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ENTEGRIS INC - Quarter Report: 2017 April (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
________________________________________ 
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 1, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32598
 _______________________________________
 Entegris, Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________
Delaware
 
41-1941551
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
129 Concord Road, Billerica, Massachusetts
 
01821
(Address of principal executive offices)
 
(Zip Code)
(978) 436-6500
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 _______________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
Smaller reporting company
 
¨
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 24, 2017
Common Stock, $0.01 par value per share
 
141,674,104 shares
 

Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED APRIL 1, 2017
 
Description
Page
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Cautionary Statements
This report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve substantial risks and uncertainties and reflect the Company’s current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project,” “should,” “may,” “will” and “would” and similar expressions are intended to identify these “forward-looking statements.” You should read statements that contain these words and statements relating to the level of future sales, future operating results, growth or contraction of and trends in, the industries and markets in which the Company participates, the development of new products or technologies or the introduction of new products, the Company's capital allocation strategy, future capital and other expenditures, the Company's expected tax rate, the impact of accounting pronouncements, and other statements carefully because they discuss future expectations, contain projections of future results of operations or of financial position or state other “forward-looking” information. All forecasts and projections in this report are “forward-looking statements,” and are based on management’s current expectations of the Company’s near-term results, based on current information available pertaining to the Company. The risks which could cause actual results to differ from those contained in such “forward looking statements” include, without limit, the risks described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 under the headings “Risks Relating to our Business and Industry”, “Risks Related to Our Indebtedness”, “Manufacturing Risks”, “International Risks”, and “Risks Related to Owning Our Common Stock” as well as in the Company’s quarterly reports on Form 10-Q and current reports on Form 8-K as filed with the Securities and Exchange Commission.
Any forward-looking statements in this Quarterly Report on Form 10-Q are not guarantees of future performance, and actual results, developments and business decisions may differ from those envisaged by such forward-looking statements, possibly materially. We disclaim any duty to update any forward-looking statements.

2
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PART 1.
FINANCIAL INFORMATION
Item 1. Financial Statements
ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
(In thousands, except share and per share data)
April 1, 2017
 
December 31, 2016
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
391,159

 
$
406,389

Trade accounts and notes receivable, net of allowance for doubtful accounts of $2,249 and $2,474
176,032

 
165,675

Inventories
188,343

 
183,529

Deferred tax charges and refundable income taxes
16,729

 
20,140

Other current assets
19,489

 
24,398

Total current assets
791,752

 
800,131

Property, plant and equipment, net of accumulated depreciation of $398,667 and $387,523
330,926

 
321,562

Other assets:
 
 
 
Goodwill
349,120

 
345,269

Intangible assets, net of accumulated amortization of $249,110 and $237,207
208,591

 
217,548

Deferred tax assets and other noncurrent tax assets
8,418

 
8,022

Other
7,287

 
7,000

Total assets
$
1,696,094

 
$
1,699,532

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt, current maturities
$
100,000

 
$
100,000

Accounts payable
54,516

 
61,617

Accrued payroll and related benefits
26,199

 
54,317

Other accrued liabilities
40,183

 
29,213

Income taxes payable
15,341

 
16,424

Total current liabilities
236,239

 
261,571

Long-term debt, excluding current maturities, net of unamortized discount and debt issuance costs of $8,535 and $9,173
460,315

 
484,677

Pension benefit obligations and other liabilities
27,833

 
27,220

Deferred tax liabilities and other noncurrent tax liabilities
26,646

 
26,846

Commitments and contingent liabilities
—

 
—

Equity:
 
 
 
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of April 1, 2017 and December 31, 2016
—

 
—

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of April 1, 2017 and December 31, 2016: 141,710,104 and 141,319,964
1,417

 
1,413

Additional paid-in capital
858,428

 
859,778

Retained earnings
123,380

 
92,303

Accumulated other comprehensive loss
(38,164
)
 
(54,276
)
Total equity
945,061

 
899,218

Total liabilities and equity
$
1,696,094

 
$
1,699,532

See the accompanying notes to condensed consolidated financial statements.

3
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended
(In thousands, except per share data)
April 1, 2017
 
April 2, 2016
Net sales
$
317,377

 
$
267,024

Cost of sales
177,781

 
152,318

Gross profit
139,596

 
114,706

Selling, general and administrative expenses
50,492

 
47,956

Engineering, research and development expenses
27,239

 
25,902

Amortization of intangible assets
10,945

 
11,289

Operating income
50,920

 
29,559

Interest expense
8,473

 
9,218

Interest income
(80
)
 
(69
)
Other expense (income), net
902

 
(675
)
Income before income tax expense
41,625

 
21,085

Income tax expense
9,111

 
4,873

Net income
$
32,514

 
$
16,212

 
 
 
 
Basic net income per common share
$
0.23

 
$
0.12

Diluted net income per common share
$
0.23

 
$
0.11

Weighted shares outstanding:
 
 
 
Basic
141,501

 
140,780

Diluted
143,315

 
141,371

See the accompanying notes to condensed consolidated financial statements.


4
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Net income
$
32,514

 
$
16,212

Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustments
16,123

 
5,600

Unrealized loss on available-for-sale securities
—

 
(226
)
Pension liability adjustments
(11
)
 
16

Other comprehensive income
16,112

 
5,390

Comprehensive income
$
48,626

 
$
21,602

See the accompanying notes to condensed consolidated financial statements.


5
Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Operating activities:
 
 
 
Net income
$
32,514

 
$
16,212

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
13,977

 
13,700

Amortization
10,945

 
11,289

Share-based compensation expense
3,870

 
2,861

Provision for deferred income taxes
3,422

 
(211
)
Other
3,633

 
4,796

Changes in operating assets and liabilities:
 
 
 
Trade accounts and notes receivable
(7,546
)
 
(6,799
)
Inventories
(5,415
)
 
(12,998
)
Accounts payable and accrued liabilities
(23,490
)
 
(9,510
)
Other current assets
5,061

 
1,796

Income taxes payable and refundable income taxes
(1,252
)
 
(726
)
Other
(2,287
)
 
(3,071
)
Net cash provided by operating activities
33,432

 
17,339

Investing activities:
 
 
 
Acquisition of property, plant and equipment
(22,190
)
 
(17,819
)
Proceeds from sale and maturities of short-term investments
—

 
932

Other
186

 
(3,427
)
Net cash used in investing activities
(22,004
)
 
(20,314
)
Financing activities:
 
 
 
Payments of long-term debt
(25,000
)
 
—

Issuance of common stock
1,041

 
—

Repurchase and retirement of common stock
(4,000
)
 
(3,573
)
Taxes paid related to net share settlement of equity awards
(4,575
)
 
(2,067
)
Other
(270
)
 
49

Net cash used in financing activities
(32,804
)
 
(5,591
)
Effect of exchange rate changes on cash and cash equivalents
6,146

 
3,144

Decrease in cash and cash equivalents
(15,230
)
 
(5,422
)
Cash and cash equivalents at beginning of period
406,389

 
349,825

Cash and cash equivalents at end of period
$
391,159

 
$
344,403


See the accompanying notes to condensed consolidated financial statements.


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Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Entegris, Inc. (“Entegris”, “the Company”, “us”, “we”, or “our”) is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries.
Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, goodwill, intangibles, accrued expenses, and income taxes and related accounts, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and contain all adjustments considered necessary, and are of a normal recurring nature, to present fairly the financial position as of April 1, 2017 and December 31, 2016, the results of operations, comprehensive income, and cash flows for the three months ended April 1, 2017 and April 2, 2016.
The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2016. The results of operations for the three months ended April 1, 2017 are not necessarily indicative of the results to be expected for the full year.
Fair Value of Financial Instruments The carrying value of cash equivalents, accounts receivable, accounts payable, accrued payroll and related benefits, and other accrued liabilities approximates fair value due to the short maturity of those items. The fair value of long-term debt, including current maturities, was $577.9 million at April 1, 2017, compared to the carrying amount of long-term debt, including current maturities, of $560.3 million at April 1, 2017.
Recent Accounting Pronouncements Adopted in 2017 In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, Compensation - Stock Compensation (Topic 718), which simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for tax effects related to share-based payments, forfeitures, and statutory tax withholding requirements, as well as the classification of tax-related cash flows in the statement of cash flows. The update eliminates the accounting for excess tax benefits to be recognized in additional paid-in capital and tax deficiencies recognized either in the income tax provision or in additional paid-in capital. ASU No. 2016-09 became effective for the Company January 1, 2017. The Company adopted ASU No. 2016-09 using the modified retrospective approach. In connection with the adoption of ASU No. 2016-09, the Company elected as an accounting policy to record forfeitures as they occur and recorded a cumulative-effect adjustment of $0.4 million to retained earnings as of January 1, 2017. The Company also recorded a cumulative-effect adjustment of $1.0 million to retained earnings as of January 1, 2017 with respect to previously unrecognized excess tax benefits. Under ASU No. 2016-09, excess tax benefits or deficiencies related to stock option exercises and restricted stock unit vesting are recognized in the condensed statement of operations. Accordingly, for the three months ended April 1, 2017, the Company recorded a tax benefit of $2.5 million in the condensed statement of operations. Also related to the adoption of ASU No. 2016-09, the Company elected to present the cash flow statement using the prospective transition method. No prior periods have been adjusted.
Recent Accounting Pronouncements Yet to be Adopted In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. As such, revenue for an entity's contracts will generally be recognized as control transfers to the customer, which is consistent with the revenue recognition model currently used for the majority of the Company's contracts. ASU No. 2014-09 may be applied either retrospectively or through the use of a modified-retrospective method. ASU

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No. 2014-09 also requires disclosures sufficient to enable users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers, including qualitative and quantitative disclosures about contracts with customers. ASU No. 2014-09 is effective for the Company beginning January 1, 2018. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and disclosures. To assist in this assessment, and to oversee the eventual adoption of ASU No. 2014-09, the Company has established a cross-functional steering committee. The initial analysis of identifying revenue streams and potential impacts of the new guidance is substantially complete, and the Company is now analyzing the potential magnitude to the consolidated financial statements and related disclosures. Based on its preliminary evaluation of ASU No. 2014-09, the Company does not currently expect it to have a material impact on its results of operations or cash flows in the periods after adoption. The Company has not yet selected a transition approach. The Company expects to complete its assessment of the cumulative effect of adopting ASU No. 2014-09 as well as the selection of a transition approach during the second quarter. The evaluation of ASU No. 2014-09 will continue through the date of adoption.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU No. 2016-02 requires the identification of arrangements that should be accounted for as leases by lessees. In general, for lease arrangements exceeding a twelve-month term, these arrangements must now be recognized as assets and liabilities on the balance sheet of the lessee. Under ASU No. 2016-02, a right-of-use asset and lease obligation will be recorded for all leases, whether operating or financing, while the income statement will reflect lease expense for operating leases, and amortization and interest expense for financing leases. The balance sheet amount recorded for existing leases at the date of adoption of ASU No. 2016-02 must be calculated using the applicable incremental borrowing rate at the date of adoption. In addition, ASU No. 2016-02 requires the use of the modified retrospective method, which will require adjustment to all comparative periods presented in the consolidated financial statements. ASU No. 2016-02 is effective beginning January 1, 2019. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements and disclosures, and the timing of adoption.
2. INVENTORIES
Inventories consist of the following:
 
(In thousands)
April 1, 2017
 
December 31, 2016
Raw materials
$
54,686

 
$
53,109

Work-in process
17,149

 
15,976

Finished goods
116,508

 
114,444

Total inventories
$
188,343

 
$
183,529

 

 
3. GOODWILL AND INTANGIBLE ASSETS

Goodwill activity for each period was as follows:
(In thousands)
Specialty Chemicals and Engineered Materials
 
Advanced Materials Handling
 
Total
December 31, 2016
$
297,858

 
$
47,411

 
$
345,269

Foreign currency translation
3,851

 
—

 
3,851

April 1, 2017
$
301,709

 
$
47,411

 
$
349,120


Identifiable intangible assets at April 1, 2017 and December 31, 2016 consist of the following:

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April 1, 2017
(In thousands)
Gross  carrying
Amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
202,653

 
$
131,940

 
$
70,713

Trademarks and trade names
16,719

 
13,109

 
3,610

Customer relationships
219,744

 
96,110

 
123,634

Other
18,585

 
7,951

 
10,634

 
$
457,701

 
$
249,110

 
$
208,591

December 31, 2016
(In thousands)
Gross  carrying
amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
202,591

 
$
126,077

 
$
76,514

Trademarks and trade names
16,661

 
12,617

 
4,044

Customer relationships
216,918

 
90,581

 
126,337

Other
18,585

 
7,932

 
10,653

 
$
454,755

 
$
237,207

 
$
217,548

Future amortization expense for each of the five succeeding years and thereafter relating to intangible assets currently recorded in the Company's consolidated balance sheets is estimated at April 1, 2017 to be the following:
 
 
Fiscal year ending December 31
(In thousands)
2017
$
31,330

2018
42,721

2019
40,476

2020
25,694

2021
18,951

Thereafter
49,419

 
$
208,591



4. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per common share (EPS): 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Basic—weighted common shares outstanding
141,501

 
140,780

Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock
1,814

 
591

Diluted—weighted common shares and common shares equivalent outstanding
143,315

 
141,371

The Company excluded the following shares underlying stock-based awards from the calculations of diluted EPS because their inclusion would have been anti-dilutive for the three months ended April 1, 2017 and April 2, 2016:
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Shares excluded from calculations of diluted EPS
504

 
1,305


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5. FAIR VALUE
Financial Assets Measured at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets that are measured at fair value on a recurring basis at April 1, 2017 and December 31, 2016. Level 1 inputs are based on quoted prices in active markets accessible at the reporting date for identical assets and liabilities. Level 2 inputs are based on quoted prices for similar instruments in active markets and quoted prices for identical or similar instruments in markets that are not active, or model-based valuation techniques for which all significant assumptions are observable in a market. Level 3 inputs are based on prices or valuations that require inputs that are significant to the valuation and are unobservable.
 
April 1, 2017
 
December 31, 2016
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts(a)
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4,784

 
$
—

 
$
4,784

Total assets measured and recorded at fair value
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
4,784

 
$
—

 
$
4,784

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other accrued liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts(a)
$
—

 
$
2,297

 
$
—

 
$
2,297

 
$
—

 
$
—

 
$
—

 
$
—

Total liabilities measured and recorded at fair value
$
—

 
$
2,297

 
$
—

 
$
2,297

 
$
—

 
$
—

 
$
—

 
$
—


(a)
Based on observable market transactions of spot currency rates and forward currency rates on equivalently-termed instruments.

A reconciliation of the net fair value of foreign currency contract assets and liabilities subject to master netting arrangements that are recorded in the April 1, 2017 and December 31, 2016 condensed consolidated balance sheets to the net fair value that could have been reported in the respective condensed consolidated balance sheets is as follows:
 
April 1, 2017
 
December 31, 2016
(In thousands)
Gross
amounts
of
recognized
liabilities
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount of
liabilities in the
condensed
consolidated
balance sheet
 
Gross
amounts
of
recognized
assets
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount of
assets in the
condensed
consolidated
balance sheet
Foreign currency contracts
$
2,297

 
$
—

 
$
2,297

 
$
4,784

 
$
—

 
$
4,784


Losses associated with derivatives are recorded in other income, net, in the condensed consolidated statements of operations. Losses associated with derivative instruments not designated as hedging instruments were as follows:
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Losses on foreign currency contracts
$
(2,297
)
 
$
(2,650
)
6. SEGMENT REPORTING
The Company reports its financial performance based on three reportable segments, which reflects an organizational alignment intended to leverage its unique portfolio of capabilities to create value for its customers by developing mission-critical solutions to maximize manufacturing yields and enable higher performance of devices. While these segments have unique products and services, and technical know-how, they share a single, global sales force, unified core systems and processes, global technology centers, strategic and technology roadmaps, and a focus on a common set of customers. The Company's business is reported in the following segments:

10

•
Specialty Chemicals and Engineered Materials (SCEM): SCEM provides high-performance and high-purity process chemistries, gases, and materials and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes.
•
Microcontamination Control (MC): MC solutions purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries.
•
Advanced Materials Handling (AMH): AMH develops solutions to monitor, protect, transport, and deliver critical liquid chemistries and substrates for a broad set of applications in the semiconductor industry and other high-technology industries.
Inter-segment sales are not significant. Segment profit is defined as net sales less direct segment operating expenses, excluding certain unallocated expenses, consisting mainly of general and administrative costs for the Company’s human resources, corporate, finance and information technology functions as well as interest expense, amortization of intangible assets and income taxes.
Summarized financial information for the Company’s reportable segments is shown in the following tables.
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Net sales
 
 
 
SCEM
$
114,435

 
$
101,107

MC
100,055

 
77,619

AMH
102,887

 
88,298

Total net sales
$
317,377

 
$
267,024

 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Segment profit
 
 
 
SCEM
$
28,140

 
$
22,416

MC
35,581

 
18,140

AMH
18,276

 
18,911

Total segment profit
$
81,997

 
$
59,467

The following table reconciles total segment profit to income before income taxes:
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Total segment profit
$
81,997

 
$
59,467

Less:
 
 
 
Amortization of intangible assets
10,945

 
11,289

Unallocated general and administrative expenses
20,132

 
18,619

Operating income
50,920

 
29,559

Interest expense
8,473

 
9,218

Interest income
(80
)
 
(69
)
Other expense (income), net
902

 
(675
)
Income before income tax expense
$
41,625

 
$
21,085



7. SUBSEQUENT EVENT
On April 24, 2017, the Company acquired the microelectronic water and chemical filtration product line of W.L. Gore & Associates, Inc. for $20.0 million in cash. The acquisition of this product line does not constitute a material business combination.

11



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. These forward-looking statements could differ materially from actual results. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016 as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The Company assumes no obligation to publicly release the results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences.

Overview
This overview is not a complete discussion of the Company’s financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of the Company's financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows and must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.
The Company is a leading global developer, manufacturer and supplier of microfiltration control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. Entegris seeks to leverage its unique breadth of capabilities to create value for its customers by developing mission-critical solutions to maximize manufacturing yields and enable higher device performance.
The Company's technology portfolio includes approximately 20,000 standard and customized products and solutions to achieve the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity. The Company’s customers consist primarily of semiconductor manufacturers, semiconductor equipment and materials suppliers as well as thin film transistor-liquid crystal display (TFT-LCD) and hard disk manufacturers, which are served through direct sales efforts, as well as sales and distribution relationships, in the United States, Asia, Europe and the Middle East.
The Company's business is organized and operated in three operating segments which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials (SCEM) segment provides high-performance and high-purity process chemistries, gases, and materials and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control (MC) segment offers solutions to purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling (AMH) segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries and substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products and technical know-how, they each share a single, global sales force, unified core systems and processes, global technology centers, strategic and technology roadmaps, and a focus on a common set of customers. The Company leverages its expertise and technologies from these three segments to create new and increasingly integrated solutions for its customers.
The Company’s fiscal year is the calendar period ending each December 31. The Company’s fiscal quarters consist of 13-week or 14-week periods that end on Saturday. The Company’s fiscal quarters in 2017 end April 1, 2017, July 1, 2017, September 30, 2017 and December 31, 2017. Unaudited information for the three months ended April 1, 2017 and April 2, 2016 and the financial position as of April 1, 2017 and December 31, 2016 are included in this Quarterly Report on Form 10-Q.
Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of the Company, include:
•
Level of sales Since a significant portion of the Company’s product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short-to-medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The

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Company’s sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuation.
•
Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company’s production operations, among others.
•
Fixed cost structure The Company’s operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short-term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company’s profitability.
Overall Summary of Financial Results

For the three months ended April 1, 2017, net sales increased 19% to $317.4 million, compared to $267.0 million for the three months ended April 2, 2016. The sales increase was due to strong across-the-board demand for the Company's products, in particular from semiconductor industry customers, reflecting both high industry fab utilization rates and increased capital spending compared to the year-ago period. Favorable foreign currency translation effects were $1.1 million for the quarter. Exclusive of that factor, the Company's sales increased 18%.

Sales were up 3% on a sequential basis over the fourth quarter of 2016, including a nominal unfavorable foreign currency translation effect. The increase in revenue resulted from modest improvements across the Company's product lines.

Reflecting the net sales increase, the Company's gross profit for the three months ended April 1, 2017 rose to $139.6 million, up from $114.7 million for the three months ended April 2, 2016, mainly reflecting the increase in sales. The Company experienced a 44.0% gross margin rate for the three months ended April 1, 2017, compared to 43.0% in the comparable year-ago period.

The Company's selling, general and administrative (SG&A) expenses increased by $2.5 million for the three months ended April 1, 2017 compared to the year-ago quarter, mainly reflecting higher compensation costs in 2017, offset in part by a decrease in professional fees.

As a result of the aforementioned factors, the Company reported net income of $32.5 million, or $0.23 per diluted share, for the quarter ended April 1, 2017, compared to net income of $16.2 million, or $0.11 per diluted share, a year ago.
During the three-month period ended April 1, 2017, the Company’s operating activities provided cash flow of $33.4 million and cash used for capital expenditures was $22.2 million. Cash and cash equivalents were $391.2 million at April 1, 2017, compared with cash and cash equivalents of $406.4 million at December 31, 2016. The Company had outstanding long-term debt of $560.3 million at April 1, 2017, compared to $584.7 million at December 31, 2016.

Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company’s condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to inventory valuation, impairment of long-lived assets, goodwill, income taxes and business acquisitions. There have been no material changes in these aforementioned critical accounting policies.
Three Months Ended April 1, 2017 Compared to Three Months Ended April 2, 2016 and December 31, 2016

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The following table compares operating results for the three months ended April 1, 2017 with results for the three months ended April 2, 2016 and December 31, 2016, both in dollars and as a percentage of net sales, for each caption.
 
Three months ended
(Dollars in thousands)
April 1, 2017
 
April 2, 2016
 
December 31, 2016
Net sales
$
317,377

 
100.0
 %
 
$
267,024

 
100.0
 %
 
$
308,502

 
100.0
 %
Cost of sales
177,781

 
56.0

 
152,318

 
57.0

 
176,702

 
57.3

Gross profit
139,596

 
44.0

 
114,706

 
43.0

 
131,800

 
42.7

Selling, general and administrative expenses
50,492

 
15.9

 
47,956

 
18.0

 
48,734

 
15.8

Engineering, research and development expenses
27,239

 
8.6

 
25,902

 
9.7

 
27,223

 
8.8

Amortization of intangible assets
10,945

 
3.4

 
11,289

 
4.2

 
10,938

 
3.5

Operating income
50,920

 
16.0

 
29,559

 
11.1

 
44,905

 
14.6

Interest expense
8,473

 
2.7

 
9,218

 
3.5

 
9,068

 
2.9

Interest income
(80
)
 
—

 
(69
)
 
—

 
(85
)
 
—

Other expense (income), net
902

 
0.3

 
(675
)
 
(0.3
)
 
1,303

 
0.4

Income before income taxes
41,625

 
13.1

 
21,085

 
7.9

 
34,619

 
11.2

Income tax expense
9,111

 
2.9

 
4,873

 
1.8

 
8,521

 
2.8

Net income
$
32,514

 
10.2
 %
 
$
16,212

 
6.1
 %
 
$
26,098

 
8.5
 %

Net sales For the three months ended April 1, 2017, net sales increased by 19% to $317.4 million, compared to $267.0 million for the three months ended April 2, 2016. An analysis of the factors underlying the increase in net sales is presented in the following table:
(In thousands)
 
Net sales in the quarter ended April 2, 2016
$
267,024

Growth associated with volume and pricing
49,214

Increase associated with effect of foreign currency translation
1,139

Net sales in the quarter ended April 1, 2017
$
317,377


The sales increase was due to strong across-the-board demand for the Company's products, in particular from semiconductor industry customers, reflecting both high industry fab utilization rates and increased capital spending compared to the year-ago period. As described below, each of the Company's segments experienced improved sales. Favorable foreign currency translation effects were $1.1 million for the quarter, mainly due to the strengthening of the Japanese yen and the Korean Won relative to the U.S. dollar. Exclusive of that factor, the Company's sales increased 18%.

On a geographic basis, in the first quarter of 2017, total sales to Asia (excluding Japan) were 58%, to North America were 21%, to Japan were 11% and to Europe were 10%, compared to prior year first quarter sales to Asia (excluding Japan) of 53%, to North America of 24%, to Japan of 13% and to Europe of 10%. Sales increased by 1%, 2%, 31%, and 16% in Japan, North America, Asia, and Europe respectively, in the first quarter of 2017 compared to the prior year's first quarter.

Sales were up 3% on a sequential basis over the fourth quarter of 2016, including a nominal unfavorable foreign currency translation effect. The increase in revenue resulted from modest improvements across the Company's product lines.

Gross profit Due mainly to the sales increase, the Company's gross profit rose 22% for the three months ended April 1, 2017 to $139.6 million, compared to $114.7 million for the three months ended April 2, 2016. The Company experienced a 44.0% gross margin rate for the three months ended April 1, 2017, compared to 43.0% in the comparable year-ago period. The gross margin improvement reflects the improved factory utilization associated with strong sales levels, a slightly favorable sales mix and the absence of the qualification and start-up costs incurred at the Company's i2M center in the first quarter a year ago. These factors were partly offset by price erosion for certain products in response to normal competitive pressures.


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Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses were $50.5 million for the three months ended April 1, 2017, up $2.5 million, or 5%, from the comparable three-month period a year earlier. An analysis of the factors underlying the increase in SG&A is presented in the following table:
(In thousands)
 
Selling, general and administrative expenses in the quarter ended April 2, 2016
$
47,956

Employee costs
2,609

Other decreases, net
(73
)
Selling, general and administrative expenses in the quarter ended April 1, 2017
$
50,492


The increase in employee costs mainly reflected higher share-based compensation and incentive plan costs.

Engineering, research and development expenses The Company’s engineering, research and development (ER&D) efforts focus on the support or extension of current product lines, and the development of new products and manufacturing technologies. ER&D expenses were $27.2 million in the three months ended April 1, 2017, compared to $25.9 million in the year-ago period, a $1.3 million increase. The increase for the quarter was mainly due to higher employee costs.
Interest expense Interest expense includes interest associated with debt outstanding issued to help fund the 2014 acquisition of ATMI, Inc. and the amortization of debt issuance costs associated with such borrowings. Interest expense was $8.5 million in the three months ended April 1, 2017, compared to $9.2 million in the three-month period ended April 2, 2016. The decrease reflects lower outstanding borrowings.
Other expense (income), net Other expense, net was $0.9 million in the three months ended April 1, 2017, and consisted mainly of foreign currency transaction losses.
Other income, net was $0.7 million in the three months ended April 2, 2016 and consisted mainly of foreign currency transaction gains.

Income tax expense The Company recorded income tax expense of $9.1 million in the three months ended April 1, 2017, compared to income tax expense of $4.9 million in the three months ended April 2, 2016. The Company’s year-to-date effective tax rate was 21.9% in 2017, compared to 23.1% in 2016. The tax rate in both years reflect the benefit of foreign source income being taxed at lower rates than the U.S. statutory rate. Year-to-date income tax expense in 2017 also includes a discrete benefit of $2.5 million recorded in connection with share-based compensation. Upon the adoption of ASU No. 2016-09 (see Note 1 to the condensed consolidated financial statements) excess tax benefits are recorded in the statement of operations as they occur. Also included in income tax expense in 2017 was a discrete charge of $3.6 million to correct an error related to the tax effects of intercompany sales and the related intercompany profit.

Net income Due to the factors noted above, the Company recorded net income of $32.5 million, or $0.23 per diluted share, in the three-month period ended April 1, 2017, compared to net income of $16.2 million, or $0.11 per diluted share, in the three-month period ended April 2, 2016.

Non-GAAP Measures The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. See the section "Non-GAAP Information" included below in this section for additional detail, including the definition of non-GAAP financial measures and the reconciliation of GAAP measures to the Company’s non-GAAP measures.

The Company’s non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share.

Adjusted EBITDA increased 39% to $75.8 million in the three-month period ended April 1, 2017, compared to $54.5 million in the three-month period ended April 2, 2016. Adjusted EBITDA, as a percent of net sales, increased to 23.9% from 20.4% in the year-ago period. These results generally reflect the same factors underlying the Company's GAAP results as described above.

Adjusted Operating Income increased 51% to $61.9 million in the three-month period ended April 1, 2017, compared to $40.8 million in the three-month period ended April 2, 2016. Adjusted Operating Income, as a percent of net sales, increased to 19.5% from 15.3% in the year-ago period.


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Non-GAAP Earnings Per Share increased 65% to $0.28 in the three-month period ended April 1, 2017, compared to $0.17 in the three-month period ended April 2, 2016.

Segment Analysis
The Company reports its financial performance based on three reporting segments. The following is a discussion on the results of operations of these three business segments. See Note 6 to the condensed consolidated financial statements for additional information on the Company’s three segments.

The following table presents selected net sales and segment profit data for the Company’s three reportable segments for the three months ended April 1, 2017, April 2, 2016 and December 31, 2016.
 
Three months ended
(In thousands)
April 1, 2017
April 2, 2016
December 31, 2016
Specialty Chemicals and Engineered Materials
 
 
 
Net sales
$
114,435

$
101,107

$
110,945

Segment profit
28,140

22,416

25,919

Microcontamination Control
 
 
 
Net sales
100,055

77,619

98,717

Segment profit
35,581

18,140

31,719

Advanced Materials Handling
 
 
 
Net sales
102,887

88,298

98,840

Segment profit
18,276

18,911

16,644

Specialty Chemicals and Engineered Materials (SCEM)
For the first quarter of 2017, SCEM net sales increased to $114.4 million, compared to $101.1 million in the comparable period last year. The sales increase was due to improved sales of glass forming and advanced deposition materials products. SCEM reported a segment profit of $28.1 million in the first quarter of 2017, up 26% from $22.4 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales, along with a 1% decrease in operating expenses.

Microcontamination Control (MC)
For the first quarter of 2017, MC net sales increased to $100.1 million, compared to $77.6 million in the comparable period last year. The sales increase was due to strength in liquid chemistry filters for wet, etch and clean and bulk photo applications, and gas filter products. MC reported a segment profit of $35.6 million in the first quarter of 2017, up 96% from $18.1 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales and the absence of the qualification and start-up costs incurred at the Company's i2M center in the first quarter a year ago, partially offset by a 3% increase in operating expenses.
Advanced Materials Handling (AMH)
For the first quarter of 2017, AMH net sales increased to $102.9 million, compared to $88.3 million in the comparable period last year. The sales increase was due to improved sales of 300mm transport module and fluid handling products. AMH reported a segment profit of $18.3 million in the first quarter of 2017, down 3% from $18.9 million in the year-ago period. The segment profit decline was primarily due to an unfavorable sales mix, the effect of modest selling price erosion on legacy products and a 13% increase in operating expenses, primarily reflecting higher selling expenses.

Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $20.1 million in the first quarter of 2017, compared to $18.6 million in the first quarter of 2016. The $1.5 million increase mainly reflects the increased employee costs referenced in the discussion of SG&A expenses above.

Liquidity and Capital Resources
Operating activities Cash flows provided by operating activities totaled $33.4 million in the three months ended April 1, 2017. Operating cash flows reflecting net income adjusted for non-cash expenses (such as depreciation, amortization and share-based compensation) was offset by changes in operating assets and liabilities of $34.9 million, mainly reflecting increases in accounts receivable and inventories, and decreases in accounts payable and accrued liabilities.

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Accounts receivable increased by $10.4 million during the three months ended April 1, 2017, or $7.5 million after accounting for foreign currency translation, mainly reflecting an increase in sales and in the Company’s days sales outstanding (DSO). The Company’s DSO was 51 days at April 1, 2017, compared to 49 days at the beginning of the year.
Inventories increased by $4.8 million during the three months ended April 1, 2017, or $5.4 million after accounting for foreign currency translation and the provision for excess and obsolete inventory. The increase reflects higher levels of all inventory categories due to higher levels of business activity.
Accounts payable and accrued liabilities decreased $24.2 million during the three months ended April 1, 2017, or $23.5 million after accounting for foreign currency translation. A key component of the decrease is the payment of 2016 incentive compensation during the first quarter of 2017.

Working capital at April 1, 2017 was $555.5 million, compared to $538.6 million as of December 31, 2016, and included $391.2 million in cash and cash equivalents, compared to cash and cash equivalents of $406.4 million as of December 31, 2016.

Investing activities Cash flows used in investing activities totaled $22.0 million in the three-month period ended April 1, 2017, consisting mainly of the acquisition of manufacturing equipment and tooling. As of April 1, 2017, the Company expects its full-year capital expenditures in 2017 to be approximately $90 million to $100 million. As of April 1, 2017, the Company had outstanding capital purchase obligations of $27.5 million for the construction or purchase of plant and equipment not yet recorded in the Company’s condensed consolidated financial statements as the Company had not yet received the related goods or property.

Financing activities Cash flows used in financing activities totaled $32.8 million during the three-month period ended April 1, 2017. This primarily reflects the Company's payment of $25.0 million on its senior secured term loan described below. In addition, the Company repurchased shares of the Company’s common stock during the first quarter of 2017 at a total cost of $4.0 million under the stock repurchase program authorized by the Company’s Board of Directors. The Company received proceeds of $1.0 million in connection with common shares issued under the Company's stock plans, while expending $4.6 million for taxes related to the net share settlement of equity awards under the Company’s stock plans.

As of April 1, 2017, the Company had outstanding long-term debt, including the current portion thereof, of $560.3 million, related to debt issued by the Company, as discussed in more detail below.

At April 1, 2017, the Company had an outstanding $360 million aggregate principal amount of 6% senior unsecured notes due April 1, 2022.

On April 30, 2014, the Company entered into a term loan facility that provided senior secured financing of $460 million. Borrowings under the term loan facility bear interest at a rate per annum equal to, at the Company’s option, a base rate (such as prime rate or LIBOR) plus, an applicable margin. The Company may voluntarily prepay outstanding loans under the term loan facility at any time.  During the first quarter of 2017, the Company and its lenders agreed to an amendment of the term loan agreement that decreases the applicable margin for the Company’s term loan from 2.75% to 2.25% per annum for LIBOR borrowings, with a LIBOR floor of 0.0%, and from 1.75% to 1.25% per annum for base rate borrowings, with a base rate floor of 1.00%. The principal amount outstanding under the term loan facility at April 1, 2017 was $208.9 million. Based on management's plans and intent, the Company reflects $100 million of the term loan as current maturities of long-term debt in its condensed consolidated balance sheet as of April 1, 2017.
The Company also has a senior secured asset-based revolving credit facility maturing April 30, 2019 that provides financing of $75 million, subject to a borrowing base.  The senior secured asset-based revolving credit facility bears interest at a rate per annum equal to at the Company's option, a base rate (prime rate or LIBOR), plus an applicable margin. As of April 1, 2017, the Company had no outstanding borrowings and $0.2 million undrawn on outstanding letters of credit under the senior secured asset-based revolving credit facility.
Through April 1, 2017, the Company was in compliance with all applicable financial covenants included in the terms of its senior unsecured notes, senior secured term loan facility and senior secured asset-based revolving credit facility.
The Company also has lines of credit with two banks that provide for borrowings of Japanese yen for the Company’s Japanese subsidiary, equivalent to an aggregate of approximately $10.7 million. There were no outstanding borrowings under these lines of credit at April 1, 2017.
The Company believes that its cash and cash equivalents, funds available under its senior secured asset-based revolving credit facility and international credit facilities and cash flow generated from operations will be sufficient to meet its working capital

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and investment requirements for at least the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms.
At April 1, 2017, the Company’s shareholders’ equity was $945.1 million, up from $899.2 million at the beginning of the year. The increase mainly reflected net income of $32.5 million, an increase to additional paid-in capital of $3.9 million associated with the Company’s share-based compensation expense, proceeds of $1.0 million in connection with common shares issued under the Company's stock plans, and foreign currency translation effects of $16.1 million, mainly associated with the weakening of the U.S. dollar versus the Korean won and Japanese yen. These increases were offset partly by the repurchase of the Company’s common stock at a total cost of $4.0 million and the payment of $4.6 million for taxes related to the net share settlement of equity awards under the Company’s stock plans.
As of April 1, 2017, the Company’s resources included cash and cash equivalents of $391.2 million, funds available under its $75 million senior secured asset-based revolving credit facility and international credit facilities, and cash flow generated from operations. As of April 1, 2017, the amount of cash and cash equivalents held by foreign subsidiaries was $296.1 million. These amounts held by foreign subsidiaries, certain of which are associated with indefinitely reinvested foreign earnings, may be subject to U.S. income taxation on repatriation to the United States. The Company does not anticipate the need to repatriate funds associated with indefinitely reinvested foreign earnings to the United States to satisfy domestic liquidity needs arising in the ordinary course of business. The Company believes its existing balances of domestic cash and cash equivalents, available cash and cash equivalents held by foreign subsidiaries not associated with indefinitely reinvested foreign earnings and operating cash flows will be sufficient to meet the Company’s domestic cash needs arising in the ordinary course of business for the next twelve months.
Recently adopted accounting pronouncements Refer to Note 1 to the Company's condensed consolidated financial statements for a discussion of accounting pronouncements recently adopted.
Recently issued accounting pronouncements Refer to Note 1 to the Company's condensed consolidated financial statements for a discussion of accounting pronouncements recently issued by not yet adopted.
Non-GAAP Information The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP).

The Company also provides certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. Regulation G, “Conditions for Use of Non-GAAP Financial Measures,” and other regulations under the Securities Exchange Act of 1934, as amended, define and prescribe the conditions for use of certain non-GAAP financial information. The Company provides non-GAAP financial measures of Adjusted EBITDA and Adjusted Operating Income together with related measures thereof, and non-GAAP Earnings Per Share (EPS).

Adjusted EBITDA, a non-GAAP term, is defined by the Company as net income before (1) income tax expense, (2) interest expense, (3) interest income, (4) other expense (income), net, (5) amortization of intangible assets and (6) depreciation. Adjusted Operating Income, another non-GAAP term, is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company’s net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.

Non-GAAP EPS, a non-GAAP term, is defined by the Company as net income before (1) gain on sale of equity investment, (2) amortization of intangible assets and (3) the tax effect of those adjustments to net income and discrete items, stated on a per share basis.
The Company provides supplemental non-GAAP financial measures to better understand its business and believes these measures provide investors and analysts additional and meaningful information for the assessment of the Company’s ongoing results. Management also uses these non-GAAP measures to assist in the evaluation of the performance of its business segments and to make operating decisions.
Management believes the Company’s non-GAAP measures help indicate the Company’s baseline performance before certain gains, losses or other charges that may not be indicative of the Company’s business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors’ overall understanding of the Company’s results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans,

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measures and evaluates the Company’s business performance. Management believes that the inclusion of non-GAAP measures provides consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.
Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand its business.
In addition, and as a consequence of the importance of these non-GAAP financial measures in managing its business, the Company’s Board of Directors uses non-GAAP financial measures in the evaluation process to determine management compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company’s industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company’s creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s consolidated financial statements in their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations:
First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other companies. For example, the Company’s non-GAAP measure of Adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.
Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance the Company will not have future restructuring activities, translation-related costs, gains or losses on sale of equity investments, or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items from the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.

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Management considers these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financial measures and evaluating these non-GAAP financial measures together with their most directly comparable financial measures calculated in accordance with GAAP. The calculations of Adjusted EBITDA, Adjusted Operating Income, and non-GAAP EPS, and reconciliations between these financial measures and their most directly comparable GAAP equivalents, are presented below in the accompanying tables.

Reconciliation of GAAP Net income to Adjusted Operating Income and Adjusted EBITDA
 
 
Three months ended
(In thousands)
April 1, 2017
 
April 2, 2016
Net sales
$
317,377

 
$
267,024

Net income
$
32,514

 
$
16,212

Adjustments to net income
 
 
 
Income tax expense
9,111

 
4,873

Interest expense
8,473

 
9,218

Interest income
(80
)
 
(69
)
Other expense (income), net
902

 
(675
)
GAAP – Operating income
50,920

 
29,559

Amortization of intangible assets
10,945

 
11,289

Adjusted operating income
61,865

 
40,848

Depreciation
13,977

 
13,700

Adjusted EBITDA
$
75,842

 
$
54,548

 
 
 
 
Adjusted operating income – as a % of net sales
19.5
%
 
15.3
%
Adjusted EBITDA – as a % of net sales
23.9
%
 
20.4
%

Reconciliation of GAAP Earnings per Share to Non-GAAP Earnings per Share
 
 
Three months ended
(In thousands, except per share data)
April 1, 2017
 
April 2, 2016
Net income
$
32,514

 
$
16,212

Adjustments to net income
 
 
 
Gain on sale of equity investment
—

 
(118
)
Amortization of intangible assets
10,945

 
11,289

Tax effect of adjustments to net income and discrete tax items
(2,705
)
 
(3,766
)
Non-GAAP net income
$
40,754

 
$
23,617

 
 
 
 
Diluted earnings per common share
$
0.23

 
$
0.11

Effect of adjustments to net income
0.06

 
0.05

Diluted non-GAAP earnings per common share
$
0.28

 
$
0.17


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Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Entegris’ principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company’s interest-bearing cash equivalents and senior secured financing obligation are subject to interest rate fluctuations. The Company’s cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately $1.2 million annually.
The cash flows and results of operations of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. At April 1, 2017, the Company had no net exposure to any foreign currency forward contracts.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the 1934 Act)) as of April 1, 2017. The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management’s evaluation (with the participation of our CEO and CFO), as of April 1, 2017, the Company's CEO and CFO have concluded that the disclosure controls and procedures used by the Company, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.



21
Table of Contents

PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of April 1, 2017, the Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. The Company believes the final outcome of these matters will not have a material adverse effect on its condensed consolidated financial statements. The Company expenses legal costs as incurred.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information concerning shares of the Company’s Common Stock $0.01 par value purchased during the three months ended April 1, 2017.
Period




(a)
Total Number of Shares Purchased(1)


(b)
Average Price Paid per Share

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 - February 4, 2017
90,000
$18.65
90,000
$90,748,733
February 5 - March 4, 2017
47,594
$21.19
47,594
$89,740,019
March 5 - April 1, 2017
58,709
$22.36
58,709
$88,427,303
Total
196,303
$20.38
196,303
$88,427,303

(1) On February 15, 2017, the Company’s Board of Directors authorized a repurchase program covering up to an aggregate of $100 million of the Company’s common stock in open market transactions and in accordance with one or more pre-arranged stock trading plans to be established in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. This authorization expires on February 15, 2018. This repurchase program represents a renewal and replacement of the $100 million repurchase program originally authorized by the Board of Directors on February 5, 2016, which expired February 15, 2017.

Item 6. Exhibits

10.1
 
Amendment No. 1 to Term Credit and Guaranty Agreement, dated as of March 14, 2017, among the Company, Goldman Sachs Bank USA, as administrative agent and collateral agent, and each participating lender party thereto (Incorporated by reference to the Registrant's Report on Form 8-K dated March 14, 2017 (File No. 001-32598))
31.1
  
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
31.2
  
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

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Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ENTEGRIS, INC.
 
 
 
Date: April 27, 2017
 
/s/ Gregory B. Graves
 
 
Gregory B. Graves
 
 
Executive Vice President and Chief Financial
 
 
Officer (on behalf of the registrant and as
 
 
principal financial officer)


23
Table of Contents

EXHIBIT INDEX
10.1
 
Amendment No. 1 to Term Credit and Guaranty Agreement, dated as of March 14, 2017, among the Company, Goldman Sachs Bank USA, as administrative agent and collateral agent, and each participating lender party thereto (Incorporated by reference to the Registrant's Report on Form 8-K dated March 14, 2017 (File No. 001-32598))
31.1
  
Certification of Chief Executive Officer Pursuant to Exchange Act Rule 13a-14(a).
31.2
  
Certification of Chief Financial Officer Pursuant to Exchange Act Rule 13a-14(a).
32.1
  
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS
  
XBRL Instance Document
101.SCH
  
XBRL Taxonomy Extension Schema Document
101.CAL
  
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
  
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
  
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
  
XBRL Taxonomy Extension Presentation Linkbase Document
 


24