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Entegris, Inc. (NASDAQ:ENTG)

Q3 2010 Earnings Conference Call

October 26, 2010 10 AM ET

Executives

Steve Cantor – VP, Corporate Relations

Gideon Argov – President & CEO

Greg Graves – EVP & CFO

Bertrand Loy – EVP & COO

Analysts

Avinash Kant – D.A. Davidson & Co.

Kelly Anderson – Sidoti & Company

Wenge Yang – Citi

Krish Sankar – Bank of America Merrill Lynch

Christian Schwab – Craig-Hallum Capital Group

Steve Schwartz – First Analysis

Dick Ryan – Dougherty

Chris Sigala – B. Riley & Company

Presentation

Operator

Please standby, we’re about to begin. Good day, and welcome to the Entegris Third Quarter 2010 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.

Steve Cantor

Thank you, Ellen [ph] and good morning, and thank you all for joining our call. Earlier today, we announced the financial results for our third quarter ended October 2nd, 2010. You can access the 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 and Regulation G. You can find a reconciliation table in today’s press release as well as on our website.

On the call today are Gideon Argov, President and CEO; Bertrand Loy, Chief Operating Officer and Greg Graves, Chief Financial Officer. Gideon will now begin the call.

Gideon Argov

Good morning and thank you for joining our call this morning. We had an excellent quarter. We executed well against our strategist, achieving growth in both our core markets and our new markets initiatives.

We generated significantly higher margins and cash earnings and comparable revenues than in past cycles – our strong cash flow allowed us to improve the net cash position on our balance sheet.

Our sales of $178 million in the third quarter were higher than those experienced during the previous industry peak and only $3 million shy of a record high as a company. While we are clearly benefiting from continued strength in our core semiconductor markets, we’re also gaining momentum in a number of initiatives in the form share games and design ends of products for advanced technology nodes. We believe this will drive our growth above and beyond the industries cycles, we’ll talk more about this in a moment.

But first, we had excellent operating performance, growing our adjusted operating margins to 18% and our non-GAAP profits to the highest levels since our merger in 2005. These results reflect the leverage we have in the business and a leaner, more efficient organization that we have in place.

At the same time, we maintained our R&D spending and even stepped up investments in long-term initiatives in both our core semiconductor markets such as EUV and lithography technologies as well as the new adjacent markets.

Our cash flow continues to be very strong as we generated $45 million of cash from operations in the third quarter. With our debt fully paid off, this strong cash flow has enabled us to build a net cash position approaching a $100 million well ahead of our schedule.

Now, as we’ve discussed previously, we put in place $1 billion over the next three years. This growth has predicated on four drivers; growth in our industry and in our customers sub-30-nanometer process requirements for our contamination control solutions; share gains as we fight back to capture share in specific markets, share gains in new areas where we can use our breadth of a technology as competitive weapon to gain new business that we did not have before and finally growth in what we call new frontiers or adjacent markets such as photovoltaic and LED.

All of these in aggregate will enable us to outgrow the industry and we believe to achieve attractive returns to our investors. I’m pleased with our progress in the third quarter.

In terms of industry trends, our third quarter semiconductor related revenues grew 12% sequentially and accounted for 74% of total revenues. Underlying this was sustained capital spending by semiconductor fabs, which drew over capital-related sale for 39% of total sales, up slightly in proportion to the second quarter.

Customer fab utilization rates ticks down slightly from the not high 90% range in Q2, but remained very high in the advanced technology processes. This helps support sequential growth in our unit driven sales nearly 4%.

In our other markets, data storage products softened as this drive customers reported slower demand for 95 millimeter drive. Flat panel related sales were also lower in Q2 as there industry was, and we were very pleased with the performance of our LED as well as our solar related products.

Looking at the performance across each of our divisions, sales for Contamination Control Solutions or CCS, or 113 million or 9% over the prior quarter, this growth was driven by record quarters for our liquid filtration in gas purification we used as well as strong demand for our fluid handling products. This growth also reflected a new 11% increase in new product sales. The CCS division generated $31 million in operating income, which amounts to a 28% operating margin for the quarter for this business.

They also done [ph] Microenvironment division or ME were $47 million, especially flat after the surge and demand for legacy, 200 millimeter process products in the June quarter. We had a good quarter for 300 millimeter wafer handling products and we have a number of new fab projects underway in the industry, were well positioned to capture share.

The ME division continued to generate strong cash flow and solid margins. Operating income for this division excluding corporate cost was $12 million, which is 25% operating margin.

Sales in our specialty materials division grew 6% reflecting modest growth in the industrial side of this business, which continues to be impacted by trends in the general industrial economy will ride [ph]. However, our operating margin was improved in the specialty materials division to 13% in Q3 excluding cost spike continuing long-market developments in this business.

Now, that’s far into Q4. Demand trends for our customers remain stable even with the uncertain phase of economic recovery across the world. It’s been a good year for the industry, its fab have infested in capacity to support a healthy global appetite for electronics. As usual specific trends bear watching particularly for some memory makers.

However, one thing remains clear, our customers are continuing to invest in next generation technologies and Entegris is in excellent position to capitalize on those investments.

I’ll now turn it over to Greg Graves for commentary on the financials as well as our outlook for the fourth quarter.

Greg Graves

Thank you, Gideon. I’m very pleased with our financial results for the third quarter. Our sales remain strong throughout the quarter and our operating margin was at the high end of the target model.

Sales of 178 million were up 6% from Q2 and reflected solid growth in each region. In Asia, our largest region, sales grew 6% sequentially. The U.S. grew 7%, Japan was up 7% and Europe grew 5% versus Q2. Foreign exchange rates had a $3 million favorable impact and sales, largely related to the appreciation of the Yen.

The unit driven, capital driven split for our revenue was 61% unit driven, 39% capital driven. Our capital driven sales were up approximately 12% and our unit driven sales were up approximately 4%.

Third quarter gross margin of 45% was in line with our target model. The decrease from 46% in Q2 was primarily due to a shift in product mix.

Q3 operating expense of $48 million up slightly.

R&D expense was a record $11 million and reflects our continued commitment to invest in new applications and technologies. This investment allows us to keep our products in the leading edge and develop new products for both current and emerging markets.

Our adjusted operating margin was 18%. This level of performance continues to be significantly higher than what we would have achieved during the last industry cycle.

Other expense for the quarter was $1.6 million. This includes the impact of currency exchange rate changes on Yen denominated liabilities, a small amount of interest expense and amortization of bank fees related to our credit agreement.

Non-GAAP EPS, which excludes amortization, was $0.18 per share and GAAP EPS was $0.17.

We had another excellent quarter of cash flow performance generating $45 million in cash for operations.

Adjusted EBITDA for the quarter was $39 million. Regardless of how the industry cycle unfolds, we are on track to generate more than $140 million of EBITDA for the year.

Turning to the balance sheet, we ended the quarter $93 million net cash positive. This is an increase of $44 million over Q2. We have continued to see strong cash flow in Q4 and I am pleased to report that our cash balance today is in excess of $100 million, an amount we had initially hoped to achieve by year end.

We continue to remain focus on cash and working capital management. Even with increasing sales and orders, trends, we kept a tight hold on inventory in the quarter. Inventory returns improved slightly to 4.1 times.

Appreciation expenses $6.8 million in the quarter and CapEx was $4.5 million.

Looking forward, business trends continue to be favorable and we currently expect sales of $173 million to 183 million in Q4. At this revenue levels, our target model is for gross margins in the 45 to 46% range, operating margins of 17 to 19% and non-GAAP EPS of $0.17 to 0.19 per share.

To provide a little more granularity, in Q4 we expect manufacturing fixed cost of approximately $26 million and variable manufacturing cost of about 39 or 40% of revenue. We expect operating expenses of $48 to 50 million up slightly from Q3. The increase reflects project related cost for several key initiatives, but de minimis in fixed cost. The tax rate should again be in the 20% range.

In summary, we are executing well against their growth strategies. We see room for growth in our core markets and are achieving design wins both with device manufactures and OEMs to position us to continue to gain share.

Our fight back initiatives have good momentum and we have good reason to be optimistic about our new market initiatives. We are generating significantly higher in cash earnings on comparable revenues and in past cycles, and finally, we are generating substantial free cash flow, our cash position continues to grow and we are essentially debt free.

In short, we are confident that the steps we are taking to drive growth and ensure solid execution will continue to build value for our shareholders, value far beyond what is reflected in our current share price.

With that, we’ll now take your questions.

Question-and-Answer Session

Operator

Thank you, Mr. Graves. (Operator Instructions) And our first question comes from Avinash Kant from D.A. Davidson & Company. Go ahead, sir.

Avinash Kant – D.A. Davidson & Co.

Good morning. Gideon and Greg.

Gideon Argov

Good morning, Avinash.

Greg Graves

How are you?

Avinash Kant – D.A. Davidson & Co.

Very good, very good. The questions regarding Q4, in the Q4 revenue guidance that you are giving us, what kind of mixed assumptions you have from unit and CapEx to run businesses?

Greg Graves

We’d expect the unit and CapEx to be pretty similar to what they were in Q3 in Avinash. So, in Q3, it was 61% unit driven, 39% capital driven.

Avinash Kant – D.A. Davidson & Co.

Should we expect a similar mix from the semi and non-semi side 74, 26?

Greg Graves

I would expect that mix to be relatively comparable, yes.

Avinash Kant – D.A. Davidson & Co.

Right. And you talked a little about your fight back initiatives and share gain initiatives. Could you gives us some idea in terms of the magnitude of traction that you’ve seen, like in terms of share gains, where are you compared to the last few quarters or in terms of absolute business from some of those products, how much are they generating right now versus a few quarters ago.

Gideon Argov

Well, Avinash, we don’t break these individually on a quarterly basis, but I will tell you that year-to-date our fight back initiatives are up 161% versus the company being up 101%. So that gives you some idea of how successful we’re being in the fight back initiatives.

Avinash Kant – D.A. Davidson & Co.

Got it.

Gideon Argov

So, good traction, growing significantly faster than the overall business.

Avinash Kant – D.A. Davidson & Co.

And could you give similar numbers for maybe the share gain initiatives that you have?

Gideon Argov

The share gain initiatives that we have really are a result of the fact that we did not reduce our investment in advance technologies and those during the downturn and that has resulted in winnings of print position or being on a number of new tools that are now ramping up.

Now, the best example I can give you is in our CCS business, a lot of the growth of the capital side of the business which was significant this last quarter relates to fluid handling platforms that are new for us and that are part of what you’re describing as share gain. I would also tell you that many of the [inaudible] opportunities we’re looking at over the next two to four quarters related to both fab expansion or fab improvement as well as new fabs, is really related to platforms to incorporate new technology that we invested in during the downturn, for example, our barrier materials and others.

Avinash Kant – D.A. Davidson & Co.

Okay, perfect. Another question on CapEx and depreciation, I am just double checking the numbers. CapEx was 4.5 and depreciation 4.3, am I right there?

Greg Graves

Depreciation was 6.8.

Avinash Kant – D.A. Davidson & Co.

6.8 and how should we model it for the rest of the year and maybe for the next year?

Greg Graves

I think for the next year, I would model depreciation relatively flat. Our amortization, which was 2.8 million this quarter, will track down slightly as we move into next year.

Avinash Kant – D.A. Davidson & Co.

And CapEx for the next year?

Greg Graves

CapEx for the next year will be up slightly from where we are this year and we’ll give some more specific guidance on that in our year end call. Today, we’re just finalizing our budgets and looking at a number of key initiatives, but we’ll give some granularity on that at year end.

Avinash Kant – D.A. Davidson & Co.

And final question, if you could talk a little bit about the LED and solar businesses that you have been talking about lately, how big it is and where is it going.

Bertrand Loy

Hello, Avinash. This is Bertrand. Now, we won’t quantify those markets for you. We have not done that. But in aggregate, those two markets were growing very nicely quarter-over-quarter and they’re starting to represent a greater portion of our total revenues. So, we like to momentum that we see those applications and those markets and we are continuing to invest in derivative technology to better meet the contamination challenges that [inaudible].

Avinash Kant – D.A. Davidson & Co.

Okay, thank you.

Bertrand Loy

But we believe we have very relevant portfolio technologies for those industries now.

Avinash Kant – D.A. Davidson & Co.

Thank you so much, Bertrand. Thanks so much.

Operator

Our next question comes from Kelly Anderson from Sidoti & Company. Go ahead, please.

Kelly Anderson – Sidoti & Company

Good morning. Thanks for taking my questions and congratulations on a strong results here. First off, I just wanted to ask about the specialty materials group. Revenue and the segment actually, it seemed to be very, very strong this quarter. Just wondering if this is all related to industrial growth or whether there were any significant designs once that hit during the quarter that you’d be willing to share with us.

Gideon Argov

Well, the sales of coding products …

Kelly Anderson – Sidoti & Company

Yes.

Gideon Argov

Within specialty materials were record sales for the quarter and that was a very good quarter. In fact, we had both sort of a trifecta. We had a record quarter for that business, we had a record month for that business and we had a record date for that business. It did very well and there are certainly design wins that are in there.

Sales of graphite products did grow modestly in some markets more than others, but we think we’re getting some decent traction in some of those as well. But coding really was outstanding performer there, Kelly.

Kelly Anderson – Sidoti & Company

Okay, great. And just a follow on to that, if you look at the pipeline of new opportunity from that business with the design wins, would you expect to see continued growth in that segment or is it going to be lumpy going forward.

Gideon Argov

It’s not going to be lumpy in the same way that an OEM business, school business is lumpy. But it is a business that will, like much of our business have growth rates that are not exactly the same in every quarter. I would expect this business to grow demonstrably over the next three to four quarters and as it does, it will grow into a level of profitability that will be commensurate with the other businesses that we have.

Kelly Anderson – Sidoti & Company

Okay, great. That’s very helpful. And then, just also touching on the LED and solar initiatives there, can you give us any milestones in that area? Are there any recent or expected product introductions that will help drive additional growth in the business and just given the recent concerns about equipment sales to the LED market, can you talk about how you feel your positioned there in light of those concerns.

Bertrand Loy

Right. So, this is Bertrand. I would only say that we have kept sort of product introductions that we will be in a better position to describe and discuss as we release our Q4 earnings. But let me put it this way, I think that what we are seeing in both solar and LED is a conversion of very [inaudible] factors, first. One, both those industries are realizing that there is a direct correlation between their years, the quality of their products and the contamination challenges that they are facing, that’s number one.

Number two, both of those industries are also working on automating their processes and that could also represent a whole new series of opportunities for us, and our teams have been working on those two funds with a fairly high degree of success, so some of those opportunities are already translating into revenues today. But some of those opportunities, some of those other opportunities may only translate into revenues in the next 12 to 18 months.

Kelly Anderson – Sidoti & Company

Fantastic. Thanks for taking my questions.

Operator

Our next question comes from Tim Arcuri from Citi. Go ahead.

Wenge Yang – Citi

Hi, this is Wenge Yang for Tim. A couple of questions. First of all, what have you seen in terms of wafer starts and utilization rates for Q4 and maybe a little bit beyond Q1.

Gideon Argov

Wenge, your question is about wafer start?

Wenge Yang – Citi

Yes.

Gideon Argov

The trend information?

Wenge Yang – Citi

Yes. That’s correct.

Gideon Argov

So, Wenge, first of all, we don’t forecast wafer starts as you know. I would say we see continued high utilization at the advance nodes that first of all the case. In some cases, some perturbations around that, potentially in some cases a little bit lower utilization, particularly the less advance nodes, the more mature parts of the business. Nothing that I would describe as a dramatic deviation from what we’ve seen sort of over the past quarter.

Wenge Yang – Citi

Okay. So, your guidance indicates flat kind of revenue and you just mentioned you will have similar mix. So, from your unit kind of revenue, you don’t see any decline. Does that mean you are shifting more towards leading edge kind of technology node and also any indication that you may gain from shares despite overall utilization may come down a little bit?

Bertrand Loy

Wenge, this is Bertrand. I would only tell you that as of right now as we get into Q4, the velocity of our in the driven business is very strong and we are not seeing any sign of weakness in terms of our in the driven revenues. You’re right that the biggest growth rates I’ve seen in product lines that are used in the leading edge technologies in particular I can give you the example of our Torrento filter which is used in wet etch and clean applications for some of the most demanding chemistries used. And that particular product line enjoyed a 30% growth rate quarter-over-quarter in Q3 and we expect this product line to continue to do really well in Q4.

Wenge Yang – Citi

Okay. In terms of OpEx you did a great job in controlling OpEx despite on the revenue growth. Is this sustainable next year and what kind of OpEx trend you’re seeing for 2011.

Greg Graves

So I would say the OpEx trend is sustainable in part because this year recall, every quarter we’ve got approximately $3 million of what I’ll call excess incentive comp above targets. Next year we would expect to operate closer to target with regard to variable compensation. And we have the organization really focused on managing to these target operating models and focus on variable costs, not adding much in the way of fixed costs so I would not expect to see OpEx move up as we move into next year.

I mean there is a number of major projects, we’ve got an SAP upgrade next year, we’re doing some things around our supply chain that are one off costs but as we look at kind of the base cost moving into next year, we should be pretty constant.

Wenge Yang – Citi

Great, just a couple more, one is regarding cash flows – my models say that you’re going to have about $150 million cash by the end of the year, that’s quite a difference compared to a year ago. So with more cash flows coming from operations, you ever think about what to do with those cash, are there any plans in terms of buybacks or other usage of the new cash coming from operation?

Gideon Argov

At this point (inaudible) we are happy with the cash flow. And we will continue to, at this point, put that on the balance sheet. If you look at the level of cash that we have relative to any group of peers, that are – the percentage of cash relative to our revenue level is still lower than we wanted to be. And so that’s our view, call it conservative view if you wish but that’s what we’re doing at the current time.

Wenge Yang – Citi

Okay, just allow me one last question. Yesterday, one of your peers in the subsystem space discussed some of the pushouts by their key customers in the end of Q3 that caused some miss on the revenues. So, have you seen similar kind of pushouts from your key customers in a CapEx side and what’s your latest discussion with incomes of Q4 push outs or delays in shipments?

Greg Graves

Yes we’ve seen some level of pushouts but in grand schema things it was not very meaningful to the overall trend of our business. And again so we’ve not seen cancellations, we’ve seen some slightly delayed projects.

Wenge Yang – Citi

Okay thanks.

Gideon Argov

I mean we saw a very strong revenue growth to the OEMs during the quarter.

Wenge Yang – Citi

And any kind of last minute weakness that is reported by one of your peer yesterday?

Bertrand Loy

No.

Gideon Argov

No, our business actually continued to strengthen through the quarter.

Operator

Our next question comes from Krish Sankar from Bank of America Merrill Lynch.

Krish Sankar – Bank of America Merrill Lynch

Yes hi, I have a couple of questions. It looks like your CCS revenue in Q3 was pretty strong. Should we expect the same level to continue into Q4?

Gideon Argov

Our CCS business grew 9%, both our liquid filtration and gas micro contamination businesses reached record levels and as Bertrand, was saying I think we’ll continue to do very well against our competition and that business is running on all cylinders, Bertrand?

Bertrand Loy

Again, we posted all-time records for those two big components of the CCS gasification and liquid filtration. Those markets – those product lines enjoy great solid business trends in both semiconductor and LED markets for the cases of gasification systems. And again I don’t expect any significant change in those trends going into Q4.

Krish Sankar – Bank of America Merrill Lynch

Got it and your CapEx sales has been pretty much like tracking in line with the OEM shipments trends, in a scenario where like what (inaudible) said the first half of 2011 being flat for shipment. What does it mean for Entegris’s CapEx driven sales business. Do you think you can do better than that, and if so why?

Gideon Argov

Well we’ve done better so far this year, I mean you say we’re tracking but our CapEx sales for the year are up nine months over nine months are up 177%. I think that’s probably better than wafer front-end equipment.

We do – I think as you pointed out I mean there is an early cycle element to that but, I don’t see any reason to think that we wouldn’t continue to track in part because we continue to do very well on the share front. We continue to do very well with regard to our fight back initiatives one of which is capital driven.

Krish Sankar – Bank of America Merrill Lynch

And can you tell us where you’re wafer shipper market share is today? I remember like six months ago, at the Analyst Day, it traded under 10% and the goal was to get it to 30%. Where is it today?

Bertrand Loy

So the market share is about still around 10% as of right now. We were particularly pleased this quarter with some new wins in terms of shipping range but we also had some headwinds to some of our largest Iran, Taiwanese customers were operating at reduced capacity utilization in Q3 as they were transitioning to 50 nanometer processors. And so it did hurt us a little bit during the quarter, but as we get into Q4, I think we are already well positioned for growth.

Krish Sankar – Bank of America Merrill Lynch

And in the past – Greg you said that, you know, net cash position of $100 million is when you’re going to start looking at like other use of cash, is it still the idea or do you want to actually increase that net cash balance to like more than $100 million at this point.

Greg Graves

Today Krish, we’re very comfortable continuing to increase that cash balance and we’ve done some work recently and compared ourselves to some of the comparable companies. And we’re still while we feel good about our balance sheet I mean it’s still not really in line with the other peers in the industry. So today, we’re going to continue to take a conservative approach and build cash.

Krish Sankar – Bank of America Merrill Lynch

So where do you think that cash has to be before you get more – before you increase the appetite for other things, is it going to be like $125 million $150 million or more than that?

Greg Graves

Today, I mean if you pin me on a number I’d say $150 million but that doesn’t mean the quarter after we hit a 150 that you can expect any kind of a magical change but I would like to see us drive towards $150 million in cash.

Krish Sankar – Bank of America Merrill Lynch

Got it. And then final question. What is – I didn’t get it, what is the breakdown of sales by geography?

Greg Graves

The breakdown by geography, I’ve got that right in front of me was 39% Asia, 18% Japan, 28% North America and 14% Europe.

Krish Sankar – Bank of America Merrill Lynch

Got it, thanks Greg.

Operator

(Operator Instructions). Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Go ahead please.

Christian Schwab – Craig-Hallum Capital Group

Great, thanks for taking my question. Actually, all my questions have been answered but I would like to congratulate you as a management team returning to precise guidance for the next quarter. That’s it, thanks.

Gideon Argov

we were thinking of you, Christian.

Operator

Our next question comes from Steve Schwartz with First Analysis. Go ahead.

Steve Schwartz – First Analysis

Hey good morning guys. Let me echo Christian’s comments, it’s a nice quarter. I guess, the first question I have is on incremental gross profit. It looks like it was about 30% and through most of this recovery you guys were running at 55% or higher. Greg, can you give us any color on what the higher cost might have been there?

Greg Graves

First, I would say we continue to operate our manufacturing facilities at very efficient levels. We did have a shift in mix for the quarter, it’s not a shift that I would expect to be permanent that had an impact on our revenue through the quarters. The last piece is that as we came into Q3 we did not – the value of our inventory created in Q2 was a little bit higher than what we brought in from Q1 into Q2. So I would not expect to see the same type of margins on the same type of revenue next quarter as we saw last quarter, I mean the margins should be stronger.

Steve Schwartz – First Analysis

Should be stronger, okay. You had this gain on the sale of equity investment. Can you just tell me what line that falls under?

Greg Graves

It’s in the other income.

Steve Schwartz – First Analysis

In other income.

Greg Graves

And that – I talked about three items that were expenses, I should have mentioned, the 500,000 net against those.

Steve Schwartz – First Analysis

Okay. You did, Greg address the higher spending in ER&D. It’s about maybe $0.01 a share this quarter versus in the quarters in the first half of the year. Do you expect that higher level at a 11.5 to continue?

Greg Graves

With regard to operating expense, I mean we can expect the operating expenses to continue to move at a pretty consistent level to where they are similar to mix what we have today. I mean if you look at most of the investments that we’ve made as we’ve come off of the bottom, I mean all of sort of what I would call kind of the permanent headcount adds or the vast majority have been on the ER&D line.

Now, we do have some tailwinds on the operating expenses as we come into next year. This year we do have very significant compensation above the sort of target model, variable comp of about $3 million a quarter. So I mean I feel very good about the fixed component of OpEx and our ability to manage that as we move into next year.

Steve Schwartz – First Analysis

Okay. And then your credit facility, the current one expires in November, right of next year?

Greg Graves

Yes.

Steve Schwartz – First Analysis

Okay, so you’ve got – and so if you could just give us some color for you sitting in your chair, what – how does that affect in your approach to managing the balance sheet and resetting that facility?

Greg Graves

That really doesn’t – given our cash position that really doesn’t have any impact on my thinking. I mean at some point we’ll need to put a new facility in place, it’ll probably be a relatively small facility. But we need to keep a facility, because we do a lot of things, letters of credit, and we need a facility to back those up.

But from a meeting $60 million of additional liquidity and a facility which is what we have today, that’s not something that we’re going to need going forward. So I would expect sometime in the first half of next year we’ll replace this facility like I said with a smaller facility.

Steve Schwartz – First Analysis

Okay. And then just one last one, I’m going to lob this out there for you guys. You’ve got a strengthening balance sheet, as previous analysts highlighted, you’re generating $30 million to $40 million in free cash a quarter. Balance sheets out there in the industry generally are strong, debt markets are getting better. Are you guys are take-out candidate? Do you think about that, do you talk about that? Can you give us any color on your thoughts there?

Gideon Argov

Yes, well, we don’t – we really don’t think we talk about that. We think we have a business that’s undervalued and Greg mentioned that in his talk today. We think the best way to get that business valued properly is to keep doing exactly what we’re doing, because these things are self-correcting in the end. So we don’t spend lot of time either worrying about this or thinking about it for sure.

Operator

Our next question comes from Dick Ryan from Dougherty. Go ahead, please.

Dick Ryan – Dougherty

Thanks for taking my question. So Greg, I think you mentioned your trends in Q3 you strengthen throughout the quarter, is that correct?

Greg Graves

That’s correct.

Dick Ryan – Dougherty

Okay. And going now with fourth quarter month in, how should we – how should we look at the trends in Q4, is there any headwinds there that you’re seeing or how should that trend?

Greg Graves

I think we saw them in our business continues to be quite firm and we’ve laid our pretty specific guidance such as we really expect the quarter to be flattish plus or minus $5 million.

Dick Ryan – Dougherty

Okay, okay, thanks. Gideon on the talk – on the discussion of specialty materials, I didn’t catch your profit growth. I thought you said something that you could expect to see that the profit expectations come up to the other two segments, are you kind of insinuating low-to-mid 20% range?

Gideon Argov

I think you need to think Dick of that that is a business with operating margins moving into the high teens. I mean we think at $25 million in revenue a quarter, that’s a 20% operating margin business.

Dick Ryan – Dougherty

At $25 million what?

Gideon Argov

$25 million in quarterly revenue, that’s a 20% operating margin business.

Dick Ryan – Dougherty

And on micro environments, is there – can those margins approach contamination margins?

Gideon Argov

Actually we’ve had some months within the quarters where they have. I mean the micro environment business is operating very well. Clearly as we see volumes are in the 300 millimeter shipper and we see additional volumes on the – in the FOUP. We could see some improvement in those margins. But today, if somebody said to me, I expect that the CCS business will continue to be our most profitable business.

Dick Ryan – Dougherty

Great, thanks guys. Good quarter.

Operator

(Operator Instructions) Our next question comes from Chris Sigala with B. Riley & Company.

Chris Sigala – B. Riley & Company

yes, good morning. This is Chris Sigala in for Mike Crawford. Thanks for taking my call. Congratulations on the quarter, just wanted to kind of touch on the fact that your business appears to be pretty strong right now. My question is what sort of things can you point to now and maybe provide some color on that would signal sort of a change in the business from the strength that you’re seeing now to potential softening?

Operator

Ladies and gentlemen, please standby. Ladies and gentlemen again please standby, we will resume momentarily. Thank you for your patience. Ladies and gentlemen again thank you for your patience. We will resume momentarily. Thank you. Okay, Mr. Cantor I’m showing the next question comes from Chris Sigala with B. Riley & Company. Go ahead sir.

Steve Cantor

Yes, Chris. Hi Chris, just want to apologize apparently we had some technical problems here, but please go ahead with your question.

Chris Sigala – B. Riley & Company

Yes, thanks. I’m just calling in for Mike Crawford. Just wanted to say congratulations on the quarter. The business appears to continue to be strong. My question is what sort of signs can you point to and hopefully provide some color on that would signal a change in the business from the strength your seeing now to some potential softening?

Gideon Argov

Hi it’s Gideon Argov. I think we’ve been pretty clear throughout this call that our business continues to be fairly robust. We’ve guided up or down 5% for the next quarter and we have even said that the fourth quarter which is now ongoing, we don’t see any signs of a self-dramatic deceleration of the business. That will be my answer.

Chris Sigala – B. Riley & Company

I wasn’t that there would be forthcoming but if there is any sort of signs that you can point to further out that would tell you that there is some potential softening?

Gideon Argov

I don’t see those signs, I mean typically what you’re talking about is to cancellation of orders and we’ve said we don’t see those cancellations.

Chris Sigala – B. Riley & Company

Okay, thanks a lot.

Operator

This concludes today’s question and answer session. At this time I would like to turn the conference back over to Gideon Argov for additional comments.

Gideon Argov

Thank you very much for joining our call. We look forward to updating you in the future.

Operator

That concludes today’s conference call. Thank you for your participation.

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