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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 25, 2001
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.
____________________
(Exact name of registrant as specified in its charter)
Minnesota 41-1941551
--------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3500 Lyman Boulevard
Chaska, Minnesota 55318
____________________
(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, 2001
as reported by the Nasdaq National Market, was approximately $205 million.
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, 2001 was 69,741,714.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2002 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 25, 2001, are incorporated by reference
into Part III of this report. (The Audit Committee Report, the Compensation and
Stock Option Committee Report and the stock performance graph of the
Registrant's Proxy Statement are expressly not incorporated by reference
herein.)
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, sensors, 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 Applied Materials, Arch Chemicals, IBM, Infineon, Intel, Texas
Instruments and TSMC. Our customers in data storage manufacturing include
Fujitsu, IBM, Komag and Seagate Technology.
International sales represented approximately 48% of our sales in both
fiscal 1999 and fiscal 2000, and 50% of our sales in fiscal 2001. 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 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 long-term 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, while worldwide semiconductor revenues are expected to decline by 31% to
$141 billion from calendar year 2000 to calendar year 2001, they are expected to
grow at a compound annual growth rate of 16% over the next three years to $218
billion in 2004.
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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 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, semiconductor manufacturers 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.
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.
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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 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:
. secure transport of materials, including chemicals and raw silicon wafers,
from suppliers to the fab;
. storage, handling and transport of wafers throughout fab processing;
. storage, mixing and distribution of chemicals throughout fab processing;
. delivery of finished wafers to test, assembly and packaging facilities; and
. 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 fiscal 2001, we released more than 200 new and
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.
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Industry and Applications Knowledge
Throughout our 35-year history, we have worked closely with semiconductor
and hard disk drive manufacturers and materials suppliers to accumulate
considerable insight into the increasingly complex 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 and Service Offerings
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 and services through both
internal research and development and strategic acquisitions. For example,
during fiscal 2001, we acquired Atcor Corporation and Critical Clean Solutions
Inc. (CCS). Atcor, based in San Jose, California, is a leading supplier of
precision cleaning systems and cleaning services, providing a variety of
cleaning and drying technologies to the world's largest semiconductor and hard
disk drive manufacturers. CCS, headquartered in Gilroy, California, is a leading
provider of sub-micron cleaning services and reuse products to the
semiconductor, disk drive and other high-technology industries.
These acquisitions provided Entegris with the necessary infrastructure for its
Silicon Delivery(TM) Systems and Services (SDS2) and Disk Delivery(TM) Systems
and Services (DDS2) programs, which offer outsourced programs for wafer, device
and disk transportation and protection. These programs include the handling for
raw wafer manufacturing and shipping, wafer processing, finished wafer shipping
and handling, product cleaning systems and/or services, logistics management,
recycling and the certification of reusable products. Entegris offers both on-
site and off-site programs.
5
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.
During fiscal 2001, we acquired Tokyo-based Nisso Engineering's fluid
handling product line, which expands our portfolio of high quality materials
integrity management solutions and supports our commitment to deliver innovative
fluid handling solutions to original equipment manufacturers (OEM) in Japan and
other locations.
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 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.
For example, we acquired NT International in fiscal 2001. NT International
designs and manufactures patented ultrahigh purity flow and pressure measurement
sensors and controllers. These products, coupled with Entegris' broad fluid
handling product line, enable us to provide customers a complete system solution
to protect and transport valuable inventories of critical fluids. It also gives
us the ability to offer reliable and highly accurate measurement and control
solutions for ultrapure and caustic fluids used in semiconductor manufacturing.
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.
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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 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:
. 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.
. 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.
. Tubing. We offer three grades of FluoroLine(R) PFA tubing, which address our
customers' needs ranging from industrial to ultra high purity applications.
. 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.
. 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.
. 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
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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 recently cooperated 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.
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 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.
- --------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------------------------------------------------
Semiconductor manufacturing products 87% 84% 76%
- --------------------------------------------------------------------------------------------------------------------------
Disk manufacturing products 9% 12% 20%
- --------------------------------------------------------------------------------------------------------------------------
Other products 4% 4% 4%
- --------------------------------------------------------------------------------------------------------------------------
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.
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Semiconductor Wafer Manufacturing
Mitsubishi Silicon Sumitomo Metals
MEMC Wacker Siltronic
Shin Etsu Handotai (SEH)
Microelectronics and Semiconductor Materials
Arch Chemicals Millipore
Ashland Pall
BOC Edwards
Semiconductor Equipment Manufacturing
Applied Materials SCP Global Technologies
FSI International
Data Storage Manufacturing
Fujitsu MMC
Hoya Seagate Technology
IBM Showa-Denko
Komag Yamagata
Semiconductor Device Manufacturing and Assembly
AMD LG International
ASE Test Micron Technology
Carsem Motorola
Fujitsu NEC
Hitachi Philips
Intel Samsung
IBM STMicroelectronics
Infineon Texas Instruments
Lucent TSMC
UMC
Custom Products for Other Industries
ADC Telecom Guidant
Boston Scientific Medtronic
Ericsson
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 for the Company's
Fluid Handling product line in Europe, and in portions of the United States and
Asia. International sales accounted for 48% and 50% of our revenues in fiscal
2000 and fiscal 2001, respectively.
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 serves as one of several stocking locations for
distribution throughout Europe. The worldwide offices of Metron also carry Fluid
Handling product inventories to meet regional demand. Direct customer support
comes from our regional service and customer support offices located in the
United States, Europe and Asia. 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, and Malaysia. 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:
. 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.
. 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
9
laser marking and measurement techniques to properly identify products during
the extrusion process and ensure consistency in overall dimension and wall
thickness.
.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.
.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.
.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.
.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.
.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.
.Tool Making. We employ about 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 25, 2001, we employed
approximately 150 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
10
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 Minnesota and 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 operated at
approximately 41% of manufacturing capacity and 90% of warehouse capacity in
fiscal 2001. We believe that we can easily obtain sufficient warehouse capacity.
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 25, 2001, our patent portfolio consisted of 110 current U.S.
patents, which expire from 2001 to 2018, and 54 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, 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,
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.
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Employees
As of August 25, 2001, we had approximately 1,900 full-time employees
throughout the world, including 1,315 in manufacturing, 150 in engineering,
research and development, including custom product development, and 435 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 1,480 are
located in the United States, 130 are located in Europe and about 290 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 17 to the Consolidated Financial Statements contained herein.
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 industry downturns 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, 1998 and 2001 (which
continues today), 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. Industry downturns reduce revenue and possibly increase pricing
pressure, affecting both gross margins and net income.
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 fiscal 1997 to fiscal 1998,
with a further decline in fiscal 1999. More recently, the Company reported
record sales in the first half of 2001, reflecting a continuation of strong
business conditions in the semiconductor industry that began in the second half
of 1999. However, incoming order rates began to decline rapidly late in the
second quarter of 2001. Consequently, the Company experienced significantly
lower sales and earnings over the last half of the year. 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.
12
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 48% of our revenues in both fiscal 1999
and fiscal 2000, and 50% of our revenues in fiscal 2001. 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 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 2001, 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
13
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 recently cooperated with the United States Department of Commerce to clarify
our licensing practices and are in the process of upgrading our licensing
practices and procedures. Although we believe we are in full compliance, 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 25, 2001, we derived 24.9% 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 January 2001, Entegris and Metron modified their existing distribution
relationship. Under the new agreement, which began in March 2001, Metron will
distribute Entegris' Fluid Handling products while we will assume a direct sales
responsibility for our Microelectronics products. As part of the agreement our
ownership of Metron decreased to approximately 12% at August 25, 2001. 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.
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. 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.
14
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 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
15
seek licenses or alternative technologies from third parties, or prevent us from
manufacturing or selling our products.
Operating Risks
Our move to direct sale of our micro-electronic products worldwide involves new
risks.
Earlier this year, we terminated Metron Technology as distributor for our
micro-electronics products worldwide, in favor of a direct sales force. We
established a global infrastructure team, hired key personnel, and commenced
direct sales. Although we believe that we are well positioned for direct sales
and we are no longer as dependant on Metron Technology, there are additional
risks relating to our sales including, but not limited to, our ability to retain
key personnel.
At the time we terminated Metron as a distributor of our micro-electronics
products, we entered into a new agreement with Metron for the continued
distribution of our fluid handling products through Metron.
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 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 can be particularly intense. Recruiting
and hiring employees with the combination of skills and attributes required to
conduct our business can be extremely competitive, time-consuming and expensive.
We may not be able to successfully identify, hire and train new manufacturing
personnel.
If we fail to identify, complete and successfully integrate recent or 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.
16
The management information and financial reporting systems that we use in
our day-to-day operations are not fully integrated on a worldwide basis. 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.
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.
17
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 701,000 5 facilities owned, Injection Molding, Extrusion, Blow Molding,
3 facilities leased Rotational Molding, Tool Making,
Micro-molding, Sheet Lining
- ----------------------------------------------------------------------------------------------------------------------
Colorado 82,000 1 facility owned Injection Molding, Tool Making
- ----------------------------------------------------------------------------------------------------------------------
California 108,000 1 facility owned, Custom Manufacturing, Product Cleaning
1 facility leased Service, Equipment Assembly
- ----------------------------------------------------------------------------------------------------------------------
Oregon 15,000 1 facility leased Warehouse
- ----------------------------------------------------------------------------------------------------------------------
Texas 20,000 1 facility leased Polymer Reclaiming
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Malaysia 105,000 1 facility owned Injection Molding
- ----------------------------------------------------------------------------------------------------------------------
Singapore 15,000 1 facility leased Product Cleaning Service
- ----------------------------------------------------------------------------------------------------------------------
Germany 44,000 1 facility owned Injection Molding, Extrusion
- ----------------------------------------------------------------------------------------------------------------------
Japan 48,000 1 facility owned, Injection Molding
1 facility leased
- ----------------------------------------------------------------------------------------------------------------------
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 (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 2001 Fiscal 2000
- ------------------------------------------------------------------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------------------------------------
First quarter $11.38 $7.00 $-- $--
- ------------------------------------------------------------------------------------------------------------
Second quarter $ 9.63 $6.50 $-- $--
- ------------------------------------------------------------------------------------------------------------
18
- --------------------------------------------------------------------------------
Third quarter $13.40 $6.38 $ -- $ --
- --------------------------------------------------------------------------------
Fourth quarter $15.60 $9.65 $15.25 $7.00
- --------------------------------------------------------------------------------
There were approximately 238 shareholder accounts of record on October 31,
2001, and the number of beneficial shareholders was estimated to be 7,000.
ITEM 6. SELECTED FINANCIAL DATA
The table that follows presents selected financial data for each of the
last six fiscal years:
FINANCIAL HIGHLIGHTS
(Amounts in thousands, except per share data) 2001 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
Operating Results (1)
Net sales $342,444 $343,465 $241,952 $266,591 $277,290 $271,037
Gross profit 162,670 160,442 92,230 109,734 119,238 122,304
Operating profit 54,499 72,108 15,325 24,711 38,868 42,467
Income before income taxes 60,110 74,631 11,677 17,989 30,015 44,281
Net income 38,616 47,933 5,965 13,130 19,216 28,409
Earnings per share outstanding-diluted 0.53 (0.02) (2.53) 0.21 0.31 0.43
Weighted shares outstanding-diluted 72,995 43,609 36,708 61,492 61,786 37,969
- ---------------------------------------------------------------------------------------------------------------
Operating Ratios
Gross profit 47.5% 46.7% 38.1% 41.2% 43.0% 45.1%
Operating profit 15.9% 21.0% 6.3% 9.3% 14.0% 15.7%
Income before income taxes 17.6% 21.7% 4.8% 6.7% 10.8% 16.3%
Net income 11.3% 14.0% 2.5% 4.9% 6.9% 10.5%
Effective tax rate 35.5% 35.8% 38.7% 25.4% 39.9% 36.6%
- ---------------------------------------------------------------------------------------------------------------
Cash Flow Statement Data
Depreciation and amortization $ 24,260 $ 27,246 $ 28,810 $ 26,591 $ 23,395 $ 18,122
Capital expenditures 24,331 21,376 10,079 33,512 44,928 52,531
- ---------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Current assets $220,037 $221,414 $110,279 $101,155 $122,761 $101,271
Current liabilities 61,253 62,544 58,372 56,567 69,006 56,352
Working capital 158,784 158,870 51,907 44,588 53,755 44,919
Current ratio 3.59 3.54 1.89 1.79 1.78 1.80
Total assets 395,678 353,368 246,978 257,475 213,643 265,343
Long-term debt 13,101 10,822 53,830 73,242 75,971 61,916
Shareholders' equity (deficit) 312,307 266,844 (17,840) 73,304 35,421 7,309
- ---------------------------------------------------------------------------------------------------------------
(1) Operating results in fiscal 2001 included two non-recurring charges: a one
time charge of $8.2 million related to the early termination of a
distribution agreement for the Microelectronics Group and $4.9 million
charge in connection with its decision to close its Castle Rock, Colorado
and Munmak, Korea facilities. Fiscal year 2000 results include an
extraordinary loss of $1.8 million pre-tax ($1.1 million after taxes) in
connection with repayment of $42 million of long-term debt and capital
lease obligations. Fiscal year 2000 results exclude a gain of $5.5 million
($3.5 million after taxes) associated with the sale of an investment in an
affiliate's common
19
stock. Fiscal year 1999 results exclude a charge of $4.9 million ($3.1
million after taxes associated with merger-related expenses.
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. The Company assumes no
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 the
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 products
and services that protect and transport the critical materials used in key
technology-driven industries. Entegris was 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, common stock was issued in
exchange for 100% of the outstanding shares of both Fluoroware, Inc., which
began operating in 1966, and EMPAK, Inc., 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.
Entegris primarily derives its revenue from the sale of products to the
microelectronics industry and recognizes sales upon the shipment of such goods
to customers. Cost of sales includes polymers and purchased components,
manufacturing personnel, supplies and fixed costs related to depreciation and
operation of facilities and equipment. The Company's customers consist primarily
of semiconductor manufacturers, semiconductor equipment and materials suppliers,
and hard disk manufacturers and are served through various subsidiaries and
sales and distribution relationships in the United States, Asia and Europe.
The Company's fiscal year is a 52- or 53-week period ending on the last Saturday
of August. The last three fiscal years ended on the following dates: August 25,
2001, August 26, 2000, and August 28, 1999. Fiscal years are identified in
this report according to the calendar year in which they end. For example, the
fiscal year ended August 25, 2001 is referred to as ``fiscal 2001'' or "2001".
In the second half of fiscal 1999, the semiconductor industry began to recover
from an industry downturn. This recovery, which continued through the second
quarter of fiscal 2001, led to greatly improved net sales and profitability.
During the third and fourth quarters of fiscal 2001, the semiconductor industry
experienced unprecedented deterioration in market conditions, with rapidly
falling rates of factory utilization and reduced capital spending. As a
consequence, the Company reported falling sales and earnings in the latter half
of fiscal 2001.
Effective August 27, 2000, the Company changed its method of accounting for its
domestic inventories from the last-in, first-out (LIFO) method to the first-in,
first-out (FIFO) method. In accordance with accounting principles generally
accepted in the United States of America, the financial statements of prior
periods have been restated to apply the new method retroactively.
Results of Operations
The following table sets forth the relationship between various components of
operations, stated as a percent of net sales, for fiscal year 2001, 2000 and
1999. The Company's historical financial data were derived from its audited
consolidated financial statements and related notes included elsewhere in this
annual report.
Percent of Net Sales
---------------------------------------------------------------------------------------------------------
2001 2000 1999
---------------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 52.5 53.3 61.9
---------------------------------------------------------------------------------------------------------
Gross profit 47.5 46.7 38.1
Selling, general and administrative expenses 22.9 21.3 25.8
20
Engineering, research and development expenses 4.8 4.4 6.0
Non-recurring charges 3.8 -- --
---------------------------------------------------------------------------------------------------------
Operating profit 15.9 21.0 6.3
Interest (income) expense, net (1.3) 0.7 2.3
Other income, net (0.3) (1.4) (0.8)
---------------------------------------------------------------------------------------------------------
Income before income taxes and other items below 17.6 21.7 4.8
Income tax expense 6.2 7.8 1.9
Equity in net (income) loss of affiliates (0.4) (0.5) 0.7
Minority interest 0.5 0.1 (0.2)
---------------------------------------------------------------------------------------------------------
Income before extraordinary item 11.3 14.3 2.5
Extraordinary loss on extinguishment of debt, net of taxes -- (0.3) --
---------------------------------------------------------------------------------------------------------
Net income 11.3 14.0 2.5
=========================================================================================================
Fiscal 2001 Compared to Fiscal 2000
Net sales. Net sales were $342.4 million in fiscal 2001, flat when compared to
$343.5 million in fiscal 2000. The Company reported record sales in the first
half of 2001, reflecting a continuation of strong business conditions in the
semiconductor industry that began in the second half of 1999. However, incoming
order rates began to decline rapidly late in the second quarter of 2001 for both
fluid handling products, which are dependent on capital spending levels in the
semiconductor industry, and microelectronics products, reflecting declining
manufacturing utilization of wafer manufacturers and semiconductor
manufacturers. Consequently, the Company experienced significantly lower sales
over the last half of the year, resulting in level sales with 2000. Falling
order rates began to stabilize during the fourth quarter of fiscal 2001.
Increased sales in Japan offset revenue declines in the North America and Asia
Pacific regions, with European sales unchanged from one year ago. Overall,
international sales accounted for approximately 50% of net sales in fiscal 2001,
up from 48% in fiscal 2000. Sales of fluid handling products, which made up 33%
of total sales, grew by 5%, while microelectronics product sales, 67% of total
sales, fell slightly.
Based on current order rates, industry analyst expectations and other
information, the Company currently expects to report lower full-year sales in
2002, particularly in the first half of the year.
Gross profit. Gross profit in fiscal 2001 increased to $162.7 million, a small
increase over the $160.4 million reported in fiscal 2000. The minor improvement
in fiscal 2001 partly reflected the benefit of integrating various elements of
the Company's manufacturing operations. Asset impairment charges of $3.5 million
and $5.9 million were recorded in 2001and 2000, respectively, mainly for asset
write-offs of molds.
Gross margin for fiscal 2001 improved to 47.5% compared to 46.7% for fiscal
2000. Gross profit and gross margin variances mainly track the utilization of
the Company's production capacity associated with varying sales levels.
Consequently, the Company reported improved gross profits and gross margins in
excess of 50% during the first half of 2001, but experienced declining gross
profits and lower gross margins over the latter half of the year.
As discussed above, management expects sales levels to decline in fiscal 2002,
particularly in the first half of the year. The correspondingly low rates of
factory utilization would result in decreased gross profits with a lower gross
margin.
Selling, general and administrative expenses. Selling, general and
administrative (SG&A) expenses increased $5.2 million, or 7%, to $78.5 million
in fiscal 2001 from $73.3 million in fiscal 2000. SG&A costs, as a percent of
net sales, increased to 22.9% from 21.3%. The year-to-year increase was due to
the cost of building the Company's global infrastructure including the addition
of direct sales forces in Europe and Asia, as well as the SG&A expenses from
acquired businesses. Fiscal 2001 also included higher expenditures for
information systems.
Non-recurring charges. Operating results in fiscal 2001 included two non-
recurring charges. During the second quarter, the Company recorded a charge of
$8.2 million related to the early termination of a distribution agreement for
the Microelectronics Group with its affiliate, Metron Technology N.V. (Metron).
Pursuant to the termination agreement, the Company assumed direct sales
responsibility for the Microelectronics Group product sales in Europe and Asia,
and transferred to Metron 1.125 million shares of Metron stock and agreed to
make future cash payments
21
totaling $1.75 million. Entegris also agreed to buy back certain
microelectronics product inventory from Metron. The Company and Metron also
executed a new distribution agreement for Entegris' Fluid Handling Group
products, which now runs through August 31, 2005.
During the third quarter, the Company recorded a $4.9 million charge in
connection with the closing of its Castle Rock, Colorado and Munmak, Korea
facilities. The charge included $1.7 million in termination costs related to a
workforce reduction of 170 employees and $1.4 million for estimated losses for
asset disposals. In addition, the charge included $1.8 million for future lease
commitments on the Castle Rock facility, the lessor of which is a major
shareholder of the Company.
Engineering, research and development expenses (ER&D). ER&D expenses increased
to $16.5 million in fiscal 2001, up 10% from $15.0 million in 2000. ER&D
expense, as a percent of net sales, rose to 4.8% in 2001 from 4.4% in fiscal
2000. A major element of fiscal 2001 ER&D costs relates to the continued
development of next generation 300mm products.
Interest (income) expense, net. The Company reported net interest income of $4.5
million in fiscal 2001 compared to net interest expense of $2.4 million in
fiscal 2000. The variance relates to interest earnings on invested cash
generated through strong operating earnings and the receipt of net proceeds of
$99.0 million from the Company's initial public offering in the fourth quarter
of fiscal 2000, $42 million of which was used to retire long-term debt and
capital lease obligations.
Other income, net. Other income was $1.1 million in fiscal 2001 compared to $4.9
million in fiscal 2000. The decrease was primarily due to the absence of the
fiscal 2000 $5.5 million gain recognized on the sale of approximately 612,000
shares of its investment in Metron. Other income in fiscal 2001 also included
foreign currency translation gains offset by losses on sales of property and
equipment.
Income tax expense. Income tax expense was $21.3 million in fiscal 2001 compared
to $26.8 million in fiscal 2000, primarily reflecting lower pre-tax income. The
effective tax rate for 2001 was 35.5% compared to 35.8% in 2000. The effective
rate in 2001 included a $1.6 million tax benefit associated with the closure of
the Korea operation, losses of which were previously non-deductible. The Company
expects an effective tax rate of about 38% in fiscal 2002.
Equity in net income of affiliates. During March 2001, the Company surrendered
ownership of 1.125 million shares of its investment in Metron in connection with
the charge described above under the caption "Nonrecurring charges". As a
result, the Company's percentage ownership in Metron decreased to approximately
12%. The Company discontinued application of the equity method to account for
its investment in Metron and accounts for its remaining investment as an
available-for-sale security under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 115 - Accounting for Certain Investments in Debt
and Equity Securities. Therefore, the Company recorded no equity in the net
income of affiliates in the third or fourth quarters of fiscal 2001. For the
first six months of 2001, the Company recorded equity in the net income of
affiliates of $1.5 million in 2001 compared to $1.7 million for all of 2000.
Minority interest. For fiscal 2001, minority interest in subsidiaries' net
income more than tripled to $1.6 million compared to fiscal 2000. This figure
reflects the improved financial performance at Entegris' 51%-owned Japanese
subsidiaries.
Net income. Net income decreased to $38.6 million in fiscal 2001, compared to
net income of $47.9 million in fiscal 2000. After the market value adjustment
related to redeemable common stock, net income applicable to nonredeemable
common shareholders was $38.6 million, or $0.53 per share diluted, in fiscal
2001, compared to a net loss of $0.7 million, or a loss of $0.02 per share
diluted, in fiscal 2000. Excluding the effects of the market value adjustment
related to redeemable common stock, nonrecurring charges in fiscal 2001 and the
fiscal 2000 gain on the sale of an affiliate's common stock, pro forma earnings
per share declined to $0. 62 per share in 2001 from $0.68 in 2000.
Fiscal 2000 Compared to Fiscal 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 recovery in the
semiconductor industry that began in the second half of 1999. Revenue gains were
recorded in all
22
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 2000 and
1999.
Gross profit. Gross profit in fiscal 2000 increased by $68.2 million to $160.4
million, an increase of 78% over the $92.2 million reported in fiscal 1999. The
gross margin for 2000 improved to 46.7% compared to 38.1% for 1999. Gross margin
and gross profit improvements were reported by both domestic and international
operations. The improvements in 2000 reflected the improved utilization of our
production capacity associated with higher sales, a more favorable product mix
and the benefits of integrating various elements of our manufacturing
operations. Partly offsetting some of the improvement in gross profit was $5.9
million in asset impairment charges, compared to $2.0 million in 1999, mainly
for asset write-offs of molds.
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, incentive compensation, personnel costs and information systems.
SG&A costs also increased due to the accrual of $2.5 million in 2000 for
charitable contributions, reflecting the Company's commitment to contribute 5%
of net income to charitable organizations. These increases were partly offset by
the absence of $3.6 million in merger-related costs incurred in 1999. SG&A
costs, as a percent of net sales, decreased to 21.3% from 25.8%.
Engineering, research and development expenses. Engineering, research and
development (ER&D) expenses increased 3% to $15.0 million in fiscal 2000 from
$14.6 million in fiscal 1999. ER&D costs, as a percent of net sales, decreased
to 4.4% from 6.0%.
Interest expense, net. Net interest expense decreased 56% to $2.4 million in
fiscal 2000 compared to $5.5 million in fiscal 2000. 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
the Company's investment in 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 currency translation.
Income tax expense. Income tax expense of $26.8 million was significantly higher
in fiscal 2000 compared to $4.5 million in income tax expense reported for
fiscal 1999, primarily reflecting significantly higher income. The effective tax
rate in fiscal 2000 was 35.8% compared to 38.7% in fiscal 1999. The lower rate
reflected the Company's ability to utilize foreign tax credit carryforwards.
Equity in net (income) loss of affiliates. The Company's equity in the net
income of affiliates was $1.7 million in fiscal 2000 compared to equity in the
net loss of affiliates of $1.6 million in fiscal 1999. This improvement
primarily reflects the operating results of Metron, which also benefited from
the improved industry conditions affecting the Company's 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 $47.9 million in fiscal 2000, compared to
net income of $6.0 million in fiscal 1999. After the market value adjustment
related to redeemable common stock, the net loss applicable to nonredeemable
common shareholders was $0.7 million, or $0.02 per share diluted, in 2000,
compared to a net loss of $92.8 million, or $2.53 per share, in 1999. Excluding
the effect of the market value adjustment related to redeemable common stock,
pro forma earnings per share improved from $0.10 per share in fiscal 1999 to
$0.73 in fiscal 2000.
23
Quarterly Results of Operations
STATEMENTS OF
OPERATIONS DATA:
- ---------------------------------------------------------------------------------------------------------------
Fiscal 2000 Fiscal 2001
- ---------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- ---------------------------------------------------------------------------------------------------------------
Dollars in thousands:
Net sales............................ $71,816 $84,846 $90,991 $95,812 $102,639 $105,712 $81,346 $52,747
Gross profit......................... 31,681 38,158 43,681 46,922 52,552 53,601 37,890 18,627
Selling, general and administrative
expenses............................. 15,034 18,631 19,913 19,715 21,235 19,727 18,761 18,787
Engineering, research and
development expenses expenses........ 3,503 3,642 3,468 4,428 3,533 4,035 4,697 4,252
Operating profit (loss).............. 13,144 15,885 20,300 22,779 27,784 21,629 9,498 (4,412)
Net income (loss) before
extraordinary item.................. $12,054 $10,330 $12,014 $14,684 $ 18,112 $ 13,784 $ 8,428 $(1,708)
- ---------------------------------------------------------------------------------------------------------------
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......................... 44.1 45.0 48.0 49.0 51.2 50.7 46.6 35.3
Selling, general and administrative
expenses............................. 20.9 22.0 21.9 20.6 20.7 18.7 23.1 35.6
Engineering, research and
development expenses expenses........ 4.9 4.3 3.8 4.6 3.4 3.8 5.8 8.1
Operating profit (loss).............. 18.3 18.7 22.3 23.8 27.1 20.5 11.7 (8.4)
Net income (loss).................... 16.8 12.2 13.2 15.3 17.6 13.0 10.4 (3.2)
- ---------------------------------------------------------------------------------------------------------------
The tables above present selected data from the Company's consolidated
statements of operations for the eight quarters ended August 25, 2001. This
unaudited information has been prepared on the same basis as the 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.
From mid-1999 through the second quarter of fiscal 2001, the Company reported
steadily improving net sales, primarily resulting from improved market
conditions in the semiconductor industry. As sales grew, gross profits and
margins improved due to improved utilization of production capacity, and often a
more favorable product sales mix. During the last two quarters of 2001, the
Company's sales fell dramatically as the global semiconductor industry
experienced historic lows in factory utilization, which led to industry capital
spending cutbacks. The Company experienced lower gross profits and margins as
sales dropped by 23% and 35% sequentially in the third and fourth quarters of
fiscal 2001.
Net income in the first quarter of fiscal 2000 included a $5.5 million pre-tax
gain recognized on the sale of a portion of the Company's investment in Metron
stock. In the second quarter of fiscal 2001, the Company recorded a pretax
charge of $8.2 million related to the termination of a distribution agreement.
Net income in the third quarter of 2001 included a $4.9 million pretax charge in
connection with its decision to close two facilities.
Our quarterly results of operations have been, and will likely continue to be,
subject to significant fluctuations due to a variety of factors, a number of
which are beyond the Company's control.
Liquidity and Capital Resources
The Company has historically financed its operations and capital requirements
through cash flow from operating activities, long-term loans, lease financing
and borrowings under domestic and international short-term lines of credit. In
fiscal 2000, Entegris raised capital via an initial public offering.
Operating activities. Cash flow provided by operating activities totaled $80.0
million, $64.1 million and $43.4 million in fiscal 2001, 2000 and 1999
respectively. Income from operations was the primary component of cash flow
generated by operations in all years. In fiscal 2001, the Company also benefited
from the lower working capital requirements associated with falling second half
sales, principally due to an accounts receivable decline of $26.3 million.
Inventories rose $3.6 million as the Company increased its safety stock of
certain critical resins and built its
24
inventories of fluid handling components used in the production of fluid
handling products. Working capital stood at $158.8 million at August 25, 2001.
Investing activities. Cash flow used in investing activities totaled $110.1
million, $15.8 million and $9.3 million in 2001, 2000 and 1999, respectively.
Acquisition of property and equipment totaled $24.2 million, $21.4 million and
$10.1 million in 2001, 2000 and 1999, respectively. Significant capital
expenditures in 2001 related principally to building our manufacturing
capabilities for 300mm products, tooling for new products, investments in the
Company's e-business initiatives, and the continued upgrading and integration of
information systems. The Company expects capital expenditures of approximately
$25 to $30 million during fiscal 2002, consisting mainly of spending on
manufacturing equipment, tooling and information systems.
The Company completed four acquisitions in fiscal 2001. In March 2001, the
Company acquired the fluid handling component product line of a Japanese company
for $10.4 million. Patents and goodwill of approximately $2.3 million and $8.0
million, respectively, were recorded in connection with the transaction. In May
2001, the Company completed its acquisition of NT International, which designs
and manufactures patented ultrahigh purity flow and pressure measurement sensors
and controllers, for a cash payment of $27.5 million. Identifiable intangible
assets, including patents, and goodwill of approximately $20.1 million and $6.0
million, respectively, were recorded in connection with the transaction. In the
fourth quarter, the Company completed the acquisition of Atcor Corporation and
the operating assets of Critical Clean Solutions, Inc. which provide precision
cleaning systems, products and services to the semiconductor industry, for cash
payments totaling of $16.0 million. Identifiable intangible assets and goodwill
of approximately $7.6 million and $2.5 million, respectively, were recorded in
connection with the transactions.
The Company made net purchases of $36.6 million of available-for-sale securities
classified as short-term investments in 2001.
Financing activities. Cash provided by financing activities totaled $2.0 million
and $38.3 million in fiscal 2001 and 2000, respectively, while cash used in
financing activities was $27.1 million in fiscal 1999.
In 2001, the Company recorded proceeds of $4.7 million in connection with common
shares issued under the Company's stock option and stock purchase plans.
Payments on long-term borrowings totaled $2.7 million.
During the fourth quarter of fiscal 2000, Entegris completed a registered
underwritten initial public offering (IPO), receiving net proceeds of $99.0
million after underwriting and issuance costs. A portion of the IPO proceeds was
used to eliminate domestic short-term borrowings and retire $42 million in long-
term debt and capital lease obligations.
The Company repurchased common shares for $0.7 million, $10.4 million and $1.1
million in 2001, 2000 and 1999, respectively. These shares were acquired in
connection with the redemption of common stock from the Company's Employee Stock
Ownership Plan and, in 2001, the repurchase of 55,000 common shares as part of a
500,000 share repurchase authorization made by the Company's board of directors
in the first quarter of fiscal 2001.
As of August 25, 2001, the Company's sources of available funds comprised $74.5
million in cash and cash equivalents, $36.6 million in short-term investments
and various credit facilities. Entegris has unsecured revolving credit
commitments with two commercial banks with aggregate borrowing capacity of $30
million, with no borrowings outstanding at August 25, 2001 and lines of credit
with six international banks which provide for borrowings of currencies for our
overseas subsidiaries, equivalent to an aggregate $9.5 million. Borrowings
outstanding on these lines of credit were $3.8 million at August 25, 2001.
The Company believes that its cash and cash equivalents, short-term investments,
cash flow from operations and available credit facilities will be sufficient to
meet its working capital and capital expenditure requirements for the next 12
months. However, future growth, including potential acquisitions, may require
the Company to raise capital through additional equity or debt financing. There
can be no assurance that any such financing would be available on commercially
acceptable terms.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies criteria
25
for intangible assets acquired in a purchase method business combination must
meet to be recognized and reported apart from goodwill. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually. Intangible
assets with definite useful lives must be amortized over their respective
estimated useful lives and reviewed for impairment.
The Company is required to adopt the provisions of SFAS No.141 immediately. The
Company expects to adopt SFAS No. 142 in the first quarter of fiscal 2002. As of
the date of adoption, the Company expects to have unamortized goodwill in the
amount of $20.3 million and unamortized identifiable intangible assets in the
amount of $31.5 million. Amortization expense related to goodwill was $1.2
million, $0.7 million and none for 2001, 2000 and 1999, respectively. Because of
the extensive effort needed to comply with adopting Statement No. 142, it is not
practicable to reasonably estimate the impact of adopting this Statement on the
Company's financial statements at the date of this report.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No.121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. SFAS No. 144 becomes effective for fiscal years
beginning after December 15, 2001. The Company is evaluating SFAS No. 144 to
determine the impact on its financial condition and results of operations.
Euro Conversion
On January 1, 1999, the European Union established fixed conversion rates and
adopted the "Euro" as its new common legal currency. At that date, the Euro
began trading on currency exchanges simultaneously with the legacy currencies of
the participating countries for a transition period between January 1, 1999 and
January 1, 2002. During this transition period, parties can elect to pay for
goods and services and transact business using either the Euro or a legacy
currency. The Company is modifying its information technology systems to permit
transactions to take place in both the legacy currencies and the Euro and
provide for the eventual elimination of the legacy currencies. In addition, the
Company is evaluating issues involving introduction of the Euro and whether
certain existing contracts will need to be modified. Currency risks and risk
management for operations in participating countries may be reduced as the
legacy currencies are converted to the Euro. Based on current information and
assessments, the Company does not expect that the Euro conversion will have a
material adverse effect on its business, results of operations or financial
condition.
Quantitative and Qualitative Disclosure About Market Risks
Entegris's principal market risks are sensitivities to interest rates and
foreign currency exchange rates. The Company's current exposure to interest rate
fluctuations is not significant. Most of its outstanding debt at August 25, 2001
carried fixed rates of interest. All of the Company's cash equivalents and
short-term investments are debt instruments with remaining maturities of 12
months or less.
The Company uses derivative financial instruments to manage foreign currency
exchange rate risk associated with the sale of products from the United States
when such sales are denominated in currencies other than the U.S. dollar. The
cash flows and earnings of foreign-based operations are also subject to
fluctuations in foreign exchange rates. A hypothetical 10% change in the foreign
currency exchange rates would potentially increase or decrease net income by
approximately $1 million.
Impact of Inflation
The Company's financial statements are prepared on a historical cost basis,
which does not completely account for the effects of inflation. Material and
labor expenses are the Company's primary costs. The cost of polymers, its
primary raw material, was essentially unchanged from one year ago. Entegris
expects the cost of resins to remain stable in the foreseeable future. Labor
costs, including taxes and fringe benefits, rose modestly in fiscal 2001.
Moderate increases also can be reasonably anticipated for fiscal 2002.
26
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.
27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Page Number
in this report
Report of Independent Auditors................................... 29
Consolidated Balance Sheets...................................... 30
Consolidated Statements of Operations for the years ended
August 25, 2001, and August 26, 2000........................... 31
Consolidated Statements of Shareholders' Equity for
the years ended August 25, 2001, and August 26, 2000........... 32
Consolidated Statements of Cash Flows for the years ended
August 25, 2001, and August 26, 2000........................... 33
Notes to Consolidated Financial Statements....................... 34
28
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 25, 2001 and August 26, 2000, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the years in the three-year period ended August 25, 2001. 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 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 provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Entegris,
Inc. and subsidiaries as of August 25, 2001 and August 26, 2000, and the results
of their operations and their cash flows for each of the years in the three-year
period ended August 25, 2001 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for domestic inventories in 2001.
/s/ KPMG LLP
Minneapolis, Minnesota
October 5, 2001
29
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share data)
(As Adjusted -
See Note 1)
August 25, August 26,
2001 2000
---- ----
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 74,451 $102,973
Short-term investments................................................................. 36,628 --
Trade accounts receivable, net of allowance for doubtful accounts of $1,608 and
$2,524, respectively................................................................ 36,303 41,325
Trade accounts receivable due from affiliates.......................................... 7,171 22,803
Inventories............................................................................ 47,202 41,976
Deferred tax assets and refundable income taxes........................................ 10,424 7,996
Other current assets................................................................... 7,858 4,341
- ---------------------------------------------------------------------------------------------------------------------
Total current assets................................................................ 220,037 221,414
- ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net....................................................... 109,131 107,733
Other assets:
Investments............................................................................ 12,295 15,740
Intangible assets, less accumulated amortization of $5,968 and $3,569,
respectively.......................................................................... 51,766 7,162
Other.................................................................................. 2,449 1,319
- ---------------------------------------------------------------------------------------------------------------------
Total assets........................................................................ $395,678 $353,368
=====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................................... $ 2,238 $ 1,828
Short-term borrowings.................................................................. 8,813 8,311
Accounts payable....................................................................... 16,572 21,849
Accrued liabilities.................................................................... 33,630 30,556
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities........................................................... 61,253 62,544
- ---------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities.................................................. 13,101 10,822
Deferred tax liabilities................................................................. 3,950 9,146
Minority interest in subsidiaries........................................................ 5,067 4,012
Commitments and contingent liabilities................................................... -- --
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares authorized;
issued and outstanding shares; 69,729,821 and 68,317,183, respectively............. 697 683
Additional paid-in capital............................................................. 121,449 114,003
Retained earnings...................................................................... 188,156 152,091
Accumulated other comprehensive income................................................. 2,005 67
- ---------------------------------------------------------------------------------------------------------------------
Total shareholders' equity.......................................................... 312,307 266,844
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity.......................................... $395,678 $353,368
=====================================================================================================================
See the accompanying notes to consolidated financial statements.
30
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Years ended
- ---------------------------------------------------------------------------------------------------------------------------
August 25, 2001 August 26, 2000 August 28, 1999
(As adjusted - (As adjusted -
See note 1) See note 1)
- ---------------------------------------------------------------------------------------------------------------------------
Sales to non-affiliates ........................................ $239,771 $245,286 $195,421
Sales to affiliates ............................................ 102,673 98,179 46,531
- ---------------------------------------------------------------------------------------------------------------------------
Net sales ...................................................... 342,444 343,465 241,952
Cost of sales .................................................. 179,774 183,023 149,722
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit .......................................... 162,670 160,442 92,230
Selling, general and administrative expenses ................... 78,510 73,293 62,340
Engineering, research and development expenses ................. 16,517 15,041 14,565
Nonrecurring charges............................................. 13,144 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Operating profit ...................................... 54,499 72,108 15,325
Interest (income) expense, net ................................. (4,477) 2,422 5,498
Other income, net .............................................. (1,134) (4,945) (1,850)
- ---------------------------------------------------------------------------------------------------------------------------
Income before income taxes and other items
below ................................................ 60,110 74,631 11,677
Income tax expense ............................................. 21,339 26,754 4,524
Equity in net (income) loss of affiliates ...................... (1,488) (1,694) 1,587
Minority interest in subsidiaries' net income (loss) ........... 1,643 489 (399)
- ---------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item ...................... 38,616 49,082 5,965
Extraordinary loss on extinguishment of debt, net of taxes....... -- (1,149) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income ............................................ 38,616 47,933 5,965
Market value adjustment to redeemable common stock............... -- (48,602) (98,754)
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to nonredeemable
common shareholders ................................. $ 38,616 $ (669) $(92,789)
===========================================================================================================================
Earnings (loss) per nonredeemable common share:
Basic ...................................................
Income (loss) before extraordinary item $ 0.56 $ 0.01 $ (2.53)
Extraordinary loss on extinguishment of debt, net
of taxes -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)................................... $ 0.56 $ (0.02) $ (2.53)
===========================================================================================================================
Diluted..................................................
Income (loss) before extraordinary item............. $ 0.53 $ 0.01 $ (2.53)
Extraordinary loss on extinguishment of debt, net
of taxes -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss)................................... $ 0.53 $ (0.02) $ (2.53)
===========================================================================================================================
See the accompanying notes to consolidated financial statements.
31
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common Accumulated
Shares Common Additional Retained Other Comprehensive
Outstanding Stock Paid-in Earnings Comprehensive Total Income
Capital Income (Loss)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at August 29, 1998, previously reported... 18,360 $ 184 $ 15,066 $ 57,564 $ (2,321) $ 70,493
Adjustment for change in accounting for
inventories from LIFO to FIFO.................. -- -- -- 2,811 -- 2,811
- -------------------------------------------------------------------------------------------------------------------------
Balance at August 29, 1998........................ 18,360 184 15,066 60,375 (2,321) 73,304
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
Net income...................................... -- -- -- 5,965 -- 5,965 5,965
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income...................... $ 8,218
=========
Balance at August 28, 1999........................ 18,354 184 15,066 (33,022) (68) (17,840)
Repurchase and retirement of shares............. (13) -- -- (89) -- (89)
Shares issued pursuant to stock option
Plans........................................ 76 -- 362 -- -- 362
Dilution of ownership on investments............ -- -- -- 2,163 -- 2,163
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...................................... -- -- -- 47,933 -- 47,933 47,933
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income...................... $ 48,068
=========
Balance at August 26, 2000........................ 68,317 683 114,003 152,091 67 266,844
Repurchase and retirement of shares............. (77) (1) (476) (246) -- (723)
Shares issued pursuant to stock option
Plans........................................ 1,235 12 2,889 -- -- 2,901
Dilution of ownership on investments .......... -- -- -- (244) -- (244)
Reclassification associated with change in
Percentage ownership in Metron Technologies
N.V. stock.................................... -- -- -- (2,061) 2,698 637
Shares issued pursuant to employee
Stock purchase plan................. 255 3 1,620 -- -- 1,623
Tax benefit associated with employee
stock plans......................... -- -- 3,413 -- -- 3,413
Foreign currency translation adjustment......... -- -- -- -- (985) (985) $ (985)
Increase in unrealized holding gain on
Marketable securities......................... -- -- -- -- 225 225 225
Net income...................................... -- -- -- 38,616 -- 38,616 38,616
- ----------------------------------------------------------------------------------------------------------------------------------
Total comprehensive income...................... $ 37,856
=========
Balance at August 25, 2001........................ 69,730 $ 697 $ 121,449 $188,156 $ 2,005 $ 312,307
- ----------------------------------------------------------------------------------------------------------------------------------
See the accompanying notes to consolidated financial statements.
32
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended
- --------------------------------------------------------------------------------------------------------------------------------
August 25, 2001 August 26, 2000 August 28, 1999
(As adjusted - (As adjusted -
See note 1) See note 1)
- --------------------------------------------------------------------------------------------------------------------------------
Operating Activities:
Net income $ 38,616 $ 47,933 $ 5,965
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 24,260 27,246 28,810
Asset impairment.............................................. 3,526 5,937 1,996
Provision for doubtful accounts............................... (482) 1,493 213
Provision for deferred income taxes........................... (1,894) 382 1,296
Tax benefit from employee stock plans......................... 3,413 -- --
Equity in net (income) loss of affiliates..................... (1,488) (1,694) 1,587
Loss on sale of property and equipment........................ 956 811 543
Gain on sale of investment in affiliate....................... -- (5,468) --
Minority interest in subsidiaries' net income (loss).......... 1,459 489 (399)
Changes in operating assets and liabilities:
Trade accounts receivable.................................... 10,666 (9,620) (3,069)
Trade accounts receivable due from affiliates................ 15,632 (12,841) (2,560)
Inventories.................................................. (3,561) (2,015) 1,508
Accounts payable and accrued liabilities..................... (369) 15,251 3,520
Other current assets......................................... (2,748) 396 152
Accrued income taxes and refundable income taxes............. (6,546) (4,075) 4,069
Other........................................................ (1,482) (96) (222)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities................. 79,958 64,129 43,409
- --------------------------------------------------------------------------------------------------------------------------------
Investing Activities:
Acquisition of property and equipment............................. (24,231) (21,376) (10,079)
Acquisition of businesses, net of cash acquired................... (42,954) -- --
Purchase of intangible assets..................................... (10,701) (2,448) (621)
Proceeds from sales of property and equipment..................... 3,464 713 1,285
Proceeds from sale of investment in affiliate..................... -- 7,398 --
Other............................................................. 916 (76) 159
Purchases and maturities of short-term investments, net........... (36,628) -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities..................... (110,134) (15,789) (9,256)
- --------------------------------------------------------------------------------------------------------------------------------
Financing Activities:
Principal payments on short-term borrowings and long-term
debt............................................................. (2,679) (52,466) (32,339)
Proceeds from short-term borrowings and long-term debt............ 747 2,028 6,382
Issuance of common stock.......................................... 4,674 99,179 --
Repurchase of redeemable and nonredeemable common stock........... (723) (10,446) (1,110)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities............................................... 2,019 38,295 (27,067)
- --------------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents...... (365) (73) 1,090
- --------------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents......... (28,522) 86,562 8,176
Cash and cash equivalents at beginning of period................. 102,973 16,411 8,235
- --------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period....................... $ 74,451 $102,973 $ 16,411
=============================================================
Non-cash Operating and Investing Activities:
Transfer of common shares owned in affiliate in connection with
termination of distribution agreement $ 6,410 -- --
See accompanying notes to consolidated financial statements.
33
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.
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 2001, 2000 and 1999 ended on August 25, 2001, August 26,
2000 and August 28, 1999, respectively.
Business Combination On June 7, 1999, Fluoroware, Inc. (Fluoroware) and EMPAK,
Inc. (EMPAK) 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 and
EMPAK, respectively.
For financial reporting purposes, the business combination was recorded using
the pooling-of-interests method of accounting. Accordingly, the historical
financial statements of Entegris, Inc. include the historical accounts and
results of operations of Fluoroware and EMPAK as if the business combination had
been in effect for all periods presented.
The results of operations for 1999 for Fluoroware, EMPAK and combined,
respectively, included in the consolidated financial statements are as follows:
Net sales of $141.8 million, $100.2 million and $242.0 million, net income
before merger-related expenses, impairment of asset charges and adjustments
recorded to conform accounting methods of $0.1 million, $9.8 million and $10.0
million, and net income (loss) of ($3.6 million), $9.4 million and $5.7 million.
Adjustments to conform the companies' methods of depreciation reduced combined
net income for 1999 by approximately $1.9 million. Expenses related to the
business combination were approximately $3.6 million for 1999. In addition, the
Company recorded asset impairment charges related to the business combination of
approximately $1.3 million during 1999.
Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents
include cash on hand, demand deposits, and highly liquid debt securities with
original maturities of three months or less. Debt securities with original
maturities greater than three months and remaining maturities less than one year
are classified as short-term investments.
Inventories Inventories are stated at the lower of cost or market. Cost is
determined by 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 is included in office furniture and equipment as of both August 25,
2001 and August 26, 2000.
34
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 Substantially all of the Company's equity investments are marketable
and are classified as available-for-sale as of August 25, 2001. Accordingly,
under the provisions of Statement of Financial Accounting Standards (SFAS) No.
115 - Accounting for Certain Investments in Debt and Equity Securities, any
unrealized holding gains and losses, net of taxes, are excluded from income, and
recognized as a separate component of shareholders' equity until realized. The
fair market value of the securities is determined based on published market
prices. At August 25, 2001 and August 26, 2000, the unrealized gains on
marketable securities were $2.3 million and $0.7 million, respectively. Through
February 2001, the Company's ownership in its affiliate, Metron Technology N.V.
(Metron), was accounted for using the equity method. The Company's nonmarketable
investments are recorded at cost.
Derivative Financial Instruments. Effective August 27, 2000, the Company adopted
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
which requires companies to record derivatives on the balance sheet as assets or
liabilities, measured at fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether the derivative is designated as part of a hedge transaction
and, if it is, depending on the type of hedge transaction. Gains and losses on
derivative instrument that are reported in other comprehensive income will be
recognized in earnings in the periods in which earnings are impacted by the
variability of the cash flows of the hedged item. The effect of adopting the
SFAS No. 133 was not material to the Company's financial position or results of
operations.
The Company periodically enters into forward foreign currency contracts to
reduce exposures relating to rate changes in certain foreign currencies. 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. None of these
derivatives is accounted for as a hedge transaction under the provisions of SFAS
No. 133. Accordingly, changes in the fair value of forward foreign currency
contracts are recorded in current earnings. The fair values of the Company's
derivative financial instruments discussed below are based on prices quoted by
financial institutions for these instruments. The Company was a party to forward
foreign currency contracts with notional amounts of $10.7 million and $2.0
million at August 25, 2001 and August 26, 2000, respectively.
Foreign Currency Translation. 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.
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.
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.
35
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 $3.5
million, $5.9 million, and $2.0 million for 2001, 2000 and 1999, respectively.
All impairment losses are included in the Company's cost of sales.
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 In July 2001, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible
Assets. SFAS No. 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS No. 141 also
specifies criteria intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill. SFAS
No. 142 requires that goodwill and intangible assets with indefinite useful
lives no longer be amortized, but instead tested for impairment at least
annually. Intangible assets with definite useful lives must be amortized over
their respective estimated useful lives and reviewed for impairment in
accordance with SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of SFAS No.141 immediately and
SFAS No. 142 becomes effective for fiscal years beginning after December 15,
2001. Goodwill and intangible assets acquired in business combinations completed
before July 1, 2001 will continue to be amortized prior to the adoption of SFAS
No. 142.
SFAS No. 141 will require upon adoption of SFAS No. 142, that the Company
evaluate its existing intangible assets and goodwill that were acquired in a
prior purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS No. 141 for
recognition apart from goodwill. Upon adoption of SFAS No. 142, the Company will
also be required to reassess the useful lives of all intangible assets acquired
in purchase business combinations, and make any necessary amortization period
adjustments. In addition, to the extent an intangible asset is identified as
having an indefinite useful life, the Company will be required to test the
intangible asset for impairment. Any impairment loss will be measured as of the
date of adoption and recognized as the cumulative effect of a change in
accounting principle.
In connection with the transitional goodwill impairment evaluation, SFAS No. 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To
36
accomplish this the Company must identify its reporting units and determine the
fair value of each reporting unit and compare it to the reporting unit's
carrying amount. If a reporting unit's carrying amount exceeds its fair value,
an indication exists that the reporting unit's goodwill may be impaired and the
Company must compare the implied fair value of the reporting unit's goodwill,
determined by allocating the reporting unit's fair value to all of it assets and
liabilities in a manner similar to a purchase price allocation in accordance
with SFAS No.141, to its carrying amount, both of which would be measured as of
the date of adoption. Any transitional impairment loss will be recognized as the
cumulative effect of a change in accounting principle in the Company's statement
of Operations.
As of the date of adoption, the Company expects to have unamortized goodwill in
the amount of $20.3 million and unamortized identifiable intangible assets in
the amount of $31.5 million. Amortization expense related to goodwill was $1.2
million, $0.7 million and none for 2001, 2000 and 1999, respectively. Because of
the extensive effort needed to comply with adopting Statement No. 142, it is not
practicable to reasonably estimate the impact of adopting this Statement on the
Company's financial statements at the date of this report, including whether any
transitional impairment losses will be required to be recognized as the
cumulative effect of a change in accounting principle.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. SFAS No. 144 becomes effective for fiscal years
beginning after December 15, 2001. The Company is evaluating SFAS No. 144 to
determine the impact on its financial condition and results of operations.
Change in Method of Accounting for Inventories Effective August 27, 2000, the
Company changed its method of accounting for its domestic inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method.
Management believes that the accounting change is preferable in the
circumstances because the accounting change provides a better matching of costs
and revenues in periods when the cost of goods and services are declining. In
accordance with accounting principles generally accepted in the United States of
America, the financial statements of prior periods have been restated to apply
the new method retroactively. Accordingly, retained earnings at August 29, 1998
on the accompanying statement of shareholders' equity sheet has been adjusted
for the effect (net of income taxes) of applying retroactively the new method of
accounting.
The effect of the accounting change on income and earnings per share are as
follows:
- ----------------------------------------
Increase (decrease)
- --------------------------------------------------------------------------------
Effect on: 2001 2000 1999
- --------------------------------------------------------------------------------
Net income (loss) $ (404) $2,642 $ (236)
Basic earnings (loss) per common share $(0.01) $ 0.06 $(0.01)
Diluted earnings (loss) per common share $(0.01) $ 0.06 $(0.01)
- --------------------------------------------------------------------------------
(2) ACQUISITIONS
The Company completed four acquisitions in fiscal 2001. In March 2001, the
Company acquired the fluid handling component product line of Nisso Engineering
Co., Ltd. a Japanese company for $10.4 million. Patents and goodwill of
approximately $2.3 million and $8.0 million, respectively, were recorded in
connection with the transaction. In May 2001, the Company completed its
acquisition of 100% of the common stock of NT International, which designs and
manufactures patented ultrahigh purity flow and pressure measurement sensors and
controllers, for a cash payment of $27.5 million. Identifiable intangible
assets, including patents, and goodwill of approximately $20.1 million and $6.0
million, respectively, were recorded in connection with the transaction. In the
fourth quarter of fiscal 2001, the Company completed the acquisition of 100% of
the common stock of Atcor Corporation and the operating assets and liabilities
of Critical Clean Solutions, Inc., which provide precision cleaning systems,
products and services to the semiconductor industry, for cash payments totaling
of $16.0 million. Identifiable intangible assets and goodwill of approximately
$7.6 million and $2.5 million, respectively, were recorded in connection with
the transactions.
The following table summarizes the estimated fair value of the assets acquired
and liabilities assumed at the dates of acquisition. The Company is in the
process of reviewing and finalizing third-party valuations of certain tangible
and intangible assets.
- --------------------------------------------------------------------------------
Nisso NT Atcor Critical Clea
- --------------------------------------------------------------------------------
37
- --------------------------------------------------------------------------------------------------------------------
(In thousands) Engineering International Corporation Solutions
- --------------------------------------------------------------------------------------------------------------------
Current assets $ 678 $ 1,292 $ 6,338 $ 373
- --------------------------------------------------------------------------------------------------------------------
Property and equipment 50 661 2,086 5,862
- --------------------------------------------------------------------------------------------------------------------
Intangible assets 2,250 20,090 7,578 --
- --------------------------------------------------------------------------------------------------------------------
Goodwill 8,051 6,047 2,494 --
- --------------------------------------------------------------------------------------------------------------------
Other assets 38 -- 507 --
- --------------------------------------------------------------------------------------------------------------------
Total assets acquired 11,067 28,090 19,003 6235
- --------------------------------------------------------------------------------------------------------------------
Current liabilities 573 590 4,103 1,464
- --------------------------------------------------------------------------------------------------------------------
Long-term debt 119 -- 184 3,481
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 692 590 4,287 4,945
- --------------------------------------------------------------------------------------------------------------------
Net assets acquired $10,375 $27,500 $14,716 $1,290
- --------------------------------------------------------------------------------------------------------------------
Each of the above transactions was accounted for by the purchase method.
Accordingly, the Company's consolidated financial statements include the net
assets and results of operations from the dates of acquisition. The following
table provides Company results as if the acquisitions occurred at the beginning
of each period presented.
- -----------------------------------------------------------------------------------------------------------------------
(In thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
As reported Pro forma As reported Pro forma
- -----------------------------------------------------------------------------------------------------------------------
Net sales $342,444 $366,827 $343,465 $368,041
- -----------------------------------------------------------------------------------------------------------------------
Net income 38,616 36,278 47,933 44,396
- -----------------------------------------------------------------------------------------------------------------------
Basic earnings per share 0.56 0.53 (0.02) (0.10)
- -----------------------------------------------------------------------------------------------------------------------
Diluted earnings per share 0.53 0.50 (0.02) (0.10)
- -----------------------------------------------------------------------------------------------------------------------
In October 1999, the Company acquired the assets of a polymer machining business
located in Upland, California for $2.7 million. The acquisition was accounted
for under the purchase method of accounting. The excess of the 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.
(3) INVENTORIES
Inventories consist of the following (in thousands):
2001 2000
- -------------------------------------------------------------------------------
Raw materials.................................... $15,167 $12,677
Work-in-process............................. 1,451 3,280
Finished goods.............................. 29,971 25,794
Supplies.................................... 613 225
- -------------------------------------------------------------------------------
$47,202 $41,976
===============================================================================
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consists of the following (in thousands):
Estimated
Useful
2001 2000 Lives
- --------------------------------------------------------------------------------
Land..................................... $ 10,112 $ 10,481
Buildings and improvements............... 59,502 55,080 5-35
Manufacturing equipment.................. 79,731 79,413 5-10
Molds.................................... 61,683 64,951 3-5
Office furniture and equipment........... 42,037 38,399 3-8
- --------------------------------------------------------------------------------
253,065 248,324
Less accumulated depreciation............ 143,934 140,591
- --------------------------------------------------------------------------------
$109,131 $107,733
================================================================================
Depreciation expense was $22.0 million, $25.3 million and $27.8 million in 2001,
2000 and 1999, respectively.
38
(5) INVESTMENTS
The Company's investments consist primarily of its equity ownership in its
affiliate, Metron Technology N.V. (Metron), a worldwide provider of
semiconductor equipment and materials support. Through February 2001, the
Company accounted for its investment in Metron using the equity method. In March
2001, the Company surrendered ownership of 1.125 million shares of its
investment in Metron Technology N.V. (Metron) in connection with the transaction
described in Note 10 under the caption "Nonrecurring charges". As a result, the
Company's percentage ownership in Metron decreased to approximately 12%.
Accordingly, the Company discontinued application of the equity method to
account for its investment in Metron. The Company's remaining investment in
Metron is accounted for as an available-for-sale security. At August 25, 2001,
the Company owned approximately 1.6 million shares of Metron with a market value
of $11.0 million.
While under the equity method, the Company's investment in Metron was accounted
for using a three-month lag due to Metron's May year end. Sales to Metron were
$85.3 million, $81.9 million and $31.8 million in 2001, 2000 and 1999,
respectively. Trade accounts receivable relating to these sales as of August 25,
2001 and August 26, 2000 were $6.1 million and $20.3 million, respectively.
A summary of assets and liabilities for Metron as of May 31, 2000 included
current assets of $159.8 million, noncurrent assets of $21.6 million, current
liabilities of $105.4 million, noncurrent liabilities of $3.5 million and
shareholders' equity of $72.5 million. Metron's results of operations for the
year ended May 31, 2000 included net sales of $337.6 million and net income of $
7.8 million.
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.
(6) ACCRUED LIABILITIES
Accrued liabilities consist of the following (in thousands):
2001 2000
- -------------------------------------------------------------------------------
Payroll and related benefits................... $12,515 $15,678
Insurance...................................... 2,475 1,850
Taxes, other than income taxes................. 1,215 1,647
Pension........................................ 2,159 2,532
Interest....................................... 44 42
Donations...................................... 1,711 2,244
Accruals related to nonrecurring charges....... 3,559 --
Warranty and related........................... 3,350 3,624
Other.......................................... 6,602 2,939
- -------------------------------------------------------------------------------
$33,630 $30,556
===============================================================================
(7) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
2001 2000
- -----------------------------------------------------------------------------------------------------------------
Stock redemption notes payable in various installments along with monthly interest of
6%, 8%, and 9% through December 2010........................................................ $ 4,427 $ 4,802
Commercial loans payable on a monthly basis in principal installments of $56, with
interest ranging from 1.68% to 3.15% and various maturities through September 2015.......... 3,250 3,722
Commercial loan payable on a semiannual basis in principal installments of $215 and
interest ranging from 4.5% to 6% and various maturities through December 2007............... 2,122 2,522
Small Business Administration loans payable on a monthly basis in principal installments
of $15 and interest ranging from 5.7% to 7.3% and various maturities through October 2020... 2,963 --
Commercial loan secured by equipment payable on a monthly basis in principal installments
of
39
$21 and interest ranging from 8.0% to 22.7% and various maturities through December 2005...... 970 --
Industrial Revenue Bonds payable on a semiannual basis with principal installments of $50
through October 2012, and variable interest ranging from 2.35% to 5.90%....................... 1,250 1,350
Other......................................................................................... 357 254
- -----------------------------------------------------------------------------------------------------------------
Total.................................................................................... 15,339 12,650
Less current maturities.................................................................. 2,238 1,828
- -----------------------------------------------------------------------------------------------------------------
$13,101 $10,822
=================================================================================================================
Annual maturities of long-term debt as of August 25, 2001, are as follows (in
thousands):
Fiscal Years Ending
--------------------------------------------------------------
2002............................................ $ 2,238
2003............................................ 2,108
2004............................................ 1,888
2005............................................ 1,671
2006............................................ 1,333
Thereafter...................................... 6,101
--------------------------------------------------------------
$15,339
==============================================================
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 fiscal 2000, 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 two commercial banks for aggregate
borrowings of $30 million with interest at the LIBOR rate (3.6% at August 25,
2001), plus 1.4%. There was no balance outstanding under this commitment at
either August 25, 2001 or August 26, 2000.
The Company has entered into line of credit agreements with six international
commercial banks, which provide for aggregate borrowings of 1 million Deutsche
marks, 2.5 million Malaysia ringgits and 1,008 million Japanese yen for its
foreign subsidiaries, which is equivalent to $9.5 million as of August 25, 2001.
Interest rates for these facilities are based on a factor of the banks'
reference rates and ranged from 1.375% to 8.0% during 2001. Borrowings
outstanding under these line of credit agreements at August 25, 2001 and August
26, 2000, were $3.8 million and $8.3 million, respectively.
The company also owed $5.0 million in other short-term bank borrowings not
subject to formal credit agreements.
(9) LEASE COMMITMENTS
As of August 25, 2001, 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
--------------------------------------------------------------------
2002..................................................... $ 2,753
2003..................................................... 1,990
2004..................................................... 1,589
2005..................................................... 1,148
2006..................................................... 662
Thereafter............................................... 2,809
--------------------------------------------------------------------
Total minimum lease payments.......................... 10,951
Less minimum sublease rentals............................ 210
--------------------------------------------------------------------
40
$10,741
==========================================================================
Total rental expense for all equipment and building operating leases was $4.0
million, $4.9million and $6.1 million in 2001, 2000 and 1999, respectively. See
note 20 for related party leases included above.
(10) NONRECURRING CHARGES
Operating results in fiscal 2001 included two nonrecurring charges. During the
second quarter, the Company recorded a charge of $8.2 million related to the
early termination of a distribution agreement for the Microelectronics Group
with its affiliate, Metron Technology N.V. (Metron). Pursuant to the
termination agreement, the Company assumed direct sales responsibility for
Microelectronics Group product sales in Europe and Asia, and transferred to
Metron 1.125 million shares of Metron stock and agreed to make cash payments
totaling $1.75 million over a 15-month period. Entegris also agreed to buy back
certain microelectronics product inventory from Metron. The Company and Metron
also executed a new distribution agreement for Entegris' Fluid Handling Group
products, which now runs through August 31, 2005.
During the third quarter, the Company recorded a $4.9 million charge in
connection with the closing of its Castle Rock, Colorado and Munmak, Korea
facilities. The charge included $1.7 million in termination costs related to a
workforce reduction of 170 employees and $1.4 million for estimated losses for
asset disposals. In addition the charge included $1.8 million for future lease
commitments on the Castle Rock facility, the lessor of which is a major
shareholder of the Company. As of August 25, 2001, future cash outflows of $2.2
million remained outstanding, mainly related to the lease commitments.
(11) INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net consists of the following (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Interest expense............................................... $ 1,505 $4,614 $6,441
Interest income................................................ 5,982 2,192 943
- -------------------------------------------------------------------------------------------------------
Interest (income) expense, net.............................. $(4,477) $2,422 $5,498
=======================================================================================================
(12) OTHER INCOME, NET
Other income, net consists the following (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------
Gain (loss) on sale of property and equipment.................. $ 146 $ (803) $ (543)
Gain on sale of investment in affiliate........................ -- 5,468 --
Gain (loss) on foreign currency translation.................... (40) 438 1,121
Other, net..................................................... 1,027 (158) 1,272
- -------------------------------------------------------------------------------------------------------
$ 1,133 $4,945 $1,850
=======================================================================================================
(13) INCOME TAXES
Income before income taxes was derived from the following sources (in
thousands):
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Domestic....................................................... $45,719 $61,439 $ 7,972
Foreign........................................................ 14,391 13,192 3,705
- ------------------------------------------------------------------------------------------------------
$60,110 $74,631 $11,677
======================================================================================================
Income tax expense (benefit) is summarized as follows (in thousands):
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Current:
Federal..................................................... 16,395 $20,462 $2,917
State....................................................... 2,309 3,487 512
Foreign..................................................... 4,247 2,275 1,343
41
- ------------------------------------------------------------------------------------------------------
22,951 26,224 4,772
- ------------------------------------------------------------------------------------------------------
Deferred:
Federal..................................................... (1,500) 414 (264)
State....................................................... (112) 116 16
- ------------------------------------------------------------------------------------------------------
(1,612) 530 (248)
- ------------------------------------------------------------------------------------------------------
$21,339 $26,754 $4,524
======================================================================================================
Income tax expense differs from the expected amounts based upon the
statutory federal tax rates as follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Expected federal income tax at statutory rate.................. 35.0% 35.0% 35.0%
State income taxes, net of federal tax effect.................. 2.5 3.1 2.8
Effect of foreign source income................................ 0.1 (0.7) 6.3
Foreign sales corporation income not subject to tax............ (1.9) (1.4) (6.2)
Research tax credit............................................ (0.6) (0.4) (3.1)
Other items, net............................................... 0.4 0.2 3.9
- ------------------------------------------------------------------------------------------------------
35.5% 35.8% 38.7%
======================================================================================================
At August 25, 2001, there were approximately $3.2 million of accumulated
undistributed earnings of subsidiaries outside the United States that are
considered to be reinvested indefinitely. No deferred tax liability has been
provided on such earnings. If they were remitted to the Company, applicable
U.S. federal and foreign withholding taxes would be substantially offset by
available foreign tax credits.
During the year ended August 25, 2001, $3.4 million was added to additional
paid-in capital in accordance with APB No. 25 reflecting the tax difference
relating to employee stock option transactions.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 25, 2001 and
August 26, 2000 are as follows (in thousands):
2001 2000
- ------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts........................................ $ 1,171 $ 1,155
Inventory items........................................................ 3,519 2,698
Accruals not currently deductible for tax purposes..................... 4,958 3,786
Other, net............................................................. 1,287 1,117
- ------------------------------------------------------------------------------------------------------
Total deferred tax assets............................................ 10,935 8,756
- ------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation............................................... 5,376 6,882
Other, net............................................................. 5,510 2,119
- ------------------------------------------------------------------------------------------------------
Total deferred tax liabilities....................................... 10,886 9,001
- ------------------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities)................................ $ 49 $ (245)
======================================================================================================
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.
(14) 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. 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.
42
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 $4.8 million and
obtained additional contributions to fund these purchases.
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 2001, 2000 or 1999.
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 14,422,366 and 17,910,514 as of August 25, 2001 and August
26, 2000, 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 as of August 28, 1999.
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.
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 11,732,982 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.
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 is automatically granted an option to
purchase 9,000 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):
2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Number of Option Number of Option Number of Option
shares price Shares price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning
of year............................... 7,307 $3.78 5,899 $2.72 6,010 $2.72
Granted............................. 1,454 9.17 1,772 7.27 -- --
Exercised........................... (1,228) 2.46 (106) 2.51 -- --
Canceled............................ (465) 6.58 (258) 4.21 (111) 2.57
- ---------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year....... 7,068 $4.94 7,307 $3.78 5,899 $2.72
=====================================================================================================================
Options exercisable, end of year....... 4,683 $3.57 4,618 $2.70 3,855 $2.54
=====================================================================================================================
Options available for grant, end
of year............................... 4,332 2,587 4,101
=====================================================================================================================
Options outstanding for the 1999 Plan and the Directors' Plan at August 25, 2001
are summarized as follows (shares in thousands):
Options Outstanding Options Exercisable
- ----------------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
- ----------------------------------------------------------------------------------------------------------------------
43
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
- ----------------------------------------------------------------------------------------------------------------------
$0.96 to $1.50 761 4.5 $ 1.31 761 $ 1.31
- ----------------------------------------------------------------------------------------------------------------------
$3.15 3,654 6.4 3.15 3,163 3.15
- ----------------------------------------------------------------------------------------------------------------------
$4.22 to $8.38 1,323 8.7 6.19 340 4.22
- ----------------------------------------------------------------------------------------------------------------------
$9.13 to $13.01 1,329 8.8 10.68 419 10.39
- ----------------------------------------------------------------------------------------------------------------------
The Company determined pro forma compensation expense under the provisions of
SFAS No. 123 using the Black-Scholes pricing model and the following
assumptions:
2001 2000
- ----------------------------------------------------------------------------------------------------
Expected dividend yield.................................... 0% 0%
Expected stock price volatility............................ 72% 90%
Risk-free interest rate.................................... 5.25% 5.50%
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):
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Net income, as reported............................................. $38,616 $47,933 $5,965
Pro forma net income................................................ 33,788 45,705 4,839
Basic net earnings (loss) per share, as reported.................... 0.56 (0.02) (2.53)
Pro forma basic net earnings (loss) per share....................... 0.49 (0.07) (2.56)
Diluted net earnings (loss) per share, as reported.................. 0.53 (0.02) (2.53)
Pro forma diluted net earnings (loss) per share..................... 0.46 (0.07) (2.56)
The weighted average fair value of options granted during 2001 and 2000 with
exercise prices equal to the market price at the date of grant was $7.40 and
$6.95 per share, respectively. 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. As of August 25, 2001, 255,107 shares had been issued under the ESPP
Plan at a weighted-average price of $6.36.
(15) 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 2001, 2000 and 1999 related to
this plan were $1.6 million, $1.6 million and $2.0 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 $3.3 million, $2.4
million and $1.8 million in 2001, 2000 and 1999, respectively.
(16) 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 2000 and 1999
represents a loss per share of common stock, the effect of including the
incremental shares of
44
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. The following table presents a
reconciliation of the share amounts used in the computation of basic and diluted
earnings (loss) per share (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Denominator
Basic earnings (loss) per share--Weighted common shares
Outstanding...................................................... 68,747 43,609 36,708
Weighted common shares assumed upon exercise of
Options.......................................................... 4,248 -- --
- -------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share.............. 72,995 43,609 36,708
===================================================================================================================
(17) 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 2001, 2000 and 1999, respectively (in thousands):
2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net sales:
United States............................................... $249,455 $252,172 $176,345
Japan....................................................... 45,749 32,659 20,337
Germany..................................................... 27,735 32,325 26,278
Malaysia.................................................... 15,057 19,094 12,100
Korea....................................................... 3,853 3,862 2,443
Singapore................................................... 595 3,353 4,449
- -------------------------------------------------------------------------------------------------------------------
$342,444 $343,465 $241,952
===================================================================================================================
Long-lived assets:
United States............................................... $ 78,339 $ 71,626 $ 84,271
Japan....................................................... 9,767 10,297 7,100
Germany..................................................... 5,517 5,625 6,484
Malaysia.................................................... 14,562 15,466 12,955
Taiwan...................................................... 82 -- --
Korea....................................................... 575 4,719 5,131
Singapore................................................... 289 -- 1,683
- -------------------------------------------------------------------------------------------------------------------
$109,131 $107,733 $117,624
==================================================================================================================
Net sales from external customers attributable to the United States amounted to
$170.9 million, $179.8 million and $126.0 million in 2001, 2000 and 1999
respectively. Net sales from external customers attributable to countries other
than the United States amounted to $171.5 million, $163.7 million and $116.0
million in 2001, 2000 and 1999, respectively. In 2001, 2000 and 1999, no single
nonaffiliated customer accounted for 10% or more of net sales.
(18) SUPPLEMENTARY CASH FLOW INFORMATION
2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Schedule of interest and income taxes paid (in thousands):
Interest.................................................... $ 1,503 $ 5,142 $ 6,633
Income taxes, net of refunds received....................... 28,460 30,884 (3,052)
(19) FAIR VALUE OF FINANCIAL INSTRUMENTS
45
The carrying amount of cash equivalents, short-term investments 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 $15.8 million at August 25, 2001.
(20) 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 paid relating to these agreements totaled $0.6 million,
$0.8 million and $1.2 million for 2001, 2000 and 1999, respectively. In March
2000, the Company entered 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.
Through December 2000, the Company allocated rental payments to Emplast, a
previously owned company, totaling $0.2 million, $0.6 million and $0.3 million
in 2001, 2000 and 1999, respectively. In connection with Emplast's purchase of
the facility in 2001, the company paid Emplast $0.3 million to terminate the
lease. As of August 25, 2001 and August 26, 2000, Emplast owed the Company $40
thousand and $0.8 million, respectively, which are included in other current
assets in the accompanying consolidated balance sheets.
Notes Receivable At August 25, 2001, 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 $1.4 million and $1.5 million and at August 25, 2001 and
August 26, 2000, respectively.
Sales to Minority Shareholder The Company sells products to Marubeni under
normal business terms. Sales to Marubeni were $17.4 million, $16.2 million and
$12.0 million in 2001, 2000 and 1999, respectively. At August 25, 2001 and
August 26, 2000, the Company had a receivable from Marubeni totaling $1.0
million and $2.5 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.
(21) QUARTERLY INFORMATION-UNAUDITED (in thousands, except per share data)
Quarter
- ------------------------------------------------------------------------------------------------------------------------
First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 2000
- ------------------------------------------------------------------------------------------------------------------------
Net sales $ 71,816 $ 84,846 $90,991 $95,812 $343,465
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 31,681 38,158 43,681 46,922 160,442
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss 12,054 10,330 12,014 14,684 49,082
- ------------------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (1,149) (1,149)
- ------------------------------------------------------------------------------------------------------------------------
Net income 12,054 10,330 12,014 13,535 47,933
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per nonredeemable
- ------------------------------------------------------------------------------------------------------------------------
common share:
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss (0.56) (0.60) 0.79 0.23 0.01
- ------------------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (0.02) (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Net income (0.56) (0.60) 0.79 0.21 (0.02)
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per nonredeemable
common share:
- ------------------------------------------------------------------------------------------------------------------------
Income before extraordinary loss (0.56) (0.60) 0.19 0.22 0.01
- ------------------------------------------------------------------------------------------------------------------------
Extraordinary loss -- -- -- (0.02) (0.03)
- ------------------------------------------------------------------------------------------------------------------------
Net income (0.56) (0.60) 0.19 0.20 (0.02)
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Fiscal 2001
- ------------------------------------------------------------------------------------------------------------------------
46
- ------------------------------------------------------------------------------------------------------------------------
Net sales $102,639 $105,712 $81,346 $52,747 $342,444
- ------------------------------------------------------------------------------------------------------------------------
Gross profit 52,552 53,601 37,890 18,627 162,670
- ------------------------------------------------------------------------------------------------------------------------
Net income (loss) 18,112 13,784 8,428 (1,708) 38,616
- ------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share .26 .20 .12 (.02) .56
- ------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share .25 .19 .12 (.02) .53
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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 beginning on page 28
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:
47
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(b) Financial Statement Schedules
Exhibit Description of Document
- ------- -----------------------
Number
- ------
3.1(i) Articles of Incorporation of Entegris, Inc.
3.2(ii) 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 Worldwide Stocking Distributor Agreement Between Fluid Handling
Group Entegris, Inc. and Metron Technology N.V. dated March 1, 2001
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
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent
48
__________________
(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.
(ii) Incorporated by reference from the Company's Report on Form 8K filed by
the Company March 2, 2001.
+ 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 25, 2001.
(c) See Exhibits listed under Item 14(a)(3).
(d) Not applicable. See Item 14(a)(2).
49
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 21, 2001.
/s/ James E. Dauwalter
----------------------
James E. Dauwalter
President and 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 Director November 21, 2001
- -------------------------------------------
Daniel R. Quernomoen
/s / James A. Bernards Director November 21, 2001
- -------------------------------------------
James A. Bernards
/s / Robert J. Boehlke Director November 21, 2001
- -------------------------------------------
Robert J. Boehlke
/s / Mark A. Bongard Director November 21, 2001
- -------------------------------------------
Mark A. Bongard
/s/ James E. Dauwalter President, Chief Executive Officer and November 21, 2001
- ------------------------------------------- Director
James E. Dauwalter
/s/ Stan Geyer Chairman of the Board of Directors November 21, 2001
- -------------------------------------------
Stan Geyer
/s / Delmer M. Jensen Director November 21, 2001
- -------------------------------------------
Delmer M. Jensen
/s / Gary F. Klingl Director November 21, 2001
- -------------------------------------------
Gary F. Klingl
/s / Roger D. McDaniel Director November 21, 2001
- -------------------------------------------
Roger D. McDaniel
/s / John D. Villas Executive Vice President and Chief November 21, 2001
- ------------------------------------------- Financial Officer (Chief Financial &
John D. Villas Accounting Officer)
50
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Entegris, Inc.:
Under date of October 5, 2001, we reported on the consolidated balance
sheets of Entegris, Inc. and subsidiaries as of August 25, 2001 and August 26,
2000 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the years in the three-year period ended August 25,
2001, as contained in the 2001 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 25, 2001. 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, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for domestic inventories in 2001.
/s/ KPMG LLP
Minneapolis, Minnesota
October 5, 2001
51
Entegris, Inc.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Balance at Charged to Balance at
Beginning of Costs and End of
Description Period Expenses Deduction Period
----------- ------ -------- --------- ------
Additions
---------
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
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
============= ============== ============ ============
Deducted from asset accounts:
Year ended August 25, 2001:
Allowance for doubtful receivables..... $2,524 (482) 434 $1,608
============= ============== ============ ============
Inventory reserves..................... $4,183 6,397 4,809 $5,771
============= ============== ============ ============
52