Back to GetFilings.com
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 31, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______to________.
Commission File Number: 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, 2002
as reported by the Nasdaq National Market, was approximately $305 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, 2002 was 71,162,539.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 2003 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 31, 2002, 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.
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Report on Form 10-K constitute
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created by
that statute. 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. Such forward-looking statements are
based upon current expectations and beliefs and involve numerous risks and
uncertainties, both known and unknown, that could cause actual events or results
to differ materially from these forward-looking statements. For a discussion of
factors that could cause actual results to differ materially from those
described in this Form 10-K, see the discussion of risk factors set forth below
in Item 1 of this report. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable as of the date of
this report, it cannot guarantee future results, levels of activity, performance
or achievements. The Company undertakes no duty to update any of the
forward-looking statements after the date of this report.
PART I
ITEM 1. BUSINESS
Overview
We are a leading provider of materials integrity management solutions to
the microelectronics industry, in particular, the semiconductor manufacturing
and disk manufacturing markets. In addition, we are providing our materials
integrity management solution to the fuel cell and life science markets.
However, over 95% of our sales in fiscal 2002 were related to the
microelectronics industry. Our materials integrity management solutions for the
semiconductor industry 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 processes.
With over 10,000 standard and customized products, we believe we provide
the most comprehensive portfolio of materials integrity management products to
the microelectronics industry. Our materials integrity management products, such
as wafer shippers, wafer transport and process carriers, SMIF pods and
work-in-process boxes, preserve the integrity of wafers as they are transported
from wafer manufacturers to semiconductor manufacturers, processed into finished
wafers and integrated circuits and subsequently tested, assembled and packaged.
We also provide chemical delivery products, such as valves, fittings, tubing,
pipe and containers, that assure the consistent and safe delivery and storage of
sophisticated chemicals between chemical manufacturers and semiconductor
manufacturers' point-of-use. To complement our product offerings, we offer
customized services, such as sub-micron and product cleaning, maintenance and
optimization services, product re-use solutions, certification, and repair and
maintenance capability for our products and cleaning equipment.
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
2
include Amkor/Anam, Applied Materials, Ashland Chemical, IBM, Infineon, Intel,
Texas Instruments and TSMC. Our customers in data storage manufacturing include
IBM, Komag and Seagate Technology.
International sales represented approximately 48%, 50% and 53% of our sales
in fiscal 2000, 2001 and 2002, respectively. We provide our customers with a
worldwide network of sales and support personnel, which enable us to offer local
service to our global customer base and assure the timely and cost-effective
delivery of our products.
Industry Background
Semiconductors, or integrated circuits, are the building blocks of today's
electronics and the backbone of the information age. The market for
semiconductors has grown significantly over the past decade. This trend is
expected to continue due to rapid growth in Internet usage and the continuing
demand for applications in data processing, wireless communications, broadband
infrastructure, personal computers, handheld electronic devices and other
consumer electronics. As integrated circuit performance has increased and the
size and cost have decreased, the use of semiconductors in these applications
has grown significantly. Despite the fact that, according to the Semiconductor
Industry Association, or SIA, worldwide semiconductor revenues declined by 32%
to $139 billion from calendar year 2000 to calendar year 2001 and are expected
to rise nominally to $141 billion in calendar 2002, they are anticipated to grow
at a compound annual growth rate of 13% over the next three years to $206
billion in 2005.
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 sector.
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 $3 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.
3
Materials Integrity Management Focus
In an effort to realize continued productivity gains, semiconductor
manufacturers have become increasingly focused on materials integrity 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 have values
ranging from approximately $1.5 million to over $5 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
(semiconductor processing is now so sensitive that ionic contamination in
certain processing chemicals is measured in parts per trillion); 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.
The need for efficient and reliable materials integrity management is
particularly important as new materials are introduced and as 300mm
semiconductor wafer manufacturing becomes a more prevalent manufacturing
technology. Processing 300mm wafers is more costly and more complex because of
the larger size of these wafers. In addition, new materials and circuit
shrinkage create new contamination and material compatibility risks, rendering
300mm wafers more vulnerable to damage or contamination. These trends will
present new and increasingly difficult shipping, transport, process and storage
challenges.
The semiconductor materials and the materials integrity management
industries 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 integrity management providers that demonstrate a deep
knowledge of materials integrity management and semiconductor manufacturing,
have a track record of reliability, offer a broad product line and have the
ability to support and service customer needs worldwide.
Products and Capabilities
We are a leading provider of materials integrity management solutions that
assure the integrity of materials as they are handled, stored, processed and
transported throughout the semiconductor manufacturing process, from raw silicon
wafers to completed integrated circuits. Among other things, our comprehensive
portfolio of products enable:
o secure transport of materials, including chemicals and raw silicon
wafers, from suppliers to the fab;
o storage, handling and transport of wafers throughout fab processing;
o storage, mixing and distribution of chemicals throughout fab
processing;
o delivery of finished wafers to test, assembly and packaging
facilities;
o safe handling of integrated circuit packages and bare die at the test,
assembly and packaging facilities; and
o optimization of product performance and productivity improvement as a
result of customized service offerings for product cleaning, recycling
and logistics management.
We also apply our materials integrity expertise within other markets, such
as the data storage sector, in the microelectronics industry, as well as the
life science and fuel cell markets. Our comprehensive product line, advanced
manufacturing capabilities, extensive polymer expertise and worldwide
infrastructure provide significant benefits to our customers.
4
Comprehensive Product Line
With over 10,000 products, we believe that we offer the broadest product
offering of materials integrity management solutions for the microelectronics
manufacturing industry. 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. Through the acquisition of NT International and internal
development programs, we now have advanced high purity fluid measurement
capabilities, including pressure measurement, flow measurement and flow control.
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. To complement our product offerings, we provide our customers the ability
to outsource their wafer, disk and device handling product cleaning,
maintenance, re-use, certification, recycling and product optimization
activities.
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, prototyping and assembly. These
capabilities, coupled with our strengths in advanced tool design and
mold-making, high volume manufacturing, quality assurance and polymer
reclaiming, enable us to be a leader in our markets.
Extensive Polymer Expertise
We have extensive research experience with the advanced polymer materials
used in our products. We have expertise in material evaluation, analytical
chemistry, polymer blending and quality assurance techniques. We understand the
properties of advanced polymers, how they interact with other materials used in
the semiconductor manufacturing process and how they address the varying
conditions of the manufacturing process.
Industry and Applications Knowledge
Throughout our 36-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, automation interface,
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 standard and unique 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 integrity
management needs of other markets. The key elements of our strategy to achieve
this objective are:
5
Expand Technological Leadership
Since our inception, we have been an innovator in materials integrity
management solutions for the semiconductor industry. For example, our chemical
delivery product line represents a number of industry firsts, including: the
first perfluoroalkoxy, or 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; the first pinch
valve; the first PFA fluid handling product line for biopharmaceutical
applications; and the first PFA non-wetted pressure and flow sensors designed
specifically for high purity and corrosive applications.
Additionally, we are a leading designer and manufacturer of 300mm materials
integrity management solutions with products such as front opening unified pods
(FOUPs), and reduced-pitch front opening shipping boxes, or FOSBs. Further, we
developed a unique wafer shipper designed to protect and transport extremely
delicate thinned wafers, which are used to achieve smaller packages, making
smaller size electronic devices possible. We intend to continue to expand the
scope of our technology leadership by: identifying and developing viable new
polymers for materials integrity management applications, developing innovative
product designs and advanced processes for molding difficult materials and
aiding the industry in establishing standards for materials integrity 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 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 us with the necessary infrastructure for our
Silicon Delivery Systems and Services (SDS2 ) and Disk Delivery Systems and
Services (DDS2) programs, which offer outsourced programs for wafer, device and
disk transportation and protection. Our WaferCareTM,, DeviceCareTM and
DiskCareTM Services include product cleaning, certified re-use services for
shipping products, on-site product maintenance and optimization, and end-of-life
recycling for our wafer, device and disk-handling products. Re-use services can
be customized depending on the customers needs to provide product cleaning,
logistics, recovery, certification and supply solutions for our products.
Expand in International Markets
We believe that further penetration of international markets, and
specifically, the Japanese market is important to our growth. Four of the
world's six 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. In addition, late in the second quarter of fiscal 2002, we
purchased the 49% minority interests held in our Fluoroware Valqua Japan K.K.
and Nippon Fluoroware K.K. subsidiaries for $5.2 million.
6
Pursue Selective Acquisitions
Although we currently have no agreements or commitments to acquire any
material 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 integrity 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 our 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.
We also acquired Atcor Corporation and Critical Clean Solutions (CCS) in
fiscal 2001. Atcor provides a variety of cleaning and drying technologies, and
CCS provides sub-micron cleaning services and re-use products to the
semiconductor, disk drive and high-technology industries. As a result of these
acquisitions, we are now in a position to provide comprehensive wafer handling
and disk care through our SDS2 and DDS2 systems.
Expand into New Industries
We believe that our materials integrity management expertise can be applied
outside the microelectronics industry to a variety of industries that use
sophisticated manufacturing processes and have critical materials integrity
management needs. For example, the life science market provides opportunities
for our polymer-based fluid handling products and application knowledge. This
includes the biopharmaceutical industry, where 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.
Increase Operational Efficiencies
During the last twelve months we have emphasized increasing manufacturing
efficiencies and reducing costs. We have created manufacturing "centers of
excellence" around the world and consolidated our manufacturing operations. We
estimate that we have reduced our fixed costs by about $10 million quarterly as
a result of this effort. Operational efficiencies will continue to be a focus as
we integrate acquisitions and continuously improve our processes.
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 in our
containers at the fab and then from the containers through our pipes, valves and
fittings 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. Through our unique, industry-leading SDS2 and DDS2
offerings, we provide our customers a complete, outsourced solution for wafer,
disk and device transportation and protections, which includes programs for
sub-micron product cleaning; certified product re-use, including cleaning,
recovery and supply logistics; on-site product maintenance and optimization; and
end-of-life recycling.
7
In addition to our product offerings, we offer outsourcing services, which
provide an opportunity to optimize the use of our products, increase
productivity and reduce total costs. We offer five major services:
o On-site service: our personnel provide sub-micron cleaning,
maintenance and optimization services, as well as training on our
products, at the customer's site;
o Sub-micron cleaning: we provide product cleaning and analysis services
at our regional service centers, which are located throughout the
world;
o Re-use services: we provide product-customized product re-use
solutions for wafer and disk shipping products, including cleaning,
certification, collection, logistics and JIT delivery;
o Recycle services: we provide environmentally sound end-of-life
disposition of our products;
o Field services: we provide repair and maintenance capability for our
products and cleaning equipment.
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. Continuing our technological leadership
in the market, we offer the FabFit300(TM) for the transportation and automated
interface of 300mm wafers. We offer a complete shipping system, including both
wafer shipping containers as well as secondary packaging that provide another
level of protection for wafers. This 300mm wafer system reduces the cleaning,
shipping and storage costs for semiconductor manufacturers and allows them to
optimize the use of their premium cleanroom space.
Wafer Handling Products We believe that we are a market leader in wafer handling
products. We offer a wide variety of products that hold and position wafers as
they travel between 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, SMIF 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.
Cleaning Systems and Services. We believe we are the only company currently
offering outsourcing programs for wafer and device transportation and protection
for both wafer manufacturing and wafer handling products. Our WaferCareTM, and
DeviceCareTM services include product cleaning, certified re-use services for
shipping products, on-site product maintenance and optimization, and end-of-life
recycling for our wafer, device and disk-handling products. Re-use services can
be customized depending on the customers needs to provide product cleaning,
logistics, recovery, certification and supply solutions for our products.
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. The products we offer
include products that measure and control the pressure and flow of these
chemicals in the fab and in the equipment used to make semiconductors. 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:
o Valves. We offer the Integra(R), Dymak(R) and Accuflo(TM) valves, each of
which were first in their respective applications. Our Integra(R) valve was the
first to feature no external metal parts, which can corrode and pose a safety
hazard when managing aggressive chemicals. Our Dymak(R) 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
8
pinch element allows greater resistance to chemical corrosion and offers lower
particle generation than competing valves. Our Accuflo(TM) metering valve is the
first to be molded entirely from PFA, which provides enhanced control for a
broad range of applications.
o Fittings. We provide fittings that have become the industry standard for high
purity chemical resistance. We offer three styles of tube fittings: Flaretek(R),
Quikgrip(R) and Galtek(R) fittings. Our Flaretek(R) 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
purity and resistance to corrosion in the semiconductor processing environment.
Our Quikgrip(R) fitting has a gripper design that features easy, user-friendly
assembly. Additionally, our Galtek(R) fittings represent the industry's first
all PFA fitting featuring an integral ferrule design for strength along with
chemical resistance features.
o Tubing. We offer three grades of FluoroLine(R) PFA tubing, which address our
customers' needs ranging from industrial to ultra high purity applications.
o Pipe. Our PUREBOND(R) fusable piping components provide leak-free piping
systems by fusion bonding over rigid pipe and components. Our patented method
for joining PFA components allows flexibility of design and assembly of fluid
delivery systems. We offer many component configuration sizes ranging from 1/4
inch to 2 inch inner diameters, meeting a wide range of customer design
requirements.
o Measurement and Control. We offer a wide variety of measurement and control
products for high purity and corrosive applications. For electronic measurement
and control, we provide a complete line of pressure and flow measurement and
control products through our subsidiary, NT International. NT International also
handles our patented line of all-plastic capacitance sensors for leak detection,
valve position, chemical level and other measurements. We also offer a complete
line of sight tube-style flowmeters and mechanical gauge pressure measurement
products.
o Chemical Containers. We offer a broad spectrum of chemical transport and
storage containers that help ensure the safe delivery of sophisticated chemicals
from chemical manufacturers to the semiconductor manufacturers' point-of-use.
Our containers are well suited for the microelectronics industry because they
help minimize contamination of chemicals to concentrations of parts per billion
and parts per trillion. Our sheet lining process allows us to provide containers
for bulk chemical storage and shipment of up to 19,000 liters. We offer a wide
variety of container types including drums, pressure vessels, intermediate bulk
containers, custom containers and bottles. In addition, we provide our patented
quick connect system, which enables safe, risk-free connections for chemical
container change-outs.
o Custom Fabricated Products. We offer a wide variety of custom-molded, welded
or fabricated fluid products, including custom valves, fittings, filter
housings, caps, closures, flanges and tanks. We manufacture these custom
products to meet stringent standards of consistency and safety by offering a
variety of high performance, chemically resistant materials.
Some of our valves fall within the scope of United States export licensing
regulations pertaining to products that could be used in connection with
chemical weapons processes. These regulations require us to obtain licenses to
ship some of our products to customers in certain countries, and we routinely
apply for and obtain export licenses. The applicable export licensing
regulations frequently change. Moreover, the types and categories of products
that are subject to export licensing are often described in the regulations in
general terms and could be subject to differing interpretations. We 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
9
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.
We recently introduced to the market our Stream(TM) product line, new tape and
reel product, which is a packaging system designed to protect and transport
microelectronic components, while enabling the high-speed automated placement of
the components onto printed circuit boards used for today's electronics.
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.
10
Customers
We have over 1,000 customers in North America, Europe and Asia, including
every major semiconductor manufacturer in the world. No single end-customer
accounts for over 5% of our sales. We provide products and solutions primarily
to semiconductor manufacturers and semiconductor equipment manufacturers,
chemical materials suppliers and data storage manufacturers. The following table
sets forth a list of major customers in each of the markets in which we operate.
- ------------------------------------- ----------------------------------------
Semiconductor Wafer Microelectronics and
Manufacturing Semiconductor Materials
- ------------------------------------- ----------------------------------------
MEMC Sumco Ashland Chemical Mykrolis
Shi Etsu Handotai Wacker Siltronic BOC Edwards Pall
(SEH) EKC Technology
- ------------------------------------- --------------------------- ------------
- --------------------------------------------------------------------------------
Semiconductor Device Manufacturing and Assembly
- --------------------------------------------------------------------------------
Agere Intel Micron Technology STATS
AMD IBM Motorola STMicroelectronics
Amkor/Anam Infineon NEC Texas Instruments
Fujitsu Lucent Philips TSMC
Hitachi LG International Samsung UMC
- --------------------------------------------------------------------------------
- --------------------------------------------- ---------------------------------
Semiconductor Equipment Manufacturing Data Storage Manufacturing
- --------------------------------------------- ---------------------------------
Applied Materials SCP Global Fujitsu MMC Technology
FSI International Technologies Hoya Seagate Technology
IBM Toyo Kohan
Komag
- --------------------------------------------- ---------------------------------
-------------------------------------------
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 our wholly-owned subsidiary, Fluoroware Valqua
Japan. 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 53% and 50% of our revenues in fiscal
2002 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, trade show participation and communications. Our marketing groups
based in the United States support our global marketing strategy, e-business and
other initiatives.
11
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 integrity 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:
o Injection Molding. Our manufacturing expertise is based on our long
experience with injection molding. Using molds produced from
computer-aided processes, our manufacturing technicians utilize
specialized injection molding equipment and operate within specific
protocols and procedures established to consistently produce precision
products.
o Extrusion. Extrusion is accomplished through the use of heat and force
from a screw to melt solid polymer pellets in a cylinder and then
forcing the resulting melt through a die to produce tubing and pipe.
We have established contamination free on-line laser marking and
measurement techniques to properly identify products during the
extrusion process and ensure consistency in overall dimension and wall
thickness.
o Blow Molding. Blow molding consists of the use of heat and force from
a screw to melt solid polymer pellets in a cylinder and then forcing
the melt through a die to create a hollow tube. The molten tube is
clamped in a mold and expanded with pressurized gas until it takes the
shape of the mold. We utilize advanced three-layer processing to
manufacture 55 gallon drums, leading to cost savings while
simultaneously assuring durability, strength and purity.
o Rotational Molding. Rotational molding is accomplished by the placing
of a solid polymer powder in a mold, placing the mold in an oven and
rotating the mold on two axes so that the melting polymer coats the
entire surface of the mold. This forms a part in the shape of the mold
upon cooling. We use rotational molding in manufacturing containers up
to 5,000 liters. Our rotational molding expertise has provided rapid
market access for our current fluoropolymer sheet lining manufacturing
business.
o Sheet Lining. Sheet lining consists of welding thin sheets of polymer
into a solid lining that conforms to the shape of a large vessel, such
as a tanker truck. We sheet line stainless steel tanks up to 19,000
liters in size through a complex adhesive and welding process that
provides customers with purity and strength for the high volume
storage and transportation of corrosive chemicals.
o Machining. Machining consists of the use of computer-controlled
equipment to create shapes, such as valve bodies, out of solid polymer
blocks or rods. Our computerized machining capabilities enable speed
and repeatability in volume manufacturing of our machined products,
particularly products utilized in chemical delivery applications.
o Assembly. We have established protocols, flow charts, work
instructions and quality assurance procedures to assure proper
assembly of component parts. The extensive use of robotics throughout
our facilities reduces labor costs, diminishes the possibility of
contamination and assures process consistency.
o Tool Making. We employ about 80 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 computer-aided design (CAD) equipment
allows us to develop three-dimensional electronic models of desired customer
products to guide design and tool-making activities. Our CAD equipment also aids
in the rapid prototyping of products.
12
We also use computer-automated engineering in the context of mold flow
analysis. Beginning with a three-dimensional CAD 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 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 analysis 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 31, 2002, we employed
approximately 165 people in our worldwide engineering, research and development
department. Of these, more than 25 work in our materials and product testing
research laboratories, where we conduct general materials research to enhance
current products and strengthen our advanced materials knowledge. The other
engineering, research and development personnel perform product design and
development in response to general market needs as well as specific industry and
customer requests. Increasingly, customers ask us to conduct research and
development to find materials, products and systems that meet their specific
materials handling needs.
We utilize sophisticated methodologies to develop and characterize our
materials and products. Our materials technology lab is equipped to analyze the
physical, rheological, thermal, chemical and compositional nature of the
polymers we use. Our materials lab includes standard and advanced polymer
analysis equipment such as inductively coupled plasma mass spectrometry
(ICP/MS), inductively coupled plasma atomic emission spectrometry (ICP/AES),
Fourier transform infrared spectroscopy (FTIR) and automated thermal desorption
gas chromatography/mass spectrometry (ATD-GC/MS). This advanced analysis
equipment allows us to detect contaminants in materials that could harm the
semiconductor manufacturing process to levels as low as parts per billion, and
in many 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 is located at our Chaska, Minnesota 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.
13
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. The table below presents certain
information relating to these manufacturing and related warehouse facilities.
- ----------------------------------------------------------------------------------------------------------------------
Manufacturing/ Operations
Location Square Footage Type of Ownership Manufacturing Use
- ----------------------------------------------------------------------------------------------------------------------
United States
- ----------------------------------------------------------------------------------------------------------------------
Minnesota 619,000 4 facilities owned, Injection Molding, Extrusion, Blow
3 facilities leased Molding, Rotational Molding, Tool
Making, Micro-molding, Sheet
Lining, Assembly, Operations,
Warehouse
Colorado 82,000 1 facility owned Injection Molding, Tool Making
California 114,000 1 facility owned, Custom Manufacturing, Product
2 facilities leased Cleaning Services, Equipment Assembly
Texas 20,000 1 facility leased Polymer Reclaiming
Oregon 15,000 1 facility leased Warehouse
Malaysia 105,000 1 facility owned Injection Molding
Singapore 15,000 1 facility leased Cleaning Services
Germany 44,000 1 facility owned Injection Molding, Extrusion
Japan 48,000 2 facilities owned, Injection Molding, Extrusion
1 facility leased
- ----------------------------------------------------------------------------------------------------------------------
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 integrity 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 integrity 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 31, 2002, our patent portfolio consisted of 125 current U.S.
patents and over 140 patents worldwide. We 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 ourselves 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
integrity management products and services in the microelectronics industry. We
compete on the basis of our technical expertise, product performance, advanced
manufacturing capabilities, global
14
locations, quality, reliability, established reputation, service 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 Saint-Gobain, 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.
Employees
As of August 31, 2002, we had approximately 1,720 full-time employees
throughout the world, including 1,095 in manufacturing, 165 in engineering,
research and development, including custom product development, and 460 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 1,290 are
located in the United States, about 125 are located in Europe and about 305 are
located in Asia. None of our employees is covered by a collective bargaining
arrangement. We consider our relationship with our employees to be good.
Legal Proceedings
See Item 3.
Financial Information about Segments and Geographic Areas
See Note 18 to the Consolidated Financial Statements contained under Items
8 and Item 15(a)(1).
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 to the present, have harmed our sales, gross profits and operating
results. Furthermore, even in periods of reduced demand, we must continue to
maintain a satisfactory level of research and development expenditures and
continue to invest in our infrastructure. We expect the semiconductor industry
to continue to be cyclical. Any future downturns will reduce revenue and
possibly increase pricing pressure, affecting both gross margin and net income.
15
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, order rates began to
decline rapidly late in the second quarter of 2001. Consequently, we experienced
significantly lower sales and earnings in the last half of 2001 and for fiscal
2002. We estimate that sales and earnings in the first quarter of fiscal 2003
will be less than the fourth quarter of fiscal 2002. We anticipate that
fluctuations in operating results will continue in the future. Such fluctuations
in our results could cause our share price to decline substantially. We believe
that period-to-period comparisons of our results of operations may not be
meaningful, and you should not rely upon them as indicators of our future
performance.
Our industry is subject to rapid technological change, and we may fail to
successfully anticipate customer needs and develop new products.
The microelectronics industry is subject to rapid technological change,
changing customer requirements and frequent new product introductions. Because
of this, the life cycle of our products is difficult to determine. Our future
success will depend, to a significant extent, on our ability to keep pace with
changes in the market and on our ability to enhance our current products and
introduce new products. For example, we must continue to identify new polymers,
improve our product design and qualify our products with our customers. We might
not successfully develop and introduce new products and materials in a timely
and cost-effective manner. Any product enhancements or new products developed by
us might not gain market acceptance. In addition, products or technologies
developed by competitors could make our products or technologies obsolete or
less competitive. If we do not anticipate or respond adequately to technological
developments or customer requirements, we could lose market share or miss market
opportunities.
International Risks
Continued terrorist attacks, war or other disturbances could lead to further
economic instability and decreases in demand for our products and could have a
material adverse effect on our operating results and financial condition.
The terrorist attacks of September 11, 2001 caused political and global
financial market instability. The long-term effects of the September 11 attacks
on our business are unknown. These attacks and the U.S. actions in Afghanistan
and the Middle East may lead to additional armed hostilities or to further acts
of terrorism and civil disturbance in the U.S. or elsewhere, which may further
contribute to economic instability and could have a material adverse effect on
our business, financial condition and results of operations.
We face risks from the uncertainty of prevailing economic conditions. Any
decrease in customer demand for our products as a result of market downturns
could have a material adverse effect on our business, financial condition and
results of operations.
During 2001 and 2002, the U.S. and other world markets experienced a
significant downturn and many of the markets that we serve were affected. As a
result of this downturn, customer demand decreased and our business and
financial results were adversely affected. Lower demand also negatively affects
our capacity utilization, which could reduce our operating margins. If this
economic slowdown were to continue for an extended period or if conditions were
to worsen, the negative impact on our business and financial results could be
further exacerbated. It is difficult for us to predict if, when or what extent
the markets we serve will recover.
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 and approximately 53% of
our revenues in fiscal 2002. 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
16
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.
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 2002, approximately
17% 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.
These risks could increase the cost of doing business internationally and
could prohibit or hinder our ability to do business in certain countries.
Strained relationships between China and Taiwan may effect our ability to
penetrate those markets.
Taiwan accounts for a significant portion of the world's semiconductor
manufacturing. Taiwan recently ended its ban on Taiwanese companies building
fabs in China, and as a result China is also an emerging market for our
products. We currently operate a sales office in Taiwan and intend to use Taiwan
as a base to launch operations in China, including a sales office. Our ability
to penetrate the emerging market in China will depend heavily on our ability to
develop business relationships there. Further, 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.
An increased concentration of wafer manufacturing in Japan could result in lower
sales of our wafer management and shipping products.
A large percentage of the world's wafer manufacturing currently takes place
in Japan. Our market share in Japan is currently low, and we believe that we
must increase our manufacturing capabilities in Japan in order to improve our
market share. If we are not able to successfully expand our manufacturing
capability and market share in Japan, we might not be able to maintain our
global market share in wafer manufacturing and handling products, especially if
wafer manufacturing in Japan increases.
Regulatory compliance impacts delivery times and reduces our ability to be
competitive in certain countries.
We are subject to federal, state, local and foreign regulations. Compliance
with future regulations, including environmental regulations in the United
States and abroad, could require us to incur substantial costs. If we do not
comply with current or future regulations, directives and standards, we could be
subject to fines; our production could be suspended or delivery could be
delayed; and we could be prohibited from offering particular products in
specified markets.
Certain of our fluid handling products fall within the scope of U.S. export
licensing regulations pertaining to products that could be used in connection
with chemical weapons processes. These regulations require us to obtain licenses
to ship some of our products to customers in certain countries, and we routinely
apply for and obtain export licenses. The applicable export licensing
regulations frequently change. Moreover, the types and categories of products
that are subject to export licensing are often described in the regulations in
general terms and could be subject to differing interpretations.
We are dependent on Metron Technology N.V. for a sizable 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 31, 2002, we derived 7% of our revenues from
customers that purchase our products through Metron Technology N.V., which
distributes our fluid handling 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
17
Metron decreased and stood at approximately 12% at August 31, 2002. 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 may enter into joint venture agreements intended to complement or expand
our manufacturing and distribution operations. 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. To cite another instance, Japan has been in a
prolonged recession, and our sales to customers in Japan have been relatively
weak since the second quarter of fiscal 2002. 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 plastic polymers
that are critical to the manufacturing of our products. At times, we have
experienced a limited supply of certain polymers as well as the need to
substitute polymers, resulting in delays, increased costs and the risks
associated with qualifying new polymers with our customers. 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.
In addition, suppliers may discontinue production of polymers specified in
certain of our products, requiring us in some instances to certify an
alternative with our customers. If we are unable to obtain an adequate quantity
of such supplies for any of the above reasons, our manufacturing operations may
be effected. Obtaining alternative sources would likely result in increased
costs and shipping delays, which could decrease profitability and damage our
relationships with current and potential customers.
Prices for polymers can vary widely. We have a long-term contract with a
key supplier of polymers that fixes our price for purchases of up to specified
quantities. If our polymer requirements exceed the quantities specified in the
contract, we could be exposed to higher material costs. If the cost of polymers
increases and we are unable to correspondingly increase the sales price of our
products, our profit margins would decline.
Our production processes are becoming increasingly complex, and our production
could be disrupted if we are unable to avoid manufacturing difficulties.
Our manufacturing processes are complex and require the use of expensive
and technologically sophisticated equipment and materials. These processes are
frequently modified to improve manufacturing yields and product quality. We have
on occasion experienced manufacturing difficulties, such as temporary shortages
of raw materials and occasional critical equipment breakdowns that have delayed
deliveries to customers. A number of our product lines are manufactured at only
one or two facilities, and any disruption could impact our sales until another
facility could commence or expand production of such products.
Our manufacturing operations are subject to numerous risks, including the
introduction of impurities in the manufacturing process that could lower
manufacturing yields and make our products unmarketable; the costs and demands
of managing and coordinating geographically diverse manufacturing facilities;
and the disruption of production in one or more facilities as a result of a
slowdown or shutdown in another facility.
18
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 countries with competing
manufacturers, as well as current and potential customers. Our inability or
failure to obtain adequate patent protection in a particular country could harm
our ability to compete effectively in that country. Our patents also might not
be sufficiently broad to protect our technology, and any existing or future
patents might be challenged, invalidated or circumvented. Additionally, our
rights under our patents may not provide competitive advantages.
Litigation may be necessary to defend us against claims of intellectual property
infringement, which if successful could cause us to pay significant damage
awards or prevent us from manufacturing or selling our products.
Some of our current or future products could infringe patents or
proprietary rights of others. Litigation may be necessary to enforce patents
issued to us, to protect our trade secrets or know-how, to defend ourselves
against claimed infringement of the rights of others or to determine the scope
and validity of the proprietary rights of others. Litigation could result in
substantial cost and diversion of our efforts. Moreover, an adverse
determination in any litigation could cause us to lose proprietary rights,
subject us to significant liabilities to third parties, require us to seek
licenses or alternative technologies from third parties, or prevent us from
manufacturing or selling our products.
Operating Risks
Our move to direct sale of our microelectronic products worldwide involves new
risks.
In January 2001, we terminated Metron Technology as distributor for our
microelectronic products worldwide, in favor of a direct sales force. We
established a global infrastructure team, hired key personnel and commenced
direct sales. Although we are no longer dependent on Metron Technology for
worldwide sales of our microelectronic products, we are subject to the risks
relating to direct sales, including, but not limited to, our ability to retain
key personnel and establish customer relationships.
19
At the time we terminated Metron as a distributor of our microelectronics
products, we entered into a new agreement with Metron for the continued
distribution of our fluid handling products.
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.
Competition for such personnel in the technology and semiconductor
industries is particularly intense. Recruiting and hiring employees with the
combination of skills and attributes required to conduct our business is
extremely competitive, time-consuming and expensive. We may not be able to
successfully identify, hire and train new manufacturing personnel.
If we fail to identify, complete and successfully integrate future acquisitions,
our ability to expand our operations and increase revenues would be harmed.
One of our strategies is to expand by acquiring other technologies, product
lines or businesses, including businesses of significant size requiring
substantial integration activity. However, we currently have no commitments or
agreements with respect to any material 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. Further, we cannot assure you that
all acquisitions undertaken by us would produce a positive impact on our
operating results.
Competition in the semiconductor materials integrity 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
integrity management solutions and products could emerge, with potentially
broader product lines. Larger competitors could spend more time and resources 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 have made substantial
investments to complete a full line of 300mm wafer manufacturing and handling
product lines, but a protracted industry slow-down has delayed customer
implementation of 300mm technology and otherwise allowed competitors to develop
products and to pressure pricing of our products. Our customers may not adopt
our 300mm wafer manufacturing and handling product lines. If we do not achieve
significant penetration of the 300mm market, our growth rate may not remain at
the levels it has maintained historically. 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.
20
Our management information and financial reporting systems are not fully
integrated and need to be upgraded, which will be costly. If these new systems
are not successfully implemented, our business may be harmed.
The management information and financial reporting systems that we use in
our day-to-day operations are not fully integrated 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. 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 integrity 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 integrity
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 integrity 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 liability claims that 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 are currently, or in the future, may be exposed to various risks related to
legal proceedings or claims.
We currently are, and in the future, may be, involved in legal proceedings
or claims regarding patent infringement, intellectual property rights, contracts
and other matters. These legal proceedings and claims, whether with or without
merit, could be time-consuming and expensive to prosecute or defend, and could
divert management's attention and resources. There can be no assurance regarding
the outcome of current or future legal proceedings or claims. If we are not able
to resolve a claim, negotiate a settlement of the matter, obtain necessary
licenses on commercially reasonable terms and/or successfully prosecute or
defend its position, our business, financial condition and results of operations
could be materially and adversely affected.
Specifically, in September 2002, the Company was named as a defendant along
with three companies in an action filed for damages arising from a chemical
spill at a customer's facility in January 2000. While the outcome of this matter
cannot be predicted with any certainty, based on the information to date, the
Company believes that it has adequate insurance to cover any damages assessed
against the Company and as such, does not believe that the matter will have a
material adverse effect on its financial position, operating results or cash
flows.
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
21
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.
Certain of our long-lived assets have and others may become other than
temporarily impaired, including our investment in Metron Technology N.V.
Our investment in Metron Technology N.V. (Metron), has a carrying value on
the balance sheet of approximately $7.6 million. The fair value of Metron is
subject to stock market fluctuations. Based on the closing stock price of Metron
Technology of $2.84 per share on August 31, 2002, the fair value of our
investment in Metron was approximately $4.4 million, or $3.2 million less than
the carrying value on our balance sheet. While we determined at August 31, 2002
that our investment in Metron Technology was not other than temporarily
impaired, it is possible that an impairment loss could be recorded in connection
with our Metron investment depending on a variety of factors.
Because of the volatility of our stock price, the ability to trade Entegris
common shares may be adversely affected and our ability to raise capital through
future equity financing may be reduced.
Our stock price has been volatile in the past and may continue to be so in
the future. In the 2002 fiscal year, for example, our stock price ranged from
$6.60 to $19.05 per share.
The trading price of our common shares is subject to wide fluctuations in
response to various factors, some of which are beyond our control, including
factors discussed elsewhere in this report and including the following: the
failure to meet the published expectations of securities analysts for a given
quarterly period; changes in financial estimates by securities analysts; press
releases or announcements by, or changes in market values of, comparable
companies; stock market price and volume fluctuations, which are particularly
common among securities of high technology companies; stock market price and
volume fluctuations attributable to inconsistent trading volume levels;
additions or departures of key personnel; and involvement in or adverse results
from litigation.
Changes to financial accounting standards may affect our reported results of
operations.
We prepare our financial statements to conform with accounting principles
generally accepted in the United States of America ("GAAP"). The GAAP are
subject to interpretation by the American Institute of Certified Public
Accountants, the Securities and Exchange Commission and various bodies formed to
interpret and create appropriate accounting policies. A change in those policies
can have a significant effect on our reported results and may even affect our
reporting of transactions completed before a change is announced.
Accounting policies affecting many other aspects of our business, including
rules relating to purchase accounting for business combinations, revenue
recognition, accounting for goodwill and other intangible assets, employee stock
purchase plans and stock option grants, have recently been revised or are under
review. Changes to those rules or the questioning of our current accounting
practices may have a material adverse effect on our reported financial results
or on the way we conduct business. In addition, our preparation of financial
statements in accordance with GAAP requires that it make estimates and
assumptions that affect the recorded amounts of assets and liabilities,
disclosure of those assets and liabilities at the date of the financial
statement and the recorded amounts of expenses during the reporting period. A
change in the facts and circumstances surrounding those estimates could result
in a change to our estimates and could impact its future operating results.
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.
22
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 619,000 4 facilities owned, Injection Molding, Extrusion, Blow
3 facilities leased Molding, Rotational Molding, Tool Making,
Micro-molding, Sheet Lining, Assembly,
Operations, Warehouse
- ----------------------------------------------------------------------------------------------------------------------
Colorado 82,000 1 facility owned Injection Molding, Tool Making
- ----------------------------------------------------------------------------------------------------------------------
California 114,000 1 facility owned, Custom Manufacturing, Product
2 facilities leased Cleaning Service, Equipment Assembly
- ----------------------------------------------------------------------------------------------------------------------
Texas 20,000 1 facility leased Polymer Reclaiming
- ----------------------------------------------------------------------------------------------------------------------
Oregon 15,000 1 facility leased Warehouse
- ----------------------------------------------------------------------------------------------------------------------
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 2 facilities owned, Injection Molding, Extrusion
1 facility leased
- ----------------------------------------------------------------------------------------------------------------------
ITEM 3. LEGAL PROCEEDINGS
In September 2002, the Company was named as a defendant along with three
companies in an action filed for damages arising from a chemical spill at a
customer's facility in January 2000. While the outcome of this matter cannot be
predicted with any certainty, based on the information to date, the Company
believes that it has adequate insurance to cover any damages assessed against
the Company and as such, does not believe that the matter will have a material
adverse effect on its financial position, operating results or cash flows.
In addition, from time to time, the Company is a party to various legal
proceedings incidental to its normal operating activities. Although it is
impossible to predict the outcome of such proceedings, facts currently available
indicate that no such claims will result in losses that would have a material
adverse effect on the financial condition, results of operations or cash flows
of the Company.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders, 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, are traded on the NASDAQ
National Market System (NMS) under the symbol "ENTG". The following table sets
forth the highest and lowest sale prices at the close of each day, as reported
by the NASDAQ-NMS, for the fiscal periods indicated:
- ------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2002
- ------------------------------------------------------------------------------
High Low High Low
- ------------------------------------------------------------------------------
First quarter $11.38 $7.00 $12.60 $ 6.60
- ------------------------------------------------------------------------------
Second quarter $ 9.63 $6.50 $12.86 $ 8.94
- ------------------------------------------------------------------------------
Third quarter $13.40 $6.38 $19.05 $11.00
- ------------------------------------------------------------------------------
Fourth quarter $15.60 $9.65 $15.12 $ 8.27
- ------------------------------------------------------------------------------
23
There were approximately 238 shareholder accounts of record on October 31,
2002, and the number of beneficial shareholders was estimated to be 6,000.
The Company has never declared or paid cash dividends on its common stock.
The Company currently intends to retain all earnings for use in its business,
and does not anticipate paying dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The table that follows presents selected financial data for each of the
last six fiscal years from the Company's consolidated financial statements. You
should read the following selected consolidated financial data in conjunction
with the Company's Consolidated Financial Statements and the related Notes and
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Form 10-K Report.
(Amounts in thousands, except per share
data) 2002 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Results (1)
Net sales $219,831 $342,444 $343,465 $241,952 $266,591 $277,290
Gross profit 88,706 162,670 160,442 92,230 109,734 119,238
Operating profit (3,834) 54,499 72,108 15,325 24,711 38,868
Income before income taxes (1,395) 60,110 74,631 11,677 17,989 30,015
Net income 2,776 38,616 47,933 5,965 13,130 19,216
Earnings per share outstanding-diluted 0.04 0.53 (0.02) (2.53) 0.21 0.31
Weighted shares outstanding-diluted 74,170 72,995 43,609 36,708 61,492 61,786
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Ratios
Gross profit 40.4% 47.5% 46.7% 38.1% 41.2% 43.0%
Operating profit (1.7)% 15.9% 21.0% 6.3% 9.3% 14.0%
Income before income taxes (0.6)% 17.6% 21.7% 4.8% 6.7% 10.8%
Net income 1.3% 11.3% 14.0% 2.5% 4.9% 6.9%
Effective tax rate 241.8% 35.5% 35.8% 38.7% 25.4% 39.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Flow Statement Data
Depreciation and amortization $28,164 $24,260 $27,246 $28,810 $26,591 $23,395
Capital expenditures 19,568 24,331 21,376 10,079 33,512 44,928
- ------------------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data
Current assets $216,735 $220,037 $221,414 $110,279 $101,155 $122,761
Current liabilities 39,621 61,253 62,544 58,372 56,567 69,006
Working capital 177,114 158,784 158,870 51,907 44,588 53,755
Current ratio 5.47 3.59 3.54 1.89 1.79 1.78
Total assets 390,260 405,815 353,368 246,978 257,475 213,643
Long-term debt 12,691 13,101 10,822 53,830 73,242 75,971
Shareholders' equity (deficit) 322,114 312,307 266,844 (17,840) 73,304 35,421
(1) Operating results in fiscal 2002 included a charge of $4.0 million
($2.5 million after taxes) in connection with the closure of a
facility, the reversal of previous nonrecurring charges of $2.4
million ($1.5 million after taxes) and a one-time tax benefit of $1.4
million. 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 stock. Fiscal
year 1999 results exclude a charge of $4.9 million ($3.1 million after
taxes) associated with merger-related expenses.
24
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., which began operating in 1966, and
EMPAK, Inc., which began operating in 1980. The business combination was
accounted for as a pooling of interests. Accordingly, the historical financial
statements of Entegris 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
semiconductor and data storage industries and generally 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 31,
2002, August 25, 2001 and August 26, 2000. Fiscal 2002 comprises 53 weeks, while
fiscal years 2001 and 2000 included 52 weeks. Fiscal years are identified in
this report according to the calendar year in which they end. For example, the
fiscal year ended August 31, 2002 is alternatively referred to as "fiscal 2002"
or "2002".
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, assumptions 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 affected
significantly by estimates, assumptions and judgments used in the preparation of
the Company's financial statements 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
25
determining its allowance for doubtful accounts. At August 31, 2002 and August
25, 2001, the Company's allowance for doubtful accounts was $1.8 million and
$1.6 million, respectively.
A reserve for sales returns and allowances is established based on historical
trends and current trends in product returns. At August 31, 2002 and August 25,
2001, the Company's reserve for sales returns and allowances was $1.2 million
and $1.9 million, respectively.
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. At August 31, 2002 and August 25, 2001, the Company's accrual for
estimated future warranty costs was $0.7 million and $1.0 million, respectively.
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. At August 31, 2002 and August 25, 2001, inventory reserves were $5.8
million and $5.8 million, respectively.
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.
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 assesses the impairment of intangible assets and related goodwill 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:
o significant underperformance relative to historical or projected
future operating results;
o significant changes in the manner of use of the acquired assets or the
Company's overall business strategy;
o significant negative industry or economic trends; and
o significant decline in the Company's stock price for a sustained
period changing the Company's market capitalization relative to its
net book value;
The Company's marketable equity securities are periodically reviewed to
determine if declines in fair value below cost basis are other-than-temporary.
At August 31, 2002, the Company's investment in Metron Technology N.V. had a
carrying value of $7.6 million with a fair value of $4.2 million. If the decline
in fair value is determined to be other-than-temporary, an impairment loss will
be recorded and the investment written down to a new cost basis.
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.
26
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. At August 31, 2002, the Company carried
a valuation allowance of $1.4 million against its net deferred tax assets with
respect to certain foreign net operating loss carryforwards.
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 2002, 2001 and
2000. 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
- -------------------------------------------------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of sales 59.6 52.5 53.3
- -------------------------------------------------------------------------------
Gross profit 40.4 47.5 46.7
Selling, general and administrative expenses 33.5 22.9 21.3
Engineering, research and development expenses 7.9 4.8 4.4
Nonrecurring charges 0.7 3.8 --
- -------------------------------------------------------------------------------
Operating (loss) profit (1.7) 15.9 21.0
Interest (income) expense, net (0.7) (1.3) 0.7
Other income, net (0.4) (0.3) (1.4)
- -------------------------------------------------------------------------------
(Loss) income before income taxes and other
items below (0.6) 17.6 21.7
Income tax expense (benefit) (1.5) 6.2 7.8
Equity in net income of affiliates -- (0.4) (0.5)
Minority interest (0.4) 0.5 0.1
- -------------------------------------------------------------------------------
Income before extraordinary item 1.3 11.3 14.3
Extraordinary loss on extinguishment of debt, net
of taxes -- -- (0.3)
- -------------------------------------------------------------------------------
Net income 1.3 11.3 14.0
===============================================================================
Fiscal 2002 Compared to Fiscal 2001
Net sales. Net sales were $219.8 in fiscal 2002, down 36% from $342.4 million in
fiscal 2001. The decline reflected the continuation of weakened business
conditions in the semiconductor industry that began in the second half of fiscal
2001, as the semiconductor industry experienced unprecedented deterioration in
market conditions, with rapidly falling rates of factory utilization and reduced
capital spending. The sales decrease was attributable to softer demand for both
fluid handling products, which generally depend on capital spending levels, and
microelectronics products, which also depend on the manufacturing utilization of
semiconductor industry. Although the Company reported sequentially higher
quarterly sales as fiscal 2002 progressed, fourth quarter revenues were still
significantly below the record levels experienced in the first half of 2001.
Fiscal 2002 sales for the Microelectronics Group were down 28% from fiscal 2001
and accounted for about 76% of Entegris sales. Fluid Handling sales in 2002 were
down 52% from a year ago, making up 24% of total sales.
Revenue declines were recorded in all geographic regions, with approximately 40%
year-to-year declines experienced for North America, Europe and Japan, while
sales to the Asia Pacific region fell just 13%, which reflects a nominal
decrease of Microelectronics Group product sales to that region. Overall,
international sales accounted for approximately 53% of net sales in fiscal 2002,
up from 50% in fiscal 2001. Fiscal 2002 sales were 47% to North America, 21% to
Asia Pacific, 16% to Europe and 16% to Japan.
Based on current order rates, industry analyst expectations and other
information, the Company expects that sales for the first quarter of fiscal 2003
will be approximately 20% lower than sales levels experienced in the fourth
quarter of fiscal 2002. However, industry volatility and uncertain global market
conditions make it difficult to forecast for future quarters.
27
Gross profit. Gross profit in fiscal 2002 decreased 45% to $88.7 million,
compared to $162.7 million in fiscal 2001. The Company's gross margin for fiscal
2002 was 40.4% compared to 47.5% for fiscal 2001. Gross margin and gross profit
declines were reported by both domestic and international operations. The drop
in fiscal 2002 figures was primarily caused by the lower sales levels noted
above, which resulted in lower factory utilization. Gross profit levels
generally improved throughout the year as sales increased sequentially by
quarter.
Partly offsetting the declines was the benefit of the Company's 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. The Company also recorded
lower asset impairment charges in 2002, incurring charges of $1.1 million and
$3.5 million in 2002 and 2001, respectively, mainly for asset write-offs of
molds.
As discussed above, the Company cannot provide guidance about fiscal 2003 sales
levels. However, in general, gross profit and gross margin variances mainly
track the utilization of the Company's production capacity associated with
varying sales levels.
Selling, general and administrative expenses (SG&A). SG&A expenses decreased
$4.9 million, or 6%, to $73.6 million in fiscal 2002 from $78.5 million in
fiscal 2001. The decline is primarily due to significantly lower incentive
compensation and charitable contribution accruals, which are based on the
Company's results of operations, offset partly by increased expenditures for
information systems and the continued building of the Company's global
infrastructure which began in fiscal 2001. SG&A costs, as a percent of net
sales, increased to 33.5% from 22.9% with the impact of lower SG&A expenses more
than offset by the effect of lower net sales.
Nonrecurring charges (reversals). 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 plant. 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.
The Company recorded pre-tax benefits of $1.6 million and $0.8 million in the
third quarter and fourth quarters of 2002, respectively, associated with the
reversal of previous accruals related to plant closures in 2002 and 2001.
Approximately $1.0 million of the reversals was associated with the favorable
settlement of future lease commitments on the Castle Rock facility, for which
the Company had recorded accruals in 2001. Lower than expected impairment costs
accounted for approximately $1.2 million of the reversals.
Operating results in fiscal 2001 included two nonrecurring charges. In fiscal
2001, the Company recorded a charge of $8.2 million related to the early
termination of a distribution agreement and a $4.9 million charge in connection
with the closing of its Castle Rock, Colorado and Munmak, Korea facilities. Both
charges are described in greater detail below.
As of August 31, 2002, $0.2 million remained outstanding in connection with the
aforementioned nonrecurring charges
Engineering, research and development expenses (ER&D). ER&D expenses increased
5% to $17.4 million, or 7.9% of net sales, in fiscal 2002 as compared to $16.5
million, or 4.8% of net sales, in fiscal 2001. In fiscal 2002, the Company's
expenditures were focused on supporting current product lines, developing new
manufacturing technologies and developing next generation products for new and
existing markets.
Interest (income) expense, net. The Company reported net interest income of $1.5
million in fiscal 2002 compared to $4.5 million in fiscal 2001. The change
reflects the significantly lower rates of interest earned on cash equivalents
and short-term investments and a shift in the mix of such investments towards
tax-exempt debt securities.
Other income, net. Other income was $1.0 million in fiscal 2002 compared to $1.1
million in fiscal 2001. Other income in fiscal 2002 consisted primarily of the
foreign currency gains, with about $0.7 million associated with the realization
of translation gains from the liquidation of the Company's Korean entity, while
other income in fiscal 2001 included foreign currency translation gains offset
by losses on sales of property and equipment.
Income tax expense (benefit). The Company recorded an income tax benefit of $3.4
million for fiscal 2002 compared to income tax expense of $21.3 million in
fiscal 2001. The effective tax rate for fiscal 2002 was 241.8%
28
compared to 35.5% in fiscal 2001. The variance primarily reflects the
significant difference in the Company's pre-tax operating results. The income
tax benefit in fiscal 2002 includes a one-time benefit of $1.4 million related
to the repatriation of earnings from certain non-U.S. subsidiaries, while income
tax expense in fiscal 2001 includes a $1.6 million tax benefit associated with
the closure of the Company's Korean manufacturing operations, losses of which
were previously non-deductible. The Company expects an effective tax rate of
about 38% in fiscal 2003.
Equity in net income of affiliates. The Company recorded no equity in the net
income of affiliates in fiscal 2002 compared to $1.5 million in fiscal 2001, all
of which was recorded in the first half of that fiscal year. This reflects the
change in accounting for the Company's investment in Metron Technology N.V.
(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 equity security, as our percentage
ownership in Metron was reduced from 20% to 12%.
Minority interest. For fiscal 2002, the minority interest in subsidiaries' net
loss was $0.8 million, reflecting the operating losses of the Company's formerly
51%-owned Japanese subsidiaries in the first half of the year. The company
purchased the 49% minority interests in these entities in February 2002. This
compares to minority interest in subsidiaries' net income of $1.6 million for
fiscal 2001.
Net income. Net income decreased to $2.8 million, or $0.04 per share diluted, in
fiscal 2002, compared to net income of $38.6 million, or $0.53 per share
diluted, in fiscal 2001. Excluding the effects of nonrecurring charges and
reversals in fiscal 2002 and 2001, pro forma diluted earnings per share declined
to $0.03 from $0.62 per share in 2001.
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.
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 reflect 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.
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 is 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 includes higher expenditures for
information systems.
Nonrecurring charges. Operating results in fiscal 2001 include 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 the Microelectronics Group product sales in Europe
29
and Asia, and transferred to Metron 1.125 million shares of Metron stock and
agreed to make future cash payments 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 includes $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 includes $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 from operations 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
$5.5 million gain recognized in fiscal 2000 on the sale of approximately 612,000
shares of the Company's investment in Metron. Other income in fiscal 2001
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.
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 (wholly-owned as of February 2002).
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.
30
Quarterly Results of Operations
The table below presents selected data from the Company's consolidated
statements of operations for the eight quarters ended August 31, 2002. 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 principally due to improved utilization of production capacity,
and often a more favorable product sales mix. During the last two quarters of
fiscal 2001 and through fiscal 2002, the Company's sales levels fell to well
below those reported in the first half of 2001, reflecting the downturn in the
global semiconductor industry, including significant cutbacks in industry
capital spending. Quarterly sales levels improved sequentially through fiscal
2002, but were still nearly 40% lower than sales experienced in the first half
of 2001. Consequently, the Company experienced lower utilization in its
manufacturing operations, leading to generally lower gross profits and earnings
in 2002.
Net income in the second quarter of fiscal 2001 includes a pretax charge of $8.2
million related to the termination of a distribution agreement. Net income in
the third quarter of 2001 includes a $4.9 million pretax charge in connection
with the closure of two facilities.
In the first quarter of fiscal 2002, the Company's results include a pretax
charge of $4.0 million in connection with the closure of an additional plant. In
the third and fourth quarters of 2002, the Company recorded pre-tax benefits of
$1.6 million and $0.8 million, respectively, associated with the reversal of
aforementioned pretax charges related to plant closures. Also in the third
quarter of 2002, the Company recognized a one-time tax benefit of $1.4 million.
STATEMENTS OF OPERATIONS DATA
- -------------------------------------------------------------------------------------------------------------------
Fiscal 2001 Fiscal 2002
- -------------------------------------------------------------------------------------------------------------------
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales ......................... $102,639 $105,712 $81,346 $52,747 $45,852 $50,702 $59,709 $63,568
Gross profit ...................... 52,552 53,601 37,890 18,627 15,195 16,938 28,127 28,446
Selling, general and
administrative expenses ........... 21,235 19,727 18,761 18,787 17,630 17,566 19,299 19,074
Engineering, research and
development expenses ............... 3,533 4,035 4,697 4,252 4,041 4,475 4,228 4,664
Operating profit (loss) ............ 27,784 21,629 9,498 (4,412) (10,477) (5,103) 6,240 5,506
Net income (loss) before
extraordinary item ................. $18,112 $13,784 $ 8,428 $(1,708) $(5,916) $(1,386) $ 5,226 $ 4,852
- -------------------------------------------------------------------------------------------------------------------
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 ........................ 51.2 50.7 46.6 35.3 33.1 33.4 47.1 44.7
Selling, general and
administrative expenses ............. 20.7 18.7 23.1 35.6 38.4 34.6 32.3 30.0
Engineering, research and
development expenses ................ 3.4 3.8 5.8 8.1 8.8 8.8 7.1 7.3
Operating profit (loss) ............. 27.1 20.5 11.7 (8.4) (22.8) (10.1) 10.5 8.7
Net income (loss) ................... 17.6 13.0 10.4 (3.2) (12.9) (2.7) 8.8 7.6
- -------------------------------------------------------------------------------------------------------------------
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.
31
Operating activities. Cash flow provided by operating activities totaled $32.9
million, $80.0 million and $64.1 million in fiscal 2002, 2001 and 2000,
respectively. The decline in fiscal 2002 compared to the two previous years
mainly reflects net earnings in 2002. In 2002, noncash charges, such as
depreciation and amortization of $28.2 million, as well as decreases in
inventory of $8.4 million, accounts receivable of $3.8 million and refundable
income taxes of $7.2 million, partly offset by a $21.7 million reduction in
accounts payable and accruals, accounted for the cash flow provided by
operations. Working capital stood at $177.1 million at August 31, 2002,
including $74.8 million in cash and cash equivalents, and short-term investments
of $44.6 million.
Investing activities. Cash flow used in investing activities totaled $38.3
million, $110.1 million and $15.8 million in 2002, 2001 and 2000, respectively.
Acquisition of property and equipment totaled $19.6 million, $24.2 million and
$21.4 million in 2002, 2001 and 2000, respectively. Significant capital
expenditures in 2002 included the expansion of the Company's Gilroy, California
facility, site of its cleaning service business and expenditures for
manufacturing equipment and information systems.
The Company expects capital expenditures of approximately $25 million during
fiscal 2003, consisting mainly of spending on manufacturing equipment, tooling
and information systems.
Acquisition of businesses totaled $8.9 million and $43.0 million in 2002 and
2001, respectively. The Company completed two transactions in 2002. In August
2002, the Company acquired assets related to products serving the semiconductor
tape and reel market for $2.0 million. Identifiable intangible assets,
consisting principally of proprietary knowledge, of approximately $1.8 million
were recorded in connection with the transaction. In February 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 $5.2 million.
Identifiable intangible assets of approximately $1.3 million were recorded in
connection with the transaction.
The Company made purchases, net of maturities, of $8.0 million and $36.6 million
of debt securities classified as short-term investments in 2002 and 2001,
respectively. Short-term investments stood at $44.6 million at August 31, 2002.
Financing activities. Cash provided by financing activities totaled $5.6
million, $2.0 million and $38.3 million in fiscal 2002, 2001 and 2000,
respectively.
The Company recorded proceeds of $5.5 million and $4.7 million in 2002 and 2001,
respectively, in connection with common shares issued under the Company's stock
option and stock purchase plans.
The Company made payments on short-term borrowings and long-term debt totaled
$13.7 million in fiscal 2002, while proceeds from borrowings were $13.8 million.
On July 11,2000, 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 and $10.4 million in 2001
and 2000, 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 31, 2002, the Company's sources of available funds comprised $74.8
million in cash and cash equivalents, $44.6 million in short-term investments
and various credit facilities. Entegris has unsecured revolving credit
commitments with two commercial banks with aggregate borrowing capacity of $20
million, with no borrowings outstanding at August 31, 2002 and lines of credit
with seven international banks that provide for borrowings of currencies for our
overseas subsidiaries, equivalent to an aggregate $13.4 million. Borrowings
outstanding on these lines of credit were $8.9 million at August 31, 2002. The
company also owed $0.5 million in other short-term bank borrowings not subject
to formal credit agreements at August 31, 2002.
At August 31, 2002, the Company's shareholders' equity stood at $322.1 million.
Book value per share was $4.53, up from $4.48 per share at the end of fiscal
2001. The impact of net earnings and proceeds from the issuance of
32
shares issued under the Company's stock option and stock purchase plans was
offset partly by a $4.2 million change in accumulated comprehensive income
(loss) and the effect of additional common shares outstanding.
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 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, it retains many of the fundamental provisions of
that Statement. SFAS No. 144 becomes effective for the Company at the beginning
of its fiscal year ended August 30, 2003. Adoption is not expected to have an
impact on the Company's results of operations or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities," which addresses accounting for restructuring and
similar costs. SFAS No. 146 supercedes previous accounting guidance and is
required for restructuring activities initiated after December 31, 2002. SFAS
No. 146 requires the recognition of the liability for costs associated with exit
or disposal activities as incurred, whereas previous accounting guidance
required that a liability be recorded when the Company committed to an exit
plan.
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 31, 2002
carried fixed rates of interest. The Company's cash equivalents and short-term
investments are debt instruments with maturities of 12 months or less. A 10%
change in interest rates would potentially increase or decrease net income by
approximately $0.8 million.
The Company uses derivative financial instruments to manage foreign currency
exchange rate risk associated with the sale of products in currencies other than
the U.S. dollar. At August 31, 2002 the company was party to forward contracts
with notional value of $1.7 million. 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.
The Company's investment in Metron common stock is accounted for as an
available-for-sale security. The company is exposed to fluctuations in the price
of Metron stock. A 25% adverse change in Metron's per share price would result
in an approximate $1.1 million decrease in the fair value of the Company's
investment as of August 31, 2002.
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 2002.
Moderate increases also can be reasonably anticipated for fiscal 2003.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item can be found 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.
33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
August 31, August 25,
2002 2001
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 74,830 $ 74,451
Short-term investments ............................................................ 44,624 36,628
Trade accounts receivable, net of allowance for doubtful accounts of
$1,798 and $1,608, respectively ................................................. 35,371 36,303
Trade accounts receivable due from affiliates ..................................... 4,219 7,171
Inventories ....................................................................... 38,859 47,202
Deferred tax assets and refundable income taxes ................................... 16,039 10,424
Other current assets .............................................................. 2,793 7,858
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets .......................................................... 216,735 220,037
- ---------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net ..................................................... 102,104 109,131
Other assets:
Investments ....................................................................... 7,883 12,295
Intangible assets, less accumulated amortization of $9,423 and $5,968,
respectively .................................................................... 61,604 61,903
Other ............................................................................. 1,934 2,449
- ---------------------------------------------------------------------------------------------------------------------------
Total assets .................................................................. $390,260 $405,815
===========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .............................................. $ 2,144 $ 2,238
Short-term borrowings ............................................................. 9,421 8,813
Accounts payable .................................................................. 7,977 16,572
Accrued liabilities ............................................................... 20,079 33,630
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities ..................................................... 39,621 61,253
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities ................................................ 12,691 13,101
Deferred tax liabilities ............................................................... 15,802 14,087
Minority interest in subsidiaries ...................................................... 32 5,067
Commitments and contingent liabilities ................................................. -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities ............................................................. 68,146 93,508
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock, par value $.01; 200,000,000 shares authorized;
issued and outstanding shares; 71,160,539 and 69,729,821,
respectively .................................................................... 712 697
Additional paid-in capital ........................................................ 132,676 121,449
Retained earnings ................................................................. 190,932 188,156
Accumulated other comprehensive (loss) income ..................................... (2,206) 2,005
- ---------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity .................................................... 322,114 312,307
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity .................................... $390,260 $405,815
===========================================================================================================================
See the accompanying notes to consolidated financial statements.
34
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Years ended
- --------------------------------------------------------------------------------------------------------------------------
August 31, 2002 August 25, 2001 August 26, 2000
- --------------------------------------------------------------------------------------------------------------------------
Sales to non-affiliates ................................................. $190,954 $239,771 $245,286
Sales to affiliates ..................................................... 28,877 102,673 98,179
- --------------------------------------------------------------------------------------------------------------------------
Net sales ....................................................... 219,831 342,444 343,465
Cost of sales ........................................................... 131,125 179,774 183,023
- --------------------------------------------------------------------------------------------------------------------------
Gross profit .................................................... 88,706 162,670 160,442
Selling, general and administrative expenses ............................ 73,569 78,510 73,293
Engineering, research and development expenses .......................... 17,408 16,517 15,041
Nonrecurring charges .................................................... 1,563 13,144 --
- --------------------------------------------------------------------------------------------------------------------------
Operating (loss) profit ......................................... (3,834) 54,499 72,108
Interest (income) expense, net .......................................... (1,466) (4,477) 2,422
Other income, net ....................................................... (973) (1,134) (4,945)
- --------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes and other items
below ...................................................... (1,395) 60,110 74,631
Income tax (benefit) expense ............................................ (3,373) 21,339 26,754
Equity in net income of affiliates ...................................... -- (1,488) (1,694)
Minority interest in subsidiaries' net (loss) income .................... (798) 1,643 489
- --------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item ................................ 2,776 38,616 49,082
Extraordinary loss on extinguishment of debt, net of taxes .............. -- -- (1,149)
- --------------------------------------------------------------------------------------------------------------------------
Net income ...................................................... 2,776 38,616 47,933
Market value adjustment to redeemable common stock. ..................... -- -- (48,602)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to nonredeemable
common shareholders ........................................... $ 2,776 $ 38,616 $ (669)
==========================================================================================================================
Earnings (loss) per nonredeemable common share:
Basic
Income before extraordinary item ........................... $0.04 $0.56 $ 0.01
Extraordinary loss on extinguishment of debt, net of
taxes .................................................... -- -- (0.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) .......................................... $0.04 $0.56 $(0.02)
==========================================================================================================================
Diluted
Income before extraordinary item ........................... $0.04 $0.53 $ 0.01
Extraordinary loss on extinguishment of debt, net of
taxes .................................................... -- -- (0.03)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) .......................................... $0.04 $0.53 $(0.02)
==========================================================================================================================
See the accompanying notes to consolidated financial statements.
35
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Accumulated
Common Additional other Comprehensive
shares Common paid-in Retained comprehensive income
outstanding stock capital earnings income (loss) Total (loss)
- ------------------------------------------------------------------------------------------------------------------------
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)
Net unrealized 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)
Net unrealized 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
Shares issued pursuant to stock
option plans ...................... 1,222 12 3,959 -- -- 3,971
Shares issued in connection with
acquisition ....................... 41 1 437 -- -- 438
Shares issued pursuant to employee
stock purchase plan ............... 168 2 1,540 -- -- 1,542
Tax benefit associated with
employee stock plans .............. -- -- 5,291 -- -- 5,291
Foreign currency translation
adjustment ........................ -- -- -- -- (71) (71) $ (71)
Net unrealized loss on
marketable securities ............. -- -- -- -- (4,140) (4,140) (4,140)
Net income .......................... -- -- -- 2,776 -- 2,776 2,776
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive income (loss) ... $(1,435)
==============
Balance at August 31, 2002 ............... 71,161 $712 $132,676 $190,932 $(2,206) $322,114
===========================================================================================================
See the accompanying notes to consolidated financial statements.
36
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Years ended
- ----------------------------------------------------------------------------------------------------------------------------
August 31, 2002 August 25, 2001 August 26, 2000
- ----------------------------------------------------------------------------------------------------------------------------
Operating activities:
Net income ........................................................... $ 2,776 $ 38,616 $ 47,933
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization ................................ 28,164 24,260 27,246
Asset impairment ............................................. 1,136 3,526 5,937
Provision for doubtful accounts .............................. 133 (482) 1,493
Provision for deferred income taxes .......................... (791) (1,894) 382
Tax benefit from employee stock plans ........................ 5,291 3,413 --
Equity in net income of affiliates ........................... -- (1,488) (1,694)
Loss on sale of property and equipment ....................... 185 956 811
Gain on sale of investment in affiliate ...................... -- -- (5,468)
Minority interest in subsidiaries' net (loss) income ......... (798) 1,459 489
Changes in operating assets and liabilities:
Trade accounts receivable .................................. 859 10,666 (9,620)
Trade accounts receivable due from affiliates .............. 2,952 15,632 (12,841)
Inventories ................................................ 8,373 (3,561) (2,015)
Accounts payable and accrued liabilities ................... (21,710) (369) 15,251
Other current assets ....................................... 5,065 (2,748) 396
Income taxes payable and refundable income taxes ........... 1,872 (6,546) (4,075)
Other ...................................................... (646) (1,482) (96)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............. 32,861 79,958 64,129
- ----------------------------------------------------------------------------------------------------------------------------
Investing activities:
Acquisition of property and equipment ................................ (19,568) (24,231) (21,376)
Acquisition of businesses, net of cash acquired ...................... (8,943) (42,954) --
Purchase of intangible assets ........................................ (824) (10,701) (2,448)
Proceeds from sales of property and equipment ........................ 1,300 3,464 713
Proceeds from sale of investment in affiliate ........................ -- -- 7,398
Purchases of short-term investments .................................. (90,200) (36,628) --
Maturities of short-term investments ................................. 82,204 -- --
Other ................................................................ (2,302) 916 (76)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................. (38,333) (110,134) (15,789)
- ----------------------------------------------------------------------------------------------------------------------------
Financing activities:
Principal payments on short-term borrowings and long-term debt ....... (13,704) (2,679) (52,466)
Proceeds from short-term borrowings and long-term debt ............... 13,809 747 2,028
Issuance of common stock ............................................. 5,514 4,674 99,179
Repurchase of redeemable and nonredeemable common stock .............. -- (723) (10,446)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities ............. 5,619 2,019 38,295
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents ......... 232 (365) (73)
- ----------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents ...... 379 (28,522) 86,562
Cash and cash equivalents at beginning of period ..................... 74,451 102,973 16,411
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period ........................... $ 74,830 $ 74,451 $102,973
=============================================================
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.
37
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-week or 53-week period ending on the last
Saturday in August. Fiscal years 2002, 2001 and 2000 ended on August 31, 2002,
August 25, 2001 and August 26, 2000, respectively, and are identified herein as
2002, 2001 and 2000.
Cash, Cash Equivalents and Short-term Investments Cash and cash equivalents
include cash on hand and highly liquid debt securities with original maturities
of three months or less, which are valued at cost.
Debt securities with original maturities greater than three months and remaining
maturities of less than one year are classified and accounted for as
held-to-maturity and recorded at amortized cost, and are included in short-term
investments. The fair market value of short-term investments is essentially the
same as amortized cost.
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 over the estimated
useful lives of the assets. 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 additions and improvements are capitalized. Property,
plant and equipment 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 of approximately $1.1 million,
$3.5 million and $5.9 million for 2002, 2001 and 2000, respectively. All
impairment losses are included in the Company's cost of sales.
Investments Substantially all of the Company's equity investments are marketable
and are classified as available-for-sale. Accordingly, such securities are
recorded at fair value, with any unrealized holding gains and losses, net of
taxes, excluded from income, and recognized as a separate component of
shareholders' equity. All equity investments are periodically reviewed to
determine if declines in fair value below cost basis are other-than-temporary.
Significant and sustained decreases in quoted market prices and a series of
historical and projected operating losses by investees are considered in the
review. If the decline in fair value is determined to be other-than-temporary,
an impairment loss is recorded and the investment written down to a new cost
basis. The Company's nonmarketable investments are recorded at cost.
Goodwill and Other Intangible Assets Goodwill is the excess of the purchase
price over the fair value of net assets of acquired businesses. Upon the
adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets in the first quarter of 2002, the Company no longer
amortizes goodwill, but instead is required to test for impairment at least
annually. See Note 6 for the pro forma effects of adopting this standard.
Other intangible assets include, among other items, patents and unpatented
technology and are amortized using the straight-line method over their
respective estimated useful lives of 5 to 17 years. SFAS No. 142 requires that
intangible assets with definite useful lives be 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.
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
38
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 instruments that are
reported in other comprehensive income will be recognized in the periods in
which earnings are impacted by the variability of the cash flows of the hedged
item.
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 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 $1.7 million and $10.7 million at
August 31, 2002 and August 25, 2001, respectively.
Foreign Currency Translation. Except for certain foreign subsidiaries whose
functional currency is the United States (U.S.) 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 generally 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 throughout the world primarily to companies in the
microelectronics industry. 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 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 these sources could have at least a temporary adverse effect on the
Company's results of operations. Furthermore, a significant increase in the
price of one or more of these components could adversely affect the Company's
results of operations.
Income Taxes Deferred income taxes are provided in amounts sufficient to give
effect to temporary differences between financial and tax reporting. The Company
accounts for tax credits as reductions of income tax expense in the year in
which such credits are allowable for tax purposes. The Company utilizes the
asset and liability method for computing its deferred income taxes. Under the
asset and liability method, deferred tax assets and liabilities are based on the
temporary difference between the financial statement and tax basis of assets and
liabilities and the enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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 (Loss) Comprehensive income (loss) represents the change in
shareholders' equity resulting from other than shareholder investments and
distributions. The Company's foreign currency translation
39
adjustments and unrealized gains and losses on marketable securities are
included in accumulated comprehensive income.
Recent Accounting Pronouncements 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, it retains many of the
fundamental provisions of that Statement. SFAS No. 144 becomes effective for the
Company at the beginning of its fiscal year ending August 30, 2003. Adoption is
not expected to have an impact on the Company's results of operations or
financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities," which addresses accounting for restructuring and
similar costs. SFAS No. 146 supercedes previous accounting guidance and is
required for restructuring activities initiated after December 31, 2002. SFAS
No. 146 requires the recognition of the liability for costs associated with exit
or disposal activities as incurred, whereas previous accounting guidance
required that a liability be recorded when the Company committed to an exit
plan.
(2) ACQUISITIONS
The Company completed two transactions in 2002. In August 2002, the Company
acquired assets related to products serving the semiconductor tape and reel
market for $2.0 million. Identifiable intangible assets, consisting principally
of proprietary knowledge, of approximately $1.8 million was recorded in
connection with the transaction. In February 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.
Identifiable intangible assets of approximately $1.3 million were recorded in
connection with the transaction.
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 $18.5 million and $12.1
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 consideration totaling
$17.8 million, including cash payments of $16.0 million and $1.8 million,
payable in common stock, in contingent consideration recorded in 2002.
Identifiable intangible assets and goodwill of approximately $7.6 million and
$7.5 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, as determined by
third-party valuations of certain tangible and intangible assets.
Critical Clean
(In thousands) Nisso Engineering NT International Atcor Corporation Solutions
- ----------------------------------------------------------------------------------------------------------
Current assets $ 678 $ 1,292 $ 6,338 $ 373
Property and equipment 50 661 2,086 5,862
Intangible assets 2,250 18,490 7,578 --
Goodwill 8,051 12,062 7,544 --
Deferred tax assets -- 2,433 -- --
Other assets 38 -- 507 --
-------------------------------------------------------------------------
Total assets acquired 11,067 34,938 24,053 6,235
-------------------------------------------------------------------------
Current liabilities 573 590 4,103 1,464
Long-term debt 119 -- 184 3,481
Deferred tax liabilities -- 6,848 3,300 --
-------------------------------------------------------------------------
Total liabilities 692 7,438 7,587 4,945
-------------------------------------------------------------------------
Net assets acquired $10,375 $27,500 $16,466 $1,290
=========================================================================
40
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, except per share data) 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 (loss) per share 0.56 0.53 (0.02) (0.10)
Diluted earnings (loss) 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 net assets acquired was $1.1 million and was allocated to goodwill.
(3) INVENTORIES
Inventories consist of the following:
(In thousands) 2002 2001
- -----------------------------------------------------------------------------
Raw materials ....................................... $13,015 $15,167
Work-in-process ..................................... 2,163 1,451
Finished goods ...................................... 23,216 29,971
Supplies ............................................ 465 613
- -----------------------------------------------------------------------------
$38,859 $47,202
=============================================================================
(4) PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment consists of the following:
Estimated
(In thousands) 2002 2001 Useful Lives
- -------------------------------------------------------------------------------------------------
Land ...................................................... $ 10,811 $ 10,112
Buildings and improvements ................................ 60,928 59,502 5-35
Manufacturing equipment ................................... 78,647 79,731 5-10
Molds ..................................................... 65,556 61,683 3-5
Office furniture and equipment ............................ 47,411 42,037 3-8
- ---------------------------------------------------------------------------------
263,353 253,065
Less accumulated depreciation ............................. 161,249 143,934
- ---------------------------------------------------------------------------------
$102,104 $109,131
=================================================================================
Depreciation expense was $24.4 million, $22.0 million and $25.3 million in 2002,
2001 and 2000, respectively.
(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 11 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 31, 2002,
the Company owned approximately 1.6 million shares of Metron with a market value
of $4.4 million. At August 31, 2002, the unrealized loss on marketable
securities was $1.9 million, net of tax benefits of $1.2 million. At August 25,
2001, the unrealized gain on marketable securities was $2.3 million, net of
taxes of $1.3 million.
41
(6) INTANGIBLE ASSETS
In July 2001, the Financial Accounting Standards Board issued SFAS No. 142,
Goodwill and Other Intangible Assets. 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.
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 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 carrying amount. As of
August 26, 2001, the Company's fair value exceeded its carrying amount.
Therefore, there was no indication that goodwill was impaired and the Company
did not record any transitional impairment loss. 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 Company'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 following table presents a reconciliation of net income and earnings (loss)
per share adjusted for the exclusion of goodwill, net of income taxes:
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Net income:
Reported net income $2,776 $38,616 $47,933
Add goodwill amortization, net of tax - 1,230 669
---------------------------------------------
Adjusted net income $2,776 $39,846 $48,602
=============================================
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Reported basic earnings (loss) per share $0.04 $0.56 $(0.02)
Add goodwill amortization, net of tax - 0.02 0.02
---------------------------------------------
Adjusted basic earnings per share $0.04 $0.58 $ -
=============================================
2002 2001 2000
- --------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share:
Reported diluted earnings (loss) per share $0.04 $0.53 $(0.02)
Add goodwill amortization, net of tax - 0.02 0.02
---------------------------------------------
Adjusted diluted earnings per share $0.04 $0.55 $ -
=============================================
The changes in carrying amount of goodwill for the years ended August 31, 2002
and August 25, 2001 are as follows:
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Beginning of year $30,266 $ 4,767
Additions to goodwill as a result of acquisitions 1,044 26,729
Amortization expense - (1,230)
----------------------------
End of year $31,310 $30,266
============================
Additions to goodwill in 2002 included a $1.8 million addition in connection
with contingent consideration related to fiscal 2001 acquisitions, partly offset
by a $0.8 million reduction associated with purchase price allocation
adjustments.
42
Other intangible assets, excluding goodwill, at August 31, 2002 and August 25,
2001 were as follows:
(In thousands)
- ----------------------------------------------
Gross carrying Accumulated Net carrying
2002 amount amortization value
- -----------------------------------------------------------------------------------------------
Patents $16,978 $3,404 $13,574
Unpatented technology 9,844 1,203 8,641
Employment and noncompete agreements 4,611 759 3,852
Other 5,040 813 4,227
-------------------------------------------------
$36,473 $6,179 $30,294
=================================================
(In thousands)
- ----------------------------------------------
Gross carrying Accumulated Net carrying
2001 amount amortization value
- -----------------------------------------------------------------------------------------------
Patents $14,337 $1,811 $12,526
Unpatented technology 9,844 200 9,644
Employment and noncompete agreements 6,211 85 6,126
Other 3,969 628 3,341
-------------------------------------------------
$34,361 $2,724 $31,637
=================================================
Amortization expense was $3.7 million, $2.3 million and $1.9 million in 2002,
2001 and 2000, respectively.
Estimated amortization expense for the fiscal years 2003 to 2007 and thereafter
is $3.7 million, $3.7 million, $3.7 million, $3.5 million, $3.1 million and
$12.6 million, respectively.
(7) ACCRUED LIABILITIES
Accrued liabilities consist of the following:
(In thousands) 2002 2001
- --------------------------------------------------------------------------------
Payroll and related benefits ...................... $ 8,446 $12,515
Employee benefit plans ............................ 2,843 4,634
Taxes, other than income taxes .................... 1,036 1,215
Interest .......................................... 53 44
Donations ......................................... 65 1,711
Accruals related to nonrecurring charges .......... 160 3,559
Warranty and related .............................. 2,198 3,350
Other ............................................. 5,278 6,602
- --------------------------------------------------------------------------------
$20,079 $33,630
================================================================================
43
(8) LONG-TERM DEBT
Long-term debt consists of the following:
(In thousands) 2002 2001
- -------------------------------------------------------------------------------------------------------------------
Stock redemption notes payable in various installments along with interest of 8% and 9%
through December 2010 ......................................................................... $ 3,308 $ 4,427
Commercial loans payable on a monthly basis in principal installments of $49, with interest
ranging from 1.68% to 3.15% and various maturities through September 2015 ..................... 2,651 3,250
Commercial loan payable on a semiannual basis in principal installments of $39 and interest
ranging from 4.5% to 6% and various maturities through December 2007 .......................... 1,747 2,122
Small Business Administration loans payable on a monthly basis in principal installments of
$9 and interest ranging from 4.2% to 7.3% and various maturities through October 2020 ......... 2,898 2,963
Commercial loan secured by equipment payable on a monthly basis in principal installments of
$40 and interest ranging from 5.0% to 21.0% and various maturities through December 2005 ...... 1,109 970
Industrial Revenue Bonds payable on a semiannual basis with principal installments of $50
through October 2012, and variable interest ranging from 1.45% to 2.60% ....................... 1,150 1,250
Private bond with interest of 1.7% and interest payable on a semiannual basis and full
principal due in 2008 ......................................................................... 1,859 -
Other. ........................................................................................ 113 357
- -------------------------------------------------------------------------------------------------------------------
Total ................................................................................. 14,835 15,339
Less current maturities ............................................................... 2,144 2,238
- -------------------------------------------------------------------------------------------------------------------
$12,691 $13,101
===================================================================================================================
Annual maturities of long-term debt as of August 31, 2002, are as follows:
Fiscal year ending (In thousands)
--------------------------------------------------------------------
2003 .............................................. $ 2,144
2004 .............................................. 2,058
2005 .............................................. 1,376
2006 .............................................. 1,095
2007 .............................................. 812
Thereafter ........................................ 7,350
--------------------------------------------------------------------
$14,835
====================================================================
The Company's debt 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, or $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".
(9) SHORT-TERM BANK BORROWINGS
The Company has a revolving commitment with two commercial banks for aggregate
borrowings of $20 million with interest at the LIBOR rate (1.8% at August 31,
2002), plus 1.4%. There was no balance outstanding under this commitment at
either August 31, 2002 or August 25, 2001.
The Company has entered into line of credit agreements with seven international
commercial banks, which provide for aggregate borrowings of 301 thousand euros,
2.5 million Malaysia ringgits and 1.2 billion Japanese yen for its foreign
subsidiaries, which is equivalent to $11.4 million as of August 31, 2002.
Interest rates for these facilities are based on a factor of the banks'
reference rates and ranged from 1.375% to 9.5% during 2002. Borrowings
outstanding under these line of credit agreements at August 31, 2002 and August
25, 2001, were $8.9 million and $3.8 million, respectively.
44
The company also owed $0.5 million in other short-term bank borrowings not
subject to formal credit agreements at August 31, 2002.
(10) LEASE COMMITMENTS
As of August 31, 2002, 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):
Fiscal year ending (In thousands)
- --------------------------------------------------------------------------------
2003 .................................................... $2,766
2004 .................................................... 1,792
2005 .................................................... 1,177
2006 .................................................... 787
2007 .................................................... 734
Thereafter .............................................. 2,193
- --------------------------------------------------------------------------------
Total minimum lease payments ....................... $9,449
================================================================================
Total rental expense for all equipment and building operating leases was $4.8
million, $4.0 million and $4.9 million in 2002, 2001 and 2000, respectively. See
note 21 for related party leases included above.
(11) NONRECURRING CHARGES (REVERSALS)
In the first quarter of 2002, the Company's results included a nonrecurring
charge of $4.0 million in connection with the closure of its Chanhassen, MN
plant. 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.
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 of fiscal 2001, 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.
The Company recorded pre-tax benefits of $1.6 million and $0.8 million in the
third quarter and fourth quarters of 2002, respectively, associated with the
reversal of previous accruals made in 2002 and 2001 related to the plant
closures described herein. Approximately $1.0 million of the reversal was
associated with the favorable settlement of future lease commitments on the
Castle Rock facility, for which the Company had recorded accruals in 2001. Lower
than expected impairment costs accounted for approximately $1.2 million of the
reversals.
As of August 31, 2002, $0.2 million remained outstanding in connection with the
aforementioned nonrecurring charges
45
(12) INTEREST (INCOME) EXPENSE, NET
Interest (income) expense, net consists of the following:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
Interest expense ............................... $ 1,218 $ 1,505 $4,614
Interest income ................................ 2,684 5,982 2,192
- ------------------------------------------------------------------------------------
Interest (income) expense, net ............. $(1,466) $(4,477) $2,422
====================================================================================
(13) OTHER INCOME, NET
Other income, net consists of the following:
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
(Loss) gain on sale of property and equipment .... $(185) $ 146 $ (803)
Gain on sale of investment in affiliate .......... -- -- 5,468
Gain (loss) on foreign currency translation ...... 808 (40) 438
Gain on liquidation of foreign subsidiary ........ 733 - --
Other, net ....................................... (383) 1,027 (158)
- ------------------------------------------------------------------------------------
$ 973 $1,133 $4,945
====================================================================================
In November 1999, the Company sold 612,000 shares of its investment in Metron as
part of Metron's initial public offering, receiving proceeds of $7.4 million,
while recognizing a gain of $5.5 million.
(14) INCOME TAXES
Income (loss) before income taxes was derived from the following sources:
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------
Domestic ................................. $(8,192) $45,719 $61,439
Foreign .................................. 6,797 14,391 13,192
- --------------------------------------------------------------------------------------
$(1,395) $60,110 $74,631
======================================================================================
Income tax expense (benefit) is summarized as follows (in thousands):
(In thousands) 2002 2001 2000
- ------------------------------------------------------------------------------------
Current:
Federal ............................. $(3,797) $16,395 $20,462
State ............................... - 2,309 3,487
Foreign ............................. 562 4,247 2,275
- ------------------------------------------------------------------------------------
$(3,235) 22,951 26,224
- ------------------------------------------------------------------------------------
Deferred:
Federal ............................. 220 (1,500) 414
State ............................... (358) (112) 116
- ------------------------------------------------------------------------------------
(138) (1,612) 530
- ------------------------------------------------------------------------------------
$(3,373) $21,339 $26,754
====================================================================================
46
Income tax expense (benefit) differs from the expected amounts based upon the
statutory federal tax rates as follows:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Expected federal income tax at statutory rate .......... $ (489) $21,039 $26,121
State income taxes, net of federal tax effect .......... (113) 1,503 2,314
Effect of foreign source income ........................ (2,267) 60 (522)
Foreign sales corporation income not subject to tax .... - (1,142) (1,040)
Research tax credit .................................... (400) (361) (298)
Tax-exempt interest .................................... (296) (360) -
Other items, net ....................................... 192 600 179
- -----------------------------------------------------------------------------------------------------
$(3,373) $21,339 $26,754
=====================================================================================================
At August 31, 2002, there were approximately $13.2 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 years ended August 31, 2002 and August 25, 2001, respectively, $5.3
million and $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 31, 2002 and
August 25, 2001 are as follows (in thousands):
2002 2001
- -----------------------------------------------------------------------------------------------
Deferred tax assets:
Accounts receivable ...................................... $ 981 $ 1,171
Inventory items .......................................... 2,780 3,519
Accruals not currently deductible for tax purposes ....... 2,772 4,958
Net operating loss carryforwards ......................... 3,661 -
Foreign tax credit carryforwards ......................... 1,506 -
Research tax credit carryforwards ........................ 340 -
Other, net ............................................... 814 1,287
Valuation allowance ...................................... (1,369) -
- -----------------------------------------------------------------------------------------------
Total deferred tax assets ........................... 11,485 10,935
- -----------------------------------------------------------------------------------------------
Deferred tax liabilities:
Accelerated depreciation ................................. 4,121 5,376
Purchased intangible assets .............................. 8,625 10,137
Other, net ............................................... 3,056 5,510
- -----------------------------------------------------------------------------------------------
Total deferred tax liabilities ...................... 15,802 21,023
- -----------------------------------------------------------------------------------------------
Net deferred tax assets (liabilities) ............... $(4,317) $(10,088)
===============================================================================================
At August 31, 2002, the Company had federal net operating loss carryforwards of
approximately $3.5 million which begin to expire in 2011, state operating loss
carryforwards of approximately $24.1 million, which begin to expire in 2010,
foreign net operating loss carryforwards of approximately $3.3 million, which
expire in 2007, foreign tax credit carryforwards of approximately $1.5 million
which expire in 2007, and research tax credit carryforwards of approximately
$0.3 million which begin to expire in 2009. The Company established a valuation
allowance of $1.4 million during 2002 with respect to the foreign net operating
loss carryforwards. Realization of the remaining deferred tax assets is
dependent on generating sufficient future taxable income and on the future
reversal of taxable temporary differences. Although realization is not assured,
the Company believes it is more likely than not that the benefit of these
deferred assets will be realized.
(15) 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
47
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. In connection with the stock split, the Company's board
of directors also approved an increase in the Company's number of authorized
common shares from 100,000,000 shares to 200,000,000 shares.
Employee Stock Ownership Plan and Trust Entegris maintains an Employee Stock
Ownership Plan and Trust (ESOT). Employer contributions to the ESOT are
determined by the board of directors at its discretion. No contributions have
been made to the ESOT since 1995.
ESOT shares totaled 11,585,038 and 14,422,366 as of August 31, 2002 and August
25, 2001, 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. 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 maximum
aggregate number of shares that may be granted under the Plans is 14,522,211 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:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------
(Shares in thousands) Number of Option Number of Option Number of Option
shares price Shares price Shares price
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, beginning
of year ........................... 7,071 $ 4.94 7,307 $3.78 5,899 $2.72
Granted ......................... 1,747 8.39 1,457 9.17 1,772 7.27
Exercised ....................... (1,222) 3.25 (1,228) 2.46 (106) 2.51
Canceled ........................ (127) 10.05 (465) 6.58 (258) 4.21
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year ..... 7,469 $ 5.94 7,071 $4.94 7,307 $3.78
===============================================================================================================
Options exercisable, end of year ..... 4,636 $ 4.37 4,683 $3.57 4,618 $2.70
===============================================================================================================
Options available for grant, end
of year ........................... 5,498 4,332 2,587
===============================================================================================================
Options outstanding for the 1999 Plan and the Directors' Plan at August 31, 2002
are summarized as follows:
(Shares in thousands) Options outstanding Options exercisable
- -----------------------------------------------------------------------------------------------------------------
Weighted- Weighted-
Remaining average average
Number contractual exercise Number exercise
Range of exercise prices outstanding life price exercisable price
- -----------------------------------------------------------------------------------------------------------------
$0.96 to $1.50 478 3.6 $ 1.24 478 $ 1.24
- -----------------------------------------------------------------------------------------------------------------
$3.15 2,909 5.3 3.15 2,909 3.15
- -----------------------------------------------------------------------------------------------------------------
$4.22 to $7.50 727 7.5 5.29 407 4.65
- -----------------------------------------------------------------------------------------------------------------
$7.53 to $8.25 1,517 9.1 8.02 7 7.53
- -----------------------------------------------------------------------------------------------------------------
$8.38 to $10.00 1,036 8.4 9.15 417 9.34
- -----------------------------------------------------------------------------------------------------------------
$10.19 to $15.38 802 8.1 11.33 418 11.11
- -----------------------------------------------------------------------------------------------------------------
48
The Company determined pro forma compensation expense under the provisions of
SFAS No. 123 using the Black-Scholes pricing model and the following
assumptions:
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Expected dividend yield ............................... 0% 0% 0%
Expected stock price volatility ....................... 77% 72% 90%
Risk-free interest rate ............................... 4.50% 5.25% 5.50%
Expected life ......................................... 10 years 10 years 10 years
Had compensation cost for option grants been determined consistent with
SFAS No. 123, the Company's net income, on a pro forma basis, would have been as
follows:
(In thousands, except per share data) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net income, as reported .............................................. $2,776 $38,616 $47,933
Pro forma net income ................................................. (572) 33,788 45,705
Basic net earnings (loss) per share, as reported ..................... 0.04 0.56 (0.02)
Pro forma basic net earnings (loss) per share ........................ (0.01) 0.49 (0.07)
Diluted net earnings (loss) per share, as reported ................... 0.04 0.53 (0.02)
Pro forma diluted net earnings (loss) per share ...................... (0.01) 0.46 (0.07)
The weighted average fair value of options granted during 2002, 2001 and 2000
with exercise prices equal to the market price at the date of grant was $6.88,
$7.40 and $6.95 per share, respectively.
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 31, 2002, 423,097 shares had been issued under the ESPP
Plan at a weighted-average price of $7.48.
(16) 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. Contributions to this plan were suspended for calendar
year 2002. Total pension expense for 2002, 2001 and 2000 related to this plan
were $0.3 million, $1.6 million and $1.6 million, respectively. The Company
maintains a 401(k) employee savings and profit sharing plan (the Plan) that
qualifies as a deferred salary arrangement 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. 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 $0.9 million, $3.3 million and
$2.4 million in 2002, 2001 and 2000, respectively.
49
(17) 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 represents a loss
per share of common stock, the effect of including the incremental shares of
common stock from assumed exercise of options and from assumed reclassification
of redeemable common stock in EPS computation is anti-dilutive, and,
accordingly, basic and diluted EPS are the same. The following table presents a
reconciliation of the share amounts used in the computation of basic and diluted
earnings (loss) per share:
(In thousands) 2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Basic earnings (loss) per share--Weighted common shares
outstanding .................................................... 70,358 68,747 43,609
Weighted common shares assumed upon exercise of
options ........................................................ 3,812 4,248 --
- -----------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share ................................. 74,170 72,995 43,609
=====================================================================================================
(18) SEGMENT INFORMATION
The Company operates in one segment as it designs, develops, manufactures,
markets and sells material management and handling products and services
predominantly within the microelectronics 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 property, plant and equipment attributed
to significant countries for 2002, 2001 and 2000, respectively):
(In thousands) 2002 2001 2000
- -------------------------------------------------------------------------------------------------------
Net sales:
United States ................................................. $160,568 $249,455 $252,172
Japan ......................................................... 26,407 45,749 32,659
Germany ....................................................... 9,350 27,735 32,325
Malaysia ...................................................... 22,186 15,057 19,094
Korea ......................................................... 41 3,853 3,862
Singapore ..................................................... 1,279 595 3,353
- -------------------------------------------------------------------------------------------------------
$219,831 $342,444 $343,465
=======================================================================================================
Property, plant and equipment:
United States .................................................. $ 74,085 $ 78,339 $ 71,626
Japan .......................................................... 8,424 9,767 10,297
Germany ........................................................ 5,362 5,517 5,625
Malaysia ....................................................... 13,757 14,562 15,466
Taiwan ......................................................... 108 82 --
Korea .......................................................... 38 575 4,719
Singapore ...................................................... 330 289 --
- --------------------------------------------------------------------------------------------------------
$102,104 $109,131 $107,733
========================================================================================================
Net sales to external customers attributable to the United States amounted to
$103.1 million, $170.9 million and $179.8 million in 2002, 2001 and 2000,
respectively. Net sales to external customers attributable to countries other
than the United States amounted to $116.7 million, $171.5 million and $163.7
million in 2002, 2001 and 2000, respectively. In 2002, 2001 and 2000, no single
nonaffiliated customer accounted for 10% or more of net sales.
(19) SUPPLEMENTARY CASH FLOW INFORMATION
(In thousands) 2002 2001 2000
- --------------------------------------------------------------------------------------------------
Schedule of interest and income taxes paid
Interest .................................................. $ 1,209 $ 1,503 $ 5,142
Income taxes, net of refunds received ..................... (13,201) 28,460 30,884
50
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
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
$12.7 million at August 31, 2002.
(21) RELATED-PARTY TRANSACTIONS
Leases Through 2002, the Company leased office space and production facilities
under various operating leases from a major shareholder's trust or from entities
related to this shareholder. The Company was required to pay for all real estate
taxes, utilities and other operating expenses. Rent paid relating to these
agreements totaled $0.3 million, $0.6 million and $0.8 million for 2002, 2001
and 2000, respectively. As of August 31, 2002, the Company had no future
obligations under any lease agreements with the major shareholder's trust or
entities related to the shareholder.
In May 2002, the Company paid $500,000 as consideration for the early
termination and buyout of future lease commitments on the Castle Rock facility,
which was leased from the related party, as described in Note 11 under the
caption "Nonrecurring charges". 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 and $0.6 million in 2001 and
2000, respectively. In connection with Emplast's purchase of the facility in
2001, the company paid Emplast $0.3 million to terminate the lease.
Notes Receivable At August 25, 2001, the Company had a $0.8 million note
receivable from a major stockholder's trust, which bore interest at 8.0% per
year. The balance due was paid in full in fiscal 2002.
Sales to Minority Shareholder The Company sells products to Marubeni Corporation
(Marubeni), a minority shareholder, under a distribution agreement scheduled to
expire February 28, 2003. Sales to Marubeni were $12.5 million, $17.4 million
and $16.2 million in 2002, 2001 and 2000, respectively. Trade accounts
receivable relating to these sales as of August 31, 2002 and August 25, 2001
were $0.9 million and $1.0 million, respectively. Also, 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 10 years.
Metron Technology N.V. As described in Note 5 under the caption "Investments",
the Company owned approximately 1.6 million shares of Metron at August 31, 2002.
In addition, the Company recorded a charge of $8.2 million in 2001 related to
the early termination of a distribution agreement as described in Note 11 under
the caption "Nonrecurring charges". Sales to Metron under current and previous
distribution agreements were $16.3 million, $85.3 million and $81.9 million in
2002, 2001 and 2000, respectively. Trade accounts receivable relating to these
sales as of August 31, 2002 and August 25, 2001 were $3.3 million and $6.1
million, respectively.
(22) COMMITMENTS AND CONTINGENT LIABILITIES
In September 2002, the Company was named as a defendant along with three other
companies in an action filed for damages arising from a chemical spill at a
customer's facility in January 2000. While the outcome of this matter cannot be
predicted with any certainty, based on the information to date, the Company
believes that it has adequate insurance to cover any damages assessed against
the Company and as such, does not believe that the matter will have a material
adverse effect on its financial position, operating results or cash flows.
In addition, from time to time, the Company is a party to various legal
proceedings incidental to its normal operating activities. Although it is
impossible to predict the outcome of such proceedings, facts currently available
indicate that no such claims will result in losses that would have a material
adverse effect on the financial condition, results of operations or cash flows
of the Company.
51
(23) QUARTERLY INFORMATION-UNAUDITED
Quarter
-----------------------------------------------------------------
(In thousands, except per share data) First Second Third Fourth Year
- ------------------------------------- ------------ ------------ ------------ ------------ -------------
Fiscal 201
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 ................... 0.26 0.20 0.12 (0.02) 0.56
Diluted earnings (loss) per share ................. 0.25 0.20 0.12 (0.02) 0.53
Fiscal 2002
Net sales ......................................... $45,852 $50,702 $59,709 $63,568 $219,831
Gross profit ...................................... 15,195 16,938 28,127 28,446 28,446
Net income (loss) ................................. (5,916) (1,386) 5,226 4,852 2,776
Basic earnings (loss) per share ................... (0.08) (0.02) 0.07 0.07 0.04
Diluted earnings (loss) per share ................. (0.08) (0.02) 0.07 0.06 0.04
52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Entegris, Inc.:
We have audited the accompanying consolidated balance sheets of Entegris,
Inc. and subsidiaries as of August 31, 2002 and August 25, 2001, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the years in the three-year period ended August 31, 2002. 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 31, 2002 and August 25, 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended August 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 6 to the consolidated financials statements, the
Company adopted the provisions of Statement of Financial Accounting Standards
No.142, Goodwill and Other Intangible Assets, on August 26, 2001.
/s/ KPMG LLP
Minneapolis, Minnesota
October 4, 2002
53
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
The Board of Directors and Shareholders
Entegris, Inc.:
Under the date of October 4, 2002, we reported on the consolidated balance
sheets of Entegris, Inc. and subsidiaries as of August 31, 2002 and August 25,
2001, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the fiscal years in the three-year period
ended August 31, 2002, as contained herein. Our report refers to a change of
accounting for goodwill in fiscal 2002. In connection with our audits of the
aforementioned consolidated financial statements, we also have audited the
related financial statement schedule as listed in the accompanying index. The
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on the 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,
presents fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
Minneapolis, Minnesota
October 4, 2002
54
Entegris, Inc.
Schedule II-Valuation and Qualifying Accounts
(In thousands)
Charged
(Credited) to
Balance at Costs and Balance at
Beginning of Expenses End of
Description Period Additions Deductions Period
----------- ------------ -------------- ---------- -----------
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
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
====== ===== ===== ======
Deducted from asset accounts:
Year ended August 31, 2002:
Allowance for doubtful
receivables ........................ $1,608 133 (57) $1,798
------ ----- ----- ------
Inventory reserves ................... $5,771 4,611 4,540 $5,842
====== ===== ===== ======
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
Certain information required by Part III is incorporated by reference to
the Company's definitive proxy statement for the annual meeting of shareholders
to be held on January 21, 2003 and which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A within 120 days after August 31,
2002.
Except for those portions specifically incorporated in this report by
reference to our proxy statement for the Annual Meeting of Shareholders to be
held on January 21, 2003, no other portions of the proxy statement are deemed to
be filed as part of this Report on Form 10-K.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and officers required by
this item is incorporated by reference to the information under the captions
"Election of Directors", "Named Executive Officers" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's proxy statement for
the Annual Meeting of Shareholders to be held on January 21, 2003.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
information under the captions "Director Compensation" and "Summary Compensation
Table" in the Company's proxy statement for the Annual Meeting of Shareholders
to be held on January 21, 2003.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
information under the captions "Security Ownership of Principal Shareholders"
and "Security Ownership of Directors and Named Executive Officers" in the
Company's proxy statement for the Annual Meeting of Shareholders to be held on
January 21, 2003.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information under the caption "Certain Transactions" in the Company's proxy
statement for the Annual Meeting of Shareholders to be held on January 21, 2003.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Based on the Company's chief executive officer's and chief financial
officer's evaluations of the effectiveness of the Company's disclosure controls
and procedures (as defined in the Securities Exchange Act of 1934 Rules
13a-14(c) and 15-d-14(c)) as of a date within 90 days of the filing date of this
Annual Report on Form 10-K, they have concluded that as of such date, the
Company's disclosure controls and procedures were adequate to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Commission's
rules and forms.
(b) Changes in internal controls.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of evaluation, nor were there any significant deficiencies or material
weaknesses in the Company's internal controls. As a result, no corrective
actions were taken.
56
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Financial Statements required by this item, along with the Independent
Auditors' Report, are submitted in a separate section of this report as
indicated in the below index:
INDEX TO FINANCIAL STATEMENTS
Page Number
in this
Report
-----------
Consolidated Balance Sheets as of August 31, 2002 and August 25, 2001 ......................... 34
Consolidated Statements of Operations for the years ended August 31,
2002, August 25, 2001, and August 26, 2000 .................................................... 35
Consolidated Statements of Shareholders' Equity for the years ended August 31, 2002,
August 25, 2001, and August 26, 2000 ........................................................ 36
Consolidated Statements of Cash Flows for the years ended August, 31, 2002, August 25,
2001, and August 26, 2000 ................................................................... 37
Notes to Consolidated Financial Statements .................................................... 38
Independent Auditors' Report .................................................................. 53
(a) 2. Financial Statement Schedules
The following Independent Auditors' Report on Schedule and the financial
statement schedule "Schedule II--Valuation and Qualifying Accounts" are filed as
part of this Report at the pages indicated, and should be read in conjunction
with the consolidated financial statements.
Page Number
in this
Report
-----------
Independent Auditors' Report on Schedule ...................................................... 54
Schedule II - Valuation and Qualifying Accounts ............................................... 55
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.
(a) 3. Exhibits
The following exhibits are filed herewith or incorporated by reference:
Exhibit
Number Description of Document
- ------- -----------------------
3.1(i) Articles of Incorporation of Entegris, Inc.
3.2(ii) Amended and Restated Bylaws 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
57
Exhibit
Number Description of Document
- ------- -----------------------
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) Promissory Note between Fluoroware, Inc. and Dan Quernemoen,
dated January 5, 1996
10.9(i) Consolidation Agreement by and among Entegris, Inc., Fluoroware,
Inc. and Empak, Inc., dated June 1, 1999
10.10(ii) Worldwide Stocking Distributor Agreement Between Fluid Handling
Group Entegris, Inc. and Metron Technology N.V. dated
March 1, 2001
10.11(i) Metron Semiconductors Europa B.V. Investor Rights Agreement dated
July 6, 1995
10.12(i) U.S. Stocking Distributor Five-Year Agreement as of September 1,
1997 between Fluoroware, Inc. and Kyser Company
10.13(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
10.14(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
10.15(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
10.16 Form of Executive Employment Agreement the Company and certain
senior executive officers of the Company.
21.1 Subsidiaries of the Company
23.1 Independent Auditors' Consent
99.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
99.4 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
- ----------
(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 31, 2002.
(c) See Exhibits listed under Item 14(a)(3).
(d) Not applicable. See Item 14(a)(2).
58
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.
/s / James E. Dauwalter
-----------------------------------------
James E. Dauwalter
President and Chief Executive Officer
Dated: November 27, 2002
/s / John D. Villas
-----------------------------------------
John D. Villas
Chief Financial Officer
Dated: November 27, 2002
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below each severally constitutes and appoints each of James E. Dauwalter and
John D. Villas, 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 27, 2002
- ------------------------------
Daniel R. Quernomoen
/s/ James A. Bernards Director November 27, 2002
- ------------------------------
James A. Bernards
/s/ Robert J. Boehlke Director November 27, 2002
- ------------------------------
Robert J. Boehlke
/s/ James E. Dauwalter President, Chief Executive Officer and November 27, 2002
- ------------------------------ Director
James E. Dauwalter
/s/ Stan Geyer Chairman of the Board of Directors November 27, 2002
- ------------------------------
Stan Geyer
/s/ Delmer M. Jensen Director November 27, 2002
- ------------------------------
Delmer M. Jensen
/s/ Gary F. Klingl Director November 27, 2002
- ------------------------------
Gary F. Klingl
/s/ Roger D. McDaniel Director November 27, 2002
- ------------------------------
Roger D. McDaniel
/s/ John D. Villas Chief Financial Officer (Chief Financial & November 27, 2002
- ------------------------------ Accounting Officer)
John D. Villas
59