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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 1, 2002 Commission File Number 000-30789
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ENTEGRIS, INC.
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(Exact name of registrant as specified in charter)
Minnesota 41-1941551
--------------- ---------------
(State or other jurisdiction of incorporation) (IRS Employer ID No.)
3500 Lyman Boulevard, Chaska, Minnesota 55318
---------------------------------------------
(Address of Principal Executive Offices)
Registrant's Telephone Number (952) 556-3131
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at June 30, 2002
- ----------------------------- ----------------------------
Common Stock, $0.01 Par Value 71,000,825
ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED JUNE 1, 2002
Description Page
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PART I FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Balance Sheets as of June 1, 2002
and August 25, 2001 3
Consolidated Statements of Operations for the Three Months and
Nine Months Ended June 1, 2002 and May 26, 2001 4
Consolidated Statements of Cash Flows for the
Nine Months Ended June 1, 2002 and May 26, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II OTHER INFORMATION
- -------
Item 6. Exhibits and Reports on Form 8-K 16
2
PART I
Item 1. Financial Statements
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
June 1, August 25,
2002 2001
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 70,438 $ 74,451
Short-term investments 37,084 36,628
Trade accounts receivable, net of allowance for doubtful accounts 34,834 36,303
Trade accounts receivable due from affiliates 4,789 7,171
Inventories 39,212 47,202
Deferred tax assets and refundable income taxes 14,145 10,424
Other current assets 5,401 7,858
--------------- ----------------
Total current assets 205,903 220,037
---------------- ---------------
Property, plant and equipment, net 103,898 109,131
Other assets
Investments 15,308 12,295
Intangible assets, net 50,087 51,766
Other 2,857 2,449
--------------- ----------------
Total assets $378,053 $395,678
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,990 $ 2,238
Short-term borrowings 9,959 8,813
Accounts payable 11,706 16,572
Accrued liabilities 20,113 33,630
---------------- ---------------
Total current liabilities 43,768 61,253
---------------- ---------------
Long-term debt, less current maturities 12,538 13,101
Deferred tax liabilities 5,772 3,950
Minority interest in subsidiaries 63 5,067
Commitments and contingencies - -
Shareholders' equity
Common stock, $0.01 par value; 200,000,000 authorized; issued
and outstanding shares: 70,980,525 and 69,729,821, respectively 710 697
Additional paid-in capital 125,983 121,449
Retained earnings 186,080 188,156
Accumulated other comprehensive income 3,139 2,005
---------------- ---------------
Total shareholders' equity 315,912 312,307
---------------- ---------------
Total liabilities and shareholders' equity $378,053 $395,678
================ ===============
See accompanying notes to consolidated financial statements.
3
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
--------------- ---------------- ---------------- ---------------
Sales to non-affiliates $ 50,470 $ 55,920 $ 136,485 $195,037
Sales to affiliates 9,239 25,426 19,778 94,660
--------------- ---------------- ---------------- ---------------
Net sales 59,709 81,346 156,263 289,697
Cost of sales 31,582 43,456 96,003 145,654
--------------- ---------------- ---------------- ---------------
Gross profit 28,127 37,890 60,260 144,043
Selling, general and administrative expenses 18,987 18,761 53,538 59,723
Nonrecurring charges (reversals) (1,640) 4,934 2,361 13,144
Engineering, research and development expenses 4,540 4,697 13,701 12,265
--------------- ---------------- ---------------- ---------------
Operating (loss) profit 6,240 9,498 (9,340) 58,911
Interest income, net (239) (1,038) (1,055) (3,905)
Other expense (income), net 268 (971) (1,471) 43
--------------- ---------------- ---------------- ---------------
Income (loss) before income taxes and other
items below 6,211 11,507 (6,814) 62,773
Income tax expense (benefit) 998 2,801 (3,951) 22,284
Equity in net income of affiliates - - - (1,488)
Minority interest in subsidiaries' net (loss) income (13) 278 (787) 1,653
--------------- ---------------- ---------------- ---------------
Net income (loss) $ 5,226 $ 8,428 $ (2,076) $ 40,324
=============== ================ ================ ===============
Earnings (loss) per common share:
Basic $ 0.07 $ 0.12 $ (0.03) $ 0.59
Diluted $ 0.07 $ 0.12 $ (0.03) $ 0.55
Weighted shares outstanding:
Basic 70,646 68,735 70,121 68,541
Diluted 75,590 72,788 70,121 72,726
4
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
----------------------------
June 1, May 26,
2002 2001
----------------------------
OPERATING ACTIVITIES
Net income (loss) $ (2,076) $ 40,324
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 20,795 17,295
Asset impairment 1,960 3,526
Provision for doubtful accounts 84 600
Provision for deferred income taxes (137) (2,369)
Equity in net income of affiliates - (1,488)
Loss on sale of property and equipment 601 1,202
Minority interest in subsidiaries' net (loss) income (787) 1,653
Changes in operating assets and liabilities:
Trade accounts receivable 1,383 (1,131)
Trade accounts receivable due from affiliates 2,383 3,236
Inventories 7,990 (6,552)
Accounts payable and accrued liabilities (18,383) 70
Other current assets 2,457 (2,225)
Refundable income taxes and accrued income taxes (745) (2,227)
Other (651) (618)
----------------------------
Net cash provided by operating activities 15,148 51,926
----------------------------
INVESTING ACTIVITIES
Acquisition of property and equipment (17,002) (19,607)
Acquisition of businesses, net of cash acquired (6,883) -
Purchases of intangible assets (514) (10,494)
Proceeds from sales of property and equipment 1,427 583
Proceeds from sale of investment in affiliate (456) 3,941
Purchases of short-term investments (63,216) (24,610)
Maturities of short-term investments 62,760 -
Other (451) 1,437
----------------------------
Net cash used in investing activities (23,789) (48,750)
----------------------------
FINANCING ACTIVITIES
Principal payments on short-term borrowings and long-term debt (4,719) (2,545)
Proceeds from issuance of debt 5,055 -
Issuance of common stock 4,546 2,545
Repurchase of common stock - (722)
----------------------------
Net cash (used in) provided by financing activities 4,882 (722)
----------------------------
Effect of exchange rate changes on cash and cash equivalents (164) (200)
----------------------------
(Decrease) increase in cash and cash equivalents (4,013) 2,254
Cash and cash equivalents at beginning of period 74,451 102,973
----------------------------
Cash and cash equivalents at end of period $ 70,438 $105,227
============================
See accompanying notes to consolidated financial statements.
5
ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Summary of Accounting Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of June 1, 2002 and August 25, 2001, the results of operations for
the three months and nine months ended June 1, 2002 and May 26, 2001 and
cash flows for the nine months ended June 1, 2002 and May 26, 2001.
Certain prior year amounts have been reclassified to conform to the
current period presentation.
The financial statements and notes are presented as permitted by Form
10-Q and do not contain certain information included in the Company's
annual consolidated financial statements and notes. The information
included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes
thereto included in the Company's Form 10-K for the year ended August
25, 2001. The results of operations for the three months and nine months
ended June 1, 2002 and May 26, 2001 are not necessarily indicative of
the results to be expected for the full year.
The Company's fiscal year ends on the last Saturday of August. In fiscal
2002, the Company's interim quarters end on November 24, 2001, March 2,
2002 and June 1, 2002. Fiscal 2002's second quarter ended March 2, 2002
included fourteen weeks with fiscal 2002 containing 53 weeks.
2. Earnings (loss) per share
The following table presents a reconciliation of the denominators used
in the computation of basic and diluted earnings (loss) per share.
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
------------------------------ ------------------------------
Basic earnings per share-weighted
common shares outstanding 70,646,000 68,735,000 70,121,000 68,541,000
Weighted common shares assumed upon
exercise of stock options 4,944,000 4,053,000 - 4,185,000
------------------------------ ----------------------------
Diluted earnings per share-weighted
common shares and common shares
equivalent outstanding 75,590,000 72,788,000 70,121,000 72,726,000
============================== ============================
Since basic EPS for the nine-month period ended June 1, 2002 represents
a loss per share of common stock, the effect of including the
incremental shares of common stock from assumed exercise of options in
EPS computation is anti-dilutive, and, accordingly, basic and diluted
EPS are the same.
6
3. Inventories
Inventories consist of the following:
June 1, 2002 August 25, 2001
------------------- ---------------------
Raw materials $14,430 $15,167
Work-in process 1,518 1,451
Finished goods 22,621 29,971
Supplies 643 613
------------------- ---------------------
Total inventories $39,212 $47,202
=================== =====================
4. Comprehensive Income (Loss)
For the three months and nine months ended June 1, 2002 and May 26, 2001, net
income (loss), items of other comprehensive income (loss) and comprehensive
income (loss) are as follows:
Three months ended Nine months ended
---------------------------- -----------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
-------------- ------------- -------------- --------------
Net income (loss) $ 5,226 $ 8,428 $ (2,076) $40,324
Items of other comprehensive income (loss)
Foreign currency translation gain (loss) 833 1,408 (628) 516
Unrealized (loss) gain in marketable
securities (27) 1,554 1,762 1,125
-------------- ------------- -------------- --------------
Comprehensive income (loss) $ 6,032 $ 11,390 $ (942) $41,965
============== ============= ============== ==============
5. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under the provisions of
SFAS No.142, goodwill and intangible assets with indefinite lives are not
amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS 142, all goodwill must
be assigned to reporting units for purposes of impairment testing and is no
longer subject to amortization.
The Company adopted SFAS No. 142 as of August 26, 2001. As required by SFAS 142,
the Company performed an assessment of whether there was an indication that
goodwill was impaired at the date of adoption. In connection therewith, the
Company determined that it consisted of a single reporting unit and determined
the Company's fair value and compared it to the Company's net book value. As of
August 26, 2001, the Company's fair value exceeded its carrying amount, and
therefore there was no indication that goodwill was impaired. Accordingly, the
Company was not required to perform the second step of the transitional
impairment test.
In the second step, the Company would be required to compare the implied fair
value of goodwill, determined by allocating the reporting unit's fair value to
all of its assets and liabilities to its carrying amount, both of which would be
measured as of the date of adoption. The Company did not record any transitional
impairment loss.
7
Goodwill amortization expense was $0.4 million for the third quarter of
fiscal 2001 and $0.8 million for the first nine months of fiscal 2001. The
Company estimates that goodwill amortization expense would have been
approximately $0.6 million in the third quarter of fiscal 2002 and $1.7
million for the first nine months of fiscal 2002. The following table
presents a reconciliation of net (loss) income and (loss) earnings per
share adjusted for the exclusion of goodwill, net of income taxes (in
thousands, except per share figures):
Three months ended Nine months ended
------------------------------------------ -----------------------------------------
June 1, May 26, May 27, June 1, May 26, May 27,
Net income (loss): 2002 2001 2000 2002 2001 2001
------------------------------------------------------------------------------------
Reported net income (loss) $5,226 $8,428 $12,014 $(2,076) $40,324 $34,398
Add: Goodwill amortization, net
of tax - 438 162 - 792 507
------------------------------------------------------------------------------------
Adjusted net income (loss) $5,226 $8,866 $12,176 $(2,076) $41,116 $34,905
====================================================================================
Three months ended Nine months ended
------------------------------------------------------------------------------
June 1, May 26, May 27, June 1, May 26, May 27,
Basic earnings (loss) per share: 2002 2001 2000 2002 2001 2000
------------------------------------------------------------------------------
Reported basic earnings (loss) per share $0.07 $0.12 $0.79 $(0.03) $0.59 $(0.38)
Add: Goodwill amortization, net of tax - 0.01 - - 0.01 0.01
------------------------------------------------------------------------------
Adjusted basic earnings (loss) per share $0.07 $0.13 $0.79 $(0.03) $0.60 $(0.37)
==============================================================================
Three months ended Nine months ended
---------------------------------------------------------------------------
June 1, May 26, May 27, June 1, May 26, May 27,
Diluted earnings (loss) per share: 2002 2001 2000 2002 2001 2000
---------------------------------------------------------------------------
Reported diluted earnings (loss) per share $0.07 $0.12 $0.19 $(0.03) $0.55 $(0.38)
Add: Goodwill amortization, net of tax - - - - 0.02 0.01
---------------------------------------------------------------------------
Adjusted diluted earnings (loss) per share $0.07 $0.12 $0.19 $(0.03) $0.57 $(0.37)
===========================================================================
As of June 1, 2002, goodwill amounted to $21.0 million, which included a
$0.8 million reduction associated with purchase price allocation
adjustments and a $1.8 million addition in connection with contingent
consideration recorded in the third quarter and second quarter,
respectively, related to fiscal 2001 acquisitions. Other intangible assets,
which include patents and other identifiable intangible assets, net of
amortization, of $29.0 million as of June 1, 2002, are being amortized over
useful lives ranging from 3 to 17 years and are as follows (in thousands):
As of June 1, 2002
------------------------------------
Gross carrying Accumulated
Amortized intangible assets: amount amortization
-------------------------------------- ------------------------------------
Patents $14,797 $2,973
Unpatented technology 9,844 957
Employment and noncompete agreements 4,611 599
Other 5,003 686
------------------------------------
$34,255 $5,215
====================================
Aggregate amortization expense for the third quarter and first nine months
of fiscal 2002 amounted to $0.9 million and $2.8 million, respectively.
Estimated amortization expense for the fiscal years 2002 to 2006 is $3.8
million, $3.8 million, $3.8 million, $3.7 million and $3.6 million,
respectively.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which addresses financial
accounting and reporting for the impairment or disposal of long-lived
assets. While SFAS No. 144 supersedes SFAS No.121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, it retains many of its fundamental provisions. SFAS No. 144 becomes
effective for the Company on September 1, 2002. The Company is evaluating
SFAS No. 144 to determine the impact on its financial condition and results
of operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and related disclosure of contingent
assets and liabilities. At each balance sheet date, management evaluates its
estimates, including, but not limited to, those related to accounts receivable,
inventories, long-lived assets, warranty and sales return obligations, and
income taxes. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. Actual results may differ from these estimates under different
assumptions or conditions. The critical accounting policies that are most
important in fully understanding and evaluating the Company's financial
condition and results of operations are discussed below.
Allowance for Doubtful Accounts and Other Accounts Receivable-Related Valuation
Accounts
The Company maintains an allowance for doubtful accounts as well as reserves for
sales returns and allowances, and warranty claims. Significant management
judgments and estimates must be made and used in connection with establishing
these valuation accounts. Material differences could result in the amount and
timing of the Company's results of operations for any period if we made
different judgments or utilized different estimates. In addition, actual results
could be different from the Company's current estimates, possibly resulting in
increased future charges to earnings.
The Company provides an allowance for doubtful accounts for all individual
receivables judged to be unlikely for collection. For all other accounts
receivable, the Company records an allowance for doubtful accounts based on a
combination of factors. Specifically, management analyzes the age of receivable
balances, historical bad debts write-off experience, customer concentrations,
general customer creditworthiness and current economic trends when determining
its allowance for doubtful accounts. At June 1, 2002, the Company's allowance
for doubtful accounts was $1.7 million, up from $1.3 million at March 2, 2002,
reflecting the growth in receivables from the second quarter to the third
quarter.
A reserve for sales returns and allowances is established based on historical
trends and current trends in product returns. At June 1, 2002, the Company's
reserve for sales returns and allowances was $1.3 million, essentially unchanged
from the prior quarter.
The Company records a liability for estimated warranty claims. The amount of the
accrual is based on historical claims data by product group and other factors.
Claims could be materially different from actual results for a variety of
reasons, including a change in the Company's warranty policy in response to
industry trends, competition or other external forces, manufacturing changes
that could impact product quality, or as yet unrecognized defects in products
sold. As of June 1, 2002, the Company's accrual for estimated future warranty
costs was $1.0 million, compared to $1.3 million at March 2, 2002.
Inventory Valuation The Company uses certain estimates and judgments to properly
value inventory. In general, the Company's inventories are recorded at the lower
of standard manufacturing cost or market value. Each quarter, the Company
evaluates its ending inventories for obsolescence and excess quantities. This
evaluation includes analyses of inventory levels, historical loss trends,
expected product lives, sales levels by product and projections of future sales
demand. Inventories that are considered obsolete are written off. In addition,
reserves are established for inventory quantities in excess of forecasted
demand, generally twelve months or less. Inventory reserves were $6.3 million at
June 1, 2002, down slightly from $6.5 million at March 2, 2002.
The Company's inventories comprise materials and products subject to
technological obsolescence and which are sold in a highly competitive industry.
If future demand or market conditions are less favorable than current analyses,
additional inventory write-downs or reserves may be required and would be
reflected in cost of sales in the period the revision is made.
9
Impairment of Long-Lived Assets The Company routinely considers whether
indicators of impairment of its property and equipment assets, particularly its
molding equipment, are present. If such indicators are present, it is determined
whether the sum of the estimated undiscounted cash flows attributable to the
assets in question is less than their carrying value. If less, an impairment
loss is recognized based on the excess of the carrying amount of the assets over
their respective fair values. Fair value is determined by discounted estimated
future cash flows, appraisals or other methods deemed appropriate. If the assets
determined to be impaired are to be held and used, the Company recognizes an
impairment charge to the extent the present value of anticipated net cash flows
attributable to the asset are less than the asset's carrying value. The fair
value of the asset then becomes the asset's new carrying value, which we
depreciate over the remaining estimated useful life of the asset.
The Company's other long-lived assets are principally comprised of identifiable
intangible assets and related goodwill. The Company assesses the impairment of
these assets at least annually, or whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. Factors considered
important which could trigger an impairment review, and potentially an
impairment charge, include the following:
... significant underperformance relative to historical or projected future
operating results;
... significant changes in the manner of use of the acquired assets or the
Company's overall business strategy;
... significant negative industry or economic trends; and
... significant decline in the Company's stock price for a sustained period
changing the Company's market capitalization relative to its net book
value;
Income Taxes In the preparation of the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
actual current tax exposures together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the Company's consolidated balance sheet.
The Company has significant amounts of deferred tax assets that are reviewed for
recoverability and valued accordingly. Management evaluates the realizability of
the deferred tax assets on a quarterly basis and assesses the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of
tax planning strategies. A valuation allowance is recorded to reduce deferred
tax assets when it is determined that the Company would not be able to realize
all or part of its deferred tax assets.
The Company carried no valuation allowance against its net deferred tax assets
at June 1, 2002. In the event it was determined that the Company would not be
able to realize all or part of the deferred tax assets in the future, an
adjustment to record a deferred tax asset valuation allowance would be charged
to income in the period such determination would be made.
10
Three Months and Nine Months Ended June 1, 2002 Compared to Three Months and
Nine Months Ended May 26, 2001
The following table compares quarterly results with year-ago results, as a
percentage of sales, for each caption.
Three Months Ended Nine Months Ended
-------------------------------------------------------
June 1, May 26, June 1, May 26,
2002 2001 2002 2001
-------------------------------------------------------
Net sales 100.0 100.0 100.0 100.0
Cost of sales 52.9 53.4 61.4 50.3
-------------------------------------------------------
Gross profit 47.1 46.6 38.6 49.7
Selling, general and administrative expenses 31.8 23.1 34.3 20.6
Nonrecurring charges (reversals) (2.7) 6.1 1.5 4.5
Engineering, research and development
expenses 7.6 5.8 8.8 4.2
-------------------------------------------------------
Operating profit (loss) 10.5 11.7 (6.0) 20.3
Interest income, net (0.4) (1.3) (0.7) (1.3)
Other expense (income), net 0.4 (1.2) (0.9) -
-------------------------------------------------------
Income (loss) before income taxes and other
items below 10.4 14.1 (4.4) 21.7
Income tax expense (benefit) 1.7 3.4 (2.5) 7.7
Equity in net income of affiliated companies - - - (0.5)
Minority interest in subsidiaries' net (loss)
income - 0.3 (0.5) 0.6
-------------------------------------------------------
Net income (loss) 8.8 10.4 (1.3) 13.9
=======================================================
Effective tax rate 16.1% 24.3% (58.0)% 35.5%
Net sales Net sales decreased 27% to $59.7 million in the third quarter of
fiscal 2002, compared to $81.3 million in the third quarter of fiscal 2001. The
sharp decline reflected the severe downturn in the semiconductor industry, which
began in the second half of fiscal 2001. However, third quarter sales for fiscal
2002 improved 18% from the $50.7 million recorded in the second quarter of the
fiscal year, the Company's second consecutive quarter of sequential improvement.
Overall sales for the Microelectronics Group were down 20% from the comparable
period a year ago, but increased by 10 percent from the second to the third
quarter 2002, and accounted for about 73% of Entegris sales in the third
quarter. Fluid Handling sales in the third quarter were down 41% from a year
ago, but improved by 51% from the second, making up 27% of total sales during
the third quarter.
The Company had continued improvement in unit driven product sales, which
increase as more wafers are being produced and devices are manufactured. This
category includes sales for chemical containers, wafer shippers and test,
assembly and packaging products. The sequential improvement of unit driven sales
from second to third quarter was not as strong as from the first to the second
quarter of fiscal year 2002. However, the Company did record double-digit
percentage sales increases for most of its unit driven products, which the
Company estimates made up about 60 percent of its total sales during the third
quarter.
Third quarter fiscal 2002 sales by geographic region were 50 percent to North
America, 15 percent to Europe, 13 percent to Japan and 21 percent to Asia
Pacific. Overall business conditions in Europe and Japan were not as strong as
in Asia Pacific and North America. Fluid Handling sales increased by over 25% in
all geographic regions, but were particularly strong in North America where many
of the global semiconductor equipment companies are located, with a
quarter-to-quarter improvement of 59%. The Microelectronics Group experienced
the largest sequential sales improvement in Asia Pacific and North America.
11
Net sales for the first nine months of fiscal 2002 were $156.3 million, down 46%
from $289.7 million in the comparable year-ago period. Revenue declines were
recorded in all geographic regions. Overall, third quarter fiscal 2002 sales
were 48% to North America, 20% to Asia Pacific, 16% to Europe and 16% to Japan.
Fluid Handling and Microelectronics Group sales declined 38% and 64%,
respectively, compared to first nine months of fiscal 2001.
Based on current information from incoming order rates, management expects that
sales for the fourth quarter of fiscal 2002 will improve - to a range of $62
million to $66 million - from the sales levels experienced in the third quarter.
Gross profit Gross profit in the third quarter of fiscal 2002 decreased 26% to
$28.1 million, compared to $37.9 million reported in the third quarter of fiscal
2001. For the first nine months of fiscal 2002, gross profit was $60.3 million,
down 58% from $144.0 million recorded in the first nine months of fiscal 2001.
As a percentage of net sales, gross margins for the third quarter and first nine
months of the fiscal 2002 were 47.1% and 38.6%, respectively, compared to 46.6%
and 49.7%, respectively, in the comparable periods a year ago.
Gross margin and gross profit declines were reported by both domestic and
international operations. The drops in fiscal 2002 figures were primarily caused
by the lower sales levels noted above, which resulted in lower production
levels. In addition, during the second quarter of fiscal 2002, the Company
recorded higher than normal inventory reserves associated with the Company's
Japanese operations.
The gross margin was 47.1% during the third quarter of fiscal 2002 compared to
the second quarter's gross margin of 33.4 %. Most of the quarter-to-quarter
improvement related to increased sales and higher production levels. In
addition, a portion of the improvement is related to a favorable product mix.
The Company also benefited from its actions in reducing costs and increasing
manufacturing efficiencies associated with the closure of manufacturing plants,
investing in automation, changing process flows and instituting manufacturing
centers of excellence.
Selling, general and administrative expenses Selling, general and administrative
(SG&A) expenses increased 1% to $19.0 million in the third quarter of fiscal
2002 from $18.8 in the third quarter of fiscal 2001. On a year-to-year basis,
SG&A expenses fell 10% to $53.5 million compared to $59.7 million a year
earlier. The declines are primarily due to significantly lower bonus and
charitable contribution accruals, which are based on company profitability. On a
year-to-date basis, SG&A costs, as a percent of net sales, increased to 34.3%
from 20.6% a year ago.
SG&A expenses for the third quarter were up 10% from the $17.2 million expended
in the second quarter of fiscal 2002. As a percent of sales SG&A expenses were
31.8 percent down from 33.9% in the second quarter. The increase from prior
quarter is primarily related to increased sales commissions, reinstatement of
some incentive compensation as sales increased as the Company regained
profitability and an increase to the allowance for doubtful accounts as accounts
receivable levels rose. In absolute dollars, SG&A expenses will generally
increase as sales improve and profit sharing and charitable donation programs
kick in. Accordingly, SG&A expenses are expected to be up marginally in the
fourth quarter of fiscal 2002.
Nonrecurring charges (reversals) The Company recorded no nonrecurring charges in
the third quarter of fiscal 2002, but recorded a $1.6 million pre-tax benefit
associated with the reversal of previous accruals related to the plant closures
of some of our facilities within the last four quarters. Approximately $1.0
million of the reversal was associated with the favorable settlement of future
lease commitments which the Company had previously accrued in full.
In the first quarter of 2002, the Company's results included a nonrecurring
charge of $4.0 million in connection with the closures of the Company's
Chanhassen, MN and one of its Chaska, MN plants. The charge included $1.5
million in termination costs related to a workforce reduction of 230 employees
and $2.3 million for estimated losses for asset impairment. During the third
quarter of fiscal 2001, the company
12
recorded a $4.9 million charge in connection with its decision to close its
Castle Rock, Colorado and Munmak, Korea facilities. 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. During the second quarter of fiscal
2001, the Company recorded a one-time charge of $8.2 million related to the
early termination of a distribution agreement for the Microelectronics Group
with its affiliate Metron Technology N.V. (Metron). As of June 1, 2002, future
cash outflows of approximately $0.4 million remained outstanding in connection
with the aforementioned nonrecurring charges.
Engineering, research and development expenses Engineering, research and
development (ER&D) expenses decreased 3% to $4.5 million, or 7.6 % of net sales,
in the third quarter of fiscal 2002 as compared to $4.7 million, or 5.8% of net
sales, for the same period in fiscal 2001. ER&D expenses increased 12 % to $13.7
million, or 8.8% of net sales, in the first nine months of fiscal 2002 as
compared to $12.3 million, or 4.2% of net sales, a year-ago period, reflecting
both higher ER&D expenditures and lower net sales as the Company continued to
focus on supporting current product lines, developing new manufacturing
technologies and developing next generation products.
Interest income, net Net interest income was $0.2 million in the third quarter
of fiscal 2002 compared to $1.0 million in the year-ago period. Net interest
income was $1.1 million in the first nine months of fiscal 2002 compared to $3.9
million for the same period in fiscal 2001. The change reflects the
significantly lower rates of interest on cash equivalents and short-term
investments and a shift in the mix of the Company's investments towards
tax-exempt securities.
Other expense (income), net Other expense was $0.3 million in the third quarter
of fiscal 2002 as compared to other expense of $1.0 million a year ago. Other
income was $1.5 million in the first nine months of fiscal 2002 consisted
primarily of the foreign currency gains, with about $0.7 million associated with
the realization of translation gains from our liquidated Korean entity, compared
to other expense of $43 thousand in the first nine months of fiscal 2001.
Income tax expense (benefit) The Company recorded an income tax expense of $1.0
million for the third quarter of fiscal 2002 compared to income tax expense of
$2.8 million in the third quarter a year ago. The effective tax rate of 16.1%
for the third quarter and (58.0)% for the first nine months of fiscal year 2002
are attributable to a one-time benefit of $1.4 million related to the
repatriation of earnings from certain non-US subsidiaries.
For the first nine months of fiscal 2002, the Company booked an income tax
benefit of $4.0 million compared to income tax expense of $22.3 million in the
first nine months of fiscal 2001. The variances primarily reflect the
differences in the Company's pre-tax operating results. The effective tax rate
was (58.0)% in the first nine months of fiscal 2002 compared to an effective tax
rate of 35.5% for the first nine months of fiscal 2001.
Equity in net income of affiliates No equity in the net income of affiliates was
recorded in the third quarter of either fiscal 2002 or fiscal 2001. The Company
recorded no equity in the net income of affiliates being recorded in the first
nine months of fiscal 2002 compared to $1.5 million for the same period a year
ago. This reflects the change in accounting for the Company's investment in
Metron, which was recorded under the equity method of accounting through the
second quarter of fiscal 2001 at which time the Company began accounting for its
remaining investment as an available-for-sale security, as our percentage
ownership was reduced significantly.
Minority interest For the nine months ended June 1, 2002, the minority interest
in subsidiaries' net loss was $0.8 million, reflecting the operating losses of
the Company's former 51%-owned Japanese subsidiaries (now 100%-owned),
particularly in the second quarter of fiscal 2002, resulting from the sales and
the inventory write-down noted above. This compares to minority interest in
subsidiaries' net income of $1.7 million a year ago.
13
Net income (loss) The Company recorded net income of $5.2 million, or $0.07 per
diluted share, in the third quarter of fiscal 2002, compared to net income of
$8.4 million, or $0.12 per diluted share, in the year-ago period. For the first
nine months of fiscal 2002, Entegris recorded a net loss of $2.1 million, or
$0.03 per diluted share, compared to net income of $40.3 million, or $0.55 per
diluted share, in the comparable period a year earlier.
Liquidity and Capital Resources
Operating activities Cash flow provided by operating activities totaled $15.1
million in the first nine months of fiscal 2002. Noncash charges, such as
depreciation and amortization of $20.8 million, as well as decreases in
inventory of $8.0 million and accounts receivable of $3.8 million were partly
offset by the Company's net loss of $2.1 million and a $18.4 million reduction
in accounts payable and accruals. Working capital at June 1, 2002 stood at
$162.1 million, including $70.4 million in cash and cash equivalents, and
short-term investments of $37.1 million.
Accounts receivable grew by $7.6 million during the third quarter in concert
with increased sales. Inventories stayed flat with the prior quarter at
approximately $39 million.
Investing activities Cash flow used in investing activities totaled $23.9
million in the first nine months of fiscal 2002. Acquisition of property and
equipment totaled $17.0 million, primarily related to a facility expansion in
California, primary site of the Company's cleaning service activity, and
expenditures for manufacturing equipment and information systems. The Company
expects capital expenditures for fiscal 2002 to total approximately $20 to $25
million. The company had purchases of short-term investments, net of maturities,
of $0.5 million during the first nine months of fiscal 2002. Short-term
investments stood at $37.1 million at June 1, 2002.
Late in the second quarter of fiscal 2002, the Company purchased the 49%
minority interests held in its Fluoroware Valqua Japan K.K. and Nippon
Fluoroware K.K subsidiaries for total consideration of $5.1 million. The excess
of purchase price over net assets acquired was approximately $1.3 million.
Financing activities Cash used by financing activities totaled $4.9 million
during the first nine months of fiscal 2002. The company made scheduled payments
$4.7 million on borrowings, while proceeds from borrowings were $5.1 million.
The Company received $4.5 million in connection with common shares issued under
the Company's stock option and stock purchase plans.
As of June 1, 2002, our sources of available funds comprised $70.4 million of
cash and cash equivalents, $37.1 million of short-term investments plus various
credit facilities. We have unsecured revolving commitments with two commercial
banks with aggregate borrowing capacity of $20 million, with no borrowings
outstanding at June 1, 2002. We also have lines of credit, equivalent to an
aggregate of approximately $10 million with nine international banks, which
provide for borrowings of the European Euro, Malaysian ringgits and Japanese yen
for our overseas subsidiaries. Borrowings outstanding on these lines of credit
were $10.0 million at June 1, 2002.
At June 1, 2002, the Company's shareholders' equity stood at $315.9 million.
Book value per share was $4.45, down from $4.48 per share at the end of fiscal
2001. The nine months' net loss accounted for the decrease.
The Company believes that its cash and cash equivalents, cash flow from
operations and available credit facilities will be sufficient to meet its
working capital and investment requirements for the next twelve months. However,
future growth, including potential acquisitions, may require additional funding,
and from time to time the Company may need to raise capital through additional
equity or debt financing.
14
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets.
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Under the provisions of
SFAS No.142, goodwill and intangible assets with indefinite lives are not
amortized, but tested for impairment annually, or whenever there is an
impairment indicator. In addition, upon adoption of SFAS 142, all goodwill must
be assigned to reporting units for purposes of impairment testing and is no
longer subject to amortization.
The Company adopted SFAS No. 142 as of August 26, 2001. As required by SFAS 142,
the Company performed an assessment of whether there was an indication that
goodwill was impaired at the date of adoption. In connection therewith, the
Company determined that it consisted of a single reporting unit and determined
the Company's fair value and compared it to the reporting unit's carrying
amount. As of August 26, 2001, the Company's fair value exceeded its carrying
amount, and therefore there was no indication that goodwill was impaired.
Accordingly, the Company was not required to perform the second step of the
transitional impairment test.
In the second step, the Company would be required to compare the implied fair
value of goodwill, determined by allocating the reporting unit's fair value to
all of its assets and liabilities to its carrying amount, both of which would be
measured as of the date of adoption. The Company did not record any transitional
impairment loss.
Goodwill amortization expense was $0.4 million for the third quarter of fiscal
2001 and $0.8 million for the first nine months of fiscal 2001. The Company
estimates that goodwill amortization expense would have been approximately $0.6
million in the third quarter of fiscal 2002 and $1.7 million for fiscal
year-to-date 2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No.121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of, it retains many of the fundamental
provisions of that Statement. SFAS No. 144 becomes effective for fiscal years
beginning after December 15, 2001. The Company is evaluating SFAS No. 144 to
determine the impact on its financial condition and results of operations.
Cautionary Statements This report contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"
"should" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forecasts and projections in this document are "forward-looking
statements," and are based on management's current expectations of the Company's
near-term results, based on current information available pertaining to the
Company, including the risk factors identified in the Company's Annual Report on
Form 10-K for the fiscal year ended August 25, 2001. Among these risks and
uncertainties are general economic conditions, the cyclical nature of the
semiconductor industry, the risks associated with the acceptance of new products
and services, the successful integration of acquisitions and the ability to
expand into new markets. Other factors could also cause the Company's results to
differ materially from those contained in its forward-looking statements.
15
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Entegris's principal market risks are sensitivities to interest rates and
foreign currency exchange rates. The Company's current exposure to interest rate
fluctuations is not significant. Most of its outstanding debt at June 1, 2002
carried fixed rates of interest. All of the Company's cash equivalents and
short-term investments are debt instruments with remaining maturities of 12
months or less.
The Company uses derivative financial instruments to manage foreign currency
exchange rate risk associated with the sale of products from the United States
when such sales are denominated in currencies other than the U.S. dollar. The
cash flows and earnings of foreign-based operations are also subject to
fluctuations in foreign exchange rates. A hypothetical 10% change in the foreign
currency exchange rates would potentially increase or decrease net income by
approximately $1 million.
Our investment in Metron is accounted for as an "available-for-sale security"
under the provisions of Statement of Financial Accounting Standards (SFAS) No.
115. The fair value of Metron is subject to stock market fluctuations. Based on
the closing stock price of Metron at June 1, 2002, the fair value of our
investment in Metron was approximately $13.9 million.
PART II
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
None
(b) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTEGRIS, INC.
Date: July 16, 2002 /s/ James E. Dauwalter
James E.Dauwalter
President and Chief Executive Officer
Date: July 16, 2002 /s/ John D. Villas
John D. Villas
Executive Vice President and
Chief Financial Officer
17