Entegris, Inc.
ENTEGRIS INC (Form: 10-Q, Received: 10/27/2009 16:47:40)
Table of Contents

 

 

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 September 26, 2009

Commission File Number 000-30789

 

 

ENTEGRIS, INC.

(Exact name of registrant as specified in charter)

 

 

 

Delaware   41-1941551
(State or other jurisdiction of incorporation)   (IRS Employer ID No.)

129 Concord Road, Billerica, Massachusetts 01821

(Address of Principal Executive Offices)

Registrant’s Telephone Number (978) 436-6500

 

 

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   ¨     NO   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   x

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 October 23, 2009

Common Stock, $0.01 Par Value    129,972,988

 

 

 


Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES

FORM 10-Q

TABLE OF CONTENTS

FOR THE QUARTER ENDED SEPTEMBER 26, 2009

 

    

Description

   Page
PART I      
Item 1.    Consolidated Financial Statements   
   Consolidated Balance Sheets as of September 26, 2009 and December 31, 2008    3
   Consolidated Statements of Operations for the Three Months and Nine Months Ended September 26, 2009 and September 27, 2008    4
   Consolidated Statements of Shareholders’ Equity and Comprehensive Loss for the Three Months and Nine Months Ended September 26, 2009 and September 27, 2008    5
   Consolidated Statements of Cash Flows for the Nine Months Ended September 26, 2009 and September 27, 2008    6
   Notes to Condensed Consolidated Financial Statements    7
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    20
Item 3.    Quantitative and Qualitative Disclosures about Market Risk    36
Item 4.    Controls and Procedures    36
PART II    Other Information   
Item 1.    Legal Proceedings    37
Item 6.    Exhibits    38

 

 

 

 

 

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Table of Contents

Item 1. Financial Statements

ENTEGRIS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(In thousands, except share data)

   September 26, 2009     December 31, 2008  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 78,376      $ 115,033   

Trade accounts and notes receivable, net of allowance for doubtful accounts of $1,514 and $1,312

     80,062        70,535   

Inventories

     84,116        102,189   

Deferred tax assets and deferred tax charges

     11,001        14,661   

Assets held for sale

     —          2,450   

Other current assets

     6,615        8,260   
                

Total current assets

     260,170        313,128   
                

Property, plant and equipment, net of accumulated depreciation of $222,094 and $208,527

     146,726        159,738   

Other assets:

    

Intangible assets, net

     82,788        93,139   

Deferred tax assets and noncurrent tax assets

     12,126        13,315   

Other assets

     16,219        18,504   
                

Total assets

   $ 518,029      $ 597,824   
                

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Current maturities of long-term debt

   $ 11,464      $ 13,166   

Short-term borrowings

     7,001        —     

Accounts payable

     27,044        21,782   

Accrued liabilities

     29,475        36,971   

Deferred tax liabilities and income taxes payable

     5,694        7,437   
                

Total current liabilities

     80,678        79,356   
                

Long-term debt, less current maturities

     73,135        150,516   

Pension benefit obligations and other liabilities

     21,448        24,559   

Deferred tax liabilities and noncurrent income tax liabilities

     4,724        7,223   

Commitments and contingent liabilities

    

Shareholders’ equity:

    

Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of September 26, 2009 and December 31, 2008

     —          —     

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares: 129,943,181 and 113,101,535

     1,299        1,131   

Additional paid-in capital

     749,388        684,974   

Retained deficit

     (444,092     (376,247

Accumulated other comprehensive income

     28,207        26,312   
                

Total Entegris, Inc. shareholders’ equity

     334,802        336,170   

Noncontrolling interest

     3,242        —     
                

Total equity

     338,044        336,170   
                

Total liabilities and shareholders’ equity

   $ 518,029      $ 597,824   
                

See the accompanying notes to condensed consolidated financial statements.

 

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ENTEGRIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

(In thousands, except per share data)

   Three months ended     Nine months ended  
     September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Net sales

   $ 110,706      $ 145,789      $ 252,320      $ 441,963   

Cost of sales

     65,929        90,391        178,795        262,690   
                                

Gross profit

     44,777        55,398        73,525        179,273   

Selling, general and administrative expenses

     29,175        35,373        84,581        115,800   

Engineering, research and development expenses

     8,575        10,284        25,322        31,147   

Amortization of intangible assets

     4,723        4,858        14,635        14,497   

Impairment of goodwill

     —          379,810        —          379,810   

Restructuring charges

     2,368        3,332        12,454        3,332   
                                

Operating loss

     (64     (378,259     (63,467     (365,313

Interest expense, net

     2,681        614        7,105        682   

Other expense, net

     4,114        947        429        1,823   
                                

Loss before income taxes and equity in affiliates

     (6,859     (379,820     (71,001     (367,818

Income tax expense (benefit)

     623        12,897        (4,226     16,312   

Equity in net loss of affiliates

     132        195        1,076        49   
                                

Loss from continuing operations

     (7,614     (392,912     (67,851     (384,179
                                

Loss from operations of discontinued businesses, net of taxes

     —          (90     —          (1,025
                                

Net loss

     (7,614     (393,002     (67,851   $ (385,204

Less net loss attributable to the noncontrolling interest

     6        —          6        —     
                                

Net loss attributable to Entegris, Inc.

   $ (7,608   $ (393,002   $ (67,845   $ (385,204
                                

Amounts attributable to Entegris, Inc.

        

Loss from continuing operations, net of tax

   $ (7,608   $ (392,912   $ (67,845   $ (384,179

Loss from discontinued operations, net of tax

     —          (90     —          (1,025
                                

Net loss attributable to Entegris, Inc.

   $ (7,608   $ (393,002   $ (67,845   $ (385,204
                                

Basic loss per common share attributable to Entegris, Inc.:

        

Continuing operations

   $ (0.07   $ (3.51   $ (0.60   $ (3.40

Discontinued operations

     —          (0.00     —          (0.01

Net loss attributable to Entegris, Inc.

   $ (0.07   $ (3.52   $ (0.60   $ (3.41

Diluted loss per common share attributable to Entegris, Inc.:

        

Continuing operations

   $ (0.07   $ (3.51   $ (0.60   $ (3.40

Discontinued operations

     —          (0.00     —          (0.01

Net loss attributable to Entegris, Inc.

   $ (0.07   $ (3.52   $ (0.60   $ (3.41

Weighted shares outstanding:

        

Basic

     115,023        111,796        113,355        112,942   

Diluted

     115,023        111,796        113,355        112,942   

See the accompanying notes to consolidated financial statements.

 

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ENTEGRIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

(Unaudited)

 

(In thousands)

   Common
shares
outstanding
    Common
stock
    Additional
paid-in

capital
    Retained
earnings
    Accumulated other
comprehensive
income
   Total     Comprehensive
loss
 

Balance at December 31, 2007

   115,356      $ 1,154      $ 701,510      $ 145,462      $ 4,183    $ 852,309     

Shares issued under stock plans

   1,276        13        3,075        —          —        3,088     

Share-based compensation expense

   —          —          5,558        —          —        5,558     

Repurchase and retirement of common stock

   (3,971     (40     (24,148     (4,707     —        (28,895  

Other, net of tax

   —          —          —          —          38      38        38   

Foreign currency translation

   —          —          —          —          7,704      7,704        7,704   

Net loss

   —          —          —          (385,204     —        (385,204     (385,204
                                                     

Total comprehensive loss

                $ (377,462
                     

Balance at September 27, 2008

   112,661      $ 1,127      $ 685,995      $ (244,449   $ 11,925    $ 454,598     
                                               

 

(In thousands)

   Common
shares
outstanding
   Common
stock
   Additional
paid-in

capital
   Retained
deficit
    Accumulated other
comprehensive
income
   Noncontrolling
interest
    Total     Comprehensive
loss
 

Balance at December 31, 2008

   113,102    $ 1,131    $ 684,974    $ (376,247   $ 26,312    $ —        $ 336,170     

Shares issued under stock plans

   741      7      1,054      —          —        —          1,061     

Shares issued under stock offering

   16,100      161      56,526             56,687     

Share-based compensation expense

   —        —        6,299      —          —        —          6,299     

Tax benefit associated with stock plans

   —        —        535      —          —        —          535     

Recognition of noncontrolling interest upon acquisition of business

   —        —        —        —          —        3,248        3,248        —     

Reclassification of foreign currency translation associated with acquisition of business

   —        —        —        —          756      —          756        756   

Other, net of tax

   —        —        —        —          65      —          65        65   

Foreign currency translation

   —        —        —        —          1,074      —          1,074        1,074   

Net loss

   —        —        —        (67,845     —        (6     (67,851     (67,851
                                                          

Total comprehensive loss

                     $ (65,956
                          

Balance at September 26, 2009

   129,943    $ 1,299    $ 749,388    $ (444,092   $ 28,207    $ 3,242      $ 338,044     
                                                    

See the accompanying notes to condensed consolidated financial statements.

 

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ENTEGRIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Nine months ended  

(In thousands)

   September 26, 2009     September 27, 2008  

Operating activities:

    

Net loss

   $ (67,851   $ (385,204

Adjustments to reconcile net loss to net cash used in operating activities:

    

Loss from discontinued operations

     —          1,025   

Depreciation

     23,628        18,776   

Amortization

     14,635        14,497   

Share-based compensation expense

     6,299        5,558   

Impairment of goodwill

     —          379,810   

Impairment of equity investments

     —          1,102   

Impairment of property and equipment

     388        —     

Provision for doubtful accounts

     190        (140

Provision for excess and obsolete inventory

     4,488        4,116   

Deferred tax valuation allowance

     17,228        26,924   

Provision for deferred income taxes

     (19,937     (14,771

Equity in net loss of affiliates

     1,076        49   

Charge for fair value mark-up of acquired inventory sold

     4,116        5,718   

Loss on sale of property and equipment

     19        247   

Loss recognized as a result of remeasuring to fair value the equity interest in the acquiree held by the Company before the business combination

     201        —     

Net loss attributable to noncontrolling interest

     6        —     

Changes in operating assets and liabilities, excluding effects of acquisitions:

    

Trade accounts receivable and notes receivable

     (7,486     14,169   

Inventories

     10,715        (884

Accounts payable and accrued liabilities

     1,783        (9,723

Other current assets

     2,370        2,371   

Income taxes payable

     2,037        (22,230

Other

     (1,030     316   
                

Net cash (used in) provided by operating activities

     (7,125     41,726   
                

Investing activities:

    

Acquisition of property and equipment

     (11,521     (19,194

Acquisition of businesses, net of cash acquired

     493        (161,973

Purchase of equity investments

     —          (10,982

Proceeds from sale of assets held for sale

     2,314        —     

Proceeds from sale of property and equipment

     236        1,029   
                

Net cash used in investing activities

     (8,478     (191,120
                

Financing activities:

    

Principal payments on short-term borrowings and long-term debt

     (528,116     (48,406

Proceeds from short-term borrowings and long-term debt

     452,722        133,000   

Issuance of common stock

     1,061        3,088   

Proceeds from stock offering, net of offering costs

     56,687        —     

Repurchase and retirement of common stock

     —          (28,895

Payments for debt issuance costs

     (3,638     (622
                

Net cash (used in) provided by financing activities

     (21,284     58,165   
                

Discontinued operations:

    

Net cash used in operating activities

     —          (343

Net cash provided by investing activities

     —          735   
                

Net cash provided by discontinued operations

     —          392   
                

Effect of exchange rate changes on cash and cash equivalents

     230        4,143   
                

Decrease in cash and cash equivalents

     (36,657     (86,694

Cash and cash equivalents at beginning of period

     115,033        160,655   
                

Cash and cash equivalents at end of period

   $ 78,376      $ 73,961   
                

Supplemental Cash Flow Information

    

Non-cash transactions

    

Acquisition of business through the use of a seller’s note

   $ 3,221        —     

See the accompanying notes to condensed consolidated financial statements.

 

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ENTEGRIS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Entegris is a leading provider of a wide range of products for purifying, protecting and transporting critical materials used in processing and manufacturing in the semiconductor and other high-technology industries. The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation.

The preparation of condensed consolidated 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, particularly receivables, inventories, property, plant and equipment, and intangibles, accrued expenses and income taxes and related accounts, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

In the opinion of the Company, the accompanying unaudited condensed 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 September 26, 2009 and December 31, 2008, the results of operations for the three months and nine months ended September 26, 2009 and September 27, 2008, and shareholders’ equity and comprehensive loss, and cash flows for the nine months ended September 26, 2009 and September 27, 2008.

The condensed consolidated 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 consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2008. The results of operations for the nine months ended September 26, 2009 are not necessarily indicative of the results to be expected for the full year.

Subsequent events have been evaluated up to and including October 27, 2009 which is the date these financial statements were issued.

Basis of Presentation The accompanying condensed consolidated financial statements have been prepared on a going concern basis.

The Company had a net loss of $517.0 million in fiscal 2008, including after-tax goodwill impairment charges of $454.6 million, a first quarter 2009 net loss of $37.7 million, a second quarter 2009 net loss of $22.5 million, and a third quarter 2009 net loss of $7.6 million. The Company has experienced significant revenue deterioration due to a severe downturn in both the capital and unit-driven segments of the semiconductor industry that began during the second half of 2008. Revenues declined sharply from $145.8 million in the third quarter of 2008 to $112.7 million in the fourth quarter of 2008 and $59.0 million in the first quarter of 2009, followed by a modest recovery to $82.6 million in the second quarter of 2009 and $110.7 million in the third quarter of 2009.

As a result of the poor business environment, the Company projected early in 2009 that it would violate the debt covenants in its then-existing revolving credit facility. Accordingly, the Company’s management, working with its banks, undertook the amendment of its revolving credit facility. On March 2, 2009, the Company amended and restated its revolving credit facility. The restated revolving credit facility, as further amended in July 2009 and August 2009, currently provides a revolving commitment of $121.7 million. $11.0 million of the revolving commitment may not be borrowed unless a majority of the lenders consent. The Company’s ability to borrow under the restated credit facility is also subject to a borrowing base, which is calculated based on the Company’s level of qualifying U.S. accounts receivable, inventories and value of property, plant and equipment. At September 26, 2009, the Company’s borrowing base supported $106.5 million in total availability with $67.4 million in borrowings and $1.3 million in undrawn letters of credit outstanding at the time. The restated revolving credit facility requires the Company to maintain compliance with new debt covenants

 

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and to pay higher rates of interest. The Company’s restated credit agreement contains financial covenants that limit its ability to make capital expenditures of more than $16.0 million in 2009 and more than $20.0 million in 2010; requires that the Company maintain a minimum level of cash in the United States; and requires the Company to achieve certain levels of EBITDA performance during 2009 and the first quarter of 2010. Beginning in the second quarter of 2010, the Company must maintain or exceed fixed charge coverage and cash flow leverage ratios. (Also see Note 8 to the Company’s condensed consolidated financial statements). Through September 26, 2009, the Company was in compliance with all applicable debt covenants.

Fair Value of Financial Instruments The carrying value of cash equivalents, accounts receivable, accounts payable 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 and approximated its carrying value at September 26, 2009.

2. ACQUISITION

In 2007, the Company acquired a 40% ownership interest in Pureline Co., Ltd. (Pureline), a privately held company located in Munmak, Korea and manufacturer of fluid handling products. The Company accounted for its interest in Pureline under the equity method of accounting. Concurrent with its 2007 investment in Pureline, the Company obtained an option to purchase one-half of the remaining outstanding shares of Pureline through July 31, 2009 and the remaining outstanding shares thereafter by July 31, 2010. The exercise price of such options to purchase the additional equity interest in Pureline was set at a predetermined multiple of Pureline’s calendar 2008 and 2009 adjusted earnings.

On July 31, 2009, the Company exercised its option and acquired an additional 30% equity interest in Pureline. The exercise price of the option to purchase the additional 30% equity interest was $4.3 million. The Company paid $1.1 million in cash and executed a note to the seller for $3.2 million, payable in three installments through April 2010. The addition of Pureline augments the Company’s base of business in the semiconductor industry, particularly in the growing Korean market.

As of the date of the acquisition, the Company owned a 70% controlling interest in Pureline. Accordingly, the transaction was accounted for under the acquisition method of accounting and the results of operations of Pureline are included in the Company’s consolidated financial statements as of and since July 31, 2009.

Pureline’s sales and operating results for the three-month period ended September 26, 2009 were not material to the Company’s condensed consolidated financial statements. Pro forma results are not included since this acquisition does not constitute a material business combination.

The Company remeasured its previously held equity interest in Pureline at its July 31, 2009 fair value. The July 31, 2009 fair value of the equity interest in Pureline held by the Company before the acquisition date was $4.3 million. Based on the carrying value of the Company’s equity interest in Pureline held by the acquirer before the business combination, the Company recognized a loss of $0.2 million in earnings. In prior reporting periods, the Company recognized changes in the value of its equity interest in Pureline related to translation adjustments in other comprehensive loss. Accordingly, the $0.8 million recognized previously in other comprehensive loss was reclassified and included in the calculation of the charge to earnings.

In connection with the transaction, the Company measured and recorded the fair value of the 30% noncontrolling interest in Pureline. The fair value of the noncontrolling interest in Pureline at July 31, 2009 was $3.2 million.

 

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The purchase price has been preliminarily allocated based on the fair values of all of Pureline’s assets acquired and liabilities assumed, with the noncontrolling interest associated with the 30% minority interest recognized in the Company’s consolidated balance sheet. The final valuation of net assets is expected to be completed as soon as possible, but no later than one year from the acquisition date. Certain net assets and liabilities are still being finalized. The following table summarizes the preliminary allocation of the purchase price to the fair values of the assets at the date of acquisition:

 

(In thousands):

    

Accounts receivable, inventory and other assets

   $ 3,730

Property, plant and equipment

     3,909

Identifiable intangible assets

     4,210

Goodwill

     716
      

Total assets acquired

     12,565
      

Current liabilities

     604

Long-term liabilities

     82
      

Total liabilities assumed

     686
      

Net assets acquired

   $ 11,879
      

The identifiable intangible assets included tradenames and trademarks, patents and customer relationships with estimated useful lives ranging from 7 to 10 years. The fair value of identifiable intangible assets was determined using various valuation techniques. These methods used a forecast of expected future net cash flows and do not anticipate any revenue or cost synergies. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams, some of which are more certain than others.

The valuation of the Company’s previously held equity interest, the 30% noncontrolling interest in Pureline and the identifiable intangible assets were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management.

In performing these valuations, the Company used discounted cash flows and other factors as the best evidence of fair value. The key underlying assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. There are inherent uncertainties and management judgment required in these determinations. No assurance can be given that the underlying assumptions will occur as projected.

The goodwill recorded in connection with the acquisition will not be amortized and is not deductible for tax purposes. The goodwill is expected to be realized through the benefits of cost-saving synergies associated with the leveraging of the Company’s manufacturing and administrative functions as well as the enhancement of sales and marketing efforts through the Company’s expanded global sales and distribution network and product offerings. The goodwill will be included in the Company’s Contamination Control Solutions reporting unit.

3. DISCONTINUED OPERATIONS

In June 2007, the Company announced its intent to divest its cleaning equipment business, a seller of precision cleaning systems to semiconductor and hard disk drive customers for use in their manufacturing operations. The Company sold the assets of the cleaning equipment business in April 2008 for proceeds of $0.7 million, essentially equal to the carrying value of the assets.

 

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The condensed consolidated financial statements have been reclassified to segregate as discontinued operations the assets and liabilities, and operating results of, the product lines divested for all periods presented. The summary of operating results from discontinued operations is as follows:

 

(In thousands)

   Three months
ended
September 27,
2008
    Nine months
ended
September 27,
2008
 

Net sales

   $ —        $ 570   
                

Loss from discontinued operations, before income taxes

   $ (142   $ (1,634

Income tax benefit

     52        609   
                

Loss from discontinued operations, net of taxes

   $ (90   $ (1,025
                

4. INVENTORIES

Inventories consist of the following:

 

(In thousands)

   September 26,
2009
   December 31,
2008

Raw materials

   $ 20,723    $ 24,922

Work-in process

     13,821      16,498

Finished goods (a)

     49,005      59,954

Supplies

     567      815
             

Total inventories

   $ 84,116    $ 102,189
             

 

(a) Includes consignment inventories held by customers for $3,989 and $4,465 at September 26, 2009 and December 31, 2008, respectively.

5. INTANGIBLE ASSETS

Identifiable intangible assets, net of amortization, of $82.8 million as of September 26, 2009 are being amortized over useful lives ranging from 3 to 15 years and are as follows:

 

     As of September 26, 2009

(In thousands)

   Gross carrying
amount
   Accumulated
amortization
   Net carrying
value

Patents

   $ 18,954    $ 16,430    $ 2,524

Developed technology

     74,988      45,049      29,939

Trademarks and trade names

     17,134      7,668      9,466

Customer relationships

     56,769      16,501      40,268

Other

     5,977      5,386      591
                    
   $ 173,822    $ 91,034    $ 82,788
                    
     As of December 31, 2008

(In thousands)

   Gross carrying
amount
   Accumulated
amortization
   Net carrying
value

Patents

   $ 17,855    $ 15,218    $ 2,637

Developed technology

     74,988      36,742      38,246

Trademarks and trade names

     15,500      6,872      8,628

Customer relationships

     55,400      12,595      42,805

Other

     7,664      6,841      823
                    
   $ 171,407    $ 78,268    $ 93,139
                    

 

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Aggregate amortization expense for the three months and nine months ended September 26, 2009 amounted to $4.7 million and $14.6 million, respectively. Estimated amortization expense for calendar years 2009 to 2013 and thereafter is approximately $19.2 million, $13.3 million, $10.1 million, $9.4 million, $8.8 million, and $36.7 million, respectively.

6. WARRANTY

The Company accrues for warranty costs based on historical trends and the expected material and labor costs to provide warranty services. The majority of products sold are covered by a warranty for periods ranging from 90 days to one year. The following table summarizes the activity related to the product warranty liability during the three-month and nine-month periods ended September 26, 2009 and September 27, 2008:

 

     Three months ended     Nine months ended  

(In thousands)

   September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Balance at beginning of period

   $ 1,195      $ 1,882      $ 1,112      $ 1,306   

Accrual for warranties issued during the period

     185        434        819        1,782   

Adjustment of unused previously recorded accruals

     (351     (471     (408     (674

Settlements during the period

     (101     (354     (595     (923
                                

Balance at end of period

   $ 928      $ 1,491      $ 928      $ 1,491   
                                

7. RESTRUCTURING COSTS

For the three-month and nine-month periods ended September 26, 2009 and September 27, 2008, the accrued liabilities, provisions and payments associated with the employee severance and retention costs of the Company’s restructuring activities were as follows:

 

       Three months ended     Nine months ended  

(In thousands)

   September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Accrued liabilities at beginning of period

   $ 7,559      $ 6,145      $ 12,696      $ 6,209   

Provision

     580        4,074        5,553        9,208   

Payments

     (3,626     (2,009     (13,736     (7,207
                                

Accrued liabilities at end of period

   $ 4,513      $ 8,210      $ 4,513      $ 8,210   
                                

Global restructuring and cost reduction initiatives

In the third quarter of 2008, the Company announced the appointment of a new Chief Operating Officer. In conjunction with this change in executive management, the Company initiated a global business restructuring of its sales and marketing functions, manufacturing operations, and realignment of its global supply chain and related ancillary operational functions. The Company has incurred employee termination and other costs in connection with this business restructuring, as well as actions taken in response to the downturn in the semiconductor industry that began during the second half of 2008.

The Company announced on November 4, 2008 that it would close the larger of its two manufacturing facilities in Chaska, Minnesota and will transfer the related production to its other existing facilities. The closure, which impacted approximately 200 positions in the Company’s worldwide workforce, is expected to be completed by the end of 2009. Associated with these changes, the Company recorded $10.4 million in the year ended December 31, 2008 related to employee severance and retention costs (generally over the employees’ required remaining term of service) that were classified as restructuring charges. In the first quarter of 2009, the Company announced workforce reductions in Asia and Japan, which affected approximately 132 positions. In the second quarter of 2009, the Company announced additional global workforce reductions, affecting approximately 100 positions. In connection with the above actions, the Company recorded charges related to employee severance costs of approximately zero and $4.7 million for the three months and nine months ended September 26, 2009, respectively, which were classified as restructuring charges.

 

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In addition, zero and $1.4 million in accelerated depreciation expense; $1.5 million and $4.8 million in other costs associated with the transfer of production from the Chaska facility; and $0.9 million and $1.6 million related to other workforce reductions were recorded and classified as restructuring charges for the three months and nine months ended September 26, 2009, respectively. The Company expects to incur approximately $1.5 million of restructuring costs in the fourth quarter of 2009, mainly related to the transfer of production within the Micro Environments segment.

Selling, general and administrative expense reductions

In March 2008, the Company terminated approximately 75 employees associated with efforts to adjust the Company’s operations to changing business conditions. In connection with this action, the Company recorded charges of $0.7 million and $4.8 million for the three months and nine months ended September 27, 2008 ($4.8 million for the year ended December 31, 2008) for employee severance and retention costs (generally over the employees’ required remaining term of service) that were primarily classified as selling, general and administrative expenses.

8. REVOLVING CREDIT AGREEMENT

On March 2, 2009, the Company amended and restated its credit agreement (as amended from time to time, the Restated Credit Agreement) with Wells Fargo Bank, National Association, as agent, and certain other banks. The Restated Credit Agreement provided for a maximum $150.0 million revolving credit facility maturing November 1, 2011, replacing the Company’s previous $230.0 million revolving credit facility maturing February 15, 2013.

Under the terms of the Restated Credit Agreement, the initial revolving commitment amount was $150 million, with $11.0 million unavailable without the consent of a majority of lenders. The Company’s ability to borrow was further restricted by a borrowing base, which is adjusted based on the Company’s levels of qualifying domestic accounts receivable, inventories and value of its property, plant and equipment.

On July 17, 2009, the Company amended the Restated Credit Agreement with its lenders. The amendment adjusts the manner in which the Company calculates the fixed asset component of its borrowing base under the Restated Credit Agreement. The adjustment to the fixed asset component of the borrowing base includes step-downs in the Company’s fixed asset valuation as of the last day of fiscal October 2009, January 2010 and April 2010 of $4.0 million, $4.0 million and $3.2 million, respectively. The step-downs in fixed asset valuation could result in the overall borrowing cap being adjusted downward over time, depending on fluctuations to the Company’s other borrowing base components. The July amendment also permitted the acquisition of Pureline Co. Ltd. as described in Note 2 above.

On August 11, 2009, the Company amended its Restated Credit Agreement with its lenders. Prior to the August 11, 2009 amendment to the Restated Credit Agreement, the Company was prohibited from issuing debt securities and was required to use 100% of the net proceeds received in any equity offering to prepay amounts outstanding under the Restated Credit Agreement. In addition, the borrowing base and, therefore, the funds available to the Company under the Agreement, would have been reduced by 100% of the net proceeds of any equity offering, but the revolving commitment amounts would not have been affected.

The August 11, 2009 amendment permits the Company to issue unsecured convertible debt securities (Qualifying Debt Offering) subject to the satisfaction of certain conditions, which include, among others, the Company’s compliance with the financial covenants contained in the Restated Credit Agreement and the receipt by the Company of at least $75.0 million in net proceeds from the offering. The Company will be required to use 100% of the net proceeds from any Qualifying Debt Offering or equity offering to prepay amounts outstanding under the Agreement. In addition, the borrowing base was amended to provide that it will be reduced by (i) 50% of the net proceeds of any Qualifying Debt Offering or equity offering received by the Company on or before August 15, 2010 and (ii) 100% of the net proceeds of any Qualifying Debt Offering or equity offering received by the Company thereafter. The borrowing base will not be reduced by more than $65 million in total in the event of any such offering(s). In addition, the revolving commitment amounts under the Restated Credit Agreement will be reduced by 50% of the receipts of any Qualifying Debt Offering or equity offering received by the Company on or before August 15, 2010.

 

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As described in Note 13 to the condensed consolidated financial statements, on September 16, 2009, the Company issued 16.1 million shares of common stock for $3.80 per share in a registered public offering. The Company received net proceeds of $56.7 million after deducting underwriting fees and other offering costs of $4.5 million. All of these proceeds were applied to pay down the outstanding balance under the Restated Credit Agreement. In addition, under the terms of the Restated Credit Agreement, as per the August 11, 2009 revision, the revolving commitment decreased by 50% of the net proceeds, or $28.3 million, to $121.7 million. $11.0 million of revolving commitment can not be borrowed unless a majority of the lenders consent. The revolving commitment is further restricted by the Company’s borrowing base.

The Company had outstanding borrowings under the Restated Credit Agreement of approximately $67.4 million as of September 26, 2009, with an additional $1.3 million undrawn on outstanding letters of credit. The Company’s borrowing base supported $106.5 million in total availability as of September 26, 2009.

The full amount outstanding under the Agreement is due on November 1, 2011, unless paid prior to that date. While the Restated Credit Agreement allows the Company some flexibility to raise additional capital, there is no assurance that adequate additional capital would be available on reasonable terms, on a timely basis or at all.

The financial covenants in the Restated Credit Agreement replaced those in the prior credit agreement. Through September 26, 2009, the Company was in compliance with all applicable debt covenants of the Restated Credit Agreement.

The Restated Credit Agreement requires that the Company not exceed certain negative year-to-date EBITDA amounts in 2009 and that the Company exceed certain positive year-to-date EBITDA amounts at prescribed levels on a monthly basis through March 2010. Under the Restated Credit Agreement EBITDA is calculated by adding consolidated net income attributable to Entegris, Inc., depreciation, amortization, share-based compensation expense, interest expense, income taxes, non-cash gains and losses, extraordinary gains and losses, non-recurring expenses associated with a permitted acquisition, foreign exchange expense and certain expenses related to the Restated Credit Agreement. Non-cash gains and losses include adjustments to the Company’s excess and obsolete inventory reserves and allowances for doubtful accounts, and impairment charges of long-lived assets and investments. In addition, the credit agreement allows the add-back of up to $1.0 million in restructuring charges.

The EBITDA covenant levels required by the Restated Credit Agreement are indicated in the table below. The Company’s actual year-to-date EBITDA, as defined by the Restated Credit Agreement, was $(8.3) million at September 26, 2009.

 

Period ending

   (In thousands)  

Fiscal 2009 year-to-date EBITDA levels

  

September 2009

     (62,000

October 2009

     (62,000

November 2009

     (62,000

December 2009

     (56,000

Fiscal 2010 year-to-date EBITDA levels

  

January 2010

   $ (3,000

February 2010

     2,000   

March 2010

     7,000   

Beginning in the second quarter of 2010, the foregoing minimum EBITDA covenants expire, and the Restated Credit Agreement requires that the Company maintain a cash flow leverage ratio of no more than 3.0 to 1.0 and a fixed charge coverage ratio no lower than 1.5 to 1.0. The cash flow leverage ratio measures the sum of short-term borrowings, long-term debt and capital lease obligations divided by the most recent two fiscal quarters’ EBITDA (as defined above) multiplied by two. The fixed charge coverage ratio measures the sum of EBITDA (as defined above) and lease expense less the sum of capital expenditures and income tax payments, which figure in turn is divided by the sum of interest expense, lease expense and scheduled principal payments.

 

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In addition to the financial metric covenants required under the Restated Credit Agreement, the Company’s is restricted from making capital expenditures in excess of $16.0 million in 2009 and $20.0 million in 2010. The Company must also maintain a minimum of $25.0 million in domestic cash balances under the terms of the Restated Credit Agreement.

Under the terms of the Restated Credit Agreement, the Company may elect that the loans comprising each borrowing bear interest at a rate per annum equal to either (a) the sum of 4.25% plus a base rate equal to the highest of: (i) the prime rate then in effect, (ii) the Federal Funds rate then in effect plus 1.25%, (iii) the one-month LIBOR rate then in effect plus 1.25% or (iv) 3.25%; or (b) the sum of 5.25% plus the greater of the LIBOR rate then in effect or 1.50%. These interest rates may be increased by 2.25% if the Company’s fiscal year-to-date EBITDA loss for the period ending on the dates below is greater than the amount indicated in the table below:

 

Period ending

   (In thousands)  

September 2009

   (46,000

October 2009

   (46,000

November 2009

   (45,000

December 2009

   (39,000

As of September 26, 2009, the weighted average interest rate on outstanding borrowings under the Restated Credit Agreement was 6.75%. In addition, the Company pays a commitment fee of 0.75% on the unborrowed commitments under the Restated Credit Agreement.

The Company’s borrowings are guaranteed by all its subsidiaries that are treated as domestic for tax purposes and secured by a first-priority security interest in all assets owned by the borrowers or such domestic guarantors, except that the collateral shall include only 65% of the voting stock owned by the borrowers or a domestic subsidiary of each subsidiary which is treated as foreign for tax purposes.

Voluntary prepayments and commitment reductions are permitted, in whole or in part, in minimum amounts without penalty, other than customary breakage costs with respect to LIBOR borrowings. Mandatory prepayments of the revolving loan, but not commitment reductions, must be made with the proceeds of asset sales, insurance and condemnation recoveries and certain extraordinary receipts.

At all times the borrowers and guarantors must maintain certain minimum cash and cash equivalents. The Restated Credit Agreement also includes limitations on the amount of cash and cash equivalents of the Company and its foreign subsidiaries.

In addition, the Restated Credit Agreement includes negative covenants, subject to exceptions, restricting or limiting the Company’s ability and the ability of its subsidiaries to, among other things, sell assets; make capital expenditures; alter the business the Company conducts; engage in mergers, acquisitions and other business combinations; declare dividends or redeem or repurchase capital stock; incur, assume or permit to exist additional indebtedness or guarantees; make loans and investments; make acquisitions; incur liens; and enter into transactions with affiliates.

The Restated Credit Agreement also contains customary provisions relating to representations and warranties, affirmative covenants and events of default, including payment defaults, breach of representations and warranties, covenant defaults, certain events of bankruptcy, certain events under ERISA, material judgments, cross defaults and changes in control. If an event of default occurs, the lenders under the Restated Credit Agreement would be entitled to take various actions, including ceasing to make further advances, accelerating the maturity of amounts outstanding under the Restated Credit Agreement and all other remedial actions permitted to be taken by a secured creditor.

 

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9. OTHER EXPENSE, NET

Other expense, net consists of the following:

 

     Three months ended     Nine months ended  

(In thousands)

   September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Loss on foreign currency remeasurement

   $ (4,070   $ (661   $ (748   $ (984

Impairment loss on equity investments

     —          (313     —          (1,102

Other, net

     (44     27        319        263   
                                

Other expense, net

   $ (4,114   $ (947   $ (429   $ (1,823
                                

The losses on foreign currency remeasurement for the three-month and nine-month periods ended September 26, 2009 mainly reflect foreign currency transaction effects of the remeasurement of yen-denominated assets and liabilities held by the Company’s U.S. entity.

In June 2008, the Company invested an additional $1.0 million in a privately held chemical mechanical planarization (CMP) pad company. Based upon the pricing of this investment, the Company determined that its previous investment of $1.5 million in this same company was partially impaired. Accordingly, the Company recognized an impairment loss of $0.8 million in the second quarter of 2008.

The Company also recognized an impairment loss of $0.3 million in the third quarter of 2008 on another equity investment.

10. INCOME TAXES

Income tax (benefit) expense differs from the expected amounts based upon the statutory federal tax rates as follows:

 

     Nine months ended  

(In thousands)

   September 26,
2009
    September 27,
2008
 

Expected federal income tax at statutory rate

   $ (25,227   $ (128,753

State income taxes before valuation allowance, net of federal tax effect

     (1,250     (993

Effect of foreign source loss (income)

     5,946        (1,735

Nondeductible goodwill

     —          119,182   

Valuation allowance

     17,228        26,924   

Other items, net

     (923     1,687   
                

Income tax (benefit) expense

   $ (4,226   $ 16,312   
                

In 2009, the Company’s tax rate was lower than U.S. statutory rates, mainly due to the $17.3 million increase in the Company’s U.S. deferred tax asset valuation allowance. Management concluded that it is not more likely than not that the Company will realize certain deferred tax assets associated with 2009 domestic operating losses to date, and thus provided an allowance for the portion of deferred tax assets that management concluded will not be utilized. The Company also reduced its foreign valuation allowance by $0.1 million.

In 2008, the Company’s tax rate was lower than U.S. statutory rates mainly attributable to two factors. The Company recorded a $379.8 million goodwill impairment charge in the quarter ended September 27, 2008. Most of the Company’s goodwill was not deductible for income tax purposes. Accordingly, the Company recognized a tax benefit of only $14.8 million in connection with the goodwill impairment charge.

Also during the three-month period ended September 27, 2008, the Company recorded a $26.9 million valuation allowance against its deferred tax assets. The realization of these assets is dependent on future U.S. taxable income which, at September 27, 2008, in management’s estimate, was not more likely than not to be achieved.

The Company’s effective tax rate was also lower than U.S. statutory rates due to the benefit of a tax holiday in Malaysia whereby, as a result of employment commitments, research and development expenditures and capital

 

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investments made by the Company, income from certain manufacturing activities in Malaysia is exempt from income taxes. The effective tax rate is also affected by lower tax rates in certain of the Company’s taxable jurisdictions.

11. LOSS PER COMMON SHARE

The following table presents a reconciliation of the denominators used in the computation of basic and diluted loss earnings per common share attributable to Entegris, Inc.

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008
   September 26,
2009
   September 27,
2008

Basic—weighted common shares outstanding

   115,023    111,796    113,355    112,492

Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock

   —      —      —      —  
                   

Diluted—weighted common shares and common shares equivalent outstanding

   115,023    111,796    113,355    112,492
                   

The effect of the inclusion of stock options and unvested restricted common stock for the three-month and nine-month periods ended September 26, 2009 and September 27, 2008, respectively, would have been anti-dilutive.

12. SEGMENT REPORTING

Effective January 1, 2009, the Company changed its financial segment reporting to reflect management and organizational changes made by the Company. Periods prior to 2009 have been restated to reflect the basis of segmentation presented below (see the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on August 8, 2009). The Company’s three reportable operating segments are business divisions that provide unique products and services. Effective January 1, 2009, each operating segment is separately managed and has separate financial information evaluated regularly by the Company’s chief operating decision maker in determining resource allocation and assessing performance.

The Company’s financial reporting segments are Contamination Control Solutions (CCS), Micro Environments (ME), and Entegris Specialty Materials (ESM).

 

   

CCS : provides a wide range of products and subsystems that purify, monitor and deliver critical liquids and gases used in the semiconductor manufacturing process.

 

   

ME : provides products that protect wafers, reticles and electronic components at various stages of transport, processing and storage related to semiconductor manufacturing.

 

   

ESM : provides specialized graphite components used in semiconductor equipment and offers low-temperature, plasma-enhanced chemical vapor deposition coatings of critical components of semiconductor manufacturing equipment used in various stages of the manufacturing process as well as graphite and silicon graphite for certain critical industrial markets.

Inter-segment sales are not significant. Segment profit is defined as net sales less direct segment operating expenses, excluding certain unallocated expenses, consisting mainly of general and administrative costs for the Company’s human resources, finance and information technology functions, interest expense, amortization of intangible assets, charges for the fair market value write-up of acquired inventory sold and restructuring charges.

 

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Summarized financial information for the Company’s reportable segments is shown in the following table:

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008
   September 26,
2009
   September 27,
2008

Net sales

           

CCS

   $ 65,649    $ 85,806    $ 147,477    $ 267,807

ME

     32,445      47,630      73,303      156,359

ESM

     12,612      12,353      31,540      17,797
                           

Total net sales

   $ 110,706    $ 145,789    $ 252,320    $ 441,963
                           

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008
   September 26,
2009
    September 27,
2008

Segment profit (loss)

          

CCS

   $ 12,261    $ 20,911    $ 7,182      $ 68,053

ME

     5,186      6,855      (5,016     24,225

ESM

     1,369      3,832      939        5,853
                            

Total segment profit (loss)

   $ 18,816    $ 31,598    $ 3,105      $ 98,131
                            

 

(In thousands)

   September 26,
2009
   December 31,
2008

Total assets

     

CCS

   $ 187,327    $ 198,991

ME

     92,536      92,452

ESM

     122,842      134,998

Corporate

     115,324      171,383
             

Total assets

   $ 518,029    $ 597,824
             

Corporate assets consist primarily of cash and cash equivalents, assets held for sale, investments, deferred tax assets and deferred tax charges.

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008
   September 26,
2009
   September 27,
2008

Depreciation and amortization

           

CCS

   $ 5,595    $ 5,839    $ 16,800    $ 18,124

ME

     2,581      2,663      7,677      8,448

ESM

     2,890      1,800      9,011      3,205

Corporate

     1,112      1,032      4,775      3,496
                           

Total depreciation and amortization

   $ 12,178    $ 11,334    $ 38,263    $ 33,273
                           

 

     Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008

Capital expenditures

     

CCS

   $ 6,392    $ 6,052

ME

     3,205      8,924

ESM

     492      423

Corporate

     1,432      3,795
             

Total capital expenditures

   $ 11,521    $ 19,194
             

 

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The following table reconciles total segment profit to operating income:

 

     Three months ended     Nine months ended  

(In thousands)

   September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Total segment profit

   $ 18,816      $ 31,598      $ 3,105      $ 98,131   

Amortization of intangibles

     (4,723     (4,858     (14,635     (14,497

Restructuring charges

     (2,368     (3,332     (12,454     (3,332

Charge for fair value mark-up of acquired inventory sold

     (51     (5,718     (4,116     (5,718

Impairment of goodwill

     —          (379,810     —          (379,810

Unallocated general and administrative expenses

     (11,738     (16,139     (35,367     (60,087
                                

Operating loss

   $ (64   $ (378,259   $ (63,467   $ (365,313
                                

The following table presents amortization of intangibles, restructuring charges and charges for fair value mark-up of acquired inventory sold:

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
    September 27,
2008
   September 26,
2009
   September 27,
2008

Amortization of intangibles

          

CCS

   $ 3,292      $ 3,695    $ 10,160    $ 11,787

ME

     159        178      489      528

ESM

     1,272        985      3,986      2,182
                            
   $ 4,723      $ 4,858    $ 14,635    $ 14,497
                            

Restructuring charges

          

CCS

   $ 250      $ 424    $ 2,454    $ 424

ME

     1,178        128      6,350      128

ESM

     (37     —        140      —  

Corporate

     977        2,780      3,510      2,780
                            
   $ 2,368      $ 3,332    $ 12,454    $ 3,332
                            

Charge for fair value mark-up of acquired inventory sold

          

CCS

   $ 51      $ —      $ 51    $ —  

ESM

     —          5,718      4,065      5,718
                            
   $ 51      $ 5,718    $ 4,116    $ 5,718
                            

13. EQUITY OFFERING

On September 16, 2009, the Company issued 16.1 million shares of common stock for $3.80 per share in a registered public offering. The Company received net proceeds of $56.7 million after deducting underwriting fees and other offering costs of $4.5 million. As required by the terms of the Company’s revolving credit facility, the proceeds were used to reduce the amount outstanding under the Company’s revolving credit facility.

14. RECENT ACCOUNTING PRONOUNCEMENTS

Accounting Standards Codification™

In June 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2009-01, Generally Accepted Accounting Principles (ASC Topic 105) which establishes the FASB Accounting Standards Codification (the Codification or ASC) as the official single source of authoritative U.S. generally accepted accounting principles (GAAP). All existing accounting standards are superseded. All other

 

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accounting guidance not included in the Codification will be considered non-authoritative. The Codification also includes all relevant Securities and Exchange Commission (SEC) guidance organized using the same topical structure in separate sections within the Codification.

Following the Codification, the Board will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASU) which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

The Codification is not intended to change GAAP, but it will change the way GAAP is organized and presented. The Codification is effective for the Company’s condensed consolidated financial statements as of and for the period ended September 26, 2009 and the principal impact on the financial statements is limited to disclosures as all future references to authoritative accounting literature will be referenced in accordance with the Codification. In order to ease the transition to the Codification, the Company is providing the Codification cross-reference alongside the references to the standards issued and adopted prior to the adoption of the Codification.

In December 2007, the FASB issued SFAS No. 141 (revised 2007) Business Combinations (ASC Topic 805). This guidance retains the fundamental requirements of the original pronouncement requiring that the purchase method be used for all business combinations and defines the acquirer as the entity that obtains control of one or more businesses in the business combination, establishes the acquisition date as the date that the acquirer achieves control and requires the acquirer to recognize the assets acquired, liabilities assumed and any noncontrolling interest at their fair values as of the acquisition date. The guidance also requires that acquisition-related costs be recognized separately from the acquisition. This guidance was effective for the Company in the first quarter of 2009 and was followed by the Company in its accounting for the acquisition described in Note 2 to condensed consolidated financial statements.

In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements (ASC Topic 810) . This guidance clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the consolidated financial statements. Consolidated net income should include the net income for both the parent and the noncontrolling interest with disclosure of both amounts on the consolidated statement of income. The calculation of earnings per share will continue to be based on income amounts attributable to the parent. This guidance was effective for the Company in the first quarter of 2009 and was followed by the Company in its accounting for the acquisition described in Note 2 to condensed consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (ASC Topic 855) . This guidance establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. This guidance was effective for the Company in the second quarter of 2009 and its adoption did not have a material impact on the Company’s condensed consolidated financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No 46(R) (ASC Topic 810) . This guidance amends certain requirements to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. This guidance is effective for the Company in 2010 and the Company does not expect its adoption to have a material effect on the Company’s condensed consolidated financial statements.

In October 2009, the FASB issued the following ASU No. 2009-13, Revenue Recognition (ASC Topic 605)— Multiple-Deliverable Revenue Arrangements , a consensus of the FASB Emerging Issues Task Force. This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when vendor specific objective evidence or third-party evidence of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. This guidance is effective for the Company in 2011. The Company is currently evaluating the impact of adopting this update on its condensed consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

This overview is not a complete discussion of the Company’s financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of its financial condition and operating performance and to provide a context for the discussion that follows. The detailed discussion and analysis that follows must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.

Entegris, Inc. is a leading provider of products and services that purify, protect and transport the critical materials used in key technology-driven industries. Entegris derives most of its revenue from the sale of products and services to the semiconductor and data storage industries. 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, Europe and the Middle East.

The Company offers a diverse product portfolio which includes more than 15,000 standard and customized products that we believe provide the most comprehensive offering of materials integrity management products and services to the microelectronics industry. Certain of these products are unit-driven and consumable products that rely on the level of semiconductor manufacturing activity to drive growth, while others rely on expansion of manufacturing capacity to drive growth. The Company’s unit-driven and consumable product class includes wafer shippers, disk shipping containers and test assembly and packaging products, membrane-based liquid filters and housings, metal-based gas filters and resin-based gas purifiers, as well as PVA roller brushes for use in post-CMP cleaning applications. The Company’s capital expense-driven products include its process carriers that protect the integrity of in-process wafers, components, systems and subsystems that use electro-mechanical, pressure differential and related technologies to permit semiconductor and other electronics manufacturers to monitor and control the flow and condition of process liquids used in these manufacturing processes. With its August 2008 acquisition of Poco Graphite, Inc. (POCO), the Company added process-critical, graphite-based consumables and finished products used in a variety of markets to its portfolio of products.

The Company’s fiscal year is the calendar period ending each December 31. The Company’s fiscal quarters consist of 13-week periods that end on Saturday. The Company’s fiscal quarters in 2009 end March 28, 2009, June 27, 2009, September 26, 2009 and December 31, 2009. Unaudited information for the three months and nine months ended September 26, 2009 and the financial position as of September 26, 2009 and December 31, 2008 are included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, except for the historical information, contains forward-looking statements. These statements are subject to risks and uncertainties. These forward-looking statements could differ materially from actual results. 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 condensed consolidated financial statements and the related notes thereto, which are included elsewhere in this report.

Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of Entegris, Inc., include:

 

   

Level of sales Since a large portion of the Company’s product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short to medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company’s sales are subject to the effects of industry cyclicality, technological change and substantial competition, including pricing pressures and foreign currency effects.

 

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Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is also affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially resin and purchased components), competition, both domestic and international, direct labor costs, and the efficiency of the Company’s production operations, among others.

 

   

Fixed cost structure Increases or decreases in sales have a large impact on profitability. There are a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expense, and depreciation and amortization. It is not possible to vary these costs easily in the short term as volumes fluctuate. Thus changes in sales volumes can affect the usage and productivity of these cost components and can have a large effect on the Company’s results of operations.

Overall Summary of Financial Results for the Three Months and Nine Months Ended September 26, 2009

For the three months ended September 26, 2009, net sales decreased by $35.1 million, or 24%, to $110.7 million compared to the three months ended September 27, 2008, primarily reflecting the continuation of the severe downturn in both the capital and unit-driven segments of the semiconductor industry that began during the second half of 2008. The third quarter sales decline was mitigated by the full-quarter inclusion of incremental sales of $5.1 million from POCO Graphite (POCO), which was acquired in August 2008. The sales decline included an unfavorable foreign currency translation effect of $0.3 million related to the year-over-year weakening of most international currencies versus the U.S. dollar, most notably the Korean won and Taiwanese dollar, offset partially by the further strengthening of the Japanese yen. Excluding those factors, third quarter sales fell 27% in 2009 when compared to 2008.

On a sequential basis, third quarter sales rose 34% from second quarter sales of $82.6 million, reflecting the continuation of a modest upturn in bookings and sales of the Company’s products that began in the second quarter of 2009. However, third quarter net sales were still well below pre-recessionary levels.

Net sales for the first nine months of 2009 were $252.3 million, down 43% from $442.0 million in the comparable year-ago period, indicative of the same factors noted above. The year-to-date sales decline was mitigated by the full nine-month inclusion of sales of $22.4 million from POCO. The sales decline included an unfavorable foreign currency translation effect of $6.7 million related to the year-over-year weakening of most international currencies versus the U.S. dollar, most notably the Korean won, Taiwanese dollar and the Euro, offset partially by the strengthening of the Japanese yen. Excluding those factors, sales for the first nine months of 2009 fell 46% when compared to 2008.

In the Company’s view, the business and industry downturn reached a trough during the first quarter of 2009. During the second and third quarters, the Company experienced a modest upturn in bookings and sales of certain of its unit-driven, consumable products. This upturn was predominantly driven by Asian foundry customers, particularly in Taiwan. In the third quarter, an indication of recovery in the Company’s capital-driven product lines was discernible. Based on bookings for future deliveries, the Company expects the upturn in the consumable side of the business to continue through the remainder of 2009 and into 2010, and a modest increase in volume for its capital-driven product lines. To date, the Company believes the revenue downturn is primarily volume driven. Based on the available information, the Company does not perceive any significant market share loss or material sales price erosion. Additionally, given that no single customer accounts for more than 6% of the Company’s annual revenue, business recovery is not predicated on any one particular customer or group of customers, but rather on the overall semiconductor sector returning to pre-recessionary levels.

The Company reported lower gross profits for both the three-month and nine-month periods compared to a year earlier. The gross profit decline for the three-month period was primarily due to the significant year-over-year sales decrease. The gross profit decline for the nine-month period, in addition to the effect of the significant year-over-year sales decrease, reflected lower factory utilization associated with the lower sales, resulting in manufacturing production falling below normal capacity.

 

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The gross margin rate for the third quarter of 2009 was 40.4% versus 38.0% for the third quarter of 2008 and 28.7% for the three months ended June 27, 2009. The year-over-year gross margin improvement was primarily due to the absence of a $5.7 million incremental charge associated with the fair market value write-up of inventory acquired in the acquisition of POCO recorded in the third quarter of 2008. Excluding that factor, gross margin a year ago was 41.9%. The decline, measured on an adjusted basis, mainly reflects the significant year-over-year sales decrease. Gross margin for the first nine months of the year was 29.1% compared to 40.6% in the comparable period a year ago, also reflects the lower factory utilization in the first half of 2009 associated with the significant year-over-year sales decreases.

The Company included period expense in cost of sales of $0.4 million and $10.5 million, respectively, in the three-month and nine-month periods ended September 26, 2009, associated with its below-capacity production levels. In the first nine months of 2009, the Company also recorded a $4.1 million incremental charge associated with the fair market value write-up of inventory acquired in the 2008 acquisition of POCO and third quarter of 2009 acquisition of Pureline.

The Company had lower year-over-year selling, general and administrative (SG&A) and engineering, research and development (ER&D) costs for the three-month and nine-month periods ended September 26, 2009 when compared to the year-ago periods, mainly reflecting lower payroll and benefits costs resulting from headcount reductions.

The Company also incurred restructuring charges of $2.4 million and $12.5 million in the three months and nine months ended September 26, 2009 in connection with business restructuring activities and actions taken in response to the downturn in the semiconductor industry.

The Company reported a net loss from continuing operations of $7.6 million for the three-month period ended September 26, 2009, compared to a loss from continuing operations of $392.9 million in the year-ago period, with a net loss from continuing operations of $67.9 million for the nine-month period comparing to a loss from continuing operations of $384.2 million in the year-ago period. The net losses in the three-month and nine-month periods ended September 27, 2008 included a goodwill impairment charge of $379.8 million ($365.2 million, net of tax).

During the nine months ended September 26, 2009, the Company’s operating activities used cash of $7.1 million. Cash and cash equivalents were $78.4 million at September 26, 2009 compared with $115.0 million at December 31, 2008.

As described in Note 8 to the Company’s condensed consolidated financial statements, the Company executed a new revolving credit agreement (Restated Credit Agreement) on March 2, 2009, which expires in November 2011. The Restated Credit Agreement was amended on July 17, 2009 and August 11, 2009. The initial revolving commitment amount under the Restated Credit Agreement was $150.0 million, with $11.0 million unavailable without consent of a majority of the Company’s lenders. The revolving commitment was further subject to a borrowing base. In accordance with the terms of the Restated Credit Agreement, after the receipt of net proceeds of $56.7 million from a registered public offering on September 16, 2009, the revolving commitment decreased by 50% of the net proceeds of the offering, or $28.3 million, to $121.7 million, with $11.0 million unavailable without consent of a majority of the Company’s lenders. The Company’s borrowing base supported $106.5 million in total availability as of September 26, 2009, with $67.4 million in borrowings and $1.3 million undrawn on letters of credit then outstanding under the Restated Credit Agreement.

The Restated Credit Agreement requires that the Company meet various financial covenants. Through September 26, 2009, the Company has been in compliance with all financial covenants required by the Restated Credit Agreement.

The global credit market crisis has created a very difficult business environment since October 2008. The Company’s operating performance, as well as its liquidity position, has been and continues to be negatively affected by these economic conditions, many of which are beyond its control. The Company does not believe it is likely that these adverse economic conditions, and their effect on the semiconductor industry, will improve to pre-recessionary status in the near term. However, the effect of the current global economic environment on the semiconductor industry requires that the Company maintain its near-term liquidity support.

 

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The Company believes that its cash and cash equivalents and funds available under the Restated Credit Agreement and international credit facilities will be sufficient to meet its working capital and investment requirements for the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management’s plans include further reducing expenditures as necessary or pursuing alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements for the next twelve months. However, given recent economic events and the resulting credit shortage, there can be no assurance that any such financing would be available on commercially acceptable terms.

Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated 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, warranty and sales return obligations, inventories, long-lived assets, income taxes, business combinations and shared-based compensation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the current and projected economic circumstances. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company’s condensed consolidated financial statements are discussed below.

Net Sales The Company’s net sales consist of revenue from sales of products net of trade discounts and allowances. The Company recognizes revenue upon shipment, primarily FOB shipping point, when evidence of an arrangement exists, contractual obligations have been satisfied, title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured based upon historical collection results and regular credit evaluations. In most transactions, the Company has no obligations to its customers after the date products are shipped other than pursuant to warranty obligations. In the event that significant post-shipment obligations or uncertainties exist such as customer acceptance, revenue recognition is deferred as appropriate until such obligations are fulfilled or the uncertainties are resolved.

Accounts Receivable-Related Valuation Accounts The Company maintains allowances for doubtful accounts and for sales returns and allowances. 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 management 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 considers the age of receivable balances, historical bad debt write-off experience and current economic circumstances when determining its allowance for doubtful accounts. The Company’s allowance for doubtful accounts was $1.5 million at September 26, 2009 and $1.3 million at December 31, 2008, respectively.

An allowance for sales returns and allowances is established based on historical and current trends in product returns. At September 26, 2009 and December 31, 2008, the Company’s reserve for sales returns and allowances was $0.9 million and $1.9 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 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 write-off trends, expected product lives, and sales levels by product. Inventories that

 

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are considered obsolete are written off or a full allowance is recorded. In addition, allowances are established for inventory quantities in excess of forecasted demand. Inventory allowances were $10.7 million and $8.3 million at September 26, 2009 and December 31, 2008, respectively.

The Company’s inventories include materials and products subject to technological obsolescence, which are sold in highly competitive industries. If future demand or market conditions are less favorable than current conditions or the Company’s planned outlook for improved sales levels, additional inventory write-downs or allowances may be required and would be reflected in cost of sales in the period the revision is made.

Impairment of Long-Lived Assets As of September 26, 2009, the Company had $146.7 million of net property, plant and equipment and $82.8 million of net intangible assets. The Company routinely considers whether indicators of impairment of the value of its assets, particularly its molding equipment, and its intangible assets, are present. A long-lived asset (asset group) shall be tested for recoverability whenever events or changes in circumstances (triggering events) indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances:

 

  a. A significant decrease in the market price of a long-lived asset (asset group)

 

  b. A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition

 

  c. A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator

 

  d. An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)

 

  e. A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)

 

  f. A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.

If such indicators are present, it is determined whether the sum of the estimated undiscounted cash flows attributable to the asset group 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 asset group over its respective fair value. Fair value is determined by discounting estimated future cash flows, appraisals or other methods deemed appropriate. If the asset groups determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the fair value attributable to the asset group is less than the assets’ carrying value. The fair value of the assets then becomes the assets’ new carrying value, which is depreciated or amortized over the remaining estimated useful life of the assets.

In connection with triggering events during the third and fourth quarters of 2008 and the first quarter of 2009, the Company reviewed its long-lived assets and determined that none of its long-lived assets were impaired for its asset groups. The determination was based on reviewing estimated undiscounted cash flows for the Company’s asset groups, which were greater than their carrying values. As required under U.S. generally accepted accounting principles, the impairment analyses for the third and fourth quarters of 2008 occurred before the goodwill impairment assessments.

Long-lived assets are grouped with other assets and liabilities at the lowest level (asset groups) for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The Company has four significant asset groups, identified by assessing the Company’s identifiable cash flows and the interdependence of such cash flows: Contamination Control Solutions (CCS), Micro Environments (ME), Poco Graphite (POCO) and Entegris Specialty Coatings (ESC).

The Company’s estimate of undiscounted cash flows attributable to the asset groups included only future cash flows (cash inflows less associated cash outflows) that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. Estimates of future cash flows used to test the recoverability of a long-lived asset (asset group) incorporated the Company’s assumptions about its use of the asset group and were determined for the remaining useful life of the primary asset (the principal long-lived tangible asset being depreciated or intangible asset being amortized

 

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that is the most significant component asset from which the asset group derives its cash-flow-generating capacity) of each asset group. The key assumptions were projected revenues, gross margin expectations and operating cost estimates. Future cash flows used to test the recoverability of each asset group were made for the remaining useful life of the asset group, which itself is based on the remaining useful life of the primary asset of each group as described below. Where the primary asset is not the asset of the asset group with the longest remaining useful life, estimates of future cash flows for the group assume the sale of the group at the end of the remaining useful life of the primary asset.

The recoverability test included all cash outflows that the asset group is estimated to incur to obtain the estimated future cash inflows. Accordingly, where required, the Company reflected within the cash flows of its asset groups an allocation of corporate expenses to its asset groups, because those assets require the services provided by the Company’s shared services infrastructure (among others, finance, human resources, information technology, sales and marketing, legal) if the asset group were operated on a stand-alone basis.

Under the first quarter 2009 impairment test, all asset groups had future undiscounted cash flows in excess of their carrying values by at least 60%, except for the ME asset group, which the Company estimated had a fair value 27% higher than its carrying value. The carrying values of this asset group’s property, plant and equipment and intangible assets at March 28, 2009 were $42.9 million and $1.2 million, respectively. If either revenue for the Company’s asset groups decreased from the then-current forecast without offsetting decreases in costs, or if the asset group’s operating costs increased from the then-current forecast without offsetting increases in revenue, the estimated undiscounted cash flows of the asset groups could have been less than their carrying values. This would have required an impairment loss to be recognized based on the excess of the carrying amount of the respective asset group over its fair value. As noted, fair value would be determined by discounting estimated future cash flows, appraisals or other methods deemed appropriate.

As described above, the evaluation of the recoverability of long-lived assets requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the identification of the asset group at the lowest level of independent cash flows and the primary asset of the group and long-range forecasts of revenue and costs, reflecting management’s assessment of general economic and industry conditions, operating income, depreciation and amortization and working capital requirements.

Due to the inherent uncertainty involved in making these estimates, particularly in the current economic environment and forecast of a recovery, actual results could differ from those estimates. In addition, changes in the underlying assumptions would have a significant impact on the conclusion that an asset group’s carrying value is recoverable, or the determination of any impairment charge if it was determined that the asset values were indeed impaired.

Based on slightly improved economic conditions within the semiconductor industry and the absence of any other triggering events, the Company was not required to perform impairment testing for any of its asset groups for the second and third quarters of 2009. Due to the uncertain economic environment within the semiconductor industry, the Company will continue to monitor circumstances and events to determine whether additional asset impairment testing is warranted. It is not unlikely that in the future the Company may no longer be able to conclude that there is no impairment of its long-lived assets, nor can the Company provide assurance that material impairment charges of long-lived assets will not occur in future periods.

Income Taxes In the preparation of the Company’s condensed 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 expense 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. Management reviews its deferred tax assets for recoverability on a quarterly basis and assesses the need for valuation allowances. Management considers the positive and negative evidence for the potential utilization of its deferred tax assets. When management concludes that it is not more likely than not that the Company will realize certain deferred tax assets in the future, it records a valuation allowance for the portion of deferred tax assets management concluded will not be utilized.

 

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As a result of the recent general economic and industry declines, and their impact on the Company’s future outlook, management has reviewed its U.S. deferred tax assets and concluded that the uncertainties related to the realization of its deferred tax assets have become unfavorable. The Company had U.S. net deferred tax asset positions of $58.7 million and $42.3 million as of September 26, 2009 and December 31, 2008, respectively, which comprised temporary differences and various credit carryforwards. Management has concluded that it is not more likely than not that the Company will realize the net deferred tax assets. Accordingly, the Company maintained valuation allowances of $58.6 million and $42.1 million as of September 26, 2009 and December 31, 2008, respectively, with respect to U.S. deferred tax assets.

The negative evidence of a cumulative three-year U.S. operating loss, the expectation for U.S. operating results in early future years and a finite carryforward period for the Company’s U.S. foreign tax credits was sufficiently significant to outweigh all identified positive evidence and tax planning strategies.

The Company had net non-U.S. deferred tax asset positions before valuation allowance of $12.8 million and $12.5 million as of September 26, 2009 and December 31, 2008, respectively. At those dates, management determined that based upon the available evidence, a valuation allowance was required against non-U.S. deferred tax assets in certain tax jurisdictions. Accordingly, the Company maintained valuation allowances of $0.4 million and $0.6 million as of September 26, 2009 and December 31, 2008, respectively, with respect to certain non-U.S. deferred tax assets. For other non-U.S. jurisdictions, principally Japan, management believes that it is more likely than not that the net deferred tax assets will be realized as management expects sufficient future earnings in those jurisdictions.

In addition, the calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.

Warranty Claims Accrual 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. Estimated claims could be materially different from actual results for a variety of reasons, including a change in product failure rates and service delivery costs incurred in correcting a product failure, manufacturing changes that could impact product quality, or as yet unrecognized defects in products sold. At September 26, 2009 and December 31, 2008, the Company’s accrual for estimated future warranty costs was $0.9 million and $1.1 million, respectively.

Business Acquisitions The Company accounts for acquired businesses using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed. For intangible assets, the Company normally utilizes the “income method.” This method starts with a forecast of the expected future net cash flows. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method or other methods include the projected amount and timing of future cash flows and the discount rate reflecting the risks inherent in the future cash flows.

Determining the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, and certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact net income.

 

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Share-Based Compensation U.S generally accepted accounting principles require the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors based on estimated fair values. The Company must estimate the value of employee stock option and restricted stock awards on the date of grant.

The fair value of restricted stock and restricted stock unit awards is valued based on the Company’s stock price on the date of grant. The fair value of stock option awards is estimated on the date of grant using an option-pricing model affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include the expected stock price volatility over the term of the awards, risk-free interest rate and dividend yield assumptions, and actual and projected employee stock option exercise behaviors and forfeitures. Because share-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, it has been recorded net of estimated forfeitures. Forfeitures are required to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures are estimated based on historical experience.

If the above factors change, and the Company uses different assumptions in future periods, the share-based compensation expense recorded may differ significantly from what was recorded in the current period.

Certain restricted stock and restricted stock unit awards involve stock to be issued upon the achievement of performance conditions (performance shares) under the Company’s stock incentive plans. Such performance shares become available subject to time-based vesting conditions if, and to the extent that, financial performance criteria for the applicable fiscal year or multi-year period are achieved. Accordingly, the number of performance shares earned will vary based on the level of achievement of financial performance objectives for the applicable period. Until such time that the Company’s performance can ultimately be determined, each quarter the Company estimates the number of performance shares more likely than not to be earned based on an evaluation of the probability of achieving the performance objectives. Such estimates are revised, if necessary, in subsequent periods when the underlying factors change the Company’s evaluation of the probability of achieving the performance objectives. Accordingly, share-based compensation expense associated with performance shares may differ significantly from the amount recorded in the current period.

 

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Three and Nine Months Ended September 26, 2009 Compared To Three and Nine Months Ended September 27, 2008

The following table compares continuing operating results with year-ago results, as a percentage of sales, for each caption.

 

     Three Months Ended     Nine Months Ended  
     September 26,
2009
    September 27,
2008
    September 26,
2009
    September 27,
2008
 

Net sales

   100.0   100.0   100.0   100.0

Cost of sales

   59.6      62.0      70.9      59.4   
                        

Gross profit

   40.4      38.0      29.1      40.6   

Selling, general and administrative expenses

   26.4      24.3      33.5      26.2   

Engineering, research and development expenses

   7.7      7.1      10.0      7.0   

Amortization of intangible assets

   4.3      3.3      5.8      3.3   

Impairment of goodwill

   —        260.5      —        85.9   

Restructuring charges

   2.1      2.3      4.9      0.8   
                        

Operating loss

   (0.1   (259.5   (25.2   (82.7

Interest expense, net

   (2.4   (0.4   (2.8   (0.2

Other expense, net

   (3.7   (0.6   (0.2   (0.4
                        

Loss before income taxes and other items below

   (6.2   (260.5   (28.1      (83.2

Income tax expense (benefit)

   0.6      8.8      (1.7   3.7   

Equity in net loss of affiliates

   0.1      0.1      0.4      0.0   
                        

Loss from continuing operations

   (6.9   (269.6   (26.9   (86.9
                        

Net sales For the three months ended September 26, 2009, net sales decreased by $35.1 million, or 24%, to $110.7 million compared to the three months ended September 27, 2008, primarily reflecting the continuation of the severe downturn in both the capital and unit-driven segments of the semiconductor industry that began during the second half of 2008. The third quarter sales decline was mitigated by the full-quarter inclusion of incremental sales of $5.1 million from POCO Graphite (POCO), which was acquired in August 2008. The sales decline included an unfavorable foreign currency translation effect of $0.3 million related to the year-over-year weakening of most international currencies versus the U.S. dollar, most notably the Korean won and Taiwanese dollar, offset partially by the strengthening of the Japanese yen. Excluding those factors, third quarter sales fell 27% in 2009 when compared to 2008.

On a sequential basis, sales rose 34% from second quarter net sales of $82.6 million, reflecting a modest upturn in bookings and sales of the Company’s products. However, third quarter net sales were still well below pre-recessionary levels.

Sales to semiconductor customers represented 71% of third quarter sales and reflected increases in fab utilization rates and wafer starts, particularly for the Company’s Asian foundry customers. On an industry wide basis, the Company expects that fab utilization rates rose to approximately 80% in the third quarter of calendar 2009 from less than 60% in the first quarter, when the entire industry was in a virtual shutdown mode during much of the first quarter. Similarly, the Company’s third quarter sales were boosted by greater demand from wafer growers, which responded to the increased fab production level. Despite a 48% increase in sales of capital-driven products, capital spending among semiconductor customers remained below pre-recessionary levels.

Net sales for the first nine months of 2009 were $252.3 million, down 43% from net sales of $442.0 million in the comparable year-ago period, indicative of the same factors noted above. The year-to-date sales decline was mitigated by the full nine-month inclusion of sales of $22.4 million from POCO. The sales decline included an unfavorable foreign currency translation effect of $6.7 million related to the year-over-year weakening of most international currencies versus the U.S. dollar, most notably the Korean won, Taiwanese dollar and the Euro, offset partially by the strengthening of the Japanese yen. Excluding those factors, sales for the first nine months of 2009 fell 46% when compared to 2008.

 

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To date, the Company believes the revenue downturn of the past several quarters is exclusively volume driven. Based on the information available, the Company believes it has maintained market share for its products and that the effect of selling price erosion has been nominal.

For the quarter ended September 26, 2009, sales of unit-driven products represented 71% and sales of capital-driven products represented 29% of total sales, respectively. For the third quarter of 2008 and the three months ended June 27, 2009 this split was 65%/35% and 74%/26%, respectively. The year-over-year shift in relative demand toward unit-driven products reflects lower spending by semiconductor customers for capital-driven, capacity-related products such as wafer carriers and liquid systems.

On a geographic basis, third quarter sales to North America were 31%, Asia (excluding Japan) 38%, Europe 12% and Japan 19% of total net sales. This compared to third quarter sales figures of North America 32%, Asia 36%, Europe 13% and Japan 19% in 2008 and second quarter 2009 sales figures of North America 31%, Asia 35%, Europe 15% and Japan 19%.

Gross profit Gross profit in the three months ended September 26, 2009 decreased by $10.6 million to $44.8 million, a decline of 19% from $55.4 million for the three months ended September 27, 2008. The gross margin rate for the third quarter of 2009 was 40.4% versus 38.0% for the three months ended September 27, 2008 and 28.7% for the three months ended June 27, 2009.

For the first nine months of 2009, gross profit was $73.5 million, down 59% from gross profit of $179.3 million recorded in the first nine months of 2008. As a percentage of net sales, gross margin for the first nine months of the year was 29.1% compared to 40.6% in the comparable period a year ago.

The gross profit decline for the three-month period was primarily due to the significant year-over-year sales decrease. The gross profit decline for the nine-month period, in addition to the effect of the significant year-over-year sales decrease, reflected lower factory utilization associated with the lower sales, resulting in manufacturing production falling below normal capacity.

The gross margin rate improvement for the three-month period ended September 26, 2009 was primarily due to the absence of a $5.7 million incremental charge associated with the fair market value write-up of inventory acquired in the acquisition of POCO recorded in the third quarter of 2008. Excluding that factor, the gross margin rate a year ago was 41.9%. The decline, measured on an adjusted basis, mainly reflects the significant year-over-year sales decrease.

The gross profit declines for the three-month and nine-month periods were primarily due to the significant year-over-year sales decrease, along with lower factory utilization associated with the sales decrease during the first half of the year, which resulted in manufacturing production falling below normal capacity. Accordingly, the Company included in cost of goods sold period expense of $0.4 million and $10.5 million in the three-month and nine-month periods ended September 26, 2009, associated with below-capacity production levels. The Company also recorded a $4.1 million incremental charge to cost of sales associated with the fair market value write-up of inventory acquired in the acquisition of POCO in the first quarter of 2009. As noted above, the gross margin rates for the three months and nine months ended September 27, 2008 included a $5.7 million incremental charge related to the acquisition of POCO.

Selling, general and administrative expenses . Selling, general and administrative (SG&A) expenses decreased $6.2 million, or 18%, to $29.2 million in the three months ended September 26, 2009, down from $35.4 million in the comparable three-month period a year earlier. SG&A expenses, as a percent of net sales, rose to 26.4% from 24.3% a year earlier. On a year-to-year basis, SG&A expenses fell by $31.2 million, or 27% to $84.6 million compared to $115.8 million a year earlier. On a year-to-date basis, SG&A costs, as a percent of net sales, rose to 33.5% from 26.2% a year ago, reflecting the decrease in net sales.

 

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The year-over-year decrease in SG&A costs includes compensation-related reductions of $16.5 million, reduced travel expense of $2.5 million and legal and professional services expense of $5.1 million, and a favorable foreign currency translation effect of $1.6 million. SG&A expenses in the first nine months of 2008 included $4.2 million of severance-related costs due to personnel terminations associated with operational streamlining efforts.

On a sequential basis, SG&A expenses rose $3.5 million, or 14%, mainly due to the reversal of salary reductions, the absence of employee furloughs and the accrual of incentive compensation in the third quarter.

The Company expects SG&A expenses to be flat or modestly higher than in the fourth quarter of 2009 as the Company has reversed a portion of the temporary cost cuts that were put in place in the first and second quarters, namely the furloughs and salary reductions for non-executive employees, reinstated some the remaining temporary cost reductions and has instituted new sales and other incentive programs for the last half of the year. The Company intends to reinstate the remaining temporary cost reductions as revenues continue to recover.

Engineering, research and development expenses Engineering, research and development (ER&D) expenses decreased by $1.7 million, or 17%, to $8.6 million in the third quarter of fiscal 2009 compared to $10.3 million for the same period in fiscal 2008. ER&D expenses decreased 19% to $25.3 million in the first nine months of 2009 compared to $31.1 million in the year-ago nine-month period. The reduction in ER&D expense mainly reflects lower employee costs. Year-to-date ER&D expenses, as a percent of net sales, increased to 10.0% from 7.0%, mainly reflecting the decrease in net sales.

On a sequential basis, ER&D expenses rose $0.7 million, or 9%, mainly due to the reversal of salary reductions, the absence of employee furloughs and the accrual of incentive compensation in the third quarter.

Amortization of intangible assets Amortization of intangible assets was $4.7 million in the three months ended September 26, 2009 compared to $4.9 million in the year-ago period. Amortization of intangible assets was $14.6 million in the first nine months of 2009 compared to $14.5 million in year-ago period.

Restructuring charges Restructuring charges were $2.4 million in the three months ended September 26, 2009 compared to $3.3 million in the year-ago period. Restructuring charges were $12.5 million in the first nine months of 2009 compared to $3.3 million in year-ago period. In 2008, the Company initiated a global business restructuring of its sales and marketing function, manufacturing operations, and realignment of the global supply chain and other ancillary operational functions. The Company has incurred employee termination and other costs in connection with the business restructuring and actions taken in response to the downturn in the semiconductor industry that began during the second half of 2008. See Note 7 to the Company’s condensed consolidated financial statements for additional detail.

Interest (expense) income, net Net interest expense was $2.7 million and $7.1 million in the three-month and nine-month periods ended September 26, 2009, respectively, compared to $0.6 million and $0.7 million in the three-month and nine-month periods ended September 27, 2008, respectively. The variance was due mainly to a significant increase in the Company’s outstanding debt compared to a year ago and higher interest rates under the Company’s Restated Credit Agreement. The Company expects lower interest expense in the three-month period ended December 31, 2009 due to the reduction in the Company’s outstanding borrowings in the third quarter.

Other expense, net Other expense was $4.1 million and $0.4 million in the three-month and nine-month periods ended September 26, 2009, respectively. These amounts mainly reflect foreign currency transaction losses of $4.1 million and $0.7 million, in the three-month and nine-month periods ended September 26, 2009 respectively, related to the remeasurement of yen-denominated assets and liabilities held by the Company’s U.S. entity.

Other expense in the three-month and nine-month periods ended September 27, 2008 totaled $0.9 million and $1.8 million, respectively. In June 2008, the Company also invested an additional $1.0 million in a privately-held chemical mechanical planarization (CMP) pad company. Based upon the pricing of this investment, the Company determined that its previous investment of $1.5 million in this same company was partially impaired. Accordingly, the Company recognized an impairment loss of $0.8 million in the second quarter of 2008.

 

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The Company recognized an impairment loss of $0.3 million in the third quarter of 2008 on another equity investment.

Income tax (benefit) expense The Company recorded income tax expense of $0.6 million in the three months ended September 26, 2009 compared to income tax expense of $12.9 million in the three months ended September 27, 2008. For the first nine months of 2009, the Company recorded income tax benefit of $4.2 million compared to income tax expense of $16.3 million in the comparable period in fiscal 2008.

The year-to-date effective tax rate was 5.9% in the 2009 period, compared to (4.4)% in the 2008 period. In 2009, the Company’s tax rate was lower than U.S. statutory rates, mainly due to the $17.3 million increase in the Company’s U.S. deferred tax asset valuation allowance. Management concluded that it is not more likely than not that the Company will realize certain deferred tax assets associated with 2009 U.S. operating losses, and thus provided an allowance for the portion of deferred tax assets management concluded will not be utilized. The Company also reduced its foreign valuation allowance by $0.1 million.

In 2008, the Company’s tax rate was lower than U.S. statutory rates mainly attributable to two factors. The Company recorded a $379.8 million goodwill impairment charge in the quarter ended September 27, 2008. Most of the Company’s goodwill was not deductible for income tax purposes. Accordingly, the Company recognized a tax benefit of only $14.8 million in connection with the goodwill impairment charge.

Also during the three-month period ended September 27, 2008, the Company recorded a $26.9 million valuation allowance against its deferred tax assets. The realization of these assets is dependent on future U.S. taxable income which, at September 27, 2008, in management’s estimate, was not more likely than not to be achieved.

The Company’s effective tax rate was also lower than U.S. statutory rates due to the benefit of a tax holiday in Malaysia whereby, as a result of employment commitments, research and development expenditures and capital investments made by the Company, income from certain manufacturing activities in Malaysia is exempt from income taxes. The effective tax rate is also affected by lower tax rates in certain of the Company’s taxable jurisdictions.

Discontinued operations The Company’s cleaning equipment business, classified as a discontinued operation, recorded operating losses of $0.1 million and $1.0 in the three months and nine months ended September 27, 2008, respectively. The Company completed the sale of its cleaning equipment business in April 2008.

Net loss The Company recorded a net loss from continuing operations of $7.6 million, or $0.07 per diluted share, in the three-month period ended September 26, 2009 compared to a net loss of $392.9 million, or $3.51 per diluted share, in the three-month period ended September 27, 2008. The net loss from continuing operations for the nine-month period was $67.9 million, or $0.60 per diluted share, compared to a net loss from continuing operations of $384.2 million, or $3.40 per diluted share, in the year-ago period. The net losses in the three-month and nine-month periods ended September 27, 2008 included a goodwill impairment charge of $379.8 million ($365.2 million, net of tax).

Segment Analysis

Effective January 1, 2009, the Company changed its financial reporting structure reflecting organizational changes. Beginning in 2009, the Company will report its financial performance based on three reporting segments. The following is a discussion on the results of operations of these three business segments. See Note 13 “Segment Reporting” to the condensed consolidated financial statements for additional information on the Company’s three segments.

 

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The following table presents selected sales and segment profit (loss) data for the Company’s three segments with the year-ago results.

 

     Three months ended    Nine months ended

(In thousands)

   September 26,
2009
   September 27,
2008
   September 26,
2009
    September 27,
2008

Contamination Control Solutions

          

Net sales

   $ 65,649    $ 85,806    $ 147,477      $ 267,807

Segment profit

     12,261      20,911      7,182        68,053

Micro Environments

          

Net sales

   $ 32,445    $ 47,630    $ 73,303      $ 156,359

Segment profit (loss)

     5,186      6,855      (5,016     24,225

Entegris Specialty Materials

          

Net sales

   $ 12,612    $ 12,353      31,540      $ 17,797

Segment profit

     1,369      3,832      939        5,853

Contamination Control Solutions (CCS)

Net sales For the third quarter of 2009, CCS net sales decreased 23% to $65.6 million, from $85.8 million, in the comparable period last year, reflecting the downturn in the semiconductor industry that began during the second half of 2008.

Sales were up 38% on a sequential basis from the second quarter of 2009, following a 39% increase from the first quarter to the second quarter. The growth reflected increased demand for liquid filtration products and chemical containers, which was driven by increased semiconductor fab utilization rates, particularly in Asia and improved sales of CCS capital-driven products, such as photochemical pumps, fluid handling products, and gas purification systems, which increased 69%. Despite this improvement, third quarter sales of most CCS capital-driven products remained at levels below historical volumes.

For the nine months ended September 26, 2009, CCS net sales decreased 45%, to $147.5 million, from $267.8 million in the comparable period last year. The changes in net sales reflect the underlying economic and semiconductor industry conditions noted above.

CCS reported a segment profit of $12.3 million in the third quarter of 2009 compared to a $20.9 million segment profit in the third quarter of 2008, a decrease of 41%. For the nine months ended September 26, 2009, CCS reported segment income of $7.2 million compared to segment profit of $68.1 million, a decrease of 89%.

The sharp decline in sales volume and the resulting reduction in gross profit primarily account for the year-to-year change in the segment’s operating results. Slightly offsetting the decline in gross profit, CCS operating expenses decreased 22%, mainly due to lower selling and engineering, research and development costs.

Micro Environments (ME)

Net sales For the third quarter of 2009, ME net sales decreased 32%, to $32.4 million, from $47.6 million in the comparable period last year, reflecting the downturn in the semiconductor industry that began during the second half of 2008.

Sales were up 24% on a sequential basis from the second quarter of 2009, following a 78% increase from the first quarter to the second quarter. The growth was primarily due to improved demand for wafer shippers needed to support increased production in the semiconductor industry, as the industry worked through wafer inventories and some of the leading wafer growers resumed production after shutting down for much of the first quarter of 2009.

For the nine months ended September 26, 2009, ME net sales decreased 53%, to $73.3 million, from $156.4 million in the comparable period last year. The changes in net sales reflect the underlying overall economic and semiconductor industry conditions noted above.

 

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ME reported segment income of $5.2 million in the third quarter of 2009 compared to a $6.9 million segment profit in the third quarter of 2008, a decrease of 24%. For the nine months ended September 27, 2009, ME reported a segment loss of $5.0 million compared to a segment profit of $24.2 million, a decrease of 121%.

The sharp decline in sales volume and the resulting reduction in gross profit primarily account for the year-to-year change in the segment’s operating results. Slightly offsetting the decline in gross profit, ME operating expenses decreased 26%, mainly due to lower selling and engineering, research and development costs.

Entegris Specialty Materials (ESM)

Net sales For the third quarter of 2009, ESM net sales increased 2%, to $12.6 million, from $12.4 million in the comparable period last year. The third quarter 2009 sales reflected the full-quarter inclusion of sales from Poco Graphite, Inc. (POCO), which was acquired in August 2008. Excluding POCO, sales fell 39% in 2009 when compared to 2008.

Sales were up 42% on a sequential basis from the second quarter of 2009. The increase was due to higher demand for semiconductor-related graphite and silicon carbide products and a partial recovery of demand for certain industrial products.

For the nine months ended September 26, 2009, ESM net sales increased 77%, to $31.5 million, from $17.8 million in the comparable period last year. The nine-month period ended September 26, 2009 reflected the full-year inclusion of net sales from POCO. Excluding POCO, sales fell 48% in 2009 when compared to 2008.

ESM reported segment income of $1.4 million in the third quarter of 2009 compared to segment income of $3.8 million in the third quarter of 2008, a decrease of 64%. For the nine months ended September 26, 2009, ESM reported a segment profit of $0.9 million compared to a segment profit of $5.9 million, a decrease of 84%. The addition of POCO’s results offset the effects of the significantly lower sales of ESM’s specialty coatings business.

Liquidity and Capital Resources

Operating activities Cash used in operating activities totaled $7.1 million in the nine months ended September 26, 2009, net of various non-cash charges, including depreciation and amortization of $38.3 million, share-based compensation expense of $6.3 million, and a $4.1 million incremental charge associated with the fair market value write-up of inventory acquired in the acquisition of POCO and Pureline. The net impact of changes in operating assets and liabilities, mainly reflecting a decline in inventory and an increase in accounts receivable, also partially offset the cash used by operations.

Accounts receivable, net of foreign currency translation adjustments, increased by $7.5 million in the first nine months of 2009. This increase reflects an upturn in bookings and sales of the Company’s products. The Company’s days sales outstanding was 66 days compared to 57 days at the beginning of the year, reflecting the effect of lower sales and the lengthening of customers’ paying patterns to historical norms. Inventories at the end of the quarter decreased by $10.7 million from December 31, 2008, after taking into account the impact of foreign currency translation adjustments, provision for excess and obsolete inventory, and the charge for the fair value mark-up of acquired inventory. The decrease was mainly due to the effect of the Company’s worldwide efforts to reduce inventories.

Working capital at September 26, 2009 stood at $179.5 million, down from $233.8 million as of December 31, 2008, and included $78.4 million in cash and cash equivalents compared to cash and cash equivalents of $115.0 million as of December 31, 2008.

Investing activities Cash flow used in investing activities totaled $8.5 million in the nine-month period ended September 26, 2009. Acquisition of property and equipment totaled $11.5 million, primarily for additions related to manufacturing equipment, tooling and information systems. The Company sold a building that was classified as an asset held for sale for $2.3 million in the nine-month period ended September 26, 2009. Under its amended credit facility, the Company may not purchase more than $16 million in capital equipment in 2009 and no more than $20 million in 2010. The Company does not anticipate that these limits on capital expenditures will have an adverse effect on the Company’s operations.

 

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On July 31, 2009, Entegris acquired an additional 30% equity interest of Pureline Co., Ltd. (Pureline), a privately held company located in Munmak, Korea and manufacturer of fluid handling products. The purchase price of the 30% equity interest was $4.3 million. The Company paid $1.1 million in cash and executed a note to the seller for $3.2 million, payable in three installments through April 2010.

Financing activities Cash used in financing activities totaled $21.3 million during the nine-month period ended September 26, 2009. The Company received proceeds of $452.7 million from its revolving credit facilities during the first nine months of 2009 and made debt payments of $528.1 million. The Company expended $3.6 million for debt issuance costs related to the Company’s amended revolving credit agreement. These costs are included in other assets in the Company’s condensed consolidated financial statements and are being amortized over the term of the agreement.

On June 25, 2009, the Company filed a shelf registration statement with the Securities and Exchange Commission to issue debt or equity securities at a future date. The registration statement became effective in September 2009 and on September 16, 2009 the Company received proceeds of $56.7 million from a registered public offering. The Company used the full amount of the net proceeds to reduce outstanding debt.

The Company received proceeds of $1.1 million in connection with common shares issued under the Company’s employee stock purchase plans.

At September 26, 2009, the Company’s shareholders’ equity stood at $334.8 million, down from $336.2 million at the beginning of the year. The decrease reflected the Company’s net loss of $67.8 million. The net loss was partially offset by the increase in additional paid-in capital of $6.3 million associated with the Company’s share-based compensation expense, the positive effects of foreign currency translation of $1.8 million and $56.7 million from the registered public offering.

As described in Note 8 to the Company’s condensed consolidated financial statements, the Company executed a new revolving credit agreement (Restated Credit Agreement) on March 2, 2009, which expires in November 2011. The initial revolving commitment under the Restated Credit Agreement was $150.0 million, with $11.0 million unavailable without consent of a majority of the Company’s banks. In accordance with the terms of the Restated Credit Agreement, after the receipt of net proceeds of $56.7 million from the registered public offering on September 16, 2009, the revolving commitment decreased by 50% of the net proceeds, or $28.3 million, to $121.7 million, with $11.0 million unavailable without consent of a majority of the Company’s banks. There were $67.4 million in borrowings and $1.3 million in undrawn letters of credit outstanding under the Restated Credit Agreement at September 26, 2009. The borrowing base supported $106.5 million in total availability under the Restated Credit Agreement as of September 26, 2009.

The Restated Credit Agreement requires that the Company meet various financial covenants. Through September 26, 2009, the Company has been in compliance with all financial covenants required by the Restated Credit Agreement. The Restated Credit Agreement requires that the Company not exceed the negative year-to-date EBITDA amounts in 2009 and that the Company exceed the positive year-to-date EBITDA amounts at prescribed levels on a monthly basis through March 2010. Under the Restated Credit Agreement EBITDA is calculated by adding consolidated net income (loss), depreciation, amortization, share-based compensation expense, interest expense, income taxes, non-cash gains and losses, extraordinary gains and losses, non-recurring expenses associated with a permitted acquisition, foreign exchange expense and certain expenses related to the Restated Credit Agreement. Non-cash gains and losses include adjustments to the Company’s excess and obsolete inventory reserves and allowances for doubtful accounts, and impairment charges of long-lived assets and investments. In addition, the credit agreement allows the add-back of up to $1.0 million in restructuring charges.

If the Company’s future financial performance fails to meet these financial covenants, then its lenders may take control of the Company’s domestic cash receipts from the collection of its receivables as well as certain other assets. In this event, the Company’s ability to conduct business could be severely impeded as there can be no assurance that funds adequate in amount and timing would be available to meet the Company’s liquidity requirements.

 

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The global credit market crisis created a very difficult business environment beginning in October 2008. The Company’s operating performance, as well as its liquidity position, has been and continues to be negatively affected by these economic conditions, many of which are beyond its control. The Company does not believe it is likely that these adverse economic conditions, and their effect on the semiconductor industry, will improve to pre-recessionary status in the near term. However, the effect of the current global economic environment on the semiconductor industry requires that the Company maintain its near-term liquidity support.

As of September 26, 2009, the Company’s sources of available funds were $78.4 million in cash and cash equivalents, of which the Company must maintain a minimum of $25.0 million domestically under the terms of the Restated Credit Agreement. The borrowing base, which is calculated by reference to the Company’s levels of qualifying domestic accounts receivable, inventories and value of its property, plant and equipment, supported $106.5 million in total availability as of September 26, 2009.

Notwithstanding the constraints under the Restated Credit Agreement described above, the Company also has a line of credit with four banks that provide for borrowings of currencies for the Company’s Japanese subsidiary, equivalent to an aggregate of approximately $17.2 million. There was $3.7 million outstanding on these lines of credit at September 26, 2009.

The Company believes that its cash and cash equivalents and funds available under its amended domestic and international credit facilities will be sufficient to meet its working capital and investment requirements for the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management’s plans include further reducing expenditures as necessary, or pursuing alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements for the next twelve months. However, given recent economic events and the resulting credit shortage, there can be no assurance that any such financing would be available on commercially acceptable terms.

New Accounting Pronouncements

See Note 14 (Recent Accounting Pronouncements) of Item 1.

Cautionary Statements This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements 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 these “forward-looking statements.” All forecasts and projections in this report 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. The risks which could cause actual results to differ from those contained in such “forward looking statements” include, without limit, (i) inability to meet customer demands associated with semiconductor industry spending; (ii) the transition to new products, the uncertainty of customer acceptance of new product offerings, and rapid technological and market change; (iii) insufficient, excess or obsolete inventory; (iv) competitive factors, including but not limited to pricing pressures; and (v) the risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 under the headings “Risks Relating to our Business and Industry”, “Manufacturing Risks”, “International Risks”, and “Risks Related to the Securities Markets and Ownership of our Securities” as well as in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K as filed with the Securities and Exchange Commission.

 

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Item 3: Quantitative and Qualitative Disclosures About Market Risk

Entegris’ principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company’s interest-bearing cash equivalents, long-term debt and short-term borrowings are subject to interest rate fluctuations. Most of the Company’s long-term debt at September 26, 2009 carries floating rates of interest. The Company’s cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately $0.5 million annually.

The cash flows and earnings of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. At September 26, 2009, the Company had no outstanding forward contracts.

Item 4: Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the “1934 Act”)) as of September 26, 2009. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of that evaluation date, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the 1934 Act is (i) recorded, processed, summarized and reported within the time periods specified in applicable rules and forms of the Securities and Exchange Commission, and (ii) accumulated and communicated to our management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.

As noted in earlier filings, the Company acquired Poco Graphite, Inc. (POCO) effective August 11, 2008. Management excluded the total assets and net sales related to POCO included in the consolidated financial statements of Entegris, Inc. and subsidiaries from its assessments of the effectiveness of the Company’s internal control over financial reporting for periods through June 27, 2009.

Management included total assets of $103 million and net sales of $28 million related to POCO in the conduct of its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 26, 2009. The Company completed the integration of the former POCO general ledger system onto the Company’s SAP platform during the third quarter of 2009. The Company continues to evaluate the associated financial reporting controls to ensure the operating effectiveness of these controls.

(b) Changes in internal control over financial reporting.

Other than the change related to POCO mentioned above, there was no change in the Company’s internal control over financial reporting during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II

OTHER INFORMATION

Item 1. Legal Proceedings

The following discussion provides information regarding certain litigation to which the Company was a party that were pending as of September 26, 2009.

As previously disclosed, on March 3, 2003 the Company’s predecessor, Mykrolis Corporation, filed a lawsuit against Pall Corporation in the United States District Court for the District of Massachusetts alleging infringement of two of the Company’s U.S. patents by certain fluid separation systems and related assemblies used in photolithography applications manufactured and sold by the defendant. The Company’s lawsuit sought a preliminary injunction preventing the defendant from the manufacture, use, sale, offer for sale or importation into the U.S. of any infringing product as well as damages. On April 30, 2004, the Court issued a preliminary injunction against Pall Corporation and ordered Pall to immediately stop making, using, selling, or offering to sell within the U.S., or importing into the U.S., its PhotoKleen EZD-2 Filter Assembly products or “any colorable imitation” of those products. On January 18, 2005, the Court issued an order holding Pall Corporation in contempt of court for the violation of the preliminary injunction and ordering Pall to disgorge all profits earned from the sale of its PhotoKleen EZD-2 Filter Assembly products and colorable imitations thereof from the date the preliminary injunction was issued through January 12, 2005. In addition, Pall was also ordered to reimburse Mykrolis for certain of its attorney’s fees associated with the contempt and related proceedings. The Court’s order also dissolved the preliminary injunction, effective January 12, 2005, based on certain prior art cited by Pall which it alleged raised questions as to the validity of the patents in suit. On February 17, 2005, the Company filed notice of appeal to the U.S. Circuit Court of Appeals for the Federal Circuit appealing the portion of the Court’s order that dissolved the preliminary injunction and Pall filed a notice of appeal to that court with respect to the finding of contempt and the award of attorneys’ fees. On June 13, 2007 the Court of Appeals issued an opinion dismissing Pall’s appeal for lack of jurisdiction and affirming the District Court’s order dissolving the preliminary injunction.

On April 6, 2006 the Company filed a lawsuit against Pall Corporation in the United States District Court for the District of Massachusetts alleging infringement of the Company’s newly issued U.S. patent No. 7,021,667 by certain filter assembly products used in photolithography applications that are manufactured and sold by the defendant. The Company’s lawsuit seeks a preliminary injunction preventing the defendant from the manufacture, use, sale, offer for sale or importation into the U.S. of the infringing products as well as damages. On October 23, 2006 the Company’s motion for preliminary injunction was argued before the court. On March 31, 2008 the court issued an order denying the Company’s motion for a preliminary injunction.

On August 23, 2006 the Company filed a lawsuit against Pall Corporation in the United States District Court for the District of Massachusetts alleging infringement of the Company’s newly issued U.S. patent No. 7,037,424 by certain fluid separation modules and related separation apparatus, including the product known as the EZD-3 Filter Assembly, used in photolithography applications that are manufactured and sold by the defendant. The Company’s lawsuit seeks a preliminary injunction preventing the defendant from the manufacture, use, sale, offer for sale or importation into the U.S. of the infringing products as well as damages. It is believed that the EZD-3 Filter Assembly was introduced into the market by the defendant in response to the action brought by the Company in March of 2003 as described above. On May 5, 2008, the court issued an order consolidating this case with the two cases described in the preceding paragraphs for purposes of discovery; these cases are currently in the discovery stage.

As previously disclosed, on December 16, 2005 Pall Corporation filed suit against the Company in U.S. District Court for the Eastern District of New York alleging patent infringement. Specifically, the suit alleges infringement of two of plaintiff’s patents by one of the Company’s gas filtration products and by the packaging for certain of the Company’s liquid filtration products. This lawsuit seeks damages for the alleged infringements. Both products and their predecessor products have been on the market for a number of years. The Company intends to vigorously defend this suit and believes that it will ultimately prevail. This case is currently awaiting a hearing before the court for claim construction of the patents in suit.

 

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On May, 4, 2007 Pall Corporation filed a lawsuit against the Company in the U.S. District Court for the Eastern District of New York alleging patent infringement. Specifically, the suit alleges that certain of the Company’s point-of-use filtration products infringe a newly issued Pall patent, as well as three older Pall patents. Pall’s action, which relates only to the U.S., asserts that “on information and belief” the Company’s Impact 2 and Impact Plus point-of-use photoresist filters infringe a patent issued to Pall on March 27, 2007, as well as three older patents. This lawsuit seeks damages for the alleged infringements. The Company intends to vigorously defend this suit and believes that it will ultimately prevail. This case is currently in the discovery stage.

Item 6. Exhibits

 

10.1    First Amendment to Amended and Restated Credit Agreement with Wells Fargo Bank National Association, as Agent, dated July 17, 2009. [Incorporated by reference to Exhibit 99.1 to Entegris, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on July 23, 2009]
10.2    Second Amendment to Amended and Restated Credit Agreement with Wells Fargo Bank National Association, as Agent, dated August 11, 2009. [Incorporated by reference to Exhibit 99.1 to Entegris, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on August 17, 2009]
10.3    Amendment No. 1 to Amended and Restated Supplemental Executive Retirement Plan for Key Salaried Employees of Entegris, Inc.
10.4    Underwriting Agreement, dated September 10, 2009, by and among Entegris, Inc. and Citigroup Global Markets, Inc. as representative of the several underwriters named therein [Incorporated by reference to Exhibit 1.1 to Entegris, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on September 15, 2009].
31.1    Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

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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: October 27, 2009  

/ S /    G REGORY B. G RAVES        

  Gregory B. Graves
  Executive Vice President and Chief Financial Officer (on behalf of the registrant and as principal financial officer)

 

39

Exhibit 10.3

A MENDMENT #1

to

AMENDED AND RESTATED

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

FOR KEY SALARIED EMPLOYEES OF

ENTEGRIS, INC.

INTRODUCTION

This document amends the Amended and Restated Supplemental Executive Retirement Plan for Key Salaried Employees of Entegris, Inc., which was originally established effective April 1, 2001 by Mykrolis Corporation, a predecessor to the Company, and which was assumed by the Board on August 10, 2005 and amended and restated by the Board on July 30, 2008.

The purpose of the Plan is to provide certain key salaried employees of the Employer with the opportunity to defer a portion of their compensation on an unfunded, nonqualified basis as hereinafter provided and to provide benefits to such employees that are supplemental to the benefits provided under the Savings Plan.

The Amended and Restated Plan, dated July 30, 2008, was intended inter alia to conform the Plan to the requirements of Section 409A, including the transition rules and exemptive relief provisions thereunder, and shall be construed consistent with that intent. Notwithstanding the foregoing, neither the Company nor any of its officers or directors, nor any other person charged with administrative responsibilities under the Supplemental Plan, shall be liable to any employee or former employee of the Company, or to any spouse or other beneficiary of any such employee or former employee, by reason of the failure of any benefit hereunder to comply with the requirements of Section 409A.

For purposes of compliance with Section 409A, the Supplemental Plan consists of two parts: (i) amounts deferred on behalf of a Participant that were earned and vested on or after January 1, 2005, including all income, gains and losses credited or charged with respect thereto (“Section 409A deferrals”) and (ii) amounts deferred on behalf of a Participant that were earned and vested on or before December 31, 2004 (including all income, gains and losses credited or charged with respect thereto) (“grandfathered deferrals”). With respect to Section 409A deferrals, the Supplemental Plan is intended to comply with the requirements of Section 409A and shall be interpreted and administered in a manner consistent with such requirements. With respect to grandfathered deferrals, the Plan is intended to be grandfathered for purposes of Section 409A and therefore exempt from Section 409A.

This Amendment #1 is intended to consolidate the provisions relating to the grandfathered deferrals into a single document with the provisions governing the 409A deferrals and to clarify certain administrative responsibilities. The terms of this Amendment #1 are to be effective as of January 1, 2009 except as indicated otherwise herein. Neither the Plan nor the provisions of this Supplemental Plan relating to grandfathered deferrals effect any material modification of the grandfathered deferrals within the meaning of Section 409A after October 3, 2004, although the Company reserves the right to amend grandfathered deferrals in the future to the extent provided


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herein. The rights of a Participant in the Plan who separated from service of the Employer on or prior to December 31, 2008 shall be governed by the terms of the Plan, including operational terms, as in effect on the date of such separation from service and in accordance with the requirements of Section 409A, to the extent applicable.

SECTION 1 DEFINITIONS

The following terms when used in this Supplemental Plan with initial capital letters shall have the meanings assigned to them below. Except where the context otherwise requires, words imparting the singular number shall include the plural number and vice versa, words denoting any gender shall include all genders and words denoting persons shall include bodies corporate and vice versa:

 

1.1. “Administrator” means the Management Development & Compensation Committee of the Board.

 

1.2. “Administrative Committee” means a committee comprised of not less than three (3) employees of the Company or other persons as shall, from time to time, be appointed by the Administrator. The initial Administrative Committee shall be comprised of those employees holding the offices with the Company listed in Appendix A hereto.

 

1.3. “Board” means the Board of Directors of Entegris, Inc., as from time to time in office.

 

1.4. “Code” means the Internal Revenue Code of 1986, as amended from time to time. Reference to any section or subsection of the Code includes reference to any comparable or succeeding provisions of any legislation which amends, supplements or replaces such section or subsection.

 

1.5. “Company” means Entegris, Inc., a Delaware corporation.

 

1.6. “Employer” means the Company, together with any subsidiary or affiliated corporation that (i) together with the Company would be treated as a single “employer” for purposes of Treas. Regs. § 1.409A-1(h)(3) and (ii) the Board determines to add to this Supplemental Plan.

 

1.7. “Participant” means a key salaried employee of the Employer who (i) is determined by the Administrator to qualify as a “highly compensated or management” employee for purposes of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA and (ii) is designated by the Administrator to receive benefits under this Supplemental Plan.

 

1.8. “Plan” means the Supplemental Executive Retirement Plan for Key Salaried Employees of Entegris, Inc. as in effect on December 31, 2004.

 

1.9. “Savings Plan” means the Entegris, Inc. 401(k) Savings and Profit Sharing Plan (2005 Restatement) , as it may be amended or restated from time to time.

 

1.10. “Section 409A” means Section 409A of the Code.


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1.11. “Specified Employee” means a Participant, if (i) at the date of such Participant’s separation from service with the Employer within the meaning of Treas. Regs. § 1.409A-1(h); the Company (or any other corporation forming part of the Employer) is a corporation any stock of which is publicly traded on an established securities market or otherwise, and (ii) the Participant is or was a “key employee” (determined under Section 416(i)(1)(A)(i), (ii) or (iii) of the Code, applied in accordance with the regulations thereunder and disregarding Section 416(i)(5) of the Code) at any time during (A) if the date of separation from service is April 1 through December 31, the preceding calendar year, or (B) if the date of separation from service is January 1 through March 31, the second calendar year preceding the calendar year in which the separation from service occurs (e.g., 2007 for a separation from service occurring January 1 through March 31 of 2009).

 

1.12. “Supplemental Account” means, for each Participant, the account under this Supplemental Plan to which contributions hereunder shall be credited in accordance with the provisions hereof. In the discretion of the Administrative Committee Supplemental Accounts may be subdivided for supplemental Participant contributions under Section 2.1, supplemental employer matching contributions under Section 2.2 supplemental employer discretionary contributions under Section 2.3 and other Employer credits under Section 2.4.

 

1.13. “Supplemental Plan” means this Amended and Restated Supplemental Executive Retirement Plan for Key Salaried Employees of Entegris, Inc. as amended by this Amendment #1 and by all subsequent amendments hereto.

SECTION 2 SUPPLEMENTAL SAVINGS PLAN BENEFITS

 

2.1. Supplemental Participant Contributions . Beginning January 1, 2005, a Participant may elect as provided in Section 3 to defer hereunder a portion or percentage of his or her gross compensation for any calendar year (prior to any deferrals under the Savings Plan, this Supplemental Plan, or any other nonqualified deferred compensation plan of the Company).

 

  2.1.1 . Pre-2005 Supplemental Participant Contributions . If, prior to January 1, 2005, contributions to the Savings Plan on behalf of a Participant were limited by the application of the limits described in Code Sections 401(a)(17) and 415 and/or a Participant made compensation deferrals pursuant to this Supplemental Plan or to any other nonqualified deferred compensation plan of the Company, the Company shall, if it has not already done so, credit to the Participant’s Supplemental Plan Account an amount equal to the excess of (a) over (b), where (a) is the amount which would have been contributed to the Savings Plan in the absence of the limits described in Code Sections 401(a)(17) and 415 and any compensation deferrals under this Supplemental Plan or any other nonqualified deferred compensation plan of the Company, and (b) is the amount actually contributed under the Savings Plan.

 

2.2.

Supplemental Employer Matching Contributions . Beginning January 1, 2006, the Company shall credit to the Supplemental Account of each Participant who has elected to


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participate in pre-tax deferrals under the Savings Plan (taking into account any limitations imposed under the Savings Plan to comply with the qualification requirements of the Code) an amount equal to the amount of employer matching contributions appropriate to the level of such Participant pre-tax deferrals and which would have been made to the Savings Plan in the absence of the limitations of Code Section 401(a)(17) and Code Section 415 minus the amount of employer matching contributions actually made to the Savings Plan.

 

  2.2.1 . Pre-2006 Supplemental Employer Matching Contributions . If, prior to January 1, 2006, a Participant made supplemental Participant contributions pursuant to Section 2.1.1 above, the Company shall, if it has not already done so, credit to his Supplemental Account an amount equal to the employer matching contributions appropriate to the level of such Participant contributions and which would have been made pursuant to the Savings Plan if the Participant’s supplemental Participant contributions had been made pursuant to the Savings Plan, without regard to the nondiscrimination requirements of Code Section 401(m).

 

2.3. Supplemental Employer Discretionary Contributions . Beginning January 1, 2006, the Company, in its sole discretion, may credit employer discretionary contributions to the Supplemental Account of each Participant in an amount and on an annual or such other basis as the Company may determine. The Company may, but is not obligated to, determine the amount of such employer discretionary contributions by considering the amount of employer discretionary contributions which would have been made to the Savings Plan on behalf of a Participant in the absence of the limitations of Code Section 401(a)(17), Code Section 415, the nondiscrimination requirements of Code Section 401(m) if, in addition to the deferrals for employer discretionary contributions actually made to the Savings Plan, the employer discretionary contributions under this Supplemental Plan had been made to the Savings Plan, minus the amount of employer discretionary contributions actually made to the Savings Plan on behalf of such Participant.

 

  2.3.1 . Pre-2006 Supplemental Employer Discretionary Contributions . If, prior to January 1, 2006, Employer Discretionary Contributions to the Savings Plan on behalf of a Participant were limited by the application of the limits described in Code Sections 401(a)(17) and 415 and/or a Participant made compensation deferrals pursuant to this Supplemental Plan or to any other nonqualified deferred compensation plan of the Company, the Company shall, if it has not already done so, credit to the Participant’s Supplemental Plan Account an amount equal to the excess of (a) over (b), where (a) is the amount which would have been contributed to the Savings Plan in the absence of the limits described in Code Sections 401(a)(17) and 415 and any compensation deferrals under this Supplemental Plan or any other nonqualified deferred compensation plan of the Company, and (b) is the amount actually contributed under the Savings Plan.

 

2.4. Other Employer Credits . The Company in its sole discretion may credit a discretionary amount to the Supplemental Accounts of one or some Participants, in such an amount and at such time, and subject to such other terms and conditions as the Company may determine in its sole discretion.


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SECTION 3 DEFERRAL ELECTION

 

3.1. In General . Each deferral under Section 2.1 shall be made by the Participant’s delivery to the Administrative Committee of a deferral election, on such form or forms as the Administrative Committee may determine in its discretion, on or before the date specified by the Administrative Committee, which date shall in all events (except as provided in 3.2 below) be, or fall prior to:

(i) in the case of any bonus that qualifies as “performance-based compensation” within the meaning of Treas. Regs. § 1.409A-1(e), the date that is six (6) months before the end of the performance period, but only if the Participant has been in continuous employment with the Employer since the later of the beginning of the performance period or the date the performance criteria are established and only if, on the date of the deferral election, the compensation has not become readily ascertainable (as determined in accordance with Treas. Regs. § 1.409A-2(a)(8));

(ii) in every other case, the last day of the calendar year preceding the calendar year in which are to be performed the services to which the deferred compensation relates.

Each election made under this 3.1 shall become irrevocable in accordance with such rules as the Administrative Committee may establish but not later than the election deadline specified in (i) or (ii) above, as applicable. Notwithstanding the above, the Administrative Committee may permit a Participant to make a deferral election without meeting the requirements of this Section 3.1, pursuant to such procedures as the Administrative Committee may determine in its discretion, to the extent permitted by transition guidance issued under Section 409A of the Code.

The Administrative Committee may impose a minimum deferral amount for anyone electing to participate in this Supplemental Plan.

 

3.2. First Year of Participation . Notwithstanding Section 3.1 above, an individual who first becomes eligible to participate in this Supplemental Plan during the course of a calendar year may elect to defer a specified portion or percentage of his gross compensation in respect of services to be performed for the remainder of the year by delivering to the Administrative Committee an irrevocable deferral election within thirty (30) days of first becoming eligible. An individual who already participates or is eligible to participate in (including an individual who has any entitlement, vested or unvested, to payments under) any other nonqualified deferred compensation plan that would be required to be aggregated with this Supplemental Plan for purposes of Treas. Regs. § 1.409A-1(c)(2) shall not be treated as eligible for the mid-year election rules of this Section 3.2 with respect to this Supplemental Plan, even if he had never previously been eligible to participate in this Supplemental Plan.

 

3.3.

Form of Election . Each deferral election shall be made in writing on a form prescribed by the Administrative Committee. To the extent consistent with Section 409A, the


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Administrative Committee may condition the effectiveness of any election upon the delivery by the Participant of such other form or forms as the Administrative Committee may prescribe.

SECTION 4 INVESTMENT DIRECTION

Participants shall be permitted, pursuant to such procedures as the Administrative Committee may determine in its discretion, to designate what percentage of all amounts credited to the Participant’s Supplemental Account in accordance with Section 2 above will be invested in the various investment options made available under the Savings Plan. Notwithstanding the foregoing, nothing herein shall obligate the Company, the Administrator or the Administrative Committee to make the same investment options available under this Supplemental Plan as are available under the Savings Plan and the Administrative Committee may change such investment options at any time in its sole discretion.

SECTION 5 DISTRIBUTIONS AND LOANS

 

5.1. Distribution of Section 409A Deferrals . All payments of benefits to Participants and/or their designated beneficiaries under this Supplemental Plan with respect to Section 409A deferrals shall be in cash in the form of a single lump sum paid within 90 days following the Participant’s separation from the service of the Employer within the meaning of Treas. Regs. § 1.409A-1(h); provided , however , that in the case of a Participant who is a Specified Employee at the date he or she separates from the service of the Employer, payment shall be made on the date that is six (6) months following the date of such separation.

 

5.2. Distribution of Grandfathered Deferrals . All payments of benefits to Participants and/or their designated beneficiaries with respect to grandfathered deferrals under this Supplemental Plan shall be made in any of the three forms set forth below; the particular form to be selected by the Administrative Committee in its sole discretion after giving due consideration to the desires of the Participant and/or his or her designated beneficiary, communicated to the Administrative Committee at least six (6) months prior to the date on which any such benefit payment is to commence:

 

  i) A lump sum payment;

 

  ii) The payment of a life annuity;

 

  iii) In five, ten or fifteen equal annual installments. (Equal shall mean dividing the account balance by the number of years remaining before making the annual installment then due).

Any unpaid balance shall remain in the Participant’s Supplemental Account and shall be adjusted in the manner as provided for in Section 2 above.

 

5.3. Distributions While Employed . No distributions may be made to a Participant under the terms of this Supplemental Plan while the Participant is an employee of the Employer.


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  5.4. Right of Offset . If, at the time of payment hereunder, the Administrative Committee determines that the Participant to whom or on whose behalf payment is being made, for any reason, is indebted to the Company or to any affiliate or subsidiary of the Company or to the Savings Plan, the Administrative Committee shall be entitled, to the extent permitted under Section 409A of the Code, to offset such indebtedness, including any interest accruing thereon, against any payments otherwise due under the Supplemental Plan.

 

  5.5. Withholding . The Company shall be entitled to withhold from payments due under the Supplemental Plan any and all taxes of any nature required by any government to be withheld from compensation paid to Participants.

 

  5.6. Loans . No loans to Participants shall be permitted under the Supplemental Plan.

 

  5.7. Designation of Beneficiary(ies) . Each Participant shall designate in writing, on such form and subject to such conditions as the Administrative Committee shall prescribe (including, in the Administrative Committee discretion, spousal consent in the case of married Participants), a beneficiary or beneficiaries to receive any amounts remaining to be paid hereunder at the Participant’s death; but if no such beneficiary designation is in effect at the time of the Participant’s death, or if the Participant’s beneficiary(ies) do(es) not survive the Participant, the Administrative Committee shall cause any such remaining benefits to be paid to the executor or administrator of the Participant’s estate.

SECTION 6 VESTING

A Participant shall be vested at all times in his or her supplemental participant contributions made under Section 2.1 and in supplemental Employer matching contributions made under Section 2.2. A Participant shall be vested in his or her supplemental Employer discretionary contributions to the same extent that the Participant is vested in his or her Employer Profit Sharing Account under the Savings Plan. A Participant shall be vested in any credit made under Section 2.4 in the sole discretion of the Company.

SECTION 7 MISCELLANEOUS

 

7.1. Amendment and Termination .

 

  (1) The Board may at any time and from time to time, amend or terminate this Supplemental Plan, without the consent of any Participant or beneficiary, provided that no such amendment or termination shall, without the consent of the affected Participant, reduce the balance of any Participant’s Supplemental Account below what it was immediately prior to the date of such termination or amendment

 

  (2) Any amendment or termination of the Supplemental Plan shall become effective as to a Participant or beneficiary on the first day of the month following the effective date of the amendment or termination.


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  (3) The Administrative Committee shall have the authority to: (i) adopt, alter and repeal such rules and procedures for the administration of this Supplemental Plan and such rules and procedures shall have the same force and effect as if set forth at length herein as a part of the Supplemental Plan; (ii) to adopt alter and repeal such rules and procedures for the conduct of its own actions and proceedings; (iii) to prescribe the form for any election or notice to be made or given under the Supplemental Plan;

 

  (4) The Administrator shall have the authority to adopt such corrective amendments to this Supplemental Plan as may be necessary to comply with the provisions of Section 409A.

 

  (5) Upon termination of the Plan, payments hereunder shall be accelerated only to the extent permitted by Section 409A.

 

7.2. No Contract of Employment . The establishment of the Supplemental Plan or any modification thereof shall not give any Participant or other person the right to remain in the service of the Company or of any subsidiary or affiliate of the Company, and all Participants and other persons shall remain subject to discharge to the same extent as if the Supplemental Plan had never been adopted.

 

7.3. Source of Funds . All payments of benefits hereunder and all costs of administration of this Plan shall be paid in cash from the general funds of the Company, and no special or separate fund shall be required to be established or other segregation of assets required to be made to assure such payments. The Plan is intended to be a “pension plan” (within the meaning of Section 3(2) of ERISA) that is unfunded for ERISA and tax purposes and that qualifies for the exemptions described in ERISA Sections 201(2), 301(a)(3) and 401(a)(1).

Nothing in this Section 7.3 shall be construed as prohibiting the Company from establishing, in its discretion, a bookkeeping account or reserve to meet its obligations hereunder and/or a so-called “rabbi trust” or similar grantor trust, and the Company may fund such trust for the purpose of providing benefits hereunder, so long as the funding of such a trust or account does not jeopardize the unfunded status of the Plan under ERISA or effective tax deferral under the Code. Except as provided in the preceding sentence, nothing contained in the Plan and no action taken pursuant to the provisions of this Plan shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Company, the Administrator or the Administrative Committee and any employee or other person. To the extent that any person acquires a right to receive payments under the Plan, such right shall be no greater than the right of any unsecured general creditor of that person’s employer or former employer.

 

7.4. Tax Effects . None of the Company, the Board, the Administrator, the Administrative Committee, and any firm, person, or corporation, represents or guarantees that any particular federal, state or local tax consequences will occur as a result of any Participant’s participation in this Supplemental Plan; each Participant shall consult with his or her own advisors regarding the tax consequences of participation in this Supplemental Plan.


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7.5. Administration of the Supplemental Plan . The Administrative Committee, subject to the supervision of the Administrator, shall have full power to interpret and administer this Supplemental Plan, to exercise all authority granted it under this Supplemental Plan and determine the eligibility of any person for benefits hereunder and the amount of any such benefit, in its discretion. Without limiting the foregoing, the Administrative Committee shall have full discretionary power and authority, not inconsistent with the express provisions of the Supplemental Plan, to select those individuals who may participate in the Supplemental Plan; to determine their gross compensation eligible for deferral under the Supplemental Plan; to determine eligibility to commence receipt of benefits (including, without limitation, any determination as to the proper treatment of leaves of absence and other periods when an individual is not actively rendering service to the Employer); and otherwise to supervise the administration of the Supplemental Plan. Any discretionary action by the Administrative Committee under the Supplemental Plan that affects the rights or benefits under the Supplemental Plan of an individual who is a member of the Administrative Committee (other than an action of general applicability to all Participants) must be approved by the Administrator. The Administrative Committee shall establish claims procedures under the Supplemental Plan consistent with the requirements of Section 503 of the Employee Retirement Income Security Act of 1974, as amended. The Administrative Committee shall also have the authority to interpret and administer this Supplemental Plan as it relates to grandfathered deferrals or the rights of a Participant who separated from the service of the Employer on or prior to December 31, 2008.

 

7.6. Entire Agreement; Successors . This Supplemental Plan, including any subsequently adopted amendments, shall constitute the entire agreement or contract between the Company and any Participant regarding the Supplemental Plan. There are no covenants, promises, agreements, conditions or understandings, either oral or written, between the Company and any Participant relating to the subject matter hereof, other than those set forth in this Supplemental Plan. This Supplemental Plan and any amendment shall be binding on the parties hereto and their respective heirs administrators, trustees, successors and assigns, and on all designated beneficiaries of the Participant.

 

7.7. Severability . If any provision of this Supplemental Plan shall be held or deemed to be invalid, inoperative or unenforceable as applied to any particular case in any jurisdiction or jurisdictions, because of its conflicting with any constitution or statute or rule of law or public policy or for any other reason, such circumstances shall not have the effect of rendering the provision or provisions in question invalid, inoperative or unenforceable in any other jurisdiction or of rendering any other provision or provisions herein contained invalid, inoperative or unenforceable, but this Supplemental Plan shall be reformed and construed in any such jurisdiction or case as if such invalid, inoperative or unenforceable provision had been contained herein and such provision reformed so that it would be valid, operative and enforceable to the maximum extent permitted in such jurisdiction or in such case.


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7.8. Validation of the Supplemental Account Balances of Certain Participants. Effective October 2006, the Supplemental Accounts of the Participants listed on Appendix B are, in accordance with the provisions of the Plan, increased to the amount set forth opposite each such Participant’s name, together with the investment returns thereon as if such increased amounts had been invested as of such respective Adjustment Effective Dates.

IN WITNESS WHEREOF , the Company has caused this Amended and Restated Supplemental Plan to be executed by its duly authorized officer as of the 29 th day of July, 2009.

 

ENTEGRIS, INC.
By:   /s/ Peter W. Walcott
Title:   Senior Vice President and General Counsel

A PPENDIX A

Initial Members of the Administrative Committee:

Chief Financial Officer

Senior Vice President Human Resources

Senior Vice President and General Counsel

A PPENDIX B

V ALIDATION OF P ARTICIPANT A CCOUNT B ALANCES

In accordance with Section 7.8 of the Supplemental Plan the Participant Account Balances of the Following Participants are increased to the respective balances set forth below:

 

Participant Name    Increased Account Balance

Exhibit 31.1

CERTIFICATIONS

I, Gideon Argov, certify that:

 

1. I have reviewed this Report on Form 10-Q of Entegris, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 27, 2009    

/s/ Gideon Argov

    Gideon Argov
    Chief Executive Officer
    (Principal Executive Officer)

 

Exhibit 31.2

CERTIFICATIONS

I, Gregory B. Graves, certify that:

 

1. I have reviewed this Report on Form 10-Q of Entegris, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects, the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: October 27, 2009    

/s/ Gregory B. Graves

    Gregory B. Graves
    Chief Financial Officer
    (Principal Financial Officer)

 

Exhibit 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q (the “Report”) of Entegris, Inc, a Delaware corporation (the “Company”), for the period ended September 26, 2009 as filed with the Securities and Exchange Commission on the date hereof, Gideon Argov, President and Chief Executive Officer of the Company and Gregory B. Graves, Chief Financial Officer of the Company, each hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 that:

 

  (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

  (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: October 27, 2009

 

/s/ Gideon Argov

Gideon Argov
Chief Executive Officer

/s/ Gregory B. Graves

Gregory B. Graves
Chief Financial Officer