Entegris, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports fourth-quarter results. Entegris supplies yield-enhancing materials, filtration and purification products, delivery systems, and related solutions, primarily to semiconductor and other high-technology manufacturers. Results include ATMI, acquired April 30, 2014, for the full year in 2015 versus eight months in 2014.
Key financial results
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net sales | $1,081.1 million | $962.1 million |
| Gross profit / margin | $470.2 million / 43.5% | $376.7 million / 39.2% |
| Operating income / margin | $118.1 million / 10.9% | $21.4 million / 2.2% |
| Net income | $80.3 million | $7.9 million |
| Diluted EPS | $0.57 | $0.06 |
| Operating cash flow | $120.9 million | $126.4 million |
| Capital expenditures | $72.0 million | $57.7 million |
| Cash and cash equivalents | $349.8 million | $389.7 million |
| Total debt, including current maturities | $667.3 million | $766.8 million |
| Working capital / current ratio | $535.2 million / 4.05 | $503.1 million / 2.92 |
FY 2015 sales rose 12%. The increase chiefly reflected $120.3 million of incremental ATMI sales, partly offset by $32.7 million of unfavorable currency translation; excluding these effects, sales increased approximately 3% organically. Unit-driven products represented 78% of sales, versus 74% in 2014. International sales were 77% of total sales.
Reported gross margin improved from 39.2% to 43.5%, but FY 2014 included a $48.6 million acquired-inventory fair-value charge. Excluding that item, 2014 gross margin was 44.2%; therefore, FY 2015 margin was lower year over year on that adjusted comparison. Management cited mix, warranty costs, currency effects, and weaker factory utilization, particularly in the second half, as pressures.
Fourth-quarter 2015 sales were $266.8 million, gross profit was $109.3 million (41.0% margin), and net income was $17.6 million ($0.12 diluted EPS). Sales and gross margin were lower than in Q3 2015, when sales were $270.3 million and gross margin was 43.0%.
Segments and material changes
- Critical Materials Handling (CMH): Sales increased 3% to $671.3 million; segment profit rose 12% to $155.2 million. Growth reflected ATMI and specialty materials sales, partly offset by currency and softer fluid-management and liquid-filtration sales.
- Electronic Materials (EM): Sales increased 33% to $409.8 million, principally from $105.3 million of incremental ATMI sales. Segment profit increased to $94.7 million from $90.1 million; lower plant utilization and higher operating expenses offset sales growth.
- SG&A fell 14% to $198.9 million, mainly because 2014 included acquisition transaction and deal costs and higher integration expenses. R&D increased 21% to $105.9 million, or 9.8% of sales.
- Adjusted EBITDA, a non-GAAP measure, rose 12% to $232.4 million; its margin was 21.5% versus 21.6%. Adjusted operating income was $178.1 million (16.5% margin), and non-GAAP diluted EPS was $0.85. These measures exclude specified expenses and should be considered alongside GAAP results.
Liquidity, debt, outlook, and risks
- Operating cash flow declined to $120.9 million; cash flow was affected in part by inventory increases and lower accounts payable and accrued liabilities. Entegris paid $100 million on its term loan during 2015. The $75 million asset-based revolver had no borrowings at year-end; its borrowing base was $64.9 million.
- Management expected 2016 capital expenditures of approximately $80 million and R&D spending to remain relatively stable as a percentage of sales. It stated that available cash and expected operating cash flows should cover ordinary domestic cash needs for the next 12 months. No specific revenue or earnings guidance was provided.
- Debt comprises a $307.3 million secured term loan and $360 million of 6% unsecured notes due 2022. The term loan bears a 3.5% rate at year-end and is due 2021. The company reported compliance with debt covenants. The filing classifies $50 million as current, although it says no term-loan payment was contractually required in 2016.
- Net income benefited from the absence of substantial 2014 acquisition-related costs and from $12.4 million of other income, including foreign-currency transaction gains and a gain on sale of an equity investment. The 2015 effective tax rate was 11.1%, reflecting, among other factors, geographic income mix and tax incentives.
- Key risks include semiconductor cyclicality and limited order backlog; customer concentration (top ten customers were 44% of sales and one customer was 12.4%); significant debt and restrictive covenants; foreign-exchange exposure; dependence on limited-source materials; and manufacturing-transition and capacity risks. Qualification and transition of membrane production to the new Bedford facility remained in progress ahead of the June 30, 2016 end of the existing arrangement.
- Management also highlighted uncertainty around market adoption of 450 mm wafer products, product-liability exposure from hazardous-gas systems, export/import restrictions, and potential operational disruption from natural events or geopolitical instability. No legal proceeding was identified as expected to have a material financial impact.
- After year-end, the board authorized up to $100 million of share repurchases through February 17, 2017. The company had not repurchased shares in 2015 and reported no cash dividends.
Important facts for investors to verify
- How much future growth is organic and how margins develop as the full-year ATMI comparison normalizes.
- Whether lower second-half factory utilization and the Q4 gross-margin decline persist.
- Cash generation, working-capital needs, planned 2016 capital spending, and progress in reducing debt.
- Completion and customer qualification of the Bedford membrane manufacturing transition before the existing arrangement expires.
- Customer concentration, foreign-currency impacts, tax benefits, and the terms and actual execution of the authorized buyback.