to employees were completed in the
first and third quarters of 2001, however, a number of these employees
will continue in their existing positions through the fourth quarter of
2002 with their related salary costs charged to operations as incurred.
In the first nine months of 2002, approximately $2,149 of the
restructuring charge was utilized, consisting of $1,238 severance and
associated benefits for 66 employees and $911 of leasehold write-offs and
other exit costs.
-8-
Details of activities related to the restructuring and other charges recorded in
the first and third quarters of 2001 are as follows:
Employee Leasehold
severance and other
costs exit costs Total
------- ------- -------
Total restructuring and other charges ............................. $13,755 $ 3,723 $17,478
Cash activity ..................................................... (6,794) (475) (7,269)
Non-cash activity ................................................. (3,148) (1,261) (4,409)
------- ------- -------
Restructuring reserve balance at December 31, 2001 ....... $ 3,813 $ 1,987 $ 5,800
Cash activity ..................................................... (1,238) (911) (2,149)
Change in estimate ................................................ (1,638) 1,638 --
------- ------- -------
Restructuring reserve balance at September 28, 2002 ...... $ 937 $ 2,714 $ 3,651
======= ======= =======
During the first and third quarters of 2002, several changes to prior estimates
occurred resulting in the reversal of $1,638 in employee severance costs and a
$1,638 increase in leasehold and other costs. These changes in estimate are
primarily due to the higher than expected level of attrition of 55 employees,
lower than expected severance benefits paid and continued deterioration in the
real estate market conditions that have shortened the potential sublease term
and decreased the sublease rental per square foot of the Company's office space
in Bedford, Massachusetts. The Company believes that approximately $937 of
accrued employee severance and pension costs relating to 11 employees will be
substantially paid by the end of 2002. The accrued lease expense and other exit
costs at September 28, 2002 of $2,714 will be paid by the lease expiration date
in 2005.
5. Income Taxes
Prior to the Distribution Date, the Company's operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if the Company filed tax returns
separately from Millipore. At December 31, 2001, the Company had a $9,000 income
tax receivable related to net operating loss carrybacks determined on a separate
return basis. In accordance with the tax sharing agreement, during the first
quarter of 2002, Millipore decided not to allow the Company to carryback these
net-operating losses. As a result, the receivable was transferred to Millipore
during the first quarter of 2002 and is reflected in the consolidated financial
statements as a reduction to additional paid in capital included in
shareholders' equity.
For the three months ended September 2002, the Company recorded income tax
benefit of $1,400 on a consolidated pre-tax loss of $5,736, yielding an
effective tax rate of 24.4%. The income tax benefit resulted from changes in
expected full year losses and the overall geographic mix of foreign operations
income and loss. For the nine months ended September 2002, the Company recorded
income tax expense of $2,570 with respect to foreign operations on a
consolidated pre-tax loss of $20,972, yielding an effective tax rate of negative
12.3%. The income tax expense includes anticipated settlements from foreign tax
audits for which the Company is responsible under its tax sharing agreement with
Millipore
For the three months ended September 2001, the Company recorded an income tax
expense of $1,500 on a consolidated pre-tax loss of $18,219, yielding an
effective tax rate of negative 8.2%. SFAS 109, "Accounting for Income Taxes,"
requires that a valuation allowance be established when, based on an evaluation
of objective verifiable evidence, there is a likelihood that some portion or all
of the deferred tax assets will not be realized. In the second quarter of 2001,
the Company increased its valuation allowance against deferred tax assets by
$22,300. The valuation allowance is primarily attributed to foreign tax credits
on unremitted earnings from foreign subsidiaries of $18,000, and other U.S.
deferred tax assets of $ 4,300. For the nine months ended September 2001, the
Company recorded income tax expense of $23,645 on a pre-tax loss of $29,484,
yielding an effective tax rate of negative 80.2%.
6. Inventories
Inventories are summarized as follows:
September 28, 2002 December 31, 2001
------------------ -----------------
Raw materials ................ $28,034 $39,294
Work in process .............. 9,293 7,345
Finished goods ............... 16,124 13,797
------- -------
$53,451 $60,436
======= =======
-9-
7. Earnings Per Share
For the three and nine months ended September 2002 and 2001, basic and diluted
loss per common share is calculated by dividing net loss by the weighted average
number of common shares outstanding during the respective period. The weighted
average basic and diluted shares outstanding calculation excludes those stock
options for which the impact would have been antidilutive based on the Company's
net loss. The number of options that were antidilutive for the three and nine
months ended September 2002 and 2001 were 6,609,715 and 1,945,400 respectively.
8. Business Segment Information
The Company operates in one reportable segment, the development, manufacture,
sale and support services of consumables and capital equipment to semiconductor
fabrication companies and to other companies using similar manufacturing
processes, as well as to OEM suppliers to those companies. The Company's
products include membrane and metal based filters, housings, precision liquid
dispense filtration pumps, resin based gas purifiers and mass flow and pressure
controllers. The products are used by customers in manufacturing operations to
remove contaminants in liquid and gas processes, to purify liquids and gases, to
measure and control flow rates and to control and monitor pressure and vacuum
levels during the manufacturing process. The Company's products are sold
worldwide through its direct sales force and through distributors in selected
regions.
The Company attributes net sales to different geographic areas as presented in
the table below.
Net sales
Three Months Ended Nine Months Ended
(unaudited) (unaudited)
September 28, September 30, September 28, September 30,
2002 2001 2002 2001
---- ---- ---- ----
United States ................................... $13,234 $11,741 $42,160 $60,091
Japan ........................................... 18,512 14,535 46,023 65,391
Asia ............................................ 11,354 8,065 30,543 30,665
Europe .......................................... 4,640 5,342 13,259 22,943
------- ------- -------- --------
Total net sales ................................. $47,740 $39,683 $131,985 $179,090
======= ======= ======== ========
9. Significant Customers and Concentration of Risk
Historically, the Company has relied on a limited number of customers for a
substantial portion of its net sales. For the three months ended September 2002
and 2001, one customer represented 15.8% and 12.9% of revenues, respectively.
During the nine months ended September 2002 and 2001, one customer represented
13.2% and 14.5% of revenues, respectively. There were no other customers that
accounted for more than 10% of revenues during any of these periods.
10. Transactions with Millipore
For purposes of governing certain of the ongoing relationships between the
Company and Millipore at and after the Separation and to provide for an orderly
transition, the Company and Millipore entered into various agreements at the
Separation date. The Separation Revolving Credit Agreement (the "Credit
Agreement") provided for Millipore to lend the Company funds between the
Separation date and the date of the Company's IPO in order to fund the Company's
working capital needs and to settle any amounts payable by the Company related
to the retention by Millipore of specified assets and liabilities of the Company
and the retention by the Company of specified Millipore assets and liabilities
that could not be transferred at the Separation due to restrictions imposed by
foreign laws or because such transfer was not practical. The net outstanding
balance of $23,730 was paid to Millipore pursuant to the terms of this Credit
Agreement from proceeds generated from the IPO and cash generated from
operations between the Separation date and the IPO date. There was no interest
expense associated with the Credit Agreement.
Millipore contributed its microelectronics business to the Company in exchange
for shares of the Company's common stock plus a term note (the "Separation
Note"). The amount of the Separation Note was determined by agreement between
Millipore and the Company to ensure that all net proceeds of the IPO in excess
of $75,000 would be payable to Millipore. The principal balance of the
Separation Note was calculated by deducting from the net IPO proceeds (i) the
outstanding balance under the Credit Agreement as described above, and (ii) the
$75,000 retained by the Company for general corporate purposes from the IPO
proceeds. As a result, $22,877 was paid to Millipore as payment of the
Separation Note in August 2001. There was no interest expense associated with
the Separation Note.
-10-
During the three months ended September 2002, and 2001, the Company purchased
$613 and $624, respectively, of products from Millipore. Products sold to
Millipore were $388 for the quarter ended September 2002 included in Net sales
and were not material for the quarter ended September 2001. During the three
months ended September 2002 and 2001, $129 and $395, respectively, in royalty
income from Millipore was recorded as other income (expense), net. The
consolidated and combined financial statements include charges for services
purchased under the transition service agreements between Millipore and the
Company. These expenses were $1,762 and $3,375 for the three months ended
September 2002 and 2001, respectively. In addition, charges for services
provided by the Company to Millipore under the transition service agreements
were $544 and $567 for the three months ended September 2002 and 2001,
respectively.
During the nine months ended September 2002 and 2001, the Company purchased
$2,004 and $2,431, respectively, of products from Millipore. Products sold to
Millipore were $1,289 for the nine months ended September 2002 included in net
sales and were not material for the nine months ended September 2001. During the
nine months ended September 2002 and 2001, $399 and $395, respectively in
royalty income from Millipore was recorded as other income (expense), net. The
consolidated and combined financial statements include charges for services
purchased under the transition service agreements between Millipore and the
Company. These expenses were $4,576 and $17,174 for the nine months ended
September 2002 and 2001, respectively. In addition, receipts for services
provided by the Company to Millipore under the transition service agreements
were $1,541 and $1,130 for the nine months ended September 2002 and 2001,
respectively.
11. Commitments and Contingencies
The Company is also subject to a number of claims and legal proceedings which,
in the opinion of the Company's management, are incidental to the Company's
normal business operations. In the opinion of the Company, although final
settlement of these suits and claims may impact the Company's financial
statements in a particular period, they will not, in the aggregate, have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
As of April 1, 2002 the Company entered into a 12-year lease for its new
corporate headquarters, research and development and manufacturing facility.
Annual rental payments under the lease are $2,451 for the first six years and
$2,801 for the remaining six years plus basic operating costs and real estate
taxes. Upon execution of the lease, the Company was required to issue an
irrevocable standby letter of credit in the initial amount of $1,000 to be
reduced by $125 on each of the first six anniversaries of commencement of the
lease. This lease also provides the Company with two 5-year renewal options at
market rent.
12. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets. Under the provisions of SFAS 142, goodwill and intangible
assets with indefinite lives are not amortized, but tested for impairment
annually or whenever there is an impairment indicator. In addition, upon
adoption of SFAS 142, all goodwill must be assigned to reporting units for
purposes of impairment testing and is no longer subject to amortization.
The Company adopted SFAS 142 as required on January 1, 2002. Accordingly, the
Company performed an assessment of whether goodwill was impaired at the date of
adoption. The Company determined that for purposes of this assessment, the
Company's business consists of liquid products and gas products reporting units,
and that the goodwill is attributable solely to the gas products reporting unit.
The Company further estimated the gas products reporting unit's fair value, as
determined by an independent valuation service company, and compared it to the
carrying value of the net assets of this reporting unit. As of January 1, 2002,
the gas reporting unit's fair value exceeded the value of its net assets, and
therefore goodwill was not impaired.
Goodwill amortization expense was $221 and $555 for the three months and nine
months ended September 2001, respectively. The Company estimates that goodwill
amortization expense would have been approximately $229 and $686 for the three
and nine months ended September 2002, respectively. The following table presents
a reconciliation of net loss and loss per share adjusted for the exclusion of
goodwill (in thousands, except per share figures):
-11-
Three months ended Nine months ended
September 28, September 30, September 28, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net loss ........................................................ $(4,336) $(19,719) $(23,542) $(53,129)
Add: Goodwill amortization ...................................... - 221 - 555
------- -------- -------- --------
Adjusted net loss ............................................... $(4,336) $(19,498) $(23,542) $(52,574)
======= ======== ======== ========
Basic and diluted loss per share ................................ $ (0.11) $ (0.54) $ (0.59) $ (1.57)
Add: Goodwill amortization ...................................... - 0.01 - 0.02
------- -------- -------- --------
Adjusted basic and diluted loss per share ....................... $ (0.11) $ (0.53) $ (0.59) $ (1.55)
======= ======== ======== ========
As of September 28, 2002, goodwill amounted to $14,454 net of accumulated
amortization at December 31, 2001. Other identifiable intangible assets of
$6,124 (net of accumulated amortization) at September 28, 2002 are being
amortized over their estimated useful lives ranging from 5 to 15 years. The
following table summarizes other intangible assets by major intangible asset
class.
As of September 28, 2002
Gross carrying Accumulated
amount amortization
-------------- ------------
Patents ............................ $16,121 $10,878
Unpatented technology .............. 8,505 7,897
Trademarks / tradenames ............ 2,906 2,892
Other .............................. 266 7
------- -------
$27,798 $21,674
======= =======
Total amortization expense for the three and nine months ended September 2002
was $396 and $1,257, respectively. Estimated amortization expense for the fiscal
years 2002 to 2006 is $1,666, $1,613, $1,178, $1,082 and $959, respectively.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 is not expected to have a material impact on the
Company's consolidated results of operations, financial position or cash flows.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS 144"), which excludes from the definition
of long-lived assets goodwill and other intangibles that are not amortized in
accordance with SFAS 142. SFAS 144 requires that long-lived assets to be
disposed of by sale be measured at the lower of carrying amount or fair value
less cost to sell, whether reported in continuing operations or in discontinued
operations. SFAS 144 also expands the reporting of discontinued operations to
include components of an entity that have been or will be disposed of rather
than limiting such discontinuance to a segment of a business. This Statement is
effective for the Company's 2002 fiscal year. The adoption of SFAS 144 had no
material impact on the Company's consolidated results of operations, financial
position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue (EITF) No. 94-3. The Company will
adopt the provision of SFAS No. 146 for restructuring activities initiated after
December 31, 2002. SFAS No. 146 requires that the liability for costs associated
with an exit or disposal activity be recognized when the liability is incurred.
Under EITF No. 94-3, a liability for an exit cost was recognized at the date of
the Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
13. Assets Held for Sale and Impairment
During the third quarter of 2002, the Company decided to place specific
manufacturing machinery up for sale. This equipment was owned by the Company and
placed with a subcontractor on its property for the machining of certain
Mykrolis sub-components. Due to a permanent decline in business volume with this
subcontractor, the machinery was recovered from the subcontractor in the third
quarter. This recovered machinery consists of a combination of fifteen lathes,
machining centers, and processing equipment. The Company wrote down the value of
this machinery to estimated fair market value in the third quarter and incurred
a $970 impairment loss, which was included as a component of "Cost of sales."
The details of the asset impairment are as follows:
Net book value of equipment before impairment .... $2,185
Impairment of book value ......................... ( 970)
-------
Net book value of equipment after impairment ..... $1,215
======
The impairment was based upon the actual sale price of some of this machinery in
the fourth quarter of 2002 and estimates of fair market value of similar
machinery received from external independent equipment brokers. The assets have
been classified as "Assets held for sale" at September 28, 2002.
-12-
14. Subsequent Event
On October 24, 2002, the Company announced measures to streamline its
organization and to further optimize the manufacturing of its products across
its manufacturing facilities worldwide. These measures will result in a seven to
ten percent reduction of the Company's workforce. The severance and other costs
relating to this workforce reduction are estimated at $1.5 million. The Company
is also considering additional restructuring actions; the extent, estimated
costs and timing of these actions have not yet been determined.
In October 2002, the Company sold surplus machinery (assets held for sale)
generating cash proceeds of $715.
-13-
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
You should read the following discussion of the Company's financial condition
and results of operations along with the consolidated and combined financial
statements and accompanying notes included herein. This discussion contains
forward-looking statements and involves numerous risks and uncertainties, which
are described under "Forward Looking Statements" below. The Company's actual
results may differ materially from those contained in any forward-looking
statements.
Overview and Financial Condition
Mykrolis Corporation is a worldwide developer, manufacturer and supplier of
liquid and gas delivery systems, components and consumables used to precisely
measure, deliver, control and purify the process liquids, gases and chemicals,
as well as the deionized water, photoresists and vacuum systems utilized in the
semiconductor manufacturing process. In addition, the Company's products are
used to manufacture a range of other products, such as flat panel displays, high
purity chemicals, photoresists, solar cells, gas lasers, optical disks and fiber
optic cables. Mykrolis was formerly the Microelectronics Division of Millipore
Corporation.
On October 3, 2000, Millipore Corporation ("Millipore") announced its plan to
spin-off its microelectronics business, which serves the semiconductor industry
and certain related industries with products needed to manufacture semiconductor
devices as well as a range of other products that now comprise the Company. On
October 16, 2000, Mykrolis Corporation was incorporated in Delaware as a
wholly-owned subsidiary of Millipore to receive Millipore's microelectronics
business and to be the spun-off company. As used herein, terms the "Company",
"Mykrolis", "we", "us" and "our" each refer to Mykrolis Corporation and
subsidiaries and to the historical operations of the microelectronics business
of Millipore. Prior to March 2001 our business was operated as a fully
integrated business unit of Millipore. On March 31, 2001, Millipore transferred
to us substantially all of the assets and liabilities associated with its
microelectronics business (the "Separation"). We completed our initial public
offering ("IPO") of 7 million shares of common stock on August 9, 2001 receiving
net proceeds of approximately $94.1 million, after deducting underwriting
commissions and offering expenses. We retained $75.0 million of the net proceeds
and paid the balance to Millipore as repayment of amounts outstanding under
inter-company loans incurred by Mykrolis in connection with the Separation.
After the initial public offering, Millipore owned 32.5 million shares or
approximately 82.3% of our total outstanding common stock. On February 27, 2002
(the "Distribution Date"), Millipore completed the spin-off of Mykrolis through
the distribution to its shareholders of all of the 32.5 million shares of
Mykrolis common stock owned by Millipore on that date. Mykrolis is now a fully
independent company with 39.7 million shares outstanding at September 28, 2002.
In connection with our separation from Millipore, we entered into agreements
with Millipore under which Millipore agreed to provide services to us during a
transition period after the Separation date. The agreements relate to facilities
services, information technology services, distribution, accounting, finance and
other services and arrangements. Under these agreements, we reimburse Millipore
for the cost of these services. The duration of each of the different transition
service agreements varied depending on the anticipated time it would take for us
to replace the service, but was generally for a one-year period. No agreement
has been extended beyond the mutually agreed upon initial transition period,
with the exception of the accounting and distribution services in Europe which
was extended by one additional quarter until the end of the second quarter 2002.
As most of these transition service agreements have expired without renewal, we
have been able to provide these services ourselves or negotiate new agreements
with various third parties as a separate stand-alone entity. We have been able
to do this at costs at least as favorable as those paid to Millipore for these
services. The last major step in our separation from Millipore will be
terminating the use of Millipore's Information Technology Data Center, which is
currently hosting our IT system operations. This last step will be completed
during the first half of 2003 in accordance with our original transition service
agreement. There can be no assurance that the terms we will be able to negotiate
for these information technology services will be as favorable as those we had
with Millipore. In addition, we have entered into agreements with Millipore for
membrane manufacturing and supply, research and development, product
distribution and contract manufacturing, generally for a five-year period. The
foregoing transition agreements do not necessarily reflect the costs of
obtaining the services from unrelated third parties or of our providing the
applicable services ourselves. However, we believe that purchasing these
services from Millipore provides us with an efficient means of obtaining these
services during the transition period. In addition, we have agreed to provide
transition services to Millipore, for which we will be reimbursed at our cost.
-14-
Basis of Presentation
Our condensed combined financial statements include amounts prior to March 31,
2001 that have been derived from the consolidated financial statements and
accounting records of Millipore using the historical results of operations and
historical basis of assets and liabilities of our business. We believe the
assumptions underlying the condensed combined financial statements are
reasonable. However, the condensed combined financial information included
herein may not necessarily reflect our operating results, financial position and
cash flows in the future or what they would have been had we been a separate,
stand-alone entity during the periods presented. Because a direct ownership
relationship did not exist among all our various units, Millipore's net
investment in us is shown in lieu of stockholders' equity in the combined
financial statements prior to the Separation. We began accumulating retained
earnings (accumulated deficit) on April 1, 2001, following the effective date of
the Separation agreement with Millipore, pursuant to which our assets and
liabilities were transferred to us. Our consolidated financial statements as of
and for the quarter ended September 2002 include all our wholly-owned
subsidiaries and our assets and liabilities. All material intercompany
transactions and balances between and among our subsidiaries have been
eliminated. Prior to March 31, 2001 Millipore allocated certain corporate
expenses, including centralized research and development, legal, accounting,
employee benefits, officers' salaries, facilities, insurance, information
technology services, distribution, treasury and other Millipore corporate and
infrastructure costs. These expense allocations were determined on a basis that
Millipore and we consider to be a reasonable assessment of the utilization of
services provided or the benefit received by us. At the Separation date, we
entered into transition service agreements with Millipore for Millipore to
provide specified functions and for us to reimburse Millipore for the cost of
these functions. The agreements do not necessarily reflect the costs of
obtaining the services from unrelated third parties or of our providing the
applicable services ourselves. However, we believe that purchasing these
services from Millipore provides us with an efficient means of obtaining these
services during the transition period. In addition, we have agreed to provide
transition services to Millipore, for which we will be reimbursed at our cost.
Millipore used a centralized approach to cash management and the financing of
its operations. Prior to the Separation, our cash deposits were transferred to
Millipore on a regular basis and netted against Millipore's net investment. As a
result, none of Millipore's cash, cash equivalents or debt at the corporate
level were allocated to us in our condensed combined financial statements
through the third quarter of 2001. Changes in Millipore's net investment include
our net earnings plus net cash transfers to or from Millipore. After the
Separation but prior to the initial public offering, cash deposits were netted
against the Separation Revolving Credit Agreement.
Restructuring and Other Charges
During the first and third quarters of 2001, we recorded restructuring and other
charges of $12.6 and $4.9 million in connection with our separation from
Millipore and in response to the prolonged duration and severity of the current
semiconductor industry downturn. The two restructuring and other charges
included $13.8 million of employee severance costs, $ 1.7 million in write-offs
of equipment and leasehold improvements and $2.0 million of net exit costs on
leased properties. Key initiatives of the restructurings included:
Consolidating manufacturing operations to eliminate redundant
manufacturing processes. We are in the process of relocating some of our
operations from two Millipore facilities in the U.S. In addition, we have
closed our manufacturing facility in England. This consolidation of our
manufacturing operations is expected to be completed by the end of 2002.
Realigning our European organizational structure to focus on operating
business units, thereby consolidating the sales and administrative
activities into fewer locations that are closer to our customer base. We
completed this realignment during 2001.
Reducing our administrative and management infrastructure costs in Asia
by exiting facilities and eliminating administrative positions during
2001.
Reducing our workforce in the U.S. in response to lower demand for our
products due to the current semiconductor industry downturn. This action
was completed during the second quarter of 2001.
Further reducing our workforce in the U.S., Asia and Europe in order to
resize the Company. This action was completed during the third quarter of
2001.
-15-
Discontinuation of our plan to renovate leased office space in Bedford,
Massachusetts and instead exit that facility. This action was completed
during the third quarter of 2001.
These restructuring initiatives resulted in the elimination of 358
positions worldwide. Notifications to employees were completed in the
first and third quarters of 2001, however a number of these employees
will continue in their existing positions through the fourth quarter of
2002 with their related salary costs charged to operations as incurred.
In the third quarter of 2002, approximately $0.5 million of the
restructuring charge was utilized, consisting of $0.3 million severance
and associated benefits for 14 employees and $0.2 million of leasehold
write-offs and other exit costs. At September 28, 2002 we believe that
approximately $0.9 million of employee severance costs relating to 11
employees will be substantially paid by the end of 2002. We believe that
accrued leasehold and other exit costs at September 28, 2002 of $2.7
million will be substantially paid by the lease expiration date in 2005.
Results of Operations
Operating trends and recent developments
The principal market we serve is the global semiconductor industry, a highly
cyclical business. As a result, we have experienced significant variations in
net sales and results of operations in the periods presented and such variations
are likely to continue. We generally have limited backlog. We believe the
business environment will be uncertain, and there are no clear signs of a
sustained industry upturn in future periods. The impact of the severe downturn
in the semiconductor industry on our operations was somewhat mitigated in the
third quarter of 2002 by the recurring revenue stream of our consumable
purification products, which depends upon the level of semiconductor device
manufacturing activity rather than expansion of plant capacity. However, there
can be no assurance that this increase in sales will continue or as to the
extent or duration of this cyclical downturn and its impact on us.
During the nine months ended September 2002, we continued to experience softer
demand for our liquid and gas delivery systems, components and consumables. A
number of our large customers have placed fewer orders as they attempted, we
believe, to manage their demand and their inventories in response to weakness in
their market. We have taken actions to reduce capital expenditures, operating
costs and expenses in response to these adverse trends that began in the first
quarter of 2001.
On October 24, 2002, we announced measures to streamline our organization and to
further optimize the manufacturing of our products across our manufacturing
facilities worldwide. These measures will result in a seven to ten percent
reduction of our workforce. The severance and other costs relating to this
workforce reduction are estimated at $1.5 million. We are also considering
additional restructuring actions; the extent, estimated costs and timing of
these actions have not yet been determined.
As of September 2002 most employees have not received any salary increase for
2002. During the fourth quarter of 2001 the top 150 employees including the
officers in the Company took a temporary reduction in their annual salaries
based on a sliding scale of up to 20 percent of annualized salary. These
salaries will be reinstated in full or in part during the fourth quarter of
2002.
Three months ended September 2002 compared to three months ended September 2001
Net Sales
Net sales were $47.7 million for the three months ended September 2002 which
represented a 20.3%, or $8.1 million, increase from the three months ended
September 2001. Sales of both equipment and consumable products increased during
the three month period ended September 2002 in most of our major markets.
Sales by geography are summarized in the table below.
Net Sales In millions of U.S. Dollars As a Percentage of Total Net Sales
--------------------------- ----------------------------------
Three Months Ended
------------------
September 28, September 30, September 28, September 30,
2002 2001 2002 2001
---- ---- ---- ----
United States .... $13.2 $11.8 27.7% 29.5%
Japan ............ 18.5 14.5 38.8 36.5
Asia ............. 11.3 8.1 23.8 20.7
Europe ........... 4.7 5.3 9.7 13.3
----- ----- ----- -----
Total ....... $47.7 $39.7 100.0% 100.0%
===== ===== ===== =====
-16-
Gross Profit
Our gross profit as a percentage of sales was 37.9% for the three months ended
September 28, 2002 as compared to 26.7% for the three months ended September 30,
2001. The improvement was primarily due to an increase in manufacturing overhead
absorption related to higher demand and inventory build-up in preparation of the
manufacturing product line transfers from Jaffrey, NH and Yonezawa, Japan to
Billerica, MA. Favorable product mix sold also contributed to the increase in
gross margins.
Operating Expenses
Selling, general and administrative expenses decreased 2.4% or $0.5 million,
from $19.2 million in the three months ended September 30, 2001 to $18.7 million
for the three months ended September 28, 2002. The decrease for the three months
ended September 28, 2002 was due to the reduction in selling, general and
administrative employees primarily as a result of the 2001 restructuring
programs as well as actions to reduce discretionary spending.
Research and development expenses were $5.1 million in the three months ended
September 28, 2002 an increase of 5.0% or $0.2 million compared to research and
development expense of $4.9 million for the three months ended September 30,
2001. During the quarter, we continued to fund key research and development
programs in spite of the current business environment uncertainties.
Restructuring and Other Charges
During the three months ended September 2001, we recorded a restructuring charge
of $4.9 million in response to the prolonged duration and severity of the
current semiconductor industry downturn. The restructuring charge included $2.5
million of employee severance costs, a $0.7 million write-off of equipment and
leasehold improvements, and $1.7 million of exit costs on leased property.
Other Income (Expense)-net
Other income (expense)-net decreased $0.2 million from a net income of $0.2
million for the three months ended September 30, 2001 to $0.0 million for the
three months ended September 28, 2002. The reduction in other income was
attributed primarily to unfavorable unrealized foreign exchange losses of $0.2
million. For the three months ended September 28, 2002 compared to the three
months ended September 30, 2001, an increase of $0.3 million of income from
investments accounted for under the equity method was offset by a $0.3 million
decrease in royalty income from Millipore.
Income Tax Expense
Prior to the Distribution Date, our operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if we filed tax returns separately from
Millipore. At December 31, 2001, we had a $9.0 million income tax receivable
related to net operating loss carrybacks determined on a separate return basis.
In accordance with the tax sharing agreement, during the first quarter of 2002,
Millipore decided not to allow us to carryback these net-operating losses. As a
result, the receivable was transferred to Millipore during the first quarter of
2002 and is reflected in the consolidated financial statements as a reduction to
additional paid in capital included in shareholders' equity.
For the three months ended September 2002, we recorded income tax benefit of
$1.4 million on a consolidated pre-tax loss of $5.7 million, yielding an
effective tax rate of 24.4%. The income tax benefit resulted from changes in
expected full year losses and the overall geographic mix of foreign operations
income and loss.
For the three months ended September 2001, we recorded an income tax expense of
$1.5 million on a consolidated pre-tax loss of $18.2 million, yielding an
effective tax rate of negative 8.2%. The income tax expense is primarily
attributable to an increase in the valuation allowance or reserve against
foreign tax credits on unremitted earnings of our foreign subsidiaries of
approximately $18.0 million and other U.S. deferred tax assets of approximately
$4.3 million. SFAS 109, "Accounting for Income Tax," requires that we establish
a valuation allowance or reserve when, based on an evaluation of objective
verifiable evidence, we believe there is likelihood that some portion or all of
the deferred tax assets will not be realized.
-17-
Nine months ended September 28, 2002 compared to nine months ended
September 30, 2001.
Net Sales
Net sales were $132.0 million for the nine months ended September 28, 2002,
which represented a decrease of 26.3%, or $47.1 million, from the nine months
ended September 30, 2001. This decrease was a result of the severe downturn in
the semiconductor industry, which began in the first quarter of 2001. The
decline in sales was significant in all geographic regions and across nearly all
product families. Sales of microelectronics hardware have declined as new
semiconductor fabrication plant construction and upgrades have declined due to
industry over-capacity. In addition, sales of consumable purification products
also declined, although to a lesser extent, as semiconductor fabrication plants
have experienced lower manufacturing volumes and have focused on achieving
manufacturing efficiencies and reducing material costs.
Sales by geography are summarized in the table below.
Net Sales In millions of U.S. Dollars As a Percentage of Total Net Sales
--------------------------- ----------------------------------
(unaudited)
Nine Months Ended
-----------------
September 28, September 30, September 28, September 30,
2002 2001 2002 2001
---- ---- ---- ----
United States ... $ 42.2 $ 60.1 31.9% 33.6%
Japan ........... 46.0 65.4 34.9 36.5
Asia ............ 30.5 30.7 23.1 17.1
Europe .......... 13.3 22.9 10.1 12.8
----- ----- ----- -----
Total ...... $132.0 $179.1 100.0% 100.0%
====== ====== ===== =====
Gross Profit
Our gross profit as a percentage of net sales was 34.3% for the nine months
ended September 28, 2002 as compared to 39.0% for the nine months ended
September 30, 2001. The decrease was primarily due to reductions in product
demand resulting in reduced leverage on our manufacturing overhead from the
lower production volume. We did respond to this change in demand during the
first and third quarters of 2001 by restructuring our manufacturing operations.
During the nine months ended September 2002, manufacturing costs also increased
by $1.7 million for redundant facility and labor expenses in order to safeguard
the quality of our manufacturing processes while we transfer these processes
into our new Billerica facility. This increase in manufacturing costs related to
non-recurring redundant facility and labor expenses. We expect to complete the
manufacturing transfer in the first quarter of 2003. In addition, $1.0 million
of non-recurring impairment charges associated with manufacturing machinery no
longer utilized (and classified as assets held for sale) were recorded during
the nine months ended September 28, 2002.
Operating Expenses
Selling, general and administrative expenses decreased 17.4% or $11.2 million,
from $64.7 million in the nine months ended September 30, 2001 to $53.5 million
for the nine months ended September 28, 2002. Excluding $1.1 million and $4.3
million of non-recurring separation related costs and expenses for the nine
months ended September 2002 and 2001, respectively, selling, general and
administrative expenses decreased by 13.2% or $8.0 million. The decrease for the
nine months ended September 28, 2002 was due to the reduction in selling,
general and administrative employees primarily as a result of the 2001
restructuring programs as well as actions to reduce discretionary spending.
Research and development expenses were $14.7 million in the nine months ended
September 28, 2002 a decrease of 10.1% or $1.6 million compared to research and
development expense of $16.3 million for the nine months ended September 30,
2001. This decrease was due to reduced spending in response to the industry
downturn. During the year we continued to fund key research and development
programs in spite of the current business environment uncertainties.
Restructuring and Other Charges
During the nine months ended September 2001, we recorded restructuring and other
charges of $17.5 million in connection with our separation from Millipore, to
improve our manufacturing asset utilization and to resize our overall cost
structure in response to the current semiconductor industry downturn. The
restructuring and other charges included $13.8 million of employee severance
costs, a $1.7 million write-off of equipment and leasehold improvements, $2.0
million of lease costs at the vacated Bedford, MA facility.
Other Income (Expense)-net
Other income (expense)-net increased $2.7 million from a net other expense of
$0.8 million for the nine months ended September
-18-
30, 2001 to a net other income of $1.9 million for the nine months ended
September 28, 2002. The increase was attributed to favorable unrealized foreign
exchange gains of $0.7 million principally related to $12.4 million of
intercompany loans made by the corporate office denominated in Euro to European
subsidiaries. During the nine months ended September 28, 2002 the Euro
strengthened against United States dollar by 9.2%, versus the same period in
2001 in which the Euro weakened against the United States dollar by 3.6%. In
addition, realized foreign exchange transaction gains in Asia increased $1.2
million in the 2002 period. Interest income also increased by $0.6 million and
income on equity investments increased $0.4 million during the nine months ended
September 28, 2002 compared to the nine months ended September 30, 2001.
Income Tax Expense
Prior to the Distribution Date, our operating results were included in
Millipore's consolidated U.S. and state income tax returns and in tax returns of
certain Millipore foreign subsidiaries. Accordingly, income taxes were
calculated on a separate return basis as if we filed tax returns separately from
Millipore. At December 31, 2001, we had a $9.0 million income tax receivable
related to net operating loss carrybacks determined on a separate return basis.
In accordance with the tax sharing agreement, during the first quarter of 2002,
Millipore decided not to allow us to carryback these net-operating losses. As a
result, the receivable was transferred to Millipore during the first quarter of
2002 and is reflected in the consolidated financial statements as a reduction to
additional paid in capital included in shareholders' equity.
For the nine months ended September 28, 2002, we recorded income tax expense of
$2.6 million with respect to certain foreign operations on a consolidated
pre-tax loss of $21.0 million, yielding an effective tax rate of negative 12.3%.
The income tax expense includes anticipated settlements of foreign tax audits
for which the Company is responsible under its tax sharing agreement with
Millipore and changes in expected full year losses and the overall geographic
mix of income and loss.
For the nine months ended September 30, 2001, the Company recorded income tax
expense of $23.6 million on a consolidated pre-tax loss of $29.5 million,
yielding an effective tax rate of negative 80.2%. The income tax expense is
primarily attributable to an increase in the valuation allowance or reserve
against foreign tax credits on unremitted earnings of our foreign subsidiaries
of approximately $18.0 million and other U.S. deferred tax assets of
approximately $4.3 million. SFAS 109, "Accounting for Income Tax," requires that
we establish a valuation allowance or reserve when, based on an evaluation of
objective verifiable evidence, we believe there is a likelihood that some
portion or all of the deferred tax assets will not be realized.
Liquidity and Capital Resources
During the nine months ended September 28, 2002, our net cash provided by
operating activities was $8.7 million as compared to net cash provided by
operating activities of $17.4 million during the nine months ended September 30,
2001. The net cash provided by operating activities resulted primarily from the
Company's net loss of $23.5 million, the increase in accounts receivable of $3.9
million, offset by the decrease in inventory of $8.5 million, the increase in
accounts payables of $13.6 million and depreciation and amortization of $9.1
million. Working capital at September 28, 2002 totaled $124.9 million including
$80.2 million in cash and cash equivalents.
Our principal cash requirements have been to fund our operations and additions
to property, plant and equipment that support the separation of our business
from Millipore. In the nine months ended September 28, 2002, cash flows used in
investing activities were $13.3 million, primarily used for the construction and
purchase of production and research and development equipment, and the transfer
of manufacturing operations from Millipore facilities pursuant to our separation
agreement. During the next three quarters we expect to spend an additional $9.0
million, of which we expect $5.0 to $7.0 million to be spent in the fourth
quarter of 2002. The majority of these expenditures relates to the consolidation
of manufacturing and research and development functions into our headquarters
facility in Billerica in the second half of 2002.
Cash flows provided by financing activities for the nine months ended September
28, 2002 were $1.7 million and resulted from net transfers of $1.8 million from
Millipore as reimbursement of expenses and $1.5 million generated by the
issuance of 155,000 shares of common stock under our employee stock purchase and
stock option plans. This was offset by $1.6 million in cash collateratization
related to a security deposit under a new lease for our corporate headquarters,
research and development and manufacturing facility and other security deposits.
At September 28, 2002, this cash collateral was invested in U.S. federal agency
securities and money market funds.
In October 2002, we generated cash proceeds of $0.7 million from the partial
sale of manufacturing machinery (assets held for sale) consisting of a
combination of fifteen lathes, machining centers, and processing equipment
Our liquidity is affected by many factors, some of which are based on the normal
ongoing operations of our business and some of which arise from uncertainties
related to global economies. We believe that our cash and cash equivalents
together with expected cash collections from existing trade receivables will be
sufficient to satisfy our working capital, capital expenditure, restructuring
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and research and development requirements for the next twelve months. We expect
that our cash flow needs beyond this twelve-month period will be satisfied
through cash flow generated from operations. Pursuant to the terms of the lease
for our vacated Bedford, Massachusetts facility, the landlord has an option to
sell the facility to us at any time prior to November 2005, the end of the lease
term, at 90% of the then current market value, excluding the value of the lease.
Approximately $3.7 million of accrued restructuring costs will be paid by the
end of 2005.
If our cash flows from operations are less than we expect, we may need to incur
debt or issue additional equity. Also, we may need to incur debt or issue equity
to make strategic acquisitions or investments. There can be no assurance that we
will be able to obtain necessary short-term or other financing on favorable
terms or at all. If we are unable to obtain necessary financing, we may not have
sufficient cash to operate our business.
Forward Looking Statement Disclaimer
The matters discussed herein, as well as in future oral and written statements
by management of Mykrolis Corporation that are forward-looking statements, are
based on current management expectations that involve substantial risks and
uncertainties which could cause actual results to differ materially from the
results expressed in, or implied by, these forward-looking statements.
When used herein or in such statements, the words "anticipate", "believe",
"estimate", "expect", "may", "will", "should" or the negative thereof and
similar expressions as they relate to Mykrolis or its management are intended to
identify such forward-looking statements. Potential risks and uncertainties that
could affect Mykrolis' future operating results include: further deterioration
in our revenues due to a prolonged downturn in the semiconductor industry; the
reduction in orders from our key customers, who are likewise adversely impacted
by the downturn in the semiconductor industry and which account for a large
percentage of our sales; delays or disruptions in the transfer of the production
of our products to our new manufacturing facility pursuant to the separation
from Millipore; increased competition in our industry resulting in downward
pressure on prices and reduced margins; increased costs associated with building
out our business infrastructure in connection with our separation from
Millipore; as well as those risks described under the headings "Risks Relating
to our Business and Industry", "Risks Related to our Separation from Millipore"
and "Risks Related to Securities Markets and Ownership of Our Common Stock" in
Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations of our Annual Report on Form 10-K for the fiscal year ended
December 31, 2001.
Recently Issued Accounting Pronouncements
We adopted Financial Accounting Standards Board (the "FASB") Statement of
Financial Accounting Standards ("SFAS") No. 142 as required on January 1, 2002.
We performed an assessment of whether there was an indication that goodwill was
impaired at the date of adoption. We determined that, for purposes of this, our
business consists of liquid products and gas products reporting units and that
our goodwill is attributable solely to the gas products reporting unit. We
estimated the gas products reporting unit's fair value, as determined by an
independent valuation services company and compared it to the carrying value of
the net assets of this reporting unit. As of January 1, 2002, the gas reporting
unit's fair value exceeded its value of the net assets, and therefore goodwill
was not impaired. Goodwill amortization expense was $0.3 million for the nine
months ended September 30, 2001. As a result of our adoption of SFAS 142, we
ceased our goodwill amortization effective January 1, 2002. We estimate that
goodwill amortization expense would have been approximately $0.7 million for the
nine months ended September 28, 2002 and $0.9 million for the full year 2002.
In August 2001, the FASB issued Statement No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"), which provides the accounting requirements
for retirement obligations associated with tangible long-lived assets. This
Statement requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. This Statement is
effective for the Company's 2003 fiscal year, and early adoption is permitted.
The adoption of SFAS 143 is not expected to have a material impact on our
consolidated results of operations, financial position or cash flows.
In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144")
effective January 1, 2002. SFAS 144 supersedes SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and
provides a single accounting model for long-lived assets to be disposed of. The
adoption of SFAS 144 had no impact on our consolidated results of operations,
financial position or cash flows.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which addresses accounting for restructuring
and similar costs. SFAS No. 146 supersedes previous accounting guidance,
principally Emerging Issues Task Force Issue (EITF) No. 94-3. We will adopt the
provision of SFAS No. 146 for restructuring activities initiated after December
31, 2002. SFAS No. 146 requires that the liability for costs associated with an
exit or disposal activity be recognized when the liability is incurred. Under
EITF No. 94-3, a liability for an exit cost was recognized at the date of the
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Company's commitment to an exit plan. SFAS No. 146 also establishes that the
liability should initially be measured and recorded at fair value. Accordingly,
SFAS No. 146 may affect the timing of recognizing future restructuring costs as
well as the amounts recognized.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to foreign currency exchange rate risk inherent in our sales
commitments, anticipated sales, and assets and liabilities denominated in
currencies other than the U.S. dollar. We sell our products in many countries
and a substantial portion of our net sales and a portion of our costs and
expenses are denominated in foreign currencies. Approximately 68.0% of our net
sales for the nine months ended September 28, 2002 were derived from customers
located outside of the U.S., principally in Asia including Japan, where we also
manufacture. This exposes us to risks associated with changes in foreign
currency that can adversely impact revenues, net income and cash flow. In
addition, we are potentially subject to concentrations of credit risk,
principally in accounts receivable, as historically we have relied on a limited
number of customers for a substantial portion of our net sales. We perform
ongoing credit evaluations of our customers and we generally do not require
collateral. Our major customers are large, well-established microelectronics
companies that have historically paid their accounts receivable balances with
us. We do not currently hold derivative financial instruments and continue to
evaluate our future hedging strategy.
Item 4. Controls and Procedures
The Company's Chairman and Chief Executive Officer, C. William Zadel, and Chief
Financial Officer, Bertrand Loy, evaluated the effectiveness of the Company's
Disclosure Controls and Procedures (as that term is defined in Rule 13a-14(c)
under the Securities Exchange of 1934, as amended) as of November 1, 2002. Based
on that evaluation, Messrs. Zadel and Loy concluded that the Company's
Disclosure Controls and Procedures were effective.
Since November 1, 2002 there have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls. No corrective actions with regard to significant deficiencies and
material weaknesses were taken or required to be taken.
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PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of C. William Zadel, Chief Executive Officer, Pursuant
to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Bertrand Loy, Chief Financial Officer, Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
b. Report on Form 8-K
No reports on Form 8-K have been filed by the Company during the
fiscal quarter ended September 28, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MYKROLIS CORPORATION
Registrant
Date November 12, 2002 /s/ Bertrand Loy
-------------------------------------------
Bertrand Loy
Vice President and Chief Financial Officer
Date November 12, 2002 /s/ Robert Hammond
-------------------------------------------
Robert Hammond
Corporate Controller
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CERTIFICATIONS*
I, C. William Zadel, Chairman of the Board and Chief Executive Officer of
Mykrolis Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mykrolis
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date November 12, 2002 /s/ C. William Zadel
----------------------------------
C. William Zadel
Chief Executive Officer
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I, Bertrand Loy, Chief Financial Officer of Mykrolis Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Mykrolis Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date November 12, 2002 /s/ Bertrand Loy
------------------------------------------
Bertrand Loy
Vice President and Chief Financial Officer
* Provide a separate certification for each principal executive officer and
principal financial officer of the registrant. See Rules 13a-14 and 15d-14. The
required certification must be in the exact form set forth above.
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