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ENTG > SEC Filings for ENTG > Form 10-Q on 25-Oct-2013All Recent SEC Filings

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Form 10-Q for ENTEGRIS INC


25-Oct-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 nine months ended September 28, 2013 and September 29, 2012 and the financial position as of September 28, 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 Nine Months Ended September 28, 2013
For the three months ended September 28, 2013, net sales decreased by $19.9 million, or 11%, to $164.6 million compared to $184.4 million for the three months ended September 29, 2012. Net sales for the first nine months of 2013 were $507.2 million, down 7% from $548.1 million in the comparable year-ago period. The year-over-year decline in net sales primarily reflected continued softness in semiconductor industry spending. The trends in the semiconductor industry remained mixed. Sequentially, overall demand from the Company's semiconductor industry customers softened. There was lower demand from leading edge fabs, aggregate fab utilization rates remained well below peak levels and semiconductor industry capital spending remains restrained. The sales decrease for the three-month and nine-month periods ended September 28, 2013 included unfavorable foreign currency translation effects of $4.6 million and $12.4 million, respectively, primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales decreased 8% and 5% for the three-month and nine-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 third quarter and first nine months 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 third quarter was 42.6% compared to 44.4% in the year-ago period, while gross margin for the first nine months of 2013 was 42.4% compared to 44.0% in the comparable year-ago period. Operating costs, consisting of selling, general and administrative (SG&A) and engineering, research and development (ER&D) declined 13% for the third quarter of 2013 when compared to the year-ago quarter. Operating costs for the first nine months of 2013 declined 6% compared to the first nine months of 2012, slightly offsetting the decrease in gross profit.
The Company's year-to-date effective tax rate decreased to 24.9% in 2013, compared to 32.2% in 2012. The lower rate in 2013 reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates. The effective tax rate in 2013 also 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 reporting segments experienced varied net sales and operating results for the three-month and nine-month periods as described in greater detail below.

As a result of the aforementioned factors, the Company reported net income of $17.8 million, or $0.13 per diluted share, for the quarter ended September 28, 2013 compared to net income of $18.0 million, or $0.13 per diluted share, in the quarter ended September 29, 2012. For the nine-month period ended September 28, 2013, net income was $54.0 million, or $0.39 per diluted share, compared to net income of $57.6 million, or $0.42 per diluted share, in the year-ago period. During the nine-month period ended September 28, 2013, the Company's operating activities provided net cash flow of $74.7 million. Capital expenditures were $49.0 million for the period. Cash and cash equivalents were $358.8 million at September 28, 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 September 28, 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


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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, 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.


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Three and Nine Months Ended September 28, 2013 Compared to Three and Nine Months
Ended September 29, 2012 and Three Months Ended June 29, 2013
The following table compares operating results for the three months ended
September 28, 2013 with results for the three months ended September 29, 2012
and June 29, 2013 and the nine months ended September 28, 2013 with the results
for the nine months ended September 29, 2012, both in absolute dollars and as a
percentage of net sales, for each caption.

                                             Three months ended                                                  Nine months ended
(Dollars in
thousands)        September 28, 2013         September 29, 2012            June 29, 2013           September 28, 2013         September 29, 2012
Net sales      $  164,585      100.0  %   $    184,449      100.0 %   $ 177,544      100.0  %   $  507,199      100.0  %   $  548,085      100.0  %
Cost of sales      94,453       57.4           102,517       55.6        99,974       56.3         292,369       57.6         307,163       56.0
Gross profit       70,132       42.6            81,932       44.4        77,570       43.7         214,830       42.4         240,922       44.0
Selling,
general and
administrative
expenses           31,746       19.3            39,095       21.2        35,397       19.9          99,564       19.6         110,132       20.1
Engineering,
research and
development
expenses           13,947        8.5            13,314        7.2        13,427        7.6          39,547        7.8          38,029        6.9
Amortization
of intangible
assets              2,343        1.4             2,389        1.3         2,359        1.3           6,989        1.4           7,259        1.3
Contingent
consideration
fair value
adjustment         (1,813 )     (1.1 )               -          -             -          -          (1,813 )     (0.4 )             -          -
Operating
income             23,909       14.5            27,134       14.7        26,387       14.9          70,543       13.9          85,502       15.6
Other expense
(income), net         963        0.6             1,441        0.8          (910 )     (0.5 )        (1,295 )     (0.3 )           636        0.1
Income before
income taxes
and equity in
net income of
affiliates         22,946       13.9            25,693       13.9        27,297       15.4          71,838       14.2          84,866       15.5
Income tax
expense             5,139        3.1             7,656        4.2         7,516        4.2          17,853        3.5          27,300        5.0
Equity in net
income of
affiliates              -          -                 -          -             -          -               -          -              (3 )        -
Net income     $   17,807       10.8  %   $     18,037        9.8 %   $  19,781       11.1  %   $   53,985       10.6  %   $   57,569       10.5  %

Net sales For the three months ended September 28, 2013, net sales declined by $19.9 million, or 11%, to $164.6 million compared to $184.4 million for the three months ended September 29, 2012. Net sales for the first nine months of 2013 were $507.2 million, down 7% from $548.1 million in the comparable year-ago period. The year-over-year declines in net sales primarily reflected continued softness in semiconductor industry spending. Sequentially, overall demand from the Company's semiconductor industry customers softened. There was lower demand from leading edge fabs, aggregate fab utilization rates remained well below peak levels and semiconductor industry capital spending remains restrained. The Company's operating segments experienced varied sales results. See "Segment Analysis" included below in this section for additional detail.


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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 28, 2013 decreased 8%, while sales of capital-driven products fell 12% compared to the year ago period. In the quarter ended September 28, 2013, sales of unit-driven products represented 67% and capital-driven products represented 33% of total sales. For the third quarter of 2012 and second quarter of 2013, this split was 66%/34% and 67%/33%, respectively.
The sales decreases for the three-month and nine-month periods ended September 28, 2013 included unfavorable foreign currency translation effects of $4.6 million and $12.4 million, respectively, primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales decreased 8% and 5% for the three-month and nine-month periods in 2013 when compared to the year-ago periods.
On a geographic basis, total sales in the third quarter of 2013 to North America were 29%, Asia (excluding Japan) 43%, Europe 14% and Japan 14% compared to prior year third quarter figures as follows: North America 30%, Asia (excluding Japan) 40%, Europe 12% and Japan 18%. Sales in North America, Asia and Japan fell 12%, 4% and 32%, respectively, while sales increased 1% in Europe in the third quarter of 2013 compared to a year ago. Slightly over one-half of the decrease in Japan sales was due to the fluctuation in exchange rates noted above. On a sequential basis, net sales decreased 7% from $177.5 million in the second quarter of 2013 and reflected decreases of 7% in sales for both unit-driven and capital-driven products. On a geographic basis, net sales to Asia (excluding Japan), Japan, North America and Europe decreased 8%, 10%, 6% and 4%, respectively.
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 for the three months ended September 28, 2013 decreased to $70.1 million, down from $81.9 million for the three months ended September 29, 2012. For the first nine months of 2013, gross profit was $214.8 million, down from $240.9 million recorded in the first nine 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 third quarter of 2013 was 42.6% versus 44.4% for the third quarter of 2012. For the first nine months of 2013, the Company's gross margin rate was 42.4% compared to 44.0% for the comparable period a year ago. The lower comparative gross margin percentages are primarily due to the Company's lower sales levels.
On a sequential basis, gross profit decreased by $7.4 million to $70.1 million in the third quarter of 2013. The gross margin rate of 42.6% for the third quarter of 2013 declined from 43.7% in the second quarter of 2013. The gross profit and gross margin reductions primarily reflect the Company's lower sales levels.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses were $31.7 million for the three months ended September 28, 2013, down 19% from the comparable three-month period a year earlier. Included in the three-month period in 2012 was a $3.9 million charge associated with compensation to which the Company's current chief executive officer (CEO) was entitled in connection with the succession and transition plan. Employee costs, which comprises about two-thirds of overall SG&A expense, decreased $1.2 million. The decrease also reflected a decline in consulting and professional fees of $1.1 million.
For the first nine months of 2013, SG&A expenses decreased by $10.6 million, or 10% to $99.6 million compared to $110.1 million a year earlier. For the first nine months of 2013, SG&A costs, as a percent of net sales, decreased to 19.6% from 20.1% a year ago, reflecting the decrease in net sales. Employee costs, which make up approximately two-thirds of SG&A expenses, decreased by $2.0 million for the nine-month period. The decrease also reflected a decline in consulting and professional fees of $1.3 million. The year-over-year decrease also reflects the $3.9 million reduction in SG&A expense related to the 2012 CEO succession and transition plan noted above. Also accounting for the decrease in SG&A expenses for the first nine months of 2013 compared to the year-ago period is a $0.7 million reduction in SG&A expense during the second quarter of 2013 related to the sale of a building classified as an asset held for sale, consisting of the gain on sale thereof and an adjustment to the real estate tax accrual for the building.

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 $13.9 million in the three months ended September 28, 2013 compared to $13.3 million in the year-ago period. The $0.6 million increase in


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ER&D expense was due to slightly higher employee costs. ER&D expenses increased 4% to $39.5 million in the first nine months of 2013 compared to $38.0 million in the year-ago nine-month period, also due to higher employee costs.

Contingent consideration fair value adjustment In the three months ended September 28, 2013, the Company recognized an acquisition-related contingent consideration adjustment of $1.8 million reflecting changes in the fair value of contingent consideration associated with the Jetalon acquisition described in note 2 in the Company's condensed consolidated financial statements. This adjustment reflects changes in the revenue and gross profit forecasts for the three years ending December 31, 2015 and the estimated probability of achieving those projections.
Other expense (income), net Other expense, net was $1.0 million and other income, net was $1.3 million in the three-month and nine-month periods ended September 28, 2013, respectively, which are mainly due to foreign currency transaction losses or gains. The foreign currency transaction loss for the three-month and nine-month periods ended September 28, 2013 included a charge of $0.7 million associated with the realization of translation losses recorded upon the liquidation of the Company's UK subsidiary.

Other expense, net was $1.4 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.

Income tax expense The Company recorded income tax expense of $5.1 million and $17.9 million, respectively, in the three and nine months ended September 28, 2013 compared to income tax expense of $7.7 million and $27.3 million in the three and nine months ended September 29, 2012. The year-to-date effective tax rate was 24.9% in the 2013 period, compared to 32.2% in the 2012 period. The 2013 rate reflects a base rate of approximately 25.5% before the recognition of discrete tax items.

The lower rate in 2013 reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates. The effective tax rate in 2013 also 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 in 2013 and recorded by the Company in the first quarter of 2013.

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 $17.8 million, or $0.13 per diluted share, in the three-month period ended September 28, 2013 compared to net income of $18.0 million, or $0.13 per diluted share, in the three-month period ended September 29, 2012. For the nine months ended September 28, 2013, net income was $54.0 million, or $0.39 per diluted share, compared to net income of $57.6 million, or $0.42 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 22% to $31.6 million in the three-month period ended September 28, 2013, compared to $40.8 million in the three-month period ended September 29, 2012. Adjusted EBITDA, as a percent of net sales, decreased to 19.2% from 22.1% a year earlier. Adjusted Operating Income decreased 27% to $24.4 million in the three-month period ended September 28, 2013, compared to $33.5 million in the three-month period ended September 29, 2012. Adjusted Operating Income, as a percent of net sales, decreased to 14.8% from 18.1% a year earlier. Non-GAAP Earnings Per Share decreased 13% to $0.14 in the three-month period ended September 28, 2013, compared to $0.16 in the three-month period ended September 29, 2012.


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Adjusted EBITDA decreased 17% to $97.5 million in the nine-month period ended September 28, 2013, compared to $117.6 million in the nine-month period ended September 29, 2012. Adjusted EBITDA, as a percent of net sales, decreased to 19.2% from 21.4% a year earlier. Adjusted Operating Income decreased 22% to $75.7 million in the nine-month period ended September 28, 2013, compared to $96.7 million in the nine-month period ended September 29, 2012. Adjusted Operating Income, as a percent of net sales, decreased to 14.9% from 17.6% a year earlier. Non-GAAP Earnings Per Share decreased 9% to $0.42 in the nine-month period ended September 28, 2013, compared to $0.46 in the nine-month period ended September 29, 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
. . .
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