Entegris, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 27, 2014. Entegris supplies materials, filtration, handling and delivery products used in semiconductor and other high-technology manufacturing. Results include ATMI from its April 30, 2014 acquisition; comparisons with 2013 are therefore not on a fully comparable basis.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $273.1m | $164.6m | $690.4m | $507.2m |
| Gross profit / margin | $98.7m / 36.2% | $70.1m / 42.6% | $258.8m / 37.5% | $214.8m / 42.4% |
| Operating income | $5.4m | $23.9m | $0.5m | $70.5m |
| Net income (loss) | $(1.1)m | $17.8m | $(1.4)m | $54.0m |
| Diluted EPS | $(0.01) | $0.13 | $(0.01) | $0.39 |
| Operating cash flow | Not provided for quarter | $91.2m | $74.7m |
Q3 sales rose 66% year over year, primarily from $94.1m of ATMI sales; excluding ATMI and nominal currency effects, sales increased 9%. Nine-month sales rose 36%, including $154.3m from ATMI; excluding ATMI, sales increased 6%. Sequentially, sales grew 9%, but fell 4% excluding incremental ATMI sales and currency effects.
Q3 gross margin included a $24.3m acquired-inventory fair-value charge; excluding it, margin was 45.1%. The corresponding nine-month charge was $48.6m, and adjusted margin was 44.5%. Higher amortization, acquisition/integration costs and interest also weighed on GAAP earnings. Adjusted EBITDA, a non-GAAP measure, was $64.0m (23.4% of sales) in Q3 versus $31.6m (19.2%) a year earlier; nine-month adjusted EBITDA was $152.2m versus $97.5m.
By segment, Q3 CMH sales/profit were $165.4m/$35.5m, while EM sales/profit were $107.7m/$33.3m. EM growth primarily reflected ATMI. Segment profit is a company-defined measure and excludes specified unallocated and acquisition-related items.
Liquidity, debt and financial position
- At September 27, 2014, cash and cash equivalents were $390.5m, short-term investments $7.9m, working capital $609.6m and total assets $1.795bn.
- Total debt was $792.8m: a $432.8m secured term loan and $360m of 6% senior unsecured notes due 2022. The term loan is due 2021; its stated interest rate was 3.5% at quarter-end. The $75m asset-based revolving facility had no outstanding borrowings and is subject to a borrowing base.
- Nine-month investing cash use was $851.5m, including $809.4m net cash paid for ATMI and $44.0m of capital expenditures. Management expected 2014 capital expenditures of approximately $60m.
- Management said cash, available credit and operating cash flow should meet working-capital and investment needs for at least 12 months. $310.7m of cash was held by foreign subsidiaries and generally subject to U.S. tax if repatriated. The company reported compliance with debt covenants at quarter-end.
Material changes, outlook and risks
- ATMI acquisition: Entegris paid approximately $1.1bn, or $809.4m net of acquired cash. Acquisition financing included $460m of term debt and $360m of notes. The acquisition added substantial goodwill and intangible assets; purchase accounting valuations remained provisional.
- Costs and integration: Management expected SG&A to remain elevated during the rest of 2014 as integration, severance and retention costs continued, with pro forma savings from combining functions expected in the second half of 2014 and 2015. ER&D costs were expected to rise with ATMI, but remain relatively stable as a percentage of sales.
- Demand: Management cited stronger semiconductor demand, improved wafer starts and higher fab utilization/capital spending, while noting lower underlying sequential demand, including lower FOUP and fluid-handling sales. The filing provides no specific revenue or earnings guidance.
- Debt and operating risks: The filing highlights substantial leverage, debt service and variable-rate exposure, restrictive covenants, refinancing and liquidity risks, semiconductor cyclicality, customer concentration in EM, supplier constraints, natural-event and cybersecurity risks, and integration risks. ATMI was excluded from the internal-control effectiveness assessment for this period; management must include it no later than Q2 2015.
- Contingency: A putative shareholder lawsuit challenging the ATMI merger remained pending; the company considered it without merit and intended to defend it. Another related suit had been dismissed. Management stated ordinary-course legal matters were not expected to have a material adverse effect.
- Tax and unusual items: The nine-month effective tax rate was 94.3%, reflecting geographic income mix, nondeductible acquisition costs and a foreign-dividend benefit. Acquisition-related inventory charges, deal/integration costs and acquired-award compensation materially affected reported results. Non-GAAP measures exclude several items, some of which may recur.
Important facts for investors to verify
- How ATMI performs on a full-period basis and whether anticipated integration savings materialize.
- The final purchase-price allocation, goodwill/intangible valuations, and expected ongoing amortization expense.
- Debt service capacity, variable-rate exposure, covenant headroom and availability under the borrowing-base-limited revolver.
- Underlying sales trends by segment, customer inventory behavior and the sustainability of margins after acquired-inventory charges expire.
- Progress integrating ATMI into internal controls by the stated deadline, and any developments in the pending merger litigation.