Good day, everyone, and welcome to Integris Third Quarter 20 15 Earnings Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Steve Kanter, Vice President of Corporate Relations. Please go ahead, sir.
Thank you. Good morning. Earlier today, we announced the financial results for our third quarter ended September 26, 2015. We have a accelerated the timing of our press release in this conference call to comply with Reg FD requirements to address an inadvertent premature disclosure of our 3rd quarter results, you can access a copy of our some forward looking statements. These statements involve a number of 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 may find a reconciliation table in today's press release. On the call today are Bertrand Law, President and CEO and Greg Graves, Chief Financial Officer Bertrand will now begin the call. Bertrand? Thank you, Steve.
I will make some general comments on the business. Greg will then provide more details on our financial results. Overall, I am pleased with our Q3 performance, particularly given the challenging industry environment we experienced in the quarter. Reflects our operations well, adjusting our spending to the general softening in the India's 3. We met our target model and achieved non GAAP EPS of $0.23.
We generated solid cash flow and continued to reduce our debt with the $25,000,000 repayment in the quarter. After a strong Q2, our 3rd quarter sales declined 4% sequentially, and were at the low end production rates and lower fab project activity materialize as we moved through the quarter. This was first amplified by the negative impact of foreign exchange. Semiconductor sales were down 1% versus the 2nd quarter as some customers decelerated their fab digitization rates and pushed out investments to match the soft near term demand. Sales in our adjacent markets contracted 11% sequentially and represented approximately 22% of our revenue in Q3.
We achieved modest growth in data storage and display with sales of graphite material declining after reaching record levels in Q2. This anticipated decline resulted after an initial surge driven by the adoption Turning to our business segments, Critical Materials Handling or CMH declined 5% sequentially, but was about flat with the third quarter a year ago. On one hand, the decline on a sequential basis reflected lower sales wafer handling and specialty materials products. Sales of wafer handling products, as you know, such as our FU can be lumpy and were impacted by the low level business driven by continued strength in our leading edge solutions for advanced, wet etch and clean and LEAP applications. The Electronic Materials OEM segment declined 2% sequentially and was down 3% year over year.
Our Advanced Deposition Materials business posted a record quarter in Q3, boosted by the introduction of new products. This performance was offset by lower sales of gas microcontamination products as a result of weak OEM demand. Through the 9 months of 2015, our sales grew 1% from last year on a pro form a basis. When adjusted for a 3% headwind from the stronger dollar, this represented a 4% gain compared to the prior year. Looking to the fourth quarter, we anticipate business conditions to remain soft as we expect chipmakers to continue work down inventory and moderate their capital investments.
Accordingly, we will be taking additional steps to control our expenses while maintaining critical investments to grow our business. For Entegris. We like the relative stability of our business model. We have a rich pipeline of new opportunities, which cuts across our broad portfolio of products to deliver on our
Thank you, Bertrand. While Q3 sales were at the low end of our expectations, I am pleased with our execution for the quarter. We flexed our spending and achieved an adjusted operating margin in line with our target model. Non GAAP EPS was $0.23, The results included a $0.03 benefit from currency gains and a Results excluding these benefits were still in line with our target model. Q3 sales of $270,000,000 were 4%
range.
Percent negative impact from foreign exchange. Gross margin of 43% declined from 45.6% in Q2. The decline in margin was due to costs resulting from supplier quality issues as well as costs related to the closure of a small manufacturing operation and to lower sales volumes. In spite of our expectations for lower sales We expect of $12,000,000 operating dollars in the 4th quarter. We'll have approximately $1,500,000 of integration costs in Q4 related to the merger of our legal entities.
These costs are slightly higher than The final steps of the integration Net interest expense was $9,200,000 On a non GAAP basis, our income mix. For Q4, we expect the GAAP tax rate to be approximately 19% and the non GAAP rate to be approximately 25%. Adjusted EBITDA for the quarter was 58,200,000 giving us a very healthy $33,000,000. Our cash balance at the end of This reflects the cash flow from operations less Total long term debt including current maturities was $667,000,000, giving us a net leverage ratio of one point five times. With the $25,000,000 of debt repayment in Q3, we have fulfilled the commitment we made at the time of the ATMI acquisition to repay $150,000,000 further in 15,000,000 CapEx to be approximately $65,000,000 to $70,000,000.
We expect sales to range from $250,000,000 to $265,000,000 reflecting continued softness in our markets. At these
level.
This model. And we remain committed to delivering on our long term and short term commitments. Operator, we'll now take questions. Certainly.
You. And we'll go ahead and take our 1st question from Todd Morkin with Jefferies.
Two quick things. First of all, Bertrand, I know you talked about sort of the medium term story here being kind of the creating synergies between 2 companies and then being able to provide kind of next generation products to your career customers. Is there anything tangible you can point to at this point in terms of any kind of design wins or product developments, things like that? And I guess secondly, just looking at the balance sheet, good to see continued cash debt reduction. Is there a way to characterize the domestic versus international cash these days?
And then I don't know if care to offer any magnitude of sort of plan to continue debt repayments that you referenced earlier? Thanks.
So let me take that first question and I would like to to Greg to answer some of the cash related question. So as it relates to the positive synergies that we're expecting to unlock from combination with ATMI. As we mentioned before, we would expect some of those new solutions to be introduced when the industry transitions to 10 nanometer and then down the road to 7 nanometer. Having said that, we have been very actively engaged with the number of technology leaders in the space I think we have now, tangible evidence that the combination of capabilities of the 2 companies are really creating value for our customers. One example of that, could be some of the recent wins that we recorded in our Advanced Deposition Materials As you know, we provide not only precursor materials, but we also provide delivery systems to sublimate the material to the face to the gas phase.
So in other words, think of is really the unique ability to provide a comprehensive solution, including solids, purification, packaging, and delivery solution for our customers. As you know, those solid precursors are used in LED and Cbd markets, which have been growing actually at an order of magnitude faster than the MSI index. So I believe that, we have actually some interesting times ahead of us as those materials introduced into production.
Then on the cash related questions, Todd, so slightly more than $300,000,000 of cash on the balance sheet. Of that, approximately $70,000,000 is held in the U. S. The balance is offshore. With regard to debt reduction, we don't plan to make additional payments in Q4 I would expect we'll pay we've classified $50,000,000 of the debt as current and I would expect we'll pay that $50,000,000 in the first, sometime in the first half of twenty sixteen.
Great. Thank you very much.
And we'll go ahead and take our next question from Patrick Ho with Stifel. Please go ahead. Your line is open.
Thank you very much. Guys, the CapEx portion of your business is obviously a smaller portion, but given some of the weakness that's out there in the industry right now, from your vantage point, have you seen any significant changes in terms of fab projects whether they're pushing out, what's your view from your vantage point on that end of the business?
Patrick, yes, so as you mentioned, is a minor part of our business. As you know, 20% of our business is impacted by the fab equipment activity. Having said that, as we mentioned in our prepared remarks, we saw a softening food business, which typically, correlates to new fab buildups. And we also saw a softening in our OEM business in particular, softer trends for our gas filtration products that are usually solutions that we sell to our OEM customers. So certainly we saw some slowing down in the rate of orders from OEMs And we've seen some push outs in terms of new fab build ups.
Great. That's helpful. And maybe, Greg, for you on the financial model, given that you guys have maintained your run rates on the target model, give us some of the volatility that we're seeing now both for you and the wafer starts as well as in the CapEx side of things. What are some of the measures and tactics you're taking to keep your target model in line as we go forward?
No, at this point, we've we're really we've really tightened up on discretionary spending. In like travel and entertainment. We've reduced some of our variable engineering and project related costs. But like I said, at this point, it's been general belt tightening around some of the variable costs. We're also looking closely today at kind of the manufacturing environment and the staffing levels there.
Great. Thank you very much.
From Dick Ryan with Dougherty. Please go ahead. Your line is open.
Thank you. So Greg, you just the last comment on your manufacturing staffing levels. Would that suggest this pause might be more than 1 quarter, sort of event? Do you kind of see this lingering into 2016? Do you what are you hearing from customers and how would you color the rebound?
Look, I'll pass that to Bertrand.
Yes, I'll take that. The industry environment right now is pretty murky and we certainly do not have more visibility than anybody else in the ecosystem. So what I can share with you is that internally, we are planning for a soft industry environment for the next 2 to 3 quarters. And we will be taking steps to ensure that we control our spending levels and that we do that while for all critical investments. We've done that before.
We have an experienced management team and integrates an convinced that we will be able to manage the uncertainty in the environment very effectively.
Okay. And Greg, what sort of ex impact are you kind of assuming for Q4?
No, Q4, we're assuming rates stay essentially where they are where they are today. So sequentially, we wouldn't expect a lot of rate impact. And year over year, the impact of foreign exchange will obviously be in Q4 because the big move in rates was in October of 2014. Okay.
Okay. And your buyback program, can you kind of fresh me where that is and how much
it cost? At this point, we actually don't have a buyback.
Okay. That expired. Okay. Okay, great.
And we'll go ahead and take our next question from Jerome Nathan with Sidoti. Please go ahead. Your line is open.
I don't know. It's a little late, but Bertrand, did you talk, guys talk about non semi and you had a pretty good quarter last in June on the non semi side? Can you kind of talk about that business? How is that doing versus semi side?
Yes. So I mentioned it down on semi business has grown since last year. It's representing today about 22% of our total revenue. Certainly, Q3 was a challenging quarter for our non semi business with a decline of 11 percent, but it's mostly attributable to one factor. And just let me give you a little bit more details around that.
But at the end of last year, we uncovered a new application for Graphite Material. And then for this application, the coefficient of thermal expansion of our material is actually the perfect match for the glass substrate. And as a result of the unique properties of our material, our customers has been able to generate very significant, yield gains and improve their cost of ownership. So early in the year, we did benefit from a surge in order as our customer converted all of their production sites to the integrase material. And we believe that, the rate of order has receded somewhat in Q3.
We believe that the current going forward. What I want to say is that this is in spite of the lumpiness of that business, in the early stages of that business, certainly a very positive development for us. As you know, we do not have a lot of new opportunities in new market that would exceed $10,000,000 on an annual basis. And this is one of them. So again, if you look at the performance of our non semi business, over time on an annual basis, we are very pleased with the progress and very pleased with the growth rate that we've been enjoying year to date.
And just could you also give somewhat color on the supply issue you talked about for the gross margin, does that continue into fourth quarter or is that solved?
Jerome, no, I would not expect that to continue into the 4th quarter. I mean, situation.
And my last question is regarding integrys has historically benefited when industry kind of moves changes notes and increases the proportion of newer generation notes here now. Is that you would think that that kind of we saw that that kind of slows down in 2016. So compared to the industry, should we expect how should we expect Entegris to perform in that light?
I think again, I mean, this overall thesis remains absolutely true. I think that The contraction that we saw in our business in Q3 is really a reflection of significant reduction in fab capacity utilization. And we saw that reduction at the trailing edge, but also at the leading edge. Some of our customers were operating leading edge fabs at or below 80 percent capacity utilization. So that's really what is behind and the softening in our business, as the industry and some of the technology leaders in the industry transition to tighter node next year, we would expect to need to benefit from that.
We'll take our next question from Amanda Scarnati with Citi. Please go ahead. Your line is open.
Hi, thanks for taking the question. Just a question on the debt and kind of the reason, Greg, that you had mentioned that you won't be paying any debt down next quarter? Is it higher expenses and maybe bonus at year on bonuses or something that you have to concern yourself with on the cash side? Or is there something else going on there that we should be aware of?
No, there's, yeah, no, I don't have any specific concerns. The primary reason is is if I make a debt payment after January 1st, it will be applied toward our 2000 any potential 2016 excess cash flow repayment requirement we would have. And so I'm saying I might as well take advantage of that opportunity. I mean, if you said, could we pay some debt in Q4? The answer is absolutely yes.
But from a the mechanism of the credit agreement, it just makes much more sense to make that payment in Q1 versus Q4.
You said about $50,000,000 in the first half of twenty fifteen.
That's what we that yes, that's what we'd expect.
Okay. And then Bertrand, just more question on the demand environment. You had mentioned that you're planning for a soft environment over the next two to three quarters and first half tends to be stronger than second half? Should we expect kind of a sub seasonal first half, you know, or is there anything that you're seeing, you know, with your customers that would kind of offset that a little bit, hopefully.
Amanda, again, as I stated earlier, we don't have any better crystal ball than the rest of the industry. What we are seeing right now is, again, a contraction in Fabry and that's the result of 2 major factors. 1 is, softening in end demand for new mobile devices and more specifically a slow demand for smartphone sales in China. And then a very concerted effort by many of our fab customers to reduce their inventory trends will likely will continue in Q4 and could continue, the beginning of next year. So again, what I was saying earlier is that for internal planning purpose, we would prefer to be cautious and careful and we're taking steps, assuming that the slowdown could last up to 2 to 3 quarters.
Do we know that? We certainly, no, we don't, but we'd rather be prepared for, again, for soft environment lasting a little longer.
And we will go ahead and take our last question from Please go ahead. Your line is open.
Yeah, Chris Katz with BB And T Capital Markets. So Bertrand, I wanted to ask about And apologies if you may have touched upon this, but just industry consolidation, generally speaking, and seems there's a wave that's maybe accelerating downstream. And just wondering what your thoughts are behind not just drivers of that, but what are the implications for Entegris both threats and opportunities, strategically, looking at a longer term as that continues to play out? Thank you very much. Right.
So I mean, I think that, it certainly has been a a lot of activity, a lot of consolidation in the space over the last few years. And I think it's probably a validation that scale matters in the semiconductor industry. When I think about our own recent acquisition of ATMI, I can tell you without agitation that the new scale that we have it has created value to all of our stakeholders, be it customers, investors and employees When you think about our cost semi market, the process challenges continue to be more complex. And our customers want to rely on fewer more capable suppliers, suppliers that can leave up to the expectations in terms of the technology they bring, the application knowledge that they have and the operational excellence that they can commit to. And all of that requires steady investment, investment in R&D, investment in CapEx, investment in talent.
So I can tell you that at Entegris with the acquisition of ATMI, we experienced the benefit of scale firsthand. We were able to increase our R and D spending from 6% of revenue to 10% of revenue. We've increased our CapEx from about 6% of sales to 7% to 8% of sales. And we've been able to attract a great deal of talent in the company in the last year as a result of the bigger platform that we have created. And we've been able to do all of that while providing superior financial returns.
So I think that scale matters, we have demonstrated that And I think that's really the impetus behind some of them, the recent news that you've seen in the marketplace.
That's good context. Thank you very much.
And we're actually going to go ahead and take one more question from Toni Venturao with Federated Investors. Please go ahead. Your line is open.
Hello, good morning. Thank you for letting me jump in here at the end. Actually, a lot of my questions have been answered, but I just want to get a little more clarification on the gross margin guidance. You guys talked about 3 things, the supply issue, a plant closure in volume. And it would seem with the supply issue behind us that going forward, the volume maybe is the bigger driver of the flat guide.
That fair to say?
That's absolutely fair.
Okay. I was actually going to ask about that consolidation issue, but that's already been answered. I guess couple then just clean up questions. In the income statement, you had $5,000,000 or so in other. Could you explain what that is?
Yes, the other related to, gains on the reevaluation of some of our assets in Malaysia as the is the dollar appreciated versus the ringgit. And so it's related and that was the $0.03. I spelled out we made $0.23, but we had an unusual benefit $0.03 related to currency and $0.02 related to tax rate, but that $5,000,000 is that $0.03.
Okay. And then in the working capital, detail in the cash flow statement, there's an $18,000,000 of other as well, use of cash. Could you explain that?
That relates, largely so we hedge our position in Malaysia. Had we not been hedged that gain would have been closer to it would have been $15,000,000 to $17,000,000 that offset in the cash statement. There was an $11,000,000 offset as we closed out our hedge contract. That was the vast majority of that amount.
Okay. All right. That makes sense. All right. Thank you for letting me ask questions.
And that does conclude our question and answer session. I will now hand it back over to Bertrand for any additional or closing remarks.
Thank you. This concludes our Q3 earnings call. And I would like to thank you all for joining the call at the short notice. Have a good day. Bye bye.
And that does conclude today's program. We'd like to thank you for your participation. Have a wonderful day, and you may disconnect at any