Entegris, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; includes unaudited fourth-quarter results. Entegris supplies products and materials that purify, protect, monitor and transport materials used mainly in semiconductor manufacturing, through three segments: Contamination Control Solutions (CCS), Microenvironments (ME) and Specialty Materials (SMD).
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $693.5 million | $715.9 million | Down 3% |
| Gross profit / margin | $294.2 million / 42.4% | $307.4 million / 42.9% | Margin down 0.5 percentage points |
| Operating income / margin | $94.2 million / 13.6% | $99.4 million / 13.9% | Down 5% |
| Net income | $74.5 million | $68.8 million | Up 8% |
| Diluted EPS | $0.53 | $0.50 | Up 6% |
| Operating cash flow | $109.4 million | $115.2 million | Down 5% |
| Capital expenditures | $60.4 million | $49.9 million | Up 21% |
Fourth-quarter sales were $186.3 million, versus $167.8 million in Q4 2012; net income was $20.5 million, versus $11.3 million. Q4 gross margin was 42.6%, compared with 39.6% a year earlier. Management reported growth and signs of stabilization in Q4 after a soft year.
Cash and cash equivalents were $384.4 million at year-end, up from $330.4 million; 2012 also included $20.0 million of short-term investments. Working capital was $514.7 million and the current ratio was 6.27. Entegris reported no outstanding bank borrowings or long-term debt at year-end. Shareholders’ equity was $756.8 million. Operating cash flow less capital expenditures was approximately $49.0 million.
Comparisons and segment results
- Annual sales declined mainly because of weak semiconductor spending and $18.6 million of unfavorable foreign-currency translation, particularly from the Japanese yen. Excluding currency effects, sales fell about 1%. Unit-driven and capital-driven sales each declined 3%; their mix remained 66% and 34%, respectively.
- CCS sales fell 3% to $447.4 million and segment profit fell 9% to $106.1 million. ME sales fell 2% to $178.2 million and segment profit fell 4% to $35.7 million. SMD sales fell 5% to $67.8 million and segment profit fell 42% to $7.1 million, reflecting weaker coated-product demand and lower factory utilization.
- Net income rose despite lower sales and operating income, principally as income tax expense declined to $21.7 million from $30.9 million and the effective tax rate fell to 22.5% from 31.0%. The 2013 rate included a $1.7 million research-credit benefit.
- Adjusted EBITDA, a non-GAAP measure, declined 7% to $131.2 million; adjusted operating income declined 10% to $101.8 million. Non-GAAP EPS increased to $0.57 from $0.55, helped by the lower tax rate.
Outlook, significant items and risks
- Management expected 2014 capital expenditures of approximately $25–30 million, following unusually high 2013 investment in 450mm wafer-handling products and an advanced membrane manufacturing and development center. It planned continued investment in membrane and coatings technologies, R&D and 450mm wafer handling. The filing gives no specific revenue or earnings guidance.
- On February 4, 2014, Entegris agreed to acquire ATMI for approximately $1.2 billion in cash, subject to approvals and other closing conditions, with closing expected in Q2 2014. ATMI reported approximately $361 million in 2013 sales excluding its Life Sciences business. Financing commitments included a $460 million secured term loan, $360 million of unsecured notes and an $85 million secured asset-based revolver. The transaction would materially increase leverage; the filing discusses a possible $100 million termination fee payable by Entegris in specified circumstances.
- Key exposures include semiconductor-industry cyclicality, limited customer purchase commitments, competitive pricing, foreign currency and international operations. The top ten customers represented 34% of sales; no single customer exceeded 10%. International sales were 71% of total.
- Other execution risks include reliance on limited-source materials, the complex transition of membrane manufacturing from Millipore-leased space expiring June 30, 2015, and uncertain returns on 450mm investments as industry adoption has been delayed. A $2.2 million correction of an inventory exchange-rate error increased Q4 2013 cost of sales; the company said the error and correction were not material to the consolidated financial statements.
- The filing reports no material legal proceedings expected to affect the financial statements. Management and the auditor concluded internal control over financial reporting was effective at December 31, 2013; the financial statements received an unqualified audit opinion.
Important facts for investors to verify
- ATMI acquisition closing status, final financing terms, resulting debt and integration performance.
- Whether semiconductor demand and fab utilization improved after the Q4 stabilization, and whether revenue and margins recover.
- Progress, spending and production continuity in the new membrane facility before the Millipore arrangement expires in June 2015.
- Actual customer adoption and returns from 450mm products and other growth investments.
- Foreign-exchange effects, segment profitability, and the assumptions supporting tax benefits and deferred tax asset realization.