Entegris, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The company supplies materials, filtration, purification, delivery and handling solutions for semiconductor and other high-technology manufacturing. ATMI, acquired April 30, 2014, is included in results from that date; therefore, year-over-year comparisons are not on a like-for-like basis.
Financial results
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $962.1 million | $693.5 million |
| Gross profit / margin | $376.7 million / 39.2% | $294.2 million / 42.4% |
| Operating income / margin | $21.4 million / 2.2% | $94.2 million / 13.6% |
| Net income | $7.9 million | $74.5 million |
| Diluted EPS | $0.06 | $0.53 |
| Cash from operating activities | $126.4 million | $109.4 million |
| Capital expenditures | $57.7 million | $60.4 million |
FY2014 sales rose 39%, primarily from $245.4 million of post-acquisition ATMI sales. Excluding ATMI and unfavorable currency translation of $7.5 million, legacy sales increased about 4%; management said sales trailed industry growth measures. Unit-driven products were 74% of sales, versus 66% in 2013.
Gross margin included a $48.6 million noncash cost-of-sales charge for the fair-value step-up of ATMI inventory sold. Excluding that charge, management reported a 44.2% gross margin. Higher SG&A, R&D and intangible amortization, acquisition/integration costs, and $33.4 million of interest expense contributed to the sharp decline in GAAP operating and net income. A $21.6 million income-tax benefit contributed to positive net income despite a $13.4 million pretax loss; the reported effective tax benefit rate was 161.1%.
Management’s non-GAAP measures were higher: adjusted EBITDA was $207.9 million (21.6% of sales), adjusted operating income $161.3 million (16.8%), and non-GAAP diluted EPS $0.69. These exclude specified acquisition-related and other items; they are not substitutes for GAAP results.
Fourth-quarter comparison
| Metric | Q4 2014 | Q4 2013 |
|---|---|---|
| Net sales | $271.6 million | $186.3 million |
| Gross profit / margin | $117.9 million / 43.4% | $79.4 million / 42.6% |
| Operating income | $20.8 million | $23.7 million |
| Net income | $9.3 million | $20.5 million |
| Diluted EPS | $0.07 | $0.15 |
Q4 sales increased substantially, with ATMI included in 2014. Gross margin improved year over year and rose from 36.2% in Q3 2014. Operating income and net income remained below Q4 2013.
Liquidity, debt and balance sheet
- Year-end cash and cash equivalents were $389.7 million; short-term investments were $4.6 million. Working capital was $503.1 million and the current ratio 2.92, compared with 6.27 a year earlier.
- Total debt was $766.8 million, including $360 million of 6% senior unsecured notes due 2022 and $406.8 million outstanding on a secured term loan due 2021. The balance sheet classified $100 million as current maturities; contractual 2015 term-loan payments were approximately $26.6 million, with prior payments reducing scheduled amounts.
- The $75 million asset-based revolver had no year-end borrowings, was subject to a borrowing base, and had $64.6 million of borrowing-base availability before other facility usage. The company reported compliance with debt covenants.
- Cash from operations was $126.4 million. Investing used $860.3 million, primarily the $809.4 million ATMI purchase price net of acquired cash; financing provided $747.6 million, principally from debt issuance.
- Approximately $301 million of cash was held by foreign subsidiaries and considered indefinitely reinvested. Management said domestic cash and operating flows should meet ordinary domestic needs for the next 12 months.
Outlook, commentary and risks
- Management expected 2015 capital expenditures of approximately $60 million. It expected elevated SG&A and integration costs through the first half of 2015, with SG&A returning to normalized levels by Q3; R&D expense was expected to rise with ATMI infrastructure but remain relatively stable as a percentage of sales.
- Key risks include semiconductor cyclicality and rapid demand changes, limited order commitments, customer concentration (one customer represented 13.6% of 2014 sales; top ten represented about 42%), pricing pressure, foreign-currency exposure, and reliance on some sole- or limited-source suppliers.
- Integration and reporting controls remain important: management and the auditor excluded ATMI’s internal controls from their 2014 control assessments, although both concluded Entegris’s assessed controls were effective. ATMI was to be included in testing by the second quarter of 2015.
- Other notable exposures include substantial debt and restrictive covenants, uncertainty around returns on 450 mm wafer investments, and the planned transition of membrane manufacturing before the Millipore facility arrangement expires June 30, 2015. Management reported no legal proceedings expected to materially affect the financial statements; the ATMI merger-related suit was dismissed by agreement in January 2015.
Important facts for investors to verify
- Separate acquisition-driven sales growth from legacy growth, and assess ATMI’s contribution to future sales and segment profitability.
- Reconcile GAAP earnings with management’s adjusted measures, including the $48.6 million inventory step-up, acquisition/integration expenses, amortization and tax effects.
- Review debt repayment requirements, covenant headroom, interest costs, and the location and availability of cash held overseas.
- Track integration savings, 2015 SG&A/R&D trends, and completion of ATMI internal-control testing and the membrane-facility transition.
- Assess concentration in major customers and suppliers, semiconductor demand and currency sensitivity, and the commercial timing and payoff of 450 mm investments.