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ENTG > SEC Filings for ENTG > Form 10-Q on 25-Oct-2012All Recent SEC Filings

Show all filings for ENTEGRIS INC

Form 10-Q for ENTEGRIS INC


25-Oct-2012

Quarterly Report


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

You should read the following discussion and analysis of our financial condition and results of operations together with our financial statements and the related notes and other financial information included elsewhere in this Quarterly Report on Form 10-Q. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should review the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2011 as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

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

Entegris, Inc. is a leading provider of products and services that purify, protect and transport the critical materials used in key technology-driven industries. Entegris derives most of its revenue from the sale of products and services to the semiconductor and related industries. The Company's customers consist primarily of semiconductor manufacturers, semiconductor equipment and materials suppliers as well as thin film transistor-liquid crystal display (TFT-LCD) and hard disk manufacturers, which are served through direct sales efforts, as well as sales and distribution relationships, in the United States, Asia, Europe and the Middle East.

The Company offers a diverse product portfolio that includes more than 17,000 standard and customized products that it believes provide the most comprehensive offering of contamination control solutions and microenvironment products and services to the microelectronics industry. Certain of these products are unit-driven and consumable products that rely on the level of semiconductor manufacturing activity to drive growth, while others rely on expansion of manufacturing capacity to drive growth. The Company's unit-driven and consumable products includes membrane-based liquid filters and housings, metal-based gas filters, resin-based gas purifiers, wafer shippers, disk-shipping containers and test assembly and packaging products and consumable graphite and silicon carbide components used in plasma etch, ion implant and chemical vapor deposition processes in semiconductor manufacturing. The Company's capital expense-driven products include components, systems and subsystems that use electro-mechanical, pressure differential and related technologies to permit semiconductor and other electronics manufacturers to monitor and control the flow and condition of process liquids used in these manufacturing processes, and process carriers that protect the integrity of in-process wafers.

The Company's fiscal year is the calendar period ending each December 31. The Company's fiscal quarters consist of 13-week or 14-week periods that end on Saturday. The Company's fiscal quarters in 2012 end March 31, 2012, June 30, 2012, September 29, 2012 and December 31, 2012. Unaudited information for the three and nine months ended September 29, 2012 and October 1, 2011 and the financial position as of September 29, 2012 and December 31, 2011 are included in this Quarterly Report on Form 10-Q.

Forward-Looking Statements

The information in this Management's Discussion and Analysis of Financial Condition and Results of Operations, except for the historical information, contains forward-looking statements. These statements are subject to risks and uncertainties and to the cautionary statement set forth above. These forward-looking statements could differ materially from actual results. The Company assumes no obligation to publicly release the results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes thereto, which are included elsewhere in this report.

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


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

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

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

Overall Summary of Financial Results for the Three Months and Nine Months Ended September 29, 2012

For the three months ended September 29, 2012, net sales increased by $11.4 million, or 7%, to $184.4 million compared to $173.0 million for the three months ended October 1, 2011. The sales increase for the three-month period ended September 29, 2012 included unfavorable foreign currency translation effects of $4.8 million, related to the weakening of most international currencies versus the U.S. dollar. Excluding this factor, net sales increased 9% for the quarter.

Net sales for the first nine months of 2012 were $548.1 million, down 6% from $585.3 million in the comparable year-ago period. The year-over-year decline in net sales primarily reflected the lower capital spending in the semiconductor industry that began in the latter half of 2011. The sales decrease for the nine-month period ended September 29, 2012 included unfavorable foreign currency translation effects of $8.3 million, related to the weakening of most international currencies, other than the Japanese yen, versus the U.S. dollar. Excluding this factor, net sales declined 5% for the nine-month period ended September 29, 2012, when compared to the comparable year-ago period.

On a sequential basis, third quarter sales declined 2% from $188.2 million in the second quarter of 2012, reflecting softness in demand for both unit-driven and capital-driven products, partly offset by an increase in royalty revenue. The effect of foreign currency translation on net sales for the quarter was nominal.

The Company's operating segments experienced varied net sales results for the three-month and nine-month periods as described in greater detail below.

Changes in gross profit for the third quarter and first nine months of 2012 when compared to the year-ago periods generally reflects the year-over-year changes in net sales. The gross margin rate for the third quarter of 2012 was 44.4% versus 43.2% for the third quarter of 2011, while the gross margin rate for the first nine months of 2012 was 44.0% compared to 44.1% in the comparable period a year ago. Operating costs, consisting of selling, general and administrative (SG&A) and engineering, research and development (ER&D) costs, increased 15% and 2% for the three-month and nine-month period ended September 29, 2012, respectively, when compared to the year-ago periods.

The Company's effective tax rate rose to 32.2% in 2012, compared to 21.2% in 2011. Tax expense in 2011 included a $14.9 million benefit associated with a decrease in the Company's U.S. deferred tax asset valuation allowance, primarily accounting for the increase in the effective rate from 2011 to 2012.


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As a result of the aforementioned factors, the Company reported net income attributable to the Company of $18.0 million, or $0.13 per diluted share, for the quarter ended September 29, 2012 compared to net income attributable to the Company of $22.0 million, or $0.16 per diluted share, in the quarter ended October 1, 2011. For the nine-month period ended September 29, 2012, net income attributable to the Company was $57.6 million, or $0.42 per diluted share, compared to net income attributable to the Company of $83.7 million, or $0.62 per diluted share, in the year-ago period.

During the first nine months of 2012, the Company's generated operating cash flow of $76.8 million. Cash, cash equivalents, and short-term investments totaled $315.8 million at September 29, 2012 compared with $273.6 million at December 31, 2011. The Company had no outstanding short-term bank borrowings or long-term debt at September 29, 2012 or December 31, 2011.

Critical Accounting Policies

Management's discussion and analysis of financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its consolidated financial statements, including, but not limited to, those related to accounts receivable-related valuation allowances, inventory valuation, impairment of long-lived assets, income taxes and share-based compensation. There have been no material changes in these aforementioned critical accounting policies.


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Three and Nine Months Ended September 29, 2012 Compared to Three and Nine Months
Ended October 1, 2011 and Three Months Ended June 30, 2012

The following table compares operating results for the three months ended
September 29, 2012 with results for the three months ended October 1, 2011 and
June 30, 2012 and the nine months ended September 29, 2012 with results for the
nine months ended October 1, 2011, both in absolute dollars and as a percentage
of net sales, for each caption.



                                                                                  Three Months Ended                                                    Nine Months Ended
                                                        September 29,                 October 1,                   June 30,                 September 29,                 October 1,
(Dollars in thousands)                                       2012                        2011                        2012                        2012                        2011
Net sales                                           $ 184,449        100.0 %    $ 173,014        100.0 %    $ 188,233        100.0 %    $ 548,085        100.0 %    $ 585,337        100.0 %
Cost of sales                                         102,517         55.6         98,186         56.8        105,487         56.0        307,163         56.0        327,021         55.9

Gross profit                                           81,932         44.4         74,828         43.2         82,746         44.0        240,922         44.0        258,316         44.1
Selling, general and administrative expenses           39,095         21.2         33,533         19.4         35,989         19.1        110,132         20.1        108,449         18.5
Engineering, research and development expenses         13,314          7.2         11,957          6.9         12,726          6.8         38,029          6.9         36,951          6.3
Amortization of intangible assets                       2,389          1.3          2,505          1.4          2,420          1.3          7,259          1.3          7,763          1.3

Operating income                                       27,134         14.7         26,833         15.5         31,611         16.8         85,502         15.6        105,153         18.0
Interest (income) expense, net                            (40 )       (0.0 )          (38 )       (0.0 )           30            0            (12 )       (0.0 )          650          0.1
Other expense (income), net                             1,481          0.8            315          0.2           (671 )       (0.4 )          648          0.1         (1,643 )       (0.3 )

Income before income taxes and equity in net
income of affiliates                                   25,693         13.9         26,556         15.3         32,252         17.1         84,866         15.5        106,146         18.1
Income tax expense                                      7,656          4.2          4,582          2.6         10,579          5.6         27,300          5.0         22,550          3.9
Equity in net income of affiliates                         -            -             (14 )       (0.0 )           -             0             (3 )       (0.0 )         (489 )       (0.1 )

Net income                                          $  18,037          9.8      $  21,988         12.7      $  21,673         11.5      $  57,569         10.5      $  84,085         14.4

Net sales For the three months ended September 29, 2012, net sales increased by $11.4 million, or 7%, to $184.4 million compared to $173.0 million for the three months ended October 1, 2011. The sales increase for the three-month period ended September 29, 2012 included unfavorable foreign currency translation effects of $4.8 million, related to the weakening of most international currencies versus the U.S. dollar. Excluding this factor, net sales increased 9% for the quarter.

Net sales for the first nine months of 2012 were $548.1 million, down 6% from $585.3 million in the comparable year-ago period. The year-over-year decline in net sales primarily reflected the lower capital spending in the semiconductor industry that began in the latter half of 2011. The sales decrease for the nine-month period ended September 29, 2012 included unfavorable foreign currency translation effects of $8.3 million, related to the weakening of most international currencies, other than the Japanese yen, versus the U.S. dollar. Excluding this factor, net sales declined 5% for the nine-month period ended September 29, 2012, when compared to the comparable year-ago period.


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On a geographic basis, total sales in the third quarter of 2012 to North America were 30%, Asia (excluding Japan) 39%, Europe 13% and Japan 18% compared to prior year third quarter figures of North America 30%, Asia (excluding Japan) 37%, Europe 15% and Japan 18%. Sales in North America, Asia (excluding Japan), and Japan rose 5%, 15%, and 4% respectively, and Europe fell 10% in the third quarter of 2012 compared to the year-ago quarter.

Demand drivers for the Company's business primarily consist of semiconductor fab utilization and production (unit-driven) as well as capital spending for new or upgraded semiconductor fabrication equipment and facilities (capital-driven). The Company analyzes sales of its products by these two key drivers. Sales of unit-driven products in the quarter ended September 29, 2012 increased 8%, while sales of capital-driven products increased 1%. Sales of unit-driven products in the quarter ended September 29, 2012 represented 66% of total sales and capital-driven products represented 34% of total sales in the quarter ended September 29, 2012. For the third quarter of 2011 and second quarter of 2012, this split was 64%/36% and 66%/34%, respectively. This shift in relative demand for capital-driven products reflects lower capital spending since mid-2011 by semiconductor customers for capacity-related products.

On a sequential basis, third quarter sales declined 2% from $188.2 million in the second quarter of 2012. The effect of foreign currency translation on net sales for the quarter was nominal. On a geographic basis, net sales to North America, Asia (excluding Japan) and Japan decreased 4%, 1% and 5%, respectively, while sales to Europe increased 5% despite the effect of unfavorable foreign currency translation effects. Unit-driven sales declined marginally, as declines in sales of legacy products and specialty coatings products offset growth in sales of advanced filtration products. Meanwhile, capital-driven sales also declined, reflecting lower sales of fluid handling components and photochemical pumps offsetting strong demand for wafer handling products.

The Company's operating segments experienced varied net sales results for the three-month and nine-month periods as described in greater detail below.

Gross profit The Company's gross profit in the three months ended September 29, 2012 increased by $7.1 million to $81.9 million, up from $74.8 million in the three months ended October 1, 2011. For the first nine months of 2012, gross profit was $240.9 million, down from $258.3 million recorded in the first nine months of 2011. Changes in gross profit for the third quarter and first nine months of 2012 when compared to the year-ago periods generally reflects the year-over-year changes in net sales.

The gross margin rate for the third quarter of 2012 was 44.4% versus 43.2% for the third quarter of 2011, while gross margin for the first nine months of 2012 was 44.0% compared to 44.1% in the comparable period a year ago. The higher comparative year-over-year gross margin percentage for the three-month period is due to improved factory utilization and higher royalty revenue of $2.3 million offset by a slightly unfavorable sales mix. The relatively flat year-over-year gross margin percentage for the nine-month period reflects slightly improved factory utilization and higher royalty revenue of $3.3 million, offset by a slightly unfavorable sales mix.

On a sequential quarter basis, gross profit for the three months ended September 29, 2012 decreased by $0.8 million to $81.9 million for the three months ended September 29, 2012, down from $82.7 million for the three months ended June 30, 2012. The Company's gross margin of 44.4% for the third quarter compared to 44.0% for the three months ended June 30, 2012. The higher comparative year-over-year gross margin percentage for the three-month period is due to higher royalty revenue of $2.7 million, partly offset by unfavorable sales mix.

Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses increased $5.6 million, or 17%, to $39.1 million in the three months ended September 29, 2012, up from $33.5 million in the comparable three-month period a year earlier. Despite the increase in net sales, SG&A expenses as a percent of net sales increased to 21.2% from 19.4% a year earlier. For the first nine months of 2012, SG&A expenses increased by $1.7 million, or 2% to $110.1 million compared to $108.4 million a year earlier. For the first nine months of 2012, SG&A costs, as a percent of net sales, increased to 20.1% from 18.5% a year ago, mainly reflecting the decrease in net sales. Included in both the three-month and nine-month periods in 2012 is a $3.9 million charge associated with compensation to which the Company's current chief executive officer is entitled in connection with the succession and transition plan described in further detail in note 7 to the Company's condensed consolidated financial statements. Other employee costs, which make up about two-thirds of SG&A expenses, decreased by $1.3 million for the nine-month period, mainly due to lower accruals for incentive compensation.


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Engineering, research and development expenses Engineering, research and development (ER&D) expenses related to the support of current product lines and the development of new products and manufacturing technologies were $13.3 million in the three months ended September 29, 2012 compared to the $12.0 million reported in the year-ago period. ER&D expenses as a percent of net sales increased to 7.2% from 6.9%, reflecting the increase in ER&D expenditures. ER&D expenses increased 3% to $38.0 million in the first nine months of 2012 compared to $37.0 million in the year-ago nine-month period. For the first nine months of 2012 ER&D expenses, as a percent of net sales, increased to 6.9% from 6.3%, mainly reflecting the decrease in net sales.

Amortization of intangible assets Amortization of intangible assets was $2.4 million in the three months ended September 29, 2012 compared to $2.5 million in the year-ago period. Amortization of intangible assets was $7.3 million in the first nine months of 2012 compared to $7.8 million in the year-ago period.

Other expense (income), net Other expense, net was $1.5 million in the three-month period ended September 29, 2012 mainly reflecting a $1.5 million loss from foreign currency transaction losses related to the remeasurement of yen-denominated assets and liabilities held by the Company. Other expense, net was $0.6 million in the nine-month period ended September 29, 2012, mainly reflecting $2.1 million of foreign currency transaction losses related to the remeasurement of yen-denominated assets and liabilities held by the Company. The loss was partially offset by a $1.5 million gain recorded in the second quarter related to the remeasurement of the previously held 50% equity investment in a Taiwan joint venture entity in which the Company's acquired a 100% interest in April 2012.

Other expense was $0.3 million and other income was $1.6 million in the three-month and nine-month periods ended October 1, 2011, respectively. The year-to-date figure includes a $1.5 million gain recorded in the second quarter of 2011 related to the sale of an equity investment.

Income tax expense The Company recorded income tax expense of $7.7 million and $27.3 million, respectively, in the three and nine months ended September 29, 2012 compared to income tax expense of $4.6 million and $22.6 million, respectively, in the three and nine months ended October 1, 2011. The effective tax rate was 32.2% in the 2012 period compared to 21.2% in the 2011 period.

In 2011, the Company's effective tax rate was lower than the U.S. statutory rate of 35% mainly due to the $14.9 million decrease in the Company's U.S. deferred tax asset valuation allowance. Management concluded the Company would realize certain deferred tax assets related to current taxes payable and has thus released the allowance for a portion of U.S. deferred tax assets. The effective tax rate in 2012 and 2011 benefitted from lower tax rates in certain of the Company's taxable jurisdictions.

Net income attributable to Entegris, Inc. Net income attributable to Entegris, Inc. of $18.0 million, or $0.13 per diluted share, in the three-month period ended September 29, 2012 compared to net income of $22.0 million, or $0.16 per diluted share, in the three-month period ended October 1, 2011. For the nine months ended September 29, 2012, net income attributable to the Company was $57.6 million, or $0.42 per diluted share, compared to net income attributable to the Company of $83.7 million, or $0.62 per diluted share, in the comparable period a year ago.

Non-GAAP Measures Information The Company's condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company's business and results of operations. See "Non-GAAP Information" included below in this section for additional detail, including the reconciliation of GAAP measures to the Company's non-GAAP measures.

The Company's non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA increased 15% to $40.8 million in the three-month period ended September 29, 2012, compared to $35.4 million in the three-month period ended October 1, 2011. Adjusted EBITDA, as a percent of net sales for the three-month period ended September 29, 2012, increased to 22.1% from 20.4% a year earlier. Adjusted Operating Income increased 17% to $33.5 million in the three-month period ended September 29, 2012, compared to $28.6 million in the three-month period ended October 1, 2011. Adjusted Operating Income, as a percent of net sales for the three-month period ended September 29, 2012, increased to 18.1% from 16.5% a year earlier. Non-GAAP Earnings Per Share decreased 6% to $0.16 in the three-month period ended September 29, 2012, compared to $0.17 in the three-month period ended October 1, 2011. The improvements in the Adjusted EBITDA and Adjusted Operating Income measures reflect the sales gains experienced for the third quarter. The slight decline in Non-GAAP Earnings Per Share is due to the higher effective tax rate in 2012.


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Adjusted EBITDA decreased 11% to $117.6 million in the nine-month period ended September 29, 2012, compared to $132.5 million in the nine-month period ended October 1, 2011. Adjusted EBITDA, as a percent of net sales for the nine-month period ended September 29, 2012, decreased to 21.4% from 22.6% a year earlier. Adjusted Operating Income decreased 14% to $96.7 million in the nine-month period ended September 29, 2012, compared to $112.2 million in the nine-month period ended October 1, 2011. Adjusted Operating Income, as a percent of net sales for the nine-month period ended September 29, 2012, decreased to 17.6% from 19.2% a year earlier. Non-GAAP Earnings Per Share decreased 28% to $0.46 in the nine-month period ended September 29, 2012, compared to $0.64 in the nine-month period ended October 1, 2011. The declines in the Adjusted EBITDA and Adjusted Operating Income measures reflect the reduction in sales. In addition, Non-GAAP Earnings Per Share was adversely affected by a higher effective tax rate.

Segment Analysis

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