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Executives

Steve Cantor - Vice President of Corporate Relations

Gideon Argov - Chief Executive Officer, President and Director

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

Bertrand Loy - Chief Operating Officer and Executive Vice President

Analysts

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

Terence R. Whalen - Citigroup Inc, Research Division

Krish Sankar - BofA Merrill Lynch, Research Division

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

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

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

Jairam Nathan - Sidoti & Company, LLC

Steven Schwartz - First Analysis Securities Corporation, Research Division

Jason Ursaner - CJS Securities, Inc.

Entegris (ENTG) Q1 2012 Earnings Call April 19, 2012 10:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the Entegris First Quarter 2012 Earnings Release Conference Call. Just a reminder, today's conference is being recorded. At this time, for opening remarks and introduction, I'll turn the conference over to Mr. Steve Cantor, Vice-President of Corporate Relations. Please go ahead, sir.

Steve Cantor

Good morning, everyone. Thank you, all, for joining our call. Earlier today, we announced the financial results for our first quarter ended March 31, 2012. 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 Gideon Argov, President and CEO; Bertrand Loy, Chief Operating Officer; and Greg Graves, Chief Financial Officer.

Before turning the call to Gideon, I do want to let everyone know that Entegris will be holding an Analyst Day on May 23 in New York City. You can contact me for more information about that event.

And with that, Gideon will now begin the call.

Gideon Argov

Thank you, Steve, and good morning, and thank you for joining the call. We had a strong start to the year and have a number of reasons to be pleased with our performance in the first quarter. We achieved sales growth of 7% for the fourth quarter of 2011 and continue to see strong demand for our products used to support leading-edge processes. We executed well, and achieved solid financial results, improved our adjusted operating margins to 16.7% and recorded cash earnings per share of $0.14. And in addition, we made investments to extend our technological leadership for years to come. I have more to say about this in a moment.

Looking at our revenue trends in the quarter. We continue to benefit from technology-driven spending by leading semiconductor device makers and ramping production of 28-nanometer fabs. We believe utilization rate of 2X nodes for many of our key fab customers with 90% to 100%. While on legacy side of the industry, utilization rates range between 50% and 70%. Overall, utilization wafer starts in the industry appear to be down in the quarter, according to most industry analysts.

We clearly benefit from the industry's adoption of advanced processes and we've seen broad-based demand increase in the quarter for a number of filtration and fluid handling products for wet etch and clean application and for our advance FOUPs for wafer handling. These products have proven themselves to be essential to address the yield issues typically come with implementing new and highly complex processes. Although we're addressing this advanced contamination control needs with both unit driven and capital driven products, our mix of sales of 65% unit driven and 35% capital driven did shift slightly to the unit side.

Unit driven sales were up 8% boosted by double-digit growth of liquid filters. Sales of other unit driven products, such as electrostatic shocks for both semiconductors, as well as solar ion implant tools remained strong. CapEx related sales grew 4% due to continuing firm demand for advanced 300 millimeter FOUPs and sales of fluid handling components for new tools for fab construction projects.

Looking at our business by market. Our semiconductor-related sales represented 74% of total, an increase of 7% from the fourth quarter. As I've just described, the increase was largely due to demand for advanced products. Revenue in our markets outside semiconductor represented 26% of our total and increased 6% from the fourth quarter. The picture in these markets is more uneven. Several of these adjacent markets, such as flat-panel display, remain weak while others, such as LED and Solar, are still digesting excess capacity built in 2011. But even with these trends, our non-SEMI business has performed relatively well.

Outlook for 2012 certainly appears brighter than it did 6 months ago. While the industry and economic forecast second half of this year are still unclear and business is off to a strong start with momentum for further growth in the second quarter. Looking beyond 2012, we feel confident about our prospects. We have a full pipeline of opportunities. Many of these opportunities relate to helping our customers stay on their own technology roadmaps for 1x and even single-digit technology nodes. The contamination issues of these nodes are requiring us to work either more closely with industry leaders and to push the boundaries of physics.

In this regard we made progress in several strategic initiatives. First, advanced filtration coatings we announced recently the creation of our i2M Center for Advanced Materials Science, new R&D and manufacturing center we built in Massachusetts. This facility will house our existing membrane manufacturing, portions of our membrane development and our coatings manufacturing, as well as R&D. Putting these technologies under one roof will create one of the most advanced nanotech centers in the world and will enable us to continue to create differentiated, high-value, unit driven products for the most advanced and demanding semiconductor application.

Second, in 450-millimeter we continue to work with the growing number of wafer growers, toolmakers and device manufacturers under 450-millimeter projects. While the industry still had lots to do to put into place production ready 450-millimeter fabs, our wafer handling and shipping products are already in use today to support developing projects. In fact this quarter, we produced our first quantities of molded products, a key milestone for us in this area.

And third, we're also continuing to support the development of EUV, both with advanced filtration as well as with solutions that protect EUV reticles during storage and handling. In short, we are very excited about our future. Greg, over to you.

Gregory Graves

Thank you, Gideon. We are very pleased with our first quarter results. We continue to execute very well as we achieved an operating margin of 16.7% cash EPS of $0.14. The Contamination Control Solutions division, or CCS, had another strong quarter. CCS sales grew 10% sequentially to $116 million and the operating margin improved to 28% from 25% in Q4. Sales for the Microenvironment division grew 2% sequentially to $41 million. ME's operating margin was 14% compared to 16% in Q4. For the Specialty Materials division, sales were $19 million, up 2% from Q4. Specialty materials achieved a record operating margin of 24% due in large part to favorable mix in the quarter.

First quarter gross margin improved 230 basis points sequentially to 43.5% due to higher factory utilization and improved product mix. Inventory increased by $7 million in the quarter as we increased our manufacturing outputs for certain products in anticipation of higher demand. Operating expenses for Q1 were $47 million. The sequential increase reflects more normalized levels as Q4 was favorably impacted by lower variable compensation expense. R&D spending was $12 million driven by spending in advanced wafer handling, leading edge filtration initiatives and lithography application.

Our tax rate for the quarter of 34% was significantly higher than Q4, which had included a onetime benefit. Given our anticipated geographic distribution of income, we expect a similar tax rate for the balance of 2012. Q1 cash EPS was $0.14 per share, which excludes amortization expense.

Moving to the balance sheet. Cash at the end of Q1 was $267 million, a decline of $6 million from Q4. This is due to 3 factors: an increase in working capital to support higher revenue and production, capital investments and the annual payout of variable compensation earned in 2011. As we indicated in our fourth quarter call, we are making a number of strategic investments in our leading-edge technologies, including equipment and tooling to manufacture 450-millimeter wafer handling products and the establishment of the i2M Center for membranes and coating, which Gideon spoke about. Given these significant one-time investments, we anticipate CapEx will be approximately $70 million in 2012. The majority of this spending relates to the i2M facility.

We did not purchase any stock in the quarter. Depreciation expense was $6.5 million in Q1 and CapEx was $10.6 million, $4.5 million higher than Q4 spending. For the second quarter, we expect sales to be up 3% to 9% and non-GAAP EPS to be $0.15 to $0.17.

In summary, we are very pleased with our Q1 performance. Demand trends remain positive points to solid growth in Q2. And we are making critical new investments in support of our strategic growth objectives that will extend our leadership in advanced technology.

Before we open up for questions, I also want to remind everyone about our Analyst Day on May 23, in New York City. Please contact Steve Cantor for more information about that event.

With that, we'll now take your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Patrick Ho with Stifel, Nicolaus.

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

Gideon, can you give a quick update in terms of how you see this unit based recovery and whether you're going to start seeing a broader mix of different technology nodes particularly in the June quarter and even beyond?

Gideon Argov

So as you know, we have limited visibility because we're a turns business for the most part. What we have seen is -- we've seen the advanced nodes operating in very high capacity and we've also commented that, that serve continued and bodes well for the second quarter. We've also said that the more mature nodes are operating considerably lower capacity and frankly 50% to 70% is quite low so I'm not sure I'd expect that to go lower. Having said that we have limited visibility beyond the second quarter. So I think our guidance is positive for the second quarter and beyond that, it's not easy to say in this environment.

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

Okay, fair enough. Maybe a question for Greg, in terms of the business model, obviously, you had a nice step up with margins due to utilization and product mix. In the near term, as revenues continue to grow, what's going to be the biggest lever for margins, say, at least on the June quarter and possibly beyond?

Gregory Graves

So as you look at towards the June quarter, Patrick, I'm expecting gross margins to be flat to slightly positive so I wouldn't expect to see us build for the kind of inventory in Q2 that we built in Q1. So that you won't see a lot of leverage on the gross margin line, you will see some leverage on the operating line. Our guidance numbers, the EPS guidance we provided assumed an operating margin in kind of a 17% range. 17-plus.

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

Great. And maybe big picture with the new nano center that you're opening. Obviously, that's still a little bit well beyond in the future. But Gideon can you give a little bit of color of what type of opportunities you'll be looking at once you get that up and running?

Gideon Argov

So we're tremendously excited about this because one of the things you saw in the last quarter is how leveraged we are to the advanced nodes, it's not just 1 business unit, it's quite a few of them, it's all of them frankly, everyone of our businesses. But this is going to be a center that actually combines several existing facilities that we're taking advantage of some leases that are expiring, we're doing some consolidation and actually creating a more efficient working environment. But frankly, the most important reason for doing this where we did it is to make sure that we attract the best and the brightest. We are locating this in an area where there are lots of the right people that are coming out of the right universities and this is going to be a facility that will, I think, allow us to stay on the leading edge of our own technologies, filtration and in coatings. Those are 2 major areas that are going to be involved in the center. And we're very excited about what this will mean for our ability to continue to innovate over, not just the next couple of years, but into over the next 5 to 10 years.

Bertrand Loy

Patrick, if I may just add, I would just say that for us, the advanced nodes will present a very significant opportunity for growth but at the same time we all recognize that the contamination challenges the industry would have to deal are becoming increasingly complex. So very important for us, in order to continue to stay on, to maintain our leadership position that we invest and that's what we're doing. You remember killer defects can be created by a number of new types of contaminants. The industry is also contending with the smaller size contaminants and lower concentrations when those contaminants are related. So again those are challenges are very complex, which is really great news for us and we really want to be sure to invest in order to provide the right solutions to our customers.

Operator

And we'll take our next question from Terence Whalen with Citi.

Terence R. Whalen - Citigroup Inc, Research Division

If I could ask, to start off with a higher level question, can you give us an indication of how your confidence regarding growth prospects for the second half has developed over the past several months? I understand that the turns business but given your observations of what's occurring in terms of similar capacity shortages, and in terms of some of the second half activity, just wanted to get your insight as to what you're seeing develop there?

Gideon Argov

Terrence, again, I would say this: the capacity that's being put in by IDMs, which is driving the advanced nodes work that us, that we are doing and other companies are doing, I mean these are not decisions that are being made lightly by these companies. Typically, they're decisions that involve looking at their own futures asking the question that you're asking. So I would be personally surprised if they were not based on a assessment that there is strong continuing demand at the advanced nodes and fundamentally driven by the devices that we are all using and that a large and burgeoning middle class around the world is using, whether it's tablets or internet-enabled communication devices or benefiting from the cloud and the infrastructure that's being created around the world. These are the things that are driving business investment in this area. So these are not short term decisions. My sense is that a lot of thought has gone into that, the capacity allocation and capital allocation decision on the part of these companies, and we're just happy to be a part of what they're doing and indispensable to what they're doing frankly and helping them succeed.

Terence R. Whalen - Citigroup Inc, Research Division

Okay, terrific. And then perhaps, if I could ask a couple other questions regarding the income statement and also the cash flow. It seems like if I look at the gross margin level here in your 43.5%, we're a couple of points below where we were in 2010 at similar revenue levels with similar revenue mix. Can you help me understand sort of cycle-to-cycle here what has been the puts and takes with gross margin to lead it to be a little bit lower, is it regarding in terms of the product mix or rather just customer concentration, if you could help me understand that?

Gregory Graves

I'll take that kind of in reverse order. I mean, no question, customer concentration plays a role but I would think the primary issue on gross margin, Terrence, would be if you go back to the first and second quarter of 2010, we had very good revenue from some old legacy 200-millimeter products, processed products that people were putting into fabs that had very high margins. That really boosted our ME margins, our Microenvironment business's margins in the first half of 2010. As that business has fallen off, we've seen a decline in the margins primarily in the Microenvironment business. So that comparison was when you go back probably to the second quarter of 2010 is primarily driven by that fact. When you look at our fastest growing business, our CCS business, and we continue to see very strong margin performance in that business, as well as in the Specialty Materials business.

Terence R. Whalen - Citigroup Inc, Research Division

Okay that's very helpful. And then my final question is regarding the cash flow statement. We obviously, saw a draw of working capital that seems to be a pretty seasonal pattern. What are your expectations for working capital going forward, and also if you can just comment about operating cash flow or free cash flow for the year given that it's a large CapEx investment here for you?

Gregory Graves

Okay. So as it relates to the year, I'm not going to comment on that guidance kind of a quarter out. As it relates to the next quarter, I would not expect to see nearly as much cash consumption as it relates to working capital. Our receivables were up very significantly, that reflects real strength in the business. In March, and our inventory was up pretty significantly as well, I'd expect that to abate as we move into Q2 in terms of the growth. The other thing that really big negative impact on Q1 cash flow is payouts to variable compensation, which amounts to high teens, millions payments that we made in Q1 related to 2011 performance.

Operator

We'll take our next question from Krish Sankar with Bank of America Merrill Lynch.

Krish Sankar - BofA Merrill Lynch, Research Division

In terms of your guidance of 3% to 9% growth, can you help us understand how the consumables in the CapEx business will trend in Q2?

Bertrand Loy

Krish, this is Bertrand. So Q1 we had a ratio of about 65-35. And very frankly, at this point, we don't anticipate that ratio to very significantly change quarter-over-quarter, so I think assumption to use in ratio.

Krish Sankar - BofA Merrill Lynch, Research Division

Okay. And then in terms of your products, can you guys bring a bigger job in terms of penetrating the leading edge, I was wondering is there any difference, for example, like let's take a filtration product in pricing and margins for the 2x nanometers versus legacy technologies?

Bertrand Loy

Well, it's a very good question. As you know, we have a pretty broad off amount of technologies so it's kind of hard for me to give you a general questions -- general answer, but again in broad terms I would say that every time we launch a new technology addressing some of those most complex contamination challenges, it is an opportunity for us to reset the price and to get paid for the value we provide to our customers.

Krish Sankar - BofA Merrill Lynch, Research Division

And then a question for Greg. Did you say that the tax rate would end up being tremendous like low 30% for the rest of the year? And what is your guidance for the GAAP tax rate for Q2?

Gregory Graves

So I would expect the tax rate for the year to be in the range of what we had in Q1, which was 34%. Essentially, the way you do the tax rate is, I mean I can do a forecast for what I expect the rate to be for the full year and that's how we come up with the Q1 rate.

Operator

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

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

Some of the leading chip companies have been talking about capacity shortages at the 28-nanometer. Have you seen activities that would point to that customers are trying to build the 28-nanometer capacity in a hurry.

Bertrand Loy

Avinash, this is Bertrand. Yes, I think, you're right I mean, if you think about the foundry capacity and the advanced nodes, it's fair to say that, that was extremely tight in Q1 and I think a couple of fabless companies have started to be relatively public about their struggles in Q1. So that's frankly that's why many of our foundry customers, they'd seek our help to solve their contamination challenges and improve their yields in Q1. So I would frankly expect that trend to continue and benefit us in Q2. Now to the other side of your question about does that mean that those companies will commit additional CapEx for those advanced nodes, well, I guess it's for everybody to speculate but if I had to place a bet, I would say that most likely we'll have to do that.

Gideon Argov

And let me just add a comment, Avinash. We're seeing, what I think amounts, this sort of a perfect storm in a positive sense for our business, given what Bertrand just said, it's an unusual time in the industry because you have the confluence of: number one, the shift to 2x, in 3x and now 2x nodes, which has proven to be quite a bit more difficult from a manufacturing yield standpoint than anything that happened before, and that's creating a very good opportunities for us and we're delighted to be helpful to our customers; number two, you have coming down the pipe, geometric shift and a shift in fundamental technologies on the stepper side and size of the wafer even further down the road, which is already in process, if you will. So that is going to provide another impetus to, really amounts to a period of great change but also great opportunity. And we want to make sure that we are positioned well, and we want to make sure that we actually execute on the investments required to take advantage of those opportunities.

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

And one follow up on that, maybe, you can break it differently but would you give us some idea about, if you were to think about 32-nanometer and below, roughly what percentage of your sales come from 32-nanometer and below?

Gideon Argov

Very, very small. It's quite small. And that's because the percentage of production of wafers of 32 and below is still quite small overall in the industry. Now it has an impact that is disproportionate, Avi.

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

And another question, any impact from the bankruptcy of Elpida that you did see or you could see?

Gregory Graves

We did have a charge in the quarter related to the Elpida bankruptcy, it was between $500,000 and a $1 million.

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

And that's all you expect, Greg?

Gregory Graves

That was our -- we've reserved for our full exposure to Elpida.

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

And which line item have that charge included in it?

Gregory Graves

That would be in SG&A.

Operator

We'll take our next question from Christian Schwab with Craig-Hallum.

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

As you guys think about wafer production, ask you a difficult question here, but TSM talked about kind of 2% of wafer starts in '11 being at the 2x node and expect that to ramp to greater than 10% and in '12, obviously, on everyone's mind given QUALCOMM's recent statements, but as we look forward and as you guys discuss with your customers, do you believe -- as you look to wafer starts at the 2x node and below, are you guys getting any indications of what you would expect those run rates to be exiting '12 and then moving forward, do you have any help there?

Bertrand Loy

Christian, this is Bertrand. I think as Gideon stated earlier, I think that we don't really provide long-term guidance. As Gideon mentioned, we feel pretty optimistic about the trends going into the second quarter. We have studied the backlog in the -- from healthy bookings in terms of our leading edge technologies going into -- beyond that, I'm not going to speculate.

Operator

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

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

Greg, with the new center opening, should we look at D&A to be changing maybe not so much in '12 but going forward?

Gregory Graves

As we move forward, I mean, we're going to trade out some D&A or rent expense, our rent expenses will come down but our D&A will come up. We'd expect that new center to be neutral with the P&L overall.

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

Okay. When you look at the target model that you guys have published for a couple of years now and looking, going forward with the kind of R&D spending required, how should we look at that target model obviously, you're spending is not going through the roof, it's very commendable with the kind of margins but how should we tie that to the year-old target model, Greg?

Gregory Graves

Okay. So at this point, we haven't announced any changes to our target model. What I would say is the target model is coming up on 3 years old and there've been a number of changes in the industry over those 3 years. I mean in increases in salaries and benefits and those type of things. I think it's fair to say that it's something that we're constantly looking at. At this point, we haven't announced any specific changes to that model. I think your point about there's an opportunity right now in the industry with the diameter and the node transition for us to continue to separate ourselves from our peers, and that is going to require continued significant investment and our plan is to make that investment to hold our leadership position.

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

Okay. And one last for me, Greg, when you look at the ME and the Specialty Materials division, can the margins improve in the ME side, with, I mean obviously, higher revenue ramp but is there anything else that can be done there to enhance the margins there? And the other question on the specialty materials side is how high can those margins go. You've done a good job on that side.

Gregory Graves

Well, so as it relates to specialty materials, we've always said at $20 million in revenue, think about 20% operating margins. We were a little short of $20 million in revenue and had 24% operating margins. So those margins, I would say, on that type of volume are as good as it gets. We had really favorable mix in that business. We're executing really well there. But we also had very favorable mix in the most recent quarters. As it relates to ME, I would look moving forward to see modest improvement in those margins as volumes move up, primarily leverage around operating expenses. But I would not expect to see those operating margins go back to what we saw and I commented earlier pertaining to what we saw in the middle of 2010, for instance.

Operator

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

Jairam Nathan - Sidoti & Company, LLC

Just wanted to follow up on that ME margins. We saw revenues were flat sequentially but we saw a significant decline in margins. Was there any pricing action taken during the quarter or something?

Gideon Argov

The margin in ME is really two things: one is some slight decline in gross margin related to product mix but also increased spending on the R&D primarily for 300 millimeter FOUPs and 450 millimeter process technology.

Jairam Nathan - Sidoti & Company, LLC

Okay. And just on your guidance for second quarter of 3% to 9%, can you call out any puts and takes, which will get you for the range, what will get you to 9% and what could be the 3% is, all economy or is there anything else?

Gideon Argov

I mean, it's not -- when we talked about 2% to 9%, I don't think we can talk about the economy, I think we talk about our own -- I mean we talk about our sense given what we see in the customer base, given our level of bookings. And it's really in the current quarter we're talking about. So we're comfortable giving guidance. So barring -- I mean given your question, I'd say barring some cataclysmic events, we will see being in that range. Steve?

Steve Cantor

Yes. Jairam, so I just want to remind you, too, that much of our business is what we call the turns business, so a lot of our sales ultimately are driven by orders within the quarter. So that obviously is somewhat difficult to predict.

Jairam Nathan - Sidoti & Company, LLC

My last question is on CapEx. You said you would spend $45 million to $50 million on the facility, i2M facility. Is all of that in the $70 million for this year or do you think some of that will get pushed to 2013, and if you can give us some guidance on '13 CapEx?

Gregory Graves

Sure. I mean, so there could be some spill over into 2013 and I'd be surprised if there weren't. I mean we expect in 2012, that we'll get the building fully -- the construction costs around the building completed and some of the equipment but probably not all of the equipment in the building. I mean, what I would say is if this year is $70 million, I'd expect next year to be somewhere probably around $40 million. What I would call the normalized CapEx of the business $25 million to $30 million plus $10 million of spillover from those major initiatives. I mean I think there's also a scenario, though, where this year is $60 million, if this year is $60 million, next year would be probably be closer to $50 million. We've got a number of large pieces of equipment that are scheduled for either late this year or early next year, and depending on how they go will impact to how our total CapEx ends up for this year and what next year looks like.

Operator

We'll take our next question from Steve Schwartz with First Analysis.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Greg, overhead absorption in 1Q '12 it sounds like with the inventory builds, you got the benefit there. Can you give us a number around that?

Gregory Graves

We really don't, I mean, it's hard for us to talk about overall capacity utilization. I mean, our manufacturing volumes for the quarter were up pretty significantly from Q4. I mean, if you think of Q4, it was a quarter where our inventory actually came down, or this was a quarter where inventory went up and volumes went up. So our absorption was quite a bit higher than just the percentage increase in the revenue.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Okay. And I think you just kind of answered this, I was going to ask you what prompted the inventory build but you just kind of said that with the volumes going up, you decided to bring up inventories. It's just simply to match the current run rate of demand?

Bertrand Loy

Yes. So it was a reaction to the run rate of business in Q1 and again our projection is going into Q2.

Steven Schwartz - First Analysis Securities Corporation, Research Division

And Gideon, I thought it was interesting, your comment about in the first quarter, making the 450-millimeter molded product, the first quantities to use your term, can you give us an idea of exactly what that means or do you have a commercial line running?

Gideon Argov

We have, the majority of the investment has been made and actually the tooling for that line. We publicly announced that we have a facility in Colorado, where we're doing that. And so this is in its infancy, I want to make sure we state the obvious, which is 450 is still a future event. So it's not -- the volumes here are very small but there are a lot of toolmakers that are developing tools. There are other wafers, the dummy wafers are being transported around this industry right now as part of the toolmakers' development efforts and sales. And pretty much most of those are in the Entegris shipping containers. So we're delighted about the progress we're making there. We have learned to make sure that we're first, and then stay with it. These kinds of efforts, so we don't intend not to be first here.

Steven Schwartz - First Analysis Securities Corporation, Research Division

Yes, it sounds like you're doing a fantastic job. Lastly, just with respect to this i2M Center, it reads like this really pulls in a lot of the technology you have under Surmet and Poco. Is that a true statement? It sounds like this is a more collaborative effort than you might have had before?

Bertrand Loy

You're partially correct. What we're trying to do is to collocate a number of different technologies and scientific under the same roof. Poco is primarily still located in Texas, though, but your comments stated that in terms of bringing together specialty coating, membrane surface modification capabilities in the same place, and membrane making capabilities in the same place and we certainly do expect that not only will we be able to advance the existing product platforms that, that collocation may lead to actually some new interesting technologies and applications to be developed.

Operator

[Operator Instructions] We'll go next to Jason Ursaner with CJS Securities.

Jason Ursaner - CJS Securities, Inc.

First a question on the leading edge, there's been a lot written about the intensity from foundries and IDMs to push forward on improving process yields and you guys both mentioned seeing the benefit from high capacity utilization but how sustainable do you think the level of activity is going forward? Is the revenue stream impacted at all by this intensity to ramp or is it just utilization?

Gideon Argov

Well, it's actually both. You have a limited number of lines that are operating at those levels around the world and its new, kind of unchartered territory because the nature of the materials being used and because of the shrink that's required. So it is causing the yield issues, and I can tell you from personal experience that it's literally difficult to meet with people at these companies who normally are more available because they're very, very busy on these issues. So this is a fact they're dealing with. My guess is there's a long history of the industry becoming progressively better very quickly at each node, and I'm guessing that's going to happen over the next few quarters. But we're just delighted to play an important role in helping our customers respond to the yield issues that they have around the world.

Jason Ursaner - CJS Securities, Inc.

Okay. And at legacy nodes, you mentioned 50% to 70% fab utilization rates, was this still trending down from last quarter, and in some of your core products designed for, you said the 45 to maybe through the 90-nanometer node, have you seen your order patterns reach a bottom in any of those?

Gideon Argov

Probably reached bottom and probably trending the other direction, that's kind of what we see, to be honest.

Jason Ursaner - CJS Securities, Inc.

And the quarter of revenue from non-semi and compound semis, how large is the LCD component of that? And what you're seeing in that market be reflective of what we're hearing from the large TV manufacturers?

Gregory Graves

LCD would be a very small portion of that, like less than 5% for sure.

Jason Ursaner - CJS Securities, Inc.

Less than 5% of the total or of that quarter?

Gregory Graves

Oh, no, of the total.

Jason Ursaner - CJS Securities, Inc.

And have you seen any bounce in that market or that's been hit pretty hard as well?

Bertrand Loy

I think that's a very good point. I think that when we look at our Q1 results, we feel actually pretty encouraged because it's fair to say that our business was not firing on all cylinders, our semiconductor business behaved really well in this first quarter of the year. But a lot of our non-semi markets were still relatively muted and soft so LCD is one, storage is another one, LED would be another example of that. So we certainly hope that we have room for improvement as the year progresses on all of those businesses.

Jason Ursaner - CJS Securities, Inc.

And then just last question for Greg, is there any pending legislation for R&D credits or anything that could still come through and get you back to that 30% to 32% effective rate or was it just...

Gregory Graves

As of right now, the R&D credit is not being extended. I mean, they tended to extend year after year but right now it's not being extended. That actually has a slightly less than a point to do with the increase in our tax rate. So if that were to be extended, the rate would come down by a little bit less than a point.

Operator

Ladies and gentlemen, that does conclude our question-and-answer session. I'd like to turn the conference back now to Mr. Gideon Argov for closing remarks.

Gideon Argov

Thank you very much for joining our call. We hope to see many of you at our Analyst Day on May 23 in New York, and have a good day.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's conference. Have a great day.

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