Item 1. Business
Cautionary Statements Under the Private Securities Litigation Reform Act of 1995
Forward-Looking Statements
Disclosures included in this Form 10-K contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by words such as “anticipate,” “plan,” “believe,” “seek,” “estimate,” “expect,” “could,” and words of similar meanings and include, without limitation, statements about the expected future business and financial performance of ATMI such as financial projections, expectations for demand and sales of new and existing products, customer and supplier relationships, research and development programs, market and technology opportunities, international trends, business strategies, business opportunities, objectives of management for future operations, microelectronics industry (including wafer start) growth, life sciences industry growth and trends in the markets in which the Company participates. Forward-looking statements are based on management’s current expectations and assumptions, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict. Investors and others should consider the cautionary statements and risk factors discussed in Item 1A
Item 1A. Risk Factors
Cautionary Statements Regarding Future Results of Operations
You should read the following cautionary statements in conjunction with the factors discussed elsewhere in this and other of our filings with the Securities and Exchange Commission (SEC) and in materials incorporated by reference in these filings. These cautionary statements are intended to highlight material factors that may affect our financial condition and results of operations. Like other companies, we are susceptible to macroeconomic downturns in the United States or abroad that may affect the general economic climate and our performance and the performance of our customers. Similarly, the price of our common stock is subject to volatility because of fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community, and other factors beyond our control.
Our profit margins may be adversely affected by a number of factors.
Our profit margins may be adversely affected in the future by a number of factors, including price reductions, decreases in our shipment volume, reductions in, or obsolescence of, our inventory, shifts in our product mix and changes in foreign currency exchange rates. Many of our expenses, particularly those relating to capital equipment and manufacturing overhead, are fixed in the short term. Accordingly, reduced demand for our products and services can cause our fixed production costs to be allocated across reduced production volumes, which can adversely affect our gross margin and profitability, and reduced demand could adversely affect our performance. Our ability to reduce expenses is further constrained because we must continue to invest in research and development to maintain our competitive position and to maintain service and support for our existing global customer base.
Cyclicality in the markets we sell to may adversely affect our performance.
The semiconductor and life sciences equipment markets have historically been cyclical and subject to significant and often rapid increases or decreases in demand. These changes could adversely affect our results of operations and could have an adverse effect on the market price of our common stock. Our results of operations have been adversely affected, and may be further affected in the future, if demand for semiconductors, or devices that use semiconductors, flat panels or life sciences products decreases or grows at a significantly slower pace than has historically occurred. Subsequent upturns in the markets which we serve have historically been characterized by sudden increased product demand and production capacity constraints. We may have difficulty reacting quickly enough to a sudden upturn in demand for our products and may incur significant expediting and manufacturing costs to meet a rapid increase in customer demand.
Global economic crisis and uncertainty in financial markets could materially and adversely affect our business and results of operations.
On an ongoing basis, our business may be affected by economic down-turns which could impact the volatility and liquidity of financial and credit markets, the general global economy, and factors such as inflationary or deflationary pressures yielding other market or economic challenges. There can be no assurance that there will not be deterioration in credit and financial markets affecting consumer confidence in economic conditions. In addition, financial difficulties experienced by our suppliers, distributors or customers could result in product delays, increased accounts receivable defaults and inventory challenges. Similarly, the price of our common stock is subject to volatility due to fluctuations in general market conditions, differences in our results of operations from estimates and projections generated by the investment community, and other factors beyond our control.
Our business could be adversely affected if we cannot protect our proprietary technology or if we infringe on the proprietary technology of others.
Our proprietary technology supports our ability to compete effectively with other companies. Although we have been awarded, have filed applications for or have been licensed under numerous patents in the United States and other countries, these patents may not fully protect our technology or competitive position. Further, our competitors may apply for and obtain patents that will restrict our ability to make and sell our products.
Our competitors may intentionally infringe our patents. Third parties may also assert infringement claims against us in the future. Litigation may be necessary to enforce patents issued to us, to protect our trade secrets or know-how, to defend ourselves against claimed infringement of the rights of others or to determine the scope and validity of the proprietary rights of others. The defense and prosecution of patent suits are both costly and time consuming, even if the outcome is favorable to us. Outside the United States, in particular, such proceedings can be extremely expensive and their outcome very unpredictable. An adverse outcome in the defense of a patent suit could cause us to lose proprietary rights, subject us to significant liabilities to third parties or require us to license rights from third parties or to cease selling our products. Any of these events could have a material adverse effect on our business, operating results and financial condition. We also rely on unpatented proprietary technology that others may independently develop or otherwise obtain access to. Our inability to maintain the proprietary nature of our technologies could negatively affect our revenues and earnings.
The loss of or significant curtailment of purchases by any of our largest customers could adversely affect our results of operations.
While we generate revenue from hundreds of customers worldwide, in 2012, approximately 68 percent of our revenues were generated by 20 customers. The loss of or significant curtailment of purchases by one or more of our top customers, including curtailments due to a change in the design or manufacturing sourcing policies or practices of these customers or the timing of customer inventory adjustments may adversely affect our results of operations. Our customers and their customers aggressive management of inventory has already adversely affected our results of operations in the past and may continue to adversely affect future results of operations.
Customer driven pricing pressure may adversely affect our average selling prices.
We face aggressive cost-containment pressures from our customers. There can be no assurances that we will be able to maintain current prices in the face of continuing pricing pressures. Over time, the average price for our products may decline as the markets for these products become more competitive. Any material reduction in product prices could negatively affect both revenues and profits.
Our revenues and earnings could be negatively affected if we cannot anticipate market trends, enhance our existing products and processes, develop and commercialize new products and processes, and identify and consummate strategic acquisitions.
We believe that our future success will depend, in part, upon our ability to anticipate rapidly changing technologies and market trends, to enhance our existing products and processes, to develop and commercialize new products and processes, and to expand through selected acquisitions of technologies or businesses or other strategic alliances. The microelectronics industry markets we serve undergo frequent technological changes, which in turn create demand for new and improved products and process technologies. We may not be able to improve our existing products and process technologies or to develop and market new products and technologies that will be cost-effective or introduced in a timely manner or accepted in the marketplace. We may not be able to leverage our knowledge to make full use of combinatorial science and HPD capabilities as an effective market offering for our customers. Our failure to develop or introduce enhanced and new products and processes in a timely manner may negatively affect our revenues and earnings, and result in a potential impairment of assets. Management considers, on a continuing basis, potential acquisitions of technologies and businesses and other strategic alliances, some of which may be material to us. However, we cannot be assured that we will identify or succeed in consummating transactions with suitable acquisition candidates or alliance partners in the future.
We may have difficulty obtaining the resources or products we need for manufacturing or assembling our products or operating other aspects of our business, which could adversely affect our ability to meet demand for our products and may increase our costs.
We have hundreds of suppliers providing various materials that we use in the production of our products and other aspects of our business, and we seek, where possible, to have several sources of supply for all of these materials. However, we may rely on a single or a limited number of suppliers, or upon suppliers in a single country, for certain of these materials. The inability of such suppliers to deliver adequate supplies of reasonable quality production materials or other supplies could disrupt our production process. In addition, production could be disrupted by the unavailability of the resources used in production such as electricity, chemicals, and gases. The unavailability or reduced availability of the materials or resources we use in our business may require us to reduce production of products or may require us to incur additional costs in order to obtain an adequate supply of these materials or resources. Our LifeSciences business is also subject to governmental approval for products that are part of the manufacture of pharmaceuticals. The occurrence of any of these events could adversely affect our business and results of operations.
We face intense competition from a variety of sources, including larger companies.
The markets for our products are intensely competitive. A number of domestic and international companies engage in commercial activities in the markets we serve. Many of these companies have substantially greater financial, research and development, manufacturing and sales resources than we do. In addition, as these industries evolve, other competitors may emerge. To remain competitive, we must continue to invest in and focus upon research and development and product and process innovation. We may not be successful if we cannot compete on: price, technical capabilities, quality, or customer service.
Our global manufacturing and sales activities subject us to risks associated with legal, political, economic or other changes.
We have facilities in eight countries worldwide and in 2012, approximately 81 percent of our revenues came from sales to companies outside the United States. The global nature of our business and the significance of our foreign operations expose us to certain risks in the countries in which we operate, including political and economic instability, the adequacy of country infrastructure and labor resources, currency fluctuations and controls, compliance with foreign laws and intellectual property protection, changes in export controls, health conditions, and possible disruptions in transportation networks, which could result in an adverse effect on our business operations in such countries and our results of operations.
Our results of operations could be adversely affected by fluctuations in exchanges rates.
Given our current operations and large customer base outside the United States, we employ the use of forward currency exchange contracts and foreign exchange contracts designated as cash flow hedges to attempt to minimize the potentially adverse earnings effect from exchange rate fluctuations on our net balance sheet exposures. Nevertheless, in periods when the U.S. dollar significantly fluctuates in relation to the non-U.S. currencies in which we transact business, such as the Euro, Japanese Yen, the South Korean Won, and the New Taiwan Dollar, fluctuations can have an adverse effect on our revenues and results of operations. Our foreign exchange contracts designed as cash flow hedges may be less effective if the forecasted notional amount hedged differs from the actual amount of cash collected.
Our results of operations could be adversely affected by climate change and natural events in the locations in which we, our customers or our suppliers operate.
We have manufacturing and other operations in locations subject to natural events such as severe weather and earthquakes that could disrupt operations. In addition, our suppliers and customers also have operations in such locations. A natural disaster that results in a prolonged disruption to our operations, or our customers’ or suppliers’ operations, may adversely affect our results of operations and financial condition. Also, climate change poses both regulatory and physical risks that could harm our results of operations or affect the way we conduct our businesses.
Incorrect forecasts of customer demand could adversely affect our results of operations.
Our ability to match inventory and production mix with the product mix needed to fill current orders and orders to be delivered may affect our ability to meet our forecasts. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture product based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may incur expedited shipping costs to deliver products to meet customer demand or hold excess or obsolete inventory that would reduce our profit margins and could adversely affect our results of operations.
We may have difficulty managing our growth and attracting and retaining highly skilled scientific, technical, managerial and marketing personnel, which could adversely affect our revenues and increase our operating expenses.
We have historically experienced periods of growth and intend to grow our business in the future. The management of our growth requires qualified personnel, systems and other resources. Our future success will depend in part on our ability to attract and retain highly skilled scientific, technical, managerial and marketing personnel. Competition for such personnel in the industries that we serve is intense, and our competitors are often larger and more established than we are. We may not be successful in attracting and retaining qualified personnel. In addition, our expansion may also significantly strain operational, management, financial, sales and marketing and other resources. To manage growth effectively, we must continue to enhance and integrate our information technology infrastructure, systems and controls and successfully expand, train and manage our employee base. We may not be able to manage this expansion effectively, including by providing satisfactory levels of customer service and technical support. Inability to manage our growth and to attract and retain skilled personnel could have a material adverse effect on our business, operating results and financial condition.
We engage in business combinations and asset acquisitions, and may encounter difficulties integrating acquired businesses with our current operations; therefore, we may not realize the anticipated benefits of the acquisitions.
We seek to grow, in part, through strategic business combinations and asset acquisitions. In the past several years, we have made certain acquisitions intended to complement and expand our business, and may continue to do so in the future. The success of these transactions will depend on our ability to integrate assets and retain and integrate key personnel acquired in these transactions, apply our internal controls to these acquired businesses, and cooperate with our strategic partners. We may encounter difficulties in integrating acquisitions with our operations, applying our internal controls processes to these acquisitions, and in managing strategic investments. We may also have difficulty in integrating and managing new IT environments. Furthermore, we may not realize the degree or timing of benefits we anticipate when we first enter into a transaction. Any of the foregoing could adversely affect our business and results of operations.
To fully achieve the anticipated benefits of the SDS Direct transaction will require a certain amount of capital spending associated with expanding our manufacturing facilities and obtaining new business licenses and permits in certain countries. We may have difficulty transitioning responsibilities away from Matheson causing the transition to be more expensive than anticipated, or potentially causing business interruptions. We may also encounter issues in obtaining the necessary licenses and permits in certain countries making it difficult to achieve the full revenue and cash flow benefits of this transaction in a timely manner.
We face the risk of product liability claims.
The manufacture and sale of our products, which include thin film, other toxic materials and packages for life sciences applications, involve the risk of product liability claims. In addition, a failure of one of our products at a customer site could interrupt the business operations of the customer. Our existing insurance coverage limits may not be adequate to protect us from all liabilities that we might incur in connection with the manufacture and sale of our products if a successful product liability claim or series of product liability claims were brought against us.
We may be subject to information technology system failures, network disruptions and breaches in data security.
Information technology system failures, network disruptions and breaches of data security from cyber-attacks, employee social media use on our computers or through failure of our internet service providers and other cloud computing service providers to successfully secure their own systems could disrupt our operations causing customer communication and order management issues, unintentional disclosure of customer, employee and proprietary information, and disruption in transaction processing which could affect our reputation and reporting of financial results. While management has taken steps to address these concerns by implementing sophisticated network security, hiring competent personnel and establishing prudent internal control measures, there can be no assurance that a system failure or data security breach will not have a material adverse effect on our financial condition and operating results.
Our business is potentially subject to substantial liabilities for failure to comply with environmental regulations.
We use, generate and discharge toxic or otherwise hazardous chemicals and waste in our manufacturing, processing and research and development activities. As a result, we are subject to a variety of governmental regulations related to the storage, use and disposal of these materials. Our failure to comply with present or future laws could result in fines or other liabilities being imposed on us, suspension of production or a cessation of operations.
In addition, under federal and state statutes and regulations, a government agency may seek to recover its response costs and/or require future remedial measures from both operators and owners of property where releases of hazardous substances may have occurred (including releases by prior occupants) or are ongoing, and for which only partial indemnification may be available in some cases.
Our activities may also result in our being subject to additional regulation. Such regulations could require us to acquire significant additional equipment or to incur other substantial expenses to comply with environmental laws. Our failure to control the use of hazardous substances could subject us to substantial financial liabilities.
Our financial results or financial condition could be adversely affected by changes in accounting standards and subjective assumptions, estimates and judgments by management related to complex accounting matters.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, such as revenue recognition, business combinations, asset impairment, inventories, fair value measurements, self-insurance, tax matters and litigation, are highly complex and involve many subjective assumptions, estimates and judgments. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments could significantly change our reported or expected financial performance or financial condition.
Our results of operations could be adversely affected by changes in taxation.
Because we are a multi-national company, we have a business presence in many countries and, as a result, are subject to taxation and audit by a number of taxing authorities. Tax rates vary among the jurisdictions in which we operate. Our results of operations could be affected by market opportunities or decisions we make that cause us to increase or decrease operations in one or more countries, or by changes in applicable tax rates or audits by the taxing authorities in countries in which we operate. In addition, we are subject to laws and regulations in various locations that govern the determination of which is the appropriate jurisdiction to decide when and how much profit has been earned and is subject to taxation in that jurisdiction. Changes in these laws and regulations could affect the locations where we are deemed to earn income, which could in turn affect our results of operations. We have deferred tax assets on our balance sheet. Changes in applicable tax laws and regulations could affect our ability to realize those deferred tax assets, which could also affect our results of operations. Each quarter we forecast our tax liability based on our forecast of our performance for the year. If that performance forecast changes, our forecasted tax liability may change.
Compliance with changing corporate governance regulations and public disclosures may result in additional risks and exposures.
Changing laws, regulations and standards relating to corporate governance and public disclosure, and new regulations from the SEC, have created uncertainty for public companies such as ours. One such example is the current ambiguity regarding the breadth and pace of adoption of IFRS whether by convergence or SEC mandate. These laws, regulations, and standards are subject to varying interpretations in many cases and as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices and our commitment to maintaining high standards with regard thereto. As a result, our efforts to comply with evolving laws, regulations, and standards have resulted in, and are likely to continue to result in, increased selling, general, and administrative expenses and significant management time and attention. We are also monitoring the evolving establishment of SEC rules in compliance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) to determine the potential future effect on our disclosures and shareholders rights. One example of incremental regulation is the newly promulgated provision of Dodd-Frank regarding the disclosure of Conflict Minerals beginning in 2014.
Item 1B.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Item 2. Properties
This table summarizes the location and size of ATMI’s significant real properties as of December 31, 2012:
(1) ATMI’s headquarters.
ATMI also leases other sales offices throughout the world, each one of which occupies 5,000 or fewer square feet.
Our fixed assets as of December 31, 2012 include the manufacturing facilities and non-manufacturing facilities such as sales and administrative offices, including leasehold improvements made to those facilities under non-cancelable leases, set forth in the table above and a substantial quantity of machinery and equipment. The facilities, leasehold improvements, machinery and equipment in use as of December 31, 2012 are in good operating condition, are well-maintained and substantially all are in regular use.
We believe that the fixed assets capitalized and facilities in operation at December 31, 2012 for the production of our products are suitable and adequate for the business conducted therein in the current business environment and have sufficient production capacity for their present intended purposes. We continue to assess the required amount of capital spending necessary for the incremental demand for our SDS products; however, because of the transition services contracted from the former manufacturer as a result of the SDS Direct transaction, we do not foresee any production capacity issues. In October 2012, ATMI announced plans to further increase our commitment to the Asia-Pacific microelectronics markets, and South Korean customers in particular, through a new state-of-the-art manufacturing facility to be built in JangAn, Gyeonggi province. Construction of the 118,000 square foot facility is underway and we expect to begin high-volume production in 2013. Utilization of our facilities varies based on demand for our products. We continuously review our anticipated requirements for facilities and, based on that review, may from time to time adjust our facility plans.
Item 3.
Item 3. Legal Proceedings
ATMI is, from time to time, involved in legal actions, governmental audits, and proceedings relating to various matters incidental to its business including contract disputes, intellectual property disputes, product liability claims, employment matters, export and trade matters, and environmental claims. While the outcome of such matters cannot be predicted with certainty, in the opinion of management, after reviewing such matters and consulting with ATMI’s counsel and considering any applicable insurance or indemnifications, any liability which may ultimately be incurred is not expected to materially affect ATMI’s consolidated financial position, cash flows or results of operations.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The following graph compares the cumulative total stockholder return on ATMI’s common stock with the return on the Total Return Index for the NASDAQ Global Select Market (NASDAQ US Index), the Russell 2000 Index and the NASDAQ Electronic Components Stock Index. The measurement assumes a $100 investment as of December 31, 2007 with all dividends, if any, reinvested. The data presented are on an annual basis for the five years ended December 31, 2012. The performance shown is not necessarily indicative of future performance.
The cumulative total stockholder return graph and related data provided in Part II Item 5 of this Form 10-K is not “soliciting material,” is not deemed filed with the SEC and is not to be incorporated by reference in any filing by us under the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
The common stock of ATMI has traded on the NASDAQ Global Select Market under the symbol ATMI since October 13, 1997, and the common stock of our predecessor company traded under that symbol from 1993 until October 12, 1997. This table sets forth, for the periods indicated, the high and low sales price for the common stock as reported on the NASDAQ Global Select Market:
As of January 31, 2013, there were approximately 148 holders of record of our common stock.
We have never paid cash dividends on our common stock and have no current plans to do so. There are no contractual restrictions in place that currently materially limit, or are likely in the future to materially limit, us from paying dividends on our common stock, but applicable state law may limit the payment of dividends. Our present policy is to retain earnings, if any, to provide funds for the operation and expansion of our business.
The Transfer Agent and Registrar for ATMI is Continental Stock Transfer & Trust Company.
Purchases of Equity Securities - This table lists all repurchases (both open market and private transactions) during the three months ended December 31, 2012 of our common stock, by or on behalf of us, or any affiliated purchaser.
(1) There were no other repurchases of our common stock by or on behalf of us or any affiliated purchaser during the fiscal quarter ended December 31, 2012.
(2) Share repurchases are shown on a trade-date basis. Represents shares repurchased to satisfy employee minimum tax withholding obligations on vesting of restricted stock and shares repurchased under the share repurchase program.
(3) In August 2010, the Company’s Board of Directors approved a share repurchase program for up to $50.0 million of ATMI common stock. Under the terms of the share repurchase program, repurchases are made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions. Management determines the timing and amount of purchases under the program based upon market conditions or other factors. The program, which has no expiration date, does not require the Company to purchase any specific number or amount of shares and may be suspended or reinstated at any time at the Company’s discretion and without notice.
Item 6.
Item 6. Selected Financial Data
These selected consolidated statements of operations for the years ended December 31, 2012, 2011, 2010, 2009 and 2008 and the consolidated balance sheet data as of such dates are derived from ATMI’s audited consolidated financial statements. The data below should be read in conjunction with the consolidated financial statements and notes thereto and other financial information included elsewhere in this Form 10-K (in thousands, except per share data).
The Company has never declared any cash dividends.
(1) Includes $3.3 million in royalty revenue related to periods prior to and including 2012 associated with IP infringement settlements reached during the year.
(2) Includes a $2.7 million gain on remeasurement of contingent consideration, partially offset by $1.6 million of severance charges.
(3) Includes a $0.5 million recognized loss on the sale of an auction rate security.
(4) Revenues were negatively impacted by $6.9 million due to the effects of the SDS Direct transaction which included $5.1 million of revenue reversal for inventory repurchases and an estimated $1.8 million net impact due to excess inventory in the SDS channel, which was partially offset by incremental revenues realized as a result of the transaction. Includes $2.4 million from IP settlements, which represent payments received related to periods prior to 2011.
(5) The cost of revenues were favorably impacted by $1.5 million due to the effects of the SDS Direct transaction, representing a $1.1 million of cost reversals for inventory repurchased and $0.4 million estimated net effect due to excess inventory in the SDS channel, partially offset by transition service costs and incremental costs on revenues realized following the transaction.
(6) Includes $1.7 million gain on remeasurement of contingent consideration, a $2.4 million benefit related to state tax credits, and distribution expenses of $1.3 million related to the SDS Direct transaction.
(7) $84.6 million contract termination charge related to the SDS Direct transaction.
(8) Includes $1.3 million foreign exchange loss on Euro exposures, $0.7 million of accretion related to the Artelis contingent consideration liability, partially offset by a $0.9 million investment gain.
(9) Includes $31.0 million tax benefit associated with the $84.6 million pre-tax contract termination charge.
(10) Includes a $0.5 million gain from the sale of a marketable security, $2.5 million gain on sale of shares of one of our equity-method investees, and a $5.9 million fair value remeasurement gain on our minority interest from our acquisition of Artelis.
(11) Includes $1.8 million of tax benefits (including interest) recognized to reverse previously established reserves for uncertain tax positions due to expiration of statutes of limitation and settlements, a $2.1 million tax benefit related to a European dividend, and a $1.9 million charge related to changes in valuation allowances.
(12) Includes $1.1 million charge for incremental excess and obsolete inventory related to product discontinuances and a reserve to cover expected product shelf-life issues; and a $3.1 million impairment charge for long-lived assets written down to their estimated fair values primarily related to the planned idling of manufacturing capacity of our gas products.
(13) Includes a $1.6 million impairment charge for long-lived assets written down to their estimated fair values related primarily to idled equipment.
(14) Includes a $1.4 million charge to increase our reserves for bad debt to cover exposures related to customer bankruptcy filings and uncertainties of collections; a $2.6 million impairment charge for long-lived assets written down to their estimated fair values primarily related to redundant enterprise management software; and a $0.6 million charge for SG&A severance costs.
(15) Includes a $2.5 million impairment charge, primarily related to a write-down associated with an auction-rate security.
(16) Balance has been reduced by $0.1 million related to reclassification of unrecognized tax benefits and valuation allowances.
(17) Balance has been reduced by $0.6 million related to reclassification of unrecognized tax benefits and valuation allowances.
(18) Balance has been reduced by $0.6 million related to reclassification of unrecognized tax benefits and valuation allowances.
(19) Includes a $2.4 million business interruption claim recovery related to a fire at a contract manufacturer in Taiwan.
(20) Includes a $3.1 million benefit associated with the settlement of a dispute with a distributor ($3.7 million recognized in revenues, with $0.6 million of associated costs recognized in cost of revenues).
(21) Includes a $2.0 million gain from the sale of a marketable security, $1.6 million of impairment charges related to our strategic investment portfolio and a $1.8 million reserve on a convertible note, and $1.1 million representing our proportionate share of gains on sales of assets by one of our equity-method investees.
(22) Includes a $3.7 million tax benefit (including interest) recognized to reverse previously established reserves for uncertain tax positions as a result of the expiration of the applicable statute of limitations.
(23) Balances have been reduced by $0.6 million for the year ended December 31, 2008 related to reclassification of unrecognized tax benefits from deferred tax liabilities.
(24) Includes non-current marketable securities of $12.1 million, $3.3 million, $25.4 million, $10.6 million, and $3.7 million at December 31, 2012, 2011, 2010, 2009, and 2008, respectively.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis of our financial condition and results of operations should be read together with the consolidated financial statements and the related notes thereto appearing in Item 8 of this Form 10-K.
Company Overview
We believe we are among the leading suppliers of high performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. Our products consist of “front-end” semiconductor performance materials, sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases to semiconductor process equipment, high-purity materials packaging and dispensing systems that allow for the reliable introduction of low volatility liquids and solids to microelectronics and biopharmaceutical processes. ATMI targets both semiconductor and flat-panel display manufacturers, whose products form the foundation of microelectronics technology rapidly proliferating through the consumer products, information technology, automotive, and communications industries. The market for microelectronics devices is continually changing, which drives demand for new products and technologies at lower cost. ATMI’s customers include many of the leading semiconductor and flat-panel display manufacturers in the world who target leading-edge technologies. ATMI also addresses an increasing number of critical materials handling needs for the life sciences markets. Our proprietary containment, mixing, and bioreactor technologies are sold to the biotechnology, laboratory and cell therapy markets, which we believe offer significant growth potential. ATMI’s objective is to meet the demands of our microelectronics and life sciences customers with solutions that maximize the efficiency of their manufacturing processes, reduce capital or operating costs, and minimize the time to develop new products and integrate them into their processes.
Use of Estimates
Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 1 to the consolidated financial statements in Item 8 of this Form 10-K describes the significant accounting policies used in preparation of the consolidated financial statements. Management believes the most complex and sensitive judgments, because of their significance to the Consolidated Financial Statements, result primarily from the need to make estimates about the effects of matters that are inherently uncertain. The most significant areas involving management judgments and estimates are described below. Actual results in these areas could differ from management’s estimates. These policies are determined by management and have been reviewed by ATMI’s Audit Committee.
Revenue Recognition
We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Revenues from product sales are generally recognized upon delivery to a common carrier when terms are equivalent to free-on-board (“FOB”) origin and upon receipt by a customer when terms are equivalent to FOB destination. In instances where final acceptance of equipment is specified by the purchase agreement, revenue is deferred until all acceptance criteria have been satisfied, except when reasonable reserves for returns can be effectively established due to substantial successful installation history for homogenous transactions. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We accrue for sales returns, warranty costs, and other allowances based on a current evaluation of our experience based on stated terms of the transactions. Should actual product failure rates or customer return experience differ from our estimates, revisions to the estimated accruals would be required.
Accounts Receivable Allowances
The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable balances. We estimate our allowance for doubtful accounts based on past due amounts and historical write-off experience, as well as trends and factors surrounding the credit risk of the markets we operate in and the financial viability of specific customers. In an effort to identify adverse trends, we assess the financial health of the markets we operate in and perform periodic credit evaluations of our customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted. Actual write-offs and adjustments could differ from the allowance estimates because of unanticipated changes in the business environment as well as factors and risks surrounding specific customers.
As of December 31, 2012 and 2011 we had $0.9 million and $0.8 million of accounts receivable allowances recorded, respectively. Although management believes these reserves are adequate, any adverse changes in market conditions may require us to record additional reserves.
Inventory Valuation Reserves
Inventory valuation reserves are established in order to report inventories at the lower of cost or market value on our consolidated balance sheets. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventory cost. Other factors that management considers in determining these reserves include whether individual inventory parts or chemicals meet current specifications and cannot be substituted for or reworked into a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives.
As of December 31, 2012 and 2011, we had $3.4 million and $2.6 million, respectively, of inventory valuation reserves recorded. Although management believes these reserves are adequate, any adverse changes in market conditions may require us to record additional inventory valuation reserves.
Non-marketable Equity Securities
We selectively invest in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support an ATMI product or initiative. Our non-marketable equity investments are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. At December 31, 2012, the carrying value of our portfolio of strategic investments in non-marketable equity securities totaled $8.1 million ($8.0 million at December 31, 2011). In certain instances, we loan funds to early-stage investees at market interest rates to enable them to focus on product and technology development. Non-marketable equity and debt securities are included in the consolidated balance sheets under the caption “Other non-current assets.” We receive regular financial information from our equity method investees typically on a one month lag.
Investments in non-marketable equity securities are inherently risky, and some of these companies are likely to fail. Their success (or lack thereof) is dependent on product development, market acceptance, operational efficiency, attracting and retaining talented professionals, and other key business success factors. In addition, depending on their future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments would likely become impaired.
We review our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis may require significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects, (b) the technological feasibility of the investee’s products and technologies, (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes, (d) factors related to the investee’s ability to remain in business, such as the investee’s liquidity, and the rate at which the investee is using its cash, and (e) the investee’s receipt of additional funding at a lower valuation.
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case we write the investment down to its fair value, using the framework required by Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures.” When an investee is not considered viable from a financial or technological point of view, we write down the entire investment since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other-than-temporarily impaired, unless specific facts and circumstances indicate otherwise. We recognized a $0.8 million impairment charge to our portfolio of non-marketable equity securities in 2011 (none in 2012 or 2010).
Income Taxes
The net deferred tax asset at December 31, 2012 was $19.4 million compared to $23.4 million at December 31, 2011. For our deferred future tax benefits, we believe that our earnings during the periods when the temporary differences become deductible will be sufficient to realize the related future income tax benefits. For those jurisdictions where the expiration date of tax carryforwards or the projected operating results indicate that realization is not likely, a valuation allowance is provided.
In the ordinary course of business there is inherent uncertainty in quantifying our income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. We adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and circumstances. A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. To the extent we prevail in matters for which we have recorded an unrecognized benefit or are required to pay amounts in excess of what we have recorded, our effective tax rate in a given financial statement period could be materially affected. An unfavorable tax settlement might require use of our cash and/or result in an increase in our effective tax rate in the year of resolution. A favorable tax settlement would be recognized as a reduction in our effective tax rate in the year of resolution. For a discussion of current tax matters, see Note 10 to the consolidated financial statements in Item 8 of this Form 10-K.
In assessing the need for a valuation allowance, we estimate future taxable income, considering the feasibility of ongoing tax planning strategies and the realizability of tax loss carryforwards. Valuation allowances related to deferred tax assets can be affected by changes to tax laws, changes to statutory tax rates and future taxable income levels. In the event we were to determine that we would not be able to realize all or a portion of our deferred tax assets in the future, we would reduce such amounts through a charge to income in the period in which that determination is made or when tax law changes are enacted. Conversely, if we were to determine that we would be able to realize our deferred tax assets in the future in excess of the net carrying amounts, we would decrease the recorded valuation allowance through an increase to income in the period in which that determination is made. Changes in deferred tax asset valuation allowances recorded in a business combination and income tax uncertainties after the acquisition date generally will affect income tax expense.
Equity-Based Compensation
We account for awards of equity-based compensation under our employee stock plans using the fair value method. Accordingly, we estimate the grant date fair value of our equity-based awards and amortize this fair value to compensation expense over the requisite service period or vesting term.
To estimate the fair value of our stock option awards we currently use the Black-Scholes-Merton options-pricing model. The determination of the fair value of equity-based awards on the date of grant using an options-pricing model is affected by our then current stock price as well as assumptions regarding a number of complex and subjective variables. Management is required to make certain judgments for these variables which include the expected stock price volatility over the term of the awards, the expected term of options based on employee exercise behaviors, and the risk-free interest rate. For awards granted subsequent to January 1, 2006, expected stock price volatility is based on the historical volatility of ATMI common stock for a period shorter than the expected term of the options. We have excluded the historical stock price volatility prior to the public announcement regarding the sale of our non-core businesses in 2004, because those businesses that were sold represented a significant portion of ATMI’s consolidated business and were subject to considerable cyclicality associated with the semiconductor equipment industry, which drove increased volatility in ATMI’s stock price. The expected term of options granted represents the period of time that options are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected term. We recognize expense only for those awards expected to vest. If actual results are not consistent with our assumptions and judgments used in estimating key assumptions, in future periods, the stock option expense that the Company records for future grants may differ significantly from what the Company has recorded in the current period.
To estimate the fair value of our Total Shareholder Return Performance Restricted Stock Units (“TSR PRSUs”), we used a Monte-Carlo simulation of future stock prices for ATMI and the components of the Russell 2000 index. This method uses a risk-neutral framework to model future stock prices. The stock price projections are based upon estimates for the risk-free rate of return, the volatility of our stock and the others included in the Russell 2000 index, and the correlation of each stock within the Russell 2000 index. Management is required to make certain judgments for these estimates.
Equity-based compensation expense is recognized on a ratable basis over the estimated service period of the awards.
Fair Value Measurements
All of our financial assets and liabilities, measured on a recurring basis, are measured at fair value based upon Level 1 or Level 2 inputs, as defined under ASC 820. For Level 1 measurements, we use quoted prices in active markets for identical assets and liabilities. For Level 2 measurements, we use observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
On November 2, 2010, ATMI’s Belgian subsidiary acquired the remaining 60 percent of the outstanding shares of Artelis S.A. As part of the acquisition, we recognized a liability for the fair value of contingent payments tied to future revenue performance for the fiscal years 2012 through 2014. The contingent payment tied to future revenue performance has a range of possible outcomes from zero to $23.3 million. The fair value measurements were calculated using unobservable inputs (primarily using discounted cash flow analyses, a discounted average rate of 6.9 percent, and reliance on the market and product knowledge of internal experts), classified as Level 3, requiring significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. There is no payout due relative to 2012 performance, because revenues were below the threshold required for a payout.
As of December 31, 2012 and 2011, the fair value of our Artelis acquisition contingent performance obligations associated with future revenue was $4.6 million and $7.2 million, respectively. See Notes 1, 5 and 7 for additional details regarding the Artelis acquisition.
Goodwill and Other Intangible Assets
The assets and liabilities of acquired businesses are recorded under the purchase method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing by completing an assessment of qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. For reporting units where the qualitative determination does not indicate that it is more likely than not that the fair value of a reporting unit is more than its carrying value, the two-step test is performed. In order to perform the two-step test we estimate the fair value of a reporting unit based on the best information available as of the date of the assessment, which primarily incorporates management assumptions about expected future cash flows and contemplates other valuation techniques. Future cash flows can be affected by changes in the global economy and local economies, changes in the microelectronics and biopharmaceutical industries, changes in technology, and the execution of management’s plans. We concluded that goodwill was not impaired during 2012. Although no goodwill impairment has been recorded to date, there can be no assurances that future goodwill impairments will not occur.
Other Long-Lived Amortizable Assets
We evaluate the potential impairment of other long-lived assets when appropriate. If the carrying value of assets exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset is written down to fair value.
Related Party Transactions
The Company’s related parties are primarily unconsolidated equity affiliates. The Company did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated with independent parties.
Results of Operations
This table shows the effect of pre-tax compensation cost arising from equity-based payment arrangements on the consolidated statements of operations (in thousands):
Year Ended December 31, 2012 Compared to Year Ended December 31, 2011
Results of Operations
The following is a summary of selected consolidated earnings information (in thousands of dollars):
Analysis of Consolidated Results
Overview
2012 was a year of progress and transition after the October 31, 2011 termination of agreements with Matheson Tri-Gas, Inc. (“Matheson”). Upon termination we assumed responsibility for manufacturing, marketing, selling, and distribution of our SDS® products (the “SDS Direct” transaction). The results from these activities have met or exceeded our expectations, and we have improved interactions with our key customers as a result.
Revenues. Revenues increased 4.4 percent to $407.4 million in 2012 compared to 2011 revenues of $390.1 million. The 2011 revenues included a fourth quarter unfavorable impact of $6.9 million associated with the SDS Direct transaction. The growth in 2012 was driven by a 4.0 percent improvement in Microelectronics revenue, which was mostly the result of SDS growth while demand for other products in Microelectronics was down as lower wafer starts were coupled with our customers’ efforts to improve material usage efficiency and to manage inventories in the second half of the year. LifeSciences growth of 8.7 percent resulted from increased consumables revenue and iCELLis® bioreactor sales.
Gross Profit. Our consolidated gross profit margin improved by 2.1 percentage points to 49.3 percent in 2012 compared to 47.2 in 2011 primarily due to the benefits of the SDS Direct transaction.
Research and Development Expenses. Research and development expenses (“R&D”) increased 2.7 percent in 2012 compared to 2011. Principal components of the higher expenses were increases in outside support services of $1.4 million, consumables of $1.0 million, and depreciation of $0.4 million, partially offset by the successful conclusion of a collaborative development agreement resulting in increased expense reimbursements to us of $2.0 million.
Selling, General and Administrative Expenses. Sales, General and Administrative (“SG&A”) expenses increased by 3.7 percent in 2012 from 2011 due to approximately $4.0 million of costs associated with SDS Direct activities, $1.4 million of severance, a capital based tax credit of $2.4 million recognized in 2011, partially offset by lower recruiting fees of $1.0 million and a $1.0 million increase in the year-over-year gain due to the change in fair value of the Artelis contingent consideration liability. SG&A as a percent of revenues was flat in 2012 compared to 2011.
Operating Income (Loss ). Operating income was $59.1 million in 2012 compared to an operating loss of $37.7 million in 2011. The operating loss in 2011 included an $84.6 million contract termination charge associated with the SDS Direct transaction.
Other income (expense), net. Other expense, net was $0.2 million in 2012. In 2011, other expense, net was $2.6 million; the major items were an $0.8 million impairment loss for a minority investment, $0.6 million of losses from equity method investees, and $1.2 million of losses from foreign exchange, partially offset by a $0.7 million gain from a previously reserved investment.
Provision for Income Taxes. In 2012, we had an effective income tax rate of 29.6 percent, compared to a 2011 effective income tax benefit rate of 48.8 percent. Excluding the $31.0 million benefit from the SDS Direct contract termination charge, the 2011 effective income tax rate would have been 26.2 percent. The 2012 effective income tax rate differs from the Federal statutory rate of 35.0 percent primarily due to lower income tax rates in foreign jurisdictions, an increase in certain valuation allowances, and state taxes. If certain 2012 retroactive provisions of The American Taxpayer Relief Act of 2012, including the US R&D credit, had been enacted into law in 2012 instead of 2013, the 2012 effective income tax rate would have been 27.8 percent.
ATMI has not provided for U.S. federal income and foreign withholding taxes on approximately $92.0 million of undistributed earnings from non-U.S. operations as of December 31, 2012, because such earnings are intended to be reinvested indefinitely outside of the United States. These earnings could become subject to additional tax if they are remitted as dividends, loaned to ATMI, or upon sale of subsidiary stock. It is not practicable to estimate the amount or timing of the additional tax, if any, that eventually might be paid on the foreign earnings.
South Korea has granted the Company an income tax exemption that expires in 2014, including the reduction from 100 percent to 50 percent of the exemption in 2013 and 2014. The exemption applies only to income related to one of the Company’s product lines. The effect of the tax exemption was to reduce income tax expense by $2.3 million, $2.8 million, and $2.1 million for the years ended December 31, 2012, 2011, and 2010.
The 2012 net income of $42.3 million ($1.30 per diluted share) compared to a net loss of $20.0 million ($0.63 per diluted share) in 2011.
Segment Analysis
Microelectronics: Revenues for 2012 were $365.5 million, an increase of 4.0 percent compared to 2011, driven primarily by incremental revenues from the SDS Direct transaction and a $2.6 million one-time royalty partially offset by weaker demand for other products as lower wafer starts were coupled with our customers’ efforts to manage inventories in the second half of the year. With wafer starts estimated to be down by nearly 4 percent for the full year 2012, our copper materials business declined a modest 2 percent in 2012 compared to 2011 with growth in new product sales offset by increased customer material efficiencies on certain of our legacy products. Revenue for our NOWPak® products declined approximately 9 percent in 2012 compared to 2011 as customers continue to migrate to higher volume packages. Microelectronics gross profit margin improved 2.4 percentage points in 2012 to 51.0 percent compared to 48.6 percent for 2011 primarily due to the SDS Direct activities. Operating expense increased in 2012 compared to 2011 driven by $4.0 million of costs associated with the SDS Direct transaction, and $1.4 million of severance as we adjusted our deployment of resources to better match anticipated future market demand. Operating income increased by $96.2 million to $109.3 million in 2012 compared to 2011. The 2011 results included an $84.6 million contract termination charge. Excluding the 2011 contract termination charge related to the SDS Direct transaction, 2012 operating income increased 11.9 percent, mostly driven by the benefits of the SDS Direct transaction.
LifeSciences: Revenues for 2012 of $41.6 million were up 8.7 percent compared to 2011 with major contributions from higher consumables sales and stronger sales of iCELLis™ systems. The 2011 results included $2.4 million of licensing revenues that related to intellectual property settlements for periods prior to 2011. The 2012 results include $0.7 million of licensing revenues related to intellectual property settlements for periods prior to 2012. Excluding the impact of these licensing settlements, revenues would have been up 14.1 percent. Excluding the negative impact from foreign exchange and license settlements, revenues would have increased 20 percent over the prior year. LifeSciences gross profit margin was 34.4 percent for 2012 compared to 34.3 percent for 2011. Operating loss for 2012 was $4.1 million compared to $6.0 million for 2011, a reduction of 31.7 percent. The 2012 loss is a result of the continued R&D and SG&A spending in support of iCELLis and Xpansion™ bioreactor commercialization efforts partially offset by a $1.0 million increase in the year-over-year gain due to the change in fair value of the Artelis contingent consideration liability.
Year Ended December 31, 2011 Compared to Year Ended December 31, 2010
Overview
Results for the year ended December 31, 2011 included revenues of $390.1 million, an agreement for the reacquisition of license, manufacturing, & distribution rights for our Safe Delivery Source (“SDS”) product line, and our first fee-based collaborative development arrangement with a key customer, which will allow us to more effectively demonstrate our High Productivity Development (“HPD”) capabilities.
The 2011 results included the effects of terminating a license, manufacturing and distribution agreement associated with our SDS® technology in exchange for a $95 million cash payment. As a result of this agreement, we recognized a one-time operating charge of $84.6 million in the fourth quarter of 2011. In connection with this agreement, revenues in the fourth quarter were unfavorably impacted by $6.9 million associated with a cash payment of $5.1 million to repurchase inventory due to previously recognized product shipments into the former distributor’s channel as well as an estimated $1.8 million net impact due to excess inventory in the SDS distribution channel in regions where the former distributor continues to sell product until ATMI secures the appropriate licenses to fully conduct business, which was partially offset by incremental revenues from the transaction.
For the year ended December 31, 2011, ATMI revenues increased by 6.2 percent to $390.1 million compared to 2010 revenues of $367.3 million, including the $6.9 million unfavorable fourth quarter impact mentioned above. The 2011 growth reflects strength in the first half of 2011 in consumer electronics demand which drove higher wafer starts and increased fab utilization followed by a lower wafer start growth environment in the second half of 2011. The revenue growth from 2010 to 2011 was driven by a 17 percent increase in copper materials and a 25 percent increase in LifeSciences. Our gross profit margin declined by 70 basis points to 47.2 percent in 2011 compared to 47.9 in 2010 due to the impact of fourth quarter inventory repurchases, anticipated price reductions, some unanticipated cost overruns, and product mix. R&D grew 10.4 percent in 2011 compared to 2010 primarily driven by product development related spending associated with the November 2010 acquisition of Artelis. SG&A declined by 2.2 percent in 2011 from 2010 due to a $2.4 million benefit related to a capital-based state tax credit, and a $1.7 million gain from the change in fair value of a contingent consideration obligation. SG&A, as a percent of revenues, decreased to 21.4 percent in 2011 compared to 23.3 percent in 2010. The operating loss of $37.7 million in 2011 was driven by the $84.6 million, one-time contract termination charge associated with the SDS Direct transaction. The 2011 effective tax benefit rate of 48.8 percent would have been an effective tax rate of 26.2 percent, excluding the $31.0 million tax benefit from the $84.6 million one-time contract termination charge. The 2011 net loss was $20.0 million ($0.63 per diluted share) compared to net income of $39.5 million ($1.24 per diluted share) in 2010. The 2011 net loss of $20.0 million includes the after tax impact of $53.6 million due to the SDS Direct termination charge.
The following is a summary of selected consolidated financial information (in thousands of dollars):
Revenues. For the year ended December 31, 2011, ATMI revenues increased by 6.2 percent to $390.1 million compared to full year 2010 revenue of $367.3 million. The 2011 revenues were negatively impacted by $6.9 million associated with a cash payment of $5.1 million to repurchase previously recognized product shipments into the former distributor’s channel as well as an estimated $1.8 million net impact due to excess inventory in the SDS distribution channel in regions where the former distributor continues to sell product until ATMI secures the appropriate licenses to fully conduct business, which was partially offset by incremental revenues from the transaction. The 2011 revenue growth reflects strength in the first half of 2011 in consumer electronics demand, which drove higher wafer starts and increased fab utilization, followed by a lower wafer start growth environment in the second half of 2011. The growth in revenues in 2011 compared to 2010 occurred in both our microelectronics and life sciences product lines. Driven by a strong first half of 2011, revenues in our microelectronics product lines grew 4.5 percent to $351.8 million in 2011 from $336.5 million in 2010 primarily due to strong growth in our copper products associated with adoption of our materials at the advanced technology nodes. In our life sciences product lines, revenues increased 24.5 percent to $38.3 million in 2011 from $30.7 million in 2010 driven by the transition from qualification to volume production at a few customers, and the additional placements of our mixing and bioreactor platforms in the marketplace and royalties from intellectual property licensing agreements. Given the ongoing pressures to bring costs down in the consumer and microelectronics industries, we continued to experience pricing pressure with several of our legacy products. Foreign currency translation provided a 100 basis point benefit to revenue in 2011 driven by a weakening US Dollar against the Japanese Yen and the Euro.
Gross Profit. In 2011, gross profit of $184.1 million increased 4.6 percent from $176.0 million in 2010. Our gross profit margin declined by 70 basis points to 47.2 percent in 2011 compared to 47.9 in 2010 due to the impact of fourth quarter inventory repurchases, anticipated price reductions, some unanticipated cost overruns, and product mix. The SDS Direct transaction reduced gross profit by $4.7 million and gross profit margin by 60 basis points due to the reversal of previously recognized product shipments, the estimated effect of excess channel inventories and incremental transition services costs. Gross profit in our microelectronics product lines increased 3.0 percent to $170.7 million in 2011 compared to $165.8 million in 2010. Gross profit margin in microelectronics was approximately 49 percent in 2011 compared to 49 percent in 2010. Gross profit in our life sciences product lines increased 31.1 percent to $13.4 million in 2011 compared to $10.2 million for the same period in 2010. Life sciences gross profit margin increased year over year to 35 percent in 2011 from 33 percent in 2010. Life sciences gross profit margin for 2011 includes the effect of the U.S. manufacturing capacity we brought online in mid-2010.
Research and Development Expenses. R&D expense increased 10.4 percent to $53.7 million in 2011 compared to $48.6 million in 2010. The increase in 2011 spending was driven by increased product development spending associated with the November 2010 Artelis acquisition ($3.3 million), consumption of material consumables ($0.7 million), intellectual property fees ($0.5 million), and rent ($0.3 million), partially offset by lower HPD licensing and maintenance ($1.8 million), and cost reimbursements related to a collaborative development agreement (“CDA”) ($0.9 million). The CDA was executed in the third quarter of 2011 with an advanced memory integrated circuit manufacturer for the purpose of developing molecules, including chemical precursors, and material systems for next generation semiconductor products. We recognized a benefit of $0.9 million in 2011.
Selling, General and Administrative Expenses. SG&A declined 2.2 percent to $83.5 million in 2011 compared to $85.4 million in 2010. The decrease is the result of a $2.4 million benefit related to a capital-based state tax credit, a $1.7 million gain from the change in fair value of a contingent consideration obligation, lower maintenance ($0.7 million), legal fees ($0.5 million) and asset impairments ($0.3 million), partially offset by expenses associated with the Artelis acquisition ($3.7 million), a 2010 bad debt reserve release of $0.8 million not repeated in 2011, $1.3 million associated with transition costs related to the SDS Direct transaction and increased employee related costs ($1.3 million).
Contract Termination Expense. In 2011, we recognized an $84.6 million charge associated with terminating a long-term license, manufacturing and distribution agreement with Matheson Tri-Gas, Inc. that gives ATMI responsibility for worldwide distribution of our SDS and VAC gas storage and delivery system.
Operating Income (Loss). For the year ended December 31, 2011, we generated an operating loss of $37.7 million compared to operating income of $41.9 million in 2010. The decrease is primarily a result of the SDS Direct contract termination charge and other items as noted above.
Interest Income. Interest income was $1.2 million for the year ended December 31, 2011 compared to $0.9 million for the year ended December 31, 2010, primarily caused by higher invested balances and slightly improved average yields.
Other income (expense), net. In 2011, we reported net other expense of $2.6 million, which was driven by a $0.8 million impairment reserve for a minority investment, losses from equity method investees of $0.6 million and losses from foreign exchange of $1.2 million partially offset by a $0.7 million gain from a previously reserved investment. In 2010, we reported net other income of $7.7 million, which was driven by a $5.9 million non-cash gain on fair value of our minority interest in Artelis coincident with the acquisition of the remaining outstanding shares and a $2.5 million gain on the sale of Anji shares.
Provision for Income Taxes. In 2011, we had an effective income tax benefit rate of 48.8 percent, compared to a 2010 effective income tax rate of 22.0 percent. Excluding the $31.0 million benefit from the SDS Direct contract termination charge, the 2011 effective income tax rate would have been 26.2 percent. The 2011 effective income tax rate differs from the Federal statutory rate of 35.0 percent primarily due to the benefit of the SDS Direct contract termination charge, lower income tax rates in foreign jurisdictions, an increase in certain valuation allowances, the U.S. R&D tax credit, equity based compensation, and state taxes.
ATMI has not provided for U.S. federal income and foreign withholding taxes on approximately $92.4 million of undistributed earnings from non-U.S. operations as of December 31, 2011, because such earnings are intended to be reinvested indefinitely outside of the United States. These earnings could become subject to additional tax if they are remitted as dividends, loaned to ATMI, or upon sale of subsidiary stock. It is not practicable to estimate the amount or timing of the additional tax, if any, that eventually might be paid on the foreign earnings.
South Korea has granted the Company an income tax exemption that expires in 2014, including the last two years at 50 percent of the exemption. The exemption applies only to income related to one of the Company’s product lines. The effect of the tax exemption was to reduce income tax expense by $2.8 million, $2.1 million, and $1.3 million for the years ended December 31, 2011, 2010, and 2009.
At December 31, 2011, ATMI had $3.7 million of unrecognized tax benefits, which, if recognized, would favorably affect the effective income tax rate in future periods. $0.7 million of this amount is included in deferred taxes, and the balance of $3.0 million is included in the caption “Other non-current liabilities” on the consolidated balance sheets, together with $0.4 million of accrued interest (net) on tax reserves and $0 accrued for penalties. In January 2012, the Internal Revenue Service completed a U.S. tax audit of tax years 2008 and 2009, although the refund claim for tax year 2009 is still subject to review by the Joint Committee on Taxation.
Liquidity and Capital Resources
We assess liquidity in terms of our ability to generate cash to fund our operating and investing activities. Of particular importance to management are cash flows generated by operating activities, and cash used for capital expenditures, acquisitions, and stock repurchases.
Until required for use in the business, we invest our cash reserves in bank deposits, certificates of deposit, money market securities, U.S. Treasuries, government and government-sponsored bond obligations, corporate debt obligations, and other interest bearing marketable debt instruments in accordance with our investment policy. We have contracted with investment advisers to invest our funds consistent with our investment policy. The value of our investments may be adversely affected by increases in interest rates, instability in the global financial markets that reduces the liquidity of securities included in our portfolio, and by other factors which may result in other-than-temporary declines in value of the investments, which could impact our financial position and our overall liquidity. Each of these events may cause us to record charges to reduce the carrying value of our investment portfolio or sell investments for less than our acquisition cost. We attempt to mitigate these risks with the assistance of our investment advisors by investing in high-quality securities and monitoring the overall risk profile of our portfolio. We also maintain a well-diversified portfolio that limits our credit exposure through concentration limits set within our investment policy.
We have financed our operating needs and capital expenditures through cash flows from our operations, and existing cash. We expect to continue to finance current and planned operating requirements principally through cash from operations, as well as existing cash resources. We believe that these funds will be sufficient to meet our operating requirements for the foreseeable future. However, we may, from time to time, seek additional funding through a combination of equity and debt financings or from other sources.
We continue to invest in R&D to provide future sources of revenue through the development of new products, as well as through additional uses for existing products. We consider R&D and the development of new products and technologies an integral part of our growth strategy and a core competency of the Company. Likewise, we continue to make capital expenditures in order to expand and modernize manufacturing and R&D facilities around the globe and to drive efficiencies throughout the organization. Additionally, management considers, on a continuing basis, potential acquisitions of strategic technologies and businesses complementary to the Company’s current business.
See Part I, Item 1A, “Risk Factors” of this Form 10-K for risk factors that could negatively impact our cash position and ability to fund future operations.
A summary of our cash flows follows (in thousands):
Operating Activities
In 2012, we generated $91.0 million of cash from operations, which represents an increase of $122.0 million from the $31.0 million of cash used in operations in 2011. The cash generated from operations was attributable to net income, increased accounts payable and income taxes payable, partially offset by increased accounts receivable and cash used for the purchase of inventories, both primarily due to the SDS Direct activities. Inventories increased by $13.9 million in 2012 driven mostly by SDS finished goods inventories as we assumed the distribution responsibilities around the globe. The increase in accounts payable of $17.8 million was mainly tied to an increase in SDS Direct related activities. Accounts receivable increased by $9.2 million primarily as a result of increased SDS revenues and longer payment terms associated with agreements assumed from the former SDS distributor. Income tax was a source of $19 million in cash due to the SDS Direct transaction. Cash used in operations in 2011 included an $84.6 million cash charge related to the SDS Direct contract termination, partially offset by $31.0 million in deferred taxes associated with the charge.
Investing Activities
Net cash used for investing activities was $41.0 million in 2012, an increase of $38.5 million compared to 2011. Our investing activities primarily relate to purchases of property, plant and equipment, and purchases, sales and maturities of marketable securities, including $4.2 million in cash received from the sale of an auction rate security. The increase in cash used for investing activities was due to the decline in net proceeds from the sale and maturities of marketable securities. The primary reason for the increase from 2011 was that in 2011 we did not reinvest funds in marketable securities as existing marketable securities matured through the second half of the year in order to ensure liquid funds were on hand for the anticipated $95.0 million contract termination payment related to the SDS Direct transaction.
Financing Activities
Financing activities resulted in a use of cash of $0.8 million in 2012 compared to cash generated of $0.4 million in 2011. The increase was primarily related to $6.0 million of purchases of treasury stock partially offset by proceeds from the exercise of stock options.
Summary of Contractual Obligations
The following is a summary of consolidated debt, lease, purchase and other obligations at December 31, 2012 (see Notes 3, 6, 7, 9 and 14 of the consolidated financial statements in Item 8 of this Form 10-K), in thousands:
(1) Includes $67.6 million commitment to purchase raw material from a strategic gas supplier.
(2) Includes $9.5 million commitment to purchase R&D license and support fees from Intermolecular, Inc.
(3) Includes $3.6 million of asset retirement obligations.
See Note 9 to the consolidated financial statements in Item 8 of this Form 10-K for further discussion of leases.
Off-Balance Sheet Arrangements
In the fourth quarter of 2012, we amended our existing contracts with Intermolecular, Inc. to extend our license of HPD technology and obtain R&D support services for 2013. Under the amendment, ATMI reduced its commitment versus the prior year and will pay a fixed fee for ATMI’s HPD tool site licenses and for selling products developed on ATMI’s HPD platform. Volume-based royalties to Intermolecular would resume after 2013. Additionally, we are committed to paying $6.9 million for R&D support services in 2013, which is down from $11.5M in 2012.
Operations Outside the United States
For the years ended December 31, 2012, 2011 and 2010, sales outside the United States, including Asia and Europe, accounted for 81.0 percent, 79.4 percent and 82.3 percent, respectively, of our revenues. Sales to Taiwan for the years ended December 31, 2012, 2011 and 2010 were 24.2 percent, 25.0 percent and 24.3 percent, respectively, of our revenues. Sales to Japan for the years ended December 31, 2012, 2011 and 2010 were 11.9 percent, 11.1 percent and 13.5 percent, respectively, of our revenues. Sales to South Korea for the years ended December 31, 2012, 2011 and 2010 were 21.1 percent, 20.3 percent and 18.4 percent, respectively, of our revenues. Management anticipates that sales outside the United States will continue to account for a significant percentage of our total revenues. ATMI has wholly-owned subsidiaries in Taiwan, Singapore, China, Japan, Malaysia and Germany where the Company sells and services its products. ATMI also has a wholly-owned subsidiary in South Korea that manufactures, sells, and distributes materials packaging, materials delivery equipment, and thin-film materials to the semiconductor and flat-panel display markets in South Korea, and NOWPak® to the Taiwan and Japanese markets. In addition, ATMI has two wholly-owned subsidiaries in Belgium that manufacture and sell high-purity materials packaging products primarily to the life sciences industry.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk
As of December 31, 2012, the Company’s cash and cash equivalents and marketable securities included bank deposits, time deposits, money market securities, corporate debt obligations, U.S. Treasuries, and government and government-sponsored bond obligations. As of December 31, 2012, an increase of 100 basis points in interest rates on securities with maturities greater than one year would reduce the fair value of the Company’s marketable securities portfolio by approximately $0.1 million. Conversely, a reduction of 100 basis points in interest rates on securities with maturities greater than one year would not have a material impact on the fair value of the Company’s marketable securities.
Foreign Currency Exchange Risk
Most of the Company’s sales are denominated in U.S. dollars and as a result, the Company has exposure to foreign currency exchange risk with respect to sales made. Approximately 48 percent of the Company’s revenues for the year ended December 31, 2012 were denominated in Japanese Yen (“JPY”), Korean Won (“KRW”), and Euros (“EUR”), but a majority of the product is sourced in U.S. dollars. Management periodically reviews the Company’s exposure to currency fluctuations. This exposure may change over time as business practices evolve and could have a material effect on the Company’s financial results in the future. We use forward foreign exchange contracts to hedge specific exposures relating to intercompany payments and anticipated, but not yet committed, sales from our U.S. entity to a Japanese customer denominated in JPY. The terms of the forward foreign exchange contracts are matched to the underlying transaction being hedged, and are typically two years or less.
Because such contracts are directly associated with identified transactions, they are an effective hedge against fluctuations in the value of the foreign currency underlying the transaction. We recognize in earnings (other income (expense), net) changes in the fair value of all derivatives that are designated as economic hedges and recognize in accumulated other comprehensive income any changes in fair value of all derivatives designated as cash flow hedges that are highly effective and meet the other related accounting requirements. Gains and losses associated with contracts designated as cash flow hedges are recognized in earnings when the underlying hedged transaction occurs. Further, we do not enter into derivative instruments for trading or speculative purposes and all of our derivatives were highly effective throughout the periods reported.
At December 31, 2012, we held forward foreign currency exchange contracts, not designated as cash flow hedges, with notional amounts totaling $22.6 million and forward foreign currency exchange contracts designated as cash flow hedges with notional amounts totaling $19.1 million, which are being used to hedge recorded foreign denominated assets, liabilities, and future cash flows which will be settled in either JPY, KRW, EUR, or New Taiwan Dollars (“NTD”). Holding other variables constant, if there were a 10 percent decline in foreign exchange rates against the US dollar for the JPY, KRW, EUR and NTD, the fair market value of the foreign exchange contracts outstanding at December 31, 2012 would decrease by approximately $2.7 million ($0.4 million would be expected to be fully offset by foreign exchange losses on the amount being hedged, and a loss of $2.3 million would be reported in accumulated other comprehensive income, until the forecasted hedged transactions occurred). The effect of an immediate 10 percent change in other foreign exchange rates would not be expected to have a material effect on the Company’s future operating results or cash flows.
Changes in Market Risk
Although we have seen mixed signs of stability, the global economy continues to deal with the repercussions of the global recession, as manifest in the recent European economic crisis that caused significant credit and financial market swings. There can be no assurance that there will not be further deterioration in credit and financial markets and deterioration of confidence in economic conditions. These economic uncertainties affect businesses such as ours in a number of ways, making it more difficult to accurately forecast and plan our future business activities.
Item 8.
Item 8. Financial Statements and Supplementary Data
The Reports of Independent Registered Public Accounting Firm, the consolidated financial statements and the financial statement schedule that are listed in the Index to Consolidated Financial Statements and Financial Statement Schedule are included herein on pages through.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon this evaluation, our CEO and CFO concluded that, as of the end of the period covered by this Form 10-K, our disclosure controls and procedures were effective in that they provided reasonable assurance that the information we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2012. In making its assessment, management has used the criteria set forth by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control-Integrated Framework. Our management concluded that based on its assessment, our internal control over financial reporting was effective as of December 31, 2012. The Company’s internal control over financial reporting as of December 31, 2012 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their attestation report on the Company’s internal control over financial reporting, which is included in this annual report.
There has been no change in our internal control over financial reporting during the quarter ended December 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Information required by Item 10 has been omitted from this report, and is incorporated by reference to the sections “Section 16(a) Beneficial Ownership Reporting Compliance,” “Election of Directors,” “Board Operations” and “Executive Officers” in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which we will file with the SEC pursuant to Regulation 14A within 120 days after the end of our 2012 fiscal year.
Item 11.
Item 11. Executive Compensation
Information required by Item 11 has been omitted from this report and is incorporated by reference to the sections “Board Operations” and “Compensation and Other Information Concerning Executive Officers and Directors” in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which we will file with the SEC pursuant to Regulation 14A within 120 days after the end of our 2012 fiscal year.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information required by Item 12 has been omitted from this report and is incorporated by reference to the sections “Stock Ownership” and “Equity Compensation Plan Information” in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which we will file with the SEC pursuant to Regulation 14A within 120 days after the end of our 2012 fiscal year.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by Item 13 has been omitted from this report and is incorporated by reference to the sections “Certain Relationships and Related Transactions” and “Board Operations” in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which we will file with the SEC pursuant to Regulation 14A within 120 days after the end of our 2012 fiscal year.
Item 14.
Item 14. Principal Accountant Fees and Services
Information required by Item 14 has been omitted from this report and is incorporated by reference to the section “Fees of Independent Registered Public Accounting Firm and Report of the Audit Committee” in our definitive Proxy Statement for the 2013 Annual Meeting of Stockholders, which we will file with the SEC pursuant to Regulation 14A within 120 days after the end of our 2012 fiscal year.
PART IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
The following documents are filed as part of this annual report on Form 10-K:
(1) Financial Statements:
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets-December 31, 2012 and 2011
Consolidated Statements of Operations for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2012, 2011 and 2010
Consolidated Statements of Cash Flows for the years ended December 31, 2012, 2011 and 2010
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule:
Schedule II-Valuation and Qualifying Accounts
The Reports of Independent Registered Public Accounting Firm, consolidated financial statements and financial statement schedule listed in the Index to Consolidated Financial Statements and Financial Statement Schedule on page hereof are filed as part of this report, commencing on page hereof.
All other financial statement schedules are omitted as the required information is not applicable or the information is shown in the consolidated financial statements or related notes.
(3) Exhibits
The documents set forth below are filed herewith or incorporated herein by reference to the location indicated.
* Indicates a management contract or compensatory plan or arrangement.
(1) Portions omitted pursuant to a request for confidential treatment.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ATMI, Inc.
February 22, 2013
By:
/s/ Douglas A. Neugold
Douglas A. Neugold
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
ATMI, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULE
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of ATMI, Inc.
We have audited the accompanying consolidated balance sheets of ATMI, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and schedule are the responsibility of ATMI, Inc.’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ATMI, Inc. at December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), ATMI, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 22, 2013
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of ATMI, Inc.
We have audited ATMI, Inc.’s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). ATMI, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Item 9A, “Management’s Report on Internal Control Over Financial Reporting.” Our responsibility is to express an opinion on ATMI, Inc.’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, ATMI, Inc. maintained in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of ATMI, Inc. as of December 31, 2012 and 2011, and the related consolidated statements of operations, consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 and our report dated February 22, 2013 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
February 22, 2013
ATMI, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
See accompanying notes.
ATMI, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
See accompanying notes.
ATMI, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share data)
ATMI, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
See accompanying notes.
ATMI, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See accompanying notes.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Description of Business
ATMI, Inc. (together with its subsidiaries, collectively referred to as the “Company,” “ATMI,” or “we”) believes it is among the leading suppliers of high performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. Our products consist of “front-end” semiconductor performance materials, sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases to semiconductor process equipment, high-purity materials packaging and dispensing systems that allow for the reliable introduction of low volatility liquids and solids to microelectronics and biopharmaceutical processes. ATMI targets semiconductor and flat-panel display manufacturers, whose products form the foundation of microelectronics technology rapidly proliferating through the consumer products, information technology, automotive, and communications industries. The market for microelectronics devices is continually changing, which drives demand for new products and technologies at lower cost. ATMI’s customers include many of the leading semiconductor manufacturers in the world who target leading edge technologies. ATMI also addresses an increasing number of critical materials handling needs for the life sciences markets. Our proprietary containment, mixing, and bioreactor technologies are sold to the biotechnology, laboratory and cell therapy markets, which we believe offer significant growth potential. ATMI’s objective is to meet the demands of our microelectronics and life sciences customers with solutions that maximize the efficiency of their manufacturing processes, reduce capital or operating costs, and minimize the time to develop new products and integrate them into their processes.
Consolidation
The consolidated financial statements include the accounts of all subsidiaries where control exists. Equity investments generally consist of 20 percent to 50 percent owned operations which by definition demonstrate significant influence and instances where the Company through voting and similar rights can exercise significant influence. Operations less than 20 percent owned, where the Company does not exercise significant influence, are generally carried at cost. Earnings from equity investments are reported, net of income taxes, within the caption, “Other income (expense), net” on the consolidated statements of operations. Intercompany transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. While actual results could differ, management believes such estimates to be reasonable.
Revenue Recognition and Accounts Receivable
We recognize revenue when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Revenues from product sales are generally recognized upon delivery to a common carrier when terms are equivalent to free-on-board (“FOB”) origin and upon receipt by a customer when terms are equivalent to FOB destination. In instances where final acceptance of equipment is specified by the purchase agreement, revenue is deferred until all acceptance criteria have been satisfied, except when reasonable reserves for returns can be effectively established due to substantial successful installation history for homogenous transactions. Should changes in conditions cause management to determine these criteria are not met for certain future transactions, revenue recognized for any reporting period could be adversely affected. We accrue for sales returns, warranty costs, and other allowances based on a current evaluation of our experience based on stated terms of the transactions.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to October 31, 2011, we used Matheson as our exclusive contract manufacturer and distribution partner for the manufacture and distribution of our Safe Delivery Source® (“SDS”) products (the “Licensed Products”). Under the terms of the original manufacturing agreement, ATMI retained the right to manufacture 25 percent of all Licensed Products, while Matheson had the right to manufacture 75 percent of all Licensed Products. Upon completion of manufacture, ATMI purchased all Licensed Products produced by Matheson. Under the terms of the distribution agreement, we received payment from Matheson based upon a formula which was dependent on the sale price obtained by Matheson from its customers. ATMI recognized revenue from the sale of Licensed Products to Matheson when Matheson sold the Licensed Products to its customers, because that is when the sales price became fixed and determinable. On October 31, 2011, we terminated the agreements with Matheson for manufacturing, marketing, selling and/or distributing of our SDS products (“SDS Direct transaction”). Matheson will provide ongoing support services to ATMI during a transition period. Subject to such continuing services, ATMI assumed control of all manufacturing, distribution, logistics and sales services, which Matheson had provided globally prior to execution of the Termination Agreement, other than the distribution of the SDS and VAC product lines in Japan, which services will continue to be provided by Matheson’s parent company, Taiyo Nippon Sanso Corporation (“TNSC”). In those regions where Matheson was involved in distributing products during the transition period in the first half of 2012, revenues were recognized only after sale of the Licensed Products to the end users.
During the years ended December 31, 2012, 2011 and 2010, ATMI recognized $6.9 million, $65.8 million, and $79.9 million of revenues from Matheson, respectively. The decline in revenue from Matheson in 2012 is a result of the SDS Direct transaction. During the years ended December 31, 2012, 2011 and 2010, ATMI recognized revenues from Taiwan Semiconductor Manufacturing Corporation (“TSMC”), of $48.1 million, $32.0 million, and $23.6 million, respectively. During the years ended December 31, 2012, 2011 and 2010, ATMI recognized revenues from Samsung, a leading global integrated circuit manufacturer of $57.3 million, $47.6 million, and $31.3 million, respectively. During the years ended December 31, 2012, 2011 and 2010, ATMI recognized revenues from United Microelectronics Corporation (“UMC”), of $44.7 million, $48.7 million, and $46.8 million, respectively.
Billings to customers for shipping and handling are included in revenues. Costs incurred for shipping and handling of products are charged to cost of revenues. Credit is extended to customers based on an evaluation of each customer’s financial condition; generally, collateral is not required. Revenues are presented in the consolidated financial statements net of sales allowances and discounts. Accounts receivable are presented in the consolidated financial statements net of the allowance for doubtful accounts. Taxes collected from customers and remitted to governmental authorities are presented on a net basis; and they are excluded from revenues.
Accounts Receivable Allowances
The allowance for doubtful accounts is established to represent our best estimate of the net realizable value of the outstanding accounts receivable balances. We estimate our allowance for doubtful accounts based on past due amounts and historical write-off experience, as well as trends and factors surrounding the credit risk of the markets we operate in and the financial viability of specific customers. In an effort to identify adverse trends, we assess the financial health of the markets we operate in and perform periodic credit evaluations of our customers and ongoing reviews of account balances and aging of receivables. Amounts are considered past due when payment has not been received within the time frame of the credit terms extended. Write-offs are charged directly against the allowance for doubtful accounts and occur only after all collection efforts have been exhausted.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents, marketable securities, accounts receivable, and currency forward exchange contracts. We invest our cash and cash equivalents and marketable securities in bank deposits, time deposits, money market securities, equity securities, corporate debt obligations, and government and government-sponsored enterprise bond obligations. The Company had amounts due from one customer that accounted for approximately 20 percent of accounts receivable at December 31, 2012 and amounts due from two customers that accounted for approximately 34 percent of accounts receivable at December 31, 2011.
Research and Development
Costs associated with the development of new products and improvements to existing products are charged to expense as incurred.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents and Marketable Securities
Highly liquid investments with maturities of three months or less, when acquired, are classified as cash and cash equivalents. Investments in publicly traded securities with maturities greater than three months, when acquired, are classified as marketable securities.
All of the Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value, with unrealized gains and losses included in stockholders’ equity as a component of accumulated other comprehensive income, net of applicable taxes. We regularly review the fair value of marketable security declines below amortized cost to evaluate whether the decline is other-than-temporary. In making this determination, the Company considers all available evidence including, among other things, considering the duration and extent of the decline and the economic factors influencing the market to determine if the fair value will recover to equal or exceed the amortized cost. If we determine that the fair value will not recover, an other-than-temporary impairment is recognized, net of applicable taxes.
In May 2012, we sold our only auction-rate security for $4.2 million resulting in a recognized loss of $0.5 million, which is included in the consolidated statements of operations in the caption “Other expense, net.”
Marketable securities that are in a temporarily impaired position, where management has the ability and intent to hold until anticipated recovery or maturity, are classified as either current or non-current based on the remaining contractual maturity of the security. Those securities in a temporarily impaired position with contractual maturities greater than one year are classified as non-current.
As part of our ongoing cash management optimization efforts during 2012, the Company purchased South Korean time deposits which were classified as marketable securities. At December 31, 2012 and 2011, the Company had $16.9 million and $6.9 million, respectively, of time deposits in South Korea. In October 2012, ATMI announced plans to increase further our commitment to the Asia-Pacific microelectronics markets, and South Korean customers in particular, through a new state-of-the-art manufacturing facility to be built in JangAn, Gyeonggi province. The addition of this new facility will require us to maintain larger balances of cash in South Korea during the period of the construction.
As of December 31, 2012, we had $19.2 million of cash and cash equivalents in South Korea, $5.4 million of cash and cash equivalents in Taiwan and $5.7 million in cash and cash equivalents in Japan, which were not available to fund domestic US operations without repatriation. These funds could become subject to additional tax if they are repatriated. It is not practicable to estimate the amount or timing of the additional tax, if any, that eventually might be paid on these foreign funds. We do not anticipate repatriating these funds in the foreseeable future.
Non-marketable Equity and Debt Securities
We selectively invest in non-marketable equity securities of private companies, which range from early-stage companies that are often still defining their strategic direction to more mature companies whose products or technologies may directly support an ATMI product or initiative. Our non-marketable equity investments are recorded using cost basis or the equity method of accounting, depending on the facts and circumstances of each investment. At December 31, 2012, the carrying value of our portfolio of strategic investments in non-marketable equity securities totaled $8.1 million ($8.0 million at December 31, 2011), of which, $5.4 million are accounted for at cost ($4.7 million at December 31, 2011) and $2.7 million are accounted for using the equity method of accounting ($3.3 million at December 31, 2011). In certain instances, we loan funds to early-stage investees at market interest rates to enable them to focus on product and technology development. At December 31, 2012, we had $3.4 million in outstanding loans and accrued interest ($4.8 million at December 31, 2011). Non-marketable equity and debt securities are included in the consolidated balance sheets under the caption “Other non-current assets.” ATMI’s share of the income or losses of all equity-method investees, using the most current financial information available, which is typically one month behind ATMI’s normal closing date, is included in our results of operations from the investment date forward.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investments in non-marketable equity securities are inherently risky, and some of these companies are likely to fail. Their success (or lack thereof) is dependent on product development, market acceptance, operational efficiency, attracting and retaining talented professionals, and other key business success factors. In addition, depending on their future prospects, they may not be able to raise additional funds when needed or they may receive lower valuations, with less favorable investment terms than in previous financings, and the investments would likely become impaired.
We review our investments quarterly for indicators of impairment; however, for non-marketable equity securities, the impairment analysis may require significant judgment to identify events or circumstances that would likely have a significant adverse effect on the fair value of the investment. The indicators that we use to identify those events or circumstances include (a) the investee’s revenue and earnings trends relative to predefined milestones and overall business prospects, (b) the technological feasibility of the investee’s products and technologies, (c) the general market conditions in the investee’s industry or geographic area, including adverse regulatory or economic changes, (d) factors related to the investee’s ability to remain in business, such as the investee’s liquidity, and the rate at which the investee is using its cash, and (e) the investee’s receipt of additional funding at a lower valuation.
Investments identified as having an indicator of impairment are subject to further analysis to determine if the investment is other-than-temporarily impaired, in which case we write the investment down to its fair value, using the framework required by Accounting Standards Codification (“ASC”) 820 “Fair Value Measurements and Disclosures.” When an investee is not considered viable from a financial or technological point of view, we write down the entire investment balance to zero since we consider the estimated fair market value to be nominal. If an investee obtains additional funding at a valuation lower than our carrying amount or requires a new round of equity funding to stay in operation and the new funding does not appear imminent, we presume that the investment is other-than-temporarily impaired, unless specific facts and circumstances indicate otherwise. We recognized an $0.8 million impairment charge in our portfolio of non-marketable equity securities in 2011 (none in 2012 or 2010).
In July 2005, ATMI made an investment in Anji Microelectronics Co., Ltd. (“Anji”), an entity in the development stage of researching and developing advanced semiconductor materials, with primary operations in Shanghai, China. We have determined that Anji is a variable interest entity. However, we have determined that we are not the primary beneficiary of Anji because we do not have the power, through voting or similar rights, to direct the activities of Anji that most significantly impact the entity’s economic performance, and we are also not expected to absorb significant losses or gains from Anji. ATMI’s carrying value of this cost basis investment is $3.9 million at December 31, 2012. The carrying value of our investment in Anji represents the cash paid, less our share of the cumulative losses during the period we used the equity-method of accounting. At December 31, 2012, our maximum exposure to loss is $4.3 million, which consists of $3.9 million of our carrying value in this investment, plus a $0.4 million reserve for a put option.
Inventories
Inventories are stated at the lower of cost or market, using the first-in, first-out (“FIFO”) method. Finished goods and work in process inventories include direct material, direct labor and manufacturing overhead costs. Inventory valuation reserves are established in order to report inventories at the lower of cost or market value on our consolidated balance sheets. The determination of inventory valuation reserves requires management to make estimates and judgments on the future salability of inventories. Valuation reserves for excess, obsolete, and slow-moving inventory are estimated by comparing the inventory levels of individual parts to both future sales forecasts or production requirements and historical usage rates in order to identify inventory where the resale value or replacement value is less than inventory cost. Other factors that management considers in determining these reserves include whether individual inventory parts or chemicals meet current specifications and cannot be substituted for or reworked into a part currently being sold or used as a service part, overall market conditions, and other inventory management initiatives.
As of December 31, 2012 and 2011, we had $3.4 million and $2.6 million, respectively, of inventory valuation reserves recorded.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, Plant, and Equipment, net
Property, plant, and equipment are carried at cost, net of accumulated depreciation. Depreciation is calculated on the straight-line method based on the estimated useful lives of the assets, which range from 3 to 35 years (see Note 6). The estimated useful life represents the projected period of time that the asset will be productively employed by the Company and is determined by management based on many factors, including historical experience with similar assets and technological life cycles. Circumstances and events relating to these assets are monitored to ensure that changes in asset lives or impairments are identified and prospective depreciation expense or impairment expense is adjusted accordingly. The depreciation periods used are: buildings, 5 to 35 years; machinery and equipment, 3 to 15 years; software, 5 to 10 years; cylinders and canisters, 7 to 15 years; furniture and fixtures, 5 years; and leasehold improvements, over the lesser of the lease term or estimated useful life. We use accelerated depreciation methods for tax purposes where appropriate.
Asset-Retirement Obligations
An asset-retirement obligation (“ARO”) is recognized in the period in which sufficient information exists to determine the fair value of the liability with a corresponding increase to the carrying amount of the related property, plant, and equipment which is then depreciated over its useful life. The liability is initially measured at fair value and then accretion expense is recorded in each subsequent period. See Note 9 for further discussion on leases.
Income Taxes
Current income taxes are determined based on estimated taxes payable or refundable on tax returns for the current year. Deferred income taxes are determined using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. However, we have recorded a $0.6 million tax liability in our consolidated balance sheets as of December 31, 2012 which will be resolved, without payment, as a result of the tax law enacted on January 3, 2013 which is retroactively applied to January 1, 2012. The Company recognizes the benefit of an income tax position only if it is more likely than not (greater than 50 percent) that the tax position will be sustained upon tax examination, based solely on the technical merits of the tax position. Otherwise, no benefit can be recognized. The tax benefits recognized are measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We adjust these unrecognized tax benefits, including any impact on the related interest and penalties, in light of changing facts and circumstances. A number of years may elapse before a particular matter for which we have established an unrecognized tax benefit is audited and fully resolved. Additionally, the Company accrues interest and related penalties, if applicable, on all tax exposures for which reserves have been established consistent with jurisdictional tax laws, which is included in income tax expense. See Note 10 for more information and disclosures on income taxes.
Fair Value of Financial Instruments
The Company measures and reports financial assets and financial liabilities on a fair value basis, consistent with ASC 820 “Fair Value Measurements and Disclosures,” using the following three categories for classification and disclosure purposes:
Level 1 - Quoted prices in active markets for identical assets and liabilities. Level 1 assets and liabilities consist of cash, money market fund deposits, time deposits, certain of our marketable equity instruments, and forward foreign currency exchange contracts that are traded in an active market with sufficient volume and frequency of transactions.
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 assets include certain of our marketable debt instruments with quoted market prices that are traded in less active markets or priced using a quoted market price for similar instruments.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. At December 31, 2012, the Artelis acquisition contingent consideration payment liability is the only item valued in this category.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
See Note 5 for more information regarding the details, methods and assumptions used to estimate the fair value of our other financial instruments.
Foreign Currency Exchange Contracts
We use forward foreign currency exchange contracts to hedge specific or anticipated exposures relating to intercompany payments (primarily U.S. export sales to subsidiaries at pre-established U.S. dollar prices), intercompany loans, future cash flows and other specific and identified exposures. The terms of the forward foreign currency exchange contracts are matched to the underlying transaction being hedged. Because such contracts are directly associated with identified transactions, they are an effective hedge against fluctuations in the value of the foreign currency underlying the transaction.
Changes in the fair value of economic hedges are recognized in earnings as an offset to the change in the fair value of the underlying exposures being hedged. The changes in fair value of derivatives that are designated as cash-flow hedges are deferred in accumulated other comprehensive income (loss) and are recognized in earnings when the underlying hedged transaction occurs. Any ineffectiveness is recognized in earnings immediately. We do not enter into derivative instruments for trading or speculative purposes and all of our derivatives were effective throughout the periods reported.
Counterparties to forward foreign currency exchange contracts are major banking institutions with credit ratings of investment grade or better and no collateral is required. There are no significant risk concentrations. We believe the risk of incurring losses on derivative contracts related to credit risk is remote.
Goodwill and Other Indefinite-Lived Intangible Assets
The assets and liabilities of acquired businesses are recorded under the purchase method of accounting at their estimated fair values at the dates of acquisition. Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses.
Goodwill and intangible assets deemed to have indefinite lives are not amortized, but are subject to annual impairment testing.
For reporting units where the qualitative determination does not indicate that it is more likely than not that the fair value of a reporting unit is more than its carrying value, the prescribed two step test is performed. In order to perform the two-step test we estimated the fair value of a reporting unit based on the best information available as of October 31, 2012, which primarily incorporates management assumptions about expected future cash flows and contemplates other valuation techniques. No goodwill impairment has been recorded to date.
Other Long-Lived Assets
We evaluate the potential impairment of other long-lived assets when indicators of impairment are present. If the carrying value of assets exceeds the sum of the undiscounted expected future cash flows, the carrying value of the asset is written down to fair value. We amortize acquired patents and other amortizable intangible assets over their estimated useful lives. All amortizable intangible assets are amortized using the straight-line method over the estimated useful lives of the assets, ranging from 3 to 17 years.
Intercompany Loans
In certain circumstances, the Company maintains intercompany agreements with and among our wholly-owned subsidiaries under which funds are provided to subsidiaries to finance general business activities. Since settlement of these agreements is not expected in the foreseeable future, and there is no repayment schedule as part of the agreements, we treat these loans as permanent advances. Therefore, any associated foreign exchange gains and losses are deferred in Accumulated other comprehensive income in the period in which they arise.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Translation of Foreign Currencies
We conduct business in many different currencies and, accordingly, are subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of many of our foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred as a separate component of Stockholders’ equity.
Equity-based Compensation
The Company recognizes compensation expense in its consolidated financial statements for all share-based payments granted based on the fair value on the date of grant. For share-based payments granted with a service period vesting restriction, compensation expense is recognized on a straight-line basis or accelerated attribution method over the awards’ respective vesting period. For share-based payments granted with a performance condition, we accrue compensation expense when we determine it is probable that the awards will be earned. For share-based payments granted with a market condition, expense is recognized using the accelerated attribution method over the awards’ respective vesting period.
Recent Accounting Pronouncements
Effective October 1, 2012, ATMI adopted ASU 2012-02, “Intangibles-Goodwill and Other (Topic 350) Testing Indefinite-Lived Intangible Assets for Impairment.” This makes the process of testing for impairment between Goodwill and Indefinite-Lived Intangible Assets uniform by allowing us to evaluate indefinite-lived intangibles within our two reporting units using qualitative factors (referred to as “Step 0”) prior to performing the historical two-step quantitative testing process. There was no material impact from the adoption of this Update.
In December 2011, the FASB issued ASU 2011-11-“Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” In this update, entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments retrospectively for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. We do not anticipate any material impact from this Update.
In February 2013, the FASB issued ASU 2013-02-“Comprehensive Income (Topic 220): Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income” Substantially all of the information that this Update requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. However, the new requirement to present information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures. Currently, this information is presented in different places throughout the financial statements. An entity is required to apply the amendments prospectively for annual reporting periods beginning after December 15, 2012. We do not anticipate any material impact from this Update.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Marketable Securities
Marketable securities include at December 31, (in thousands):
(1) State and municipal government debt obligations.
(2) Government sponsored enterprise.
(3) The cost basis of the Massachusetts Educational Financing Authority (MEFA) auction rate security was equal to the par value of $5,000,000 less unaccreted non-cash credit losses of $280,000 at December 31, 2011.
(4) The unrealized gains on GSE debt obligations and U.S. Treasury obligations and unrealized losses on corporate debt obligations are less than $1,000 for each category.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and estimated fair value of available-for-sale securities, by contractual maturity, as of December 31, 2012 are shown below (in thousands); expected maturities may differ from contractual maturities because the issuers of the securities may exercise the right to prepay obligations without prepayment penalties.
As of December 31, 2012, 10 out of the 24 marketable securities held were in an unrealized loss position. This table shows the Company’s marketable securities that were in an unrealized loss position at December 31, 2012, and also shows the duration of time the security had been in an unrealized loss position (in thousands):
(1) Government sponsored enterprise.
See Note 5 for further discussion.
3. Inventories
Inventories include at December 31, (in thousands):
As of December 31, 2012, the Company had commitments for inventory purchases of $81.5 million.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As December 31, 2012 and 2011, respectively, we had $5.1 million and $5.0 million of finished goods inventory residing at non-ATMI consignment locations.
4. Foreign Currency Exchange Contracts
At December 31, 2012, we held foreign currency exchange contracts, not designated as cash flow hedges, with notional amounts totaling $22.6 million of which $9.0 million will be settled in Euros, $4.2 million will be settled in Taiwan Dollars, $5.8 million will be settled in Korean Won, and $3.6 million will be settled in Japanese Yen. At December 31, 2012, we held forward foreign currency exchange contracts designated as cash flow hedges with notional amounts totaling $19.1 million, which will be settled in Japanese Yen. The cash flow hedges held at December 31, 2012 mature monthly through the second quarter of 2014. At December 31, 2012, the accumulated net unrecognized losses that are expected to be reclassified into earnings during the next twelve months is $0.8 million.
The Company recorded a net gain of $1.7 million for the year ended December 31, 2012 and net losses of $2.0 million and $0.8 million for the years ended December 31, 2011, and December 31, 2010, respectively, under the caption “Other expense, net” in the Consolidated Statements of Operations related to changes in the fair value of the foreign currency exchange contract economic hedges. The Company recorded a net gain of $1.1 million for the twelve months ended December 31, 2012 in other comprehensive income related to the change in the fair value of cash flow hedges. Reclassification of deferred losses in other comprehensive income into earnings was $0.2 million for the twelve months ended December 31, 2012.
At December 31, 2011, we held foreign currency exchange contracts that were economic hedges with notional amounts totaling $22.0 million, of which $10.4 million were settled in Euros, $1.9 million were settled in Taiwan Dollars, $0.6 million were settled in Japanese Yen, and $9.1 million were settled in Korean Won. Changes in the fair market value (gain or loss) on these contracts were not significant as of December 31, 2011.
5. Fair Value Measurements
Assets / Liabilities Measured at Fair Value on a Recurring Basis
This table summarizes the Company’s assets (liabilities) measured at fair value on a recurring basis at December 31, 2012 (in thousands):
In 2012, our valuation methodologies were consistent with previous years, and there were no transfers made among the three levels of the valuation hierarchy.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table presents a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2012 (in thousands).
Assets / Liabilities Measured at Fair Value on a Nonrecurring Basis
All assets and liabilities measured at fair value on a nonrecurring basis are categorized as Level 3, requiring significant management judgment due to the absence of quoted market prices or observable inputs for assets of a similar nature. The individual amounts of assets and liabilities measured on a non-recurring basis are discussed below.
In the third quarter of 2012, our Microelectronics segment received $2.6 million of research and development equipment as compensation for a royalty agreement with a third party. The fair value of the equipment was determined using Level 3 inputs, including cash flow analysis and also the use of market comparables for similar equipment. The fair value of the equipment is recorded as revenues in the consolidated statements of operations.
On November 2, 2010, ATMI’s Belgian subsidiary acquired the remaining 60 percent of the outstanding shares of Artelis S.A. The total accounting purchase consideration of $21.8 million included a cash payment of $4.0 million, the fair value of contingent payments tied to future revenue performance of $8.4 million, the carrying value of $5.9 million related to our original 40 percent non-controlling ownership interest, and assumed debt of $3.5 million. The acquisition was recorded under the purchase method of accounting and, accordingly, Artelis’ results of operations are included in the Company’s financial statements from the date of acquisition.
The liability for the Artelis contingent consideration payments, which is classified as Level 3, and is tied to future revenue performance for the fiscal years 2012 through 2014, was calculated using unobservable inputs (primarily using discounted cash flow analyses, a current average discount rate of 6.9 percent, and reliance on the market and product knowledge of internal experts). The contingent payments have a range of possible outcomes from $0 to $23.3 million. There is no payout due based upon 2012 performance, because revenues were below the threshold required for a payout.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the contingent payments as of December 31, 2012 was $4.6 million compared to $7.2 million as of December 31, 2011. The decline in the liability of $2.6 million was driven by a reduction in our assessment of our future payment obligation due to a decline in our assessment of future revenues due to delays in customer adoption as they complete governmental reviews of their processes and changes in strategic relationships. A gain of $2.4 million was captured in Selling, General and Administrative (“SG&A”) expense in our consolidated statements of operations. The difference between the change in liability and the gain recorded in SG&A is currency related. We will continue to use a term appropriate risk-free rate plus a spread commensurate to our credit rating in future valuations.
Due to their nature, the carrying value of cash, receivables, and payables approximates fair value.
6. Property, Plant and Equipment, Net
Property, plant, and equipment, net, consists of the following (in thousands):
Depreciation and amortization expense for property, plant, and equipment for the years ended December 31, 2012, 2011 and 2010 was $22.9 million, $23.3 million, and $22.8 million, respectively.
Fully depreciated assets, which were no longer in use, of approximately $11.4 million (primarily leasehold improvements and machinery and equipment) and $12.7 million were written off in the years ended December 31, 2012 and 2011, respectively.
We recognized disposals and impairment losses from property, plant, and equipment of $0.9 million, $0.6 million, and $0.5 million, in the years ended December 31, 2012, 2011 and 2010, respectively.
As of December 31, 2012, the Company had commitments for capital expenditures of $3.7 million.
This table shows amounts recorded in the consolidated statements of operations related to depreciation expense for property, plant, and equipment (in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Goodwill and Other Intangibles
In October 2012, ATMI acquired commercial and exclusive intellectual property rights related to certain electronic waste recovery technology. ATMI recorded $6.3 million of intangible assets in the acquisition of which $5.5 million was cash consideration and $0.8 million was the non-cash portion. This asset is being amortized over 15 years.
In December 2012, ATMI acquired intellectual property rights from one of our cost basis investees. ATMI recorded $7.3 million of intangible assets in the acquisition of which $4.9 million was non-cash consideration. These rights are being amortized over 17 years.
Goodwill and other intangibles balances at December 31, 2012 and 2011 were (in thousands):
Changes in carrying amounts of goodwill and other intangibles for the years ended December 31, 2012 and 2011, respectively, were (in thousands):
Goodwill related to the Microelectronics and LifeSciences segments at December 31, 2012 is $13.4 million and $33.4 million, respectively.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table shows amounts recorded in the consolidated statements of operations related to amortization expense for intangibles (in thousands):
The approximate amortization expense expected to be recognized related to intangible assets is (in thousands):
In conjunction with the SDS Direct transaction in 2011, we recognized intangible assets of $11.8 million for the reacquired rights ($8.8 million) and a non-competition agreement ($3.0 million) net of liabilities assumed. The useful lives of the reacquired rights and the non-competition agreement are 10 years and 9 years, respectively. In 2012, $2.0 million of purchase price refinements have reduced the initial values recorded as certain fees have been recovered from the seller, resulting in the final intangible asset cost basis of $9.8 million.
The license for our distribution rights to Enthone’s copper ECD products, including its ViaForm products, is subject to automatic renewal upon satisfaction of certain conditions in 2013, which we have met. The net book value of the licensing right at December 31, 2012 was $6.4 million.
8. Other Non-Current Assets
In 2007, we entered into a purchase agreement with Intermolecular, Inc. (“Intermolecular”). As part of the initial agreement, we purchased HPD capabilities, which expanded upon an existing alliance agreement. We have since purchased additional HPD capabilities (including tool sets), as well as services related to the use of these tools and dedicated research personnel. In November 2011, Intermolecular completed an initial public offering, and we converted our preferred shares into common shares and exercised a warrant to purchase additional common shares, which caused us to reclassify our investment from “Other non-current assets” to “Marketable securities” as the securities are now publicly traded. At December 31, 2012 we own common shares with a market value of $34.3 million.
In the fourth quarter of 2012, we amended our existing contracts with Intermolecular, Inc. to extend our license of HPD technology and obtain R&D support services for 2013. Under the amendment, ATMI will pay a reduced fixed fee for ATMI’s HPD tool site licenses and for selling products developed on ATMI’s HPD platform. Volume-based royalties to Intermolecular would resume after 2013. Additionally, we are committed to paying $6.9 million for R&D support services in 2013, which is down from $11.5 million in 2012.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Leases
The Company leases office, and manufacturing facilities, certain manufacturing equipment, and land under several operating leases expiring between 2012 and 2034. Rental expense was $3.8 million, 3.7 million, and $3.4 million, for the years ended December 31, 2012, 2011 and 2010, respectively.
Below is a schedule of future minimum lease payments for operating leases as of December 31, 2012 (in thousands):
We lease two facilities in Danbury, CT. One facility houses our research and development activities and certain of our microelectronics manufacturing capabilities, and contains approximately 73,000 square feet of space. In December 2010 we exercised a renewal option for the period January 1, 2012 to December 31, 2016. For the period January 1, 2012 to December 31, 2016, the monthly base rent is $47,500. There is one additional five-year renewal period available to ATMI under this lease. We have agreed to certain restoration obligations associated with this facility, which we are accounting for as an asset retirement obligation (“ARO”), associated with the leasehold improvements made to this facility. The discounted fair value of the ARO at December 31, 2012 is $2.8 million.
The other facility in Danbury, CT is our headquarters, and contains approximately 31,000 square feet of space. In October 2010, we exercised a renewal option for the period January 1, 2012 to December 31, 2016. For the period January 1, 2011 to December 31, 2016, the monthly base rent is $17,606. There is one additional five-year renewal period available to ATMI under this lease.
Changes in the carrying amounts of the Company’s AROs at December 31, 2012 are shown below (in thousands):
The ARO liability is included in the consolidated balance sheets under the caption, “Other non-current liabilities.”
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Income Taxes
Pre-tax income (loss) was taxed in these jurisdictions (in thousands):
Significant components of the provision (benefit) for income taxes for the following years ended are (in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred tax assets and liabilities are (in thousands):
The valuation allowance relates to the realizability of certain U.S. state and foreign net operating losses.
As of December 31, 2012, the Company had the following deferred tax assets related to net operating loss (“NOLs”) and tax credit carryforwards (in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The reconciliation of income tax expense (benefit) from operations computed at the U.S. federal statutory tax rate to the Company’s tax expense (benefit) is (in thousands):
ATMI has not provided for U.S. federal income and foreign withholding taxes on approximately $92.0 million of undistributed earnings from non-U.S. operations as of December 31, 2012, because such earnings are intended to be reinvested indefinitely outside of the United States. These earnings could become subject to additional tax if they are remitted as dividends, loaned to ATMI, or upon sale of subsidiary stock. It is not practicable to estimate the amount or timing of the additional tax, if any, that eventually might be paid on the foreign earnings.
South Korea has granted the Company an income tax exemption that expires in 2014, including the reduction from 100 percent to 50 percent of the exemption in 2013 and 2014. The exemption applies only to income related to one of the Company’s product lines. The effect of the tax exemption was to reduce income tax expense by $2.3 million, $2.8 million, and $2.1 million for the years ended December 31, 2012, 2011, and 2010.
At December 31, 2012, ATMI had $3.6 million of unrecognized tax benefits (out of a total of $30.6 million), which, if recognized, would favorably affect the effective income tax rate in future periods. $0.3 million of this amount is included in deferred taxes, and the balance of $3.3 million is included in the caption “Other non-current liabilities” on the consolidated balance sheets, together with $0.6 million of accrued interest (net) on tax reserves and $0 accrued for penalties. At December 31, 2011, the amount of unrecognized tax benefits, which, if recognized, would have favorably affected the effective income tax rate in future periods, was $3.7 million, $0.4 million of accrued interest (net) on tax reserves and $0 accrued for penalties. December 31, 2010, the amount of unrecognized tax benefits, which, if recognized, would have favorably affected the effective income tax rate in future periods, was $5.6 million, $0.7 million of accrued interest (net) on tax reserves and $0 accrued for penalties.
The reconciliation of the unrecognized tax benefits (exclusive of interest) at the beginning of 2011 through the end of 2012 is (in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
It is reasonably possible that in the next 12 months, because of changes in facts and circumstances, the unrecognized tax benefits for tax positions taken related to previously filed tax returns may decrease. The range of possible decrease is $0 million to $28.7 million. In August 2012, the Internal Revenue Service initiated the audit of tax year 2010.
11. Defined Contribution Plan
The Company maintains a defined contribution plan (401(k) Plan) covering substantially all of its U.S. employees that is subject to the provisions of the Employee Retirement Income Security Act of 1974. The Company’s matching contributions are discretionary by plan year and were approximately $1.8 million, $1.8 million, and $1.5 million for the years ended December 31, 2012, 2011 and 2010, respectively. The Plan provides for discretionary matching contributions of 100 percent of the first 3 percent of each participant’s eligible compensation plus 50 percent on the next 2 percent of each participant’s eligible compensation, up to statutory limitations. There is no matching contribution above 5 percent of each participant’s eligible compensation.
12. Stockholders’ Equity
This table shows the effect of pre-tax compensation cost arising from equity-based payment arrangements recognized in the consolidated statements of operations (in thousands):
No equity-based compensation cost was capitalized.
Summary of Plans
We currently have three equity-based compensation plans which provide for the granting of up to 7,000,000 shares of common stock pursuant to nonqualified stock options, incentive stock options (“ISOs”), stock appreciation rights, Total Shareholder Return Performance Restricted Stock Units (“TSR PRSU”), and restricted stock awards to employees, directors and consultants of the Company. Stock options typically vest over periods ranging from one to four years with a maximum term of ten years. Restricted stock awards and units typically vest over periods ranging from three to five years. Shares issued as a result of stock option exercises are primarily settled by the issuance of new shares.
This table shows the number of shares approved by shareholders for each plan and the number of shares that remain available for equity awards at December 31, 2012 (in thousands):
(1) Exercise prices for ISOs and non-qualified stock options granted under this plan may not be less than 100 percent of the fair market value for the Company’s common stock on the date of grant.
(2) Employees may purchase shares at 95 percent of the closing price on the day previous to the last day of each six-month offering period. This plan is not considered to be compensatory.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
The Company uses the Black-Scholes-Merton options-pricing model to determine the fair value of stock options under ASC 718 “Compensation - Stock Compensation.” Management is required to make certain assumptions with respect to selected model inputs, including anticipated changes in the underlying stock price (i.e., expected volatility) and option exercise activity (i.e., expected term). For awards granted subsequent to January 1, 2006, expected volatility is based on the historical volatility of ATMI common stock for a period shorter than the expected term of the options. We have excluded the historical volatility prior to the public announcement regarding the sale of our non-core businesses in 2004, because those businesses that were sold represented a significant portion of ATMI’s consolidated business and were subject to considerable cyclicality associated with the semiconductor equipment industry, which drove increased volatility in ATMI’s stock price. The expected term of options granted is derived using historical exercise patterns which represent the period of time that options granted are expected to be outstanding. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period commensurate with the estimated expected term. In accordance with ASC 718, in the determination of equity-based compensation cost, the Company estimates the total number of instruments that will be forfeited as a result of a failure to provide the requisite service to earn the award.
To estimate the fair value of our TSR PRSU’s, we use a Monte-Carlo simulation of future stock prices for ATMI and the components of the Russell 2000 index. This method uses a risk-neutral framework to model future stock prices. The stock price projections are based upon estimates for the risk-free rate of return, the volatility of our stock and the others included in the Russell 2000 index, and the correlation of each stock within the Russell 2000 index. Management is required to make certain judgments for these estimates.
The weighted-average fair value of options granted during the years ended December 31, 2012, 2011 and 2010 was $11.66, $9.66 and $8.62, respectively, based on the Black-Scholes-Merton options-pricing model. These weighted-average assumptions were used for grants in the periods indicated:
The Company uses historical data to estimate forfeitures of awards from employee terminations in order to estimate compensation cost for awards expected to vest. In addition, we separate employees into groups that have similar characteristics for purposes of making forfeiture estimates.
Stock Option and Restricted Stock Activity
This table shows the option activity under the plans as of December 31, 2012 and changes during the year then ended (options are expressed in thousands; averages are calculated on a weighted basis; life in years; intrinsic value expressed in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The aggregate intrinsic value represents the difference between the Company’s closing stock price of $20.88 as of December 31, 2012 and the exercise price of the dilutive options at that date, multiplied by the number of dilutive options outstanding at that date. The total intrinsic value of stock options exercised during the years ended December 31, 2012, 2011 and 2010 was $0.6 million, $0.1 million, and $0.2 million, respectively. The total fair value of options which vested during the years ended December 31, 2012, 2011 and 2010 was $1.9 million (203,000 shares), $1.7 million (184,000 shares), and $1.7 million (189,000 shares) respectively.
An income tax deficiency was recognized in additional paid-in capital from equity-based compensation totaling $0, $0, and $0.1 million for the years ended December 31, 2012, 2011 and 2010 respectively. An income tax deficiency was recognized in income tax expense from equity-based compensation totaling $0.2 million, $0.9 million, and $0.4 million for the years ended December 31, 2012, 2011, and December 31, 2010, respectively.
This table shows restricted stock activity as of December 31, 2012 and changes during the year then ended (shares are expressed in thousands; averages are calculated on a weighted basis):
The total fair value of restricted stock which vested during the years ended December 31, 2012, 2011 and 2010 was $5.7 million, $5.3 million and $5.0 million, respectively.
As of December 31, 2012, $2.2 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1.6 years. As of December 31, 2012, $9.3 million of unrecognized compensation cost related to restricted stock is expected to be recognized over a weighted-average period of approximately 2.2 years. As of December 31, 2012, $0.4 million of unrecognized compensation cost related to TSR PRSU’s is expected to be recognized over a weighted-average period of approximately 1.2 years.
Earnings Per Share
This table shows the computation of basic and diluted earnings per share (in thousands, except per share data):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
This table shows the potential common shares excluded from the calculation of weighted-average shares outstanding because their effect was considered to be antidilutive (in thousands):
The Company has never declared or paid cash dividends on its capital stock.
In August 2010, the Company’s Board of Directors approved a share repurchase program for up to $50.0 million of ATMI common stock. The program, which has no expiration date, does not require the Company to purchase any specific number or amount of shares and may be suspended or reinstated at any time at the Company’s discretion and without notice. Under the terms of the share repurchase program, repurchases can be made from time to time in open market transactions at prevailing market prices or in privately negotiated transactions. Management determined the timing and amount of purchases under the repurchase program based upon market conditions or other factors.
Under all the repurchase programs approved by the Company’s Board of Directors, the Company purchased a total of 8,226,301 shares of its common stock at an average price of $28.12 per share.
13. Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income are (in thousands):
(1) Determined based on the specific identification method
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments, Contingencies, and Other
ATMI is, from time to time involved in legal actions, governmental audits, and proceedings relating to various matters incidental to its business including contract disputes, intellectual property disputes, product liability claims, employment matters, export and trade matters, and environmental claims. While the outcome of such matters cannot be predicted with certainty, in the opinion of management, after reviewing such matters and consulting with ATMI’s counsel and considering any applicable insurance or indemnifications, any liability which may ultimately be incurred is not expected to materially affect ATMI’s consolidated financial position, cash flows or results of operations.
In the fourth quarter of 2012, we amended our existing contracts with Intermolecular, Inc. to extend our license of HPD technology and obtain R&D support services for 2013. Under the amendment, ATMI will pay a reduced fixed fee for ATMI’s HPD tool site licenses and for selling products developed on ATMI’s HPD platform. Volume-based royalties to Intermolecular would resume after 2013. Additionally, we are committed to paying $6.9 million for R&D support services in 2013, which is down from $11.5 million in 2012.
As part of the Artelis acquisition, we recognized a liability for the fair value of contingent payments tied to future revenue performance, which is currently valued at $4.6 million. The range of possible outcomes related to the contingent payment obligation is $0 to $23.3 million.
ATMI is self-insured for U.S. employee medical claims with stop loss risk insurance.
Other
Approximately 9 percent of the Company’s employees are covered by collective bargaining agreements that will expire in June 2013. All of the employees covered by these agreements are based in Belgium. The net assets of the Company’s Belgian subsidiary represent approximately 5 percent of the Company’s consolidated net assets.
15. Segments
During the first quarter of 2012, we realigned our management team to give operational control of our two primary product groups to each of two executive officers who report directly to the Chief Executive Officer, who is responsible for evaluating companywide product line performance and resource allocation decisions between the product groups. Each of these two executive officers functions as a segment manager and has the responsibility to drive operating results for our Microelectronics and LifeSciences operating segments, respectively, and is accountable for results down to the operating profit level. Based on these changes, we have determined that we now have two reportable operating segments, Microelectronics and LifeSciences. Our Chief Executive Officer now regularly reviews financial information which separately identifies each segment’s results.
The Microelectronics business unit sells high-purity materials and materials delivery systems directly to integrated circuit manufacturers and to chemical suppliers for flat-panel display manufacturing. Microelectronics products consist of ATMI’s patented Safe Delivery Source® (“SDS”) solutions, copper integration and surface preparation products, deposition materials and high-purity liquid materials packaging solutions. Microelectronics products represent the largest portion of ATMI’s business and development activities. The principal drivers for this market are technical performance, yield improvement, time to market, cost, utilization of capital, and risk reduction. The success of an electronic component or device is determined by the increased functionality it can deliver at an acceptable cost.
The life sciences industry has been using disposable components like filters, connectors, and disposable storage bags for several years; however, as customers migrate toward processes which combine disposable components and integrate them into disposable systems we see growing opportunities. The LifeSciences business unit sells products that address an increasing number of critical process steps for the biotechnology, laboratory and cell therapy markets, including disposable mixers and bioreactors, both considered growth opportunities for ATMI. This unit includes our Newform™ products and Integrity™ mixers, bioreactors and bioprocess vessels.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates performance and allocates resources based on profit or loss from operations. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Our segment financial results are below (in thousands):
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intersegment sales were not significant for the years ended December 31, 2012, 2011 and 2010.
16. Geographic Data
The Company’s geographic data for the years ended December 31, 2012, 2011 and 2010 are (in thousands):
Revenues are attributed to countries based on the location of the customer. Long-lived assets are located in the respective geographic regions, as shown above. Other than Taiwan, Japan, Belgium, and South Korea, no one specific country within the Pacific Rim, Europe, South America, and other regions accounted for greater than 10 percent of consolidated revenues and long-lived assets in 2012, 2011 and 2010.
ATMI, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Quarterly Results of Operations (Unaudited)
Summarized quarterly results of operations data is as follows (in thousands, except per share amounts):
(a) Includes $1.5 million capitalization of certain logistics and freight costs into inventory.
(b) Includes a $0.5 million recognized loss on the sale of an auction rate security.
(c) Includes $2.6 million from IP settlement, which represents the settlement of royalties for periods prior to the third quarter of 2012.
(d) Includes $0.7 million from IP settlements, which represents the payment of royalties for periods prior to the fourth quarter of 2012.
(e) Includes a $2.4 million gain on remeasurement of contingent consideration.
(f) Includes $1.7 million from IP settlements, which represents the payment of royalties for periods prior to 2011.
(g) Includes a $0.9 million gain on remeasurement of contingent consideration and a $1.2 million benefit related to state tax credits.
(h) Includes $0.7 million of pre-tax foreign exchange losses.
(i) Revenues were negatively impacted by the effects of the SDS Direct transaction which included inventory repurchases and excess inventory in the SDS channel, partially offset by incremental revenues realized from the transaction. Includes $0.7 million from IP settlements, which represents the payment of royalties for periods prior to 2011.
(j) The cost of revenues were favorably impacted by the effects of the SDS Direct transaction, representing cost reversals for inventory repurchased and the effects of excess inventory in the SDS channel, partially offset by transition service costs and incremental costs on revenues realized from the transaction.
(k) Includes an $84.6 million contract termination charge related to the SDS Direct transaction, transition related distribution expenses of $1.3 million, and an $0.8 million gain on remeasurement of contingent consideration and a $1.2 million benefit related to state tax credits.
(l) Includes $31.0 million of tax benefit associated with the contract termination charge, and a $0.8 million pre-tax impairment loss on an equity investment.
ATMI, Inc.
Schedule II-Valuation and Qualifying Accounts
Three Years Ended December 31, 2012
(In thousands)