Entegris, Inc. — Q3 2013 Form 10-Q
Business and period: Entegris supplies products and services that purify, protect and transport materials used in semiconductor and other high-technology manufacturing. This unaudited report covers the quarter ended September 28, 2013 and the first nine months of fiscal 2013; comparisons are with the corresponding 2012 periods unless noted.
Financial performance
| Metric | Q3 2013 | Q3 2012 | First 9 months 2013 | First 9 months 2012 |
|---|---|---|---|---|
| Net sales | $164.6 million | $184.4 million | $507.2 million | $548.1 million |
| Gross profit / margin | $70.1 million / 42.6% | $81.9 million / 44.4% | $214.8 million / 42.4% | $240.9 million / 44.0% |
| Operating income / margin | $23.9 million / 14.5% | $27.1 million / 14.7% | $70.5 million / 13.9% | $85.5 million / 15.6% |
| Net income | $17.8 million | $18.0 million | $54.0 million | $57.6 million |
| Diluted EPS | $0.13 | $0.13 | $0.39 | $0.42 |
Q3 sales fell 11% year over year and 7% sequentially; nine-month sales declined 7%. Excluding unfavorable currency translation, sales were down 8% for Q3 and 5% year to date. Gross margin contracted in both comparisons, mainly reflecting lower sales. Q3 SG&A declined 19%, partly because the prior-year quarter included a $3.9 million CEO-transition charge; ER&D rose modestly. The nine-month effective tax rate was 24.9%, versus 32.2%, reflecting a shift in geographic income mix and a $1.3 million research-credit benefit.
Cash flow and balance sheet: Nine-month operating cash flow was $74.7 million, compared with $76.8 million in 2012. Capital expenditures were $49.0 million, versus $39.1 million; investing activities used $35.7 million. Cash and cash equivalents were $358.8 million at September 28, 2013, versus cash and short-term investments totaling $350.4 million at year-end 2012. Working capital was $493.4 million. The company reported no short- or long-term debt and no revolving-credit borrowings. Shareholders’ equity was $734.1 million.
Material developments and outlook
- Demand and segments: Management described semiconductor demand as soft and mixed, with lower leading-edge fab demand, utilization below peak levels and restrained capital spending. Q3 segment sales were CCS $105.2 million (down 7%), Microenvironments $42.5 million (down 22%) and Specialty Materials $16.9 million (down 1%). Microenvironments’ segment profit fell substantially; Specialty Materials’ nine-month segment profit declined 45% to $6.1 million.
- Currency: Unfavorable translation, primarily from the weaker Japanese yen, reduced sales by $4.6 million in Q3 and $12.4 million year to date. Foreign-exchange movements also affected earnings and equity.
- Acquisition and unusual items: Entegris acquired Jetalon Solutions on April 1 for $13.4 million cash, plus contingent consideration of up to $14.5 million. It recorded a $1.8 million Q3 gain from revaluing the earnout; the remaining contingent-consideration liability was $1.3 million at quarter end. The company also sold a building for $6.5 million, against a $6.0 million carrying value. Q3 other expense included a $0.7 million charge related to liquidation of a UK subsidiary.
- Investment and liquidity outlook: Management expected 2013 capital expenditures of approximately $65 million, including investment in 450mm wafer-handling technology and an advanced membrane facility; $16.1 million of capital purchase obligations remained unrecorded at quarter end. Management believed available cash, credit facilities and operating cash flow would meet working-capital and investment needs for at least 12 months. The company stated it did not expect to need repatriation of foreign cash for ordinary domestic needs; approximately $150.1 million of cash was associated with indefinitely reinvested foreign earnings.
- Capital returns: Entegris repurchased $14.8 million of shares in the first nine months under a $50 million authorization that was scheduled to expire in February 2014 unless extended or terminated.
Risks and contingencies
Key stated exposures include semiconductor-industry cyclicality, competition and pricing pressure, manufacturing costs and fixed-cost absorption, foreign-exchange changes, and interest-rate sensitivity. Management estimated that a 100-basis-point interest-rate change could affect annual net income by approximately $2.3 million. Ordinary-course legal claims were not expected to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. Forward-looking statements are subject to risks described in the company’s other SEC filings; actual results may differ.
Important facts for investors to verify
- Whether semiconductor demand, fab utilization and capital spending recovered or further weakened after quarter end.
- Whether sales and margins stabilized, particularly in Microenvironments and Specialty Materials, and how much currency movements continued to affect results.
- Whether planned capital spending, including the 450mm and membrane-facility projects, stayed near the approximately $65 million outlook and generated expected returns.
- How Jetalon performed against earnout forecasts and whether contingent consideration changed materially.
- Cash accessibility and any tax cost associated with repatriating foreign-held funds; confirm liquidity and credit-facility status.
- How much of reported performance depended on tax benefits, the contingent-consideration gain, or other items excluded from management’s non-GAAP measures.