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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended August 26, 2000
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: 000-30789
ENTEGRIS, INC.
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(Exact name of registrant as specified in its charter)
Minnesota 41-1941551
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3500 Lyman Boulevard
Chaska, Minnesota 55318
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(Address of principal executive offices)
Registrant's telephone number, including area code: (952) 556-3131
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act:
Common Stock, $0.01 Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting stock held by non-affiliates of
the registrant, based on the last sale price of the Common Stock on October 31,
2000 as reported by the Nasdaq National Market, was approximately $175,000,000.
Shares held by each officer and director of the registrant and by each person
who owns 5 percent or more of the outstanding Common Shares have been excluded
from this computation in that such persons may be deemed to be affiliates of the
registrant. This determination of affiliate status for this purpose is not
necessarily a conclusive determination for other purposes.
The number of outstanding shares of the registrant's Common Stock,
$0.01 Par Value, as of October 31, 2000 was 68,424,736.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2001 Annual General Meeting of
Shareholders (the "Proxy Statement"), to be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after the
Registrant's fiscal year ended August 26, 2000, are incorporated by reference
into Part III of this report.
Certain Exhibits filed with the registrant's Registration Statement on Form S-1,
No.333-33668 filed with the Commission on July 10, 2000, are incorporated by
reference into Part IV of this report.
PART I
ITEM 1. BUSINESS
Overview
Entegris, Inc. is a leading provider of materials management solutions
that protect and transport the critical materials used in the semiconductor and
other high technology industries, in particular, the semiconductor manufacturing
and disk manufacturing markets. Our materials management solutions assure the
integrity of materials as they are handled, stored, processed and transported
throughout the semiconductor manufacturing process, from raw silicon wafer
manufacturing to packaging of completed integrated circuits. These solutions
enable our customers to protect their investment in work-in-process and finished
devices by facilitating the safe handling, purity and precision processing of
the critical materials used in their manufacturing process.
With over 10,000 standard and customized products, we believe we
provide the most comprehensive portfolio of materials management products to the
microelectronics industry. Our materials management products, such as wafer
shippers, wafer transport and process carriers, pods and work-in-process boxes,
preserve the integrity of wafers as they are transported from wafer
manufacturers to semiconductor manufacturers, processed into finished wafers and
integrated circuits and subsequently tested, assembled and packaged. We also
provide chemical delivery products, such as valves, fittings, tubing, pipe and
containers, that assure the consistent and safe delivery and storage of
sophisticated chemicals between chemical manufacturers and semiconductor
manufacturers' point-of-use.
We sell our products worldwide to over 1,000 customers, who represent a
broad base of leading suppliers to the microelectronics industry. Our customers
in the semiconductor industry include wafer manufacturers, chemical suppliers,
equipment manufacturers, device manufacturers and assemblers. Our semiconductor
customers include Amkor/Anam, Applied Materials, Arch Chemicals, IBM, Infineon,
Intel, Texas Instruments and TSMC. Our customers in data storage manufacturing
include HMT, IBM, Komag and Seagate Technology.
International sales represented approximately 45% of our sales in
fiscal 1998, and 48% of our sales in both fiscal 1999 and fiscal 2000. We
provide our customers with a worldwide network of sales and support personnel,
which enable us to offer local service to our global customer base and assure
the timely and cost-effective delivery of our products.
Industry Background
Semiconductors, or integrated circuits, are the building blocks of
today's electronics and the backbone of the information age. The market for
semiconductors has grown significantly over the past several years. This trend
is expected to continue due to rapid growth in Internet usage and the continuing
demand for applications in data processing, wireless communications, broadband
infrastructure, personal computers, handheld electronic devices and other
consumer electronics. As integrated circuit performance has increased and the
size and cost have decreased, the use of semiconductors in these applications
has grown significantly. According to the Semiconductor Industry Association, or
SIA, worldwide semiconductor revenues grew by 14.7% in 1999 to $144.1 billion,
and is expected to grow at a compound annual growth rate of 17.5% over the next
three years to $233.6 billion in 2002.
The semiconductor materials industry is comprised of a wide variety of
materials and consumables that are used throughout the semiconductor production
process. The extensive and complex process of turning bare silicon wafers into
finished integrated circuits is dependent upon a variety of materials used
repeatedly throughout the
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manufacturing process, such as silicon, chemicals, gases and metals. The
handling of these materials during the integrated circuit manufacturing process
requires the use of a variety of products, such as wafer shippers, wafer
transport and process carriers, fluid and gas handling components and integrated
circuit trays. Semiconductor unit volume is the primary driver of the demand for
these materials and products because they are used or consumed throughout the
production process and many are replenished or replaced on a regular basis.
While influenced by capacity expansion, the semiconductor materials and
materials management industries are less cyclical than the semiconductor capital
equipment industries.
Semiconductor Manufacturing Process
Semiconductor manufacturing is highly complex and consists of two
principal segments: front-end and back-end processes. The front-end process
begins with the delivery of raw wafers from wafer manufacturers to semiconductor
manufacturers. After the wafers are shipped to semiconductor manufacturers, they
are processed into finished wafers. During the front-end process, raw wafers
undergo a series of highly complex and sensitive manufacturing steps, during
which a variety of materials, including chemicals and gases, are introduced.
Once the front-end manufacturing process is completed, finished wafers are
transferred to back-end manufacturers or assemblers. The back-end semiconductor
manufacturing process consists of test, assembly and packaging of finished
wafers into integrated circuits. Materials integrity management products, such
as wafer shippers, wafer transport and process carriers, fluid and gas handling
components and integrated circuit trays, facilitate the storage, transport,
processing and protection of wafers through these front-end and back-end
manufacturing steps. Semiconductor manufacturing has become more complex in
recent years as new technologies have been introduced to enhance device
performance and as larger wafer sizes have been introduced to increase
production efficiencies. Increased processing complexity adds significantly to
the cost of constructing and equipping a wafer manufacturing facility, or fab,
which can now exceed $2 billion.
As a result of the growing cost and complexity of manufacturing
integrated circuits, semiconductormanufacturers have increasingly focused on
improving productivity in their manufacturing facilities. In the 1970s, yield
management techniques such as process monitoring and in-line testing were
introduced to the semiconductor manufacturing process. These techniques were
widely adopted in the 1980s and 1990s. Automation was introduced to
semiconductor manufacturing facilities in the 1980s in an effort to improve
efficiency. Because of the widespread use of these technologies, significant
productivity gains have already been realized.
Materials Integrity Management Focus
In an effort to realize continued productivity gains, semiconductor
manufacturers have become increasingly focused on materials management solutions
that enable them to safely store, handle, process and transport materials
throughout the manufacturing process to minimize the potential for damage or
degradation to their materials and to protect their investment in processed
wafers. Wafer processing can involve as many as 500 steps and take up to six
weeks. As a result, a batch of 25 fully processed wafers can cost more than $1
million. Since significant value is added to the wafer during each successive
manufacturing step, it is essential that the wafer be handled carefully and
precisely to minimize damage. In addition, materials handling products must meet
exact specifications each and every time or valuable wafers can be damaged. For
example, in the case of wafer carriers, precise wafer positioning, highly
reliable and predictable cassette interface dimensions and advanced materials
are crucial. The failure to prevent damage to wafers can severely impact
integrated circuit performance, render an integrated circuit inoperable or
disrupt manufacturing operations. Thus, semiconductor manufacturers are seeking
to: minimize contamination, protect semiconductor devices from electrostatic
discharge and shock, avoid process interruptions, prevent damage or abrasion to
wafers and materials during automated processing caused by contact with other
materials or equipment, prevent damage due to abrasion or vibration of
work-in-process and finished goods during transportation to and from customer
and supplier facilities and eliminate the dangers associated with handling toxic
chemicals--Rose Associates reports suggest that the semiconductor industry will
use over 100 million gallons of extremely corrosive chemicals in 2000 alone.
The importance of efficiently managing materials throughout the
manufacturing process and the need to protect wafers is demonstrated by the
existence of related standards established by the Semiconductor Equipment and
Materials International (SEMI) organization, a leading industry trade
organization. SEMI has specifically included the need to eliminate these risks
in SEMI's official standards publication.
The need for efficient and reliable materials management is
particularly important as new materials are introduced and as 300mm
semiconductor wafer manufacturing becomes a more prevalent manufacturing
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technology. These 300mm wafers are increasingly larger, more costly and more
complex, and thus are more vulnerable to damage or contamination. In addition,
new materials as well as increased wafer size and circuit shrinkage create new
contamination and material compatability risks. These trends will present new
and increasingly difficult shipping, transport, process and storage challenges.
The semiconductor materials industry and the materials management
industry are highly fragmented and are served by a variety of providers,
consisting of divisions within large corporations and smaller companies that
target niche markets or specific geographic regions. Semiconductor manufacturers
require materials management providers that demonstrate a deep knowledge of
materials management and semiconductor manufacturing, have a track record of
reliability, offer a broad product line and have the ability to support and
service customer needs worldwide.
Products and Capabilities
We are a leading provider of materials integrity management solutions
that assure the integrity of materials as they are handled, stored, processed
and transported throughout the semiconductor manufacturing process, from raw
silicon wafers to completed integrated circuits. Among other things, our
comprehensive portfolio of products enable:
o secure transport of materials, including chemicals and raw silicon wafers,
from suppliers to the fab;
o storage, handling and transport of wafers throughout fab processing;
o storage, mixing and distribution of chemicals throughout fab processing;
o delivery of finished wafers to test, assembly and packaging facilities; and
o safe handling of integrated circuit packages and bare die at the test,
assembly and packaging facilities.
We also apply our materials integrity expertise within other markets in
the microelectronics industry, such as the data storage market. Our
comprehensive product line, advanced manufacturing capabilities, extensive
polymer expertise, industry and applications knowledge and worldwide
infrastructure benefit our customers and position us for growth.
Comprehensive Product Line
With over 10,000 products, we believe that we offer the broadest
product offering of materials management solutions for the microelectronics
manufacturing industry. In the last eighteen months, we have released more than
100 new products, including front opening unified pods, or FOUPs, and 500
derivative products. In the semiconductor industry, we offer products to ship,
process, test and store wafers before during and after the integrated circuit
manufacturing process. We also offer a complete product line to transport,
process, store and ship chemicals used in the semiconductor manufacturing
process. In the data storage market, we offer a broad range of products to
transport and handle magnetic hard disk drives, read/write heads and optical and
compact disks.
Advanced Manufacturing Capabilities
We have a wide range of advanced polymer manufacturing capabilities
that use a variety of mold designs to produce high precision products, often in
cleanroom facilities. Our polymer capabilities include injection molding,
rotational molding, blow molding, extrusion, machining, welding and flaring,
sheet lining, over-molding, insert molding and prototyping. These capabilities,
coupled with our strengths in advanced tool design and mold-making, high volume
manufacturing, quality assurance and polymer reclaiming, enable us to be a
leader in our markets.
Extensive Polymer Expertise
We have extensive research experience with the advanced polymer
materials used in our products. We have expertise in material evaluation,
analytical chemistry, polymer blending and quality assurance techniques. We
understand the properties of advanced polymers, how they interact with other
materials used in the semiconductor manufacturing process and how they address
the varying conditions of the manufacturing process.
Industry and Applications Knowledge
Throughout our 34-year history, we have worked closely with
semiconductor and hard disk drive manufacturers and materials suppliers to
accumulate considerable insight into the increasingly complex
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manufacturing requirements of the semiconductor and data storage markets. This
insight allows us to more effectively target our research and development toward
products that satisfy our customers' manufacturing requirements. Our industry
knowledge encompasses contamination control, electrostatic discharge protection
and cleanroom manufacturing. This industry knowledge has enabled us to serve as
a leader in developing industry standards. Our ability to characterize and test
products allows us to understand the interaction of our products with wafers in
our customers' manufacturing process in order to ensure superior performance
while reducing the risk of damage.
Worldwide Infrastructure
Our worldwide infrastructure positions us in every major region of the
world where semiconductor manufacturing takes place. Our manufacturing
operations and support offices in the United States, Europe and Asia enable us
to offer local service, the timely and cost-effective delivery of our products
and the capacity to meet customer requirements. We offer customer service 24
hours a day, 7 days a week.
Strategy
Our objective is to build upon our leadership in materials integrity
management solutions for semiconductor device, equipment and materials
suppliers, as well as apply our expertise to the growing materials management
needs of other markets. The key elements of our strategy to achieve this
objective are:
Expand Technological Leadership
Since our inception, we have been an innovator in materials management
solutions for the semiconductor industry. For example, our chemical delivery
product line represents a number of industry firsts, including the first
perfluoroalkoxy (PFA) fusion-bonded piping, the first valves with no metal parts
in the fluid stream, the first nonmetallic capacitive sensors to successfully
perform in harsh environments at high temperatures and the first pinch valve.
Additionally, we are a leading designer and manufacturer of 300mm
materials management solutions with products such as FOUPs, and reduced-pitch
front opening shipping boxes, or FOSBs. We will continue to expand the scope of
our technology leadership by identifying viable new polymers for materials
management applications, developing innovative product designs and advanced
processes for molding difficult materials and aiding the industry in
establishing manufacturing standards for materials management products.
Broaden Product Offering
Although we offer a comprehensive line of more than 10,000 products, we
believe that there is significant potential for sales of new products and
solutions in the semiconductor and data storage markets and within the broader
microelectronics industry including, among others, new products and solutions
for the emerging 300mm wafer market; upgrading 200mm fabs with new and improved
products, new products and solutions to store, mix, handle and transport
ultra-pure and corrosive chemicals used in the semiconductor manufacturing
process; and new products and solutions in the area of testing, storing and
shipping finished integrated circuits. We are committed to developing new
products through both internal research and development and strategic
acquisitions.
Expand in Japan
We believe that further penetration of the Japanese market is critical
to our growth. Five of the world's seven largest wafer manufacturers are
headquartered in Japan. We have maintained a manufacturing and sales presence in
Japan since the 1970s through licensing arrangements, joint venture injection
molding operations and a joint venture sales company, which has allowed us to
develop strategic relationships and an understanding of the Japanese market. To
increase our presence in Japan, we intend to expand our local manufacturing
operations, introduce new products, expand our marketing initiatives and pursue
strategic acquisitions.
Pursue Selective Acquisitions
Although we currently have no agreements or commitments to acquire any
business, we intend to pursue selective acquisitions to complement our growth.
Our goal is to acquire businesses that will strengthen our position in our
targeted markets, enhance our technology base, increase our manufacturing
capability and our product
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offerings and expand our geographic presence. Expanding our business in key
market segments could strengthen our presence with existing customers and
provide access to new customers who seek a global service provider for their
materials management needs.
Expand into New Industries
We believe that our materials management expertise can be applied
outside the microelectronics industry to a variety of industries that use
sophisticated manufacturing processes and have critical materials management
needs. For example, in the biopharmaceutical industry, we are seeking to apply
our expertise to live bacteria drug manufacturing, which is a metal-sensitive
process enabled by our polymer expertise and products. We are also pursuing
other growth opportunities in the chemical processing and medical device
markets.
Markets and Products
With over 10,000 standard and customized products, we believe that we
provide the most comprehensive portfolio of materials integrity management
solutions to the microelectronics industry. Our product lines address both the
semiconductor and the data storage manufacturing markets. During the front-end
semiconductor manufacturing process, we provide materials integrity management
products and services that preserve the integrity of wafers as they travel from
wafer manufacturers to semiconductor manufacturers. As the wafers are
subsequently processed, we provide wafer transport products that reliably
interface with automated processing equipment. We also provide products that
safely deliver processing chemicals from chemical manufacturers to containers at
the fab and then from containers to process equipment within the fab. During the
back-end semiconductor manufacturing process, we provide products that transport
and handle completed integrated circuits during testing, assembly and packaging.
Furthermore, we provide products that prevent degradation and damage to magnetic
hard disk drives and read/write heads as they are processed and shipped.
A summary of our materials management product offerings is as follows:
Semiconductor Manufacturing: Front-End
Wafer Manufacturing Products. We are a leading provider of critical shipping
products that preserve the integrity of raw silicon wafers as they are
transported from wafer manufacturers to semiconductor manufacturers. We lead the
market with our extensive, high volume line of UltraPak(R) and CrystalPak(R)
products which are supplied to wafer manufacturers in a full range of sizes
covering 100, 125, 150 and 200mm wafers. The UltraPak was first introduced in
the mid 1980s. It is made of a proprietary blend of polypropylene and is the
market leader in wafer shipping boxes. The CrystalPak was introduced in the
early 1990s as a reusable wafer shipping box and is made of a proprietary blend
of polycarbonate. Continuing our technological leadership in the market, we
offer the FabFit300(TM) for the transportation and automated interface of 300mm
wafers. We offer a complete shipping system, including both wafer shipping
containers as well as secondary packaging that provide another level of
protection for wafers. This 300mm wafer system reduces the cleaning, shipping
and storage costs for semiconductor manufacturers and allows them to optimize
the use of their premium cleanroom space.
Wafer Handling Products. We believe that we are a market leader in wafer
handling products. We offer a wide variety of products that hold and position
wafers as they travel to and from each piece of equipment used in the automated
manufacturing process. These specialized carriers provide precise wafer
positioning, wafer protection and highly reliable and predictable cassette
interfaces in automated fabs. Semiconductor manufacturers rely on our products
to improve yields by protecting wafers from abrasion, degradation and
contamination during the manufacturing process. We provide standard and
customized products that meet the full spectrum of industry standards and
customers' wafer handling needs including FOUPs, wafer transport and process
carriers, pods and work-in-process boxes. To meet our customers' varying wafer
processing and transport needs, we offer wafer carriers in a variety of
materials and in sizes ranging from 100mm through 300mm.
Chemical Delivery Products. Chemicals spend most of their time in contact with
fluid storage and management distribution systems, so it is critical for fluid
storage and handling components to resist these chemicals and avoid contributing
contaminants to the fluid stream. We offer chemical delivery products that allow
the consistent and safe delivery of sophisticated chemicals from the chemical
manufacturer to the point-of-use in the semiconductor fab. Most of these
products are made from perfluoroalkoxy or PFA, a fluoropolymer resin widely used
in the industry because of its high purity and inertness to chemicals. The
innovative design and reliable performance of our products and systems under the
most stringent of process conditions has made us a recognized leader in high
purity
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fluid transfer products and systems. Both semiconductor manufacturers and
semiconductor OEMs use our chemical delivery products and systems. Our
comprehensive product line provides our customers with a single source provider
for their chemical storage and management needs throughout the manufacturing
process. Our chemical delivery products include:
o Valves. We offer the Integra(R), Dymak(R) and Accuflo(TM) valves, each of
which were first in their respective applications. Our Integra valve was the
first to feature no external metal parts, which can corrode and pose a safety
hazard when managing aggressive chemicals. Our Dymak valve is the first PFA
pinch valve designed for chemical mechanical polishing, or CMP, slurries, bulk
chemical distribution and other high flow applications. The all-PFA pinch
element allows greater resistance to chemical corrosion and offers lower
particle generation than competing valves. Our Accuflo metering valve is the
first to be molded entirely from PFA, which provides enhanced control for a
broad range of applications.
o Fittings. We provide fittings that have become the industry standard for high
purity chemical resistance. We offer three styles of fittings: Flaretek(R),
Quikgrip(R) and Galtek(R) fittings. Our Flaretek fittings feature a flare design
that combines leak-free performance with minimum dead volume. All of the wetted
surfaces of our fittings products are Teflon(R) PFA, chosen for its resistance
to corrosion and wear in the semiconductor processing environment. Our Quikgrip
fitting has a gripper design that features easy, user-friendly assembly.
Additionally, our Galtek fittings represent the industry's first all PFA fitting
featuring an integral ferrule design for strength along with chemical resistance
features.
o Tubing. We offer three grades of FluoroLine(R) PFA tubing, which address our
customers' needs ranging from industrial to ultra high purity applications.
o Pipe. Our PUREBOND(R) fusable piping components provide leak-free piping
systems by fusion bonding over rigid pipe and components. Our patented method
for joining PFA components allows flexibility of design and assembly of fluid
delivery systems. We offer many component configuration sizes ranging from 1 /4
inch to 2 inch inner diameters, meeting a wide range of customer design
requirements.
o Chemical Containers. We offer a broad spectrum of chemical transport and
storage containers that help ensure the safe delivery of sophisticated chemicals
from chemical manufacturers to the semiconductor manufacturers' point-of-use.
Our containers are well suited for the microelectronics industry because they
help minimize contamination of chemicals to concentrations of parts per billion
and parts per trillion. Our sheet lining process allows us to provide containers
for bulk chemical storage and shipment of up to 19,000 liters. We offer a wide
variety of container types including drums, pressure vessels, intermediate bulk
containers, custom containers and bottles. In addition, we provide our patented
quick connect system, which enables safe, risk-free connections for chemical
container change-outs.
o Custom Fabricated Products. We offer a wide variety of custom-molded, welded
or fabricated fluid products, including custom valves, fittings, filter
housings, caps, closures, flanges and tanks. We manufacture these custom
products to meet stringent standards of consistency and safety by offering a
variety of high performance, chemically resistant materials. Some of our valves
fall within the scope of United States export licensing regulations pertaining
to products that could be used in connection with chemical weapons processes.
These regulations require us to obtain licenses to ship some of our products to
customers in certain countries, and we routinely apply for and obtain export
licenses. The applicable export licensing regulations frequently change.
Moreover, the types and categories of products that are subject to export
licensing are often described in the regulations in general terms and could be
subject to differing interpretations. We are currently cooperating with the
United States Department of Commerce to clarify our licensing practices and to
review our practices with respect to prior sales of our valve products to
customers in Taiwan and Israel. While the Department of Commerce review is
pending, we have been applying for export licenses for ongoing orders for our
valves from customers in Taiwan and Israel, and the Department of Commerce has
been granting licenses for these sales.
Semiconductor Manufacturing: Back-End
Test, Assembly and Packaging Products. Rapidly changing packaging strategies for
semiconductor applications are creating new materials management challenges for
back-end manufacturers. We offer chip and matrix trays as well as shippers and
carriers for thinned wafers, bare die handling and integrated circuits. Our
materials management products are compatible with industry standards and
available in a wide range of sizes with various feature sets. Our standard trays
offer dimensional stability and permanent electrostatic discharge protection.
Our trays also offer a
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number of features including custom designs to minimize die movement and
contact; shelves and pedestals to minimize direct die contact, special pocket
features to handle various surface finishes to eliminate die sticking; and other
features for automated or manual die placement and removal. In addition, we
support our product line with a full range of accessories to address specific
needs such as static control, cleaning, chip washing and other related materials
management requirements. To better address this market, we have established
ictray.com, a website which allows new and existing customers to select from our
full range of standard and custom integrated circuit trays.
Hard Disk Drive Manufacturing
Disk Manufacturing Products. Like the semiconductor industry, the data storage
market continues to face new challenges and deploy new technologies at an
accelerating rate. We provide materials management products and solutions to
manage two critical sectors of this industry: magnetic disks and the read/write
heads used to read and write today's higher density disks. Because both of these
hard disk drive components are instrumental in the transition to more powerful
storage solutions, we offer products that carefully protect and maintain the
integrity of these components during their processing, storage and shipment. Our
product offerings for magnetic hard disk drives include process carriers, boxes,
packages, tools and shippers for aluminum and other disk substrates. Our optical
hard disk drive products include stamper cases, process carriers, boxes and
glass master carriers. Our read/write head products include transport trays,
carriers, handles, boxes, individual disk substrate packages and accessories.
Other Industries
We offer our extensive polymer molding expertise to customers outside the
microelectronics industry, such as the biopharmaceutical, medical and
telecommunications industries. We work with our customers in these industries to
develop specialized components and assemblies that meet their stringent
specifications for close tolerances and cleanliness. We offer a wide variety of
services and capabilities to these customers, including materials research,
parts design, mold design, manufacturing, molding, assembly and final testing.
The following table sets forth for the fiscal years indicated our net sales
derived from the sale of semiconductor manufacturing products, disk
manufacturing products and other products.
2000 1999 1998
Semiconductor manufacturing products 84% 76% 75%
Disk manufacturing products 12% 20% 20%
Other products 4% 4% 5%
----- ----- -----
100% 100% 100%
===== ===== =====
Customers
We have over 1,000 customers in North America, Europe and Asia,
including every major semiconductor manufacturer in the world. No single
end-customer accounts for over 5% of our sales. We provide products and
solutions primarily to semiconductor manufacturers and semiconductor equipment
manufacturers, chemical materials suppliers and data storage manufacturers. The
following table sets forth a list of major customers in each of the markets in
which we operate.
Semiconductor Wafer Manufacturing HMT Seagate Technology
Mitsubishi Silicon Sumitomo Metals IBM
MEMC Wacker Siltronic
Shin Etsu Handotai (SEH) Semiconductor Device Manufacturing and
Assembly
Microelectronics and Semiconductor Materials AMD LG International
Arch Chemicals Millipore Amkor/Anam Micron Technology
Ashland Pall ASE Test Motorola
BOC Edwards Carsem NEC
Fujitsu Philips
Semiconductor Equipment Manufacturing Hitachi Samsung
Applied Materials SCP Global Technologies Intel STMicroelectronics
FSI International IBM Texas Instruments
Infineon TSMC
Data Storage Manufacturing Lucent UMC
Fujitsu Komag
Hoya MMC Custom Products for Other Industries
ADC Telecom Guidant
Boston Scientific Medtronic
Ericsson
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Sales and Marketing
We market and sell our products on a worldwide basis through a network
of direct sales personnel, commissioned sales representatives and stocking
distributors. Our sales and marketing initiatives in Japan are coordinated
through the sales office of Fluoroware Valqua Japan, our majority owned
subsidiary. Metron, a global distributor of semiconductor products and services
partially owned by Entegris, has broad distribution rights in Europe, and in
portions of the United States and Asia. International sales accounted for 45% of
our revenues in fiscal 1998, and 48% in both fiscal 1999 and fiscal 2000.
We support our worldwide sales activities by stocking select products
in regional warehouses, which facilitates rapid response to customers' needs.
For example, Entegris Europe GmbH is a stocking location for distribution
throughout Europe. The worldwide offices of Metron also carry inventories to
meet regional demand. Direct customer support comes from our five regional
service and customer support offices located in the United States, Germany,
Japan, Korea and Malaysia. We work with each of our regional service and
customer support offices to provide regional marketing support, including public
relations, collateral development and publication, corporate positioning,
advertising and trade show participation and communications. Our marketing
groups based in the United States support our global marketing strategy,
e-business and other initiatives.
Manufacturing
Our customers rely on our products to assure their materials integrity
by providing dimensional precision and stability, cleanliness and consistent
performance. Our ability to meet our customers' expectations, combined with our
substantial investments in worldwide manufacturing capacity, position us to
respond to the increasing materials management demands of the microelectronics
industry and other industries that require similar levels of materials
integrity. To meet our customer needs worldwide, we have established an
extensive global manufacturing network with facilities in the United States,
Germany, Japan, Malaysia and South Korea. Because we work in an industry where
contamination control is paramount, we maintain Class 100 to Class 10,000
cleanrooms for manufacturing and assembly. We believe that our worldwide
manufacturing operations and our advanced manufacturing capabilities are
important competitive advantages. Our advanced manufacturing capabilities
include:
o Injection Molding. Our manufacturing expertise is based on our long experience
with injection molding. Using molds produced from computer-aided processes, our
manufacturing technicians utilize specialized injection molding equipment and
operate within specific protocols and procedures established to consistently
produce precision products.
o Extrusion. Extrusion is the use of heat and force from a screw to melt solid
polymer pellets in a cylinder and then forcing the resulting melt through a die
to produce tubing and pipe. We have established contamination free on-line laser
marking and measurement techniques to properly identify products during the
extrusion process and ensure consistency in overall dimension and wall
thicknesses.
o Blow Molding. Blow molding consists of the use of heat and force from a screw
to melt solid polymer pellets in a cylinder and then forcing the melt through a
die to create a hollow tube. The molten tube is clamped in a mold and expanded
with pressurized gas until it takes the shape of the mold. We utilize advanced
three-layer processing to manufacture 55 gallon drums, leading to cost savings
while simultaneously assuring durability, strength and purity.
o Rotational Molding. Rotational molding is the placing of a solid polymer
powder in a mold, placing the mold in an oven and rotating the mold on two axes
so that the melting polymer coats the entire surface of the mold. This forms a
part in the shape of the mold upon cooling. We use rotational molding in
manufacturing containers up to 5,000 liters. Our rotational molding expertise
has provided rapid market access for our current fluoropolymer sheet lining
manufacturing business.
o Sheet Lining. Sheet lining consists of welding thin sheets of polymer into a
solid lining that conforms to the shape of a large vessel, such as a tanker
truck. We sheet line stainless steel tanks up to 19,000 liters in size through a
complex adhesive and welding process that provides customers with purity and
strength for the high volume storage and transportation of corrosive chemicals.
9
o Machining. Machining consists of the use of computer controlled equipment to
create shapes, such as valve bodies, out of solid polymer blocks or rods. Our
computerized machining capabilities enable speed and repeatability in volume
manufacturing of our machined products, particularly products utilized in
chemical delivery applications.
o Assembly. We have established protocols, flow charts, work instructions and
quality assurance procedures to assure proper assembly of component parts. The
extensive use of robotics throughout our facilities reduces labor costs,
diminishes the possibility of contamination and assures process consistency.
o Tool Making. We employ more than 100 toolmakers at three separate locations in
the United States. Our toolmakers produce the majority of the tools we use
throughout the world.
We have made significant investments in systems and equipment to create
innovative products and tool designs. Our pro-engineer CAD equipment allows us
to develop three-dimensional electronic models of desired customer products to
guide design and tool-making activities. Our pro-engineer CAD equipment also
aids in the rapid prototyping of products.
We also use computer-automated engineering in the context of mold flow
analysis. Beginning with a pro-engineer 3D model, mold flow analysis is used to
visualize and simulate how our molds will fill. The mold flow analysis
techniques cut the time needed to bring a new product to market because of the
reduced need for sampling and development. Also, our pro-engineer CAD equipment
can create a virtual part with specific geometries, which drives subsequent tool
design, tool manufacturing, mold flow analysis and performance simulation.
In conjunction with our three-dimensional product designs, we use
finite element software to simulate the application of a variety of forces or
pressures to observe what will happen during product use. This analysis helps us
anticipate forces that affect our products under various conditions. The program
also assists our product designers by measuring anticipated stresses against
known material strengths and establishing proper margins of safety.
Engineering, Research and Development
We devote a significant portion of our financial and human resources to
research and development programs. As of August 26, 2000, we employed
approximately 135 people in our worldwide engineering, research and development
department. Of these, more than 20 work in our materials and product testing
research laboratories, where we conduct general materials research to enhance
current products and strengthen our advanced materials knowledge. The other
engineering, research and development personnel perform product design and
development in response to general market needs as well as specific industry and
customer requests. Increasingly, customers ask us to conduct research and
development to find materials, products and systems that meet their specific
materials handling needs. We utilize sophisticated methodologies to develop and
characterize our materials and products. Our materials technology lab is
equipped to analyze the physical, rheological, thermal, chemical and
compositional nature of the polymers we use. Our materials lab includes standard
and advanced polymer analysis equipment such as inductively coupled plasma mass
spectrometry (ICP/MS), inductively coupled plasma atomic emission spectrometry
(ICP/AES), Fourier transform infrared spectroscopy (FTIR) and automated thermal
desorption gas chromatography/mass spectrometry (ATD-GC/MS). This advanced
analysis equipment allows us to detect contaminants in materials that could harm
the semiconductor manufacturing process to levels as low as parts per billion,
and in some cases parts per trillion. Our capabilities to test and characterize
our materials and products are focused on continuously reducing risk to our
customers. The majority of our research laboratories are located at our Chaska,
Minnesota and Colorado Springs, Colorado facilities. We expect that technology
and product research and development will continue to represent an important
element in our ability to develop and characterize our materials and products.
Facilities
We conduct manufacturing operations in facilities strategically
positioned throughout the world. Our factory and warehouse facilities adequately
meet our production capacity and work flow requirements. Due to significant
capital spending over the past several years, we estimate that we are currently
operating at approximately 50% of manufacturing capacity and 90% of warehouse
capacity. However, we believe that we can easily obtain sufficient warehouse
capacity.
10
Patents and Proprietary Rights
We rely on patent, copyright, trademark and trade secret laws,
confidentiality agreements and other contractual arrangements with our
employees, strategic partners and others to protect our technology. Our goal is
to obtain intellectual property protection to maintain our position as a leader
in materials management and to give us a competitive advantage in the industry.
We actively pursue a program of patent applications to seek protection
of technologically sensitive features of our materials management products and
processes. We conduct extensive research on the patentability of our
innovations, the potential infringement on existing patents and the business
value of retaining the information as proprietary knowledge. With this
information, we determine whether to seek a patent, disclose the information
through an industry white paper or maintain the information as a trade secret.
As of August 26, 2000, our patent portfolio consisted of 104 current U.S.
patents, which expire from 2000 to 2018, and 43 pending U.S. patent
applications. We also regularly seek patent protection outside the United States
by filing counterpart applications, principally in Europe, Taiwan and Japan. We
also pursue trademark registration of our key trademarks in the principal
countries where we do business.
The patent position of any manufacturer, including us, is subject to
uncertainties and may involve complex legal and factual issues. Litigation may
be necessary in the future to enforce our patents and other intellectual
property rights or to defend us against claims of infringement or invalidity.
The steps that we have taken in seeking patents and other intellectual property
protections may prove inadequate to deter misappropriation of our technology and
information. In addition, our competitors may independently develop technologies
that are substantially equivalent or superior to our technology.
Competition
We face substantial competition from a number of companies, some of
which have greater financial, marketing, manufacturing and technical resources.
We are not aware of any single competitor who offers a comparable breadth of
materials management products and services in the microelectronics industry. We
compete on the basis of our technical expertise, product performance, advanced
manufacturing capabilities, global locations, quality, reliability, established
reputation and customer relationships. We believe that we compete favorably on
the basis of these factors in each of our served markets.
Our wafer management product line faces competition largely on a
product-by-product basis. We have historically faced significant competition
from companies such as Kakizaki, Sanga Flantek, Dainichi and Asyst Technologies.
These companies compete with us primarily in 200mm and 300mm applications. Our
chemical delivery products also face worldwide competition from companies such
as Furon, Parker, Pillar and Gemu. In assembly, packaging and testing of
semiconductor and data storage applications, we compete with companies such as
Advantek, GEL-Pak, ITW/Camtex, Peak International and 3M. Primary competition
for our wafer shipping containers comes from Japanese companies such as SEP and
Kakizaki. In the disk shipping and bare and packaged die tray markets, we face
competition from regional suppliers.
Employees
As of August 26, 2000, we had approximately 1,800 full-time employees
throughout the world, including approximately 1,300 in manufacturing, 135 in
engineering, research and development, including custom product development, and
365 in selling, marketing and general and administrative activities, including
customer service, finance and accounting, information technology, human
resources and corporate management. Of our full-time employees, approximately
1,380 are located in the United States, 120 are located in Europe and about 300
are located in Asia. None of our employees are covered by a collective
bargaining arrangement. We consider our relationship with our employees to be
good.
Legal Proceedings
We are not a party to any material pending legal proceedings.
Financial Information about Segments and Geographic Areas
See Note 16 to the Consolidated Financial Statements contained herein.
11
RISK FACTORS
Our business faces significant risks. These risks include those
described below and may include additional risks and uncertainties not presently
known to us or that we currently believe are immaterial. If any of the events or
circumstances described in the following risks occurs, our business, operating
results or financial condition could be materially adversely affected. These
risks should be read in conjunction with the other information set forth in this
report.Additional risks and uncertainties not presently known to us or that we
currently believe are immaterial also may impair our business operations. If any
of the events described in the following risks occur, our business, operating
results and financial condition could be significantly harmed.
Industry Risk
The semiconductor industry is highly cyclical, and an industry downturn would
reduce revenue and profits.
Our business depends on the purchasing patterns of semiconductor
manufacturers, which, in turn, depend on the current and anticipated demand for
semiconductors and products utilizing semiconductors. The semiconductor industry
is highly cyclical and historically has experienced periodic downturns, which
often have resulted in decreased expenditures by semiconductor manufacturers.
These downturns, which occurred most recently in 1996 and 1998, have harmed our
sales, gross profits and operating results. Furthermore, even in periods of
reduced demand, we must continue to maintain a satisfactory level of research
and development expenditures and continue to invest in our infrastructure. We
expect the semiconductor industry to continue to be cyclical. Any future
downturns will reduce revenue and possibly increase pricing pressure.
Our revenue and operating results may fluctuate in future periods.
Our sales and operating results can vary significantly from quarter to
quarter. Because our expense levels are relatively fixed in the short-term, an
unanticipated decline in revenue in a particular quarter could
disproportionately affect our net income in that quarter. In addition, because
we typically do not have significant backlog, changes in order patterns have a
more immediate impact on our revenues. The 1998 downturn in the semiconductor
industry resulted in declines in our net income from $16.9 million in fiscal
1997 to $13.1 million in fiscal 1998 and a further decline to $5.7 million in
fiscal 1999. We anticipate that fluctuations in operating results will continue
in the future. We believe that period-to-period comparisons of our results of
operations may not be meaningful, and you should not rely upon them as
indicators of our future performance.
Our industry is subject to rapid technological change, and we may fail to
successfully anticipate customer needs and develop new products.
The microelectronics industry is subject to rapid technological change,
changing customer requirements and frequent new product introductions. Because
of this, the life cycle of our products is difficult to determine. Our future
success will depend, to a significant extent, on our ability to keep pace with
changes in the market and on our ability to enhance our current products and
introduce new products. For example, we must continue to identify new polymers,
improve our product design and qualify our products with our customers. We might
not successfully develop and introduce new products and materials in a timely
and cost-effective manner. Any product enhancements or new products developed by
us might not gain market acceptance. In addition, products or technologies
developed by competitors could make our products or technologies obsolete or
less competitive. If we do not anticipate or respond adequately to technological
developments or customer requirements, we could lose market share or miss market
opportunities.
International Risks
We are dependent upon sales outside the United States, and the risks associated
with international operations could affect our ability to maintain and increase
revenues.
International sales accounted for 45% of our revenues in fiscal 1998,
and 48% in both fiscal 1999 and fiscal 2000. We anticipate that sales outside
the United States will be an increasing percentage of our revenues as we pursue
our international growth strategy. A significant portion of our revenues will
therefore be subject to risks associated with sales in markets outside the
United States, including unexpected changes in legal and regulatory requirements
and policy; changes affecting the markets for semiconductor technology;
difficulties in managing sales
12
representatives or distributors; difficulties in staffing and managing foreign
operations; and difficulties in protecting our intellectual property outside the
United States.
These risks could increase the cost of doing business internationally
and could prohibit or hinder our ability to do business in certain countries.
Taiwan accounts for a growing portion of the world's semiconductor
manufacturing. There are currently strained relations between China and Taiwan.
Any adverse development in those relations could significantly impact the
worldwide production of semiconductors, which would lead to reduced sales of our
products.
The value of the U.S. dollar in relation to other currencies may also
harm our sales to customers outside the United States. In fiscal 2000,
approximately one-quarter of our sales revenue was not denominated in U.S.
dollars, which exposes us to currency fluctuations. We intend to expand
internationally, and to the extent that we do so or change our pricing practices
to denominate prices in other currencies, we will be exposed to increased risks
of currency fluctuations as well as the increased risks of doing business
internationally.
An increased concentration of wafer manufacturing in Japan could result in lower
sales of our wafer management and shipping products.
A large percentage of the world's wafer manufacturing currently takes
place in Japan. Our market share in Japan is currently low, and we believe that
we must increase our manufacturing capabilities in Japan in order to improve our
market share. If we are not able to successfully expand our manufacturing
capability and market share in Japan, we might not be able to maintain our
global market share in wafer manufacturing and handling products, especially if
wafer manufacturing in Japan increases.
Regulatory compliance impacts delivery times and reduces our ability to be
competitive in certain countries.
We are subject to federal, state, local and foreign regulations.
Compliance with future regulations, including environmental regulations in the
United States and abroad, could require us to incur substantial costs. If we do
not comply with current or future regulations, directives and standards, we
could be subject to fines; our production could be suspended or delivery could
be delayed; and we could be prohibited from offering particular products in
specified markets.
Certain of our fluid handling products fall within the scope of U.S.
export licensing regulations pertaining to products that could be used in
connection with chemical weapons processes. These regulations require us to
obtain licenses to ship some of our products to customers in certain countries,
and we routinely apply for and obtain export licenses. The applicable export
licensing regulations frequently change. Moreover, the types and categories of
products that are subject to export licensing are often described in the
regulations in general terms and could be subject to differing interpretations.
We are currently cooperating with the United States Department of Commerce to
clarify our licensing practices and to review our practices with respect to
sales of products to certain countries in recent years. The review relates to
sales of approximately $100,000 in fiscal 1999. The review does not relate to
any product sales in fiscal 2000. The Department of Commerce may determine that
some of our past practices were not in compliance with export licensing
regulations, which could subject us to penalties. Any denial or delay in the
issuance of future export licenses could result in lost sales.
We are dependent on Metron Technology N.V. for a substantial portion of our
sales, and a decline in sales by Metron could limit our ability to maintain and
grow our revenues.
For the period ended August 26, 2000, we derived 28.3% of our revenues
from customers that purchase our products through Metron Technology N.V., which
distributes our products in parts of Europe, Asia and the United States. Any
negative material event relating to Metron may impact our business. For example,
Metron's sales could decline or Metron could choose to sell our competitors'
products instead of our products.
In November 1999, Metron completed an initial public offering.
Primarily due to the offering, our ownership of Metron decreased from 32.8% to
20.3% at August 26, 2000. Although we retain a significant ownership stake in
Metron, we now have less influence on Metron's business and decision making, and
Metron may make decisions regarding the conduct of its business that could harm
us and over which we have no control.
13
Relationships with joint venture partners affect our ability to do business
internationally.
We have entered into joint venture agreements intended to complement or
expand our manufacturing and distribution operations in Japan and Korea. The
success of our joint ventures depends in part on our ability to strengthen our
relationships with our joint venture partners. If we do not develop and maintain
good relationships with joint venture partners, we will be less able to
successfully penetrate international markets.
Economic difficulties in countries in which we sell our products could lead to a
decrease in demand for our products.
The volatility of general economic conditions as well as fluctuations
in currency exchange and interest rates can lead to decreased demand in
countries in which we sell products. For example, in 1997 and 1998, many Asian
countries experienced economic and financial difficulties. During this period,
our sales to customers in Asia declined. Moreover, any economic, banking or
currency difficulties experienced by countries in which we have sales may lead
to economic recession in those countries. This in turn could result in a
reduction in sales to customers in these countries.
Manufacturing Risks
Our dependence on single and limited source suppliers could affect our ability
to manufacture our products.
We rely on single and limited source suppliers for some of the advanced
polymers that are critical to the manufacturing of our products. At times, we
have experienced a limited supply of some of these polymers, which resulted in
delays and increased costs. An industry-wide increase in demand for these
polymers could affect the ability of our suppliers to provide sufficient
quantities to us. If we are unable to obtain an adequate quantity of such
supplies, our manufacturing operations may be interrupted. Obtaining alternative
sources could result in increased costs and shipping delays, which could
decrease profitability and damage our relationships with current and potential
customers.
Prices for polymers have varied widely in recent years. We have a
long-term contract with a key supplier of polymers that fixes our price for
purchases of up to specified quantities. If our polymer requirements exceed the
quantities specified in the contract, we could be exposed to higher material
costs. If the cost of polymers increases and we are unable to correspondingly
increase the sales price of our products, our profit margins would decline.
Our production processes are becoming increasingly complex, and our production
could be disrupted if we are unable to avoid manufacturing difficulties.
Our manufacturing processes are complex and require the use of
expensive and technologically sophisticated equipment and materials. These
processes are frequently modified to improve manufacturing yields and product
quality. We have on occasion experienced manufacturing difficulties, such as
temporary shortages of raw materials and occasional critical equipment
breakdowns that have delayed deliveries to customers. A number of our product
lines are manufactured at only one or two facilities, and any disruption could
impact our sales until another facility could commence or expand production of
such products.
Our manufacturing operations are subject to numerous risks, including
the introduction of impurities in the manufacturing process that could lower
manufacturing yields and make our products unmarketable; the costs and demands
of managing and coordinating geographically diverse manufacturing facilities;
and the disruption of production in one or more facilities as a result of a
slowdown or shutdown in another facility.
We could experience these or other manufacturing difficulties, which
might result in a loss of customers and exposure to product liability claims.
We may lose sales if we are unable to timely procure, repair and replace capital
equipment necessary to manufacture many of our products.
Internally designing and producing new complex tools or purchasing
additional capital equipment can take several months. If our existing equipment
fails, or we are unable to obtain new equipment quickly enough to satisfy
14
any increased demand for our products, we may lose sales to competitors. In
particular, we do not maintain duplicate tools for most of our important
products. Fixing or replacing complex tools is time consuming, and we may not be
able to replace a damaged tool in time to meet customer requirements.
We generally have no written contracts with our customers, which diminishes our
ability to plan for future manufacturing needs.
As is typical in our industry, our sales are primarily made on a
purchase order basis and we have few written purchase contracts with our
customers. Customers may choose to delay or cancel orders. As a result, we
cannot predict the level of future sales or commitments from our current
customers, which diminishes our ability to effectively allocate labor, materials
and equipment in the manufacturing process.
We may not be able to protect our intellectual property, which may limit our
ability to compete.
Our success depends in part on our proprietary technology. We attempt
to protect our intellectual property rights primarily through patents,
trademarks and non-disclosure agreements. However, we might not be able to
protect some of our technology, and competitors might be able to develop similar
technology independently. In addition, the laws of certain foreign countries
might not afford our intellectual property the same protection as do the laws of
the United States. The costs of applying for patents in foreign countries and
translating the applications into foreign languages require us to select
carefully the inventions for which we apply for patent protection and the
countries in which we seek such protection. Generally, we have concentrated our
efforts on obtaining international patents in Europe, Japan and Taiwan because
there are competing manufacturers in those countries, as well as current and
potential customers. Our inability or failure to obtain adequate patent
protection in a particular country could harm our ability to compete effectively
in that country. Our patents also might not be sufficiently broad to protect our
technology, and any existing or future patents might be challenged, invalidated
or circumvented. Additionally, our rights under our patents may not provide
competitive advantages.
Litigation may be necessary to defend us against claims of intellectual property
infringement, which if successful could cause us to pay significant damage
awards or prevent us from manufacturing or selling our products.
Some of our current or future products could infringe patents or
proprietary rights of others. Litigation may be necessary to enforce patents
issued to us, to protect our trade secrets or know-how, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others. Litigation could result in
substantial cost and diversion of our efforts. Moreover, an adverse
determination in any litigation could cause us to lose proprietary rights,
subject us to significant liabilities to third parties, require us to seek
licenses or alternative technologies from third parties, or prevent us from
manufacturing or selling our products.
Operating Risks
If we do not attract and retain key personnel, our production would be disrupted
and shipments might be delayed.
Our success depends upon the continued efforts of our senior management
team and our technical, manufacturing, marketing and sales personnel. These
employees may voluntarily terminate their employment with us at any time.
If a significant number of manufacturing personnel were to voluntarily terminate
their employment with us, our production would be disrupted and shipments might
be delayed.
Hiring qualified personnel has become more difficult in recent years.
The U.S. economy's long period of expansion and high rate of employment have
increased the difficulty of recruiting qualified manufacturing personnel, such
as operators of our manufacturing equipment. Competition for such personnel in
the technology and semiconductor industries is particularly intense. Recruiting
and hiring employees with the combination of skills and attributes required to
conduct our business is extremely competitive, time-consuming and expensive. We
may not be able to successfully identify, hire and train new manufacturing
personnel.
15
If we fail to identify, complete and successfully integrate future acquisitions,
our ability to expand our operations and increase revenues would be harmed.
One of our strategies is to expand by acquiring other businesses,
technologies or product lines. However, we currently have no commitments or
agreements with respect to any acquisition. We might not be able to successfully
identify, negotiate or finance any acquisitions, or integrate such acquisitions
with our current business, which could diminish our ability to expand our
business and remain competitive. Moreover, expansion could require significant
management time and resources.
Competition in the semiconductor materials management industry could intensify
as the industry further consolidates, which would limit our ability to maintain
and increase our market share and raise prices.
We face substantial competition from a number of companies, some of
which have greater financial, marketing, manufacturing and technical resources.
Because of an industry trend toward consolidation, larger providers of materials
management solutions and products could emerge, with potentially broader product
lines. Larger competitors could spend more on research and development, which
could give those competitors an advantage in meeting customer demand. We expect
that existing and new competitors will improve the design of their existing
products and will introduce new products with enhanced performance
characteristics. The introduction of new products or more efficient production
of existing products by our competitors could diminish our market share and
increase pricing pressure on our products. Further, customers continue to demand
lower prices, shorter delivery times and enhanced product capability. If we do
not respond adequately to such pressures, we could lose customers or orders. If
we are unable to compete successfully, we could experience pricing pressures,
reduced gross margins and order cancellations.
Lack of market acceptance of our 300mm products could harm our operating
results.
The growing trend toward the use of 300mm wafers has contributed to the
increasing complexity of the semiconductor manufacturing process. The greater
diameter of these wafers requires higher tooling costs and presents more complex
handling, storage and transportation challenges. We are making substantial
investments to complete a full line of 300mm wafer manufacturing and handling
products. Our customers may not adopt our 300mm wafer manufacturing and handling
product lines. If we are not a leader in the 300mm market, the market share for
our other products could decline. In addition, if the trend toward 300mm wafer
manufacturing does not evolve as we anticipate, sales of our products for these
applications would be minimal and we might not recover our development costs.
Our management information and financial reporting systems are not fully
integrated and need to be upgraded, which will be costly. If these new systems
are not successfully implemented, our business may be harmed.
The management information and financial reporting systems that we use
in our day-to-day operations are not fully integrated. We will need to continue
to invest in these systems in order to maintain our current level of business
and accommodate any future growth. We anticipate that the total costs associated
with upgrading and integrating our systems will be approximately $8 to $10
million over the next two to four years. Our failure to successfully upgrade and
integrate our management information and financial reporting systems may disrupt
our business, create inefficiencies due to the lack of centralized data, result
in unnecessarily high levels of inventories, and increase expenses associated
with additional employees to compensate for the lack of fully integrated
systems.
We may not be able to significantly expand our customer base by soliciting
customers of our competitors because customers tend to standardize materials
handling procedures and are reluctant to change their standardized manufacturing
processes.
Once an original equipment manufacturer or a microelectronics
manufacturer has selected particular materials management products, that
manufacturer typically must qualify those products before incorporating them
into customized manufacturing procedures that assure precise and consistent
processing steps. Qualification and incorporation of materials management
products by manufacturers can be time-consuming and expensive. After these
procedures have been established, manufacturers are very reluctant to switch to
another provider of materials management products. Accordingly, it may be
difficult to sell our products to a manufacturer that has already selected a
competitor's products.
16
We may face product liability claims, which could harm our operating results.
Our products are used by our customers to handle sensitive, complex and
valuable wafers and semiconductor materials and devices. If our products fail,
these materials could be damaged or contaminated, which could expose us to
product liability claims. Business interruption and personal injury claims are
also possible in the event of a product failure or misapplication of our product
by a customer. In addition, the failure of our chemical delivery products could
subject us to environmental liability claims and a failure of our custom medical
device components could subject us to personal injury claims. We cannot predict
whether our existing insurance coverage limits are adequate to protect us from
any liabilities that we might incur in connection with the manufacture, sale or
use of our products. A successful product liability claim or series of product
liability claims brought against us could damage our reputation, diminish
customer confidence in our products, expose us to increased competition and
increase our insurance costs.
We may not be able to pursue our expansion strategy if we are unable to raise
required funds.
We may need to raise additional capital to acquire or invest in
complementary businesses. If we issue additional equity securities, the
ownership stakes of our existing shareholders would be reduced, and the new
equity securities may have rights, preferences or privileges senior to those of
our existing common shares. If we cannot raise funds, if needed, on acceptable
terms, we may not be able to develop our business, take advantage of future
opportunities, or respond to competitive pressures or unanticipated
requirements.
We do not intend to pay dividends, and therefore investors must rely solely on
the market value of our shares to realize a return on their investment.
We have never declared or paid any cash dividends on our capital
shares. In addition, our loan agreements restrict our ability to pay dividends
without the consent of our lenders. We currently intend to retain any future
earnings to fund the development and growth of our business and, therefore, do
not anticipate paying any cash dividends in the foreseeable future.
Special Note Regarding Forward-Looking Statements
Some of the statements under the captions "Business," "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and elsewhere in this report are "forward-looking statements." These
statements involve known and unknown risks, uncertainties, and other factors
that may cause our, or our industry's, actual results, levels of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by the
forward-looking statements. These factors are listed under "Risk Factors" and
elsewhere in this report.
In some cases, you can identify forward-looking statements by
terminology such as "expects," "anticipates," "intends," "may," "should,"
"plans," "believes," "seeks," "estimates," "could," "would" or the negative of
such terms or other comparable terminology.
Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Moreover, neither we nor any
other person assumes responsibility for the accuracy and completeness of these
statements. We are under no duty to update any of the forward-looking statements
after the date of this report to conform these statements to actual results.
ITEM 2. PROPERTIES
Our corporate headquarter is located in Chaska, Minnesota. The table
below presents information relating to our manufacturing and warehousing
facilities:
- -----------------------------------------------------------------------------------------------------------------
Facility Square Type of
Location Footage Ownership Manufacturing Use
- -----------------------------------------------------------------------------------------------------------------
United States
- -----------------------------------------------------------------------------------------------------------------
Minnesota 712,000 6 facilities owned, Injection Molding, Extrusion, Blow
2 facilities leased Molding, Rotational Molding, Tool Making,
Micro-molding, Sheet Lining
- -----------------------------------------------------------------------------------------------------------------
17
- -----------------------------------------------------------------------------------------------------------------
Colorado 148,000 1 facility owned, Injection Molding, Tool Making
1 facility leased
- -----------------------------------------------------------------------------------------------------------------
California 30,000 1 facility leased Custom Manufacturing
- -----------------------------------------------------------------------------------------------------------------
Texas 20,000 1 facility leased Polymer Reclaiming
- -----------------------------------------------------------------------------------------------------------------
Malaysia 105,000 1 facility owned Injection Molding
- -----------------------------------------------------------------------------------------------------------------
Korea 78,000 1 facility owned, Injection Molding, Extrusion, Sheet
1 facility leased Lining
- -----------------------------------------------------------------------------------------------------------------
Germany 44,000 1 facility owned Injection Molding, Extrusion
- -----------------------------------------------------------------------------------------------------------------
Japan 42,000 1 facility owned Injection Molding
- -----------------------------------------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year covered by this report.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Shares, $0.01 par value, has been traded on The
Nasdaq National Market(R) (Nasdaq) under the symbol "ENTG" since our initial
public offering on July 11, 2000. The following table sets forth the high and
low sales prices, as reported by Nasdaq, for the periods indicated.
Fiscal 2000 High Low
----------- ---- ---
First Quarter................ $- $-
Second Quarter............... $- $-
Third Quarter................ $- $-
Fourth Quarter............... $15.25 $7.00
There were approximately 160 shareholder accounts of record on October
31, 2000, and the number of beneficial shareholders was estimated to be 7,000.
Use of Proceeds
The Company's Registration Statement on Form S-1 (Registration No.
333-33668) was declared effective on July 10, 2000. The Company sold 9,890,000
common shares at an initial public offering (IPO) price of $11.00 per share,
including 1,290,000 shares pursuant to the exercise of the underwriters'
over-allotment option. The Company received net proceeds of approximately $99.0
million after deducting underwriting discounts, commissions and offering
expenses. During the fourth quarter of fiscal 2000, the Company used $42 million
of the IPO proceeds to retire certain long-term debt and capital lease
obligations. The Company intends to use the remaining net proceeds for working
capital and general corporate purposes, including sales, marketing, customer
support and other activities related to its business. The Company is currently
assessing the specific uses and allocations for these funds.
18
ITEM 6. SELECTED FINANCIAL DATA
The table that follows presents selected financial data for each of the
last five fiscal years:
FINANCIAL HIGHLIGHTS
(Dollars in thousands, except per share
data) 2000 1999 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Net sales $343,465 $241,952 $266,591 $277,290 $271,037
Gross profit 164,705 91,850 109,658 115,558 121,995
Operating profit 76,371 14,945 24,635 35,188 47,158
Net income 50,575 5,729 13,083 16,934 28,672
Earnings per common share-diluted (1): 0.77 0.09 0.21 0.27 0.45
- ------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 102,973 16,411 8,235 11,354 11,251
Total assets 352,964 242,064 252,941 260,885 212,865
Long-term debt and capital lease 10,822 53,830 73,242 75,971 61,916
obligations
Shareholders' equity (1) 268,040 124,683 118,399 109,382 82,703
(1) Per share figures and shareholders' equity figures presented give effect to
the reclassification of redeemable Employee Stock Ownership Trust common
shares no longer redeemable upon consummation of the Company's initial
public offering in July 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, except for the historical
information, contains forward-looking statements. These statements are subject
to risks and uncertainties. You should not place undue reliance on these
forward-looking statements as actual results could differ materially. We do not
assume any obligation to publicly release the results of any revision or updates
to these forward-looking statements to reflect future events or unanticipated
occurrences. This discussion and analysis should be read in conjunction with our
Consolidated Financial Statements and the related Notes, which are included
elsewhere in this report.
Overview
Entegris, Inc. is a leading provider of materials integrity management
solutions that protect and transport the critical materials used in the
semiconductors and other high technology industries. We were incorporated in
June 1999 to effect the business combination of Fluoroware, Inc. and EMPAK,
Inc., which was accounted for as a pooling of interests. Accordingly, we issued
common stock in exchange for 100% of the outstanding shares of both Fluoroware,
which began operating in 1966, and EMPAK, which began business in 1980. The
historical financial statements of Entegris are shown to include the historical
accounts and results of operations of Fluoroware and EMPAK and their respective
subsidiaries, as if the business combination had existed for all periods
presented.
We derive our revenue from the sale of products to the microelectronics
industry and recognize revenue upon the shipment of such goods to customers. Our
cost of sales includes polymers and purchased components, manufacturing
personnel, supplies and fixed costs related to depreciation and operation of
facilities and equipment. Our customers consist primarily of semiconductor
manufacturers and semiconductor equipment and materials suppliers. We serve our
customers through various subsidiaries and sales and distribution relationships
in the United States, Asia and Europe.
Our fiscal year is a 52- or 53-week period ending on the last Saturday
of August. Our last three fiscal years ended on the following dates: August 29,
1998, August 28, 1999 and August 26, 2000. Fiscal years are identified in this
report according to the calendar year in which they end. For example, the fiscal
year ended August 26, 2000 is referred to as "fiscal 2000."
Our results in fiscal 1998 and 1999 were affected by downturns in the
semiconductor industry. In response to these downturns, we reduced personnel and
variable expenses. We also consolidated manufacturing operations by combining
the activities of two of our facilities into one, which allowed the Company to
reduce infrastructure support costs and eliminate duplicate production
equipment. In the second half of fiscal 1999, the semiconductor industry began
to recover from the downturn. This recovery, which continued through fiscal
2000, has led to greatly improved net sales and profitability.
19
Results of Operations
The following table sets forth the relationship between various
components of operations, stated as a percent of net sales, for each of the
periods indicated. Our historical financial data for fiscal 2000, 1999 and 1998
were derived from, and should be read in conjunction with, our audited
consolidated financial statements and the related notes included elsewhere in
this annual report.
Percent of Net Sales
------------------------------------------------------------------------------------------------------------------
2000 1999 1998
------------------------------------------------------------------------------------------------------------------
Net sales 100.0 100.0 100.0
Cost of sales 52.0 62.0 58.9
------------------------------------------------------------------------------------------------------------------
Gross profit 48.0 38.0 41.1
Selling, general and administrative expenses 21.3 25.8 24.4
Engineering, research and development expenses 4.4 6.0 7.5
------------------------------------------------------------------------------------------------------------------
Operating profit 22.2 6.2 9.2
Interest expense, net 0.7 2.3 2.6
Other income, net (1.4) (0.8) (0.1)
------------------------------------------------------------------------------------------------------------------
Income before income taxes and other items 23.0 4.7 6.7
below
Income tax expense 8.3 1.8 1.7
Equity in net (income) loss of affiliates (0.5) 0.7 --
Minority interest 0.1 (0.2) 0.1
------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 15.1 2.4 4.9
Extraordinary loss on extinguishment of debt, net (0.3) -- --
of taxes
------------------------------------------------------------------------------------------------------------------
Net income 14.7 2.4 4.9
------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended August 26, 2000 Compared to Fiscal Year Ended August 28, 1999
Net sales. Net sales increased $101.5 million, or 42%, to $343.5 million in
fiscal 2000, compared to $242.0 million in fiscal 1999. The improvement
reflected the increase in product sales associated with the sustained recovery
in the semiconductor industry that began in the second half of fiscal 1999.
Revenue gains were recorded in all geographic regions and across all product
lines. Sales of Fluid Handling products grew by 77% and Microelectronics product
sales increased by 31%. International sales accounted for approximately 48% of
net sales in fiscal 2000, essentially unchanged from fiscal 1999.
Gross profit. Gross profit in fiscal 2000 increased by $72.9 million to $164.7
million, an increase of 79% over the $91.9 million reported in fiscal 1999. The
gross margin for fiscal 2000 improved to 48.0% compared to 38.0% for fiscal
1999. Gross margin and gross profit improvements were reported by both domestic
and international operations. The improvements in fiscal 2000 reflected the
improved utilization of our production capacity associated with the higher sales
levels noted above, a more favorable product mix and the benefits of integrating
various elements of our manufacturing operations. A $4.3 million reduction in
our last-in, first-out (LIFO) inventory reserve, also reflecting the improved
utilization of production capacity, also contributed to higher gross profit and
gross margin. Partly offsetting the factors underlying the improvement in gross
profit was $5.9 million in asset impairment charges, compared to $2.0 million in
fiscal 1999, mainly for asset write-offs of molds that were determined to have
no future use.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses increased $11.0 million, or 18%, to $73.3 million
in fiscal 2000 from $62.3 million in fiscal 1999. The increase was due to higher
commissions and incentive compensation as well as higher expenditures for
personnel and information systems. SG&A costs also increased due to the accrual
of $2.5 million in fiscal 2000 for charitable contributions, reflecting our
commitment to contribute 5% of fiscal 2000 net income to charitable
organizations. These increases were partly offset by the absence of $3.6 million
in merger-related costs incurred in fiscal 1999. SG&A costs, as a percent of net
sales, decreased to 21.3% from 25.8% primarily due to increased net sales.
Engineering, research and development expenses. Engineering, research and
development expenses increased 3%, to $15.0 million in fiscal 2000 from $14.6
million in fiscal 1999. Engineering, research and
20
development costs, as a percent of net sales, decreased to 4.4% from 6.0% due
mainly to increased net sales.
Interest expense, net. Net interest expense decreased 56% to $2.4 million in
fiscal 2000 compared to $5.5 million in the comparable period a year ago. The
decrease reflected the reduction of domestic borrowings and the short-term
investment of available cash balances. These actions occurred most notably in
the fourth quarter when the Company received proceeds of $99.0 million from its
initial public offering, $42 million of which was used to retire long-term debt
and capital lease obligations.
Other income, net. Other income was $4.9 million in fiscal 2000 compared to
other income of $1.9 million in fiscal 1999. The increase was primarily due to
the $5.5 million gain recognized on the sale of approximately 612,000 shares of
its investment in Metron Technology N.V. (Metron) as part of Metron's initial
public offering in November 1999. Other income in fiscal 2000 also included
losses on sales of property and equipment offset by gains from foreign exchange
translation.
Income tax expense. Income tax expense of $28.4 million was significantly higher
in fiscal 2000 compared to $4.4 million in income tax expense reported for
fiscal 1999, primarily reflecting significantly higher income. The effective tax
rate in fiscal 2000 was 36.0% compared to 38.8% in fiscal 1999. The lower rate
reflected the Company's ability to utilize foreign tax credit carryforwards.
Equity in net (income) loss of affiliates. Our equity in the net income of
affiliates was $1.7 million in fiscal 2000. Our equity in the net loss of
affiliates was $1.6 million in fiscal 1999. This improvement primarily reflects
the operating results of Metron, which also benefited from the improved industry
conditions affecting our results.
Extraordinary loss on extinguishment of debt. During the fourth quarter, the
Company incurred prepayment costs of $1.8 million ($1.1 million after taxes, or
$0.02 per share) in connection with repayment of $42 million of long-term debt
and capital lease obligations.
Net income. Net income increased to $50.6 million in fiscal 2000, compared to
net income of $5.7 million in fiscal 1999. After the market value adjustment
related to redeemable common stock, the net income applicable to nonredeemable
common shareholders was $2.0 million, or $0.04 per share diluted, in fiscal
2000, compared to a net loss applicable to nonredeemable common shareholders of
$93.0 million, or $2.53 per share, in fiscal 1999. Excluding the effect of the
market value adjustment related to redeemable common stock, pro forma earnings
per share improved from $0.09 per share in fiscal 1999 to $0.77 in fiscal 2000.
Fiscal Year Ended August 31, 1999 Compared to Fiscal Year Ended August 31, 1998
Net sales. Net sales decreased $24.6 million, or 9%, to $242.0 million in fiscal
1999 from $266.6 million in fiscal 1998. The revenue decline was primarily
associated with the slowdown experienced in the semiconductor industry and
reflected lower sales in all major product lines and geographic areas, primarily
in the United States. International sales accounted for 48% of sales in fiscal
1999 compared to 45% in fiscal 1998.
Gross profit. Gross profit in fiscal 1999 declined by $17.8 million to $91.9
million, a decrease of 16% from $109.7 million in fiscal 1998. Gross margin for
fiscal 1999 decreased to 38.0% compared to 41.1% in fiscal 1998. The primary
factor underlying the gross margin decline was the reduced utilization of our
production capacity resulting from lower sales levels in fiscal 1999, as well as
a less favorable product mix. A moderate expansion in production capacity also
contributed to the drop in gross margin. Fiscal 1999 costs included $2.0 million
associated with the business combination of Fluoroware and EMPAK.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $2.8 million, or 4%, to $62.3 million in
fiscal 1999 from $65.1 million in fiscal 1998. Fiscal 1999 costs included
expenses of $3.6 million associated with the business combination as well as
higher information systems costs. These increases were offset by improvements
related to headcount reductions and lower incentive compensation. SG&A costs, as
a percent of net sales, increased to 25.8% from 24.4% primarily due to the
decline in net sales and one-time business combination expenses.
21
Engineering, research and development expenses. Engineering, research and
development expenses decreased $5.3 million, or 27%, to $14.6 million in fiscal
1999 from $19.9 million in fiscal 1998. The decrease was due to lower personnel
costs associated with personnel reductions related to the semiconductor
downturn, as well as reduced product sampling and development expenditures.
Engineering, research and development costs, as a percentage of net sales,
decreased to 6.0% from 7.5% due to both increased net sales and reduced costs.
Interest expense, net. Net interest expense decreased 21% to $5.5 million in
fiscal 1999 compared to $7.0 million in fiscal 1998. The decrease reflected
reduced borrowings.
Other income, net. Other income was $1.9 million in fiscal 1999 compared to $0.3
million in fiscal 1998. The increase primarily reflected a $2.0 million
difference in foreign currency translation gains.
Income tax expense. Income tax expense decreased slightly in fiscal 1999
compared to fiscal 1998. Our effective tax rate was 38.8% in fiscal 1999
compared to 25.3% in fiscal 1998, which reflected the benefit of tax deductions
related to international operations not recognized in prior years.
Equity in net loss of affiliates. Our equity in the net loss of affiliates was
$1.6 million in fiscal 1999 compared to $0.1 million in fiscal 1998. This
decline reflected the operating results of Metron, which reflected many of the
same declining industry conditions affecting our results.
Net income. Net income decreased $7.4 million, or 56%, to $5.7 million in fiscal
1999 from $13.1 million in fiscal 1998. After the market value adjustment
related to redeemable common stock, the net loss applicable to nonredeemable
common shareholders in fiscal 1999 was $93.0 million, or $2.53 per share,
compared to net income applicable to nonredeemable common shareholders of $40.3
million, or $0.21 per share, in fiscal 1998. Excluding the effect of the market
value adjustment related to redeemable common stock, pro forma earnings per
share fell from $0.21 in fiscal 1998 to $0.09 in fiscal 1999.
Quarterly Results of Operations
The following tables present selected data from the Company's
consolidated statements of operations in thousands of dollars and as a percent
of net sales for the eight quarters ended August 26, 2000.
STATEMENT OF RESULTS DATA:
- -------------------------------------------------------------------------------------------------------------------
Fiscal 1999 Fiscal 2000
- -------------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------------------------------------------
Dollars in thousands:
Net sales.......................... $51,466 $60,124 $60,585 $69,777 $71,816 $84,846 $90,991 $95,812
Gross profit....................... 17,091 22,473 24,737 27,549 31,667 39,349 44,173 49,516
Selling, general and
administrative expenses............ 14,110 14,786 13,897 19,548 15,034 18,631 19,913 19,715
Engineering, research and
development expenses............... 4,379 3,192 3,345 3,649 3,503 3,642 3,468 4,428
Operating profit (loss)............ (1,398) 4,495 7,496 4,353 13,130 17,076 20,792 25,373
Net income (loss) before $(1,650) $ 1,750 $ 2,433 $ 3,197 $12,045 $11,068 $12,319 $16,292
extraordinary item.................
- -------------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------------------------------------------
Percent of Net Sales:
Net sales.......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Gross profit....................... 33.2 37.4 40.8 39.5 44.1 46.4 48.5 51.7
Selling, general and
administrative expenses............ 27.4 24.6 22.9 28.0 20.9 22.0 21.9 20.6
Engineering, research and
development expenses............... 8.5 5.3 5.5 5.2 4.9 4.3 3.8 4.6
Operating profit (loss)............ (2.7) 7.5 12.4 6.2 18.3 20.1 22.9 26.5
Net income (loss).................. (3.2) 2.9 4.0 4.6 16.8 13.0 13.5 17.0
- -------------------------------------------------------------------------------------------------------------------
22
This unaudited information has been prepared on the same basis as our
audited consolidated financial statements appearing elsewhere in this annual
report. All adjustments which management considers necessary for the fair
presentation of the unaudited information have been included in the quarters
presented. The results for any quarter are not necessarily indicative of the
results to be expected for the entire year or any future period.
Over the past eight quarters, we have generally reported improved net
sales and net income, primarily resulting from improved conditions in the
semiconductor industry. Gross profits have increased due to higher sales,
improved utilization of our production capacity and a more favorable product
sales mix. Many of our customers opened or upgraded facilities in fiscal 2000,
which resulted in a significant increase in the sale of chemical delivery and
wafer handling products.
Cost of sales and selling, general and administrative expenses in the
fourth quarter of fiscal 1999 included $2.0 million of asset impairment charges
and $3.6 million, respectively, in expenses associated with the business
combination. Net income in the first quarter of fiscal 2000 included a $5.5
million gain recognized on the sale of approximately 612,000 shares of our
investment in Metron stock.
Our quarterly results of operations have been, and will likely continue
to be, subject to significant fluctuations due to a variety of factors,
including, among others: economic conditions in the semiconductor industry;
size, timing and shipment of customer orders; timing of announcements or
introductions by us or our competitors of new products and product upgrades or
enhancements; exchange rate fluctuations; price competition; our ability to
design, introduce and manufacture new products on a cost effective and timely
basis; and other factors, a number of which are beyond our control.
Liquidity and Capital Resources
We have historically financed our operations and capital requirements
through cash flow from operating activities, long-term loans, and lease
financing (some of which are secured by property and equipment) and borrowings
under domestic and international short-term lines of credit. In fiscal 2000, we
raised capital via an initial public offering.
Operating activities. Cash flow provided by operating activities totaled $64.1
million, $43.4 million and $45.9 million in fiscal 2000, 1999 and 1998,
respectively. Net income and noncash charges, such as depreciation, primarily
accounted for the cash flow generated by operations in all years. In fiscal
2000, these items were partly offset by higher working capital requirements,
principally related to accounts receivable growth of $22.5 million. Fiscal 1999
and 1998 operating cash flows benefited from reductions in working capital. Our
working capital stood at $158.5 million and $48.9 million at the end of fiscal
2000 and 1999, respectively.
Investing activities. Cash flow used in investing activities totaled $15.8
million, $9.3 million and $34.0 million in fiscal 2000, 1999 and fiscal 1998,
respectively. Acquisition of property and equipment, the main component of cash
flow used in investing activities, totaled $21.4 million, $10.1 million and
$33.5 million in fiscal 2000, 1999 and 1998, respectively. Significant capital
expenditures in fiscal 2000 included additions of manufacturing equipment and
the upgrading and integration of information systems. We plan capital
expenditures of approximately $35 million during fiscal 2001, consisting mainly
of spending on manufacturing equipment and information systems.
In fiscal 2000, we received $7.4 million from the sale of 612,000 shares of our
investment in Metron Technology N.V., leaving us with ownership of approximately
2.7 million shares, or 20.3% of total Metron shares outstanding.
Financing activities. Cash provided by financing activities totaled $38.3
million in fiscal 2000, while cash used in financing activities was $27.1
million and $14.9 million in fiscal 1999 and 1998, respectively.
During the fourth quarter of fiscal 2000, we completed a registered underwritten
initial public offering. We issued 9,890,000 common shares at $11 per share,
receiving net proceeds of $99.0 million after underwriting and issuance costs.
Certain of our shareholders also sold 5,060,000 shares.
In fiscal 2000, we eliminated our use of domestic short-term borrowings and
capital lease obligations and made scheduled payments on our long-term
borrowings. We retired $42 million in long-term debt and capital lease
obligations in the fourth quarter using a portion of the proceeds from the
initial public offering In fiscal 1999 and 1998, we also paid down outstanding
debt with cash flow from operations not used for investing purposes.
23
We repurchased common shares for $10.4 million, $1.1 million and $2.6 million in
fiscal 2000, fiscal 1999 and fiscal 1998, respectively, primarily in connection
with the redemption of common stock from our Employee Stock Ownership Plan.
As of August 26, 2000, our sources of available funds comprised $103.0 million
in cash and cash equivalents and various credit facilities. We have unsecured
revolving commitments with two commercial banks with aggregate borrowing
capacity of $30.0 million, with no borrowings outstanding at August 26, 2000. We
also have lines of credit, equivalent to an aggregate $11.9 million with six
international banks, which provide for borrowings of German deutsche marks,
Malaysian ringgits and Japanese yen for our overseas subsidiaries. Borrowings
outstanding on these lines of credit were $8.3 million at August 26, 2000.
We believe that our cash and cash equivalents, cash flow from operations and
available credit facilities will be sufficient to meet our working capital and
investment requirements for the next twelve months. However, our future growth,
including potential acquisitions, may require additional funding, and from time
to time we may need to raise capital through additional equity or debt
financing. If we were unable to obtain this additional funding, we might have to
curtail our expansion or acquisition plans. There can be no assurance that any
such financing would be available to us on commercially acceptable terms.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement, as amended, requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the derivative
and whether it qualifies for hedge accounting. SFAS No. 133 will be effective
for us beginning in the first quarter of fiscal 2001. Adoption of SFAS No. 133
is not expected to materially impact our financial position or results of
operations.
In December 1999, the Securities and Exchange Commission released Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements", which provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. Based on a review of our revenue
recognition policy and practices, the Company believes that it is in conformity
with the provisions of SAB No. 101.
Quantitative and Qualitative Disclosure About Market Risks
Our principal market risks are sensitivities to interest rates and
foreign currency exchange rates. Our exposure to interest rate fluctuations is
not significant. Most of our outstanding debt at August 26, 2000 carried fixed
rates of interest. All of our short-term investments are debt instruments that
mature in three months or less.
We use derivative financial instruments to manage foreign currency
exchange rate risk associated with the sale of products from the United States
when such sales are denominated in currencies other than the U.S. dollar. The
cash flows and earnings of our foreign-based operations are also subject to
fluctuations in foreign exchange rates. A hypothetical 10% change in the foreign
currency exchange rates would increase or decrease our net income by
approximately $2 million.
Our cash flows and earnings are also subject to fluctuations in foreign
exchange rates due to investments in foreign-based affiliates. Investments in
affiliates includes our 20.3% interest in Metron. Metron attempts to limit its
exposure to changing foreign currency exchange rates through operational and
financial market actions. Products are sold in a number of countries throughout
the world resulting in a diverse portfolio of transactions denominated in
foreign currencies. Metron manages certain short-term foreign currency exposures
by the purchase of forward contracts to offset the earnings and cash flow impact
of foreign currency denominated receivables and payables.
Our investment in Metron is accounted for by the equity method of
accounting and has a carrying value on the balance sheet of approximately $14.5
million. The fair value of Metron is subject to stock market fluctuations. Based
on the closing stock price of Metron on August 26, 2000, the fair value of our
investment in Metron was approximately $33.1 million.
24
Impact of Inflation
Our financial statements are prepared on a historical cost basis, which
does not completely account for the effects of inflation. However, since the
cost of 81% of our inventories is determined using the LIFO method of
accounting, cost of sales, except for depreciation expense included therein,
generally reflects current costs. The cost of polymers, our primary raw
material, was essentially unchanged from a year ago. We expect the cost of
resins to remain stable in the foreseeable future. Labor costs, including taxes
and fringe benefits, rose modestly in fiscal 2000, and moderate increases also
can be reasonably anticipated for fiscal 2001.
Forward-Looking Statements
The information in this Management's Discussion and Analysis of
Financial Condition and Results of Operations, except for the historical
information, contains forward-looking statements. In addition, when used in this
report, the words "anticipate", "plan", "believe", "estimate", "except" and
similar expressions as they relate to us or our management are intended to
identify forward-looking statements. All forward-looking statements involve
risks and uncertainties. You should not place undo reliance on these
forward-looking statements, as actual results could differ materially from
expected or historical results. We do not assume any obligation to publicly
release the results of any revision or updates to these forward-looking
statements to reflect future events or unanticipated occurrences. Additional
information about these risks and uncertainties have been identified by Company
in the Company's Annual Report on Form 10-K, which will be filed on or before
November 24, 2000.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See information/discussion appearing under the subcaption "Quantitative and
Qualitative Disclosure About Market Risks" of Management's Discussion and
Analysis of Financial Condition and Results of Operations in Item 7.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Auditors............................................ 27
Consolidated Balance Sheets as of August 26, 2000 and August 28, 1999..... 28
Consolidated Statements of Operations for the years ended August 26,
2000, and August 28, 1999 and August 29, 1998........................... 29
Consolidated Statements of Cash Flows for the years ended August 26,
2000, and August 28, 1999 and August 29, 1998........................... 30
Consolidated Statements of Shareholders' Equity (Deficit) for the years
ended August 26,2000, and August 28, 1999 and August 29, 1998........... 31
Notes to Consolidated Financial Statements................................ 32
26
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Entegris, Inc.:
We have audited the accompanying consolidated balance sheets of
Entegris, Inc. and subsidiaries as of August 26, 2000 and August 28, 1999, and
the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
August 26, 2000. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits. We did not audit
the 1998 financial statements of Empak, Inc., a wholly-owned subsidiary, which
statements reflect total revenues constituting 40% of total consolidated
revenues in 1998. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Empak, Inc., is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Entegris, Inc. and
subsidiaries as of August 26, 2000 and August 28, 1999, and the results of their
operations and their cash flows for each of the years in the three-year period
ended August 26, 2000 in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
Minneapolis, Minnesota
October 10, 2000
27
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
August 26, August 28,
2000 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents ............................................ $ 102,973 $ 16,411
Trade accounts receivable, net of allowance for doubtful accounts of
$2,524 and $1,205, respectively ................................... 41,325 32,932
Trade accounts receivable due from affiliates ........................ 22,803 9,962
Inventories .......................................................... 41,325 35,047
Deferred tax assets and refundable income taxes ...................... 8,243 6,276
Other current assets ................................................. 4,341 4,737
- ---------------------------------------------------------------------------------------------------
Total current assets ............................................. 221,010 105,365
- ---------------------------------------------------------------------------------------------------
Property, plant and equipment, net ........................................ 107,733 117,624
Other assets:
Investments in affiliates ............................................ 14,452 10,421
Intangible assets, less accumulated amortization of $3,569 and $2,462,
respectively ....................................................... 7,162 6,318
Investments in marketable securities ................................. 1,288 860
Other ................................................................ 1,319 1,476
- ---------------------------------------------------------------------------------------------------
Total assets ..................................................... $ 352,964 $ 242,064
===================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt ................................. $ 1,828 $ 6,566
Current maturities of capital lease obligations ...................... -- 2,642
Short-term borrowings ................................................ 8,311 8,439
Accounts payable ..................................................... 21,849 10,548
Accrued liabilities .................................................. 30,556 26,780
Income tax payable ................................................... -- 1,530
- ---------------------------------------------------------------------------------------------------
Total current liabilities ........................................ 62,544 56,505
- ---------------------------------------------------------------------------------------------------
Long-term debt, less current maturities ................................... 10,822 48,023
Capital lease obligations, less current maturities ........................ -- 5,807
Deferred tax liabilities .................................................. 7,546 6,139
Minority interest in subsidiaries ......................................... 4,012 907
Redeemable ESOT common stock .............................................. -- 145,570
Commitments and contingent liabilities .................................... -- --
Shareholders' equity (deficit):
Common stock, par value $.01; 200,000,000 shares authorized;
issued and outstanding shares; 68,317,183 and 18,354,344,
respectively ..................................................... 683 184
Additional paid-in capital ........................................... 114,003 15,066
Retained earnings (deficit) .......................................... 153,287 (36,069)
Accumulated other comprehensive gain (loss) .......................... 67 (68)
- ---------------------------------------------------------------------------------------------------
Total shareholders' equity (deficit) ............................. 268,040 (20,887)
- ---------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity (deficit) ............. $ 352,964 $ 242,064
===================================================================================================
See the accompanying notes to consolidated financial statements.
28
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended
- --------------------------------------------------------------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
- --------------------------------------------------------------------------------------------------------------
Sales to non-affiliates................................... $245,286 $195,421 $216,852
Sales to affiliates....................................... 98,179 46,531 49,739
- ---------------------------------------------------------------------------------------------------------------
Net sales................................................. 343,465 241,952 266,591
Cost of sales............................................. 178,760 150,102 156,933
- ---------------------------------------------------------------------------------------------------------------
Gross profit...................................... 164,705 91,850 109,658
Selling, general and administrative expenses.............. 73,293 62,340 65,111
Engineering, research and development expenses............ 15,041 14,565 19,912
- ---------------------------------------------------------------------------------------------------------------
Operating profit.................................. 76,371 14,945 24,635
Interest expense, net..................................... 2,422 5,498 6,995
Other income, net......................................... (4,945) (1,850) (273)
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes and other items below.. 78,894 11,297 17,913
Income tax expense........................................ 28,375 4,380 4,536
Equity in net (income) loss of affiliates................. (1,694) 1,587 118
Minority interest in subsidiaries' net income (loss)...... 489 (399) 176
- ---------------------------------------------------------------------------------------------------------------
Income before extraordinary item.................. 51,724 5,729 13,083
Extraordinary loss on extinguishment of debt, net of taxes (1,149) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income........................................ 50,575 5,729 13,083
Market value adjustment to redeemable common stock........ (48,602) (98,754) 27,170
- ---------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to nonredeemable
common shareholders............................. $1,973 $(93,025) $40,253
===============================================================================================================
Earnings (loss) per nonredeemable common share:
Basic
Income (loss) before extraordinary item...... $ 0.07 $ (2.53) $ 1.10
Extraordinary loss on extinguishment of debt,
net of taxes............................... (0.03) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss)............................ $ 0.05 $ (2.53) $ 1.10
===============================================================================================================
Diluted
Income (loss) before extraordinary item...... $ 0.06 $ (2.53) $ 0.21
Extraordinary loss on extinguishment of debt,
net of taxes............................... (0.02) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income (loss)............................ $ 0.04 $ (2.53) $ 0.21
===============================================================================================================
See the accompanying notes to consolidated financial statements.
29
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands)
Common Accumulated
Shares Common Paid-in Retained Comprehensive Comprehensive
Outstanding Stock Capital Earnings Income (Loss) Total income
- ------------------------------------------------------------------------------------------------------------------------
Balance at August 30, 1997............. 18,208 $182 $14,767 $18,239 $(531) $32,657
Repurchase and retirement of shares (143) (1) -- (928) -- (929)
Shares issues pursuant to stock
options exercised............... 295 3 299 -- -- 302
exercised.....................
Market value adjustment to
redeemable ESOT common stock.... -- -- -- 27,170 -- 27,170
Foreign currency translation
adjustment...................... -- -- -- (1,622) (1,622) $(1,622)
Decrease in unrealized holding
gain on marketable securities... -- -- -- -- (168) (168) (168)
Net income........................ -- -- -- 13,083 -- 13,083 13,083
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income........ $11,293
==============
Balance at August 29, 1998............. 18,360 184 15,066 57,564 (2,321) 70,493
Repurchase and retirement of shares (6) -- -- (20) -- (20)
Dilution of ownership on equity
investment...................... -- -- -- (588) -- (588)
Market value adjustment to
redeemable ESOT common stock.... -- -- -- (98,754) -- (98,754)
Foreign currency translation
adjustment...................... -- -- -- -- 1,792 1,792 $ 1,792
Increase in unrealized holding
gain on marketable securities... -- -- -- -- 461 461 461
marketable securities.........
Net income........................ -- -- -- 5,729 -- 5,729 5,729
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income........ $ 7,982
==============
Balance at August 28, 1999............. 18,354 184 15,066 (36,069) (68) (20,887)
Repurchase and retirement of shares (13) -- -- (89) -- (89)
Shares issued pursuant to stock
options exercised............... 76 -- 362 -- -- 362
Dilution of ownership on
investments..................... -- -- -- 3,764 -- 3,764
Market value adjustment to
redeemable ESOT common stock.... -- -- -- (48,602) -- (48,602)
Reclassification of ESOT shares
upon consummation of initial
public offering................. 21,621 216 (108) 183,708 -- 183,816
Shares issued pursuant to public
offering, net of issuance costs. 9,890 99 98,867 -- -- 98,966
Stock split adjustment............ 18,389 184 (184) -- -- --
Foreign currency translation
adjustment...................... -- -- -- -- (63) (63) $ (63)
Increase in unrealized holding
gain on marketable securities... -- -- -- -- 198 198 198
Net income ....................... -- -- -- 50,575 -- 50,575 50,575
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income........ $50,710
==============
Balance at August 26, 2000 ............ 68,317 $683 $114,003 $153,287 $ 67 $268,040
===========================================================================================================
See the accompanying notes to consolidated financial statements.
30
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended
- ------------------------------------------------------------------------------------------------------------------------------
August 26, 2000 August 28, 1999 August 29, 1998
- ------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income.................................................... $ 50,575 $ 5,729 $13,083
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization......................... 27,246 28,810 26,591
Asset impairment...................................... 5,937 1,996 425
Provision for doubtful accounts....................... 1,493 213 57
Provision for deferred income taxes................... 382 1,296 667
Stock option compensation expense..................... 150 -- --
Equity in net (income) loss of affiliates............. (1,694) 1,587 118
Loss (gain) on sale of property and equipment......... 811 543 (360)
Gain on sale of investment in affiliate............... (5,468) -- --
Minority interest in subsidiaries' net income (loss).. 489 (399) 176
Changes in operating assets and liabilities:
Trade accounts receivable........................... (9,620) (3,069) 7,983
Trade accounts receivable due from affiliates....... (12,841) (2,560) 113
Inventories......................................... (6,279) 1,888 7,122
Accounts payable and accrued liabilities............ 15,251 3,520 (11,685)
Other current assets................................ 396 152 5,457
Accrued income taxes................................ (2,453) 3,925 (4,094)
Other............................................... (246) (222) 256
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities...... 64,129 43,409 45,909
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisition of property and equipment......................... (21,376) (10,079) (33,512)
Purchase of intangible assets................................. (2,448) (621) (618)
Proceeds from sales of property and equipment................. 713 1,285 343
Proceeds from sale of investment in affiliate................. 7,398 -- --
(Decrease) increase in investment in affiliates............... (76) 159 (213)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities.......... (15,789) (9,256) (34,000)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Principal payments on short-term borrowings and long-term
debt....................................................... (52,466) (32,339) (28,567)
Proceeds from short-term borrowings and long-term debt........ 2,028 6,382 15,895
Issuance of common stock...................................... 99,179 -- 302
Repurchase of redeemable and nonredeemable common stock....... (10,446) (1,110) (2,578)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities................................... 38,295 (27,067) (14,948)
- ------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents.. (73) 1,090 (80)
- ------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents................................. 86,562 8,176 (3,119)
Cash and cash equivalents at beginning of period.............. 16,411 8,235 11,354
- ------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period.................... $102,973 $16,411 $ 8,235
===============================================================
See accompanying notes to consolidated financial statements.
31
ENTEGRIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation Entegris, Inc. (the
Company) is a leading provider of materials integrity management solutions that
protect and transport the critical materials used in the semiconductor and other
high technology industries. The accompanying consolidated financial statements
include the accounts of the Company and its majority-owned subsidiaries. The
Company accounts for its investment in its 20.3% owned affiliate, Metron
Technology N.V. (Metron), using the equity method. The Company's investment in
Metron is accounted for using a three-month lag due to Metron's May year end.
Intercompany profits, transactions and balances have been eliminated in
consolidation. Certain amounts reported in previous years have been reclassified
to conform to the current year's presentation.
The Company's fiscal year is a 52 or 53 week period ending on the last Saturday
in August. Fiscal years 2000, 1999 and 1998 ended on August 26, 2000, August 28,
1999 and August 29, 1998, respectively.
Business Combination On June 7, 1999, Fluoroware, Inc. and EMPAK, Inc. completed
a business combination which resulted in the formation of Entegris, Inc., a
corporation formed for the purpose of effecting the business combination. The
Company issued 36 million shares and 24 million shares of its common stock in
exchange for 100% of the outstanding shares of Fluoroware, Inc. and EMPAK, Inc.,
respectively.
For financial reporting purposes, the business combination has been recorded
using the pooling-of-interests method of accounting under accounting principles
generally accepted in the United States. Accordingly, the historical financial
statements of Entegris, Inc. include the historical accounts and results of
operations of Fluoroware, Inc. and EMPAK, Inc. as if the business combination
had been in effect for all periods presented.
The results of operations for 1999 and 1998 for the separate companies and
combined amounts presented in the consolidated financial statements are as
follows (in thousands):
1999 1998
---- ----
Net sales:
Fluoroware, Inc................................................. $141,758 152,805
EMPAK, Inc...................................................... 100,194 113,786
- -----------------------------------------------------------------------------------------------------------------
Combined................................................... $241,952 266,591
======== =======
Net income before merger-related expenses, impairment of asset
charges and adjustments recorded to conform accounting methods:
Fluoroware, Inc................................................. $ 149 1,940
EMPAK, Inc...................................................... 9,843 11,414
- -----------------------------------------------------------------------------------------------------------------
Combined.................................................... $9,992 13,354
========= ========
Net income (loss):
Fluoroware, Inc.................................................. $(3,630) 1,724
EMPAK, Inc....................................................... 9,359 11,359
- -----------------------------------------------------------------------------------------------------------------
Combined.................................................... $ 5,729 13,083
======= ========
Adjustments to conform the companies' methods of depreciation reduced
combined net income for 1999 and 1998 by approximately $1.9 million and $0.5
million, respectively.
Expenses related to the business combination were approximately $3.6
million for 1999, of which approximately $0.9 million and $2.6 million is in
accrued liabilities at August 26, 2000 and August 28, 1999, respectively. In
addition, the Company recorded asset impairment charges related to the business
combination of approximately $1.3 million during 1999.
Cash and Cash Equivalents Cash and cash equivalents include cash on hand, demand
deposits, and short-term investments with original maturities of three months or
less.
32
Inventories Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method for approximately 81% and 73%
of total inventories at August 26, 2000 and August 28, 1999, respectively.
Inventories not valued at LIFO are recorded using the first-in, first-out (FIFO)
method.
Property, Plant, and Equipment Property, plant, and equipment are carried at
cost and are depreciated principally on the straight-line method. When assets
are retired or disposed of, the cost and related accumulated depreciation are
removed from the accounts, and gains or losses are recognized in the same
period. Maintenance and repairs are expensed as incurred; significant renewals
and betterments are capitalized.
Capitalized Software The Company capitalizes certain costs associated with
significant software obtained and developed for internal use. Certain costs are
capitalized when both the preliminary project stage is completed and management
deems the project will be completed and used to perform the intended function.
Capitalization of such costs ceases no later than the point at which the project
is substantially complete and ready for its intended purpose.
Capitalized software costs are amortized over the estimated useful life of the
project which is generally 4 to 5 years. Capitalized software of approximately
$5.5 million and $4.6 million is included in office furniture and equipment as
of August 26, 2000 and August 28, 1999, respectively.
Intangible Assets Patents, trademarks and goodwill are carried at cost, less
accumulated amortization, and are being amortized over 5 to 17 year periods,
using the straight-line method. Costs associated with bond and debt issuance are
carried at cost, less accumulated amortization, and are being amortized on a
straight-line basis over the life of the applicable bond or debt instrument,
which is 10 to 15 years.
The carrying value of intangible assets is reviewed when circumstances suggest
that there has been possible impairment. If this review indicates that
intangible assets will not be recoverable based on the projected/estimated
undiscounted net cash flows over the remaining amortization period, the carrying
value of intangible assets is reduced to estimated fair value.
Investments in Marketable Securities Certain of the Company's investments are
classified as available-for-sale, and accordingly, any unrealized holding gains
and losses, net of taxes, are excluded from income, and recognized as a separate
component of shareholders' equity until realized. Fair market value of the
securities is determined based on published market prices. At August 26, 2000
and August 28, 1999, the gross unrealized gains on marketable securities were
$0.7 million and $0.5 million, respectively.
Foreign Currency Translation/Foreign Currency Contracts Except for certain
foreign subsidiaries whose functional currency is the United States dollar,
assets and liabilities of foreign subsidiaries are translated from foreign
currencies into U.S. dollars at current exchange rates. Income statement amounts
are translated at the weighted average exchange rates for the year. Gains and
losses resulting from foreign currency transactions are included in net income.
For certain foreign subsidiaries whose functional currency is the U.S. dollar,
currency gains and losses resulting from translation are determined using a
combination of current and historical rates and are reported as a component of
net income.
The Company periodically enters into forward foreign currency contracts to
reduce certain exposures relating to rate changes in foreign currency. These
contracts are subject to gains or losses from changes in foreign currency rates,
however, any realized gain or loss will be offset by gains or losses on the
underlying hedged foreign currency transactions. Certain exposures to credit
losses related to counterparty nonperformance exist, however, the Company does
not anticipate nonperformance by the counterparties as they are large,
well-established financial institutions. The fair values of the Company's
forward hedging instruments discussed below are estimated based on prices quoted
by financial institutions for these instruments. The Company was a party to
forward foreign currency contracts with notional amounts of $2.0 million and
$1.6 million at August 26, 2000 and August 28, 1999, respectively.
Revenue Recognition/Concentration of Risk Revenue and the related cost of sales
are recognized upon shipment of the products. The Company provides for estimated
returns and warranty obligations when the revenue is recorded. The Company sells
its products to semiconductor manufacturing companies throughout the world. The
Company performs continuing credit evaluations of its customers and generally
does not require collateral. Letters of credit may be required from its
customers in certain circumstances. The Company maintains an allowance for
doubtful accounts which management believes is adequate to cover any losses on
trade receivables.
33
Certain of the materials included in the Company's products are obtained from a
single source or a limited group of suppliers. Although the Company seeks to
reduce dependence on those sole and limited source suppliers, the partial or
complete loss of certain of these sources could have at least a temporary
adverse effect on the Company's results of operations. Furthermore, a
significant increase in the price of one or more of these components could
adversely affect the Company's results of operations.
Income Taxes Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting. The Company
accounts for tax credits as reductions of income tax expense in the year in
which such credits are allowable for tax purposes.
The Company utilizes the asset and liability method for computing its deferred
income taxes. Under the asset and liability method, deferred tax assets and
liabilities are based on the temporary difference between the financial
statement and tax basis of assets and liabilities and the enacted tax rates
expected to apply to taxable income in the years in which these temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
Long-lived Assets Long-lived assets and certain identifiable intangibles are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable based on estimated
future undiscounted cash flows. The Company recorded asset write-offs on molds
and equipment which were determined to have no future use of approximately $5.9
million, $2.0 million, and $0.4 million for 2000, 1999 and 1998, respectively.
All impairment losses are included in the Company's cost of sales.
Earnings (Loss) per Share (EPS) Basic EPS is computed by dividing net income
(loss) applicable to nonredeemable common stock by the weighted average number
of shares of nonredeemable common stock outstanding during each period. Since
basic EPS for 1999 represents a loss per share of common stock, the effect of
including the incremental shares of common stock from assumed exercise of
options and from assumed reclassification of redeemable common stock in EPS
computation is anti-dilutive, and, accordingly, basic and diluted EPS are the
same.
Accounting Estimates The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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 date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Stock-based Compensation The Company accounts for stock-based compensation under
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. APB No. 25 requires compensation cost to be recorded on the date of
the grant only if the current market price of the underlying stock exceeds the
exercise price. The Company has adopted the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-based Compensation.
Comprehensive Income Comprehensive income represents the change in shareholders'
equity resulting from other than shareholder investments and distributions. The
Company's foreign currency translation adjustments and unrealized gains and
losses on marketable securities are included in accumulated comprehensive income
(loss). The effect of deferred taxes on other comprehensive income is not
material.
Recent Accounting Pronouncements SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which, as amended, becomes effective for the
Company in the first quarter of fiscal 2001. The pronouncement requires
companies to record derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes in the value of
those derivatives would be accounted for depending on the use of derivatives and
whether it qualifies for hedge accounting. The effect of adopting the SFAS No.
133 is not material to the Company's financial position or results of
operations.
(2) ACQUISITIONS
In October 1999, the Company acquired the assets of a polymer machining business
located in Upland, California for $2.7 million. The acquisition has been
accounted for under the purchase method of accounting. The excess of the
34
purchase price over the net assets acquired was $1.1 million and was allocated
to goodwill. Results of operations are included in the consolidated financial
statements subsequent to October 1999.
In April 1998, the Company acquired all the common stock of Hanbal Korea, a
Korean corporation, for a nominal amount. Subsequent to the acquisition, the
Company contributed additional capital of $2.3 million. The acquisition has been
accounted for under the purchase method of accounting. The excess of the
purchase price over the net book value of the common stock acquired was $0.8
million and was allocated to goodwill. Results of operations are included in the
consolidated financial statements subsequent to April 1998.
In January 1998, the Company acquired an additional interest in Nippon
Fluoroware K.K. (NFKK) for $0.9 million. In October 1999, NFKK agreed to issue
equity of $2.2 million and debt of $2.2 million in exchange for property and
equipment. As a result, The Company's ownership percentage in NFKK decreased to
51% and resulted in a charge to retained earnings of $0.7 million.
(3) INVENTORIES
Inventories consist of the following (in thousands):
2000 1999
- -------------------------------------------------------------------------
Raw materials......................... $ 12,554 $ 7,194
Work-in-process................... 3,280 4,377
Finished goods.................... 25,266 22,703
Supplies.......................... 225 773
- -------------------------------------------------------------------------
$41,325 $35,047
=========================================================================
If the FIFO cost method had been used by the company, inventories would have
been $0.7 million and $4.9 million higher at August 26, 2000 and August 28,
1999, respectively.
During fiscal 1999 and 1998, inventory quantities were reduced, which resulted
in a liquidation of LIFO inventory layers carried at lower costs than those
prevailing in prior years. The effect of this liquidation was to increase income
before income taxes in 1999 and 1998 by approximately $1.6 million and $1.0
million, respectively.
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consists of the following (in thousands):
Estimated
2000 1999 Useful Lives
- --------------------------------------------------------------------------------
Land............................... $10,481 $ 7,307
Buildings and improvements......... 55,080 55,349 5-35
Manufacturing equipment............ 79,413 77,625 5-10
Molds.............................. 64,951 68,352 3-5
Office furniture and equipment..... 38,399 34,291 3-8
- --------------------------------------------------------------------------------
248,324 242,924
Less accumulated depreciation...... 140,591 125,300
- --------------------------------------------------------------------------------
$107,733 $117,624
================================================================================
Depreciation expense was $25.3 million, $27.8 million and $25.6 million in 2000,
1999 and 1998, respectively.
(5) INVESTMENT IN AFFILIATES
The Company's investment in Metron, a worldwide provider of semiconductor
equipment and materials support, is accounted for using the equity method. and
has at August 26, 2000. At August 26, 2000, the Company owned approximately 2.7
million shares of Metron with a carrying value of $14.5 million and a market
value of $33.1 million. Sales to Metron were $81.9 million, $31.8 million and
$34.6 million in 2000, 1999 and 1998, respectively. Trade accounts receivable
relating to these sales as of August 26, 2000 and August 28, 1999 were $20.3
million and $8.1 million, respectively.
35
In November 1999, the Company sold 612,000 shares of its investment in Metron as
part of an initial public offering, receiving proceeds of $7.4 million, while
recognizing a gain of $5.5 million. The Company's ownership percentage decreased
to 20.3% as a result of the public offering and subsequent share issuances for
exercised stock options by Metron. The value of the Company's investment
increased as a result of the initial public offering and was reflected as an
increase to retained earnings of $5.0 million.
In 1999, our ownership percentage in Metron was reduced from 37.5% to 32.8% due
to the dilution of ownership resulting from an acquisition by Metron. The
Company recorded this $0.6 million reduction in its investment through retained
earnings.
A summary of assets, liabilities, and results of operations for Metron is as
follows (in thousands):
May 31, 2000 May 31, 1999
- --------------------------------------------------------------------------------
Current assets............................... $159,761 $ 86,956
Noncurrent assets, net....................... 21,608 12,669
Current liabilities.......................... 105,374 64,326
Noncurrent liabilities....................... 3,480 5,344
- --------------------------------------------------------------------------------
Total shareholders' equity......... $72,515 $ 29,955
================================================================================
Year ended Year ended
May 31, 2000 May 31, 2000
- --------------------------------------------------------------------------------
Net sales.................................... $337,551 $228,121
================================================================================
Net income (loss)............................ $ 7,752 $ (4,534)
================================================================================
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
2000 1999
- --------------------------------------------------------------------------------
Payroll and related benefits....... $15,678 $ 6,896
Insurance.......................... 1,850 2,248
Taxes, other than income taxes..... 1,647 1,472
Pension............................ 2,532 3,218
Interest........................... 42 570
Other.............................. 8,807 12,376
- --------------------------------------------------------------------------------
$30,556 $26,780
================================================================================
(7) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
2000 1999
- -------------------------------------------------------------------------------------------------------------------
Unsecured senior notes payable in various semiannual principal installments, including
semiannual interest installments at 7.42% through February 2011............................. -- $19,200
Stock redemption notes payable in various installments along with monthly interest of 6%,
8%, and 9% through December 2010............................................................ $4,802 8,490
Unsecured senior notes payable in various quarterly principal installments, including
monthly interest installments at 9.46% through February 2005................................ -- 8,400
Mortgage loans payable in monthly installments of $55 including principal and
interest at 8.75% and 9.95% through July 2000 and July 2008; secured by land and
buildings................................................................................... -- 2,331
Commercial loans payable on a monthly basis in principal installments of $58,
with interest ranging from 2.125% to 3.15% and various maturities through
September 2015.............................................................................. 3,722 5,391
Commercial loan payable on a semiannual basis in principal installments of $213 and
interest ranging from 4.9% to 6% and various maturities through December 2007............... 2,522 3,416
Industrial Revenue Bonds payable on a semiannual basis with principal installments of $50
through October 2012, and variable interest ranging from 3.45% to 5.85%..................... 1,350 1,450
Note payable to Marubeni Corporation, interest at 9.07%, due monthly; balloon payment of
$3,913 due March 2002; secured by building.................................................. -- 4,543
Other....................................................................................... 254 1,368
- -------------------------------------------------------------------------------------------------------------------
Total............................................................................... 12,650 54,589
Less current maturities............................................................. 1,828 6,566
- -------------------------------------------------------------------------------------------------------------------
$10,822 $48,023
===================================================================================================================
36
Annual maturities of long-term debt as of August 26, 2000, are as follows
(in thousands):
Fiscal Years Ending
------------------------------------------------------------------
2001............................................. $1,828
2002............................................. 1,425
2003............................................. 1,400
2004............................................. 1,389
2005............................................. 1,304
Thereafter....................................... 5,304
------------------------------------------------------------------
$12,650
==================================================================
During fiscal 2000, the Company signed new debt agreements which replaced the
unsecured senior notes payable and the unsecured reducing revolving commitments.
These new agreements contain substantially identical terms as the former
agreements. The new agreements require the Company to maintain certain quarterly
financial covenants beginning with the quarter ended February 28, 2000.
During the fourth quarter, the Company retired $42 million of long-term and
capital lease obligations, utilizing a portion of the proceeds raised in the
Company's initial public offering. In connection therewith, prepayment costs of
$1.8 million ($1.1 million after taxes) were incurred by the Company. This
amount is reported in the Consolidated Statements of Operations as
"Extraordinary loss on extinguishment of debt, net of taxes".
(8) SHORT-TERM BANK BORROWINGS
The Company has a revolving commitment with three commercial banks for aggregate
borrowings of $30 million with interest at the LIBOR rate (5.4% at August 26,
2000), plus 2.0%, or at prime (8.25% at August 26, 2000). During 2000 interest
ranged between 7.75% and 8.5%. There was no balance outstanding under this
commitment at either August 26, 2000 or August 28, 1999.
The Company has entered into line of credit agreements with six international
commercial banks, which provide for aggregate borrowings of 4 million Deutsche
marks, 5 million Malaysia ringgits and 900 million yen for its foreign
subsidiaries, which is equivalent to $11.9 million as of August 26, 2000.
Interest rates for these facilities are based on a factor of the banks'
reference rates and ranged from 1.625% to 5.7% during 2000. Borrowings
outstanding under these line of credit agreements at August 26, 2000 and August
28, 1999, were $8.3 million and $8.4 million, respectively.
(9) LEASE COMMITMENTS
At August 26, 2000, the Company was obligated under noncancellable operating
lease agreements for certain equipment and buildings. Future minimum lease
payments for noncancellable operating leases with initial or remaining terms in
excess of one year are as follows (in thousands):
Fiscal Year Ending
------------------------------------------------------------------
2001............................................. $4,393
2002............................................. 2,974
2003............................................. 2,086
2004............................................. 1,776
2005............................................. 1,217
Thereafter....................................... 3,261
------------------------------------------------------------------
Total minimum lease payments................ 15,707
Less minimum sublease rentals.................... 2,837
------------------------------------------------------------------
$12,870
==================================================================
Total rental expense for all equipment and building operating leases was $4.9
million, $6.1million and $4.3 million in 2000, 1999 and 1998, respectively. See
note 19 for related party leases included above.
37
(10) INTEREST EXPENSE, NET
Interest expense, net consists of the following (in thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Interest expense..................... $4,614 $ 6,441 $ 7,111
Less interest income................. 2,192 943 116
- --------------------------------------------------------------------------------
Interest expense, net........... $ 2,422 $ 5,498 $ 6,995
================================================================================
(11) OTHER INCOME, NET
Other income, net consists the following (in thousands):
2000 1999 1998
- -------------------------------------------------------------------------------------------------
Gain (loss) on sale of property and equipment....... $ (803) $ (543) $ 1,225
Gain (loss) on sale of investment in affiliate...... 5,468 -- --
Gain (loss) on foreign currency translation......... 438 1,121 (904)
Other, net.......................................... (158) 1,272 (48)
- -------------------------------------------------------------------------------------------------
$ 4,945 $ 1,850 $ 273
=================================================================================================
(12) INCOME TAXES
Income before income taxes was derived from the following sources (in
thousands):
2000 1999 1998
- --------------------------------------------------------------------------------
Domestic.......................... $65,702 $ 7,592 $16,634
Foreign........................... 13,192 3,705 1,279
- --------------------------------------------------------------------------------
$78,894 $11,297 $17,913
================================================================================
Income tax expense (benefit) is summarized as follows (in thousands):
2000 1999 1998
- -------------------------------------------------------------------------------
Current:
Federal........................ $21,878 $2,790 $2,919
State........................ 3,692 495 876
Foreign...................... 2,275 1,343 280
- -------------------------------------------------------------------------------
27,845 4,628 4,075
- -------------------------------------------------------------------------------
Deferred:
Federal........................ 414 (264) 546
State.......................... 116 16 (85)
- -------------------------------------------------------------------------------
530 (248) 461
- -------------------------------------------------------------------------------
$28,375 $4,380 $4,536
===============================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 26, 2000 and
August 28, 1999 are as follows (in thousands):
2000 1999
- ----------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts............................. $1,155 $ 749
Inventory items............................................. 2,698 2,449
Accruals not currently deductible for tax purposes.......... 3,786 5,165
Other, net.................................................. 1,117 1,258
- ----------------------------------------------------------------------------------------------------
Total current deferred tax assets...................... 8,756 9,621
- ----------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation.................................... 6,882 7,220
Other, net.................................................. 2,119 2,264
- ----------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities................... 9,001 9,484
- ----------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities).................. $ (245) $ 137
====================================================================================================
38
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Based upon the level of historical
taxable income and projections for future taxable income over the periods during
which deferred tax assets are deductible, the Company believes it is more likely
than not that the benefit of these deductible differences will be realized.
Income tax expense differs from the expected amounts based upon the
statutory federal tax rates as follows:
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------
Expected federal income tax at statutory rate................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect................. 3.1 2.9 2.5
Effect of foreign source income............................... (0.7) 6.3 2.1
Foreign sales corporation income not subject to tax........... (1.4) (6.2) (5.5)
Research tax credit........................................... (0.4) (3.1) (5.2)
Foreign losses not previously benefited....................... -- -- (5.1)
Other items, net.............................................. 0.4 3.9 1.5
- ------------------------------------------------------------------------------------------------------------
36.0% 38.8% 25.3%
============================================================================================================
(13) SHAREHOLDERS' EQUITY
Initial Public Offering In July 2000, the Company completed an initial public
offering of 9,890,000 shares of common stock at an offering price of $11.00 per
share. The Company received proceeds of $99.0 million after deducting $7.3
million and $2.5 million for underwriting and issuance costs, respectively. Net
proceeds were to be used for the retirement of debt, working capital and other
general corporate purposes.
Stock Split In March, 2000, the Company effected a two-for-one stock split of
the Company's common stock to be effective prior to the Company's initial public
offering. All share and per share amounts have been restated to give effect to
the stock split. In connection with the stock split, the Company's board of
directors also approved an increase in the Company's number of authorized common
shares from 100,000,000 shares to 200,000,000 shares.
Employee Stock Ownership Plan and Trust Entegris maintains an Employee Stock
Ownership Plan and Trust (ESOT). In August 1985 and August 1989, the ESOT
purchased 27,790,156 shares of common stock of the Company from a shareholder.
The ESOT borrowed funds, guaranteed by the Company, for $3.6 million and
obtained additional contributions to fund this purchase in October 1985. In
August 1989, the ESOT borrowed additional funds of $1.2 million guaranteed by
the Company, to purchase an additional 4,631,692 shares of common stock from a
stockholder.
Employer contributions to the ESOT are determined from time to time by the board
of directors at its discretion, and are made without regard to the profits of
the Company. Contributions shall not exceed the amount allowable by the Internal
Revenue Code. No contributions were made to the ESOT for 2000, 1999 or 1998.
Employer contributions are allocated to separate accounts maintained for each
participant in the proportion that the total qualified compensation of each
participant bears to the total qualified compensation for all participants. Each
participant's account is adjusted, at least annually, to reflect investment
gains or losses.
ESOT shares totaled 17,910,514 and 23,252,398 as of August 26, 2000 and August
28, 1999, respectively. Prior to the company's initial public offering completed
in July 2000, the ESOT plan contained a put option, whereby the Company agreed
to purchase the vested shares distributed to terminated participants or their
estates, at the appraised value of the shares as of the second August 31
following termination, or after the first August 31 upon death, disability, or
attainment of age 65. The fair value of shares was estimated by an independent
appraiser to be $6.25 and $2.01 as of August 28, 1999 and August 29, 1998,
respectively. As a result of this redemption feature, these shares were
classified separately from shareholders' equity. Pursuant to the terms of the
ESOT plan, upon the consummation of an initial public offering these shares
would no longer be redeemable and, accordingly, were reclassified into
shareholders' equity in the fourth quarter of fiscal 2000.
On August 20, 1998, the board of directors approved a change to the distribution
procedures, whereby a corporate bylaw restriction was eliminated. The impact of
this restriction elimination allowed participants (beneficiaries and alternate
payees) to receive their distribution in Company stock. This change was
effective for distributions based on the August 29, 1998 valuation. Subsequent
to the Company's initial public offering, all distributions will be in the form
of Company stock.
39
Stock Option Plans In August 1999, Entegris, Inc. established the Entegris, Inc.
1999 Long-Term Incentive and Stock Option Plan (the 1999 Plan) and the Entegris,
Inc. Outside Directors' Stock Option Plan (the Directors' Plan). The 1999 Plan
and the Directors' Plan (the Plans) replaced similar plans in effect prior to
the business combination described in Note 1. The maximum aggregate number of
shares that may be granted under the plans is 9,000,000 and 1,000,000,
respectively. The Plans state that the exercise price for these shares shall not
be less than 100% of the fair market value of the common stock on the date of
grant of such option.
On February 12, 1998, 10-year stock options were granted at a price equal to the
most recent fair market appraised value. Some of the options became immediately
exercisable while others are exercisable on a cumulative basis at a rate of 25%
per year.
Under the Directors' Plan, each outside director shall automatically be granted
an option to purchase 15,000 shares upon the date the individual becomes a
director. Annually, each outside director will automatically be given an option
to purchase 6,000 shares. Options will be exercisable six months subsequent to
the date of grant. The term of the option shall be ten years. The Plan states
that the exercise price for these shares shall not be less than 100% of the fair
market value of the common stock on the date of grant of such option.
Option activity for the 1999 Plan and the Directors' Plan is summarized as
follows (shares in thousands):
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------
Number of Option Number of Option Number of Option
shares price shares price shares price
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, beginning
of year........................... 5,899 $2.72 6,010 $2.72 1,810 $1.43
Granted......................... 1,772 7.27 -- -- 4,610 3.15
Exercised....................... (106) 2.51 -- -- -- --
Canceled........................ (258) 4.21 (111) 2.57 (410) 2.01
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year..... 7,307 $3.78 5,899 $2.72 6,010 $2.72
===============================================================================================================
Options exercisable, end of year..... 4,618 $2.70 3,855 $2.54 2,769 $2.45
===============================================================================================================
Options available for grant, end
of year........................... 2,587 4,101 3,990
===============================================================================================================
Options outstanding for the 1999 Plan and the Directors' Plan at August 26,
2000 is summarized as follows (shares in thousands):
Options Outstanding Options Exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- -----------------------------------------------------------------------------------------------------------------
$0.96 to $1.50 1,343 5.7 years $1.38 1,343 $1.38
- -----------------------------------------------------------------------------------------------------------------
$3.15 4,295 7.4 years 3.15 2,995 3.15
- -----------------------------------------------------------------------------------------------------------------
$6.25 to $11.00 1,669 9.4 years 7.34 280 4.22
- -----------------------------------------------------------------------------------------------------------------
The Company determined pro forma compensation expense under the provisions
of SFAS No. 123 using the Black-Scholes pricing model and the following
assumptions:
2000 1998
- --------------------------------------------------------------------------------
Expected dividend yield.............. 0% 0%
Expected stock price volatility...... 90% 0%
Risk-free interest rate.............. 5.50% 5.32-5.96%
Expected life........................ 10 years 10 years
Had compensation cost for option grants been determined consistent with
SFAS No. 123, the Company's net income (loss), on a pro forma basis, would have
been as follows (in thousands, except per share data):
40
2000 1999 1998
- -------------------------------------------------------------------------------------------------------------------
Net income, as reported............................................. $50,575 $5,729 $13,083
Pro forma net income ............................................... 48,347 4,603 10,018
Basic net earnings (loss) per share, as reported.................... 0.05 (2.53) 1.10
Pro forma basic net earnings (loss) per share....................... (0.01) (2.56) 1.01
Diluted net earnings (loss) per share, as reported.................. 0.04 (2.53) 0.21
Pro forma diluted net earnings (loss) per share..................... (0.01) (2.56) 0.16
The weighted average fair value of options granted during 2000 and 1998 with
exercise prices equal to the market price at the date of grant was $6.95 and
$1.33 per share, respectively. In 2000, options for 200,000 common shares were
granted with an exercise price of $6.25 per share. The Company will record
compensation expense of $0.6 million for these grants based on the difference
between the exercise price and the fair value on the date of grant of the common
stock over the four-year vesting term of the options. No options were granted in
1999.
Employee Stock Purchase Plan In March 2000, the Company's board of directors
adopted, and our shareholders approved in May 2000, the Entegris, Inc. Employee
Stock Purchase Plan (ESPP Plan). A total of 4,000,000 common shares were
reserved for issuance under the ESPP Plan. The ESPP Plan allows employees to
elect, at six-month intervals, to contribute up to 10% of their compensation,
subject to certain limitations, to purchase shares of common stock at the lower
of 85% of the fair market value on the first day or last day of each six-month
period. At August 26, 2000, no shares had yet been issued under the ESPP Plan.
(14) PENSION AND 401(k) SAVINGS PLAN
Entegris, Inc. has a defined contribution pension plan covering eligible
employees. Contributions under this plan are determined by a formula set forth
in the plan agreement. Total pension costs for 2000, 1999 and 1998 related to
this plan were $1.6 million, $2.0 million and $1.7 million, respectively.
The Company maintains 401(k) employee savings plans (the Plans) that qualify as
deferred salary arrangements under Section 401(k) of the Internal Revenue Code.
Under the Plans, eligible employees may defer a portion of their pretax wages,
up to the Internal Revenue Service annual contribution limit. Effective January
1, 2000, the Company matches 100% of employees' contributions on the first 3% of
eligible wages and 50% of employees' contributions on the next 2% of eligible
wages, or a maximum match of 4% of the employee's eligible wages. The board of
directors may, at its discretion, declare a profit sharing contribution in
addition to the matching contribution, but all contributions are limited to the
maximum amount deductible for federal income tax purposes. The employer profit
sharing and matching contribution expense under the Plans was $2.4 million, $1.8
million and $1.6 million in 2000, 1999 and 1998, respectively.
(15) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is based upon the weighted average common shares
outstanding during each year. Diluted earnings (loss) per share is based upon
the weighted average common shares outstanding and dilutive common stock
equivalent shares outstanding during each year. The following table presents a
reconciliation of the numerators and denominators used in the computation of
basic and diluted earnings (loss) per share (in thousands):
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Numerator
Basic earnings (loss) per share--Net income (loss) applicable
to nonredeemable common shareholders ...................... $ 1,973 $(93,025) $ 40,253
Marketable value adjustment to redeemable common stock........ -- -- (27,170)
- -----------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings (loss) per share.......... $ 1,973 $(93,025) $ 13,083
=================================================================================================================
Denominator
Basic earnings (loss) per share--Weighted common shares
outstanding................................................ 43,609 36,708 36,651
Weighted common shares assumed upon exercise of
options.................................................... -- 745
. 5,050
Weighted common shares assumed upon reclassification of
redeemable common shares................................... -- -- 24,096
- -----------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share........ 48,659 36,708 61,492
=================================================================================================================
The effect of the inclusion of redeemable common shares and stock options in
1999 is anti-dilutive.
41
(16) SEGMENT INFORMATION
The Company operates in one segment as it designs, develops, manufactures,
markets and sells material management and handling products predominantly within
the semiconductor industry. All products are sold on a worldwide basis.
The following table summarizes total net sales, based upon the country from
which sales were made, and long-lived assets attributed to significant countries
for 2000, 1999 and 1998, respectively (in thousands):
2000 1999 1998
- ------------------------------------------------------------------------------
Net sales:
United States......... $252,172 $176,345 $217,171
Japan................. 32,659 20,337 19,129
Germany............... 32,325 26,278 18,853
Malaysia.............. 19,094 12,100 5,828
Korea................. 3,862 2,443 1,249
Singapore............. 3,353 4,449 4,361
- ------------------------------------------------------------------------------
$343,465 $241,952 $266,591
==============================================================================
Long-lived assets:
United States......... $ 71,626 $ 84,271 $102,190
Japan................. 10,297 7,100 6,044
Germany............... 5,625 6,484 7,143
Malaysia.............. 15,466 12,955 13,094
Korea................. 4,719 5,131 2,742
Singapore -- 1,683 2,110
- -----------------------------------------------------------------------------
$107,733 $117,624 $133,323
=============================================================================
Export sales, principally from the United States, amounted to $79.1 million,
$50.3 million and $70.7 million in 2000, 1999 and 1998, respectively. In 2000,
1999 and 1998, no single customer accounted for 10% or more of net sales.
(17) SUPPLMENTARY CASH FLOW INFORMATION
2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------
Schedule of interest and income taxes paid (in thousands):
Interest.................................................. $ 5,142 $ 6,633 $6,881
Income taxes, net of refunds received..................... 30,884 (3,052) 7,777
(18) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash equivalents and short-term debt approximates fair
value due to the short maturity of those instruments.
The fair value of long-term debt was estimated using discounted cash flows based
on market interest rates for similar instruments approximated its carrying value
of $12.7 million at August 26, 2000.
(19) RELATED-PARTY TRANSACTIONS
Leases The Company leases office space and production facilities under operating
leases from a major shareholder's trust or from entities related to this
shareholder. These leases, which expire through the year 2004, may be adjusted
periodically based on a percentage of the increase in the consumer price index.
The Company is required to pay for all real estate taxes, utilities and other
operating expenses. Rent expense relating to these agreements totaled $1.1
million, $1.2 million and $0.9 million for 2000, 1999 and 1998, respectively. In
March 2000, the Company entered
42
into an agreement to purchase certain real estate and personal property, which
the Company previously leased from the related party. The purchase price of the
property, which was purchased on May 1, 2000, was $2.5 million.
Service Agreement The Company allocated rental payments to Emplast, a previously
owned company, totaling $0.6 million, $0.3 million and $0.4 million in 2000,
1999 and 1998, respectively. As of August 26, 2000 and August 28, 1999, Emplast
owed the Company $0.4 million and $0.8 million and respectively, which are
included in other current assets in the accompanying consolidated balance
sheets.
Notes Receivable At August 26, 2000, the Company has a $0.8 million note
receivable from a major stockholder trust which bears interest at 8.0% per year.
Debt Guarantees The Company guarantees a loan of a former officer and a major
shareholder related to the Company's leased facility in Castle Rock, Colorado.
This guarantee totaled $1.5 million and $1.6 million and at August 26, 2000 and
August 28, 1999, respectively.
Sales to Minority Shareholder The Company sells products to Marubeni under
normal business terms. Sales to Marubeni were $16.2 million, $12.0 million and
$18.0 million in 2000, 1999 and 1998, respectively. At August 26, 2000 and
August 28, 1999, the Company had a receivable from Marubeni totaling $2.5
million and $1.9 million, respectively, due under normal trade terms. In
addition, in February 1997, Marubeni was granted an option to buy 214,942 shares
of the Company's common stock with an exercise price of $5.19 per share. The
grant was immediately vested and is exercisable for ten years.
(20) QUARTERLY INFORMATION-UNAUDITED (in thousands, except per share data)
Quarter
- -----------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
- -----------------------------------------------------------------------------------------------------------------
Fiscal 1999
- -----------------------------------------------------------------------------------------------------------------
Net sales $51,466 $60,124 $60,585 $69,777 $241,952
- -----------------------------------------------------------------------------------------------------------------
Gross profit 17,091 22,473 24,737 27,549 91,850
- -----------------------------------------------------------------------------------------------------------------
Net income (loss) (1,650) 1,750 2,433 3,197 5,729
- -----------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share (0.72) (0.62) (0.61) (0.59) (2.53)
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share (0.72) (0.62) (0.61) (0.59) (2.53)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal 2000
- -----------------------------------------------------------------------------------------------------------------
Net sales $71,816 $84,846 $90,991 $95,812 $343,465
- -----------------------------------------------------------------------------------------------------------------
Gross profit 31,667 39,349 44,173 49,516 164,705
- -----------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 12,045 11,068 12,319 16,292 51,724
- -----------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (1,149) (1,149)
- -----------------------------------------------------------------------------------------------------------------
Net income 12,045 11,068 12,319 15,143 50,575
- -----------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per nonredeemable
common share:
- -----------------------------------------------------------------------------------------------------------------
Income before extraordinary loss (0.56) (0.58) 0.80 0.26 0.07
- -----------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (0.02) (0.03)
- -----------------------------------------------------------------------------------------------------------------
Net income (0.56) (0.58) 0.80 0.24 0.05
- -----------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per nonredeemable common share:
- -----------------------------------------------------------------------------------------------------------------
Income before extraordinary loss (0.56) (0.58) 0.69 0.24 0.06
- -----------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (0.02) (0.02)
- -----------------------------------------------------------------------------------------------------------------
Net income (0.56) (0.58) 0.69 0.22 0.04
- -----------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
43
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item, which is included in the Proxy
Statement, is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item, which is included in the Proxy
Statement, is incorporated by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Financial Statements
The Financial Statements required by this item, with the report of
independent auditors, are submitted in a separate section on pages 26 to 43 of
this report.
2. Financial Statement Schedules
The financial statement schedule "Schedule II--Valuation and Qualifying
Accounts" is filed as part of this Report and should be read in conjunction with
the consolidated financial statements.
All other schedules for which provisions are made in the applicable
accounting regulation of the Securities and Exchange Commission have been
omitted because the information required to be set forth therein is not
applicable or is shown in the Financial Statements or notes thereto.
3. Exhibits
The following exhibits are filed herewith or incorporated by reference:
44
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) Financial Statement Schedules
Exhibit
Number Description of Document
- -------- -----------------------
3.1(i) Articles of Incorporation of Entegris, Inc.
3.2 Amended and Restated Bylaws of Entegris, Inc.
3.3(i) Audit Committee Charter of Entegris, Inc.
4.1(i) Specimen of Common Stock Certificate
10.1(i) Entegris, Inc. 1999 Long-Term Incentive and Stock Option Plan
10.2(i) Entegris, Inc. Outside Directors' Option Plan
10.3(i) Entegris, Inc. 2000 Employee Stock Purchase Plan
10.4(i) Entegris, Inc. Employee Stock Ownership Plan
10.5(i) Entegris, Inc. Pension Plan
10.6(i) Entegris, Inc. 401(k) Savings and Profit Sharing Plan
10.7(i) Employment Agreement between Delmer Jensen and Empak, Inc., dated
as of January 1, 1999
10.8(i) Lease Agreement between Empak, Inc. and Fleninge Partnership,
dated June 15, 1993
10.9(i) Lease Agreement between Empak, Inc. and Wayne C. Bongard, dated
September 22, 1998
10.10(i) Amended and Restated Sublease Agreement between Empak, Inc. and
Emplast, Inc., dated April 28, 1997
10.11(i) Real Estate Purchase and Sale Agreement between Fleninge
Partnership and Entegris, Inc., dated March 15, 2000
10.12(i) Promissory Note between Wayne C. Bongard estate and Empak, Inc.,
dated April 15, 1999
10.13(i) Promissory Note between Fluoroware, Inc. and Dan Quernemoen,
dated January 5, 1996
10.14(i) Guaranty between Empak, Inc. and First Bank National Association,
dated March 1, 1994
10.15(i) Consolidation Agreement by and among Entegris, Inc., Fluoroware,
Inc. and Empak, Inc., dated June 1, 1999
10.16(i) Distribution Agreement between Fluoroware, Inc. and Metron
Semiconductors Europa B.V., dated July6, 1995, as amended by
Entegris, Inc., ISS Amendements to Metron/Fluoroware Distribution
Contract, between Entegris, Inc. Integrated Shipping Systems and
Metron Technology, Inc., dated October 22, 1999
10.17(i) Metron Semiconductors Europa B.V. Investor Rights Agreement dated
July 6, 1995
10.18(i) U.S. Stocking Distributor Five-Year Agreement as of September 1,
1997 between Fluoroware, Inc. and Kyser Company
10.19(i) STAT-PRO(R) 3000 and STAT-PRO(R) 3000E Purchase and Supply
Agreement between Fluoroware, Inc. and Miller Waste Mills, d/b/a
RTP Company, dated April 6, 1998
10.20(i) Amended and Restated Distributorship Agreement by and among
Entegris, Inc., Empak, Inc., Marubeni America Corporation and
Marubeni Corporation, dated as of December 1, 1999
10.21(i)+ PFA Purchase and Supply Agreement by and between E.I. Du Pont De
Nemours and Company and Fluoroware, Inc., dated January 7,
1999, which was made effective retroactively to November 1,
1998, and supplemented by the Assignment and Limited
Amendment by and between the same parties and Entegris, Inc.,
dated as of September 24, 1999
45
21.1(i) Subsidiaries of the Company
27.1 Financial Data Schedule
- ------------------
(i) Incorporated by reference from the Company's Registration Statement on
Form S-1 (No. 333-33668), filed with the Commission on July 10, 2000,
as amended through the date hereof.
+ Confidential information has been omitted from these exhibits and filed
separately with the SEC accompanied by a confidential treatment request
pursuant to Rule 406 under the Securities Act of 1933, as amended.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of instruments
defining the rights of holders of certain long-term debt of Entegris are not
filed, and in lieu thereof, Entegris agrees to furnish copies thereof to the SEC
upon request.
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during the quarter ended August 26, 2000.
(c) See Exhibits listed under Item 14(a)(3).
(d) Not applicable. See Item 14(a)(2).
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of Chaska,
State of Minnesota, on November 22, 2000.
/s/ Stan Geyer
-----------------
Stan Geyer
Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below each severally constitutes and appoints each of Stan Geyer and James E.
Dauwalter, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that the said attorney-in-fact, or their
substitutes, may lawfully do, or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities stated and on the dates indicated.
Signatures Title Date
-------------------------------- ---------------------------------- -----------------
/s/ Daniel R. Quernomoen Chairman of the Board of Directors November 22, 2000
- ---------------------------------
Daniel R. Quernomoen
/s/ James A. Bernards Director November 22, 2000
- ---------------------------------
James A. Bernards
/s/ Robert J. Boehlke Director November 22, 2000
- ---------------------------------
Robert J. Boehlke
/s/ Mark A. Bongard Director November 22, 2000
- ---------------------------------
Mark A. Bongard
/s/ James E. Dauwalter Director November 22, 2000
- ---------------------------------
James E. Dauwalter
/s/ Stan Geyer Chief Executive Officer and Director November 22, 2000
- ---------------------------------
Stan Geyer
/s/ Delmer M. Jensen Director November 22, 2000
- ---------------------------------
Delmer M. Jensen
/s/ Gary F. Klingl Director November 22, 2000
- ---------------------------------
Gary F. Klingl
/s/ Roger D. McDaniel Director November 22, 2000
- ---------------------------------
Roger D. McDaniel
/s/ John D. Villas Executive Vice President and Chief November 22, 2000
- ---------------------------------
John D. Villas Financial Officer (Chief Financial &
Accounting Officer)
47
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Entegris, Inc.:
Under date of October 10, 2000, we reported on the consolidated balance
sheets of Entegris, Inc. and subsidiaries as of August 26, 2000 and August 28,
1999 and the related consolidated statements of operations, shareholders' equity
(deficit) and cash flows for each of the years in the three-year period ended
August 26, 2000, as contained in the 2000 Annual Report to Shareholders. These
consolidated financial statements and our report thereon are included in the
annual report on Form 10-K for the fiscal year ended August 26, 2000. In
connection with our audits of the aforementioned consolidated financial
statements, we have also audited the related financial statement Schedule II -
Valuation and Qualifying Accounts. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, based our audits and the report of the other auditors, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Minneapolis, Minnesota
October 10, 2000
48
Entegris, Inc.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Charged to
Balance at Costs and Balance at
Beginning of Expenses End of
Description Period Additions Deduction Period
----------- ------ --------- --------- ------
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Deducted from asset accounts:
Year ended August 29, 1998:
Allowance for doubtful
receivables............ $1,489 57 224 $1,322
====== ===== ===== ======
Inventory reserves ...... $2,855 2,475 2,818 $2,512
====== ===== ===== ======
Deducted from asset accounts:
Year ended August 28, 1999:
Allowance for doubtful
receivables............ $1,322 213 330 $1,205
====== ===== ===== ======
Inventory reserves....... $2,512 2,701 2,043 $3,170
====== ===== ===== ======
Deducted from asset accounts:
Year ended August 26, 2000:
Allowance for doubtful
receivables............ $1,205 1,493 174 $2,524
====== ===== ===== ======
Inventory reserves ...... $3,170 3,073 2,060 $4,183
====== ===== ===== ======
49