Entegris, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 28, 2015; balance sheet compared with December 31, 2014. Entegris supplies materials, contamination-control products and related systems for semiconductor and other high-technology manufacturing. Results include ATMI, acquired April 30, 2014, for the first time in this year-over-year comparison.
Financial performance
| Metric | Q1 2015 | Comparable period |
|---|---|---|
| Net sales | $263.4 million | $165.8 million |
| Gross profit / margin | $116.5 million / 44.2% | $71.4 million / 43.0% |
| Operating income / margin | $27.5 million / 10.5% | $18.5 million / 11.2% |
| Net income | $14.9 million; $0.11 diluted EPS | $14.3 million; $0.10 diluted EPS |
| Operating cash flow | $(0.1) million | $12.4 million |
| Capital expenditures | $20.5 million | $13.8 million |
| Cash and cash equivalents | $341.4 million | $389.7 million at Dec. 31, 2014 |
| Total debt | $741.9 million | $766.8 million at Dec. 31, 2014 |
Revenue increased 59% year over year, including $87.3 million from ATMI; legacy sales rose $18.4 million while currency translation reduced sales by $8.2 million. Excluding ATMI and currency effects, management reported sales growth of 11%. Sales were down 3% sequentially from Q4 2014. Net income increased about 4%, but operating margin declined year over year as operating expenses and acquired intangible amortization grew.
Cash from operations was nearly neutral as net income and noncash charges were offset by working-capital use, notably receivables. Days sales outstanding rose to 64 days from 52 at year-end. Cash declined by $48.3 million during the quarter, including capital spending, a $25 million term-loan prepayment and foreign-exchange effects. Working capital was $518.3 million.
Business and material changes
- Critical Materials Handling sales were $167.5 million, up 15%; segment profit was $41.3 million, up 35%.
- Electronic Materials sales were $95.9 million versus $20.2 million, and segment profit was $20.2 million versus $3.7 million. The increase primarily reflects ATMI, which contributed $75.8 million of EM sales.
- Gross margin improved year over year, reflecting higher sales and ATMI’s product mix. Q1 gross margin was 44.2%, compared with 43.4% in Q4 2014.
- Interest expense rose to $9.8 million from a nominal amount, primarily due to debt issued to fund the ATMI acquisition. SG&A included $2.6 million of integration costs; acquired ATMI operations also increased SG&A and R&D.
Management’s non-GAAP measures showed adjusted EBITDA of $55.8 million (21.2% of sales), versus $30.0 million (18.1%); adjusted operating income of $42.5 million (16.1%), versus $22.2 million (13.4%); and non-GAAP diluted EPS of $0.18, versus $0.12. These measures exclude specified costs and should be considered alongside GAAP results.
Liquidity, outlook and risks
- Debt consisted of a $381.9 million secured term loan and $360 million of 6% senior unsecured notes. The term loan bears interest at 3.5%; $75 million of current maturities was reported. The $75 million asset-based revolving facility had no borrowings, subject to its borrowing base.
- The company reported compliance with debt covenants and said cash, available facilities and expected operating cash flow should meet working-capital and investment needs for at least 12 months. It cautioned that alternative financing might be needed if liquidity proves insufficient, and availability on acceptable terms is not assured.
- Management expected 2015 capital expenditures of approximately $60 million. SG&A was expected to remain above normal through the first half, with integration-related costs continuing, and to return to normalized levels by Q3; integration savings were expected during 2015. No specific revenue or earnings forecast was provided.
- Key exposures include semiconductor-industry cyclicality, customer demand and capacity spending, pricing and competition, input costs, foreign exchange, manufacturing risks and substantial acquisition-related debt. Management cited better semiconductor customer demand than in the year-ago period, while currency translation remained a headwind.
- Other items: a $0.7 million impairment and sale loss on an equity investment, partly offset in other income by foreign-currency transaction gains; foreign-currency translation reduced other comprehensive income by $9.7 million. Routine legal matters were not expected by management to materially affect the financial statements.
- Disclosure controls were deemed effective. Management had excluded ATMI from its internal-control effectiveness assessment for this quarter and planned to include it in Q2; integration of ATMI’s financial systems onto SAP was completed, with related controls still being evaluated.
Important facts for investors to verify
- How much of reported growth and margin improvement is attributable to ATMI versus underlying business demand, and whether expected integration savings materialize.
- Receivables collection and working-capital trends, given the increase in DSO and near-zero operating cash flow.
- Debt service, interest costs, covenant headroom and access to the revolving facility as the company continues integration and capital spending.
- Whether Q1’s stronger legacy demand persists and how foreign exchange, semiconductor cyclicality and customer capital spending affect results.
- Completion of ATMI purchase accounting and management’s planned Q2 inclusion of ATMI in the internal-control assessment.