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Executives

Steven Cantor - Vice President of Corporate Relations

Bertrand Loy - Chief Executive Officer, President and Director

Gregory B. Graves - Chief Financial Officer, Executive Vice President and Treasurer

Analysts

Krish Sankar - BofA Merrill Lynch, Research Division

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Jason Ursaner - CJS Securities, Inc.

Avinash Kant - D.A. Davidson & Co., Research Division

Richard A. Ryan - Dougherty & Company LLC, Research Division

Steven Schwartz - First Analysis Securities Corporation, Research Division

Jairam Nathan - Sidoti & Company, LLC

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

Entegris (ENTG) Q2 2013 Earnings Call July 23, 2013 10:00 AM ET

Operator

Good day, everyone, and welcome to the Entegris Second Quarter 2013 Earnings Release Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Steve Cantor, Vice President of Corporate Relations. Please go ahead, sir.

Steven Cantor

Thank you, Kyle. Good morning and thank you all for joining our call today. Earlier, we announced the financial results for our second quarter ended June 29, 2013. You can access a copy of our press release on our website www.entegris.com.

Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, which are outlined in detail in our reports and filings with the SEC. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find the reconciliation table in today's press release as well as on our website.

On the call today are Bertrand Loy, President and CEO; and Greg Graves, Chief Financial Officer.

Bertrand?

Bertrand Loy

Thank you, Steve. I will make some comments on the quarter's achievements and then Greg will provide detail on the second quarter financials and on our guidance for the third quarter.

I am very pleased with the second quarter performance. We grew our sales 8% sequentially, and exceeded our forecast. We executed well, achieving an adjusted operating margin of 16% and cash earnings per share of $0.15, both ahead of our target model. We generated strong cash flow, $35 million in cash from operations and achieved some key milestones on our product and technology roadmaps.

In terms of our sales mix for the quarter, our revenue shifted slightly towards the semiconductor market. Semi-related sales represented 75% of total revenue and grew 10% sequentially, driven by a record quarter for Liquid Filtration Products and steady growth of fluid handling components, legacy wafer handling products.

Overall, the demand in our overall industrial markets picked up but the level and extent of the strength was not uniformed. There was strong demand from leading edge fabs. Although in aggregate, fab utilization rates, one of the key drivers for our business remained well below peak levels for the industry.

Sales in our non-semiconductor markets were 24% of total revenue, and declined 1% from Q1. While there was strength in some of our mature electronics markets deserves [ph] display, our data storage business was down modestly. Our PV, LED and Energy storage related revenue grew modestly.

We had another quarter of strong cash flow from operations. Consistent with a clearly defined capital allocation strategy, we are deploying our cash to achieve our goal of both rising above market growth through the cycles and creating long-term shareholder value. There are 4 components to our capital allocation strategy: Invest in new products and technologies for the advanced knobs; invest in our R&D and manufacturing infrastructure and capabilities; make focused acquisitions; and return excess cash to shareholders. I will provide an update on each of these.

First, we are sustaining and selectively expanding our investment in R&D, consistent with our target model in order to accelerate new product development and collaboration with key industry leaders and consortium. We are pleased with the results so far. As an example, our 450 mm wafer handling solutions were recently selected by New York based G450C, the industry consortium leading the development in this area. While the precise timing of the adoption of 450 process technology has yet to be finalized, the decision by this leading consortium is an important endorsement of our technology and capability.

Second, we will continue to make progress with our investment in key technology and infrastructure capital projects, the i2M Center in Massachusetts and the ATC center in Colorado. The i2M facility will be one of the most advanced centers of its kind in the world for membrane and coatings, manufacturing and R&D. The ATC is focused on technology development and volume manufacturing for 450 and EUV handling products.

As we have discussed with you before, magnitude and scope of these projects are unusual for us. Typically, our business does not require this level of capital investment. Though we are confident that when these facilities are fully up and running in 2014, they will provide us with a compelling competitive advantage and extend our leadership in our served market. As of today, almost 2/3 of the capital outlays for both of these projects are already behind us and we expect that the vast majority of the spending will be completed by year-end.

The third element of our cash deployment strategy is to acquire businesses or technologies that complement our existing capabilities or divulge to our presence in adjacent markets. The acquisition of Jetalon, which was completed in April is a good example. While Jetalon is small and will not have a meaningful impact on our results in 2013, its unique fluid concentration measurement technology is generating considerable interest from both OEM and device makers in the semiconductor industry, as well as in life sciences. Since becoming part of Entegris, Jetalon is already leveraging our technical capabilities and has launched 4 new products. We are continuing to seek out businesses that can augment our technology portfolio.

The fourth priority of our capital allocation strategy is to return excess cash to shareholders. In Q2, we repurchased nearly 600,000 shares and have purchased about 1 million shares since the program begun in February. Our intent is to return excess cash to shareholders through a sustained and opportunistic share repurchase program.

Looking out to the second half of the year, we continue to see a mixed picture as there are signs of potential slowing and shift demand and shift in timing of capital spending. Having said that, our long-term goal remains to grow 300 basis points faster than our markets through the cycles. We have proven our ability to do this over the past 4 years, and we believe that our market and technology position, combined with our critical investments, put us in a good position to continue to achieve this. And as we do that, we will be able to provide very attractive returns for shareholders.

As I discussed in our last earnings call in April, and more recently at the Analyst Day in June, the semiconductor industry is in the midst of an unprecedented period of R&D intensity, driven by the introduction of a number of new process technology in fab, 3D, EUV and 450 mm wafers. We believe that our expertise in Contamination Control and the breadth of our solutions, position us to play an increasingly important role to help the industry develop and ramp up the critical technology.

Greg will now provide more details on the financials for the quarter.

Gregory B. Graves

Thank you, Bertrand. Good morning and thank you all for joining the call. It was an all-around excellent quarter. We executed well and achieved results, which exceeded our target model. Sales of $178 million were above our guidance and up 8% from Q1. Our non-GAAP EPS was $0.15.

Geographically, Asia sales were $76 million and grew 8% sequentially, primarily due to strength at the major foundries.

Sales to Japan were $25 million, up 1%, even in light of the weaker yen. Sales to North America were $52 million, up 8%. Sales to Europe were $24 million, up 14%. Foreign currency exchange rates had a negative impact of approximately $3 million on our revenues compared to Q1.

In terms of quarterly performance by division, sales for the Contamination Control Solutions division or CCS, grew 10% sequentially to $114 million. Record quarterly sales of liquid filters and higher sales of fluid handling components contributed to CCS's strong financial sales performance. The operating margin for the CCS division improved to 25% versus 21% in Q1.

Sales for the Microenvironments division or ME, were up 4% sequentially to $46 million, driven largely by higher sales of legacy products. ME's operating margin was 20%, down from 21% in Q1. Sales for the Specialty Materials division or SMD, were $17 million, or even with Q1. As planned, SMD's operating margin of 11% declined from 13% in the first quarter, reflecting higher investments in new products for the LED and semiconductor market.

Overall, gross margin of 43.7% improved approximately 3 points from Q1, reflecting improved mix, better absorption and solid execution at our manufacturing plant.

In Q3, we expect gross margin to be approximately 43%, which reflects slightly less favorable mix and lower absorption. Operating expenses for Q1 were $49 million or 27.5% of sales and were in line with our expectations for the quarter. This was up modestly from Q1, reflecting sustained investments in R&D and other customer phasing initiative.

In Q3, we expect operating expenses to be approximately $48 million to $50 million. Our GAAP tax rate was 28% in Q2. For the balance of the year, we would expect the tax rate to be 27% to 29%, which is slightly better than our expectations coming into the year.

Our working capital management for the quarter was solid. DSOs were 56 days, down from 57 in Q1. Inventory turns were 4.0, unchanged from Q1. We generated $34.8 million in cash from operations in Q2, up from $7.4 million in Q1. Consistent with our stated cash allocation strategy, there were 3 significant uses of cash in the quarter: First, CapEx for the i2M Center; second, payment of the purchase price for the Jetalon acquisition; and third, share repurchases.

In terms of CapEx, we spent $18 million on capital investments in Q2, the majority of which related to the i2M facility. To date, we have spent approximately 2/3 of the capital required for this project and expect to have these capital outlays largely behind us as we go into 2014.

Depreciation expense was $7.3 million in Q2. We used $13 million of cash to purchase Jetalon, and we spent $5.6 million to repurchase approximately 600,000 shares as part of our ongoing share repurchase plan. Since the plan was initiated in February, we have purchased about 1 million shares. Given these cash outlays, we ended the quarter with $343 million in cash on the balance sheet, an increase of $5 million from the end of Q1.

In terms of our outlook for the third quarter, demand trends and industry trends remain somewhat mixed. We expect Q3 sales to be in the range of $165 million to $180 million. Given these levels, our target model calls for adjusted operating margin 13% to 15%, and we would expect non-GAAP EPS to be $0.11 to $0.14.

Before taking your questions, I want to highlight 2 key points: We achieved good growth and executed well in Q2, delivering results ahead of our target model. We have a clear capital allocation strategy that is enabling us to invest to extend our technology and market leadership over the next several years and to build long-term shareholder value.

With that, we'll open it up for Q&A. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] We'll take our first question from Krish Sankar from Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

A few of them. Bertrand, what was the percentage of mixture of consumables versus CapEx in June quarter and how do you expect that to trend in September?

Bertrand Loy

Right. So Krish, the split was 66% unit driven, 34% CapEx driven, which was actually a slight shift towards unit driven from Q1 of this year. We expect actually the shift to continue to evolve more towards unit driven as we get into the second half of this year.

Krish Sankar - BofA Merrill Lynch, Research Division

So if I look at the midpoint of the guidance, it's roughly down like 3 percentage points. Should we assume both unit and CapEx would be down in Q3 or is one better than the other?

Bertrand Loy

So we certainly, I mean, this guidance actually is a reflection of the fact that we expect CapEx to be softer in the second half of the year and certainly, that will be the case in Q3. In terms of MSI, the reason why guidance is actually so broad is we are actually reflecting on the potential scenario on a high-end of the guidance, which suggest some -- the continuation of strong wafer start trends through the end of Q3. But there's another scenario that could play out, which would be a deceleration of wafer starts sometime in September. And that actually is the assumption behind the lower end of the guidance.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. That's really helpful. I don't know if you guys have a view on this, but it seems like most industry forecasts of wafer starts is in like the low to mid-single digits for this year. So even if you get into the upper end for Q3, it seems like Q4 has to be strong to get to those levels, which is against normal seasonality. So I'm just kind of curious if low to mid-single-digit wafer starts for the year is actually a little too optimistic for the industry.

Bertrand Loy

Well, I think, Krish, that's really what we're all trying to make sense of, right? I think the trends are really very mixed right now. We spend a lot of time with our customers trying to understand what the near-term trends are for their business. And again, I think that general consensus is that, [indiscernible] again, are very, very mixed. I think that the reality is that logic and memory maker output will be influenced by the near-term trends in PC and in mobile devices, which are both trends showing signs of weakness. And I guess, that's why we are very cautious in our outlook in terms of MSI for Q3 and it's too early to comment obviously, on what to expect in Q4.

Krish Sankar - BofA Merrill Lynch, Research Division

Got it. Got it. And then final question for Greg. How much -- is it $37 million you have left in the buyback? Is that the approximate number? Or...

Gregory B. Graves

We have a $50 million authorization, Krish. And year-to-date, we've spent right around $10 million. So we've got about $40 million left.

Operator

We'll take our next question from Patrick Ho from Stifel.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Can you just give a little more color in terms of the CapEx outlook? You did mention that 3Q sounds a little bit soft. At this point in time, do you see that coming back in Q4? Is there something that pushes out into 2014?

Bertrand Loy

Patrick, this is Bertrand. Again, it's hard for us to really comment on Q4 at this point. Again, I would limit my comment to Q3, and we are seeing some softening in our CapEx -- the CapEx business as we enter the quarter. We are hearing from a lot of our customers that they are working really hard at optimizing their capital spending allocation decisions and trying to push out some of their spending into 2014. I don't know exactly what the impact of all of that would be on to Q4. I think that generally speaking, we agree with the view that the industry, we need to continue to invest aggressively over the next 2 years to add capacity and to continue to aggressively march on the industry technology roadmap. But having said that, I think that the timing of these investments are really difficult to predict. And while we remain very optimistic around the prospects for 2014, I would say that again, there's a fair amount of uncertainty and likely soft environment ahead of us in the next couple of quarters.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Fair enough. Just going to the unit side of the business. Typically, as we enter both June and September, that's traditionally the seasonally stronger period time of the year. Did you experience any problems [ph] to the June quarter that may be taking some away from the September quarter in terms of seasonality aspects? As I would assume that, that would've been up a little bit as well going into the September quarter. Can you give a little bit of color in terms of the outlook there?

Bertrand Loy

That's a good question. I don't think we've seen much of that, frankly speaking. I think that the current velocity of our unit driven business going into Q3 is about same as exiting Q2. So which is again, a reflection on a lot of the fabs operating at roughly similar levels of production right now. Again, I think our guidance is just a reflection of the fact that if indeed their Q3 -- their Q4, I'm sorry, proves to be soft -- and again, a lot of the device makers would suggest that Q4 -- their Q4 revenues will be weaker than their Q3 revenues. The likely impact on us is that factory loading will start slowing down some time before the end of Q3, and we are really not sure about when that will happen. And that's really what we're trying to reflect into our guidance.

Patrick J. Ho - Stifel, Nicolaus & Co., Inc., Research Division

Okay. Fair enough. And final question maybe for Greg. In terms of the operating model, you guys did really well this quarter and looks like those positive trends are continuing into the September quarter in terms of the margin profile. I guess, what's the biggest maybe shift or what's the biggest occurrence that has led to what I would assume pretty sharp improvements, particularly on the gross margin profile, given where you were a quarter ago and even a few quarters ago?

Gregory B. Graves

Yes. I mean, really, we talked about our results, Patrick, for Q4 and Q1. We suggested that we had adverse mix and we have relatively low manufacturing volumes. We really just had a much better mix in Q2. We'd expect the mix to stay good as we move into Q3. But if you think about the Q2 mix, it was heavy on legacy ME products, it was heavy on Liquid Filtration Products, all of which are good products for us as it relates to margin. On the operating line, we just continue to -- I mean, we're focused on investing in the R&D but we continue to keep a sharp eye on the SG&A side. And so our spending continues to be kind of in a reasonable range, like it's a revenue levels, if you get to revenue levels at 170 and above, or it's much more comfortable for us to make the model.

Operator

We'll take our next question from Jason Ursaner from CJS Securities.

Jason Ursaner - CJS Securities, Inc.

I just have a question on Liquid Filtration. Greg, you just mentioned margin on those products is favorable. I know in the past, you guys have talked about how the true leading edge filtration products, there is higher cost and you haven't fully set your manufacturing scale and that it is important to set the standard but it may not show up in margins immediately. So I'm just wondering if you could maybe give an update on that trend and if the margin, I guess, is now beginning to more show up on some of those products.

Gregory B. Graves

I don't think we've really seen any specific change in terms of the margin on some of those leading-edge products as much as the fact that we've just seen much higher volumes of those products in Q2 than we saw in Q1.

Jason Ursaner - CJS Securities, Inc.

So in terms of absorption, I mean, are those products...

Gregory B. Graves

Our absorption was much better. We still work on a number of those products. We're still working on getting them to what I call for RTM, or ready to manufacture, which is where we'll begin -- we should begin to see better margins on those products.

Jason Ursaner - CJS Securities, Inc.

Okay. And then for Bertrand, excluding the timing of Q3 versus Q4, versus next year, can you just -- I guess, go over broadly what's driving the expectations for this aggressive growth in capacity that you're going to need over the next couple of years, particularly if there is capacity in the legacy nodes and if PC sales and smartphone demand may be softening relative to some expectations, why you would still need the capacity growth and investments?

Bertrand Loy

Right. So Jason, I would like to characterize that in simple terms. But if you look at the various segments of the industry in terms of semiconductor makers and start with memory. I think, there is a clear case there for capacity to be constrained. And I think that we've all been looking at all of those players and we are -- at one level pleased with the fact that they've been a lot more disciplined in the ways of being timing. There are new capacity additions, but we all know that they will have, at some point in time, to act, and they will have to spend additional CapEx to add capacity. If you look on the logic side of the equation, I think that the CapEx decisions will be driven by different considerations, depending on the players. I think some device makers will need to add capacity because they are currently running actually at near-full capacity on their leading-edge nodes and fabs. And for some other players, I think their CapEx will be driven by the desire to remain in a leadership position in terms of process technology. They may not need the additional capacity but their decision to invest will be driven by more strategic consideration. So again, different reasons, I think, depending on industry participants. But again, I can spend a lot of time with all of those companies. I'm comfortable with the statement that CapEx should be up or could up most likely in 2014. And again, we're still left with the timing of that recovery and when actually we would start to see some pre-cursing signs.

Operator

We'll take our next question from Avinash Kant from D.A. Davidson & Co.

Avinash Kant - D.A. Davidson & Co., Research Division

So a few questions. You talked about the weakness in the bookings near-term. Now could you give us some idea about where have you seen some weakness coming from? Is it from the memory side or logic side or foundry side or is it all over it?

Bertrand Loy

Actually, we didn't say that. I think what we said is the opposite. We said that the bookings right now are at about the same level as what we've been experiencing in Q2. What we are seeing is -- what we are saying is that we are concerned that there may be a softening in our bookings and in our shipments as we get closer to the end of the quarter.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. So it's just an indication, you have not seen it in your bookings yet?

Bertrand Loy

No.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And in the guidance, did you talk about -- going forward in the guidance, Q3, what do you see from the non-semiconductor businesses and what do you see from the semiconductor side?

Gregory B. Graves

Can you repeat the question, Avinash?

Avinash Kant - D.A. Davidson & Co., Research Division

Like if I were to look at the semi- and the non-semi businesses separately, Q2 to Q3, what's the expectation?

Bertrand Loy

Well, I think, we kind of covered that question on the semi side of things. But on the non-semi side of things, I would say that we expect environment to be relatively flat. Remember that our non-semi business is really made of a number of markets that are all subject to their own microtrends, be it display, data storage, LED, PV, et cetera. And we do not expect any of those markets to meaningfully depart from what we saw in Q2.

Avinash Kant - D.A. Davidson & Co., Research Division

Right. And at one point, did I hear you right that you said capital spending for the second half could be weaker than the first half?

Bertrand Loy

Yes, we said that we expect actually a slowing down, of course, in CapEx for the second half of the year.

Avinash Kant - D.A. Davidson & Co., Research Division

So that's what -- so slowing down at current levels or the second half, you think will end up being weaker than the first half?

Bertrand Loy

What we said is that we expect Q3 to be weaker than Q2, and we said that we will not quantify or qualify Q4, it's too early. But all in all, we expect, again, the second half CapEx to be soft.

Avinash Kant - D.A. Davidson & Co., Research Division

Okay. And this is the revenues you're talking about, not the bookings?

Bertrand Loy

We were talking about our revenues.

Gregory B. Graves

And just to be clear, I mean, our revenues and bookings are not that much different. I mean, remember we're a turns business. So I mean, we typically book and ship within 30 days.

Operator

We'll take our next question from Dick Ryan from Dougherty.

Richard A. Ryan - Dougherty & Company LLC, Research Division

Greg, on your capital spending plans, you said $18 million in Q2 and if I recall, it was $16 million Q1. I thought you were looking at around $70 million for the year, but then you mentioned something about 2/3 of the way through the spending in -- for maybe the 2 new facilities. Can you just kind of clarify that for me?

Gregory B. Graves

Yes, for those 2 big projects, I mean we've essentially got about $30 million -- I mean, on a combined basis, we've got about $30 million in additional spending to go on those 2 large projects. Actually, a little bit less than $30 million. And that breaks down about 1/3 of that relates to the facility in New England and about -- excuse me, 2/3 relates to the facility in New England and about 1/3 relates to the facility in Colorado Springs. So I would expect that we'll spend -- of that remaining amount, we'll probably spend 80% of it this year and then we'll have -- with regard to the facility in Colorado Springs, we know that we're going to have some spill over into next year. But sitting here today, I would still hold with our thesis that we will be in that $65 million to $70 million range in spending for this year.

Richard A. Ryan - Dougherty & Company LLC, Research Division

Okay. Shifting over to the Specialty division, you talked about how your investments kind of impacting the margin there, setting up for some new product introductions. Can you give us a flavor for what you're looking at? Anything there to kind of move the needle potential?

Gregory B. Graves

So the 2 areas that we're investing in there is, one, is really in our silicon carbide technology, which is where kind of the next-generation of applications and the Poco business are within the semiconductor market. So we're spending money there. We're also spending money on some advanced applications in ion implant. And both of those are opportunities that we think over the next several years can have a meaningful impact on the top line of that business.

Operator

[Operator Instructions] We'll take our next question from Steve Schwartz from First Analysis.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Greg, just to carry that question from Dick over on the Specialty Materials. So where do you expect the margin in this business could go? Because you mean at this point, you're running $70 million in revenue and obviously, you're down 300 or 400 basis points from where you were last year at the same revenue level.

Gregory B. Graves

I mean, I would expect the operating margin in that business -- I mean, we've consistently said the $20 million in revenue is 20% operating margin business. I wouldn't change our tenor there. But what I would say is that we will be continuing to invest in that business over the next several quarters. So unlike revenue levels, I wouldn't expect to see a meaningful improvement. Now there are some things in mix that could change, it could improve -- that could change that. But I would say in general, if we continue to operate at the same mix that we're operating at now in the same revenue levels, we'd see similar margins. I mean, as I said in my prepared remarks, I mean, the margin decline there was actually planned for. I mean, we're making conscientious investments in that business.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Yes. I mean, they are already at the leading edge in terms of the type of carbon they produce. Can you, without bogging down our call here with the details, but can you, in 1 or 2 sentences, kind of talk about what else they're doing here for the silicon carbide or ion implant?

Bertrand Loy

So just that high level, I would say that on the chuck technology, we've been invited to participate in some development work to again, upgrade and update our chuck technology to meet some of the requirements of the next generation ion implanters. And we will actually permit the resources required for us to successfully deliver the right solution and the right technology for this application. And that's probably the primary investment that we're making into this division. And we're doing that again in the complex of a very soft business environment for ion implanter sales. So I think that's what puts a lot of drag on the overall margin level of this division. In terms of the silicon carbide initiative, as the industry transitions to the next nodes, they require actually more dense, more solid cleaner materials and we are also in the process of developing that. So those 3 investments actually, relatively significant, especially given the small scale of the overall division. I said that as Greg mentioned, we are making a conscious choice in deciding to invest into those opportunities. And I would tell you that the results that this division has delivered over the last couple of quarters are exactly in line with our expectations. So they are delivering, and they are executing actually very well. And the lower margin levels should have not be viewed as sharp executions in any shape or form.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Okay. Just as a follow-up on the Microenvironments business. Greg, you talk a little bit about the operating margin there sequentially. If you could step in to the way back machine and just talk a little bit on the year-over-year basis, I thought the second quarter of '12 was pretty strong for the legacy products and yet you had a higher margin on a year-over-year basis. You noted that the legacy products were strong in the second quarter of '13. Can you just talk a little bit about how you got that 130 basis point improvement year-over-year?

Gregory B. Graves

Right. What I would say with regard to the Microenvironment business is we've just -- we've been on a pretty consistent trend of improving execution over the last 6 or 8 quarters, and it's really not any -- I mean, it's not any one thing. I mean, particularly on the manufacturing side, though, that business continues to do quite well.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Okay. So it's manufacturing?

Gregory B. Graves

Well, yes. I mean, so they're doing well on the manufacturing side, improving their gross margins and unlike the CCS -- the CCS business, I mean we've made very significant investments in ER&D. The spending levels in that Microenvironment business have been pretty consistent for the last 2 to 3 years.

Bertrand Loy

And a lot of ingredients in terms of improving manufacturing technology of this division. And we have brought a lot more process stability to processes. I mean, remember that manufacturing processes in CCS and ME are very different. In ME, you're talking about a fairly capital intensive, automated type of process. And we are actually seeing some very nice improvements in terms again, of process stability, the adoption of statistical process, our controlled tools, which makes actually the environment a lot more sustainable and we are enjoying nice, greater yields than before.

Operator

We'll take our next question from Jairam Nathan with Sidoti.

Jairam Nathan - Sidoti & Company, LLC

Just most of my questions have been answered but a couple of ones on -- you indicated your ForEx impact on revenue. Is there an earnings impact, which you can -- is it material?

Gregory B. Graves

The earnings impact would not -- from an operating margin percentage perspective, would not be material.

Jairam Nathan - Sidoti & Company, LLC

Okay. And just on your tax rate, it looks like you had closer to -- over 30% in 2012, it seems to be coming down quite a bit. What's the reason behind that and is that kind of sustainable into 2014?

Gregory B. Graves

So I'm really pleased with where we are on the tax rate relative to 2012, and it's -- it really involves around 2 things: One, is the number of planning strategies that we've implemented over the last year or so that I don't really want to go into specific details on. The other thing would just be -- we've had very strong performance in 2 lower tax rate jurisdictions, and that's Malaysia, where we've had very good manufacturing performance. And Taiwan, where we've had good sales performance. And making higher profits in those lower rate jurisdictions has certainly been helpful.

Jairam Nathan - Sidoti & Company, LLC

Okay. And then lastly, on your -- on Jetalon, I'm kind of -- can you give us some more details on like -- is there like an addressable market that kind of opens up for Entegris. And how should -- and where would the revenue kind of be bracketed once the cash starts flowing in?

Bertrand Loy

Right. So again, what this technology is all about is it will allow us to measure critical fluids in the fabs realtime. So just think about the possibilities that this will open up in the -- so we would be selling to both fab operators as well as OEM and -- or semiconductor applications and we have a lot of evaluations happening right now. But this technology is likely the number of applications outside of semi and one of the particularly appealing area would be in life sciences. And we're working across the life sciences ecosystem with manufacturers of bioreactors and with Biotech companies directly to unlock that potential.

Operator

[Operator Instructions] We'll take our next question from Christian Schwab from Craig-Hallum Capital Group.

Christian D. Schwab - Craig-Hallum Capital Group LLC, Research Division

As we look at your semiconductor related sales, can you remind me what your mix is with the device makers between boundary, logic and memory?

Bertrand Loy

Well, Christian, we don't break that down. I think again, overall, the semiconductor business grew 10% to 11% sequentially. Feel pretty good about that. We don't break that down across the various types of fabs operating.

Operator

I would now like to turn the conference back over to Mr. Bertrand Loy for any closing remarks.

Bertrand Loy

Well, thank you again, everyone, for being on the call today. And we look forward to updating you on our Q3 performance soon. Thank you.

Operator

And this does conclude today's conference call. Thank you, all for your participation.

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Source: Entegris Inc (ENTG) Management Discusses Q2 2013 Results - Earnings Call Transcript
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