ENTG-2014.9.27-10Q
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 September 27, 2014
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý
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 October 27, 2014
Common Stock, $0.01 par value per share
 
139,501,173 shares
 

Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 27, 2014
 
Description
Page
 
 
 
 
 
 
 
 
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 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, 2013 under the headings “Risks Relating to our Business and Industry”, “Manufacturing Risks”, “International Risks”, and “Risks Related to Owning Our Securities”, the risks described in Part II, Item 1A of this report, 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.

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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)
September 27, 2014
 
December 31, 2013
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
390,493

 
$
384,426

Short-term investments
7,930

 
—

Trade accounts and notes receivable, net of allowance for doubtful accounts of $1,974 and $1,779
175,087

 
101,873

Inventories
164,601

 
94,074

Deferred tax assets, deferred tax charges and refundable income taxes
23,450

 
20,844

Other current assets
21,335

 
11,088

Total current assets
782,896

 
612,305

Property, plant and equipment, net of accumulated depreciation of $309,823 and $283,815
316,385

 
186,440

Other assets:
 
 
 
Goodwill
336,252

 
12,274

Intangible assets, net of accumulated amortization of $134,322 and $109,468
322,282

 
43,509

Deferred tax assets and other noncurrent tax assets
1,964

 
12,039

Other
35,441

 
8,727

Total assets
$
1,795,220

 
$
875,294

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt, current maturities
$
4,600

 
$
—

Accounts payable
67,095

 
38,396

Accrued payroll and related benefits
45,725

 
30,116

Interest payable
14,695

 
—

Other accrued liabilities
33,572

 
18,700

Deferred tax liabilities and income taxes payable
7,601

 
10,373

Total current liabilities
173,288

 
97,585

Long-term debt, excluding current maturities
788,249

 
—

Pension benefit obligations and other liabilities
25,376

 
15,411

Deferred tax liabilities and other noncurrent tax liabilities
50,030

 
5,455

Commitments and contingent liabilities


 


Equity:
 
 
 
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of September 27, 2014 and December 31, 2013
—

 
—

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of September 27, 2014 and December 31, 2013: 139,500,865 and 138,734,442
1,395

 
1,387

Additional paid-in capital
826,394

 
819,632

Retained deficit
(90,024
)
 
(88,599
)
Accumulated other comprehensive income
20,512

 
24,423

Total equity
758,277

 
756,843

Total liabilities and equity
$
1,795,220

 
$
875,294


3
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See the accompanying notes to condensed consolidated financial statements.

4
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended
Nine months ended
(In thousands, except per share data)
September 27, 2014
 
September 28, 2013
September 27, 2014
 
September 28, 2013
Net sales
$
273,054

 
$
164,585

$
690,436

 
$
507,199

Cost of sales
174,311

 
94,453

431,673

 
292,369

Gross profit
98,743

 
70,132

258,763

 
214,830

Selling, general and administrative expenses
55,820

 
31,746

172,954

 
99,564

Engineering, research and development expenses
24,427

 
13,947

61,698

 
39,547

Amortization of intangible assets
13,128

 
2,343

24,854

 
6,989

Contingent consideration fair value adjustment
—

 
(1,813
)
(1,282
)
 
(1,813
)
Operating income
5,368

 
23,909

539

 
70,543

Interest expense
10,443

 
56

23,009

 
100

Interest income
(347
)
 
(75
)
(762
)
 
(254
)
Other expense (income), net
110

 
982

1,639

 
(1,141
)
(Loss) income before income taxes and equity in net loss of affiliates
(4,838
)
 
22,946

(23,347
)
 
71,838

Income tax (benefit) expense
(3,810
)
 
5,139

(22,012
)
 
17,853

Equity in net loss of affiliates
40

 
—

90

 
—

Net (loss) income
$
(1,068
)
 
$
17,807

$
(1,425
)
 
$
53,985

 
 
 
 
 
 
 
Basic net (loss) income per common share
$
(0.01
)
 
$
0.13

$
(0.01
)
 
$
0.39

Diluted net (loss) income per common share
$
(0.01
)
 
$
0.13

$
(0.01
)
 
$
0.39

Weighted shares outstanding:
 
 
 
 
 
 
Basic
139,480

 
138,904

139,215

 
139,061

Diluted
139,480

 
139,482

139,215

 
139,688

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Net (loss) income
$
(1,068
)
 
$
17,807

 
$
(1,425
)
 
$
53,985

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(8,749
)
 
2,105

 
(2,919
)
 
(14,314
)
Available-for-sale investments, unrealized loss, net of tax
(393
)
 
—

 
(1,037
)
 
—

Reclassification of cumulative translation adjustment associated with liquidated subsidiary
—

 
739

 
—

 
739

Pension liability adjustments
26

 
(5
)
 
45

 
52

Other comprehensive (loss) income
(9,116
)
 
2,839

 
(3,911
)
 
(13,523
)
Comprehensive (loss) income
$
(10,184
)
 
$
20,646

 
$
(5,336
)
 
$
40,462

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 
(In thousands)
Common
shares
outstanding
 
Common
stock
 
Additional
paid-in  capital
 
Retained
deficit
 
Foreign  currency
translation
adjustments
 
Defined
benefit
pension
adjustments
 
Total
 
 
Balance at December 31, 2012
138,458

 
$
1,385

 
$
809,514

 
$
(157,038
)
 
$
41,997

 
$
(1,059
)
 
$
694,799

 
 
Shares issued under stock plans
1,748

 
17

 
6,650

 
—

 
—

 
—

 
6,667

 
 
Share-based compensation expense
—

 
—

 
5,859

 
—

 
—

 
—

 
5,859

 
 
Repurchase and retirement of common stock
(1,539
)
 
(15
)
 
(8,998
)
 
(5,813
)
 
—

 
—

 
(14,826
)
 
 
Tax benefit associated with stock plans
—

 
—

 
1,125

 
—

 
—

 
—

 
1,125

 
 
Pension liability adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
52

 
52

 
 
Reclassification of cumulative translation adjustment associated with liquidated subsidiary
—

 
—

 
—

 


 
739

 
—

 
739

 
 
Foreign currency translation
—

 
—

 
—

 
—

 
(14,314
)
 
—

 
(14,314
)
 
 
Net income
—

 
—

 
—

 
53,985

 
—

 
—

 
53,985

 
 
Balance at September 28, 2013
138,667

 
$
1,387

 
$
814,150

 
$
(108,866
)
 
$
28,422

 
$
(1,007
)
 
$
734,086

 
 
(In thousands)
Common
shares
outstanding
 
Common
stock
 
Additional
paid-in capital
 
Retained
deficit
 
Foreign currency
translation
adjustments
 
Available-for-sale investments, change in net unrealized losses
 
Defined
benefit
pension
adjustments
 
Total
Balance at December 31, 2013
138,734

 
$
1,387

 
$
819,632

 
$
(88,599
)
 
$
25,280

 
$
—

 
$
(857
)
 
$
756,843

Shares issued under stock plans, net of shares withheld for employee taxes
767

 
8

 
(593
)
 
—

 
—

 
—

 
—

 
(585
)
Share-based compensation expense
—

 
—

 
6,513

 
—

 
—

 
—

 
—

 
6,513

Tax benefit associated with stock plans
—

 
—

 
842

 
—

 
—

 
—

 
—

 
842

Pension liability adjustment, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
45

 
45


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Available-for-sale investments, change in net unrealized losses

—

 
—

 
—

 
—

 
—

 
(1,037
)
 
—

 
(1,037
)
Foreign currency translation
—

 
—

 
—

 
—

 
(2,919
)
 
—

 
—

 
(2,919
)
Net loss
—

 
—

 
—

 
(1,425
)
 


 
—

 
—

 
(1,425
)
Balance at September 27, 2014
139,501

 
$
1,395

 
$
826,394

 
$
(90,024
)
 
$
22,361

 
$
(1,037
)
 
$
(812
)
 
$
758,277

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
Operating activities:
 
 
 
Net (loss) income
$
(1,425
)
 
$
53,985

Adjustments to reconcile net (loss) income to net cash provided by operating activities:
 
 
 
Depreciation
33,005

 
21,812

Amortization
24,854

 
6,989

Share-based compensation expense
6,513

 
5,859

Charge for fair value write-up of acquired inventory sold
48,586

 
—

Provision for deferred income taxes
(28,782
)
 
3,282

Other
7,036

 
866

Changes in operating assets and liabilities:
 
 
 
Trade accounts and notes receivable
(21,299
)
 
(16,722
)
Inventories
(8,078
)
 
(2,555
)
Accounts payable and accrued liabilities
27,929

 
(970
)
Other current assets
45

 
391

Income taxes payable and refundable income taxes
(3,153
)
 
5,239

Other
5,989

 
(3,483
)
Net cash provided by operating activities
91,220

 
74,693

Investing activities:
 
 
 
Acquisition of business, net of cash acquired
(809,390
)
 
(13,358
)
Acquisition of property, plant and equipment
(44,013
)
 
(49,030
)
Proceeds from maturities of short-term investments
8,888

 
20,000

Proceeds from sale of assets held for sale
—

 
6,500

Payments for non-compete agreements
(7,517
)
 
—

Other
560

 
188

Net cash used in investing activities
(851,472
)
 
(35,700
)
Financing activities:
 
 
 
Proceeds from long-term debt
855,200

 
—

Payments of long-term debt
(62,500
)
 
—

Issuance of common stock
1,705

 
6,667

Taxes paid related to net share settlement of equity awards
(2,290
)
 
—

Payments for debt issuance costs
(20,747
)
 
—

Repurchase and retirement of common stock
—

 
(14,826
)
Other
763

 
1,125

Net cash provided by (used in) financing activities
772,131

 
(7,034
)
Effect of exchange rate changes on cash and cash equivalents
(5,812
)
 
(3,596
)
Increase in cash and cash equivalents
6,067

 
28,363

Cash and cash equivalents at beginning of period
384,426

 
330,419

Cash and cash equivalents at end of period
$
390,493

 
$
358,782

Supplemental Cash Flow Information

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(In thousands)
Nine months Ended September 27, 2014
 
Nine months Ended September 28, 2013
Non-cash transactions:
 
 
 
Equipment purchases in accounts payable
$
261

 
1,952

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Entegris, Inc. (Entegris or the Company) is a leading provider of yield-enhancing materials and solutions for advanced 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, and 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 (consisting of only normal recurring adjustments) necessary to present fairly the financial position as of September 27, 2014 and December 31, 2013, and the results of operations, comprehensive (loss) income, equity and cash flows for the three and nine months ended September 27, 2014 and September 28, 2013.
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, 2013. The results of operations for the three and nine months ended September 27, 2014 are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606)(ASU 2014-09). ASU 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. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. ASU 2014-09 is effective beginning January 1, 2017. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and disclosures.
Other Accounting Standards Updates issued but not effective for the Company until after September 27, 2014 are not expected to have a material effect on the Company’s condensed consolidated financial statements.

2. ACQUISITIONS

ATMI
On April 30, 2014, the Company acquired ATMI, Inc. (the Merger), a Delaware corporation (ATMI), for approximately $1.1 billion in cash pursuant to an Agreement and Plan of Merger (the Merger Agreement), dated as of February 4, 2014. As a result of the Merger, ATMI became a wholly-owned subsidiary of the Company. The Merger was accounted for under the acquisition method of accounting and the results of operations of ATMI are included in the Company's condensed consolidated financial statements as of and since April 30, 2014. Direct costs of $13.3 million associated with the acquisition of ATMI, consisting mainly of professional and consulting fees, were expensed as incurred in the nine months ended September 27, 2014. These costs are classified as selling, general and administrative expense in the Company's condensed consolidated statements of operations.

ATMI is a leading supplier of high-performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronic devices. These products consist of “front-end” semiconductor performance materials,

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sub-atmospheric pressure gas delivery systems for safe handling and delivery of toxic and hazardous gases, and high-purity materials packaging and dispensing systems that allow for the reliable introduction of low volatility liquids and solids to microelectronics processes. The acquisition was executed to expand the Company’s product offering base and technological base, and enhance the leverage of its selling and administrative functions. ATMI’s sales for the year ended December 31, 2013 were approximately $361 million.

The purchase price of ATMI consisted of the following: 
(In thousands):
 
Cash paid to ATMI shareholders
$
1,099,033

Cash paid in settlement of share-based compensation awards
31,451

Total purchase price
1,130,484

Less cash and cash equivalents acquired
321,094

Total purchase price, net of cash acquired
$
809,390


Under the terms of the Merger Agreement, the Company paid $34 per share for all outstanding common shares of ATMI (excluding treasury shares). In addition, the Company settled all outstanding share-based compensation awards held by ATMI employees at the same per share price. The acquisition method of accounting requires the Company to include the amount associated with pre-combination service as consideration in the acquisition, reflected in the table immediately above, while the fair value of the unvested portion of the awards in the amount of $21.3 million is recorded as expense, classified as selling, general and administrative expense, in the Company's condensed consolidated statement of operations.

The Merger was funded with existing cash balances as well as funds raised by the Company through the issuance of debt in the form of a senior secured term loan in an aggregate principal amount of $460 million and senior unsecured notes in an aggregate principal amount of $360 million as described in further detail in note 7 to the condensed consolidated financial statements.

The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the ATMI acquisition:
(In thousands):
 
Accounts receivable and other current assets
$
106,824

Inventory
115,469

Property, plant and equipment
127,164

Identifiable intangible assets
296,074

Other noncurrent assets
15,748

Current liabilities
(89,162
)
Deferred tax liabilities and other noncurrent liabilities
(86,753
)
       Net assets acquired
485,364

Goodwill
324,026

Total purchase price, net of cash acquired
$
809,390


The fair value of acquired inventories of $115.5 million is valued at the estimated selling price less the cost of disposal and reasonable profit for the selling effort, and is provisional pending the Company's final review. The fair value write-up of acquired finished goods inventory was $48.6 million, the amount amortized over the expected turn of the acquired inventory. Accordingly, $24.3 million and $48.6 million incremental cost of sales charges associated with the fair value write-up of inventory acquired in the merger with ATMI was recorded for the three and nine months ended September 27, 2014, respectively.

The fair value of acquired property, plant and equipment of $127.2 million is valued at its value-in-use, unless there was a known plan to dispose of an asset, and is provisional pending the Company's completion of its valuation of certain assets, and its final review of all acquired property, plant and equipment.
 

The fair value of the acquired intangible assets is $296.1 million. The acquired intangible assets, all of which are finite-lived, have a weighted average useful life of approximately 8.3 years and are being amortized on a straight-line basis. The intangible assets that comprise the amount include customer relationships of $165.1 million (10-year weighted average useful life),

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developed technology and related trade names of $120.8 million (6-year weighted average useful life), and other intangible assets of $10.2 million (7.2-year weighted average useful life).

The fair value of acquired identifiable intangible assets was determined using the “income approach” on an individual project basis. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 in the fair value hierarchy.

The purchase price of ATMI exceeded the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $324.0 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. The purchase price also included the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value in addition to a going-concern element that represents the Company's ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill. No amount of goodwill is expected to be deductible for income tax purposes.

The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no later than one year from the acquisition date. Given the size and complexity of the acquisition, the valuation of certain assets and liabilities is still being completed, or is subject to final review. In addition to inventory and property, plant and equipment, as noted above, the Company's valuation of ATMI's tax accounts is provisional pending the completion of and the Company's review of ATMI's tax returns to be filed for periods up to the acquisition date. To the extent that the Company's estimates require adjustment, the Company will modify the value.

Subsequent to the Merger, the Company agreed to make severance payments of $7.5 million to ATMI executives. Under the terms of various agreements, the executives are unable to compete with the Company for periods averaging 1.6 years. Based on the Company's analysis, the payments associated with these noncompete clauses were capitalized as finite-lived intangible assets to be amortized over twelve to eighteen months. The fair value of these noncompete clauses was determined using the “income approach” on an individual executive basis, following a methodology similar to the one described above for acquired identifiable intangible assets.

Pro Forma Results

The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisition of ATMI had occurred as of the beginning of the years presented. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company.
 
Three months ended
Nine months ended
                                                                                                                                               (In thousands, except per share data) (Unaudited)
September 27, 2014
September 28, 2013
September 27, 2014
September 28, 2013
Net sales
$
273,054

$
251,799

$
804,701

$
770,688

Net income (loss)
15,937

15,726

58,967

46,089

Per share amounts:
 
 
 
 
  Net income (loss) per common share - basic
$
0.11

$
0.11

$
0.42

$
0.33

  Net income (loss) per common share - diluted
0.11

0.11

0.42

0.33


The unaudited pro forma financial information above gives effect to the following:

a.
The elimination of transactions between Entegris and ATMI, which upon completion of the merger would be considered intercompany. This reflects the elimination of intercompany sales and associated intercompany accounts.
b.
Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.

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c.
The above pro forma results have been reclassified to segregate the operating results of ATMI's discontinued operations.

The unaudited pro forma financial information above for the three and nine months ended September 27, 2014 excludes the purchase accounting impact of the incremental charge reported in cost of sales for the sale of acquired inventory that was written-up to fair value of $24.3 million and $48.6 million, respectively.

The pro forma data does not include data for Jetalon Solutions, Inc. for the period prior to its acquisition due to the immaterial impact on the pro forma financial information for the three and nine months ended September 27, 2014.
Jetalon
On April 1, 2013, the Company acquired substantially all the operating assets and liabilities of Jetalon Solutions, Inc. (Jetalon), a California-based supplier of fluid metrology products. The transaction was accounted for under the acquisition method of accounting and the results of operations of the entity are included in the Company's condensed consolidated financial statements as of and since April 1, 2013. The acquisition of Jetalon’s assets and liabilities did not constitute a material business combination.

The purchase price for Jetalon included cash consideration of $13.4 million, funded from the Company's then-existing cash on hand, and earnout-based contingent consideration of up to $14.5 million based on the operating performance of Jetalon in 2013, 2014 and 2015. Costs associated with the acquisition of Jetalon were not significant and were expensed as incurred.

Upon acquisition, the Company recorded a contingent consideration obligation of $3.1 million representing the fair value of the earnout-based contingent consideration. This amount was estimated through a valuation model that incorporates probability-adjusted assumptions relating to the achievement of possible operating results and the likelihood of the Company making payments. This fair value measurement is based upon significant inputs not observable in the market and therefore represents a Level 3 measurement.

The purchase price of Jetalon consisted of the following: 
(In thousands):
 
Cash paid at closing
$
13,358

Contingent consideration obligation
3,094

Total purchase price
$
16,452


The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the Jetalon acquisition:
(In thousands):
 
Accounts receivable, inventory and other assets
 
$
944

Identifiable intangible assets
 
5,634

Current liabilities
 
(216
)
       Net assets acquired
 
6,362

Goodwill
 
10,090

Total purchase price
 
$
16,452


The purchase price of Jetalon, including the Company's valuation of contingent consideration, exceeded the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $10.1 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. The purchase price also included the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value in addition to a going-concern element that represents the Company's ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes. The goodwill has been assigned to the Company's Critical Materials Handling reportable segment.


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The Company completed its fair value determinations for all elements of the Jetalon acquisition in 2013. Intangible assets, consisting mostly of technology-related intellectual property, are being amortized on a straight-line basis over an estimated useful life of approximately 10 years.

Subsequent changes in the fair value of this obligation have been recognized as adjustments to the contingent consideration obligation and reflected in the Company's condensed consolidated statements of operations. During the quarter ended June 28, 2014, the Company assessed the contingent consideration based on the valuation methodology described above and recorded a $1.3 million gain in the Company's condensed consolidated statements of operations, reflecting the removal of any remaining contingent consideration obligation.

3.  SHORT-TERM INVESTMENTS
In conjunction with the acquisition of ATMI, the Company acquired South Korea bank time deposits and common shares of one publicly traded security, which are classified as available-for-sale and are reported at fair value, with unrealized gains and losses included in shareholders’ equity as a component of accumulated other comprehensive income, net of applicable taxes. Available-for-sale investments as of September 27, 2014 consist of the following:
(In thousands)
Cost
basis
 
Gross
unrealized
gains
 
Gross
unrealized
losses
 
Fair
value
Common stock
$
7,051

 
$
—

 
$
(1,037
)
 
$
6,014

Time deposits
$
1,916

 
$
—

 
$
—

 
$
1,916

Total available-for-sale investments
$
8,967

 
$
—

 
$
(1,037
)
 
$
7,930

Equity investments with continuous unrealized losses for less than 12 months and their related fair values at September 27, 2014 were as follows:
 
Less than 12 months
(In thousands)
Fair
value
 
Gross
unrealized
losses
Common stock
$
6,014

 
$
(1,037
)
Total
$
6,014

 
$
(1,037
)
The Company regularly reviews the fair value of marketable security declines below amortized cost to evaluate whether the decline is other-than-temporary. In making this determination, the Company considers all available evidence including, among other things, considering the duration and extent of the decline and the economic factors influencing the market to determine if the fair value will recover to equal or exceed the amortized cost. If the Company determines that the fair value will not recover, an other-than-temporary impairment is recognized, net of applicable taxes. Management does not believe the unrealized losses represent other-than-temporary impairments based on our evaluation of available evidence as of September 27, 2014. As part of that evaluation, the Company has concluded that it has the ability and intent to hold the investment until the recovery of fair value.
The amortized cost and fair value of available-for-sale debt investments as of September 27, 2014, by contractual maturity, were as follows:
(In thousands)
Cost
basis
 
Fair
value
Due in 1 year or less
$
1,916

 
$
1,916

Total
$
1,916

 
$
1,916


The net unrealized holding losses on available-for-sale investments that have been included in other comprehensive income as of September 27, 2014 were as follows:
(In thousands)
 
Net unrealized holding losses included in other comprehensive income
$
(1,037
)

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4. INVENTORIES
Inventories consist of the following:
 
(In thousands)
September 27, 2014
 
December 31, 2013
Raw materials
$
40,323

 
$
26,012

Work-in process
16,531

 
10,512

Finished goods(a)
107,185

 
56,998

Supplies
562

 
552

Total inventories
$
164,601

 
$
94,074

 
(a)
Includes consignment inventories held by customers of $11.0 million and $5.1 million at September 27, 2014 and December 31, 2013, respectively.
 
5. GOODWILL AND INTANGIBLE ASSETS

Goodwill activity for each period was as follows:
(In thousands)
CMH
 
EM
 
Total
December 31, 2012
$
2,209

 
$
—

 
$
2,209

Addition due to acquisition
10,090

 
—

 
10,090

Other, including foreign currency translation
(25
)
 
—

 
(25
)
December 31, 2013
12,274

 
—

 
12,274

Addition due to acquisition
31,440

 
292,586

 
324,026

Other, including foreign currency translation
(23
)
 
(25
)
 
(48
)
September 27, 2014
$
43,691

 
$
292,561

 
$
336,252


As of September 27, 2014, goodwill amounted to approximately $336.3 million, an increase of $324.0 million from the balance at December 31, 2013. The increase in goodwill relates to the acquisition of ATMI completed in April 2014 as described in note 2 and is provisional subject to the Company's final valuation of assets acquired and liabilities assumed. The increase was partially offset by the foreign currency translation adjustments.

Other intangible assets, excluding goodwill, were as follows:
As of September 27, 2014
(In thousands)

Gross carrying
amount
 
Accumulated amortization
 

Net carrying
value
 
Weighted average life in years
Developed technology
200,864

 
73,737

 
127,127

 
6.6
Trademarks and trade names
17,210

 
8,376

 
8,834

 
9.8
Customer relationships
222,726

 
49,893

 
172,833

 
10.3
Other
15,804

 
2,316

 
13,488

 
6.4
 
$
456,604

 
$
134,322

 
$
322,282

 
8.5



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As of December 31, 2013
(In thousands)

Gross carrying
amount
 
Accumulated amortization
 

Net carrying
value
 
Weighted average life in years
Developed technology
80,055

 
62,906

 
17,149

 
7.5
Trademarks and trade names
13,092

 
7,306

 
5,786

 
12.0
Customer relationships
57,617

 
39,146

 
18,471

 
11.0
Other
2,213

 
110

 
2,103

 
13.3
 
$
152,977

 
$
109,468

 
$
43,509

 
9.3

Amortization expense for the three and nine months ended September 27, 2014 amounted to $13.1 million and $24.9 million, respectively. Amortization expense for the three and nine months ended September 28, 2013 amounted to $2.3 million and $7.0 million, respectively.

The amortization expense for each of the five succeeding years and thereafter relating to intangible assets currently recorded in the Company's condensed consolidated balance sheets is estimated to be the following at September 27, 2014.
Fiscal year ending December 31
 
(In thousands)
2014
 
$
12,917

2015
 
48,586

2016
 
45,602

2017
 
44,178

2018
 
42,899

Thereafter
 
128,100

 
 
$
322,282



6. ASSET RETIREMENT OBLIGATIONS

In connection with the acquisition of ATMI described in note 2, the Company assumed asset retirement obligations (AROs) related to environmental disposal obligations associated with cylinders used to supply customers with ATMI's products, and certain restoration obligations associated with its leased facilities.

Changes in the carrying amounts of the Company’s AROs at September 27, 2014 are shown below:
(In thousands)

 
Balance at December 31, 2013
$
2,167

Liabilities assumed in ATMI acquisition
8,032

Liabilities settled
(63
)
Liabilities incurred
147

Accretion expense
125

Revision of estimate
(53
)
Balance at September 27, 2014
$
10,355


The ARO liability is included in the condensed consolidated balance sheets under the caption pension benefit obligations and other liabilities.

7. DEBT

Long-term debt at September 27, 2014 consists of the following:

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(In thousands)
September 27, 2014
Senior secured term loan facility due 2021
$
432,849

Senior unsecured notes due 2022
360,000

Total long-term debt
792,849

Less current maturities of long-term debt
4,600

Long-term debt less current maturities
$
788,249


Annual maturities of long-term debt as of September 27, 2014 are as follows:
Fiscal year ending
(In thousands)
2014
$
2,300

2015
54,600

2016
4,600

2017
4,600

2018
4,600

Thereafter
722,149

 
$
792,849

As described in note 2 to the condensed consolidated financial statements, the Company issued debt with a principal amount of $820 million to supply the funding required to complete its acquisition of ATMI. Debt issuance costs of $2.3 million paid directly to lending institutions are recorded as a debt discount, while debt issuance costs of $20.7 million paid to third parties are capitalized as debt issuance costs, and reflected within other current and other noncurrent assets. These debt issuance costs are being amortized as interest expense over the term of the debt instrument using the effective-interest method for the senior secured term loan facility and senior unsecured notes, and the straight-line method for the senior secured asset-based revolving credit facility.
The Company recorded $0.8 million and $5.1 million, respectively, of amortized debt issuance costs in the three and nine months ended September 27, 2014, including $4.0 million for bridge financing fees paid for the availability of funding for the acquisition of ATMI. These amounts are included in interest expense in the Company's condensed consolidated statements of operations.

Senior Secured Term Loan Facility and Security Agreement
On April 30, 2014, the Company entered into a term loan credit and guaranty agreement with Goldman Sachs Bank USA, as administrative agent, collateral agent, sole lead arranger, sole bookrunner and sole syndication agent (the Term Loan Facility), that provides senior secured financing of $460 million (which may be increased by up to $225 million in certain circumstances). 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's interest rate is 3.5% at September 27, 2014. In addition to paying interest on outstanding principal under the Term Loan Facility, the Company is required to pay customary agency fees.
During the three months ended September 27, 2014, the Company made a discretionary prepayment of $25 million on the Term Loan Facility.
The credit agreement governing the Term Loan Facility requires the Company to prepay outstanding term loans, subject to certain exceptions, with (a) up to 50% of the Company’s annual Excess Cash Flow (as defined in the credit agreement governing the Term Loan Facility) and (b) 100% of the net cash proceeds of (i) certain asset sales and casualty and condemnation events, subject to reinvestment rights and certain other exceptions; and (ii) any incurrence or issuance of certain debt, other than debt permitted under the Term Loan Facility.
The Company may voluntarily prepay outstanding loans under the Term Loan Facility at any time without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.
The Company is required to remit scheduled quarterly payments each equal to 0.25% of the original principal amount of the term loans made on the closing date, with the balance due on the seventh anniversary of the closing date.
All obligations under the Term Loan Facility are unconditionally guaranteed by certain of the Company’s existing wholly owned domestic subsidiaries, and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Company's subsidiary guarantors.

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The Term Loan Facility contains a number of negative covenants that, subject to certain exceptions, restrict the Company’s ability and each of the Company’s subsidiaries ability to incur additional indebtedness; pay dividends on its capital stock or redeem, repurchase or retire its capital stock or its other indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to the Company from the Company’s restricted subsidiaries; engage in transactions with its affiliates; sell assets, including capital stock of its subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions. The Company is in compliance with all of the above covenants at September 27, 2014.

The credit agreement governing the Term Loan Facility additionally contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.

2022 Senior Unsecured Notes
On April 1, 2014, the Company issued $360 million aggregate principal amount of 6% senior unsecured notes due April 1, 2022 (the 2022 Senior Unsecured Notes). The 2022 Senior Unsecured Notes were issued under an indenture dated as of April 1, 2014 (the 2022 Senior Unsecured Notes Indenture) by and among the Company and Wells Fargo Bank, National Association, as trustee (the 2022 Senior Unsecured Notes Trustee). Interest on the 2022 Senior Unsecured Notes is payable semi-annually in arrears on April 1 and October 1, commencing October 1, 2014.
The 2022 Senior Unsecured Notes are guaranteed, jointly and severally, fully and unconditionally, on an unsecured senior basis, by each of the Company’s domestic subsidiaries (the Guarantors) that guarantee indebtedness under the Company’s senior secured term loan facility and senior secured asset-based revolving credit facility (Senior Secured Credit Facilities).
As provided in the Senior Unsecured Notes Indenture, the Company may at its option on one or more occasions redeem all or a part of the 2022 Senior Unsecured Notes at a redemption price equal to (a) 100% of the principal amount of the 2022 Senior Unsecured Notes redeemed plus a make-whole premium if redeemed prior to April 1, 2017, or (b) a percentage of principal amount between a percentage from 100% and 104.5% of the aggregate principal amount of notes to be redeemed depending on the period of redemption, if redeemed on or after April 1, 2017, plus, in each case, accrued and unpaid interest thereto.
Upon a change in control, the Company is required to offer to purchase all of the 2022 Senior Unsecured Notes at a price in cash equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the date of purchase.

If the Company or its subsidiaries engage in asset sales, the Company generally must either invest the net cash proceeds from such sales in its business within a period of time, prepay debt under the Senior Secured Credit Facilities or make an offer to purchase a principal amount of the 2022 Senior Unsecured Notes equal to the excess net cash proceeds, subject to certain exceptions. 

The 2022 Senior Unsecured Notes Indenture contains covenants that, among other things, limit the Company’s ability and the ability of the Company’s restricted subsidiaries to pay dividends or distributions or redeem or repurchase equity; prepay subordinated debt or make certain investments, loans, advances and acquisitions; incur or guarantee additional debt, or issue certain disqualified stock and preferred stock; create liens; engage in a consolidation or merger, or sell, transfer or otherwise dispose of all or substantially all of their assets; enter into transactions with affiliates; and create restrictions on the payment of dividends or other amounts to the Company from its restricted subsidiaries. The Company is in compliance with all of the above covenants at September 27, 2014.

The 2022 Senior Unsecured Notes Indenture also provides for events of default which, if certain of them occur, would permit the 2022 Senior Unsecured Notes Trustee or the holders of at least 25% in aggregate principal amount of the then total outstanding 2022 Senior Unsecured Notes to declare the principal, premium, if any, interest and any other monetary obligations on all the then-outstanding 2022 Senior Unsecured Notes to be due and payable immediately.

Senior Secured Asset-Based Revolving Credit Facility and Security Agreement
On April 30, 2014, the Company entered into an asset-based credit agreement with Goldman Sachs Bank USA, as administrative agent, collateral agent, sole lead arranger, sole bookrunner and sole syndication agent (the ABL Facility), that provides senior secured financing of $75 million (which may be increased by up to $35 million in certain circumstances), subject to a borrowing base limitation. The borrowing base for the ABL Facility at any time equals the sum of certain percentages of various accounts and inventories. The ABL Facility includes borrowing capacity in the form of letters of credit up to $35 million of the facility, and up to $20 million in U.S. dollars for borrowings on same-day notice, referred to as swingline loans. There is no outstanding balance under the ABL Facility at September 27, 2014.


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Borrowings under the ABL Facility bear interest at a rate per annum equal to, at the Company’s option, a base rate (prime rate or LIBOR), plus an applicable margin. The Company's interest rate is 4.25% at September 27, 2014. Swingline loans shall bear interest at a rate per annum equal to the base rate plus the applicable margin.
In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee of 0.33% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and agency fees.
The Company may voluntarily reduce the unutilized portion of the commitment amount and repay outstanding loans at any time. Prepayments of the loans may be made without premium or penalty other than customary “breakage” costs with respect to LIBOR loans.
There is no scheduled amortization under the Company’s ABL Facility. The principal amount outstanding under the ABL Facility is due and payable in full on April 30, 2019.

All obligations under the ABL Facility are unconditionally guaranteed by certain of the Company’s existing wholly owned domestic subsidiaries and are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the Company's subsidiaries that have guaranteed the ABL Facility.

The ABL Facility contains a number of negative covenants that, among other things, subject to certain exceptions, restrict the Company’s ability and the ability of each of the Company’s subsidiaries to incur additional indebtedness; pay dividends on its capital stock or redeem, repurchase or retire its capital stock or its other indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to the Company from the Company’s restricted subsidiaries; engage in transactions with its affiliates; sell assets, including capital stock of its subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions. The Company is in compliance with all of the above covenants at September 27, 2014.

 The credit agreement governing the ABL Facility additionally contains certain customary representations and warranties, affirmative covenants and provisions relating to events of default.
 
Intercreditor Agreement
In connection with the closing of the ABL Facility and Term Loan Facility, on April 30, 2014, Goldman Sachs Bank USA, as collateral agent for the ABL Facility and as collateral agent for the Term Loan Facility, entered into an intercreditor agreement (the Intercreditor Agreement), acknowledged by the Company, which governs the relative priorities (and certain other rights) of the ABL Facility lenders and Term Loan Facility lenders pursuant the respective security agreements that each entered into with the Company and the guarantors.
8. LEASE COMMITMENTS
As of September 27, 2014, the Company was obligated under noncancellable operating lease agreements for certain sales offices and manufacturing facilities, manufacturing equipment, vehicles, information technology equipment and warehouse space. Future minimum lease payments for noncancellable operating leases with initial or remaining terms in excess of one year are as follows:
 
 
(In thousands)
 
2014
$
3,155

2015
9,620

2016
6,869

2017
4,300

2018
3,652

Thereafter
1,163

Total minimum lease payments
$
28,759


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Total rental expense for all equipment and building operating leases for the three and nine months ended September 27, 2014 were $3.3 million and $8.7 million, respectively and for the three and nine months ended September 28, 2013 were $2.3 million and $7.1 million, respectively.

9. INCOME TAXES

Income tax expense differs from the expected amounts based on the statutory federal tax rates for the three and nine months ended September 27, 2014 and September 28, 2013 as follows:
 
Three months ended
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Expected federal income tax (benefit) expense at statutory rate
$
(1,693
)
 
$
8,031

 
$
(8,171
)
 
$
25,143

Effect of foreign source income
(3,460
)
 
(3,059
)
 
(12,958
)
 
(6,742
)
Effect of foreign dividend
1,800

 
—

 
(2,936
)
 
—

Nondeductible acquisition costs
(353
)
 
—

 
1,503

 
—

Other items, net
(104
)
 
167

 
550

 
(548
)
Income tax (benefit) expense
$
(3,810
)
 
$
5,139

 
$
(22,012
)
 
$
17,853


The Company’s year-to-date effective tax rate associated with the income tax benefit was 94.3% in 2014, compared to an effective tax rate of 24.9% in connection with income tax expense in 2013. This variance reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates, nondeductibility of certain acquisition-related expenditures incurred in connection with the ATMI acquisition and the benefit of a foreign dividend. The effective tax rate in 2013 included a $1.3 million benefit associated with the reinstatement of the U.S. federal credit for increasing research expenditures, as retroactively signed into law and recorded by the Company in the first quarter of 2013, included in other items, net, in the above table.

10. (LOSS) EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted (loss) earnings per common share (EPS): 
 
Three months ended
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Basic—weighted common shares outstanding
139,480

 
138,904

 
139,215

 
139,061

Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock
—

 
578

 
—

 
627

Diluted—weighted common shares and common shares equivalent outstanding
139,480

 
139,482

 
139,215

 
139,688

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 and nine months ended September 27, 2014 and September 28, 2013:
 
 
Three months ended
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
September 27, 2014
 
September 28, 2013
Shares excluded from calculations of diluted EPS
1,389

 
1,550

1,896

 
1,550


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

The carrying value of accounts receivable and accounts payable approximates fair value due to the short maturity of those instruments.
The following table presents the Company’s financial assets that are measured at fair value on a recurring basis at September 27, 2014 and December 31, 2013. 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.
 
September 27, 2014
 
December 31, 2013
(In thousands)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial paper
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
49,988

 
$
—

 
$
49,988

Money market fund deposits
—

 
—

 
—

 
—

 
118,090

 
—

 
—

 
118,090

Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
6,014

 
—

 
—

 
6,014

 
—

 
—

 
—

 
—

Time deposits
1,916

 
—

 
—

 
1,916

 
—

 
—

 
—

 
—

Other current assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts(a)
 
—

 
831

 
—

 
831

 
—

 
—

 
—

 
—

Total assets measured and recorded at fair value
$
7,930

 
$
831

 
$
—

 
$
8,761

 
$
118,090

 
$
49,988

 
$
—

 
$
168,078

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

 
$
—

 
$
—

 
$
—

 
$
—

 
$
514

 
$
—

 
$
514

Contingent consideration obligation
—

 
—

 
—

 
—

 
—

 
—

 
1,282

 
1,282

Total liabilities measured and recorded at fair value
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
514

 
$
1,282

 
$
1,796


(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 September 27, 2014 and December 31, 2013 condensed consolidated balance sheets to the net fair value that could have been reported in the respective condensed consolidated balance sheets is as follows:
 
September 27, 2014
 
December 31, 2013
(In thousands)
Gross
amounts of
recognized
assets
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount
of assets
in the
condensed
consolidated
balance
sheet
 
Gross
amounts
of
recognized
liabilities
 
Gross
amounts
offset in the
condensed
consolidated
balance
sheet
 
Net amount of
liabilities in the
condensed
consolidated
balance sheet
Foreign currency contracts
$
2,138

 
$
1,307

 
$
831

 
$
620

 
$
106

 
$
514



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Gains (losses) associated with derivatives are recorded in other expense (income), net in the condensed consolidated statements of operations. Gains (losses) associated with derivative instruments not designated as hedging instruments were as follows:
 
Three months ended
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
September 27, 2014
 
September 28, 2013
Gains (losses) on foreign currency contracts
$
1,181

 
$
(784
)
$
740

 
$
(5,212
)

12. SEGMENT REPORTING

In the second quarter of 2014 the Company changed its financial segment reporting to reflect management and organizational changes made by the Company. Under the new structure, the managers of two primary product groups are accountable for results at the segment profit level and report directly to the Company’s Chief Executive Officer, who is responsible for evaluating companywide performance and resource allocation decisions between the product groups. Accordingly, the Company will report its financial performance based on two reportable segments: Critical Materials Handling (CMH) and Electronic Materials EM). The Company's two reportable segments are business divisions that provide unique products and services.
•
CMH: provides a broad range of products that filter, handle, dispense, and protect critical materials used in the semiconductor manufacturing process and in other high-technology manufacturing. CMH’s products and subsystems include high-purity materials packaging, fluid handling and dispensing systems and liquid filters as well as microenvironment products that protect critical substrates such as wafers during shipping and manufacturing. CMH also provides specialized graphite components and specialty coatings for high-temperature applications.
•
EM: provides high performance materials, materials packaging and materials delivery systems that enable high yield, cost effective semiconductor manufacturing. EM’s products consist of specialized chemistries and performance materials, gas microcontamination control systems and components, and sub-atmospheric pressure gas delivery systems for the safe and efficient handling of hazardous gases to semiconductor process equipment.
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, finance and information technology functions as well as interest expense, amortization of intangible assets, charges for the fair value write-up of acquired inventory sold and contingent consideration fair value adjustments.

Summarized financial information for the Company’s reportable segments is shown in the following tables. Periods up to March 30, 2014 have been restated to reflect the basis of segmentation presented below.

23

 
 
Three months ended
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
September 27, 2014
 
September 28, 2013
Net sales
 
 
 
 
 
 
CMH
$
165,368

 
$
145,601

$
487,757

 
$
449,534

EM
107,686

 
18,984

202,679

 
57,665

Total net sales
$
273,054

 
$
164,585

$
690,436

 
$
507,199

 
 
Three months ended
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Segment profit
 
 
 
 
 
 
 
CMH
$
35,520

 
$
31,616

 
$
107,115

 
$
96,727

EM
33,316

 
4,064

 
59,728

 
12,417

Total segment profit
$
68,836

 
$
35,680

 
$
166,843

 
$
109,144

 
 
(In thousands)
September 27, 2014
 
December 31, 2013
Total assets:
 
 
 
CMH
$
533,932

 
$
421,756

EM
830,756

 
33,790

Corporate, including cash and cash equivalents
$
430,532

 
$
419,748

Total assets
$
1,795,220

 
$
875,294

The following table reconciles total segment profit to (loss) income before income taxes:
 
 
Three months ended
 
Nine months ended
(In thousands)
September 27, 2014
 
September 28, 2013
 
September 27, 2014
 
September 28, 2013
Total segment profit
$
68,836

 
$
35,680

 
$
166,843

 
$
109,144

Less:
 
 
 
 
 
 
 
Charge for fair value write-up of acquired inventory sold
24,293

 
—

 
48,586

 
—

Amortization of intangible assets
13,128

 
2,343

 
24,854

 
6,989

Contingent consideration fair value adjustment
—

 
(1,813
)
 
(1,282
)
 
(1,813
)
Unallocated general and administrative expenses
26,047

 
11,241

 
94,146

 
33,425

Operating income
5,368

 
23,909

 
539

 
70,543

Interest expense
10,443

 
56

 
23,009

 
100

Interest income
(347
)
 
(75
)
 
(762
)
 
(254
)
Other expense (income), net
110

 
982

 
1,639

 
(1,141
)
(Loss) income before income taxes
$
(4,838
)
 
$
22,946

 
$
(23,347
)
 
$
71,838



24



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. Some of the 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. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, the risks described in Part II, Item 1A of this report, 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.
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 its 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.
Entegris is a leading provider of a wide range of products and services for purifying, protecting and transporting critical materials used in processing and manufacturing in the microelectronics and other high-technology industries. Entegris derives most of its revenue from the sale of products and services to the semiconductor and related industries. 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 offers a diverse product portfolio which includes more than 18,000 standard and customized products that it believes provide the most comprehensive offering of products and services to maintain the purity and integrity of critical materials used by the semiconductor and other high-technology industries. Certain of these products are unit-driven and consumable products that rely on the level of semiconductor manufacturing activity to drive growth, while others are capital-expenditure driven and rely on expansion of manufacturing capacity to drive growth. The Company’s unit-driven and consumable products includes membrane-based liquid filters and housings, metal-based gas filters, resin-based gas purifiers, wafer shippers, disk-shipping containers and test assembly and packaging products and consumable graphite and silicon carbide components used in plasma etch, ion implant and chemical vapor deposition processes in semiconductor manufacturing. The Company’s capital expense-driven products include components, systems and subsystems that use electro-mechanical, pressure differential and related technologies to permit semiconductor and other electronics manufacturers to monitor and control the flow and condition of process liquids used in these manufacturing processes, and process carriers that protect the integrity of in-process wafers.
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 2014 end March 29, 2014, June 28, 2014, September 27, 2014 and December 31, 2014. Unaudited information for the three and nine months ended September 27, 2014 and September 28, 2013 and the financial position as of September 27, 2014 and December 31, 2013 are included in this Quarterly Report on Form 10-Q.
Forward-Looking Statements
The information in this Management’s Discussion and Analysis of Financial Condition and Results of Operations, except for the historical information, contains forward-looking statements. These statements are subject to risks and uncertainties and to the cautionary statement set forth above. These forward-looking statements could differ materially from actual results. 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. This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and the related notes thereto, which are included elsewhere in this report.
Key operating factors
Key factors, which management believes have the largest impact on the overall results of operations of Entegris, 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

25
Table of Contents

operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The 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 also affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, stainless steel and purchased components), competition, both domestic and international, 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 expense, 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 and Nine Months Ended September 27, 2014

On April 30, 2014, the Company acquired ATMI, Inc., a Delaware corporation (ATMI), for approximately $1.1 billion in cash, or $809.4 million net of cash acquired, as described in note 2 to the condensed consolidated financial statements. ATMI is a leading supplier of high-performance materials, materials packaging and materials delivery systems used worldwide in the manufacture of microelectronics devices. The acquisition of ATMI (the Merger) was funded with the issuance of $820 million in debt, described in note 7 to the condensed consolidated financial statements.

For the three months ended September 27, 2014, net sales increased by $108.5 million, or 66%, to $273.1 million, compared to $164.6 million for the three months ended September 28, 2013. This sales improvement was principally driven by the inclusion of sales of $94.1 million from ATMI. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 9%, reflecting continued strong demand from device makers and improved wafer starts. Overall demand from the Company's semiconductor industry customers increased, reflecting improved industry fab utilization rates and higher industry capital spending.

Although net sales increased significantly year over year, the Company's gross profit rose by only $28.6 million for the three months ended September 27, 2014, to $98.7 million, up from $70.1 million for the three months ended September 28, 2013. Accordingly, the Company experienced a 36.2% gross margin rate compared to 42.6% in the comparable year-ago period. The gross profit and gross margin figures reflect a $24.3 million charge for fair value write-up of acquired ATMI inventory sold during the quarter. Excluding that charge, the Company's gross margin for the third quarter was 45.1%.
  
The Company also incurred significantly higher selling, general and administrative (SG&A) expenses for the three and nine months ended September 27, 2014, mainly due to the inclusion of SG&A expenses for ATMI's operations and the cost of integration activities.

The Company incurred interest expense of $10.4 million for the quarter ended September 27, 2014 compared to a nominal amount in the comparable year-ago period, the increase related to the debt outstanding issued to help fund the ATMI acquisition. The Company reported a net loss of $1.1 million, or $0.01 per diluted share, for the quarter ended September 27, 2014 compared to net income of $17.8 million, or $0.13 per diluted share, a year ago.

Net sales for the nine months ended September 27, 2014 were $690.4 million, up 36% from $507.2 million in the comparable year-ago period, principally driven by the inclusion of ATMI sales of $154.3 million. Exclusive of the ATMI sales, the Company's sales grew 6%. Gross profit, operating expenses, interest and tax expense for the nine months ended September 27, 2014 were also affected by ATMI-related items described in greater detail below. As a result, the Company reported a net loss of $1.4 million, or $0.01 per diluted share,for the nine months ended September 27, 2014 compared to net income of $54.0 million, or $0.39 per diluted share, in the comparable year-ago period.

Sales for the third quarter ended September 27, 2014 were up 9% on a sequential basis over the second quarter of 2014. The Company's sales increased mainly due to the inclusion of incremental sales of $32.6 million from ATMI, reflecting a full quarter's sales compared to two months' sales in the prior quarter, net of nominal unfavorable foreign currency translation effects. Exclusive of these factors, the Company's sales fell 4%, reflecting lower demand from device makers compared to last quarter.

26
Table of Contents

The Company’s reportable segments experienced varied net sales and operating results for the three-month and nine-month periods as described in greater detail below.
During the nine-month period ended September 27, 2014, the Company’s operating activities provided net cash flow of $91.2 million. Cash used for the ATMI acquisition, net of cash acquired, was $809.4 million, while capital expenditures were $44.0 million for the period. Cash and cash equivalents were $390.5 million at September 27, 2014 compared with cash and cash equivalents of $384.4 million at December 31, 2013. The Company had outstanding long-term debt of $792.8 million at September 27, 2014 and none at December 31, 2013, respectively.
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, 2013 filed with the Securities and Exchange Commission. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its consolidated financial statements, including, but not limited to, those related to accounts receivable-related valuation allowances, inventory valuation, impairment of long-lived assets, and income taxes. There have been no material changes in these aforementioned critical accounting policies. In addition, due to the significance of the estimates, assumptions and judgments associated with the acquisition of ATMI discussed elsewhere in this Quarterly Report on Form 10-Q, the Company provides the following discussion of its critical accounting policy for business acquisitions.

Business Acquisitions
The Company accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items, the Company typically obtains assistance from a third-party valuation firm.

There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, the Company normally utilizes one or more forms of the “income method.” This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Some of the more significant estimates and assumptions inherent in the income method (or other methods) include the projected future cash flows (including timing) and the discount rate reflecting the risks inherent in the future cash flows.

Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income.


27
Table of Contents

Three and Nine Months Ended September 27, 2014 Compared to Three and Nine Months Ended September 28, 2013 and Three Months Ended June 28, 2014
The following table compares operating results for the three and nine months ended September 27, 2014 with results for the three and nine months ended September 28, 2013 and for the three months ended June 28, 2014, both in dollars and as a percentage of net sales, for each caption.
 
 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 27, 2014
 
September 28, 2013
 
June 28, 2014
 
September 27, 2014
 
September 28, 2013
Net sales
$
273,054

 
100.0
 %
 
$
164,585

 
100.0
 %
 
$
251,578

 
100.0
 %
 
$
690,436

 
100.0
 %
 
$
507,199

 
100.0
 %
Cost of sales
174,311

 
63.8

 
94,453

 
57.4

 
162,910

 
64.8

 
431,673

 
62.5

 
292,369

 
57.6

Gross profit
98,743

 
36.2

 
70,132

 
42.6

 
88,668

 
35.2

 
258,763

 
37.5

 
214,830

 
42.4

Selling, general and administrative expenses
55,820

 
20.4

 
31,746

 
19.3

 
82,347

 
32.7

 
172,954

 
25.0

 
99,564

 
19.6

Engineering, research and development expenses
24,427

 
8.9

 
13,947

 
8.5

 
21,581

 
8.6

 
61,698

 
8.9

 
39,547

 
7.8

Amortization of intangible assets
13,128

 
4.8

 
2,343

 
1.4

 
9,390

 
3.7

 
24,854

 
3.6

 
6,989

 
1.4

Contingent consideration fair value adjustment
—

 
—

 
(1,813
)
 
(1.1
)
 
(1,282
)
 
(0.5
)
 
(1,282
)
 
(0.2
)
 
(1,813
)
 
(0.4
)
Operating income
5,368

 
2.0

 
23,909

 
14.5

 
(23,368
)
 
(9.3
)
 
539

 
0.1

 
70,543

 
13.9

Interest expense
10,443

 
3.8

 
56

 
—

 
12,537

 
5.0

 
23,009

 
3.3

 
100

 
—

Interest income
(347
)
 
(0.1
)
 
(75
)
 
—

 
(192
)
 
(0.1
)
 
(762
)
 
(0.1
)
 
(254
)
 
(0.1
)
Other expense (income), net
110

 
—

 
982

 
0.6

 
1,351

 
0.5

 
1,639

 
0.2

 
(1,141
)
 
(0.2
)
(Loss) income before income taxes and equity in affiliates
(4,838
)
 
(1.8
)
 
22,946

 
13.9

 
(37,064
)
 
(14.7
)
 
(23,347
)
 
(3.4
)
 
71,838

 
14.2

Income tax (benefit) expense
(3,810
)
 
(1.4
)
 
5,139

 
3.1

 
(22,445
)
 
(8.9
)
 
(22,012
)
 
(3.2
)
 
17,853

 
3.5

Equity in net loss of affiliates
40

 
—

 
—

 
—

 
50

 
—

 
90

 
—

 
—

 
—

Net (loss) income
$
(1,068
)
 
(0.4
)%
 
$
17,807

 
10.8
 %
 
$
(14,669
)
 
(5.8
)%
 
$
(1,425
)
 
(0.2
)%
 
$
53,985

 
10.6
 %
Net sales For the three months ended September 27, 2014, net sales increased by $108.5 million to $273.1 million, compared to $164.6 million for the three months ended September 28, 2013. This sales improvement was principally driven by the inclusion of sales of $94.1 million from ATMI. Exclusive of the effect of the added ATMI sales and nominal favorable foreign currency translation effects, the Company's sales increased 9%, reflecting strong demand from device makers and improved wafer starts. Overall demand from the Company's semiconductor industry customers increased, reflecting improved industry fab utilization rates and higher industry capital spending.
Net sales for the nine months ended September 27, 2014 were $690.4 million, up 36% from $507.2 million in the comparable year-ago period, principally driven by the inclusion of sales of $154.3 million from ATMI for the five-month period subsequent to the acquisition. Exclusive of the ATMI sales, the Company's sales grew 6%, reflecting the strong demand from device makers and improved wafer starts noted above.

28
Table of Contents

Sales were up 9% on a sequential basis over the second quarter of 2014. Exclusive of the effect of the incremental sales of $32.6 million from ATMI reflecting a full quarter's sales compared to two months' sales in the prior quarter and nominal unfavorable foreign currency translation effects, the Company's sales fell 4%, mainly due to lower sales of FOUPs and fluid handling products, both of which experienced strong sales in the second quarter.
Foreign currency translation effects on net sales for the three and nine months ended September 27, 2014 were nominal with the effect of a weaker Japanese yen versus the U.S. dollar offset by the strength of most other currencies versus the U.S. dollar.
On a geographic basis, total sales in the third quarter of 2014 to North America were 23%, Asia (excluding Japan) 54%, Europe 10% and Japan 13% compared to prior year third quarter sales to North America of 29%, Asia (excluding Japan) 43%, Europe 14% and Japan 14%. Sales in Asia, North America, Japan and Europe increased 109%, 30%, 57%, and 19%, respectively in the third quarter of 2014 compared to last year's third quarter, mainly due to the addition of sales from ATMI.
Other than the effects noted above, the Company believes its sales changes are primarily volume driven. Based on the information available, the Company believes it is generally improving or maintaining market share for its products and that the effect of selling price erosion has been nominal.

Gross profit Gross profit for the three months ended September 27, 2014 increased to $98.7 million, up from $70.1 million for the three months ended September 28, 2013. The increase in gross profit reflects the improvement in legacy Entegris sales and the inclusion of sales from ATMI. Despite the improvement in gross profit, the Company experienced a 36.2% gross margin rate compared to 42.6% in the comparable year-ago period.

Gross profit for the nine months ended September 27, 2014 increased to $258.8 million, up from $214.8 million for the nine months ended September 28, 2013, a $43.9 million increase. The figures reflect a 37.5% gross margin rate for the first nine months of 2014 compared to 42.4% in the comparable year-ago period.

The gross margin percentages for the three and nine months were below the comparable year-ago figures primarily due to incremental cost of sales charges of $24.3 million and $48.6 million, respectively, associated with the sale of inventory acquired in the acquisition with ATMI. An inventory write-up of $48.6 million was recorded as part of the purchase price allocation and was amortized over the expected inventory turn of the acquired finished goods inventory. Excluding that charge, the Company's gross margin for the three and nine months ended September 27, 2014 were 45.1% and 44.5%, respectively. The adjusted gross margin rates exceeded the comparable year-ago figures mainly due to the increase in Company sales levels and, on average, higher margins for ATMI products.
On a sequential basis, gross profit increased by $10.1 million to $98.7 million, up from $88.7 million in the second quarter. The sequential gross profit increase reflects an improvement in legacy Entegris sales and the inclusion of one additional month of sales from ATMI. Reflecting the higher sales levels and slightly higher margins for ATMI products, the adjusted gross margin rate of 45.1% for the third quarter of 2014 improved from 44.9% in the second quarter of 2014, after adjusting both quarters for the incremental cost of sales charges associated with the sale of inventory acquired in the acquisition with ATMI noted above
Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses were $55.8 million for the three months ended September 27, 2014, up $24.1 million, or 76%, from the comparable three month period a year earlier. SG&A expenses recorded by ATMI and included in the Company's condensed consolidated financial statements amounted to $15.1 million, accounting for approximately 63% of the increase, which included severance and retention costs of $1.6 million. In addition, legacy Entegris incurred expenses of $7.1 million in merger-related expenses, including severance and termination costs and other costs associated with the integration of the two operations.
SG&A expenses increased 74% to $173.0 million in the first nine months of 2014 compared to $99.6 million in the year-ago period, an increase of $73.4 million. Expenses associated with the ATMI infrastructure, including certain merger-related expenses, amounted to $50.7 million, or about 70% of the increase. Included in these expenses were costs of $26.8 million related to the ATMI acquisition, specifically $22.2 million for share-based compensation expense and related taxes associated with the unvested portion of ATMI share-based awards settled in cash on the date of the acquisition, as well as severance and retention costs of $1.7 million. In addition, legacy Entegris incurred other expenses of $17.9 million in merger-related expenses, including direct transaction costs and transaction-related expenses, as well as severance and termination costs, and other costs associated with the integration of the two operations.
On a sequential basis, SG&A expenses decreased by $26.5 million in the third quarter of 2014. The sequential SG&A expense decline reflects the absence of direct transaction costs and transaction-related expenses totaling $38.8 million, including the share-based compensation expense noted above, recorded in the second quarter, offset in part by increased integration costs of $3.5 million and the inclusion of ATMI's SG&A costs of $5.8 million for one additional month of activity in the third quarter.

29
Table of Contents


In addition to the increase in SG&A costs associated with ATMI's infrastructure, the Company expects SG&A costs to be higher than normal during the remainder of 2014 as integration costs and related severance and retention costs will continue during this period. The Company expects overall SG&A costs will decline on a pro forma basis resulting from the combination of various sales, marketing and other corporate functions during the balance of 2014 and 2015. These savings are expected to be realized in the second half of 2014 and in 2015.

Engineering, research and development expenses Engineering, research and development (ER&D) expenses related to the support of current product lines and the development of new products and manufacturing technologies were $24.4 million in the three months ended September 27, 2014 compared to $13.9 million in the year-ago period, a $10.5 million increase. ER&D expenses recorded by ATMI and included in the Company's condensed consolidated financial statements amounted to $8.5 million, accounting for approximately 80% of the increase.

ER&D expenses increased 56% to $61.7 million in the first nine months of 2014 compared to $39.5 million in the year ago period, also due to the addition of $14.5 million in ER&D expenses from ATMI, accounting for approximately 65% of the increase.

The increases also reflect higher legacy Entegris ER&D activity levels, including increased employee costs of $1.9 million and $4.1 million for the three and nine months ended September 27, 2014, respectively, and increased customer samples and supplies expense of $1.5 million for the nine months ended September 27, 2014.
On a sequential basis, ER&D expenses increased by $2.8 million in the third quarter of 2014. The sequential ER&D expense increase is primarily due to the additional month of ATMI operations in the third quarter.

The Company expects ER&D costs will increase during the remainder of 2014 due to the addition of ATMI's ER&D infrastructure. However, these costs are expected to stay relatively stable as a percentage of net sales. The Company’s overall ER&D efforts will continue to focus on the support or extension of current product lines, and the development of new products and manufacturing technologies.
Interest expense Interest expense was $10.4 million and $23.0 million in the three and nine months ended September 27, 2014 compared to nominal interest expense for the three and nine months ended September 28, 2013. The significant increases reflect the interest associated with the borrowings made by the Company in connection with the acquisition of ATMI as described in notes 2 and 7 to the Company's condensed consolidated financial statements. Interest expense included interest on outstanding borrowings, the amortization of debt issuance costs associated with such borrowings and bridge financing costs of $4.0 million, which were recorded in the second quarter.
Other expense (income), net Other expense, net was $0.1 million and $1.6 million in the three month and nine month periods ended September 27, 2014, respectively, which was mainly due to foreign currency transaction losses. Other expense, net of $1.0 million and other income, net of $1.1 million in the three month and nine month periods ended September 28, 2013, respectively, also consisted mainly of foreign currency transaction gains.

Income tax (benefit) expense The Company recorded an income tax benefit of $3.8 million and $22.0 million, respectively, in the three and nine months ended September 27, 2014 compared to income tax expense of $5.1 million and $17.9 million, respectively, in the three and nine months ended September 28, 2013. The Company’s year-to-date effective tax rate was 94.3% in 2014, compared to 24.9% in 2013. This variance reflects changes in the Company's geographic composition of income toward jurisdictions with lower tax rates, nondeductibility of certain acquisition-related expenditures and the benefit of a foreign dividend. The effective tax rate in 2013 included a $1.3 million benefit associated with the reinstatement of the U.S. federal credit for increasing research expenditures, as retroactively signed into law and recorded by the Company in the first quarter of 2013.
Net (loss) income Due to the factors noted above, the Company recorded a net loss of $1.1 million, or $0.01 per diluted share, in the three-month period ended September 27, 2014 compared to net income of $17.8 million, or $0.13 per diluted share, in the three-month period ended September 28, 2013. For the nine months ended September 27, 2014, the Company recorded a net loss of $1.4 million, or $0.01 per diluted share, compared to net income of $54.0 million, or $0.39 per diluted share, in the comparable year ago period. The net losses and diluted losses per share for the 2014 periods mainly reflect the effect of the significant costs associated with the ATMI acquisition.
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

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affecting the Company’s business and results of operations. See 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 102% to $64.0 million in the three month period ended September 27, 2014, compared to $31.6 million in the three-month period ended September 28, 2013. Adjusted EBITDA, as a percent of net sales, increased to 23.4% from 19.2% in the year-ago period. Adjusted Operating Income increased 104% to $49.9 million in the three-month period ended September 27, 2014, compared to $24.4 million in the three-month period ended September 28, 2013. Adjusted Operating Income, as a percent of net sales, increased to 18.3% from 14.8% in the year-ago period. Non-GAAP Earnings Per Share increased 50% to $0.21 in the three-month period ended September 27, 2014, compared to $0.14 in the three-month period ended September 28, 2013.
Segment Analysis
In the second quarter of 2014 the Company changed its financial segment reporting to reflect management and organizational changes made by the Company. Under the new structure, the managers of two primary product groups are accountable for results at the segment profit level and report directly to the Company’s Chief Executive Officer, who is responsible for evaluating companywide performance and resource allocation decisions between the product groups. Beginning in the second quarter, the Company reports its financial performance based on two reportable segments: Critical Materials Handling (CMH) and Electronic Materials (EM). See note 12 to the condensed consolidated financial statements for additional information on the Company’s two segments.
The following table presents selected net sales and segment profit data for the Company’s two reportable segments for the three and nine months ended September 27, 2014 and September 28, 2013, and the three months ended June 28, 2014.

 
Three months ended
Nine months ended
(In thousands)
September 27, 2014
September 28, 2013
June 28, 2014
September 27, 2014
September 28, 2013
Critical Materials Handling
 
 
 
 
 
Net sales
$
165,368

$
145,601

$
176,820

$
487,757

$
449,534

Segment profit
35,520

31,616

41,069

107,115

96,727

Electronic Materials
 
 
 
 
 
Net sales
$
107,686

$
18,984

$
74,758

$
202,679

$
57,665

Segment profit
33,316

4,064

22,708

59,728

12,417

Critical Materials Handling (CMH)
For the third quarter of 2014, CMH net sales increased 14% to $165.4 million, from $145.6 million in the comparable period last year, due to the inclusion of sales of $11.6 million from ATMI and an increase in liquid microcontamination control product sales. CMH reported a segment profit of $35.5 million in the third quarter of 2014, up 12% from $31.6 million in the year-ago period due to higher sales and a slightly favorable sales mix, partly offset by a 13% increase in operating expenses, mainly consisting of higher ER&D expenditures and costs associated with the ATMI infrastructure.

For the nine months ended September 27, 2014, CMH net sales increased 9% to $487.8 million, from $449.5 million in the comparable period last year, and reflects the inclusion of sales of $19.8 million from ATMI and the increase of 300mm wafer process product sales. CMH reported a segment profit of $107.1 million in the nine months ended September 27, 2014, up 11% from $96.7 million in the year-ago period also due to higher sales and a slightly favorable sales mix, partly offset by a 9% increase in operating expenses, mainly consisting of higher ER&D expenditures and costs associated with the ATMI infrastructure.
Electronic Materials (EM)
For the third quarter of 2014, EM net sales increased 467% to $107.7 million, from $19.0 million in the comparable period last year. The revenue increase primarily reflects the inclusion of sales of $82.5 million from ATMI, while the remainder reflects improved sales of gas microcontamination control systems products. EM reported a segment profit of $33.3 million in the third quarter of 2014 compared to a $4.1 million segment profit in the year-ago period. The increase in the segment's profit is primarily associated with higher sales levels reflecting the sales of ATMI products and improved margins related to a more favorable sales mix, offset partly by costs associated with the ATMI infrastructure.

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For the nine months ended September 27, 2014, EM net sales increased 251% to $202.7 million, from $57.7 million in the comparable period last year. The sales increase also reflects the inclusion of sales of $134.4 million from ATMI, while the remainder reflected improved sales of gas microcontamination control systems products. EM reported a segment profit of $59.7 million in the nine months ended September 27, 2014 compared to a $12.4 million segment profit in the year-ago period. The increase in the EM's profit for the nine months ended September 27, 2014 reflects the same factors noted for the improvement of the third quarter segment profit.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $26.0 million in the third quarter of 2014 compared to $11.2 million in the third quarter of 2013. The increase reflects unallocated general and administrative expenses of $7.3 million recorded by ATMI and included in the Company's condensed consolidated financial statements after the date of the Merger, accounting for approximately 50% of the increase. In addition, the Company incurred expenses of $7.1 million associated with integration of the two operations.

Unallocated general and administrative expenses for the nine months ended September 27, 2014 totaled $94.1 million, up from $33.4 million in the comparable period last year. The inclusion of unallocated general and administrative expenses of $37.8 million recorded by ATMI accounted for approximately 62% of the increase. In addition, the Company incurred expenses of $9.1 million in connection with the completion of the ATMI merger, as well as the costs of integration of $10.6 million incurred in the second and third quarters. Included in the ATMI expenses was $22.2 million for share-based compensation expense and related taxes associated with the unvested portion of ATMI share-based awards settled in cash on the date of the Merger, as well as severance and retention costs of $5.4 million.
Liquidity and Capital Resources
Operating activities Cash flows provided by operating activities totaled $91.2 million in the nine months ended September 27, 2014. Cash generated by operating activities in the nine months ended September 27, 2014 was primarily the result of a net loss adjusted for non-cash expenses (such as depreciation, amortization, share-based compensation and a charge for the fair value write-up of acquired inventory sold). The net impact of changes in operating assets and liabilities absorbed $1.4 million