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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended November 30, 2002 Commission File Number 000-30789
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ENTEGRIS, INC.
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(Exact name of registrant as specified in charter)
Minnesota 41-1941551
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(State or other jurisdiction of incorporation) (IRS Employer ID No.)
3500 Lyman Boulevard, Chaska, Minnesota 55318
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(Address of Principal Executive Offices)
Registrant's Telephone Number (952) 556-3131
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES X NO
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practicable date.
Class Outstanding at December 31, 2002
- ------------------------------- --------------------------------
Common Stock, $0.01 Par Value 71,215,514
ENTEGRIS, INC., INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED NOVEMBER 30, 2002
Description Page
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PART I
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Item 1. Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of November 30, 2002
and August 31, 2002 3
Consolidated Statements of Operations for the
Three Months Ended November 30, 2002 and November 24, 2001 4
Consolidated Statements of Cash Flows for
the Three Months Ended November 30, 2002 and
November 24, 2001 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Item 4. Controls and Procedures 14
PART II Other Information
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Item 6. Exhibits and Reports on Form 8-K 15
2
Item 1. Financial Statements
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ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
November 30, August 31,
2002 2002
------------ ----------
ASSETS
Current assets
Cash and cash equivalents $ 83,678 $ 74,830
Short-term investments 37,108 44,624
Trade accounts receivable, net of allowance for doubtful
accounts 35,067 35,371
Trade accounts receivable due from affiliates 3,042 4,219
Inventories 37,705 38,859
Deferred tax assets and refundable income taxes 16,721 16,039
Other current assets 2,775 2,793
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Total current assets 216,096 216,735
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Property, plant and equipment, net 98,210 102,104
Other assets
Investments 8,464 7,883
Intangible assets, net of amortization 29,619 30,295
Goodwill 31,309 31,309
Other 2,089 1,934
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Total assets $ 385,787 $ 390,260
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt $ 1,838 $ 2,144
Short-term borrowings 10,524 9,421
Accounts payable 8,796 7,977
Accrued liabilities 19,164 20,079
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Total current liabilities 40,322 39,621
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Long-term debt, less current maturities 11,212 12,691
Deferred tax liabilities 15,872 15,802
Minority interest in subsidiaries -- 32
Commitments and contingencies -- --
Shareholders' equity
Common stock, $0.01 par value; 200,000,000 authorized; issued
and outstanding shares: 71,190,736 and 71,160,539, respectively 712 712
Additional paid-in capital 132,759 132,676
Retained earnings 185,291 190,932
Accumulated other comprehensive loss (381) (2,206)
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Total shareholders' equity 318,381 322,114
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Total liabilities and shareholders' equity $ 385,787 $ 390,260
========= =========
See accompanying notes to consolidated financial statements.
3
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)
Three Months Ended
--------------------------
November 30, November 24,
2002 2001
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Sales to non-affiliates $ 48,350 $ 40,502
Sales to affiliates 5,371 5,350
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Net sales 53,721 45,852
Cost of sales 31,843 30,657
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Gross profit 21,878 15,195
Selling, general and administrative expenses 18,922 17,630
Engineering, research and development expenses 4,073 4,041
Nonrecurring charges 1,812 4,001
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Operating loss (2,929) (10,477)
Interest income, net (300) (451)
Other expense (income), net 4,787 (289)
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Loss before income taxes and other items below (7,416) (9,737)
Income tax benefit (1,832) (3,700)
Equity in net loss of affiliates 58 --
Minority interest in subsidiaries' net loss -- (121)
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Net loss $ (5,642) $ (5,916)
======== ========
Loss per common share:
Basic $ (0.08) $ (0.08)
Diluted $ (0.08) $ (0.08)
Weighted shares outstanding:
Basic 71,165 69,742
Diluted 71,165 69,742
See accompanying notes to consolidated financial statements.
4
ENTEGRIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
--------------------------
November 30, November 24,
2002 2001
------------ ------------
OPERATING ACTIVITIES
Net loss $ (5,642) $ (5,916)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 6,775 6,871
Impairment of property and equipment 350 2,300
Impairment of investment in Metron Technology N.V 4,452 --
Provision for doubtful accounts (188) (194)
Provision for deferred income taxes (1,153) (287)
Equity in net loss of affiliates 58 --
(Gain) loss on sale of property and equipment (57) 265
Minority interest in subsidiaries' net loss -- (121)
Changes in operating assets and liabilities:
Trade accounts receivable 492 2,450
Trade accounts receivable due from affiliates 1,177 4,802
Inventories 1,154 3,330
Accounts payable and accrued liabilities (74) (13,862)
Other current assets 17 3,122
Accrued income taxes and refundable income taxes (682) 978
Other (303) (458)
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Net cash provided by operating activities 6,376 3,280
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INVESTING ACTIVITIES
Acquisition of property and equipment (2,517) (2,632)
Purchases of intangible assets (299) (135)
Proceeds from sales of property and equipment 85 236
Purchases of short-term investments (11,070) (30,326)
Maturities of short-term investments 18,587 19,415
Other (2,028) 45
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Net cash provided by (used in) investing activities 2,758 (13,397)
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FINANCING ACTIVITIES
Principal payments on short-term borrowings and long-term debt (1,652) (3,462)
Proceeds from short-term borrowings and long-term debt 1,428 4,768
Issuance of common stock 84 32
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Net cash (used in) provided by financing activities (140) 1,338
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Effect of exchange rate changes on cash and cash equivalents (146) (100)
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Increase (decrease) in cash and cash equivalents 8,848 (8,879)
Cash and cash equivalents at beginning of period 74,830 74,451
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Cash and cash equivalents at end of period $ 83,678 $ 65,572
======== ========
See accompanying notes to consolidated financial statements.
5
ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
1. Summary of Significant Accounting Policies
------------------------------------------
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly,
in conformity with accounting principles generally accepted in the United
States of America, the financial position as of November 30, 2002 and
August 31, 2002, the results of operations for the three months ended
November 30, 2002 and November 24, 2001 and cash flows for the three months
ended November 30, 2002 and November 24, 2001. Certain prior year amounts
have been reclassified to conform to the current period presentation.
The financial statements and notes are presented as permitted by Form 10-Q
and do not contain certain information included in the Company's annual
consolidated financial statements and notes. The information included in
this Form 10-Q should be read in conjunction with Management's Discussion
and Analysis and financial statements and notes thereto included in the
Company's Form 10-K for the year ended August 31, 2002. The results of
operations for the three months ended November 30, 2002 and November 24,
2001 are not necessarily indicative of the results to be expected for the
full year.
The Company's fiscal year is a 52- or 53-week period ending on the last
Saturday of August. In fiscal 2003, the Company's interim quarters end on
November 30, 2002, March 1, 2003 and May 31, 2003 and includes 52 weeks.
The previous fiscal year ended on August 31, 2002 and comprised 53 weeks.
Fiscal years are identified in this report according to the calendar year
in which they end. For example, the fiscal year ended August 30, 2003 is
referred to as "fiscal 2003".
2. Loss per share
--------------
The following table presents a reconciliation of the denominators used in
the computation of basic and diluted loss per share.
Three Months Ended
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November 30, November 24,
2002 2001
------------ ------------
Basic loss per share-weighted common
shares outstanding 71,165,000 69,742,000
Weighted common shares assumed upon
exercise of stock options -- --
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Diluted loss per share-weighted common
shares and common shares equivalent
outstanding 71,165,000 69,742,000
========== ==========
The effect of the inclusion of stock options in the first quarters of
fiscal 2003 and 2002 is anti-dilutive.
6
3. Inventories
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Inventories consist of the following (in thousands):
November 30, 2002 August 31, 2002
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Raw materials $11,734 $13,015
Work-in process 2,001 2,163
Finished goods 23,423 23,216
Supplies 547 465
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Total inventories $37,705 $38,859
======= =======
4. Comprehensive Loss
------------------
For the quarters ended November 30, 2002 and November 24, 2001 net loss,
items of other comprehensive loss and comprehensive loss are as follows (in
thousands):
Quarter ended
-------------------------
November 30, November 24,
2002 2001
------------ ------------
Net loss $(5,642) $(5,916)
Items of other comprehensive (loss) income
Foreign currency translation (71) (376)
Net change in unrealized gain (loss) on
marketable securities (17) (531)
Reclassification adjustment for impairment
loss on marketable securities included
in earnings 1,913 --
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Comprehensive loss $(3,817) $(6,823)
======= =======
5. Nonrecurring Charge
-------------------
During the first quarter of fiscal 2003, the Company recorded a pre-tax
charge of $1.8 million related to the relocation of its Upland, California
operations and certain workforce reductions. The charge included $0.9
million in termination costs related to a workforce reduction of
approximately 75 employees, $0.4 million for estimated losses for asset
impairment and $0.5 million for future lease commitments on the Upland
facility. The Company expects the Upland plant to be closed and all the
equipment sold or moved to Chaska, Minnesota by the end of February 2003.
As of November 30, 2002, future cash outlays of $1.2 million remained
outstanding in connection with the aforementioned charge, related to
severance payments of $0.7 million, which run through fiscal 2004, and the
lease commitments, which run through fiscal 2006.
6. Impairment of investment in Metron Technology N.V.
--------------------------------------------------
The Company's Results of Operations included other expense of $4.8 million
in the first quarter of fiscal 2003. Included was the impairment loss of
$4.5 million, or $3.3 million after tax, related to the write-down of the
Company's equity investment in Metron Technology N.V. common stock. The
Company, a founding shareholder of Metron, owns about 1.6 million shares of
Metron common stock. Prior to the impairment charge, the Company's
investment in Metron Technology N.V. common stock had a carrying value of
$7.6 million. At November 30, 2002, the fair value of the investment was
$3.1 million, based on a price of $2.00 per share, the closing price of
Metron at the end of the first quarter. The decline in fair value was
determined to be other-than-temporary. Accordingly an impairment loss of
$4.5 million was recorded in the first quarter of fiscal 2003 and the
investment in Metron common stock written down to a new carrying value of
$3.1 million.
7
7. 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 became effective for
the Company during the first quarter of the fiscal year ending August 30,
2003. Adoption did not have an impact on the Company's results of
operations or financial position.
Item 2. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
---------------------
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 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 which are served through direct sales efforts, as well as 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 current fiscal year will end on August 30, 2003 and includes 52
weeks. The previous fiscal year ended on August 31, 2002 and comprised 53 weeks.
Fiscal years are identified in this report according to the calendar year in
which they end. For example, the fiscal year ended August 30, 2003 is referred
to as "fiscal 2003".
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,
industry and geographic concentrations of customers, general customer
creditworthiness and current economic trends when determining its allowance for
doubtful accounts. At November 30, 2002, the Company's allowance for doubtful
accounts was $1.7 million, down from $1.8 million at August 31, 2002.
8
A reserve for sales returns and allowances is established based on historical
trends and current trends in product returns. The Company's reserve for sales
returns and allowances was $1.2 million at both November 30, 2002 and August 31,
2002.
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. The Company's accrual for estimated future warranty costs was $0.7 million
at both November 30, 2002 and August 31, 2002.
Inventory Valuation The Company uses certain estimates and judgments to properly
value inventory. In general, the Company's inventories are recorded at the lower
of 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.
Inventory reserves were $7.1 million at November 30, 2002, up from $5.8 million
at August 31, 2002.
The Company's inventories comprise materials and products subject to
technological obsolescence and which are sold in a highly competitive industry.
If future demand or market conditions are less favorable than current analyses,
additional inventory write-downs or reserves may be required and would be
reflected in cost of sales in the period the revision is made.
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,
requiring an impairment loss to be recorded and the investment written down to a
new cost basis. At November 30, 2002, the Company's investment in Metron
Technology N.V. common stock had a carrying value of $7.6 million with a fair
value of $3.1 million. The decline in fair value was determined to be
other-than-temporary. Accordingly an impairment loss of $4.5 million was
recorded in the first quarter of fiscal 2003 and the investment in Metron common
stock written down to a new carrying value of $3.1 million.
9
Income Taxes In the preparation of the Company's consolidated financial
statements, management is required to estimate income taxes in each of the
jurisdictions in which the Company operates. This process involves estimating
actual current tax exposures together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in the Company's consolidated balance sheet.
The Company has significant amounts of deferred tax assets that are reviewed for
recoverability and valued accordingly. Management evaluates the realizability of
the deferred tax assets on a quarterly basis and assesses the need for valuation
allowances. These deferred tax assets are evaluated by considering historical
levels of income, estimates of future taxable income streams and the impact of
tax planning strategies. A valuation allowance is recorded to reduce deferred
tax assets when it is determined that the Company would not be able to realize
all or part of its deferred tax assets. At November 30, 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. In the
event it was determined that the Company would not be able to realize all or
part of its remaining net deferred tax assets in the future, an adjustment to
increase the deferred tax asset valuation allowance would be charged to income
in the period such determination would be made.
Quarter Ended November 30, 2002 Compared to Quarter Ended November 24, 2001
The following table compares quarterly results with year-ago results, as a
percentage of sales, for each caption.
Three Months Ended
-------------------------
November 30, November 24,
2002 2001
------------ ------------
Net sales 100.0 100.0
Cost of sales 59.3 66.9
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Gross profit 40.7 33.1
Selling, general and administrative expenses 35.2 38.4
Engineering, research and development expenses 7.6 8.8
Nonrecurring charges 3.4 8.7
----- -----
Operating loss (5.5) (22.8)
Interest income, net (0.6) (1.0)
Other expense (income), net 8.9 (0.6)
----- -----
Loss before income taxes and other items below (13.8) (21.2)
Income tax benefit (3.4) (8.1)
Equity in net loss of affiliated companies 0.1 --
Minority interest in subsidiaries' net loss -- (0.3)
----- -----
Net loss (10.5) (12.9)
===== =====
Net sales Net sales were $53.7 million in the first quarter of fiscal 2003, up
17% compared to $45.9 million in the first quarter of fiscal 2002. Sequentially,
sales for the quarter were 15% lower than the fourth quarter of fiscal 2002.
The semiconductor market generated 79% of the Company's overall sales compared
to about 74% a year earlier, with sales up about 27% over the prior year. Most
semiconductor product areas recorded sales gains, with the largest improvements
experienced by the wafer shipper products, test, assembly and packaging
products, and microenvironments product groups. Orders for all product groups in
the semiconductor market picked-up slightly at the end of the quarter or
minimally flattened. However, market conditions in the semiconductor industry
remain difficult and uncertain.
Entegris's Data Storage market accounted for about 12% of net sales, compared to
16% in the first quarter of fiscal 2002. Although sales declined 16% from the
year-ago quarter, Data Storage sales and orders were stronger than expected,
particularly after the slowdown in the business experienced in the fourth
quarter of fiscal 2002. Demand for hard disks was relatively strong, inventories
in the supply chain were low, and two significant customers ordered new products
for their entire production line.
10
Service market revenue, up 24% for the quarter compared to the year-ago quarter,
made up 8% of overall sales, the same as a year ago.
On a geographic basis, total sales to North America were 43%, Asia Pacific 25%,
Europe 17% and Japan 15%. Sales increased from the first quarter 2002 to the
first quarter 2003 in all geographic regions, except Japan. An increasing
percentage of total sales came from Asia Pacific and Europe, where sales were up
65% and 52%, respectively. The Company estimates that about 65% of total sales
for the quarter were for unit-driven products and 35% for products associated
with capital spending.
While the business environment continues to be uncertain, the Company expects
sales for the second quarter of fiscal 2003 to be about flat with first quarter
fiscal 2003 levels.
Gross profit Gross profit in the first quarter of fiscal 2003 increased by $6.7
million to $21.9 million, an increase of 44% from the $15.2 million reported in
the first quarter of fiscal 2002. The gross margin for the fiscal 2003 first
quarter was 40.7% versus 33.1% in the year-ago first quarter. Gross margin and
gross profit gains were reported by both domestic and international operations.
The improvements in fiscal 2003 figures were primarily the result of the
increased sales levels noted above, which resulted in higher production levels,
and the benefits of the Company's cost reduction and manufacturing efficiency
actions associated with facility consolidations initiated over the past 18
months, investments in automation and the creation of manufacturing centers
focused on the production of products with similar requirements in order to
maximize the utilization of the Company's facilities.
As discussed above, management expects sales levels for the second quarter of
fiscal 2003 to be about flat with first quarter sales levels. Accordingly,
factory utilization, a significant factor associated with changes in gross
margin levels, is expected to remain essentially unchanged.
Selling, general and administrative expenses . Selling, general and
administrative (SG&A) expenses increased $1.3 million, or 7%, to $18.9 million
in the first quarter of fiscal 2003, up from $17.6 million in the first quarter
of fiscal 2002. The year-to-year increase was due to the higher sales
commissions and bonus accruals. In addition, the first quarter of fiscal 2002
included the reversal of profit-sharing accruals made in earlier quarters when
the Company generated net earnings, which were ultimately not paid. SG&A costs,
as a percent of net sales, decreased to 35.2% from 38.4%. In absolute dollars,
SG&A expenses will generally increase as sales and profitability improve, and
profit sharing and charitable donation accruals are recorded.
Nonrecurring charges During the first quarter of fiscal 2003, the Company
recorded a pre-tax charge of $1.8 million related to the relocation of its
Upland, California operations and certain workforce reductions. The charge
included $0.9 million in termination costs related to a workforce reduction of
approximately 75 employees, $0.4 million for estimated losses for asset
impairment and $0.5 million for future lease commitments on the Upland facility.
The Company expects the Upland plant to be closed and all the equipment sold or
moved to Chaska, Minnesota by the end of February 2003. As of November 30, 2002,
future cash outlays of $1.2 million remained outstanding in connection with the
aforementioned charge, related to severance payments of $0.7 million, which run
through fiscal 2004, and the lease commitments, which run through fiscal 2006.
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, Minnesota and one of its Chaska, Minnesota plants. The charge
included $1.5 million in termination costs related to a workforce reduction of
230 employees and $2.3 million for estimated losses for asset impairment.
Engineering, research and development expenses Engineering, research and
development (ER&D) expenses were $4.1 million in the first quarter of fiscal
2003, up marginally from $4.0 million in the first quarter of fiscal 2002. ER&D
costs, as a percent of net sales, decreased to 7.6% from 8.8% mainly reflecting
higher net sales in the current year's first quarter. The Company continued to
focus on the support of current product lines, and the development of new
products and manufacturing technologies.
11
Interest income, net Net interest income of $0.3 million in the first quarter of
fiscal 2003 compared to $0.5 million in the year-ago period. The change reflects
the lower rates of interest earned on marketable securities in the current year
compared to the year-ago period.
Other (income) expense, net Other expense was $4.8 million in the first quarter
of fiscal 2003 compared to other income of $0.3 million in the first quarter of
fiscal 2002. Included in fiscal 2003 was the impairment loss of $4.5 million, or
$3.3 million after tax, related to the write-down of the Company's equity
investment in Metron Technology N.V. common stock. The Company, a founding
shareholder of Metron, owns about 1.6 million shares of Metron common stock.
Prior to the impairment charge, the Company's investment in Metron Technology
N.V. common stock had a carrying value of $7.6 million. At November 30, 2002,
the fair value of the investment was $3.1 million, based on a price of $2.00 per
share, the closing price of Metron at the end of the first quarter. The decline
in fair value was determined to be other-than-temporary. Accordingly an
impairment loss of $4.5 million was recorded in the first quarter of fiscal 2003
and the investment in Metron common stock written down to a new carrying value
of $3.1 million.
Other expense in the first quarter of fiscal 2003 also included $0.3 million of
foreign currency losses. Other income of $0.3 million in the first quarter of
fiscal 2002 mainly reflected the foreign currency gains associated with forward
foreign currency contracts.
Income tax benefit expense An income tax benefit of $1.8 million in the first
quarter of fiscal 2003 compared to an income tax benefit of $3.7 million a year
earlier, both figures primarily reflecting the Company's pre-tax losses. The
effective tax rate was 24.7% in the first quarter of fiscal 2003, compared to
38% in the first quarter of fiscal 2002. Excluding the tax effect from the
impairment loss recorded on the Company's investment in Metron stock, the
effective tax rate was 23.0%. The difference between 23% and the U.S. statutory
tax rate of 35 % is primarily due to lower taxes on foreign operations, a tax
benefit associated with export activities, and a tax credit associated with R&D
activities. Tax calculations at fairly low profitability levels are complex and
sensitive to estimates of annual levels of profitability. Therefore, it is
possible that there will be volatility in the Company's effective tax rate
during the remainder of the fiscal year.
Equity in net income of affiliates Equity in the net loss of affiliates was $0.1
million in the first quarter of fiscal 2003 and represents the Company's share
of losses in entities accounted for under the equity method of accounting. No
equity in the net earnings of affiliates was recorded in the first quarter of
fiscal 2002 as the Company did not account for any entities under the equity
method of accounting during that period.
Minority interest The Company recorded no minority interest for the three months
ended November 30, 2002 as all of its consolidated subsidiaries are 100%-owned.
For the first quarter of fiscal 2002, the minority interest in subsidiaries' net
loss was $0.1 million, reflecting the net operating losses of the Company's
formerly 51%-owned Japanese subsidiaries, which became 100%-owned in February
2002.
Net loss The Company recorded a net loss of $5.6 million, or $0.08 per diluted
share, in the first quarter of fiscal 2003, compared to a net loss of $5.9
million, or $0.08 per diluted share, in the year-ago period.
Liquidity and Capital Resources
Operating activities Cash flow provided by operating activities totaled $6.4
million in the first quarter of fiscal 2003. The Company's net loss of $5.6
million was more than offset by noncash charges, including depreciation and
amortization of $6.8 million and the impairment loss of $4.5 million on the
Company's investment in Metron Technology, as well as slight reductions in
accounts receivable and inventory. Working capital at November 30, 2002 stood at
$175.8 million, including $120.8 million in cash, cash equivalents and
short-term investments.
Investing activities. Cash flow provided by investing activities totaled $2.8
million in the first quarter of fiscal 2003. The company had maturities, net of
purchases of short-term investments of $7.5 million during the quarter.
Short-term investments stood at $37.1 million at November 30, 2002.
12
Acquisition of property and equipment totaled $2.5 million, primarily for
additions of manufacturing, computer and laboratory equipment. The Company
expects capital expenditures of approximately $25 million during fiscal 2003,
consisting mainly of spending on manufacturing equipment, tooling and
information systems. The Company also invested $1.8 million in equipment
expected to be contributed to a joint venture in exchange for an equity interest
in the entity.
Financing activities Cash used by financing activities totaled $0.1 million
during the first quarter of fiscal 2003. The company made payments $1.7 million
on borrowings, while proceeds from short-term borrowings were $1.4 million. The
Company received $0.1 million in connection with common shares issued under the
Company's stock option plan.
As of November 30, 2002, the Company's sources of available funds comprised
$120.8 million in cash, cash equivalents, short-term investments plus various
credit facilities. Entegris has unsecured revolving commitments with two
commercial banks with aggregate borrowing capacity of $20 million, with no
borrowings outstanding at November 30, 2002 and lines of credit with seven
international banks that provide for borrowings of currencies for the Company's
overseas subsidiaries, equivalent to an aggregate of approximately $13 million.
Borrowings outstanding on these lines of credit were approximately $10.5 million
at November 30, 2002.
At November 30, 2002, the Company's shareholders' equity stood at $318.4
million. Book value per share was $4.47, down from $4.53 per share at the end of
fiscal 2002. The Company's net loss for the three months ended November 30, 2002
accounted for the decrease.
The Company believes that its cash and cash equivalents, cash flow from
operations and available credit facilities will be sufficient to meet its
working capital and investment requirements for the next 12 months. However,
future growth, including potential acquisitions, may require additional funding,
and from time to time the Company may need to raise capital through additional
equity or debt financing. There can be no assurance that any such financing
would be available on commercially acceptable terms.
Recently Issued Accounting Pronouncements
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. Accordingly, the accounting treatment of any exit or disposal activities
initiated by the Company after December 31, 2002 may differ from the treatment
used by the Company for previous exit or disposal activities, particularly as
relates to the timing and disclosure of certain costs associated with the exit
or disposal activities.
Cautionary Statements This report contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. These
statements may include forward-looking statements which reflect the Company's
current views with respect to future events and financial performance. The words
"believe," "expect," "anticipate," "intends," "estimate," "forecast," "project,"
"should" and similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All forecasts and projections in this document are "forward-looking
statements," and are based on management's current expectations of the Company's
near-term results, based on current information available pertaining to the
Company, including the risk factors identified in the Company's Annual Report on
Form 10-K for the fiscal year ended August 31, 2002. Among these risks and
uncertainties are general economic conditions, the volatile and cyclical nature
of the semiconductor industry, the risks associated with political and global
market instability, including the possibility of war, the ability of the Company
to develop and protect its intellectual property, the risks associated with the
acceptance of new products and services and the successful integration of
acquisitions. Other factors could also cause the Company's results to differ
materially from those contained in its forward-looking statements.
13
Item 3: Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Entegris's principal market risks are sensitivities to interest rates and
foreign currency exchange rates. The Company's current exposure to interest rate
fluctuations is not significant. Most of its outstanding debt at 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 $1.0 million annually.
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 November 30, 2002, the company was party to forward
contracts with notional value of approximately $0.8 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 $0.8 million decrease in the fair value of the Company's
investment as of November 30, 2002.
Item 4: Controls and Procedures
- --------------------------------
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-14(c) of the Securities
Exchange Act of 1934, as amended, within 90 days of the filing date of this
Quarterly Report on Form 10-Q. Based upon their evaluation, the principal
executive officer and principal financial officer concluded that the Company's
disclosure controls and procedures are effective. There were no significant
changes in the Company's internal controls or in other factors that could
significantly affect these controls, since the date the controls were evaluated.
14
PART II
OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
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.
(b) Reports on Form 8-K
None
15
CONFORMED COPY
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTEGRIS, INC.
Date: January 14, 2003 /s/ James E. Dauwalter
----------------------
James E. Dauwalter
President and Chief Executive Officer
Date: January 14, 2003 /s/ John D. Villas
------------------
John D. Villas
Chief Financial Officer
16