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ATMI > SEC Filings for ATMI > Form 10-K on 7-Mar-2014All Recent SEC Filings

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Form 10-K for ATMI INC


Annual Report

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 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's objective is to meet the demands of our microelectronics 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, 2013 and 2012 we had $0.9 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.

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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 saleability 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, 2013 and 2012, we had $2.9 million 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, 2013, the carrying value of our portfolio of strategic investments in non-marketable equity securities totaled $6.6 million ($6.6 million at December 31, 2012). 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. There were no impairments recognized in our portfolio of non-marketable equity securities in 2013, 2012 or 2011. Income Taxes
The net deferred tax asset at December 31, 2013 was $11.9 million compared to $16.8 million at December 31, 2012. 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.

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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, refer to Note 9 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 in 2010 and 2011, 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, solely 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, which we did not believe would be representative of future expected volatility. Starting in 2012, awards granted did not have any exclusions related to the determination of expected volatility. 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.

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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. For Level 3 measurements, we use unobservable inputs to the valuation methodology that are significant to the measurement of fair value of the assets or liabilities.
We regularly review our financial assets for evidence of impairment and consider the length of the time and the extent to which the market value has been less than cost, as well as, the financial condition and near-term prospects of the issuer, including any specific event that may influence the operations of the issuer.
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. We evaluate goodwill for impairment at the reported operating segment level - Micrelectronics and LifeSciences. We first assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates a likelihood that the carrying amount is less than fair value, then the two-step goodwill impairment test is performed. We primarily use the income approach to determine the fair value of our reporting units. We also employ the market approach by the use of revenue and EBITDA multiple comparisons to corroborate the fair value determined using the income approach. Based on our last completed step 1 analysis, the fair value for each of our two reporting units exceeded the carrying value by more than 40 percent. We also note that the price of our common stock has increased approximately 50 percent from December 31, 2011 to December 31, 2013 with a commensurate increase in our market capitalization. At December 31, 2013, the goodwill balance from our continuing operation was $13.7 million and the balance of goodwill in our discontinued operation was $33.7 million.
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 Continuing Operations
This table shows the effect of pre-tax compensation cost arising from equity-based payment arrangements recognized in income (loss) from continuing operations (in thousands):

                                                   December 31,
                                            2013       2012       2011
Cost of revenues                          $   161    $   232    $   406
Research and development                      476        612        794
Selling, general, and administrative        6,144      6,954      5,878
Total equity-based compensation expense   $ 6,781    $ 7,798    $ 7,078

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Results of Continuing Operations
The following is a summary of selected consolidated earnings information (in thousands of dollars):

                                                        December 31,
                                                     2013          2012        % Change
Revenues                                          $ 360,959     $ 365,849        (1.3 )%
Cost of revenues                                    185,013       179,258         3.2  %
Gross profit                                        175,946       186,591        (5.7 )%
Gross profit margin                                    48.7 %        51.0 %
Operating expenses:
Research and development                             55,666        47,286        17.7  %
Selling, general and administrative                  72,884        73,521        (0.9 )%
Total operating expenses                            128,550       120,807         6.4  %
Operating income                                     47,396        65,784       (28.0 )%
Interest income                                         944           900         4.9  %
Other income (expense), net                           2,616           (58 )   4,610.3  %
Income before income taxes                           50,956        66,626       (23.5 )%
Provision for income taxes                           12,197        18,331       (33.5 )%
Effective tax rate                                     23.9 %        27.5 %
Income from continuing operations                 $  38,759     $  48,295       (19.7 )%
Loss from discontinued operations, net of taxes   $  (8,594 )   $  (5,965 )     (44.1 )%
Net income                                        $  30,165     $  42,330       (28.7 )%

Analysis of Continuing Operations
2013 was a year of significant progress and change for ATMI, Inc. as we neared completion of our JangAn manufacturing facility in South Korea, recognized license revenues from our eVOLV process, completed a significant reorganization in our business to better position ourselves with customers and to streamline operations, and embarked on a review of strategic alternatives. On December 22, 2013, ATMI, Inc. and certain of its subsidiaries and Pall Corporation, entered into a Share and Asset Purchase Agreement pursuant to which, ATMI, Inc agreed to sell to Pall Corporation all assets and liabilities primarily related to the LifeSciences business in exchange for cash proceeds of $185 million, subject to customary working capital adjustments. This transaction closed on February 20, 2014. We estimate the pre-tax gain from this transaction will be approximately $68 million, which will be recognized in the first quarter of 2014. For purposes of this Form 10-K, we have treated the LifeSciences business as a discontinued operation and have excluded the results associated with the discontinued operations from the discussion and analysis below consistent with the treatment of this discontinued operation throughout this Form 10-K.

On February 4, 2014, ATMI and Entegris, Inc. ("Entegris") entered into an Agreement and Plan of Merger pursuant to which, subject to the satisfaction or waiver of certain conditions, ATMI will merge with and into Atomic Merger Corporation, a wholly-owned subsidiary of Entegris ("Merger Sub"). Under the terms of the merger agreement, ATMI shareholders will receive $34.00 in cash, without interest or dividends, for each share of ATMI common stock they hold at the time of closing. We anticipate closing the transaction in the second quarter of 2014.

Revenues for 2013 declined as weakness in our copper materials and NowPak® products were partially offset by volume growth in SDS® and higher license revenues in eVOLV™. Gross Margins also declined approximately 2 percent in full year 2013 compared to full year 2012 due primarily to a combination of lower volume and unfavorable product mix. Also, in the fourth quarter of 2013, we recorded an $11.5 million impairment charge in Research and Development ("R&D") related to certain of our High Productivity Development assets. Net income from continuing operations declined approximately 20 percent for the full year 2013 compared to the full year 2012.

Results of Continuing Operations
Revenue. Revenues of $361.0 million represent a decline of approximately 1 percent compared to the same period in 2012 as volume weakness in our copper materials and NowPak® product lines was partially offset by SDS volume growth and higher license revenues in eVOLV. Full year 2012 results included a one-time $2.6 million royalty. SDS revenues grew 13 percent compared to the full year 2012. Our copper materials product lines declined 9 percent in 2013 compared to 2012, driven by weak economic conditions, customer material-usage efficiencies, and, the strategic decision to stop selling certain very low margin copper plating electrolytes. Pricing reductions impacted revenues by 2 percent for 2013 compared to 2012. Negative fluctuations in the Japanese Yen decreased revenue approximately 2 percentage points in 2013. Our eVOLV™ product line generated $2.5 million revenue in 2013 an increase of $2.4 million from 2012. Gross Profit. Gross profit margins were approximately 49 percent in 2013 compared to approximately 51 percent in 2012. Gross profit margins were down primarily due to pricing declines and the $2.6 million one-time royalty recognized in 2012.
Research and Development Expenses. Research and Development expenses ("R&D") increased $8.4 million or approximately 18 percent to $55.7 million in 2013 compared to $47.3 million in 2012. The 2013 results included an $11.5 million impairment charge related to certain of our HPD assets. In the fourth quarter of 2013, we completed negotiations with Intermolecular, Inc. for the use of certain long lived assets, which resulted in the strategic decision to discontinue certain portions of the site, maintenance, and license support for our HPD tools. As a result, we recorded an impairment charge for long-lived assets held and used with a carrying amount of $10.8 million and the related prepaid support fees with a carrying amount of $0.7 million under the caption, research and development expense. These increases were partially offset by $4.1 million in reduced fees associated with our service and usage agreements with Intermolecular, Inc. We also recorded reductions in spending on consumables ($1.4 million), outside services ($0.4 million) and prototypes ($0.6 million), partially offset by the prior year cost reimbursements of $2.9 million related to a collaborative development agreement.
Selling General and Administrative Expenses. Selling, General and Administrative ("SG&A") expenses decreased approximately 1 percent in 2013 to $72.9 million compared to 2012. The decline was driven by lower employee spending of $0.5 million (lower salaries of $0.5 million, lower equity compensation of $0.8 million and reduced benefits costs of $0.4 million, partially offset by increased employee incentives of $1.2 million), lower depreciation of $0.5 million, reduced facilities maintenance of $0.5 million and reduction in various other expenses of $0.5 million, partially offset by higher legal costs of $1.3 million as we evaluated our strategic alternatives and increased severance costs of $1.1 million driven by our 2013 reorganization.
Operating Income. Operating income declined 28 percent to $47.4 million in 2013 . . .

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