Entegris, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter ended June 30, 2012; comparative quarter ended July 2, 2011. Six-month results compare the periods ended June 30, 2012 and July 2, 2011. Amounts below are in millions of dollars unless stated otherwise.
Business context
Entegris supplies products and services that purify, protect, and transport critical materials, primarily for the semiconductor industry. Its three segments are Contamination Control Solutions (CCS), Microenvironments (ME), and Specialty Materials (SMD). Results were affected by weaker semiconductor-industry spending that began in the second half of 2011, particularly lower capital spending.
Financial performance
| Metric | Q2 2012 | Q2 2011 | First half 2012 | First half 2011 |
|---|---|---|---|---|
| Net sales | $188.2 | $209.2 | $363.6 | $412.3 |
| Gross profit / margin | $82.7 / 44.0% | $95.1 / 45.5% | $159.0 / 43.7% | $183.5 / 44.5% |
| Operating income / margin | $31.6 / 16.8% | $41.0 / 19.6% | $58.4 / 16.1% | $78.3 / 19.0% |
| Net income attributable to Entegris | $21.7 | $32.5 | $39.5 | $61.7 |
| Diluted EPS | $0.16 | $0.24 | $0.29 | $0.45 |
| Operating cash flow | Not provided by quarter | $43.5 | $63.2 |
Q2 sales fell 10% year over year, but increased 7% sequentially from Q1 2012; excluding an unfavorable $1.1 million currency effect, the sequential increase was 8%. First-half sales declined 12% year over year. Management attributed the annual declines mainly to lower industry spending. Gross margin weakened year over year due to lower factory utilization and a slightly unfavorable sales mix. Q2 reported operating costs (SG&A plus R&D) were down year over year, but the improvement did not offset lower gross profit.
For the first half, capital expenditures were $30.1 million, versus $14.6 million a year earlier. Cash and cash equivalents were $286.9 million at June 30, up from $273.6 million at year-end 2011. Working capital was $440.6 million, compared with $410.4 million at year-end. The company reported no short- or long-term debt. Its revolving credit facility has a $30 million commitment and matures June 9, 2014; $0.3 million of letters of credit were outstanding. Management said available liquidity and operating cash flow should cover working-capital and investment needs for the next 12 months.
At June 30, total assets were $768.7 million, current liabilities $94.4 million, and shareholders’ equity $652.0 million. Inventories increased to $102.9 million from $93.9 million at year-end; receivables rose to $115.5 million from $107.2 million.
Segments and material changes
- CCS: Q2 sales declined 10% to $123.1 million; segment profit fell to $34.7 million from $44.9 million. Sequential sales rose 7%.
- ME: Q2 sales declined 13% to $44.6 million; segment profit was $8.5 million versus $8.6 million. Sequential sales rose 9%.
- SMD: Q2 sales declined 4% to $20.5 million; segment profit increased to $4.4 million from $4.3 million. Sequential sales rose 7%.
Across the business, unit-driven products were 66% of Q2 sales and capital-driven products 34%; year-over-year sales decreased 5% and 18%, respectively. First-half adjusted EBITDA, a non-GAAP measure, was $76.8 million (21.1% of sales), down from $97.1 million (23.6%). First-half adjusted operating income was $63.2 million (17.4% margin), versus $83.6 million (20.3%); non-GAAP diluted EPS was $0.30 versus $0.47.
Outlook, risks, and unusual items
- Management expected 2012 capital expenditures of approximately $70–$80 million. The existing credit-facility limit was $60 million annually; management said lenders had tentatively agreed to raise it to $85 million and expected an amendment in August 2012. The amendment was not yet executed at filing.
- Management cited semiconductor-industry cyclicality, customer spending and fab utilization, pricing and competition, sales mix, raw-material costs, manufacturing efficiency, and foreign-currency movements as factors affecting results. It cautioned that forward-looking statements are not guarantees and disclaimed a duty to update them.
- The first-half effective tax rate was 33.2%, versus 22.6% a year earlier. The prior-year rate benefited from a $9.7 million release of a U.S. deferred-tax valuation allowance.
- On April 2, 2012, Entegris acquired the remaining 50% of its Taiwan EPT joint venture for $3.4 million cash, bringing ownership to 100%. It recorded a $1.3 million gain on remeasurement of its previously held interest; the acquired operation’s results were not material.
- Ordinary-course legal claims were disclosed; the company did not expect their outcome to have a material adverse effect. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
- Foreign-exchange movements affected reported results. At June 30, the company reported no net exposure to foreign-currency forward contracts. It estimated that a 100-basis-point interest-rate change could affect annual net income by approximately $1.8 million.
Important facts for investors to verify
- Whether the credit-facility amendment permitting the planned capital expenditures was completed, and the actual 2012 capital-spending level.
- Whether sequential sales improvement continued, particularly given lower capital-driven demand and the industry’s spending cycle.
- Inventory growth, factory utilization, and gross-margin trends as demand changes.
- The sustainability and comparability of tax rates, considering the prior-year valuation-allowance release.
- The final purchase accounting and subsequent performance of the acquired Taiwan business, including assumptions underlying fair-value estimates.
- Non-GAAP comparisons alongside GAAP results: the company notes that its non-GAAP measures exclude recurring depreciation and amortization and may not be comparable with other companies’ measures.