e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 28, 2009
or
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission File Number: 0-17276
FSI INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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MINNESOTA
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41-1223238 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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3455 Lyman Boulevard, Chaska, Minnesota
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55318 |
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(Address of principal executive offices)
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(Zip Code) |
952-448-5440
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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.
þ YES o NO
Indicate by a 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
(§ 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).
o YES o 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. (Check one):
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Large accelerated filer o |
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Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting
company) |
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Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o YES þ NO
Indicate the number of shares outstanding of each of the issuers classes of common stock as of the
latest practicable date:
Common Stock, no par value 31,636,000 shares outstanding as of December 30, 2009.
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
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PAGE NO. |
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Item 1. Condensed Consolidated Financial Statements (unaudited): |
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3 |
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5 |
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6 |
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7 |
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16 |
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24 |
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24 |
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25 |
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25 |
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25 |
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25 |
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25 |
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25 |
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26 |
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27 |
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EX-31.1 |
EX-31.2 |
EX-32.1 |
2
PART I. ITEM 1. FINANCIAL STATEMENTS
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 28, 2009 AND AUGUST 29, 2009
(unaudited)
(in thousands)
ASSETS
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November 28, |
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August 29, |
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2009 |
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2009 |
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Current assets: |
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Cash and cash equivalents |
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$ |
4,877 |
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$ |
6,760 |
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Restricted cash |
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444 |
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818 |
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Trade accounts receivable, net of
allowance for doubtful accounts of $112
and $125, respectively |
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12,049 |
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8,697 |
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Inventories |
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22,064 |
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21,171 |
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Other receivables |
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2,836 |
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2,624 |
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Prepaid expenses and other current assets |
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1,715 |
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1,710 |
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Total current assets |
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43,985 |
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41,780 |
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Property, plant and equipment, at cost |
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73,492 |
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74,657 |
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Less accumulated depreciation and amortization |
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(58,683 |
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(59,510 |
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Property, plant and equipment, net |
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14,809 |
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15,147 |
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Long-term securities |
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4,458 |
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4,458 |
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Investment |
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460 |
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460 |
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Other assets |
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1,674 |
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1,840 |
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Total assets |
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$ |
65,386 |
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$ |
63,685 |
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(continued)
See accompanying notes to condensed consolidated financial statements.
3
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
NOVEMBER 28, 2009 AND AUGUST 29, 2009
(continued)
(unaudited)
(in thousands)
LIABILITIES AND STOCKHOLDERS EQUITY
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November 28, |
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August 29, |
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2009 |
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2009 |
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Current liabilities: |
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Trade accounts payable |
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$ |
5,129 |
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$ |
3,170 |
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Accrued expenses |
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6,679 |
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6,972 |
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Customer deposits |
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12 |
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Deferred profit |
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2,458 |
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2,362 |
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Total current liabilities |
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14,266 |
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12,516 |
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Long-term accrued expenses |
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555 |
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512 |
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Stockholders equity: |
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Preferred stock, no par value; 9,700 shares
authorized; none issued and outstanding |
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Series A Junior Participating Preferred Stock, no par
value; 300 shares authorized; none issued and
outstanding |
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Common stock, no par value; 50,000 shares
authorized; 31,636 shares issued and outstanding |
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226,562 |
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226,562 |
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Accumulated deficit |
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(177,646 |
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(177,591 |
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Accumulated other comprehensive loss |
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(1,136 |
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(1,027 |
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Other stockholders equity |
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2,785 |
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2,713 |
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Total stockholders equity |
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50,565 |
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50,657 |
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Total liabilities and stockholders equity |
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$ |
65,386 |
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$ |
63,685 |
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See accompanying notes to condensed consolidated financial statements.
4
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED NOVEMBER 28, 2009 AND NOVEMBER 29, 2008
(unaudited)
(in thousands, except per share amounts)
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November 28, |
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November 29, |
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2009 |
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2008 |
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Sales |
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$ |
14,617 |
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$ |
12,244 |
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Cost of goods sold |
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8,050 |
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7,617 |
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Gross margin |
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6,567 |
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4,627 |
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Selling, general and administrative expenses |
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3,795 |
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5,657 |
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Research and development expenses |
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2,756 |
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4,393 |
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Operating income (loss) |
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16 |
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(5,423 |
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Interest expense |
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(17 |
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Interest income |
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28 |
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132 |
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Other (loss, net |
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(83 |
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(20 |
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Loss before income taxes |
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(39 |
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(5,328 |
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Income taxes expense (benefit) |
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16 |
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(11 |
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Net loss |
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$ |
(55 |
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$ |
(5,317 |
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Net loss per common share: |
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Basic |
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$ |
0.00 |
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$ |
(0.17 |
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Diluted |
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$ |
0.00 |
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$ |
(0.17 |
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Weighted average common shares basic |
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31,636 |
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30,839 |
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Weighted average common shares diluted |
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31,636 |
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30,839 |
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See accompanying notes to condensed consolidated financial statements.
5
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE QUARTERS ENDED NOVEMBER 28, 2009 AND NOVEMBER 29, 2008
(unaudited)
(in thousands)
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November 28, |
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November 29, |
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2009 |
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2008 |
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OPERATING ACTIVITIES: |
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Net loss |
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$ |
(55 |
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$ |
(5,317 |
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Adjustments to reconcile net income (loss) to net cash used in
operating activities: |
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Stock compensation expense |
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270 |
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109 |
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Depreciation |
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691 |
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937 |
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Amortization |
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61 |
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Gain on sales of fixed assets |
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(57 |
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Changes in operating assets and liabilities: |
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Restricted cash |
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113 |
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Accounts receivable |
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(3,352 |
) |
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3,505 |
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Inventories |
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(893 |
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(1,187 |
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Prepaid expenses and other assets |
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(51 |
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10 |
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Trade accounts payable |
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1,959 |
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305 |
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Accrued expenses |
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(448 |
) |
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(1,605 |
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Customer deposits |
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(12 |
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3 |
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Deferred profit |
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96 |
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(1,510 |
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Net cash used in operating activities |
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(1,852 |
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(4,576 |
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INVESTING ACTIVITIES: |
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Capital expenditures |
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(353 |
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(5 |
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Proceeds from sales of fixed assets |
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57 |
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Decrease in restricted cash |
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374 |
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Sale of marketable securities |
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975 |
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Net cash provided by investing activities |
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78 |
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970 |
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FINANCING ACTIVITIES: |
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Principal payments on capital lease |
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(223 |
) |
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Net cash used in financing activities |
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(223 |
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Effect of exchange rates on cash |
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(109 |
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87 |
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Decrease in cash and cash equivalents |
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(1,883 |
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(3,742 |
) |
Cash and cash equivalents at beginning of period |
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6,760 |
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14,788 |
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Cash and cash equivalents at end of period |
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$ |
4,877 |
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$ |
11,046 |
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See accompanying notes to condensed consolidated financial statements.
6
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(1) Description of Business and Summary of Significant Accounting Policies
Description of Business
FSI International, Inc. (the Company) is a global supplier of surface conditioning equipment
(process equipment that is used to etch and clean organic and inorganic materials from the surfaces
of a silicon wafer), and technology and support services for microelectronics manufacturing. The
Companys broad portfolio of batch and single-wafer cleaning products includes process technologies
for immersion (a method used to clean silicon wafers by immersing the wafers in multiple tanks
filled with process chemicals), spray (sprays chemical mixtures, water and nitrogen in a variety of
sequences on to the microelectronic substrate), vapor (utilizes gas phase chemistries to
selectively remove sacrificial surface films) and CryoKinetic (a momentum transfer process used to
remove non-chemically bonded particles from the surface of a microelectronic device). The Companys
support services programs provide product and process enhancements to extend the life of installed
FSI equipment.
The Companys customers include microelectronics manufacturers located throughout North
America, Europe, Japan and the Asia-Pacific region.
Condensed Consolidated Financial Statements
The accompanying condensed consolidated financial statements have been prepared by the Company
without audit and reflect all adjustments (consisting only of normal and recurring adjustments,
except as disclosed in the notes) which are, in the opinion of management, necessary to present a
fair statement of the results for the interim periods presented. The condensed consolidated
financial statements have been prepared in accordance with the regulations of the Securities and
Exchange Commission (SEC) but omit certain information and footnote disclosures necessary to
present the financial statements in accordance with accounting principles generally accepted in the
United States of America. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full fiscal year. These condensed
consolidated financial statements should be read in conjunction with the consolidated financial
statements included in the Companys Annual Report on Form 10-K for the fiscal year ended August
29, 2009, previously filed with the SEC.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
could affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
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
established 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 accounting guidance not included in the
Codification is considered non-authoritative. The Codification also includes all relevant SEC
guidance organized using the same topical structure in separate sections within the Codification.
7
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 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, however it changes the way GAAP is organized
and presented. The Codification is effective for the Companys condensed consolidated financial
statements as of and for the period ended November 28, 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 141 (revised 2007) (SFAS 141R), Business
Combinations (ASC Topic 805), and SFAS 160, Noncontrolling Interests in Consolidated Financial
Statements (ASC Topic 810), to improve, simplify, and converge internationally the accounting for
business combinations and the reporting of noncontrolling interests in consolidated financial
statements, respectively. The provisions of this guidance were effective for us beginning in the
first quarter of fiscal 2010. The adoption did not have an impact on our consolidated financial
statements.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (ASC Topic 855). This guidance
is intended to establish 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 requires the disclosure of the date through which an entity has evaluated
subsequent events and the basis for that date. The disclosure requirement under this guidance was
effective for our annual reporting for our fiscal year ending August 29, 2009. We evaluated
subsequent events through the date and time the financial statements were issued on January 8,
2010.
In October 2009, the FASB issued 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. Using this guidance, a vendor is 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 revenue
arrangements entered into or materially modified in fiscal years beginning on or after June 15,
2010. Early adoption is permitted and we adopted this guidance in the first quarter of fiscal
2010. The adoption did not have a material impact on our consolidated financial statements for the
first quarter of fiscal 2010. The adoption may have a material impact in future fiscal quarters.
(2) Inventories
Inventories are summarized as follows (in thousands):
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November 28, |
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August 29, |
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2009 |
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2009 |
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Finished products |
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$ |
1,960 |
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$ |
3,013 |
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Work-in-process |
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6,716 |
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4,797 |
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Raw materials and purchased parts |
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13,388 |
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13,361 |
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$ |
22,064 |
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$ |
21,171 |
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8
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(3) Accrued Expenses
Accrued expenses are summarized as follows (in thousands):
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November 28, |
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August 29, |
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2009 |
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2009 |
|
Salaries and benefits |
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$ |
2,073 |
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$ |
1,507 |
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Vacation |
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1,193 |
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1,157 |
|
Realignment |
|
|
453 |
|
|
|
986 |
|
Product warranty |
|
|
1,412 |
|
|
|
1,702 |
|
Other |
|
|
1,548 |
|
|
|
1,620 |
|
|
|
|
|
|
|
|
|
|
$ |
6,679 |
|
|
$ |
6,972 |
|
|
|
|
|
|
|
|
(4) Supplementary Cash Flow Information
The following summarizes supplementary cash flow information (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
November 28, |
|
November 29, |
|
|
2009 |
|
2008 |
Income taxes received |
|
|
|
|
|
$ |
(17 |
) |
(5) Comprehensive Loss
Other comprehensive loss pertains to revenues, expenses, gains and losses that are not
included in the net loss but rather are recorded directly in stockholders equity. For the
quarters ended November 28, 2009 and November 29, 2008, other comprehensive loss consisted of the
foreign currency translation adjustment. The components of comprehensive loss are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 28, |
|
|
November 29, |
|
|
|
2009 |
|
|
2008 |
|
Net loss |
|
$ |
(55 |
) |
|
$ |
(5,317 |
) |
Items of other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
(110 |
) |
|
|
87 |
|
|
|
|
|
|
|
|
Comprehensive loss |
|
$ |
(165 |
) |
|
$ |
(5,230 |
) |
|
|
|
|
|
|
|
(6) Stock-Based Compensation
Stock-based compensation expense for new stock options granted or vested under the Companys
stock incentive plans and employee stock purchase plan was reflected in the condensed consolidated
statements of operations for the first quarter of each of fiscal 2010 and 2009 as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 28, |
|
|
November 29, |
|
|
|
2009 |
|
|
2008 |
|
Cost of goods sold |
|
$ |
26 |
|
|
$ |
10 |
|
Selling, general and administrative |
|
|
132 |
|
|
|
79 |
|
Research and development |
|
|
112 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
$ |
270 |
|
|
$ |
109 |
|
|
|
|
|
|
|
|
9
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The Company uses historical data to estimate the expected price volatility,
the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S.
Treasury yield curve in effect at the time of grant for the estimated life of the option. The
Company has not made any dividend payments nor does it expect to pay dividends in the foreseeable
future. There were no options granted during the first quarter of fiscal 2010 and 5,000 options
were granted in the first quarter of fiscal 2009.
The following assumptions were used to estimate the fair value of options granted during the
first quarter of fiscal 2009 using the Black-Scholes option-pricing model:
|
|
|
|
|
|
|
Quarter Ended |
|
|
November 29, |
|
|
2008 |
Stock options: |
|
|
|
|
Volatility |
|
|
71.0 |
% |
Risk-free interest rate |
|
|
2.2 |
% |
Expected option life |
|
|
5.4 |
|
Stock dividend yield |
|
|
|
|
There were no options granted during the first quarter of fiscal 2010.
A summary of our option activity for the first quarter of fiscal 2010 is as follows (in
thousands, except price per share and contractual term):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
average |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Number of |
|
|
Exercise Price |
|
|
Contractual |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Per Share |
|
|
Term |
|
|
Value |
|
Outstanding as of August 29, 2009 |
|
|
3,399 |
|
|
$ |
6.05 |
|
|
|
|
|
|
|
|
|
Options granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(1 |
) |
|
|
2.24 |
|
|
|
|
|
|
|
|
|
Options expired |
|
|
(53 |
) |
|
|
6.38 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding as of November 28, 2009 |
|
|
3,345 |
|
|
$ |
6.05 |
|
|
|
4.2 |
|
|
$ |
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable as of November 28, 2009 |
|
|
2,934 |
|
|
$ |
6.78 |
|
|
|
3.6 |
|
|
$ |
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the status of our unvested option shares as of November 28, 2009 is as follows
(in thousands except fair value amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average |
|
|
|
Number of |
|
|
Grant-Date Fair |
|
|
|
Shares |
|
|
Value |
|
Unvested at August 29, 2009 |
|
|
471 |
|
|
$ |
0.60 |
|
Options granted |
|
|
|
|
|
|
|
|
Options forfeited |
|
|
(1 |
) |
|
|
1.40 |
|
Options vested |
|
|
(59 |
) |
|
|
1.05 |
|
|
|
|
|
|
|
|
|
Unvested at November 28, 2009 |
|
|
411 |
|
|
$ |
0.54 |
|
|
|
|
|
|
|
|
|
10
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of November 28, 2009, there was $238,000 of total unrecognized compensation cost related to
unvested share-based compensation granted under our plans. That cost is expected to be recognized
over a weighted-average period of 0.7 years. The total fair value of option shares vested during
the first quarters of fiscal 2010 and fiscal 2009 was $270,000 and $109,000, respectively.
(7) Product Warranty
Warranty provisions and claims for the quarters ended November 28, 2009 and November 29, 2008
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
November 28, |
|
|
November 29, |
|
|
|
2009 |
|
|
2008 |
|
Beginning balance warranty
accrual |
|
$ |
1,702 |
|
|
$ |
2,757 |
|
Warranty provisions |
|
|
(196 |
) |
|
|
101 |
|
Warranty claims |
|
|
(94 |
) |
|
|
(416 |
) |
|
|
|
|
|
|
|
Ending balance warranty accrual |
|
$ |
1,412 |
|
|
$ |
2,442 |
|
|
|
|
|
|
|
|
During the first quarter of fiscal 2010, the Company reversed $345,000 of unused prior period
warranty accruals associated with improved claims experience.
(8) Cost Reductions and Realignment
In the second quarter of fiscal 2009, the Company committed to a plan of additional cost
reduction actions, including the reduction of headcount, salary reductions and scheduled plant
shutdowns. The cost reduction actions were due to the Company continuing to be impacted by the
global economic slowdown and in particular the reduced demand for the Companys products. A total
of 111 positions were eliminated of which 37 were manufacturing positions, 37 were sales, service
and marketing positions, 8 were administrative positions and 29 were engineering positions.
Severance and outplacement costs, net of change in estimate, recorded in fiscal 2009 were allocated
as follows: $1,133,000 to selling, general and administrative expense, $875,000 to research and
development expense and $604,000 to cost of goods sold.
The fiscal 2009 severance and outplacement costs are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount Paid |
|
|
|
|
|
|
Amount |
|
|
through |
|
|
Accrual at |
|
|
|
Charged |
|
|
November 28, |
|
|
November 28, |
|
|
|
Fiscal 2009 |
|
|
2009 |
|
|
2009 |
|
Selling, general and administrative expenses |
|
$ |
1,133 |
|
|
$ |
995 |
|
|
$ |
138 |
|
Research and development expenses |
|
|
875 |
|
|
|
706 |
|
|
|
169 |
|
Cost of goods sold |
|
|
604 |
|
|
|
458 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
2,612 |
|
|
$ |
2,159 |
|
|
$ |
453 |
|
|
|
|
|
|
|
|
|
|
|
11
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(9) Long-term Securities
As of November 28, 2009, the Company had investments in ARS reported at a fair value of $4.5
million after reflecting a $0.2 million other than temporary impairment against $4.7 million par
value. The other than temporary impairment was recorded in fiscal 2008. The Company valued the
majority of ARS using a mark-to-model approach that relies on discounted cash flows, market data
and inputs derived from similar instruments. This model takes into account, among other variables,
the base interest rate, credit spreads, downgrade risks and default/recovery risk, the estimated
time required to work out the disruption in the traditional auction process and its effect on
liquidity, and the effects of insurance and other credit enhancements.
The ARS held by the Company are marketable securities with long-term stated maturities for
which the interest rates are reset every 28 days through an auction process and at the end of each
reset period, investors can sell or continue to hold the securities at par. There were no
redemptions of the Companys ARS in the first quarter of fiscal 2010.
The $4.7 million par value ARS held by the Company are backed by student loans and are
collateralized, insured and guaranteed by the United States Federal Department of Education and are
classified as long-term. All of the ARS held by the Company continue to carry investment grade
ratings and have not experienced any payment defaults. ARS that did not successfully auction, reset
to the maximum interest rate as prescribed in the underlying indenture and all of the Companys
holdings continue to be current with their interest payments. The Companys ARS are classified as
long-term assets. If uncertainties in the credit and capital markets continue, these markets
deteriorate further or any ARS the Company holds are downgraded by the rating agencies, the Company
may be required to recognize additional impairment charges.
The Company categorizes its assets and liabilities into one of three levels based on the
assumptions (inputs) used in valuing the asset or liability. Level 1 provides the most reliable
measure of fair value, while Level 3 generally requires significant management judgment. The three
levels are defined as follows:
Level 1 Quoted prices in active markets for identical assets or liabilities.
Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the
assets or liabilities.
Level 3 Unobservable inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or liabilities.
The Company valued its ARS based on level 3 inputs in which values are based on prices or
valuation techniques that require inputs that are both unobservable and significant to the overall
fair value measurement. These level 3 inputs reflect managements own assumptions about the
assumptions a market participant would use in pricing the ARS.
(10) Contingencies
In late calendar 2006, the Company determined that certain of its replacement valves, pumps
and heaters could fall within the scope of United States export licensing regulations to products
that could be used in connection with chemical weapons processes. The Company determined that
these regulations require it to obtain licenses to ship some of its replacement spare parts, spare
parts kits and assemblies to customers in certain controlled countries as defined in the export
licensing regulations. During the second
12
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
quarter of fiscal 2007, the Company was granted licenses to ship replacement spare parts,
spare parts kits and assemblies to all customers in the controlled countries where the Company
conducts business.
The applicable export licensing regulations frequently change. Moreover, the types and
categories of products that are subject to export licensing are often described in the regulations
in general terms and could be subject to differing interpretations.
In the second quarter of fiscal 2007, the Company made a voluntary disclosure to the United
States Department of Commerce to clarify its licensing practices and to review its practices with
respect to prior sales of certain replacement valves, pumps and heaters to customers in several
controlled countries as defined in the licensing regulations.
In October 2009, the Company entered into a settlement agreement with the Office of Export
Enforcement for $450,000. The Company began paying $5,000 per month for ten months in November
2009. The remaining $400,000 included in the settlement will be suspended for 12 months. If the
Company does not commit any export violations during the 12-month period, it will be released from
further payment, including the suspended $400,000. As of November 28, 2009, the Company has accrued
$45,000 for payments to be made under the settlement agreement, which is reflected in other accrued
expenses.
(11) Share Repurchase Plan
In October 2008, the Company authorized the repurchase of up to $3 million of the Companys
common stock to be effected from time to time in transactions in the public markets or in private
purchases. The timing and extent of any repurchases will depend upon market conditions, the trading
price of the Companys shares and other factors, subject to the restrictions relating to volume,
price and timing of share repurchases under applicable law. The repurchase program may be modified,
suspended or terminated at any time by the Company without notice. The Company did not repurchase
any of its common stock during fiscal 2009 or the first quarter of fiscal 2010.
(12) Liquidity
As of November 28, 2009, the Company had $9.8 million of cash, cash equivalents, restricted
cash and marketable securities, of which $4.5 million are classified as long-term due to the lack
of liquidity of the ARS as discussed in Note 8. During the first quarter of fiscal 2010, the
Company used approximately $1.9 million for operations. During fiscal 2009, the Company used
approximately $10.1 million for operations, which included the liquidation of approximately $2.4
million of life insurance investments. The cash usage in fiscal 2009 and the first quarter of
fiscal 2010 was primarily related to funding operations.
In light of its financial condition, the Company recognized the need to reduce its use of cash
and implemented a number of cost reduction steps in fiscal 2009. The Companys actions in fiscal
2009 are expected to lower the Companys annual operating expenses.
The Company currently does not have any revolving line of credit or other form of debt
financing. If the economic environment does not improve in fiscal 2010, and, not withstanding the
Companys cash management initiatives, if more cash is needed to fund the Company than expected,
the Company may need to take additional actions. These actions could include entering into a
sale-leaseback arrangement for its facility in Chaska, Minnesota, entering into an asset-based
lending arrangement, borrowing up to $3.5 million against or liquidating its remaining life
insurance investments of $3.6 million and/or borrowing up to 50% against or selling some or all of
its currently illiquid ARS, possibly at a loss, selling additional
13
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
equity or other cash generating actions. If the Company must engage in any of the foregoing
cash generating actions, there is no assurance that any such actions will be available to the
Company, particularly those relating to third-party financing arrangements. Further, there is no
assurance on the amount of cash that may be generated as a result of these actions, or whether the
amount of cash received will be sufficient to cover the Companys operating expenses at such time.
The sale of additional equity would likely result in additional dilution to the Companys
shareholders.
(13) Income Taxes
As of November 28, 2009 and August 29, 2009, the Company had $0.6 million and $0.5 million,
respectively, of liabilities recorded related to unrecognized tax benefits. Included in the
liability balance as of November 28, 2009 and August 29, 2009 are approximately $0.5 million and
$0.4 million, respectively, of unrecognized tax benefits that, if recognized, will affect the
Companys effective tax rate. Accrued interest and penalties on these unrecognized tax benefits
were $0.1 million as of both November 28, 2009 and August 29, 2009. The Company recognizes
potential interest and penalties related to income tax positions, if any, as a component of
provision for income taxes on the consolidated statements of operations. The Company does not
anticipate that the total amount of unrecognized tax benefits will significantly change during the
next twelve months.
The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax
of numerous state and foreign jurisdictions. The Company is subject to U.S. federal tax, state tax
and foreign tax examinations by tax authorities for fiscal years after 2003. Income tax
examinations that the Company may be subject to for the various state and foreign taxing
authorities vary by jurisdiction.
The Company recorded income tax expense of $16,000 in the first quarter of fiscal 2010 related
primarily to foreign taxes. The Company recorded an income tax benefit of $11,000 in the first
quarter of fiscal 2009. The income tax benefit in fiscal 2009 related primarily to foreign taxes.
(14) Revenue Recognition Change
As discussed in Note 1, the Company elected early adoption of ASU No. 2009-13. The ASU was
adopted on a prospective basis in the first quarter of fiscal 2010. Revenue arrangements entered
into prior to the first quarter of fiscal 2010 continue to be accounted for under the Companys
previous revenue recognition policy. As of the first quarter of fiscal 2010, revenue from multiple
element arrangements is allocated among the separate accounting units based on the relative selling
price of each deliverable. The Company recognizes the equipment revenue upon shipment and transfer
of title. The equipment revenue is determined based on the estimated selling price which is
determined by managements judgment. The other multiple elements include installation, service
contracts and training. Equipment installation revenue is determined based on estimated service
person hours to complete installation and quoted service labor rates and is recognized when the
installation has been completed and the equipment has been accepted by the customer. Service
contract revenue is determined based on estimated service person hours to complete the service and
quoted service labor rates and is recognized over the contract period. Training revenue is
determined based on quoted training class prices and is recognized when the customers complete the
training classes or when a customer-specific training period has expired. The quoted service labor
rates and training class prices are rates actually charged and billed to our customers. All other
product sales with customer-specific acceptance provisions are recognized upon customer acceptance.
The impact of the new revenue recognition policy was not material to the Companys
consolidated financial statements.
14
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(15) Other Sales Information
Geographic Information
International sales were approximately 54% of total sales in the first quarter of fiscal 2010
and approximately 76% of total sales in the first quarter of fiscal 2009. The basis for determining
sales by geographic region is the location that the product is shipped to. Included in these
percentages and the table below are sales to related parties. Sales by geographic area are
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
|
November 28, |
|
|
November 29, |
|
|
|
2009 |
|
|
2008 |
|
Asia |
|
$ |
5,688 |
|
|
$ |
6,643 |
|
Europe |
|
|
2,162 |
|
|
|
2,663 |
|
Other |
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
|
Total International |
|
|
7,850 |
|
|
|
9,308 |
|
Domestic |
|
|
6,767 |
|
|
|
2,936 |
|
|
|
|
|
|
|
|
|
|
$ |
14,617 |
|
|
$ |
12,244 |
|
|
|
|
|
|
|
|
South Korea accounted for 33% of total sales in the first quarter of fiscal 2010 and in the
first quarter of fiscal 2009. In the first quarter of fiscal 2009, China accounted for 16% of total
sales and Germany accounted for 11% of total sales.
Customer Information
The following summarizes significant customers comprising 10% or more of the Companys trade
accounts receivable as of November 28, 2009 and August 29, 2009 and 10% or more of sales for the
first quarters of fiscal 2010 and 2009, which includes sales through affiliates to end-users:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Trade Accounts |
|
|
|
|
Receivable as of |
|
% of Sales for the Fiscal Quarter Ended |
|
|
November 28, |
|
August 29, |
|
November 28, |
|
November 29, |
|
|
2009 |
|
2009 |
|
2009 |
|
2008 |
Customer A |
|
|
41 |
% |
|
|
27 |
% |
|
|
57 |
% |
|
|
17 |
% |
Customer B |
|
|
16 |
% |
|
|
22 |
% |
|
|
* |
|
|
|
15 |
% |
Customer C |
|
|
* |
|
|
|
10 |
% |
|
|
* |
|
|
|
* |
|
Customer D |
|
|
* |
|
|
|
* |
|
|
|
* |
|
|
|
16 |
% |
|
|
|
* |
|
Trade accounts receivable from or sales to respective customer were less than 10% as of the
end of or during the fiscal period. |
15
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The information in this report, except for the historical information, contains
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and is subject to the safe harbor created by that statute. Typically, we identify
forward-looking statements by use of an asterisk *. In some cases, you can identify
forward-looking statements by terminology such as expects, anticipates, intends, may,
should, plans, believes, seeks, estimates, could, would, or the negative of such
terms or other comparable terminology. These forward-looking statements include, but are not
limited to, expected annual cost savings; expected breakeven revenue level; expected cash flow
revenue level; expected orders, expected revenues, expected financial results, expected cash usage
and other expected financial performance for the second quarter of fiscal 2010. These statements
are subject to various risks and uncertainties, both known and unknown. Factors that could cause
actual results to differ include, but are not limited to, changes in industry conditions; order
delays or cancellations; general economic conditions; changes in customer capacity requirements and
demand for microelectronics; the extent of demand for our products and our ability to meet demand;
global trade policies; worldwide economic and political stability; our successful execution of
internal performance plans; the cyclical nature of our business; volatility of the market for
certain products; performance issues with key suppliers and subcontractors; the level of new
orders; the timing and success of current and future product and process development programs; the
success of our direct distribution organization; legal proceedings; the potential impairment of
long-lived assets; and the potential adverse financial impacts resulting from declines in the fair
value and liquidity of investments we presently hold; as well as other factors listed from time to
time in our SEC reports including, but not limited to, the Risk Factors set forth in our Form 10-K
for the fiscal year ended August 29, 2009. Readers also are cautioned not to place undue reliance
on these forward-looking statements as actual results could differ materially. We undertake no duty
to update any of the forward-looking statements after the date of this report.
This discussion and analysis should be read in conjunction with the condensed consolidated
financial statements and notes thereto appearing elsewhere in this report.
Industry
Gartner, Inc. (Gartner), a leading equipment industry research group, in December 2009
revised its revenue forecasts for the semiconductor industry from that made in September 2009;
Gartner now expects calendar 2009 worldwide semiconductor revenue to decrease 11.4 percent and
semiconductor capital equipment spending to decrease 46.8 percent from the calendar 2008 levels.
The September 2009 Gartner forecast projected calendar 2009 worldwide semiconductor revenue to
decrease 17.0 percent and equipment spending to decrease 47.9 percent from the calendar 2008
levels.
Many semiconductor manufacturers are experiencing improved factory utilization rates. As a
result, they are increasing their production capacity through equipment upgrades and technology
conversions. The capacity expansions have primarily occurred at foundries that provide outsourcing
services for logic device producers and microprocessor suppliers. Memory device manufacturer
spending on equipment that enables technology advancement and increased productivity started to
accelerate in the second half of calendar 2009 with a sustainable spending increase expected by
industry analysts to continue in calendar 2010.*
As a result of the improving industry conditions Gartner recently forecasted that
semiconductor revenues will grow 13.0 percent, to $255 billion, in calendar 2010, from the expected
$225 billion level in 2009. Certain industry analysts expect demand for smart cell phones, personal
computers and LEDs , along with higher chip unit prices to be key drivers for year-over-year
growth. Gartner recently forecasted the equipment revenues will increase 56.3 percent in calendar
2010, to $25.5 billion, from the expected $16.3 billion level in calendar 2009. Certain industry
analysts expect both logic and memory capacity additions to contribute to the year-over-year
revenue increase.
16
Application of Critical Accounting Policies and Estimates
In accordance with SEC guidance, those material accounting policies that we believe are the
most critical to an investors understanding of our financial results and condition and require
complex management judgment are discussed below.
Our critical accounting policies and estimates are as follows:
|
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revenue recognition; |
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|
valuation of long-lived assets; |
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|
estimation of valuation allowances and accrued liabilities, specifically product
warranty, inventory provisions and allowance for doubtful accounts; |
|
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|
stock-based compensation; and |
|
|
|
|
income taxes. |
Revenue Recognition
We recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred
or services have been rendered, the purchase price is fixed or determinable and collectibility is
reasonably assured. If our equipment sales involve sales to our existing customers who have
previously accepted the same type(s) of equipment with the same type(s) of specifications, we
account for the product sales as a multiple element arrangement. Revenue from multiple element
arrangements is allocated among the separate accounting units based on the relative selling price
of each deliverable. We recognize the equipment revenue upon shipment and transfer of title. The
equipment revenue is determined based on the estimated selling price which is determined by
managements judgment. The other multiple elements include installation, service contracts and
training. Equipment installation revenue is determined based on estimated service person hours to
complete installation and quoted service labor rates and is recognized when the installation has
been completed and the equipment has been accepted by the customer. Service contract revenue is
determined based on estimated service person hours to complete the service and quoted service labor
rates and is recognized over the contract period. Training revenue is determined based on quoted
training class prices and is recognized when the customers complete the training classes or when a
customer-specific training period has expired. The quoted service labor rates and training class
prices are rates actually charged and billed to our customers.
All other product sales with customer-specific acceptance provisions are recognized upon
customer acceptance. Future revenues may be negatively impacted if we are unable to meet
customer-specific acceptance criteria. Revenue related to spare part sales is recognized upon
shipment or delivery based on the trade terms. Revenues related to maintenance and service
contracts are recognized ratably over the duration of such contracts.
The timing and amount of revenue recognized depends on whether revenue is recognized upon
shipment versus acceptance. For revenue recognized upon acceptance, it is dependent upon when
customer-specific criteria are met.
Impairment of Long-Lived Assets
We assess the impairment of long-lived assets whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. An asset or asset group is considered
impaired if its carrying amount exceeds the undiscounted future net cash flow the asset or asset
group is expected to generate. If an asset or asset group is considered to be impaired, the
impairment to be recognized is
17
measured by the amount by which the carrying amount of the asset exceeds its fair value. If
estimated fair value is less than the book value, the asset is written down to the estimated fair
value and an
impairment loss is recognized.
If we determine that the carrying amount of long-lived assets may not be recoverable, we
measure any impairment based on the fair value of the long-lived assets. Net long-lived assets
amounted to $14.8 million as of November 28, 2009.
In the first quarter of fiscal 2010, we did not generate positive cash flows from operations.
If our long-term future plans do not yield positive cash flows in excess of the carrying amount of
our long-lived assets, we would anticipate possible future impairments of those assets.*
Considerable management judgment is necessary in estimating future cash flows and other
factors affecting the valuation of long-lived assets and the operating and macroeconomic factors
that may affect them. We use historical financial information, internal plans and projections and
industry information in making such estimates.
Product Warranty Estimation
We record a liability for warranty claims at the time of sale. The amount of the liability is
based on the trend in the historical ratio of claims to sales, releases of new products and other
factors. The warranty periods for new equipment manufactured by us typically range from six months
to two years. Special warranty reserves are also accrued for major rework campaigns. Although
management believes the likelihood to be relatively low, claims experience could be materially
different from actual results because of the introduction of new, more complex products;
competition or other external forces; manufacturing changes that could impact product quality; or
as yet unrecognized defects in products sold.
During the first quarter of fiscal 2010, we reversed $345,000 of unused prior period warranty
accruals associated with improved claims experience.
Inventory Provisions Estimation
We record provisions for inventory shrinkage and for potentially excess, obsolete and slow
moving inventory. The amounts of these provisions are based upon historical loss trends, inventory
levels, physical inventory and cycle count adjustments, expected product lives, forecasted sales
demand and recoverability. Results could be materially different if demand for our products
decreased because of economic or competitive conditions, length of the industry downturn, or if
products become obsolete because of technical advancements in the industry or by us. In the first
quarter of fiscal 2010, we recorded approximately $400,000 of additional inventory provisions
associated primarily with engineering design changes.
Allowance for Doubtful Accounts Estimation
Management must estimate the uncollectibility of our accounts receivable. The most significant
risk is a sudden unexpected deterioration in financial condition of a significant customer who is
not considered in the allowance. Management specifically analyzes accounts receivable and analyzes
historical bad debts, customer concentrations, customer credit-worthiness, current economic trends
and changes in our customer payment terms when evaluating the adequacy of the allowance for
doubtful accounts. Results could be materially impacted if the financial condition of a significant
customer deteriorated and related accounts receivable are deemed uncollectible. Accounts receivable
are determined to be past due based on payment terms and are written off after management
determines that they are uncollectible.
18
As of November 28, 2009, our accounts receivable included $2.0 million attributable to a past
due receivable with a customer in Asia. The customer has delayed payment due to their cash flow
issues and lower than expected capacity utilization. Management is working on obtaining a letter of
credit for the outstanding amount with expected payment in the second quarter of fiscal 2010.*
Management still believes that this receivable is collectible and will continue to monitor the
situation closely.*
Stock-Based Compensation
We utilize the Black-Scholes option-pricing model to estimate fair value of each award on the
date of grant. The Black-Scholes model requires the input of certain assumptions that involve
management judgment. Key assumptions that affect the calculation of fair value include the expected
life of stock-based awards and our stock price volatility. Additionally, we expense only those
shares expected to vest. The assumptions used in calculating the fair value of stock-based awards
and the forfeiture rate of such awards reflect managements best estimates. However, circumstances
may change and additional data may become available over time, which could result in changes to
these assumptions that materially impact the fair value determination of future awards or their
estimated rate of forfeiture.
Income Taxes
Our effective income tax rate is based on income, statutory tax rates and tax planning
opportunities available to us in the various jurisdictions in which we operate. We have established
valuation allowances for all operating losses to reflect the uncertainty of our ability to fully
utilize these benefits given the limited carryforward periods permitted by the various
jurisdictions. The evaluation of the realizability of our net operating losses requires the use of
considerable management judgment to estimate the future taxable income for the various
jurisdictions, for which the ultimate amounts and timing of such estimates may differ. The
valuation allowance can also be impacted by changes in the tax regulations.
Significant judgment is required in determining unrecognized tax benefits. We have established
accruals for unrecognized tax benefits using managements best judgment and adjust these accruals
as warranted by changing facts and circumstances. A change in our accruals in any given period
could have a significant impact on our results of operations for that period. The accrual for
unrecognized benefits increased by $43,000 for the first quarter of fiscal 2010 and decreased by
$93,000 for the first quarter of fiscal 2009.
19
FIRST QUARTER OF FISCAL 2010 COMPARED WITH FIRST QUARTER OF FISCAL 2009
The Company
The following table sets forth for the fiscal quarter indicated, certain income and expense
items as a percent of our total sales.
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|
Percent of Sales |
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November 28, |
|
November 29, |
First quarter ended: |
|
2009 |
|
2008 |
Sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of goods sold |
|
|
55.1 |
|
|
|
62.2 |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
44.9 |
|
|
|
37.8 |
|
Selling, general and administrative |
|
|
25.9 |
|
|
|
46.2 |
|
Research and development |
|
|
18.9 |
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|
35.9 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
0.1 |
|
|
|
(44.3 |
) |
Other (expense) income, net |
|
|
(0.4 |
) |
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(0.3 |
) |
|
|
(43.5 |
) |
Income taxes expense (benefit) |
|
|
0.1 |
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
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|
Net loss |
|
|
(0.4 |
%) |
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|
(43.4 |
%) |
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|
Sales Revenues and Shipments
Sales revenues increased to $14.6 million for the first quarter of fiscal 2010 as compared to
$12.2 million for the first quarter of fiscal 2009. The increase related primarily to improved
industry conditions. International sales were $7.8 million, representing 54% of total sales during
the first quarter of fiscal 2010 and $9.3 million, representing 76% of total sales, during the
first quarter of fiscal 2009.
Shipments were $14.6 million in the first quarter of fiscal 2010 as compared to $9.6 million
in the first quarter of fiscal 2009.
Based upon our revenue recognition policy, certain shipments to customers are not recognized
until customer acceptance. Therefore, depending on timing of shipments and customer acceptances,
there are time periods where shipments may exceed sales revenue or, due to timing of acceptances,
sales revenue may exceed shipments.
We currently expect second quarter of fiscal 2010 revenues to be between $18 and $20 million.*
In order to achieve this revenue level, we will need to receive several system orders that can be
shipped and recognized as revenue in the second quarter.*
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products
sold; the geographic mix of products sold, with international sales generally having lower gross
profit than domestic sales; initial product placement discounts; utilization of manufacturing
capacity; the sales of inventory previously written down to zero; and the competitive pricing
environment.
Gross margin as a percentage of sales was 44.9% for the first quarter of fiscal 2010 compared
to 37.8% for the first quarter of fiscal 2009. The increase in gross margin was primarily related
to improved manufacturing capacity utilization associated with the increase in shipments from $9.6
million in the first quarter of fiscal 2009 to $14.6 million in the first quarter of fiscal 2010.
20
Gross profit margins are expected to be 41% to 43% of revenues for the second quarter of
fiscal 2010 due to mix of products sold.* We anticipate improved capacity utilization as a result
of expected higher shipments as compared to the first quarter of fiscal 2010 and continued cost
control.*
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $3.8 million in the first quarter of fiscal
2010 and $5.7 million in the first quarter of fiscal 2009. The decrease related primarily to cost
reduction initiatives associated with reductions in headcount taken in fiscal 2009.
We expect selling, general and administrative expenses in the second quarter of fiscal 2010 to
be in the range of $3.8 to $4.0 million as we continue to focus on managing costs and supporting
the expected higher revenue amount.*
Research and Development Expenses
Research and development expenses were $2.8 million for the first quarter of fiscal 2010 and
$4.4 million for the first quarter of fiscal 2009. The decrease related primarily to cost reduction
initiatives associated with reductions in headcount taken in fiscal 2009. During the first quarter
we continued investing in the introduction of our ORION® Single Wafer Wet System,
applications development and cost reduction efforts.
We expect research and development expenses to range from $2.8 to $3.0 million for the second
quarter of fiscal 2010.* This reflects the engineering resources required to support customer
demonstrations, evaluation tool placements and the ORION system introduction initiative.
Income Taxes
We recorded income tax expense of $16,000 in the first quarter of fiscal 2010 and income tax
benefit of $11,000 in the first quarter of fiscal 2009, primarily related to foreign taxes in both
periods.
Our net deferred tax assets on the balance sheet as of November 28, 2009 have been fully
reserved for with a valuation allowance. We do not expect to significantly reduce our valuation
allowance until we are consistently profitable on a quarterly basis.*
We have net operating loss carryforwards for federal income tax purposes of approximately $188
million, which will begin to expire in fiscal 2011 through fiscal 2030 if not utilized. Of this
amount, approximately $15.0 million is subject to Internal Revenue Code Section 382 limitations on
utilization. This limitation is approximately $1.4 million per year.
Net Loss
Our net loss was $55,000 in the first quarter of fiscal 2010 as compared to a net loss of $5.3
million in the first quarter of fiscal 2009.
Assuming that we can achieve the projected revenues, gross margin and operating expense
levels, we expect to report net income between $0.5 and $1.5 million in the second quarter of
fiscal 2010.*
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and marketable securities were approximately $9.8
million as of November 28, 2009, a decrease of $2.3 million from the end of fiscal 2009. The
decrease was primarily due to $1.9 million of net cash used for operations and $0.4 million of
capital expenditures.
21
As of November 28, 2009, we had investments in ARS reported at a fair value of $4.5 million
after reflecting a $0.2 million other than temporary impairment against $4.7 million par value. The
other than temporary impairment was recorded in fiscal 2008. The ARS we hold are marketable
securities with long-term stated maturities for which the interest rates are reset every 28 days
through an auction process.
There were no redemptions of our ARS in the first quarter of fiscal 2010.
These ARS may not provide the liquidity to us as we need it, and it could take until the final
maturity of the underlying notes (from 26 to 34 years) to realize our investments recorded value.
Currently, there is a very limited market for any of these securities and future liquidations at
this time, if possible, would likely be at a significant discount.
Accounts receivable increased $3.4 million from the end of fiscal 2009. The increase in
accounts receivable related primarily to an increase in shipments to $14.6 million in the first
quarter of fiscal 2010 as compared to $12.5 million in the fourth quarter of fiscal 2009. The
balance at the end of fiscal 2009 included $2.0 million attributed to a past due receivable with a
customer in Asia. The customer has delayed payment due to their cash flow issues and lower than
expected capacity utilization. We are working on obtaining a letter of credit for the balance with
expected payment in the second quarter of fiscal 2010. Accounts receivable will fluctuate quarter
to quarter depending on individual customers timing of shipping dates, payment terms and cash flow
conditions. In certain situations, extended payment terms may be granted to customers.
Inventory was approximately $22.1 million at November 28, 2009 and $21.2 million at the end of
fiscal 2009. The increase in inventory related primarily to an increase in work-in-process
inventory associated with increased orders and the anticipation of future shipments.
Trade accounts payable increased to $5.1 million as of November 28, 2009 as compared to $3.2
million at the end of fiscal 2009. The increase in trade accounts payable related primarily to the
timing of inventory receipts and payments to vendors.
As of November 28, 2009, our current ratio of current assets to current liabilities was 3.1 to
1.0, and working capital was $29.7 million.
The following table provides aggregate information about our contractual payment obligations
and the periods in which payments are due (in thousands):
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|
|
|
|
|
|
|
|
|
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Payments due by period |
|
|
|
|
|
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|
Less than 1 |
|
|
|
|
|
|
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|
More than 5 |
|
Contractual Obligations: |
|
Total |
|
|
Year |
|
|
1-3 years |
|
|
3-5 years |
|
|
years |
|
Operating lease
obligations |
|
$ |
916 |
|
|
$ |
557 |
|
|
$ |
328 |
|
|
$ |
22 |
|
|
$ |
9 |
|
Purchase obligations |
|
|
5,551 |
|
|
|
5,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty obligations |
|
|
163 |
|
|
|
163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other long-term commitments
(1) |
|
|
1,375 |
|
|
|
125 |
|
|
|
500 |
|
|
|
500 |
|
|
|
250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8,005 |
|
|
$ |
6,396 |
|
|
$ |
828 |
|
|
$ |
522 |
|
|
$ |
259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other long-term commitments represent payments related to minimum royalty
payments or discounts granted under a license agreement. |
The contractual obligations table does not include $0.6 million of accruals for unrecognized
tax benefits, as the timing of payments or reversals is uncertain.
22
Capital expenditures were $353,000 in the first quarter of fiscal 2010, as compared to $5,000
in the first quarter of fiscal 2009. We expect capital expenditures to be less than $100,000 in the
second quarter of fiscal 2010.* Depreciation for the second quarter of fiscal 2010 is expected to
be between $0.6 and $0.7 million.*
In light of our financial condition, we implemented a number of cost reduction steps in fiscal
2009 to reduce our use of cash. Our cost reduction actions in fiscal 2009 are expected to lower
our annual operating expenses by $11 to $12 million, which is expected to reduce our cash flow
breakeven revenue level to approximately $12 to $14 million per quarter, depending on the gross
margins and the timing of shipments and accounts receivable collections.* In addition, we plan to
manage cash flows by reducing capital expenditures to less than $500,000 in fiscal 2010 and to
aggressively improve our working capital levels in the second half of fiscal 2010.*
We do not have any revolving line of credit or other form of debt financing. If the economic
environment does not improve in early fiscal 2010 and, notwithstanding our cash management
initiatives, more cash is needed to fund operations than expected, we may need to take additional
actions.* These actions could include additional cost reduction measures and possible cash
generating activities, including exploring a sale-leaseback arrangement for our Chaska, Minnesota
facility, entering into an asset-based lending arrangement, borrowing up to $3.5 million against or
liquidating our remaining life insurance investments of $3.6 million, borrowing up to 50% against
or selling some or all of our currently illiquid ARS, possibly at a loss, or selling additional
equity.* We can provide no assurance that any of these cash-generating activities will be
available to us when needed, or if available, on such terms that will be acceptable or in
sufficient amounts to cover our operating expenses at such time. The sale of additional equity
would likely result in additional dilution to our shareholders.* In addition, without substantial
available capital, we may be unable to take advantage of strategic opportunities as they arise,
such as investments in or acquisitions of businesses, products or technologies.*
At the expected revenue and expense run rate, we anticipate being cash flow neutral from
operations in the second quarter of fiscal 2010.* We believe that with existing cash, cash
receipts, cash equivalents, marketable securities and internally generated funds, there will be
sufficient funds to meet our currently projected working capital requirements, and to meet other
cash requirements through at least fiscal 2010.* We believe that success in our industry requires
substantial capital to maintain the flexibility to take advantage of opportunities as they arise.
One of our strategic objectives is, as market and business conditions warrant, to consider
divestitures, investments or acquisitions of businesses, products or technologies. We may fund such
activities with additional equity or debt financing.* The sale of additional equity or debt
securities, whether to maintain flexibility or to meet strategic objectives, could result in
additional dilution to our shareholders.*
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
New Accounting Pronouncements
See Note 1 of the Notes to Condensed Consolidated Financial Statements.
23
|
|
|
ITEM 3. |
|
QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to
investments in foreign-based subsidiaries. As of November 28, 2009, our investments included 100%
interests in our Europe and Asia sales and service offices and a 20% interest in Apprecia
Technology, Inc. (formerly known as mFSI LTD), which operates as a distributor for us in Japan. We
denominate the majority of our sales outside of the U.S. in U.S. dollars.
We have direct sales, service and applications support and logistics responsibilities for our
products in Europe and the Asia Pacific region and incur labor, service and other expenses in
foreign currencies. As a result, we may be exposed to fluctuations in foreign exchange rate risks.*
As of November 28, 2009, we had not entered into any hedging activities and our foreign currency
transaction gains and losses for the first quarter of fiscal 2010 were insignificant. We are
currently evaluating various hedging activities and other options to minimize these risks.
We do not have significant exposure to changing interest rates as we currently have no
long-term debt. As of November 28, 2009, amortized cost approximated market value for all
outstanding marketable securities. We do not undertake any specific actions to cover our exposure
to interest rate risk and we are not party to any interest rate risk management transactions. The
annual impact on income (loss) before income taxes of a 1% change in short-term interest rates
would be approximately $98,000 based on cash, restricted cash, cash equivalents and marketable
securities balances as of November 28, 2009.
As of November 28, 2009, our investment portfolio included ARS reported at a fair value of
$4.5 million after reflecting a $0.2 million other than temporary impairment against $4.7 million
par value. The other than temporary impairment was recorded in fiscal 2008. The interest rates of
our ARS are reset every 28 days through an auction process and at the end of each reset period,
investors can sell or continue to hold the securities at par.
The ARS held by us are backed by student loans and are collateralized, insured and guaranteed
by the United States Federal Department of Education. All ARS held by us are rated by the major
independent rating agencies and carry investment grade ratings and have not experienced any payment
defaults.
All of our ARS have experienced failed auctions due to sell orders exceeding buy orders. These
failures are not believed to be a credit issue, but rather reflect a lack of liquidity in the
market for these securities. Under the contractual terms, the issuer is obligated to pay penalty
interest rates should an auction fail. In the event we need to access funds associated with failed
auctions, they are not expected to be accessible until a successful auction occurs, the issuer
redeems the issue, a buyer is found outside of the auction process or the underlying securities
have matured and are paid upon maturity in accordance with their terms.
We determined and recorded an other than temporary impairment of approximately $0.4 million as
of August 28, 2008. Approximately $0.1 million of this other than temporary impairment was reversed
in fiscal 2009 associated with the redemption of approximately $3.0 million ARS at par. If the
issuers of the ARS are unable to successfully close future auctions or do not redeem the ARS, or
the United States government fails to support its guaranty of the obligations, we may be required
to record additional impairment charges.
|
|
|
ITEM 4. |
|
CONTROLS AND PROCEDURES |
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of the principal executive officer and principal financial
officer, of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)). Based on this evaluation, the
principal executive officer and the principal financial officer concluded that our disclosure
controls and procedures are effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Exchange
24
Act is recorded, processed, summarized and reported within the time periods specified in SEC
rules and
forms. There was no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are not subject to any material pending legal proceedings.
ITEM 1.A. Risk Factors
There have not been any material changes from the risk factors previously disclosed in our
Form
10-K for the fiscal year ended August 29, 2009.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
25
ITEM 6. Exhibits
(a) Exhibits
|
|
|
2.1
|
|
Agreement and Plan of Reorganization, dated as of January 21, 1999
among FSI International, Inc., BMI International, Inc. and YieldUP
International Corporation (3) |
|
|
|
2.2
|
|
Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and Semiconductor
Systems, Inc. (1) |
|
|
|
2.3
|
|
Asset Purchase Agreement dated as of June 9, 1999 between FSI
International, Inc. and The BOC Group, Inc. (4) |
|
|
|
3.1
|
|
Restated Articles of Incorporation of the Company. (2) |
|
|
|
3.2
|
|
Restated and amended By-Laws. (6) |
|
|
|
3.5
|
|
Articles of Amendment of Restated Articles of Incorporation (5) |
|
|
|
31.1
|
|
Certification by Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.(filed herewith) |
|
|
|
31.2
|
|
Certification by Principal Financial and Accounting Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.(filed
herewith) |
|
|
|
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.(filed herewith) |
|
|
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement on Form S-4 (as amended)
dated March 21, 1996, SEC File No. 333-1509 and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the quarter ended February
24, 1990, SEC File No. 0-17276, and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on January
27, 1999, SEC File No. 0-17276 and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on June 24,
1999, SEC File No. 0-17276 and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on Form 10-K for the fiscal year ended August
28, 1999, SEC File No. 0-17276, and incorporated by reference. |
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(6) |
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Filed as an Exhibit to the Companys Report on Form 10-Q for the fiscal quarter ended
February 23, 2002, SEC File No. 0-17276 and incorporated by reference. |
26
SIGNATURE
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.
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FSI INTERNATIONAL, INC. |
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[Registrant] |
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DATE: January 8, 2010 |
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By: |
/s/ Patricia M. Hollister
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Patricia M. Hollister, |
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Chief Financial Officer
on behalf of the
Registrant and as
Principal Financial and Accounting Officer |
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27
INDEX TO EXHIBITS
|
|
|
|
|
Exhibit |
|
Description |
|
Method of Filing |
2.1
|
|
Agreement and Plan of Reorganization, dated as of January 21,
1999 among FSI International, Inc., BMI International, Inc.
and YieldUP International Corporation (3)
|
|
Incorporated by reference. |
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|
2.2
|
|
Agreement and Plan of Reorganization by and Among FSI
International, Inc., Spectre Acquisition Corp., and
Semiconductor Systems, Inc. (1)
|
|
Incorporated by reference. |
|
|
|
|
|
2.3
|
|
Asset Purchase Agreement dated as of June 9, 1999 between FSI
International, Inc. and The BOC Group, Inc. (4)
|
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Incorporated by reference. |
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|
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3.1
|
|
Restated Articles of Incorporation of the Company. (2)
|
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Incorporated by reference. |
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3.2
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|
Restated and amended By-Laws. (6)
|
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Incorporated by reference. |
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3.5
|
|
Articles of Amendment of Restated Articles of Incorporation (5)
|
|
Incorporated by reference. |
|
|
|
|
|
31.1
|
|
Certification by Principal Executive Officer Pursuant to
section 302 of the Sarbanes-Oxley Act of 2002.
|
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Filed herewith. |
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31.2
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|
Certification by Principal Financial and Accounting Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
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Filed herewith. |
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|
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|
|
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.
|
|
Filed herewith. |
|
|
|
(1) |
|
Filed as an Exhibit to the Companys Registration Statement on Form S-4 (as amended)
dated March 21, 1996, SEC File No. 333-1509 and incorporated by reference. |
|
(2) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the quarter ended February
24, 1990, SEC File No. 0-17276, and incorporated by reference. |
|
(3) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on January
27, 1999, SEC File No. 0-17276 and incorporated by reference. |
|
(4) |
|
Filed as an Exhibit to the Companys Report on Form 8-K, filed by the Company on June 24,
1999, SEC File No. 0-17276 and incorporated by reference. |
|
(5) |
|
Filed as an Exhibit to the Companys Report on Form 10-K for the fiscal year ended August
28, 1999, SEC File No. 0-17276, and incorporated by reference. |
|
(6) |
|
Filed as an Exhibit to the Companys Report on Form 10-Q for the fiscal quarter ended
February 23, 2002, SEC File No. 0-17276 and incorporated by reference. |
28