ENTEGRIS, INC. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 29, 2014; comparisons are with the three months ended March 30, 2013 unless stated otherwise. Entegris supplies products and services that purify, protect, and transport critical materials, primarily for semiconductor and other high-technology industries. Financial statements are unaudited.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $165.8 million | $165.1 million |
| Gross profit / margin | $71.4 million / 43.0% | $67.1 million / 40.7% |
| Operating income / margin | $18.5 million / 11.2% | $20.2 million / 12.3% |
| Net income | $14.3 million | $16.4 million |
| Diluted EPS | $0.10 | $0.12 |
| Operating cash flow | $12.4 million | $7.4 million |
| Capital expenditures | $13.8 million | $16.1 million |
Adjusted EBITDA, a non-GAAP measure, was $30.0 million (18.1% of sales), versus $29.8 million (18.1%). Adjusted operating income was $22.2 million (13.4% of sales), versus $22.5 million (13.7%); non-GAAP diluted EPS was $0.12 versus $0.13. The company cautions that non-GAAP measures are not standardized and should be considered alongside GAAP results.
Balance sheet and liquidity
At March 29, 2014, cash and cash equivalents were $381.7 million, working capital was $525.2 million, total assets were $883.5 million, and shareholders’ equity was $771.8 million. The company reported no short- or long-term debt at quarter-end. Current liabilities were $90.8 million. Operating cash flow was below capital spending, resulting in a $2.8 million decrease in cash during the quarter, to $381.7 million.
Management said available cash, credit facilities, operating cash flow, and acquisition-related debt financing were expected to cover working capital and investment needs for at least 12 months. The filing reports $109.0 million of cash associated with indefinitely reinvested foreign earnings.
Changes and operating trends
- Sales rose 0.4% year over year; excluding $2.3 million of unfavorable foreign-currency translation, sales increased 2%. Sales declined 11% sequentially from Q4 2013 as semiconductor customer demand softened.
- Gross margin improved 2.3 percentage points year over year, mainly from more favorable sales mix. Sequential gross margin also improved, to 43.0% from 42.6%.
- SG&A increased 7% and research and development expense rose $3.5 million, contributing to lower operating income and net income despite higher gross profit. Higher R&D reflected employee costs and increased customer sample and supply activity.
- Effective tax rate was 22.9%, compared with 24.1%; the prior-year rate included a $1.3 million research-credit benefit.
- Segment sales and profit: Contamination Control Solutions (CCS) sales were $105.3 million and segment profit $24.5 million; Microenvironments (ME) sales were $42.8 million and profit $7.8 million; Specialty Materials (SMD) sales were $17.7 million and profit $1.9 million. CCS profit rose year over year; ME and SMD profit declined.
Outlook, acquisition, and risks
Management expected 2014 capital expenditures of approximately $30 million. The filing gives no specific revenue or earnings guidance. Management described semiconductor-industry trends as mixed, with demand softer sequentially; results remain sensitive to industry cyclicality, fab utilization and capital spending, pricing, product mix, input costs, foreign exchange, and fixed-cost absorption.
Subsequent event: On April 30, 2014, Entegris acquired ATMI for approximately $1.2 billion in cash. ATMI reported approximately $361 million in 2013 sales. Funding included existing cash, $460 million of secured term debt, and $360 million of unsecured notes bearing 6% interest and due in 2022. The term loan is due in 2021 and initially bears interest at LIBOR plus 2.75%; a $75 million asset-based revolving facility was also established, due in 2019. The filing states that preliminary purchase-price allocation information was not yet available. Acquisition-related costs of $1.3 million were expensed in Q1.
Other disclosed risks include foreign-exchange and interest-rate exposure; management estimated that a 100-basis-point interest-rate change could affect annual net income by approximately $2.4 million. Ordinary-course legal claims were not expected to have a material adverse effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Key facts for investors to verify
- Post-acquisition debt balances, interest expense, covenants, liquidity, and integration costs after the $1.2 billion ATMI purchase.
- ATMI’s final purchase-price allocation and the acquired business’s subsequent contribution to revenue, earnings, and cash flow.
- Whether the Q1 gross-margin improvement from mix can persist amid softer sequential demand and declining sales.
- Working-capital trends, especially receivables, DSO (60 days versus 50 days at the start of the year), and higher inventories.
- Actual capital spending versus the approximately $30 million 2014 expectation, and the effects of foreign exchange and semiconductor-industry conditions.