Entegris, Inc. — Form 10-Q Summary
Reporting period: Quarter ended June 28, 2014, with year-to-date comparisons for the six months ended June 28, 2014. Entegris supplies materials, filtration, handling and delivery products for semiconductor and other high-technology manufacturing.
Business context and material change
On April 30, 2014, Entegris acquired ATMI for approximately $1.13 billion, or $808.9 million net of cash acquired. ATMI contributed $60.2 million of sales during the two months included in this quarter. The acquisition substantially expanded the company’s Electronic Materials business and changed its reporting structure to Critical Materials Handling (CMH) and Electronic Materials (EM).
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $251.6 million | $177.5 million | $417.4 million | $342.6 million |
| Gross margin | 35.2% | 43.7% | 38.3% | 42.2% |
| Operating income (loss) | $(23.4) million | $26.4 million | $(4.8) million | $46.6 million |
| Net income (loss) | $(14.7) million | $19.8 million | $(0.4) million | $36.2 million |
| Diluted EPS | $(0.11) | $0.14 | $0.00 | $0.26 |
- Q2 sales rose 42%; excluding ATMI and nominal favorable currency effects, sales increased 7% year over year. First-half sales rose 22%; excluding ATMI, growth was 4%. Sequentially, Q2 sales increased 52%, or 15% excluding ATMI and currency effects.
- Q2 gross profit was $88.7 million. A $24.3 million acquisition-related inventory fair-value charge reduced reported margins; excluding it, Q2 gross margin was 44.9% and first-half margin was 44.2%.
- Q2 SG&A increased to $82.3 million, including ATMI costs and significant acquisition and integration expenses. Interest expense was $12.5 million versus $0.04 million a year earlier, mainly reflecting acquisition financing.
- Income tax benefit was $22.4 million in Q2 and $18.2 million for the first half. The year-to-date effective tax rate was 98.3%, reflecting geographic income mix, nondeductible acquisition costs and a foreign dividend benefit.
- Management-reported non-GAAP Q2 adjusted EBITDA was $58.2 million (23.1% of sales) versus $36.1 million (20.3%); non-GAAP diluted EPS was $0.20 versus $0.15. These measures exclude substantial acquisition-related and other specified items and are not GAAP results.
Segments
- CMH: Q2 sales were $176.8 million, up 12%; segment profit was $41.1 million, up 14%.
- EM: Q2 sales were $74.8 million, up 269%, primarily from $51.9 million of ATMI sales; segment profit was $22.7 million versus $3.9 million.
Cash flow, debt and liquidity
- First-half operating cash flow was $23.5 million, down from $42.3 million. Investing cash use was $839.1 million, including the $808.9 million net ATMI acquisition outlay and $28.9 million of capital expenditures.
- Cash and cash equivalents were $367.0 million at June 28, 2014, versus $384.4 million at year-end. Working capital was $637.2 million.
- Debt totaled $817.7 million: a $457.7 million senior secured term loan and $360 million of 6% senior unsecured notes due 2022. The term loan is due 2021; its reported interest rate at quarter-end was 3.5%. The $75 million asset-based revolving facility had no borrowings, subject to borrowing-base limits.
- Management said cash, available credit facilities and operating cash flow should meet working-capital and investment needs for at least 12 months. It also disclosed $272.8 million of cash held by foreign subsidiaries and generally subject to U.S. tax if repatriated.
Outlook, risks and unusual items
- Management expected acquisition-related SG&A, integration, severance and retention costs to remain elevated during the rest of 2014, with expected pro forma cost savings in the second half of 2014 and in 2015. R&D costs were expected to rise with ATMI’s addition but remain relatively stable as a share of sales.
- Management expected 2014 capital expenditures of approximately $60 million. The $24.3 million acquired-inventory charge was expected to be fully amortized by the end of Q3 2014. The filing provides no specific revenue or earnings guidance.
- Principal disclosed risks include the substantial new debt burden, debt-service and refinancing capacity, variable-rate exposure and restrictive covenants; semiconductor cyclicality and customer concentration in EM; supplier and manufacturing disruptions; natural disasters; cybersecurity; and integration and internal-control risks.
- One ATMI merger-related shareholder lawsuit remained pending; the company said it believed the case was without merit and intended to defend it. Management stated disclosure controls were effective, but excluded ATMI from the internal-control assessment and said ATMI would be included no later than Q2 2015.
Important facts for investors to verify
- How much reported growth and profitability reflect ATMI versus organic demand, and whether expected integration savings are achieved.
- The final purchase-price allocation, including provisional acquired asset and liability valuations, and the duration and effect of acquisition-related charges.
- Cash conversion, working-capital trends—particularly receivables and inventory—and the company’s ability to service debt while funding planned investment.
- The assumptions and exclusions behind non-GAAP measures, and the unusually high reported effective tax benefit rate.
- Progress integrating ATMI’s financial controls, debt-covenant compliance, and the outcome of the pending merger litigation.