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ENTG > SEC Filings for ENTG > Form 10-Q on 5-May-2014All Recent SEC Filings

Show all filings for ENTEGRIS INC

Form 10-Q for ENTEGRIS INC


5-May-2014

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, 2013 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 2014 end March 29, 2014, June 28, 2014, September 27, 2014 and December 31, 2014. Unaudited information for the three months ended March 29, 2014 and March 30, 2013 and the financial position as of March 29, 2014 and December 31, 2013 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 Ended March 29, 2014 For the three months ended March 29, 2014, net sales increased by $0.7 million to $165.8 million, compared to $165.1 million for the three months ended March 30, 2013. Trends in the semiconductor industry remained mixed. Sequentially, overall demand from the Company's semiconductor industry customers softened from the fourth quarter of 2013 which had seen modest improvement in industry fab utilization rates and industry capital spending.
Net sales for the three-month period ended March 29, 2014 included unfavorable foreign currency translation effects of $2.3 million primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales increased 2% for the three-month period in 2014 when compared to the year-ago period.
The Company reported a higher gross profit in the first quarter when compared to the comparable year-ago period, primarily due to margin improvement associated with an improved sales mix. The Company's gross margin rate for the first quarter was 43.0% compared to 40.7% in the year-ago period. Operating costs, consisting of selling, general and administrative (SG&A) and engineering, research and development (ER&D), increased 13% for the first quarter of 2014 when compared to the year-ago quarter.
The Company's year-to-date effective tax rate decreased to 22.9% in 2014, compared to 24.1% in 2013. The lower rate in 2014 reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates. 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 reporting segments experienced varied net sales and operating results for the three-month period as described in greater detail below.

As a result of the aforementioned factors, the Company reported net income of $14.3 million, or $0.10 per diluted share, for the quarter ended March 29, 2014 compared to net income of $16.4 million, or $0.12 per diluted share, in the quarter ended March 30, 2013.
During the three-month period ended March 29, 2014, the Company's operating activities provided net cash flow of $12.4 million. Capital expenditures were $13.8 million for the period. Cash and cash equivalents were $381.7 million at March 29, 2014 compared with cash and cash equivalents of $384.4 million at December 31, 2013. The Company had no outstanding short-term or long-term debt at March 29, 2014 or December 31, 2013.
Subsequent Event
On April 30, 2014, the Company acquired ATMI, Inc., a Delaware corporation (ATMI), for approximately $1.2 billion in cash pursuant to an Agreement and Plan of Merger with ATMI. ATMI is a leading supplier of high-performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. ATMI's sales for the year ended December 31, 2013 were approximately $361 million. The acquisition of ATMI was funded with existing cash balances as well as funds raised by the Company through the issuance of debt in the form of a senior secured term loan in the aggregate principal amount of $460 million and senior unsecured notes in the aggregate principal amount of $360 million. See note 6 to the condensed consolidated financial statements for more information concerning the merger and the related issuance of debt.


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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, 2013 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 Months Ended March 29, 2014 Compared to Three Months Ended March 30, 2013 and December 31, 2013
The following table compares operating results for the three months ended March 29, 2014 with results for the three months ended March 30, 2013 and December 31, 2013, both in absolute dollars and as a percentage of net sales, for each caption.

                                                         Three months ended
(Dollars in thousands)           March 29, 2014            March 30, 2013           December 31, 2013
Net sales                    $ 165,804      100.0  %   $ 165,070      100.0  %   $ 186,260      100.0  %
Cost of sales                   94,452       57.0         97,942       59.3        106,876       57.4
Gross profit                    71,352       43.0         67,128       40.7         79,384       42.6
Selling, general and
administrative expenses         34,787       21.0         32,421       19.6         37,559       20.2
Engineering, research and
development expenses            15,690        9.5         12,173        7.4         15,773        8.5
Amortization of intangible
assets                           2,336        1.4          2,287        1.4          2,358        1.3
Operating income                18,539       11.2         20,247       12.3         23,694       12.7
Other income, net                  (16 )        -         (1,348 )     (0.8 )         (663 )     (0.4 )
Income before income taxes      18,555       11.2         21,595       13.1         24,357       13.1
Income tax expense               4,243        2.6          5,198        3.1          3,816        2.0
Net income                   $  14,312        8.6  %   $  16,397        9.9  %   $  20,541       11.0  %

Net sales For the three months ended March 29, 2014, net sales increased by $0.7 million to $165.8 million, compared to $165.1 million for the three months ended March 30, 2013. Trends in the semiconductor industry remained mixed, with pockets of strength in some areas, offset by softer trends in others. Sequentially, overall demand from the Company's semiconductor industry customers softened from the fourth quarter of 2013 which had seen modest improvement in industry fab utilization rates and industry capital spending.
The sales increase for the three-month period ended March 29, 2014 included unfavorable foreign currency translation effects of $2.3 million primarily related to the weakening of the Japanese yen versus the U.S. dollar. Excluding this factor, net sales increased 2% for the three-month periods in 2014 when compared to the year-ago period.
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 March 29, 2014 increased 1%, while sales of capital-driven products increased 1% compared to the year ago period. In the quarter ended March 29, 2014, sales of unit-driven products represented 66% and capital-driven products represented 34% of total sales. For the first quarter of 2013 and fourth quarter of 2013, this split was 66%/34% and 65%/35%, respectively.
On a geographic basis, total sales in the first quarter of 2014 to North America were 29%, Asia (excluding Japan) 43%, Europe 15% and Japan 14% compared to prior year first quarter figures as follows: North America 29%, Asia (excluding Japan) 43%, Europe 12% and Japan 15%. Sales in North America and Asia remained flat, Japan fell 8%, and sales increased 12% in Europe in the first quarter of 2014 compared to a year ago. The decrease in Japan sales was primarily due to the fluctuation in exchange rates noted above.
On a sequential basis, net sales decreased 11% from $186.3 million in the fourth quarter of 2013 and reflected decreases of 9% and 14% in sales for both unit-driven and capital-driven products, respectively. On a geographic basis, net sales to Asia (excluding Japan), Japan, and North America declined by 10%, 22%, and 13%, respectively, while net sales to Europe increased 3%. 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.


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Gross profit Gross profit for the three months ended March 29, 2014 increased to $71.4 million, up from $67.1 million for the three months ended March 30, 2013. Primarily reflecting margin improvement associated with a more favorable sales mix, the Company reported a higher gross profit in the first quarter when compared to the comparable year-ago period. The Company's gross margin rate for the first quarter was 43.0% compared to 40.7% in the year-ago period. On a sequential basis, gross profit decreased by $8.0 million to $71.4 million in the first quarter of 2014. The sequential gross profit reduction primarily reflects the Company's lower sales levels, partly offset by slightly improved sales mix. The gross margin rate of 43.0% for the first quarter of 2014 improved from 42.6% in the fourth quarter of 2013.
Selling, general and administrative expenses. Selling, general and administrative (SG&A) expenses were $34.8 million for the three months ended March 29, 2014, up 7% from the comparable three-month period a year earlier. Consulting and professional fees, and government fees, both primarily reflecting costs related to the ATMI acquisition, rose by $1.6 million. Travel-related expenditures increased by $0.6 million.

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 $15.7 million in the three months ended March 29, 2014 compared to $12.2 million in the year-ago period. The $3.5 million increase in ER&D expense was due to higher employee costs of $1.2 million as well as increased ER&D activity levels, reflecting higher customer samples and supplies of $1.4 million. Other income, net Other income, net was $0.0 million and $1.3 million in the three-month periods ended March 29, 2014 and March 30, 2013, respectively, which are mainly due to foreign currency transaction gains.

Income tax expense The Company recorded income tax expense of $4.2 million in the three months ended March 29, 2014 compared to income tax expense of $5.2 million in the three months ended March 30, 2013. The Company's year-to-date effective tax rate decreased to 22.9% in 2014, compared to 24.1% in 2013. The lower rate in 2014 reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates. 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. Net income The Company recorded net income of $14.3 million, or $0.10 per diluted share, in the three-month period ended March 29, 2014 compared to net income of $16.4 million, or $0.12 per diluted share, in the three-month period ended March 30, 2013. The reductions in net income and diluted earnings per share mainly reflect the Company's higher operating expenses (SG&A and ER&D expenses) offset in part by improved gross profit and a lower effective tax rate.
Non-GAAP Measures 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 definition of non-GAAP financial measures and 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 increased 1% to $30.0 million in the three-month period ended March 29, 2014, compared to $29.8 million in the three-month period ended March 30, 2013. Adjusted EBITDA, as a percent of net sales, remained flat at 18.1% from a year earlier. Adjusted Operating Income decreased 2% to $22.2 million in the three-month period ended March 29, 2014, compared to $22.5 million in the three-month period ended March 30, 2013. Adjusted Operating Income, as a percent of net sales, decreased to 13.4% from 13.7% a year earlier. Non-GAAP Earnings Per Share decreased 8% to $0.12 in the three-month period ended March 29, 2014, compared to $0.13 in the three-month period ended March 30, 2013.

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 5 to the condensed consolidated financial statements for additional information on the Company's three segments.


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The following table presents selected net sales and segment profit data for the Company's three reporting segments for the three months ended March 29, 2014 and March 30, 2013, and the three months ended December 31, 2013.

                                                          Three months ended
(In thousands)                        March 29, 2014       March 30, 2013       December 31, 2013
Contamination Control Solutions
Net sales                           $        105,318     $        103,961     $           123,665
Segment profit                                24,480               22,078                  30,417
Microenvironments
Net sales                           $         42,791     $         44,132     $            45,680
Segment profit                                 7,837                9,325                   8,413
Specialty Materials
Net sales                           $         17,695     $         16,977     $            16,915
Segment profit                                 1,913                2,216                     970

Contamination Control Solutions (CCS)
For the first quarter of 2014, CCS net sales increased 1% to $105.3 million, from $104.0 million in the comparable period last year. The increase included unfavorable foreign currency translation effects of $2.2 million, related to weakness in the Japanese yen; excluding the unfavorable foreign currency translation effect, CCS sales rose 3%. The slight year-over-year sales increase primarily reflected higher sales of gas filtration products. Sales of fluid components and systems and liquid filtration products were flat. CCS reported a segment profit of $24.5 million in the first quarter of 2014, up 11% from $22.1 million in the year-ago period due to a favorable sales mix, partly offset by a 14% increase in operating expenses, mainly consisting of higher ER&D expenditures.
Primarily due to lower sales of liquid filtration products, CCS sales were down 15% on a sequential basis from the fourth quarter of 2013. CCS's segment profit declined by 20%, primarily reflecting the decrease in sales levels, partially offset by a slightly favorable sales mix and a 3% decrease in operating expenses.
Microenvironments (ME)
For the first quarter of 2014, ME net sales decreased 3% to $42.8 million, from $44.1 million in the comparable period last year. The revenue decrease primarily reflected lower sales of 300mm wafer process and wafer shipper products. ME reported a segment profit of $7.8 million in the first quarter of 2014 compared to a $9.3 million segment profit in the year-ago period. The decrease in the segment's gross profit is associated with lower sales levels, offset partly by a favorable sales mix, and a 1% decrease in operating expenses.

Sales were down 6% on a sequential basis from the fourth quarter of 2013, reflecting reduced sales of 300mm wafer process products. The decrease in the segment's gross profit associated with lower sales levels and an unfavorable sales mix, was partially offset by a 13% decrease in operating expense levels, leading to a lower sequential segment profit for the first quarter of 2014. Specialty Materials (SMD)
For the first quarter of 2014, SMD net sales increased 4%, to $17.7 million, from $17.0 million in the comparable period last year. The sales increase mainly reflected slightly improved demand for SMD's high-margin specialty-coated products. SMD reported a segment profit of $1.9 million in the first quarter of 2014, down 14%, compared to a segment profit of $2.2 million in the first quarter of 2013. An increase in operating expenses, mainly related to increased ER&D expenditures, accounts for the reduction in segment profit. Unallocated general and administrative expenses Unallocated general and administrative expenses totaled $13.4 million in the first quarter of 2014 compared to $11.1 million in the first quarter of 2013. Costs related to the ATMI acquisition, consisting mainly of consulting and professional fees, and government fees, were $1.3 million in the first quarter of 2014.


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Liquidity and Capital Resources
Operating activities Cash flow provided by operating activities totaled $12.4 million in the three months ended March 29, 2014. Cash generated by operating activities in the three months ended March 29, 2014 was primarily the result of net income adjusted for non-cash expenses (such as depreciation, amortization and share-based compensation). The net impact of changes in operating assets and liabilities absorbed $14.8 million in operating cash flow, mainly reflecting increases in accounts receivable and inventories, and a decrease in accrued liabilities.
Despite the decline in sales, accounts receivable increased by $7.2 million during the three months ended March 29, 2014. This change mainly reflects the increase in the Company's days sales outstanding (DSO) as well significant sales being made late in the quarter. The Company's DSO was 60 days at March 29, 2014 compared to a historically-low 50 days at the beginning of the year. Inventories at March 29, 2014 increased by $6.4 million during the three months ended March 29, 2014, but increased by $7.5 million after taking into account the impact of foreign currency translation adjustments and the provision for excess and obsolete inventory. The increase reflects higher levels of work-in-process and raw materials.
Accounts payable and accrued liabilities decreased $2.7 million during the three months ended March 29, 2014, but were $3.6 million lower net of foreign currency translation adjustments. The decrease reflects the payment of fiscal year 2013 incentive compensation during the first quarter of 2014.
Working capital at March 29, 2014 was $525.2 million, compared to $514.7 million as of December 31, 2013, and included $381.7 million in cash and cash equivalents, compared to cash and cash equivalents of $384.4 million as of December 31, 2013.
Investing activities Cash flow used in investing activities totaled $13.4 million in the three-month period ended March 29, 2014. . . .

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