Entegris, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter ended June 27, 2015; comparisons are with the quarter ended June 28, 2014. Six-month figures compare the periods ended on those dates. Entegris supplies materials and solutions for semiconductor and other advanced manufacturing. Results include ATMI, acquired April 30, 2014, for a full quarter in Q2 2015 versus two months in Q2 2014.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $280.7 million | $251.6 million | $544.1 million | $417.4 million |
| Gross profit / margin | $128.1 million / 45.6% | $88.7 million / 35.2% | $244.6 million / 45.0% | $160.0 million / 38.3% |
| Operating income (loss) | $39.3 million | $(23.4) million | $66.9 million | $(4.8) million |
| Net income (loss) | $24.4 million | $(14.7) million | $39.3 million | $(0.4) million |
| Diluted EPS | $0.17 | $(0.11) | $0.28 | $0.00 |
Q2 operating margin was 14.0% and net margin was 8.7%. For the six months, operating margin was 12.3% and net margin was 7.2%. Q2 adjusted EBITDA was $67.1 million (23.9% of sales), versus $58.2 million (23.1%); six-month adjusted EBITDA was $122.9 million (22.6%), versus $88.2 million (21.1%). These are company-defined non-GAAP measures, not substitutes for GAAP results.
Q2 sales increased 12% year over year, primarily from $33.0 million of incremental ATMI sales; unfavorable foreign currency translation reduced sales by $9.8 million. Excluding those factors, sales grew 2%. Six-month sales rose 30%, including $120.3 million of incremental ATMI sales and a $18.0 million currency headwind; excluding those factors, sales grew 6%. Q2 CMH sales were $174.3 million, down 1%, while EM sales were $106.5 million, up 42%; both segments reported higher segment profit.
Cash, liquidity and debt
At June 27, 2015, cash and cash equivalents were $313.7 million, down from $389.7 million at year-end; working capital was $558.7 million. The cash flow statement reports $36.1 million of net cash provided by operating activities for the six months, compared with $23.5 million provided a year earlier. Investing used $32.3 million, including $34.2 million of capital expenditures; financing used $76.1 million, principally reflecting $75.0 million of term-loan repayments. Cash decreased by $76.0 million overall.
Total debt was $692.0 million, versus $766.8 million at December 31, 2014: $332.0 million on the term loan and $360.0 million of 6% notes due 2022. The term-loan rate was 3.5%. The $75 million asset-based revolving facility had no borrowings. The company reported compliance with debt covenants and said available cash, credit facilities and operating cash flows should meet requirements for at least the next 12 months.
Changes, outlook and risks
- Reported gross margin improved sharply year over year, but the comparison is affected by a $24.3 million ATMI acquired-inventory charge in Q2 2014; excluding it, prior-year Q2 gross margin was 44.9%, close to the current 45.6%.
- SG&A fell substantially as prior-year ATMI transaction and deal costs did not recur. Management expected integration-related savings, particularly from combining corporate staff functions, to bring SG&A to normalized levels beginning in Q3 2015.
- Management cited improved sequential semiconductor demand, higher fab utilization and capital spending. It expected 2015 capital expenditures of approximately $65 million. No specific sales or earnings guidance was provided.
- Risks discussed include industry cyclicality, competition and pricing pressure, fixed-cost exposure, raw-material costs, foreign-exchange movements, international operations and indebtedness. Foreign earnings of $232.2 million were considered indefinitely reinvested and generally subject to U.S. tax if repatriated.
- Ordinary-course legal claims were disclosed; management did not expect their outcome to materially adversely affect the financial statements. A $0.5 million other-than-temporary impairment of an equity investment was recorded in Q1 2015. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile the operating-cash-flow narrative: the cash flow statement reports $36.1 million provided, while MD&A twice describes $36.1 million as used.
- Assess underlying growth and profitability apart from ATMI’s partial-period comparison, acquisition-related costs and the prior-year acquired-inventory charge; review the company’s non-GAAP reconciliations.
- Monitor working-capital absorption, including higher receivables and inventories; DSO was 58 days versus 52 days at the start of the year.
- Track debt repayment, interest expense, covenant compliance and the planned $65 million of 2015 capital expenditures.