Good day, everyone, and welcome to the Entegris Second Quarter 20 16 Earnings Call with Analyst. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Steve Kanter, Vice President of Corporate Relations. Please go ahead, sir.
Okay, thank you. Good morning, everyone, and thank you all for joining our call. Earlier today, we announced the financial results for our second quarter ended July 2 2016. You can access a copy of our press release on our website Before we begin, I would like risks and uncertainties, which are outlined in detail in our reports and filings with the SEC. On this call, we will also refer to non GAAP financial measures as defined by the SEC in Regulation G.
You can find a reconciliation table in today's press release as well as on our website. On the call today are Bertrand Loy, President and CEO and Greg Graves, CFO. Bertrand will now begin the call. Bertrand?
Thank you, Steve. I will make some general comments on the quarter and Greg will then provide more details on our financial results. Simply stated, We grew our sales more than 13% sequentially to a record high of 303,000,000 We achieved GAAP EPS of $0.23 and non GAAP EPS of $0.28. We generated strong cash flow and achieved an adjusted EBITDA margin of 23.5%. We repaid $25,000,000 of debt, reducing our net debt ratio to 1.1 times, down from two times when we announced the ATM ideal in 2014.
Our growth was steady across all market segments, including leading edge logic and memory makers, as well as legacy fabs and our industrial markets. The increase in revenue was broad based across our product portfolio with strong growth in filtration, hoops, and our specialty materials. In particular, our liquid filtration and advanced deposition businesses which benefited from new product introductions At our analyst meeting in San Francisco, we discussed how the Entegris value proposition to our customers rests on 3 pillars: 1st, the unique technology portfolio 2nd, a comprehensive global footprint And third, but not least, a relentless dedication to operational excellence. Our performance in Q2 provides compelling evidence that our strategy and the quality of our execution are yielding results. We have a rich pipeline of new technology and breakthrough products that are leveraging the breadth of our technology driven in part by leading edge filters, high purity liquid containers, advanced troops, new cleaning chemistries, and next Generation Deposition Materials.
Regarding our global presence, the expansions of our tech centers in Taiwan and Korea, or facilitating even deeper engagement with our major customers in Asia. This will allow us to shorten the development time of our tailored solutions. In new manufacturing operations around the world has alleviated capacity constraints and has improved lead times. The flagship of these investments is obviously our I2M center. I am pleased to report that we were based on I2M made membrane, which helped drive our filtration sales to record levels.
We are on track to exit the legacy Millipore facility in August. Having the best technology and a global footprint is only one part of the value proposition. The investments we have made over the past several years in our quality systems cleaner manufacturing processes and statistical process capability, as well as our constant focus on operational excellence are paying off. Through the first half of twenty sixteen, we have approached 5.5 Sigma levels of quality. This is a vast improvement from and SKUs across our global operations, achieving this kind of world class result is a great accomplishment Over the past few years, Entegris has been consistently recognized by its most demanding customers as one of their most reliable and most critical suppliers.
In terms of our financial performance, our second quarter results demonstrated the earnings and cash flow generation potential of Entegris. The quarter marked a clear step towards achieving a $1 per share of annual earnings. I am also pleased with our path to de lever our balance sheet and to execute our capital allocation strategy to increase shareholder value. We've been thoughtful and transparent in how we have deployed capital, and you should expect us to continue to deliver on our commitments. It is Entegris's 50th year as a company.
While it is very gratifying to celebrate this milestone, with the type of performance we reported today. I am even more excited about what lies ahead. We have a unique value proposition for our customers, and we have built very promising pipeline of growth opportunities. This gives us the conviction that we can continue to expand our served available market grow our share outpace the industry and create lasting value for shareholders. I will now turn the call to Greg for the financial detail.
Greg?
Thank you, Bertrand. 2nd quarter sales of $303,000,000 were record levels and above the high end of our guidance. Sales were up 8% from a year ago. On a sequential basis, sales were up 13.5% and included a 1% favorable impact currency. For the first half of twenty sixteen, Our non GAAP earnings per share of The strong EPS was driven by gross margins of 45.9%, which improved from 43% in Q1, due to favorable mix, higher volumes same as in Q1 as we finished the last remaining membrane qualification and prepared to complete the I2M transition in the current quarter.
We expect gross margins to be Sales for Critical Material Handling, or CMH, grew 17 percent to $195,000,000 from Q1, while the operating margin for CMH grew 27% in Q2, up from 22.8% in Q1. Sales for Electronic Materials or EM rose 7 percent sequentially to $108,000,000 as EM's operating margin of 25.4 percent increased from 21.4% in Q1. The margin improvements in both CMH and EM were largely due to favorable product mix and greater manufacturing efficiency. Excluding amortization of $11,100,000 non GAAP operating expenses in Q2 were $81,700,000, Operating expenses were higher than initially expected due to unplanned severance, higher variable compensation costs, and other one time expenses. We expect non GAAP operating expenses Adjusted operating margin was the operating margin would have been past several quarters.
Our GAAP tax rate for the quarter lower tax rate reflects more favorable geographic income mix. For the full year, We expect the non GAAP tax rate to be 23 percent to 25 percent or down about 300 basis points from our prior guidance. Adjusted EBITDA for the Cash flow from operations for the quarter The excellent cash flow was driven Inventories increased by only $3,000,000 sequentially. Turns of 3.6 improved from 3.4 in Q1. ESOs in Q2 were 54 days compared to 51 days in Q1.
2nd quarter CapEx was $14,300,000 and year to date CapEx was $32,000,000. We are now expecting full year CapEx of $70,000,000 to $75,000,000 which is down slightly $4,000,000, of which $176,000,000 was in the U. S. Total long term debt including current maturities $632,000,000. We repaid $25,000,000 in the last week of Q2 and expect to repay an additional $50,000,000 over the next 12 months.
Our net leverage ratio is 1.1 times, which is consistent with what we expected at the time of the ATMI acquisition. We continue to execute our capital allocation strategy, which balances debt repayment, building liquidity for potential M and A and opportunistic share repurchase. Turning to our outlook for We expect sales to range from $285,000,000 to $300,000,000, reflecting current demand trends. The third quarter is typically seasonally flat or down slightly from the second quarter. At these revenue levels, We expect non GAAP EPS to In summary, we performed very well in Q2 Year to date revenue was up 4.8%, which we believe is well ahead of market growth.
We generated strong cash flow And finally, we
team.
We'll take our
1st question from Dick Ryan, Dougherty and Company.
Thank you and congratulations on the strong quarter guys. Say, Greg, you mentioned a 1% favorable impact in FX in Q2. How are you looking at that for either Q3 or the remainder of the year?
Were 1% favorable in Q2, which was about $3,000,000 primarily related to the Japanese yen. For the balance of the year, we would expect only nominal impact from currency as well.
Okay. So whatever you get hit from Europe Japan probably helps you the other way?
Correct.
Okay. And can you give us a general breakdown unit versus CapEx and again, Q2 and kind of how we should look at that going forward?
Right. So the majority of our revenues, as you know, unit driven and that was firm in Q2 with, our unit driven business representing about 77% of total revenue. Very much in line with what we experienced in Q1. And CapEx represented, of course, 23%, both size of the business actually performed very strongly, in Q2.
Okay. And Bertrand, you mentioned strength across the trailing edge, leading edge. And I think trailing kind of drove results in Q1. Can you give us a little more perspective on both sides there?
So yes, so we saw actually strength across the board. On the trading edge, we continue to see a lot of flanks in our consumer business. So think about the filters and the chemistries that are used every day in the production environment of those trading etch fabs. But we continue to see some interest by those legacy fabs in the retrofit kits that we have that can represent some interesting cost effect alternative to increase the throughput and improve the capacity that they can get from the older generation tools. So in other words, is a nice alternative for them to having to purchase an expensive new tool.
So a perfect example of, this type of solution will be our photoresist ponds, and we continue to see strength for that particular product line. As it comes to the leading edge, I noted that you were telling our Analyst Day, in San Francisco a few weeks back. And we provided a lot of details around a number of growth opportunities that we are particularly excited about. And all of those opportunities actually had a lot of success in Q2, achieve among them how photoresist the filtration product lines that we introduced earlier this year, but we also saw a lot of strength in our specialty gas business in a number of new product that we introduced.
Thank you. We'll take our next question from Patrick Ho with Stifel Nicolaus.
Thank you very much and congrats as well. Bertron, maybe just as a follow-up to some of the new product that you've mentioned on the call as it involves the filtration and new chemistries and some of the new materials. Are those primarily focused on leading edge applications, or are some of those also being applied to, as you mentioned, the trailing edge?
It's a great question, Patrick. It's a little bit of both. So if you think about the photoresist filters, it's mostly targeting the leading edge. But you should think about, the new borrowing mixtures. This is actually targeting both the leading and the trading edge fabs think about the value proposition for our customers here.
It's really about providing a, cleaner material that improves the iron source lifetime and increase the beam stability. And for the customer, the value proposition has increased uptime and reduce cost of ownership. So you can imagine that those types of, attributes are equally important for the leading edge fabs as it is for the trading edge fabs. If you continue down the list, the other 3, I would say are, in fact, so the other the next two would be the coatings and the pad conditioners the pad conditioners are both leading edge and trading edge. The coatings are really mostly leading edge and the advanced deposition materials, I think we talked about the Dungsten Material, this is clearly leading edge.
Leading edge logic, but also a lot of applications obviously on the memory side.
Great. That's really helpful. And maybe a question for Greg. In terms of the operating model, Now with the I2M headwinds behind you, what are some of the key levers we should be looking at for gross margins on a going forward basis? Is it simply mix utilization?
What's going to be kind of the biggest drivers for gross margins? As we look forward?
I think, Patrick, if you look at margins really over the last eight quarters, I mean, they've been with the exception of Q4 of last year, they've been quite stable in kind of that 44, 45 range. We've had a couple of quarters where it's touched 46 and we've had a couple of quarters where been below that. I think moving forward, you'll see more stability in the margin. But in terms of levers, I don't see a lot of upside. I mean, as I said this consistently, I don't see this as a 47, 48 percent margin business.
I mean, obviously as volumes move up over 300, we'll see margins like we saw this quarter. But I think you need to be thinking about it as more stability in the margin, but a margin in that kind of 45 ish plus or minus.
Great. Thank you very much.
Thank you. We'll take our next question from Christian Schwab from Craig Hallum Capital Group.
Hey, congratulations on a great success in the quarter and guidance. But, Rod, as we look to your 3 growth strategies, that you highlighted at your Analyst Day. Can you just remind us between market share gains and new applications and Sam expansion. What you're most confident in, to drive growth over the course of the next year at rates that look to continue to be faster than the industry.
Right. So Christian, it's I think you're referring to the growth model that was really based on that 3 layer assumption. The first layer was a 2% GDP growth assumption. Then an additional 1% linked to the IoT trends, which we believe will drive greater wafer starts and additional industry CapEx Then finally, and most importantly, the final layer was an additional 1 to 200% of growth coming from a number of new opportunities And I think that's where your question is, is how much of that will be served available market expansion as opposed to share growth And I would say that actually a lot of it is going to be, market expansion. And I think that's probably what is so different from the growth opportunity pipeline that we had or that we've had for the last 5 to 10 years.
I think that there's a greater emphasis and there has been a greater emphasis in expanding the application of our technology and capabilities outside of the traditional applications that we've been serving, and this is starting to pay off. So certainly a little bit of share growth but I would say the vast majority is really about an expansion.
Great. Thank you. And then, just on the operating model, Greg, we shouldn't assume any different adjusted operating margin goals than kind of we've kind of previously talked about like 20 percent plus revenues above 3.10 and you know, times when the market may contract a little bit that 17 to 19 at 280. That's still kind of what we should be thinking about.
At this point, I think you should consider the model that we have in place, and I'd note have had in place for over 2 years now to be kind of the model going forward. Obviously, as we move into 2017 and start thinking about higher revenue levels, we'll need to think about what that model looks like at the upper ends.
Perfect. Great. No other questions. Thanks guys.
Thanks, Christian. Thank you.
We'll take our next question from Chris Kapsch with BB And T Capital Markets.
Yes. So my question is sort of a follow-up to the previous question and your discussion about, I guess, sort of outsized growth being a function of expanding the market. In this quarter though specifically, I think your comment, your formal comments were that you exceeded the market growth, and that's apparent in the results. And just wondering if you could provide some color in this quarter, what contributed to the, your growth exceeding the market growth, maybe if you could provide a little bit more color by segment? Was it newer products and advanced technologies or was it was there some market share?
Was there some pent up catch up demand associated with the I2M transition. Any sort of color on that would be appreciated.
Sure. So first of all, let me say, but start by saying that everything played out the way we had hoped it would in Q2. The industry environment was certainly positive with wafer start. Sequentially up in the mid to high single digits. Anything that was driven by strong demand from the mid to low tier smartphones and steady demand by IoT related applications.
But more importantly, As we mentioned, we benefited from a number of, successful new product introductions. So we cited liquid filters not just, or the photoresist application, but also we introduced, a new Torrento platform with a focus on wet and clean application. So that family of filter performed extremely well during the quarter as well. Has did a series of new products in our specialty gas business as well and deposition materials. Another product platform that did very well and remain actually very steady during the quarter was our foot business, which, recorded revenue of approximately $16,000,000.
That was up from $14,000,000 last quarter, which was not a record quarter, but that was the 2nd highest quarter ever recorded for this product line as well. So and as you know, this is a business that can be lumpy, but a business where we enjoy can market share. So as I said, a lot of strength across a number of product lines, and I'm not sure I want to Natalie provide more details. The list will be too long. But again, a very well balanced, performance across the portfolio.
Okay. That's helpful. And then just if I could follow-up on, I guess it's more on the M and A topic and out in San Francisco, you did make the case that you've felt like you've earned the right to be a consolidator in a space that probably is likely to see some consolidation. And, you mentioned you're evaluating various, I guess you have a pipeline of potential targets. And given the situation now you're at 1.1 times, You mentioned this morning, building your cash balance for the purpose of having liquidity for M And A.
Just wondering like where would you feel comfortable taking this business in terms of leverage if you found a compelling acquisition that has meaningful bite. So just how what kind of leverage would you be willing to go to in order to do what you feel is strategically compelling deal?
Chris, this is Greg. So we talk a lot about the net leverage and it being down to 1.1 times from about 2 at the time we did the ATMI acquisition The external markets in the credit markets in particular tend to look at the gross leverage ratio. So today, that growth leverage is, still up around 2.25. We've No, from talking to the rating agencies, we could essentially maintain our existing rating with gross leverage up at 3.5 And we certainly wouldn't go any further than that.
We'll take our next question from Amanda Bernati from Citi.
Hi. Just a question on the tech centers in Asia that you had mentioned Bertrand. You said that it was you were deepening relationships within those reach and allowing for shorter development lead times. Are you working more closely with the R and D teams at the big players in Asia in order to kind of get a head start per se on the leading edge or is this more on the new technologies that you're working on that your the new products that you're building rather than just purely the traditional products that you work on heading towards the leading edge?
No, Amanda. It's actually it's actually both. I mean, we've had, tech centers in all of the large electronics market for a number of years. We keep adding talent. We keep adding capabilities to those centers.
And the reason we are doing that is because the model works We talked during the Analyst Day about the Integris customer engagement model, which is really based on on our desire to be viewed as an extension of the engineering teams of our customers. And you hear a lot of companies talk about collaboration, but they mostly flagged the need for collaboration, which is clearly a necessity indeed in this industry as process and metrology challenges continue to grow and become more complex But there are very few companies that really know how to actually do it. And I think that if you look back at Entegris, we've been framing that concept at Vision for the last 7, 8 years and it's starting to hold. And that strategy has actually led us to make a number of consequential decision. You were talking about the local, tech centers, but it's only part of the solution.
It also, made us rethink how we want to be managing our new product development process. It fosters rethink the type of skill sets and the location of the talent, on a global basis, we reshaped a number of internal processes to help us be more efficient and faster And more importantly, I would say it really transformed the mindset of the company. And that's probably what I'm the most proud of And frankly, to the great extent, I think that this is what is really translating into the series of new opportunities that have emerged from those close partnerships with our customers.
Great. And then just in terms of the revenue line, I'm this quarter was a very large quarter above well above seasonal and above expectations. And we're also starting to see inventory rising at a lot of the semiconductor companies in general. Were you seeing any sort of pull in of revenues or any expectations that there could be a contract a deeper contraction than what you're expecting in the third quarter heading through the second half of the year?
Yes, I mean, certainly something that we are watching very carefully, Amanda. Having said that, again, we expect a very solid third quarter for the Integra's business. I mean, if you think about the midpoint of our guidance for Q3 This represents an increase of 8% versus the same quarter last year. And the reason why we believe we can do it is we expect continued strength in our new product sales. But and while we see the current booking levels as just as strong as the momentum that we're experiencing at the end of Q2.
We expect some level of seasonality to impact fab utilization later in Q3, and we wanted to take that into account in our guidance. So in summary, very solid Q3 guidance that I think will position us really well, to make 2016 a record year for the company.
Great. Thank you.
We will take our next question from Todd Morgan with Jefferies.
Thanks. Thanks for holding the call. Kind of a follow-up on that too is, Q2 revenue is pretty strong. Q2 revenue, I think you've guided sort of flat to a down slightly sequentially kind of from historical purposes. Is that the really the right way to think about the revenue potential in the third quarter though given the new products and all the other initiatives you've launched?
Thanks.
So again, I think if I wanted to summarize my previous answer, I would say that what our Q3 guidance taking into account is normal seasonality for Q3, offset by continued strength in our new product sales. And, again, if you think about the Q3 guidance that we're providing, this represents a very meaningful increase from the same quarter last year.
Fair enough. Thank you very much.
It appears there are no further questions at this time. Mr. Kantor, I'd like to turn the conference back over to you for any additional closing remarks.
Thank you. Before closing, I want to note that we will be presenting at the Pacific Crest Tech Conferences And Needham Industrial Conferences in August. Thank you all for joining us this morning. We look forward to updating you at the next conference call. Have a good day.
That concludes today's conference. Thank you for your participation. You may now disconnect.