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

Show all filings for ENTEGRIS INC

Form 10-Q for ENTEGRIS INC


5-Aug-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, the risks described in Part II, Item 1A of this report,
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 18,000 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 and six month periods ended June 28, 2014 and June 29, 2013 and the financial position as of June 28, 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


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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 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 28, 2014

On April 30, 2014, the Company acquired ATMI, Inc., a Delaware corporation (ATMI), for approximately $1.1 billion in cash, or $808.9 million net of cash acquired, as described in note 2 to the condensed consolidated financial statements. ATMI is a leading supplier of high-performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. The acquisition of ATMI (the Merger) was funded partly with the issuance of $820 million in debt, described in note 5 to the condensed consolidated financial statements.

For the three months ended June 28, 2014, net sales increased by $74.0 million, or 42%, to $251.6 million, compared to $177.5 million for the three months ended June 29, 2013. This sales improvement was principally driven by the inclusion of sales of $60.2 million from ATMI for the two-month period subsequent to the date of the merger. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 7%, reflecting strong demand from device makers and improved wafer starts.

Although net sales increased significantly year over year, the Company's gross profit rose by only $11.1 million for the three months ended June 28, 2014, to $88.7 million, up from $77.6 million for the three months ended June 29, 2013. Accordingly, the Company experienced a 35.2% gross margin rate compared to 43.7% in the comparable year ago period. The gross profit and gross margin figures reflect a $24.3 million charge for fair value write-up of acquired ATMI inventory sold during the quarter. Excluding that charge, the Company's gross margin for the second quarter was 44.9%.

The Company also incurred significantly higher selling, general and administrative (SG&A) expenses for the quarter ended June 28, 2014, mainly due to the inclusion of SG&A expenses for ATMI's operations and the significant merger-related expenses, including direct transaction costs, transaction-related expenses, mainly related to share-based compensation expense associated with the unvested portion of ATMI share-based awards settled in cash on the date of the Merger, severance and termination costs, and the cost of integration activities expensed during the period.

The Company incurred interest expense of $12.5 million for the quarter ended June 28, 2014 compared to a nominal amount a year earlier, the increase related to the debt outstanding issued to help fund the ATMI acquisition. The Company also recorded an income tax benefit of $22.4 million for the quarter. As a result, the Company reported a net loss of $14.7 million, or $0.11 loss per diluted share, for the quarter ended June 28, 2014 compared to net income of $19.8 million, or $0.14 per diluted share, a year ago.

Net sales for the six months ended June 28, 2014 were $417.4 million, up 22% from $342.6 million in the comparable year-ago period, principally driven by the inclusion of ATMI sales of $60.2 million. Exclusive of the ATMI sales, the Company's sales grew 4%, reflecting the strong demand from device makers and improved wafer starts noted above. Gross profit, operating expenses, interest and tax expense for the six months ended June 28, 2014 were also affected by the ATMI-related items noted above. As a result, the Company reported a net loss of $0.4 million, or $0.00 per diluted share,for the six months ended June 28, 2014 compared to net income of $36.2 million, or $0.26 per diluted share, in the comparable year-ago period.

Sales were up 52% on a sequential basis over the first quarter of 2014. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 15%. Sequentially, overall demand from the Company's semiconductor industry customers increased, reflecting improved industry fab utilization rates and higher industry capital spending.


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The Company's reportable segments experienced varied net sales and operating results for the three-month and six-month periods as described in greater detail below.
During the six-month period ended June 28, 2014, the Company's operating activities provided net cash flow of $23.5 million. Cash used for the ATMI acquisition, net of cash acquired, was $808.9 million, while capital expenditures were $28.9 million for the period. Cash and cash equivalents were $367.0 million at June 28, 2014 compared with cash and cash equivalents of $384.4 million at December 31, 2013. The Company had outstanding long-term debt of $817.7 million at June 28, 2014 and none at December 31, 2013, respectively. 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. In addition, due to the significance of the estimates, assumptions and judgments associated with the acquisition of ATMI. Inc. discussed elsewhere in this Quarterly Report on Form 10-Q, the Company provides the following discussion of its critical accounting policy for business acquisitions.

Business Acquisitions
The Company accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items, the Company typically obtains assistance from a third-party valuation expert.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, the Company normally utilizes one or more forms of the "income method." This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method (or other methods) include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.

Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.


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Three and Six Months Ended June 28, 2014 Compared to Three and Six Months Ended
June 29, 2013 and Three Months Ended March 29, 2014
The following table compares operating results for the three and six months
ended June 28, 2014 with results for the three and six months ended June 29,
2013 and for the three months ended March 29, 2014, both in dollars and as a
percentage of net sales, for each caption.

                                            Three months ended                                                Six months ended
(Dollars in
thousands)          June 28, 2014              June 29, 2013            March 29, 2014             June 28, 2014             June 29, 2013
Net sales      $ 251,578       100.0  %   $ 177,544      100.0  %   $ 165,804      100.0  %   $ 417,382      100.0  %   $ 342,614      100.0  %
Cost of sales    162,910        64.8         99,974       56.3         94,452       57.0        257,362       61.7        197,916       57.8
Gross profit      88,668        35.2         77,570       43.7         71,352       43.0        160,020       38.3        144,698       42.2
Selling,
general and
administrative
expenses          82,347        32.7         35,397       19.9         34,787       21.0        117,134       28.1         67,818       19.8
Engineering,
research and
development
expenses          21,581         8.6         13,427        7.6         15,690        9.5         37,271        8.9         25,600        7.5
Amortization
of intangible
assets             9,390         3.7          2,359        1.3          2,336        1.4         11,726        2.8          4,646        1.4
Contingent
consideration
fair value
adjustment        (1,282 )      (0.5 )            -          -              -          -         (1,282 )     (0.3 )            -          -
Operating
(loss) income    (23,368 )      (9.3 )       26,387       14.9         18,539       11.2         (4,829 )     (1.2 )       46,634       13.6
Interest
expense           12,537         5.0             40          -             29          -         12,566        3.0             44          -
Interest
income              (192 )      (0.1 )          (54 )        -           (223 )     (0.1 )         (415 )     (0.1 )         (179 )     (0.1 )
Other expense
(income), net      1,351         0.5           (896 )     (0.5 )          178        0.1          1,529        0.4         (2,123 )     (0.6 )
(Loss) income
before income
taxes and
equity in
affiliates       (37,064 )     (14.7 )       27,297       15.4         18,555       11.2        (18,509 )     (4.4 )       48,892       14.3
Income tax
(benefit)
expense          (22,445 )      (8.9 )        7,516        4.2          4,243        2.6        (18,202 )     (4.4 )       12,714        3.7
Equity in net
loss of
affiliates            50           -              -          -              -          -             50          -              -          -
Net (loss)

income $ (14,669 ) (5.8 )% $ 19,781 11.1 % $ 14,312 8.6 % $ (357 ) (0.1 )% $ 36,178 10.6 %

Net sales For the three months ended June 28, 2014, net sales increased by $74.0 million to $251.6 million, compared to $177.5 million for the three months ended June 29, 2013. This sales improvement was principally driven by the inclusion of sales of $60.2 million from ATMI for the two-month period subsequent to the date of the merger. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 7%, reflecting strong demand from device makers and improved wafer starts. Net sales for the six months ended June 28, 2014 were $417.4 million, up 22% from $342.6 million in the comparable year-ago period, principally driven by the inclusion of sales from ATMI of $60.2 million. Exclusive of the ATMI sales, the Company's sales grew 4%, reflecting the strong demand from device makers and improved wafer starts noted above.
Sales were up 52% on a sequential basis over the first quarter of 2014. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 15%. Sequentially, overall demand from the Company's semiconductor industry customers increased primarily reflecting improved industry fab utilization rates.
Foreign currency translation effects on net sales for the three and six months ended June 28, 2014 were nominal with the effect of a weaker Japanese yen versus the U.S. dollar offset by strength in most other currencies versus the U.S. dollar.


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The Company's operating segments experienced varied sales results. See "Segment Analysis" included below in this section for additional detail. On a geographic basis, total sales in the second quarter of 2014 to North America were 25%, Asia (excluding Japan) 52%, Europe 12% and Japan 12% compared to prior year second quarter sales to North America of 29%, Asia (excluding Japan) 43%, Europe 12% and Japan 14%. Sales in Asia increased 70%, while sales in North America, Japan and Europe each rose approximately 20% in the second quarter of 2014 compared to a year ago.
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.

Gross profit Gross profit for the three months ended June 28, 2014 increased to $88.7 million, up from $77.6 million for the three months ended June 29, 2013. The increase in gross profit reflects the improvement in legacy Entegris sales and the inclusion of sales from ATMI. Despite the improvement in gross profit, the Company experienced a 35.2% gross margin rate compared to 43.7% in the comparable year ago period.

Gross profit for the six months ended June 28, 2014 increased to $160.0 million, up from $144.7 million for the six months ended June 29, 2013, a $15.3 million increase. The figures reflect a 38.3% gross margin rate for the first half of 2014 compared to 42.2% in the comparable year ago period.

The gross margin percentages for the three and six months were below the comparable year-ago figures primarily due to a $24.3 million incremental cost of sales charge associated with the sale of inventory acquired in the merger with ATMI. An inventory write-up of $48.6 million was recorded as part of the purchase price allocation and is being expensed over the expected inventory turn of the acquired finished goods inventory. The inventory write-up is expected to be fully amortized by the end of the third quarter of 2014. Excluding that charge, the Company's gross margin for the three and six months ended June 28, 2014 were 44.9% and 44.2%, respectively. The adjusted gross margin rates exceeded the comparable year-ago figures mainly due to the increase in Company sales levels and, on average, higher margins for ATMI products.
On a sequential basis, gross profit increased by $17.3 million to $88.7 million, up from $71.4 million in the first quarter. The sequential gross profit increase reflects an improvement in legacy Entegris sales and the inclusion of sales from ATMI, net of the incremental cost of sales charge associated with the write-up of inventory acquired noted above. Reflecting the Company's higher sales levels, the adjusted gross margin rate of 44.9% for the second quarter of 2014 improved from 43.0% in the first quarter of 2014.
Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses were $82.3 million for the three months ended June 28, 2014, up $47.0 million, or 133%, from the comparable three-month period a year earlier. SG&A expenses recorded by ATMI and included in the Company's condensed consolidated financial statements after the date of the Merger amounted to $35.6 million, accounting for approximately 75% of the increase. Included in these expenses were costs of $26.8 million related to the ATMI acquisition, specifically $22.2 million for share-based compensation expense, as well as severance and retention costs of $4.6 million. In addition, the Company incurred expenses of $7.8 million in connection with the completion of the ATMI merger, as well as costs of $3.4 million associated with integration of the two operations.
SG&A expenses increased 73% to $117.1 million in the first six months of 2014 compared to $67.8 million in the year-ago period, an increase of $49.3 million, also primarily due to the addition of SG&A expenses incurred by or related to ATMI recorded in the second quarter. On a sequential basis, SG&A expenses increased by $47.6 million in the second quarter of 2014. The sequential SG&A expense increase is also primarily due to the addition of the SG&A expenses incurred by or related to ATMI recorded in the second quarter.

In addition to the increase in SG&A costs associated with ATMI's infrastructure, the Company expects SG&A costs to be higher than normal during the remainder of 2014 as integration costs and related severance and retention costs will continue during this period. The Company expects overall SG&A costs will decline on a pro forma basis resulting from the combination of various sales, marketing and other corporate functions during the balance of 2014 and 2015. These savings are expected to be realized in the second half of 2014 and in 2015.

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 $21.6 million in the three months ended June 28, 2014 compared to $13.4 million in the year-ago period, an $8.2 million increase. ER&D expenses recorded by ATMI and included in the Company's condensed consolidated financial statements after the date of the Merger amounted to $6.0 million, accounting for approximately three-quarters of the increase. ER&D expenses increased 46%


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to $37.3 million in the first six months of 2014 compared to $25.6 million in the year-ago period, also due to the addition of ER&D expenses from ATMI. The remainder of the increase is due to higher employee costs ($1.0 million and 2.2 million for the three and six months ended June 28, 2014, respectively) as well as increased ER&D activity levels, including higher customer samples and supplies of $1.5 million and $2.9 million for the three and six months ended June 28, 2014, respectively).
On a sequential basis, ER&D expenses increased by $5.9 million in the second quarter of 2014. The sequential ER&D expense increase is primarily due to the addition of the ER&D expenses incurred by ATMI in the second quarter.

The Company expects ER&D costs will increase during the remainder of 2014 due to the addition of ATMI's ER&D infrastructure. However, these costs are expected to stay relatively stable as a percentage of net sales. The Company's overall ER&D efforts will continue to focus on the support or extension of current product lines, and the development of new products and manufacturing technologies. Interest expense Interest expense was $12.5 million in the three-month period ended June 28, 2014. The increase over the nominal interest expense for the three months ended June 29, 2013 reflects the interest associated with the borrowings made by the Company in connection with the acquisition of ATMI as described in notes 2 and 5 to the Company's condensed consolidated financial statements. Interest expense included interest on outstanding borrowings, the amortization of debt issuance costs associated with such borrowings and bridge financing costs of $4.0 million.
Other expense (income), net Other expense, net was $1.4 million and $1.5 million in the three-month and six-month periods ended June 28, 2014, respectively, which was mainly due to foreign currency transaction losses. Other income, net was $0.9 million and $2.1 million in the three-month and six-month periods ended June 29, 2013, respectively, which are mainly due to foreign currency transaction gains.

Income tax (benefit) expense The Company recorded an income tax benefit of $22.4 million and $18.2 million, respectively, in the three and six months ended June 28, 2014 compared to income tax expense of $7.5 million and $12.7 million, respectively, in the three and six months ended June 29, 2013. The Company's year-to-date effective tax rate was 98.3% in 2014, compared to 26.0% in 2013. This increase reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates, nondeductibility of certain . . .

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