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ENTG > SEC Filings for ENTG > Form 10-Q on 26-Jul-2013All Recent SEC Filings

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Form 10-Q for ENTEGRIS INC


26-Jul-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements 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, 2012 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 a wide range of products and services for purifying, protecting and transporting critical materials used in processing and manufacturing in the microelectronics and other high-technology 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 which includes more than 17,000 standard and customized products that it believes provide the most comprehensive offering of products and services to maintain the purity and integrity of critical materials used by the semiconductor and other high-technology industries. Certain of these products are unit-driven and consumable products that rely on the level of semiconductor manufacturing activity to drive growth, while others are capital-expenditure driven and 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 2013 end March 30, 2013, June 29, 2013, September 28, 2013 and December 31, 2013. Unaudited information for the three and six months ended June 29, 2013 and June 30, 2012 and the financial position as of June 29, 2013 and December 31, 2012 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:
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


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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 polymers, stainless steel 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 The Company's operations include 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. Accordingly,
             increases or decreases in sales volume can have a large effect on
             the usage and productivity of these cost components, resulting in a
             large impact on the Company's profitability.

Overall Summary of Financial Results for the Three Months and Six Months Ended June 29, 2013
For the three months ended June 29, 2013, net sales decreased by $10.7 million, or 6%, to $177.5 million compared to $188.2 million for the three months ended June 30, 2012. Net sales for the first six months of 2013 were $342.6 million, down 6% from $363.6 million in the comparable year-ago period. The year-over-year decline in net sales primarily reflected continued softness in semiconductor industry spending compared to the first half of 2012. The trends in the semiconductor industry remained mixed. Sequentially, overall demand in the semiconductor industry improved, but the level and extent of the strength was not uniform. There was strong demand from leading edge fabs, although in aggregate utilization rates remained well below peak levels for the industry. The sales decrease for the three-month and six-month periods ended June 29, 2013 included unfavorable foreign currency translation effects of $4.8 million and $7.9 million, respectively, primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales decreased 3% and 4% for the three-month and six-month periods in 2013 when compared to the year-ago periods.
Primarily reflecting the year-over-year sales decrease, the Company reported a lower gross profit in the second quarter and first half of 2013 when compared to the comparable year-ago periods. The decrease in sales was the primary factor underlying the decline in gross profit. The Company's gross margin rate for the second quarter was 43.7% compared to 44.0% in the year-ago period, while gross margin for the first six months of 2013 was 42.2% compared to 43.7% 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 were flat for the second quarter of 2013 when compared to the year-ago quarter. Operating costs for the first half of 2013 fell 2% compared to the first half of 2012, slightly offsetting the decrease in gross profit.
The Company's effective tax rate decreased to 26.0% in 2013, compared to 33.2% in 2012. The effective tax rate in 2013 included a $1.3 million benefit associated with the reinstatement of the U.S. federal credit for increasing research expenditures, as retroactively signed into law and recorded by the Company in the first quarter of 2013.
The Company's operating segments experienced varied net sales results for the three-month and six-month periods as described in greater detail below.

As a result of the aforementioned factors, the Company reported net income of $19.8 million, or $0.14 per diluted share, for the quarter ended June 29, 2013 compared to net income of $21.7 million, or $0.16 per diluted share, in the quarter ended June 30, 2012. For the six-month period ended June 29, 2013, net income was $36.2 million, or $0.26 per diluted share, compared to net income of $39.5 million, or $0.29 per diluted share, in the year-ago period. During the six-month period ended June 29, 2013, the Company's operating activities provided net cash flow of $42.3 million. Capital expenditures were $34.1 million for the period. Cash and cash equivalents were $343.4 million at June 29, 2013 compared with cash and cash equivalents, and short-term investments of $350.4 million at December 31, 2012. The Company had no outstanding short-term or long-term debt at June 29, 2013 or December 31, 2012. 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


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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, 2012 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, and income taxes. There have been no material changes in these aforementioned critical accounting policies.
Three and Six Months Ended June 29, 2013 Compared to Three and Six Months Ended June 30, 2012 and Three Months Ended March 30, 2013 The following table compares operating results for the three months ended June 29, 2013 with results for the three months ended June 30, 2012 and March 30, 2013 and the six months ended June 29, 2013 with the results for the six months ended June 30, 2012, both in absolute dollars and as a percentage of net sales, for each caption.

                                           Three months ended                                                Six months ended
(Dollars in
thousands)          June 29, 2013             June 30, 2012            March 30, 2013             June 29, 2013             June 30, 2012
Net sales      $ 177,544      100.0  %   $ 188,233      100.0  %   $ 165,070      100.0  %   $ 342,614      100.0  %   $ 363,636      100.0  %
Cost of sales     99,974       56.3        105,487       56.0         97,942       59.3        197,916       57.8        204,646       56.3
Gross profit      77,570       43.7         82,746       44.0         67,128       40.7        144,698       42.2        158,990       43.7
Selling,
general and
administrative
expenses          35,397       19.9         35,989       19.1         32,421       19.6         67,818       19.8         71,037       19.5
Engineering,
research and
development
expenses          13,427        7.6         12,726        6.8         12,173        7.4         25,600        7.5         24,715        6.8
Amortization
of intangible
assets             2,359        1.3          2,420        1.3          2,287        1.4          4,646        1.4          4,870        1.3
Operating
income            26,387       14.9         31,611       16.8         20,247       12.3         46,634       13.6         58,368       16.1
Other income,
net                 (910 )     (0.5 )         (641 )     (0.3 )       (1,348 )     (0.8 )       (2,258 )     (0.7 )         (805 )     (0.2 )
Income before
income taxes
and equity in
net income of
affiliates        27,297       15.4         32,252       17.1         21,595       13.1         48,892       14.3         59,173       16.3
Income tax
expense            7,516        4.2         10,579        5.6          5,198        3.1         12,714        3.7         19,644        5.4
Equity in net
income of
affiliates             -          -              -          -              -          -              -          -             (3 )        -
Net income     $  19,781       11.1  %   $  21,673       11.5  %   $  16,397        9.9  %   $  36,178       10.6  %   $  39,532       10.9  %

Net sales For the three months ended June 29, 2013, net sales declined by $10.7 million, or 6%, to $177.5 million compared to $188.2 million for the three months ended June 30, 2012. Net sales for the first six months of 2013 were $342.6 million, down 6% from $363.6 million in the comparable year-ago period. The year-over-year declines in net sales primarily reflected


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continued softness in semiconductor industry spending compared to the first half of 2012. The trends in the semiconductor industry remained mixed. Sequentially, overall demand in the semiconductor industry improved, but the level and extent of the strength was not uniform. There was strong demand from leading edge fabs, although in aggregate utilization rates remained well below peak levels for the industry.
The Company's operating segments experienced varied sales results. See "Segment Analysis" included below in this section for additional detail.
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 June 29, 2013 decreased 4%, while sales of capital-driven products fell 10%. In the quarter ended June 29, 2013, sales of unit-driven products represented 67% and capital-driven products represented 33% of total sales. For both the second quarter of 2012 and first quarter of 2013, this split was 66%/34%.
The sales decreases for the three-month and six-month periods ended June 29, 2013 included unfavorable foreign currency translation effects of $4.8 million and $7.9 million, respectively, primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales decreased 3% and 4% for the three-month and six-month periods in 2013 when compared to the year-ago periods.
On a geographic basis, total sales in the second quarter of 2013 to North America were 29%, Asia (excluding Japan) 43%, Europe 14% and Japan 14% compared to prior year second quarter figures as follows: North America 30%, Asia (excluding Japan) 39%, Europe 12% and Japan 19%. Sales in North America and Japan fell 10% and 29%, respectively, while sales increased 4% and 11% in Asia (excluding Japan) and Europe, respectively, in the second quarter of 2013 compared to a year ago. Slightly over one-half of the decrease in Japan sales was due to the fluctuations in exchange rates noted above.
On a sequential basis, net sales increased 8% from $165.1 million in the first quarter of 2013 and reflected modest improvement in sales for both unit-driven and capital-driven products. Sales of unit-driven products increased 8%, while sales of capital-driven products rose 6%. On a geographic basis, net sales to Asia (excluding Japan), Japan, North America, and Europe increased 8%, 1%, 8% and 14%, respectively. The sequential sales increase included an unfavorable foreign currency translation effect of $2.8 million, due primarily to the quarter-over-quarter weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales improved 9% on a sequential quarter basis. Other than the foreign currency effects noted above, the Company believes its sales changes are primarily volume driven. Based on the information available, the Company believes it is generally improving or maintaining market share for its products and that the effect of selling price erosion has been nominal. Additionally, as no single customer accounts for more than 10% of the Company's revenue, the changes in sales are not driven by any one particular customer or group of customers.
Gross profit Gross profit in the three months ended June 29, 2013 decreased to $77.6 million, down from $82.7 million for the three months ended June 30, 2012. For the first six months of 2013, gross profit was $144.7 million, down from $159.0 million recorded in the first six months of 2012. The year-over-year sales decreases primarily account for the declines in gross profit.

As a percentage of net sales, the gross margin rate for the second quarter of 2013 was 43.7% versus 44.0% for the second quarter of 2012. For the first six months of 2013, the Company's gross margin rate was 42.2% compared to 43.7% for the comparable period a year ago. The lower comparative gross margin percentages are due to lower factory utilization associated with the Company's lower sales levels and slightly unfavorable sales mix.
On a sequential basis, gross profit increased by $10.4 million to $77.6 million in the second quarter of 2013. The gross margin rate of 43.7% for the second quarter of 2013 increased from 40.7% in the first quarter of 2013. The gross profit and gross margin improvements reflect the increase in sales and a favorable sales mix.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses were $35.4 million in the three months ended June 29, 2013, down 2% from the comparable three-month period a year earlier. Employee costs, which comprises about two-thirds of overall SG&A expense, decreased $0.3 million. SG&A expenses for the quarter ended June 29, 2013 included a $0.7 million reduction in SG&A expense related to the sale of a building classified as assets held for sale, consisting of the gain on sale thereof and an adjustment to the real estate tax accrual for the building. For the first six months of 2013, SG&A expenses decreased by $3.2 million, or 5% to $67.8 million compared to $71.0 million a year earlier. For the first six months of 2013, SG&A costs, as a percent of net sales, increased to 19.8% from 19.5% a year ago, reflecting the decrease in net sales. Employee costs, which make up about two-thirds of SG&A expenses, decreased by


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$0.8 million for the six-month period. The decrease also reflected a bad debt expense decline of $0.7 million and the $0.7 million reduction in SG&A expense related to the sale of a building noted above.
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 $13.4 million in the three months ended June 29, 2013 compared to $12.7 million in the year-ago period. The $0.7 million increase in ER&D expense was due to slightly higher employee costs. ER&D expenses increased 4% to $25.6 million in the first six months of 2013 compared to $24.7 million in the year-ago six-month period, also due to higher employee costs. For the first six months of 2013 ER&D expenses, as a percent of net sales, increased to 7.5% from 6.8%, mainly reflecting the decrease in net sales.
Other income, net Other income, net was $0.9 million and $2.3 million in the three-month and six-month periods ended June 29, 2013, respectively, which are mainly due to foreign currency transaction gains.

In the three and six months ended June 30, 2012, other income, net was $0.6 million and $0.8 million respectively, mainly reflecting 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. This gain was partly offset by foreign currency transactions losses related to the remeasurement of yen-denominated assets and liabilities held by the Company.

Income tax expense The Company recorded income tax expense of $7.5 million and $12.7 million, respectively, in the three and six months ended June 29, 2013 compared to income tax expense of $10.6 million and $19.6 million in the three and six months ended June 30, 2012. The year-to-date effective tax rate was 26.0% in the 2013 period, compared to 33.2% in the 2012 period. The 2013 rate reflects a base rate of approximately 27% before the recognition of a discrete tax benefit.

In 2013, the Company's effective tax rate was lower than the U.S. statutory rate mainly due to lower tax rates in certain of the Company's taxable jurisdictions and a discrete tax benefit. On January 2, 2013 President Obama signed into law H.R. 8, the American Taxpayer Relief Act of 2012 (the Act). The Act reinstated the federal credit for increasing research expenditures retroactively to the beginning of 2012. Accordingly, the Company recognized a discrete tax benefit of approximately $1.3 million related to the credit during the first quarter of 2013. None of the other Act provisions are expected to have a material impact on the financial statements.

In 2012, the Company's effective tax rate was lower than the U.S. statutory rate due to lower tax rates in certain of the Company's taxable jurisdictions. Net income The Company recorded net income of $19.8 million, or $0.14 per diluted share, in the three-month period ended June 29, 2013 compared to net income of $21.7 million, or $0.16 per diluted share, in the three-month period ended June 30, 2012. For the six months ended June 29, 2013, net income was $36.2 million, or $0.26 per diluted share, compared to net income of $39.5 million, or $0.29 per diluted share, in the comparable period a year ago. The reductions in net income and diluted earnings per share mainly reflect the Company's lower net sales and corresponding decreases in gross profit, offset partly by lower SG&A expenses and a lower effective tax rate.
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.
Adjusted EBITDA decreased 12% to $36.1 million in the three-month period ended June 29, 2013, compared to $41.1 million in the three-month period ended June 30, 2012. Adjusted EBITDA, as a percent of net sales, decreased to 20.3% from 21.8% a year earlier. Adjusted Operating Income decreased 16% to $28.7 million in the three-month period ended June 29, 2013, compared to $34.0 million in the three-month period ended June 30, 2012. Adjusted Operating Income, as a percent of net sales, decreased to 16.2% from 18.1% a year earlier. Non-GAAP Earnings Per Share decreased 6% to $0.15 in the three-month period ended June 29, 2013, compared to $0.16 in the three-month period ended June 30, 2012. Adjusted EBITDA decreased 14% to $65.9 million in the six-month period ended June 29, 2013, compared to $76.8 million in the six-month period ended June 30, 2012. Adjusted EBITDA, as a percent of net sales, decreased to 19.2% from 21.1% a year earlier. Adjusted Operating Income decreased 19% to $51.3 million in the six-month period ended June 29, 2013, compared to


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$63.2 million in the six-month period ended June 30, 2012. Adjusted Operating Income, as a percent of net sales, decreased to 15.0% from 17.4% a year earlier. Non-GAAP Earnings Per Share decreased 7% to $0.28 in the six-month period ended June 29, 2013, compared to $0.30 in the six-month period ended June 30, 2012.

Segment Analysis
The Company reports its financial performance based on three reporting segments. The following is a discussion on the results of operations of these three business segments. See Note 6 "Segment Reporting" to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three segments for the three and six months ended June 29, 2013 and June 30, 2012.


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                                                    Three months ended                                 Six months ended
(In thousands)                    June 29, 2013       June 30, 2012       March 30, 2013       June 29, 2013       June 30, 2012
Contamination Control Solutions
Net sales                       $       114,634     $       123,144     $        103,961     $       218,595     $       238,696
Segment profit                           28,581              34,683               22,078              50,659              66,752
Microenvironments
Net sales                       $        45,869     $        44,565     $         44,132     $        90,001     $        85,270
Segment profit                            9,364               8,523                9,325              18,689              14,051
Specialty Materials
Net sales                       $        17,041     $        20,524     $         16,977     $        34,018     $        39,670
Segment profit                            1,900               4,404                2,216               4,116               9,072

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