Attached files
file | filename |
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EX-32.1 - EX-32.1 - FSI INTERNATIONAL INC | c63867exv32w1.htm |
EX-10.1 - EX-10.1 - FSI INTERNATIONAL INC | c63867exv10w1.htm |
EX-31.1 - EX-31.1 - FSI INTERNATIONAL INC | c63867exv31w1.htm |
EX-31.2 - EX-31.2 - FSI INTERNATIONAL INC | c63867exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 26, 2011
or
o | 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.
MINNESOTA | 41-1223238 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
3455 Lyman Boulevard, Chaska, Minnesota | 55318 | |
(Address of principal executive offices) | (Zip Code) |
952-448-5440
N/A
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 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.
Large accelerated filer o
|
Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate
by a checkmark 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 38,699,000 shares outstanding as of March 31, 2011.
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
2
Table of Contents
PART I. Item 1. FINANCIAL STATEMENTS
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 26, 2011 AND AUGUST 28, 2010
ASSETS
(unaudited)
(in thousands)
(unaudited)
(in thousands)
February 26, | August 28, | |||||||
2011 | 2010 | |||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 31,767 | $ | 34,365 | ||||
Restricted cash |
322 | 322 | ||||||
Trade accounts receivable, net of allowance for doubtful
accounts of $112 |
16,971 | 18,935 | ||||||
Inventories, net |
36,933 | 26,145 | ||||||
Other receivables |
2,560 | 2,489 | ||||||
Prepaid expenses and other current assets |
1,691 | 1,184 | ||||||
Total current assets |
90,244 | 83,440 | ||||||
Property, plant and equipment, at cost |
72,340 | 71,502 | ||||||
Less accumulated depreciation and amortization |
(59,245 | ) | (58,298 | ) | ||||
13,095 | 13,204 | |||||||
Long-term securities |
2,766 | 3,612 | ||||||
Investment |
460 | 460 | ||||||
Other assets |
1,642 | 1,582 | ||||||
Total assets |
$ | 108,207 | $ | 102,298 | ||||
(continued) |
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
FEBRUARY 26, 2011 AND AUGUST 28, 2010
(continued)
LIABILITIES AND STOCKHOLDERS EQUITY
(unaudited)
(in thousands)
(unaudited)
(in thousands)
February 26, | August 28, | |||||||
2011 | 2010 | |||||||
Current liabilities: |
||||||||
Trade accounts payable |
$ | 9,372 | $ | 8,396 | ||||
Accrued expenses |
5,946 | 8,020 | ||||||
Deferred profit |
5,770 | 2,669 | ||||||
Total current liabilities |
21,088 | 19,085 | ||||||
Long-term accrued expenses |
459 | 410 | ||||||
Stockholders equity: |
||||||||
Preferred stock, no par value; 9,700 shares
authorized, none issued and outstanding |
| | ||||||
Series A Junior Participating Preferred Stock, no par
value; 300 shares authorized, none issued and
outstanding |
| | ||||||
Common stock, no par value; 50,000 shares
authorized; issued and outstanding, 38,699 and 38,554
shares, at February 26, 2011 and August 28, 2010,
respectively |
245,102 | 244,796 | ||||||
Accumulated deficit |
(162,931 | ) | (165,349 | ) | ||||
Accumulated other comprehensive loss |
(143 | ) | (870 | ) | ||||
Other stockholders equity |
4,632 | 4,226 | ||||||
Total stockholders equity |
86,660 | 82,803 | ||||||
Total liabilities and stockholders equity |
$ | 108,207 | $ | 102,298 | ||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE QUARTERS ENDED FEBRUARY 26, 2011, AND FEBRUARY 27, 2010
(unaudited)
(in thousands, except per share data)
February 26, | February 27, | |||||||
2011 | 2010 | |||||||
Sales |
$ | 30,752 | $ | 18,925 | ||||
Cost of sales |
17,703 | 10,882 | ||||||
Gross margin |
13,049 | 8,043 | ||||||
Selling, general and administrative expenses |
4,957 | 4,267 | ||||||
Research and development expenses |
3,172 | 3,263 | ||||||
Operating income |
4,920 | 513 | ||||||
Interest income |
25 | 22 | ||||||
Gain on sale of marketable securities |
| 6 | ||||||
Other (expense) income, net |
(26 | ) | 62 | |||||
Income before income taxes |
4,919 | 603 | ||||||
Income tax benefit |
(1 | ) | (6 | ) | ||||
Net income |
$ | 4,920 | $ | 609 | ||||
Net income per common share |
||||||||
Basic |
$ | 0.13 | $ | 0.02 | ||||
Diluted |
$ | 0.13 | $ | 0.02 | ||||
Weighted average common shares basic |
38,635 | 31,917 | ||||||
Weighted average common shares diluted |
39,176 | 32,252 |
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED FEBRUARY 26, 2011 AND FEBRUARY 27, 2010
(unaudited)
(unaudited)
(in thousands, except per share data)
February 26, | February 27, | |||||||
2011 | 2010 | |||||||
Sales |
$ | 41,633 | $ | 33,542 | ||||
Cost of sales |
23,413 | 18,932 | ||||||
Gross margin |
18,220 | 14,610 | ||||||
Selling, general and administrative expenses |
9,628 | 8,061 | ||||||
Research and development expenses |
6,172 | 6,019 | ||||||
Operating income |
2,420 | 530 | ||||||
Interest income |
54 | 51 | ||||||
Gain on sale of marketable securities |
| 6 | ||||||
Other expense, net |
(63 | ) | (22 | ) | ||||
Income before income taxes |
2,411 | 565 | ||||||
Income tax (benefit) expense |
(7 | ) | 10 | |||||
Net income |
$ | 2,418 | $ | 555 | ||||
Net income per common share |
||||||||
Basic |
$ | 0.06 | $ | 0.02 | ||||
Diluted |
$ | 0.06 | $ | 0.02 | ||||
Weighted average common shares basic |
38,589 | 31,777 | ||||||
Weighted average common shares diluted |
38,995 | 32,017 |
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED FEBURARY 26, 2011 AND FEBRUARY 27, 2010
(unaudited)
(in thousands)
February 26, | February 27, | |||||||
2011 | 2010 | |||||||
OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 2,418 | $ | 555 | ||||
Adjustments to reconcile net income to net cash (used
in) provided by operating activities: |
||||||||
Stock compensation expense |
403 | 1,128 | ||||||
Gain on sale of marketable securities |
| (6 | ) | |||||
Depreciation |
1,097 | 1,329 | ||||||
Loss (gain) on sales of fixed assets |
16 | (86 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Restricted cash |
| 121 | ||||||
Trade accounts receivable |
1,964 | 56 | ||||||
Inventories |
(10,788 | ) | (1,548 | ) | ||||
Prepaid expenses and other assets |
(638 | ) | 82 | |||||
Trade accounts payable |
976 | 3,220 | ||||||
Accrued expenses |
(2,022 | ) | (2,105 | ) | ||||
Customer deposits |
| 303 | ||||||
Deferred profit |
3,101 | (115 | ) | |||||
Net cash (used in) provided by operating activities |
(3,473 | ) | 2,934 | |||||
INVESTING ACTIVITIES: |
||||||||
Capital expenditures |
(1,004 | ) | (404 | ) | ||||
Proceeds from sales of fixed assets |
| 86 | ||||||
Decrease in restricted cash |
| 375 | ||||||
Sales of marketable securities |
846 | 100 | ||||||
Net cash (used in) provided by investing activities |
(158 | ) | 157 | |||||
FINANCING ACTIVITIES: |
||||||||
Net proceeds from issuance of common stock |
306 | 194 | ||||||
Net cash provided by financing activities |
306 | 194 | ||||||
Effect of exchange rate changes on cash |
727 | (255 | ) | |||||
(Decrease) increase in cash and cash equivalents |
(2,598 | ) | 3,030 | |||||
Cash and cash equivalents at beginning of period |
34,365 | 6,760 | ||||||
Cash and cash equivalents at end of period |
$ | 31,767 | $ | 9,790 | ||||
See accompanying notes to condensed consolidated financial statements.
7
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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.
Basis of Presentation
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 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 28, 2010, previously filed with the Securities Exchange Commission
(SEC). The Companys fiscal year ends on the last Saturday in August and is comprised of 52 or 53
weeks.
The Company determined that certain expenses were understated as a result of intercompany
transactions being recorded improperly. The error was discovered prior to filing the first quarter
fiscal 2011 Form 10-Q and was thought to be limited in nature. During the second quarter of fiscal
2011, additional analysis was performed. The Company corrected the error to properly present its
condensed consolidated financial statements as of and for the three and six months ended February
26, 2011 in accordance with generally accepted accounting principles. The Company adjusted
beginning accumulated deficit by an immaterial amount of $778,000 to reflect the correction of the
cumulative understatement of expenses for periods through August 30, 2008. The Company corrected
the remaining understatement of $341,000 related to the fiscal year 2010 within the three months
ended November 27, 2010 and $222,000 related to the fiscal year 2009 within the three months ended
February 26, 2011.
As a result of recording the correcting adjustment for the cumulative understatement of
expenses for periods though August 30, 2008, the condensed consolidated balance sheet as presented
for August 28, 2010 was adjusted. The Company increased accumulated deficit by $778,000 to $165.3
million from $164.6 million. The Company decreased accumulated other comprehensive loss from $1.6
million to $0.9 million.
As a result of recording the correcting adjustment for the cumulative understatement of
expenses for periods subsequent to August 30, 2008, the condensed consolidated statement of
operations presented for the three months and six months ended February 26, 2011 was adjusted. Net
income for the three months ended February 26, 2011 was reduced by $222,000. Net income for the six
months ended February 26, 2011 was reduced by $563,000. The correction had no impact on diluted
earnings per share for the three months ended February 26, 2011, and reduced diluted earnings per
share by $0.02 to $0.06 for the six months ended February 26, 2011.
8
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The Company has concluded that the impact of this error is not material to any one period
within its previously issued financial statements. The Company determined that reflecting the
cumulative correction within the financial statements as an immaterial revision to beginning
accumulated deficit and as an adjustment to the condensed consolidated statements of operations for
the three and six months ended February 26, 2011 is also not material. The Company will reflect the
revision to its beginning accumulated deficit for previously issued financial statements in its
prospective filings 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.
(2) | Inventories, Net |
Inventories, net are summarized as follows (in thousands):
February 26, | August 28, | |||||||
2011 | 2010 | |||||||
Finished products, including evaluation systems |
$ | 6,334 | $ | 4,238 | ||||
Work-in-process |
16,198 | 9,453 | ||||||
Raw materials and purchased parts |
14,401 | 12,454 | ||||||
$ | 36,933 | $ | 26,145 | |||||
(3) | Accrued Expenses |
Accrued expenses are summarized as follows (in thousands):
February 26, | August 28, | |||||||
2011 | 2010 | |||||||
Salaries and benefits |
$ | 1,247 | $ | 1,028 | ||||
Discretionary compensation and bonus |
717 | 2,964 | ||||||
Vacation |
971 | 1,055 | ||||||
Product warranty |
1,208 | 1,127 | ||||||
Other |
1,803 | 1,846 | ||||||
$ | 5,946 | $ | 8,020 | |||||
9
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
(4) | Comprehensive Income (Loss) |
Other comprehensive income (loss) pertains to revenues, expenses, gains and losses that are
not included in the net income (loss) but rather are recorded directly in stockholders equity.
For the quarters and six months ended February 26, 2011 and February 27, 2010, other comprehensive
income (loss) consisted of the foreign currency translation adjustment. The components of
comprehensive income (loss) are summarized as follows (in thousands):
February 26, | February 27, | |||||||
2011 | 2010 | |||||||
For the Quarters Ended |
||||||||
Net income |
$ | 4,920 | $ | 609 | ||||
Item of other comprehensive income (loss): |
||||||||
Foreign currency translation |
265 | (145 | ) | |||||
Comprehensive income |
$ | 5,185 | $ | 464 | ||||
For the Six Months Ended |
||||||||
Net income |
$ | 2,418 | $ | 555 | ||||
Item of other comprehensive income (loss): |
||||||||
Foreign currency translation |
727 | (255 | ) | |||||
Comprehensive income |
$ | 3,145 | $ | 300 | ||||
(5) | 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 (ESPP) was reflected in the statements of
operations for the second quarter and first six months of each of fiscal 2011 and 2010 as follows
(in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
February 26, | February 27, | February 26, | February 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Cost of sales |
$ | 29 | $ | 84 | $ | 51 | $ | 102 | ||||||||
Selling, general and administrative |
132 | 372 | 254 | 505 | ||||||||||||
Research and development |
55 | 409 | 98 | 521 | ||||||||||||
$ | 216 | $ | 865 | $ | 403 | $ | 1,128 | |||||||||
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.
10
Table of Contents
FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The following assumptions were used to estimate the fair value of options granted during
the second quarter and first six months of fiscal 2011 and 2010 using the Black-Scholes
option-pricing model:
Quarters Ended | Six Months Ended | |||||||||||||||
February 26, | February 27, | February 26, | February 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Stock options: |
||||||||||||||||
Volatility |
80.4 | % | 79.9 | % | 80.4 | % | 79.9 | % | ||||||||
Risk-free interest rates |
2.0 | % | 2.4 | % | 2.0 | % | 2.4 | % | ||||||||
Expected option life |
5.5 | 5.4 | 5.5 | 5.4 | ||||||||||||
Stock dividend yield |
| | | | ||||||||||||
ESPP: |
||||||||||||||||
Volatility |
80.4 | % | 79.9 | % | 80.4 | % | 79.9 | % | ||||||||
Risk-free interest rates |
0.2 | % | 0.2 | % | 0.2 | % | 0.2 | % | ||||||||
Expected option life |
0.5 | 0.5 | 0.5 | 0.5 | ||||||||||||
Stock dividend yield |
| | | |
A summary of the option activity for the first six months of fiscal 2011 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 28, 2010 |
3,146 | $ | 5.02 | |||||||||||||
Options granted |
404 | 4.62 | ||||||||||||||
Options forfeited |
| | ||||||||||||||
Options expired |
(47 | ) | 9.63 | |||||||||||||
Options exercised |
(85 | ) | 1.38 | |||||||||||||
Outstanding as of February 26, 2011 |
3,418 | 5.00 | 5.1 | $ | 2,125 | |||||||||||
Exercisable as of February 26, 2011 |
2,500 | $ | 5.58 | 3.6 | $ | 1,255 | ||||||||||
A summary of the status of the unvested options as of February 26, 2011 is as follows (in
thousands, except fair value amounts):
Weighted-average | ||||||||
Number of | Grant-Date Fair | |||||||
Shares | Value | |||||||
Unvested at August 28, 2010 |
730 | $ | 1.55 | |||||
Options granted |
404 | 3.11 | ||||||
Options forfeited |
| | ||||||
Options vested |
(216 | ) | 1.36 | |||||
Unvested at February 26, 2011 |
918 | $ | 2.28 | |||||
11
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
As of February 26, 2011, there was $1.9 million of total unrecognized compensation cost
related to unvested share-based compensation granted under these plans. That cost is expected to be
recognized over a weighted-average period of 1.3 years. The total fair value of option shares
vested during the second quarter of fiscal 2011 was $216,000, during the first six months of fiscal
2011 was $403,000, during the second quarter of fiscal 2010 was $865,000 and during the first six
months of fiscal 2010 was $1,128,000.
(6) Product Warranty
Warranty provisions and claims for the quarters and six months ended February 26, 2011 and
February 27, 2010 were as follows (in thousands):
Quarters Ended | Six Months Ended | |||||||||||||||
February 26, | February 27, | February 26, | February 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Beginning balance
warranty accrual |
$ | 1,121 | $ | 1,412 | $ | 1,127 | $ | 1,702 | ||||||||
Warranty provisions |
482 | 161 | 519 | 346 | ||||||||||||
Warranty claims |
(268 | ) | (191 | ) | (658 | ) | (285 | ) | ||||||||
Change in estimates |
(127 | ) | (230 | ) | 220 | (611 | ) | |||||||||
Ending balance warranty accrual |
$ | 1,208 | $ | 1,152 | $ | 1,208 | $ | 1,152 | ||||||||
(7) | Marketable Securities and Fair Value Measurements |
During the second quarter of fiscal 2011, the Company sold $0.9 million par value of auction
rate securities (ARS) for the book value of $0.8 million.
As of February 26, 2011, the Company had investments in ARS reported at a fair value of $2.8
million after reflecting a $0.1 million other-than-temporary impairment against $2.9 million par
value. The other-than-temporary impairment was recorded in fiscal 2008. The Company valued the
majority of its 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. Due to the liquidity
issues experienced in global credit and capital markets, the ARS held by the Company have
experienced multiple failed auctions, beginning on February 19, 2008, as the amount of securities
submitted for sale has exceeded the amount of purchase orders. During the second quarter of fiscal
2008, the Company reclassified $8.5 million of ARS from current marketable securities to long-term
marketable securities on the Consolidated Balance Sheet due to difficulties encountered at auction
and the conditions in the general debt markets creating uncertainty as to when successful auctions
may be reestablished.
The remaining $2.9 million par value ARS held by the Company as of February 26, 2011 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. 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.
12
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 cash and cash equivalents and restricted cash based on level 1 inputs.
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.
The fair value measurements as of February 26, 2011 of cash and cash equivalents, restricted
cash and marketable securities are summarized below (in thousands):
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents |
$ | 31,767 | $ | 31,767 | | | ||||||||||
Restricted cash |
322 | 322 | | | ||||||||||||
Marketable securities |
2,766 | | | $ | 2,766 |
The fair value measurements as of August 28, 2010 of cash and cash equivalents, restricted
cash and marketable securities are summarized below (in thousands):
Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
Cash and cash equivalents |
$ | 34,365 | $ | 34,365 | | | ||||||||||
Restricted cash |
322 | 322 | | | ||||||||||||
Marketable securities |
3,612 | | | $ | 3,612 |
(8) | 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 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
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 paid $5,000 per month for ten months beginning in November
2009. The remaining $400,000 owed under the settlement was suspended for 12 months. The 12 month
suspension period expired October 29, 2010. The Company believes it has maintained compliance with
all export laws during the suspension period and does not anticipate any additional payments.
(9) 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 2010 or the first half of fiscal 2011.
(10) Income Taxes
As of February 26, 2011 and August 28, 2010, the Company had $459,000 and $410,000,
respectively, of liabilities recorded related to unrecognized tax benefits. Included in the
liability balance as of February 26, 2011 and as of August 28, 2010 are approximately $416,000 and
$360,000, respectively, of unrecognized tax benefits that, if recognized, will affect the Companys
effective tax rate. Accrued interest and penalties on these unrecognized tax benefits as of
February 26, 2011 and August 28, 2010 were $43,000 and $50,000, respectively. The Company
recognizes potential interest and penalties related to income tax positions, if any, as a component
of the 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 an income tax benefit of $1,000 in the second quarter of fiscal 2011 and
an income tax benefit of $7,000 in the first half of fiscal 2011 related primarily to foreign taxes
and a refundable Minnesota research and development credit. The Company recorded an income tax
benefit of $6,000 in the second quarter fiscal 2010 and income tax expense of $10,000 in the first
half fiscal 2010 related primarily to foreign taxes.
(11) Stock Offering
The Company filed a shelf registration statement with the SEC on March 30, 2010 to register an
indeterminate number of shares of common stock, preferred stock, warrants and units, the aggregate
initial offering price of which is not to exceed $50 million. On June 14, 2010, the Company closed
on a public offering of 6.2 million shares of its common stock at a public offering price of $3.05
per share. Net proceeds from the sale of the shares, after underwriter discounts and commissions
and other offering expenses, were approximately $17.6 million. Following the June 2010 stock
offering, the Company has registered under its shelf registration statement an indeterminate number
of shares of common stock, preferred stock, warrants and units with an aggregate initial offering
price not to exceed $31 million.
(12) Other Sales Information
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Geographic Information
International sales were approximately 46% of total sales in the second quarter of fiscal
2011, approximately 49% of total sales in the second quarter of fiscal 2010, 54% of total sales in
the first six months of fiscal 2011 and
51% of total sales in the first six months of fiscal 2010. 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 | Six Months Ended | |||||||||||||||
February 26, | February 27, | February 26, | February 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Asia |
$ | 7,002 | $ | 6,860 | $ | 10,036 | $ | 12,548 | ||||||||
Europe |
7,043 | 2,347 | 12,341 | 4,509 | ||||||||||||
Other |
16 | 2 | 22 | 2 | ||||||||||||
Total International |
14,061 | 9,209 | 22,399 | 17,059 | ||||||||||||
Domestic |
16,691 | 9,716 | 19,234 | 16,483 | ||||||||||||
$ | 30,752 | $ | 18,925 | $ | 41,633 | $ | 33,542 | |||||||||
South Korea accounted for 14% of total sales in the second quarter of fiscal 2011, 21% of
total sales in the second quarter of fiscal 2010, 11% of total sales in the first six months of
fiscal 2011 and 27% of total sales in the first six months of fiscal 2010. France accounted for 10%
of total sales in the second quarter of fiscal 2011 and 12% of total sales in the first six months
of fiscal 2011. Singapore accounted for 12% of total sales in the second quarter of fiscal 2010.
Customer Information
The following summarizes significant customers comprising 10% or more of the Companys trade
accounts receivable as of February 26, 2011 and August 28, 2010 and 10% or more of sales for the
second quarters and first six months of fiscal 2011 and 2010, which includes sales through related
parties to end-users:
% of Trade Accounts | % of Sales for the Fiscal Quarter | % of Sales for the First Six | ||||||||||||||||||||||
Receivable as of | Ended | Months Ended | ||||||||||||||||||||||
February 26, | August 28, | February 26, | February 27, | February 26, | February 27, | |||||||||||||||||||
2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||
Customer A |
27 | % | * | 51 | % | 31 | % | 38 | % | 42 | % | |||||||||||||
Customer B |
* | * | * | 25 | % | * | 15 | % | ||||||||||||||||
Customer C |
* | * | * | 10 | % | * | * | |||||||||||||||||
Customer D |
* | 17 | % | 12 | % | * | 16 | % | * | |||||||||||||||
Customer E |
* | 14 | % | * | * | * | * | |||||||||||||||||
Customer F |
31 | % | 19 | % | * | * | * | * | ||||||||||||||||
Customer G |
* | 11 | % | * | * | * | * |
* | Trade accounts receivable from or sales to respective customer were less than 10% as of the end of or during the fiscal period. |
15
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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 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; the impact of natural disasters on parts and consumables supply and demand for
products; 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 28, 2010.
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.
The Gartner Report described in this document (the Gartner Report) represents data, research
opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc.
(Gartner), and are not representations of fact. Each Gartner Report speaks as of its original
publication date (and not as of the date of this document) and the opinions expressed in the
Gartner Reports are subject to change without notice.
This discussion and analysis should be read in conjunction with the condensed consolidated
financial statements and notes thereto appearing elsewhere in this report.
Industry
In March 2011, Gartner reported that calendar 2010 semiconductor revenue grew 32 percent, to
$300 billion, from $228 billion in calendar 2009. In March 2011, Gartner also forecasted that
semiconductor revenues would grow 6.2 percent to $319 billion in calendar 2011.* The calendar 2011
year-over-year increase is expected to be led by NAND flash and foundry revenue growth.
Industry analysts, including Gartner, expect demand for smart cell phones, media tablets and
automotive electronics to be key contributors to the calendar 2010 growth and the expected growth
in semiconductor revenue in calendar 2011.
In March 2011, Gartner reported that capital equipment spending grew 137 percent in calendar
2010 and raised its calendar 2011 spending forecast to 12.4 percent growth from a 1.0 percent
decrease forecasted in December 2010.
With the projected growth in the demand for semiconductor devices (and the expected growth in
the number of transistors per unit), we expect that the semiconductor manufacturers will need to
increase production capacity. Some foundry and NAND producers have announced or begun construction
projects to increase capacity. Since silicon wafer and equipment suppliers have not completed
development activities, we do not believe that device
16
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manufacturers will, in the near term, be able
to increase production through a wafer size increase from 300mm to 450mm diameter silicon wafers.
Therefore, we believe device manufacturers currently are focused on smaller feature sizes,
such as transitioning from 45nm to 28nm manufacturing technology, and yield improvements (the
number of devices that can be sold divided by the total number of wafers that fit on a silicon
wafer). Therefore, we believe that both of these factors are contributing to increased interest in
our ORION® and ANTARES® products.
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:
| revenue recognition; | ||
| valuation of long-lived assets; | ||
| estimation of valuation allowances and accrued liabilities, specifically product warranty, inventory provisions and allowance for doubtful accounts; | ||
| 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.
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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.
We collect various sales and value-added taxes on certain product and service sales. These
product and service sales are accounted for on a net basis.
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 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.
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 second quarter of fiscal 2011, we reversed $127,000, during the second quarter of
fiscal 2010, we reversed $230,000 and during the first six months of fiscal 2010, we reversed
$611,000 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 second
quarter of fiscal 2011, we recorded approximately $425,000, in the first six months of fiscal 2011,
we recorded approximately $725,000, in the second quarter of fiscal 2010, we recorded approximately
$460,000 and in the first six months of fiscal 2010 we recorded approximately $870,000 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.
Stock-Based Compensation
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We utilize the Black-Scholes option-pricing model to estimate the 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 $49,000 for the first six months of fiscal 2011 and decreased by
$9,000 for the six months of fiscal 2010.
SECOND QUARTER AND FIRST HALF OF FISCAL 2011 COMPARED WITH SECOND QUARTER AND FIRST HALF OF FISCAL
2010
The Company
The following table sets forth on a consolidated basis, for the fiscal periods indicated,
certain income and expense items as a percent of total sales.
Percent of Sales | Percent of Sales | |||||||||||||||
Quarter Ended | Six Months Ended | |||||||||||||||
February 26, | February 27, | February 26, | February 27, | |||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Cost of sales |
57.6 | 57.5 | 56.3 | 56.4 | ||||||||||||
Gross margin |
42.4 | 42.5 | 43.7 | 43.6 | ||||||||||||
Selling, general and administrative |
16.1 | 22.6 | 23.1 | 24.0 | ||||||||||||
Research and development |
10.3 | 17.2 | 14.8 | 18.0 | ||||||||||||
Operating income |
16.0 | 2.7 | 5.8 | 1.6 | ||||||||||||
Other income, net |
| 0.5 | | 0.1 | ||||||||||||
Income before income taxes |
16.0 | 3.2 | 5.8 | 1.7 | ||||||||||||
Income tax (benefit) expense |
| | | | ||||||||||||
Net income |
16.0 | % | 3.2 | % | 5.8 | % | 1.7 | % | ||||||||
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Revenue and Shipments
Sales revenue increased to $30.8 million for the second quarter of fiscal 2011 as compared to
$18.9 million for the second quarter of fiscal 2010. The increase related primarily to an increase
in shipments from $18.6 million in the second quarter of fiscal 2010 to $33.4 million in the second
quarter of fiscal 2011. Sales revenue increased to $41.6 million for the first half of fiscal 2011
as compared to $33.5 million for the first half of fiscal 2010. The increase related primarily to
an increase in shipments from $33.2 million in the first half of fiscal 2010 to $49.1 million in
the first half of fiscal 2011. The increases in the fiscal 2011 periods as compared to the fiscal
2010 periods were primarily in shipments to Europe and domestic shipments. The increases in
shipments to Europe related to improved spares and service and legacy products activity, and the
increases in domestic shipments related to improved ANTARES system activity. Overall, the increases
were associated with industry and overall global economic conditions.
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 acceptance,
sales revenue may exceed shipments.
International revenue was $14.1 million, representing 46% of total revenue, during the second
quarter of fiscal 2011 and $9.2 million, representing 49% of total revenue, during the second
quarter of fiscal 2010. International revenue was $22.4 million, representing 54% of total revenue,
during the first half of fiscal 2011 and $17.1 million, representing 51% of total revenue, during
the first half of fiscal 2010.
Gross Margin
Our gross profit margin fluctuates due to a number of factors, including the mix of products
sold; initial product placement discounts; utilization of manufacturing capacity; and the
competitive pricing environment.
Gross margin as a percentage of sales for the second quarter of fiscal 2011 was relatively
flat at 42.4% as compared to 42.5% for the second quarter of fiscal 2010. Gross margin as a
percentage of sales for the first half of fiscal 2011 was also relatively flat at 43.7% as compared
to 43.6% for the first half of fiscal 2010.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $5.0 million in the second quarter of fiscal
2011 as compared to $4.3 million for the second quarter of fiscal 2010. Selling, general and
administrative expenses were $9.6 million for the first half of fiscal 2011 as compared to $8.1
million for the same period in fiscal 2010. The increases in the year-over-year selling, general
and administrative expenses related primarily to an increase in the number of service employees
needed to support the increase in unit installations and support for product evaluations, resulting
in higher salary and travel expenses. The increases in the fiscal 2011 periods also related to
discretionary compensation expense recorded in the second quarter of fiscal 2011. There was no
discretionary compensation expense recorded in the fiscal 2010 periods. The increases were
partially offset by lower non-cash stock compensation of $132,000 in the second quarter of fiscal
2011 as compared to $372,000 in the second quarter of fiscal 2010 and $254,000 in the first half of
fiscal 2011 as compared to $505,000 in the first half of fiscal 2010. The higher non-cash stock
compensation expense in the fiscal 2010 periods was due to vesting under our employee stock
purchase plan and the increase in our stock price.
Research and Development Expenses
Research and development expenses were $3.2 million for the second quarter of fiscal 2011 as
compared to $3.3 million for the same period in fiscal 2010. Research and development expenses
were $6.2 million for the first six months of fiscal 2011 as compared to $6.0 million for the first
six months of fiscal 2010. The amounts were impacted by lower non-cash stock compensation expense
of $55,000 in the second quarter of fiscal 2011 as compared to $409,000 in the second quarter of
fiscal 2010 and $98,000 in the first half of fiscal 2011 as compared
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to $521,000 in the first half
of fiscal 2010. The higher non-cash stock compensation expense in the fiscal 2010 periods was due
to vesting under our employee stock purchase plan and the increase in our stock price. The net
increase in the first half of fiscal 2011 as compared to the first half of fiscal 2010 related
primarily to investments in our ORION Single Wafer Wet System.
Income Taxes
We recorded an income tax benefit of $1,000 in the second quarter of fiscal 2011 and an income
tax benefit of $7,000 in the first half of fiscal 2011 related primarily to foreign taxes and a
refundable Minnesota research and development credit. We recorded an income tax benefit of $6,000
in the second quarter of fiscal 2010 and an income tax expense of $10,000 in the first half of
fiscal 2010 related primarily to foreign taxes.
Our deferred tax assets on our balance sheet as of February 26, 2011 have been fully reserved
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
$164.5 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. We do not
anticipate significant income tax expenses or benefits for the foreseeable future, other than for
foreign tax purposes.*
Net Income
Net income was $4.9 million in the second quarter of fiscal 2011 as compared to a net income
of $0.6 million in the second quarter of fiscal 2010. Net income was $2.4 million for the first
half of fiscal 2011 as compared to a net income of $0.6 million for the first half of fiscal 2010.
Liquidity and Capital Resources
Our cash, restricted cash, cash equivalents and long-term securities were approximately $34.9
million as of February 26, 2011, a decrease of $3.4 million from the end of fiscal 2010. The
decrease was due primarily to $3.5 million of cash used for operations and $1.0 million of capital
expenditures. The decrease was partially offset by proceeds from the issuance of common stock of
$0.3 million.
As of February 26, 2011, we had investments in ARS reported at a fair value of $2.8 million
after reflecting a $0.1 million other-than-temporary impairment against $2.9 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. During the second quarter of fiscal 2011, we sold $0.9 million par
value of ARS for the book value of $0.8 million.
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 25 to 33 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 decreased $2.0 million from $18.9 million at the end of fiscal 2010. The
decrease in accounts receivable related primarily to the timing of shipments within the second
quarter of fiscal 2011 in which a greater portion shipped at the beginning of the quarter than in
the fourth quarter of fiscal 2010. Accounts receivable will fluctuate quarter to quarter depending
on individual customers timing of shipping dates and payment terms.
Inventory was approximately $36.9 million at February 26, 2011 and $26.1 million at the end of
fiscal 2010. The increase in inventory related primarily to an increase in work in process
inventory related to the production of
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additional ORION and ANTARES systems required to support our
ongoing customer evaluation programs and to meet an increase in demand for these products.
Trade accounts payable increased to $9.4 million as of February 26, 2011 as compared to $8.4
million at the end of fiscal 2010. The increase in trade accounts payable related primarily to the
timing of inventory receipts and payments to vendors.
As of February 26, 2011, our current ratio of current assets to current liabilities was 4.3 to
1.0, and working capital was $69.2 million.
The following table provides aggregate information about our contractual payment obligations
and the periods in which payments are due (in thousands):
Payments due by period | ||||||||||||||||||||
Less than | More than 5 | |||||||||||||||||||
Total | 1 Year | 1-3 years | 3-5 years | years | ||||||||||||||||
Contractual Obligations: |
||||||||||||||||||||
Operating lease obligations |
$ | 438 | $ | 290 | $ | 123 | $ | 25 | $ | | ||||||||||
Purchase obligations (1) |
14,131 | 14,131 | | | | |||||||||||||||
Royalty obligations |
790 | 790 | | | | |||||||||||||||
Other long-term commitments (2) |
1,250 | 125 | 500 | 500 | 125 | |||||||||||||||
Total |
$ | 16,609 | $ | 15,336 | $ | 623 | $ | 525 | $ | 125 | ||||||||||
(1) | Purchase obligations include purchase orders entered into in the ordinary course of business. | |
(2) | 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 $0.5 million of accruals for
unrecognized tax benefits, as the timing of payments or reversals is uncertain.
Capital expenditures were $1.0 million in the first half of fiscal 2011 and $404,000 in the
first half of fiscal 2010.
We filed a shelf registration statement with the SEC on March 30, 2010 to register an
indeterminate number of shares of common stock, preferred stock, warrants and units, the aggregate
initial offering price of which is not to exceed $50 million. On June 14, 2010, we closed on a
public offering of 6.2 million shares of our common stock at a public offering price of $3.05 per
share. Net proceeds from the sale of the shares, after underwriter discounts and commissions and
other offering expenses, were approximately $17.6 million. Following the June 2010 stock offering,
we have registered under the shelf registration statement an indeterminate number of shares of
common stock, preferred stock, warrants and units with an aggregate initial offering price not to
exceed $31 million.
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 2011.* 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.*
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Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our cash flows and earnings are subject to fluctuations in foreign exchange rates due to
investments in our foreign-based affiliates. As of February 26, 2011, our investments included a
100% interest in our sales and service offices located in Europe and Asia and a 20% interest in
Apprecia Technology, Inc., which operates as our distributor 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 February 26, 2011, we had not entered into any hedging activities and our foreign currency
transaction gains and losses for the second quarter and first six months of fiscal 2011 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. 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 before income taxes of a 1% change in short-term interest rates would be approximately
$349,000 based on our cash and cash equivalents, restricted cash and long-term marketable
securities balances as of February 26, 2011.
As of February 26, 2011, our investment portfolio included ARS reported at a fair value of
$2.8 million after reflecting a $0.1 million other-than-temporary impairment against $2.9 million
par value. The interest rates of our ARS are reset every 28 days through an auction process and at
the end of each reset period, assuming no failed auction, 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 in
fiscal 2008. Approximately $0.1 million of this other-than-temporary impairment was reversed in
fiscal 2009 due to the redemption of approximately $3.0 million ARS at par value, and approximately
$6,000 of this other-than-temporary impairment was reversed in the second quarter of fiscal 2010
due to the redemption of approximately $0.1 million ARS at par value. In the second quarter of
fiscal 2011, approximately $54,000 of this other-than-temporary impairment was reversed due to the
sale of $0.9 million ARS at book value of $0.8 million. If the issuers of our 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.
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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 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 28, 2010, except as set forth below.
We cannot predict the impact that recent events in Japan may have on our business and operations.
On March 11, 2011, Japan experienced an 8.9 magnitude earthquake, triggering a tsunami that
lead to widespread damage and business interruption. We have not identified any material impacts
on our business at this time, but cannot predict what, if any, impact the current interruptions in
Japan may have on our operations in the future.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 5. Other Information
None
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FSI INTERNATIONAL, INC. AND SUBSIDIARIES
ITEM 6. Exhibits
(a) | Exhibits |
3.1
|
Restated Articles of Incorporation of the Company. (1) | |
3.2
|
Restated By-Laws. (1) | |
3.3
|
Articles of Amendment of Restated Articles of Incorporation (1) | |
10.1
|
Incentive Compensation Plan. (filed herewith) | |
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-3 filed with the SEC on March 30, 2010 and incorporated by reference. |
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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.
FSI INTERNATIONAL, INC. | ||||||
[Registrant] | ||||||
By: | /s/ Patricia M. Hollister
|
|||||
Chief Financial Officer | ||||||
on behalf of the | ||||||
Registrant and as | ||||||
Principal Financial and | ||||||
Accounting Officer | ||||||
DATE: April 5, 2011 |
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INDEX TO EXHIBITS
Exhibit | Description | Method of Filing | ||
3.1
|
Restated Articles of Incorporation of the Company. (1) | Incorporated by reference. | ||
3.2
|
Restated By-Laws. (1) | Incorporated by reference. | ||
3.3
|
Articles of Amendment of Restated Articles of Incorporation. (1) | Incorporated by reference. | ||
10.1
|
Incentive Compensation Plan. | Filed herewith. | ||
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-3 filed with the SEC on March 30, 2010 and incorporated by reference. |
27