Linda Lagorga
Good morning, and thank you, Bertrand. Our sales in the first quarter of $773 million were up 5% year over year, excluding the impact of divestitures. On an as-reported basis, our sales were flat year over year and down 9% sequentially. Foreign exchange negatively impacted revenue by $5 million year over year and negatively impacted revenue by $2 million sequentially in Q1.
Gross margin on a GAAP and non-GAAP basis was 46.1% in the first quarter. Gross margin was at the midpoint of our guidance range and was up sequentially, driven by strong cost management across our supply chain. Operating expenses on a GAAP basis were $234 million in Q1. Operating expenses on a non-GAAP basis in Q1 were $186 million better than our guidance range.
Adjusted EBITDA in Q1 was 28.5% at the midpoint of our guidance. The GAAP tax rate in Q1 was 11.5%, and the non-GAAP tax rate was 15%. GAAP diluted EPS was $0.41 per share in the first quarter, non-GAAP EPS was $0.67 per share at the midpoint of guidance.
Sales for material solutions in Q1 were $341 million, up 8% year on year, excluding the impact of divestitures. Sales were down 5% sequentially in line with normal seasonality.
Adjusted operating margin for MS was 22% for the quarter, up modestly sequentially. Sales for advanced purity solutions in Q1 were $434 million, up 3% year on year and down 11% sequentially. The sequential sales decrease was driven by CapEx products, including fluid handling products and FOUPs.
Adjusted operating margin for APS was 25.4% for the quarter the decline in margin was driven by lower volume. As we navigate this dynamic environment, we are focused on controlling what we can control, including our cost structure.
For example, we've elected to retain approximately 75% of the previously announced $15 million of cost savings from the formation of the APS division instead of fully reinvesting those savings. As always, we remain committed to delivering results in line with the frameway of our analyst published day target model.
Moving on to cash flow. Free cash flow was $32 million. As we mentioned in our last earnings call, we are committed to improving our free cash flow margin and have made free cash flow a compensable goal for the management team and the rest of the organization starting this year. In 2025, we expect our free cash flow margin to be in the low double digits. Over the next several years, you can expect steady improvement as we aim at returning to levels similar to where we were pre-pandemic.
One of our major focus areas is working capital optimization, in particular, inventory where we have the greatest opportunity as we look to improve lead times and optimize stock levels across our entire network. In addition to working capital improvements, we now expect our capital expenditures to be approximately $300 million in 2025, down from our previous expectation of $325 million. As a reminder, our capital expenditures are weighted more to the first half of the year driven by strategic investments, including Phase one of our Colorado facility.
As an aside, I'm pleased to share that we have achieved our first CHIPS Act milestone and expect to receive $9 million in the second quarter. A quick overview of our capital structure. At the end of the quarter, our gross debt was approximately $4 billion, and our net debt was $3.7 billion. Gross leverage was 4.4 times and net leverage was 4 times.
Our debt is well structured and derisked. The blended interest rate on our debt portfolio is approximately 4.9%. Since our term loan is fully hedged, currently 100% of our debt is fixed, and there are no maturities on the debt until 2028 and no maintenance covenants on the debt. From a capital allocation standpoint, our single priority remains paying down our debt. We will use all levers at our disposal to reduce our gross leverage to below 4 times.
Looking forward, I believe we are well positioned to navigate through the dynamic tariff and economic environment. We expect to see a temporary impact to our top line related to our sales to China. We are actively working with our customers and suppliers to mitigate to the greatest extent possible the direct tariff impact by leveraging our global footprint and regional supply chain.
Moving on to our Q2 outlook. We are widening our revenue guidance range to reflect our current assessment of the direct tariff impacts. We expect our Q2 sales to range from $735 million to $775 million. Excluding China, our business remains strong. Let me be clear, the lower sequential sales guidance is driven entirely by the uncertainty of shipments of our US-made products into China.
We expect a gross margin of approximately 45%, both on a GAAP and non-GAAP basis. GAAP operating expenses of $225 million to $229 million, and non-GAAP operating expenses of $179 million to $183 million. We expect EBITDA margin of approximately 27.5%.
Net interest expense of approximately $50 million, and we expect our non-GAAP tax rate to be approximately 12% due to the expiration of a tax reserve. GAAP EPS between $0.34 and $0.41 per share and non-GAAP EPS between $0.60 and $0.67 per share. We also expect depreciation of approximately $51 million.
I'll now hand it back over to Bertrand for some closing remarks.
Bertrand Loy
Thank you, Linda. In closing, the industry environment remains dynamic. In that context, we will remain focused on what we can control, engaging with our customers, managing our cost, delivering strong profitability, improving free cash flow and paying down our debt. In 2025, we are prioritizing critical investments that enable our customers, no transitions and technology road maps needs.
Looking further out, we continue to have high confidence in the strong long-term growth outlook for the semiconductor industry and for Entegris. Our customers technology road maps are calling for new materials and ever greater purity levels to improve device performance and achieve optimal yields.
Our expertise in material science and materials purity is increasingly valuable. The R&D investments we are making are translating into key wins in new nodes, and are expected to fuel our growth and market outperformance in the years to come.
With that, operator, let's open the line for questions.
Operator
(Operator Instructions)
Melissa Weathers, Deutsche Bank.
Melissa Weathers
Thank you so much for letting me ask you a question. Good morning everybody. I guess on the comments that you guys have made on the direct impacts from tariffs in China and your outlook. Could you help us understand, so is the main message that excluding those direct impacts, everything else is pretty much going as planned, as you talked about last quarter? Or just help us -- if we could get a little bit more context on how you're guiding and how much of that is tariff impact and how much of that is any cyclical weakness? Thank you.
Bertrand Loy
Yes, good morning, Melissa and good question. And let me put actually this Q2 guidance in the right context, and I may provide a little bit more detail than I usually do, but I think the circumstances warrant that. So let's start with a few facts. I mean entering Q2, our business is strong. The fill rate is steady, quarter-to-date. Our book-to-bill ratio is strong, it's actually approaching 1.2, so that's good. That's actually very good.
Another important fact, ex China, our second quarter forecast is also solid. Actually, we expect the ex-China business to be up sequentially in line with the industry trends that we expect in Q2. Specifically, we expect sequential growth in our consumable product lines, consistent with the expected sequential improvement in wafer starts. That's going to be offset slightly by the sequential contraction in the -- in our CapEx product lines, and that's also consistent with the expected sequential contraction in the industry CapEx. But again, net-net, our ex China business is solid and is expected to be up sequentially. So that's good as well.
So and then to your question, I mean, we certainly have this China tariff situation to deal with. China introduced new tariffs on imports from the US. Our products, unfortunately, do not qualify for the temporary exemptions granted by the Chinese government. And as a result, as of right now, our Chinese customers have put inbound shipments from US on hold. So the impact for us, just for Q2, worst case could be up to $50 million again, just for Q2. And that's the bad news.
Now the good news, as Linda stated multiple times in her prepared comments is that we have alternate Entegris manufacturing sites across Asia that our China customers could use. Actually, they have started qualifying them, and we are ourselves in the process of hiring and training additional staff, ramping up our local supply chain.
So realistically, we expect to be able to mitigate some of that impact in Q2 and that gets you somewhere at the midpoint of that guidance range for Q2. And of course, we expect to make more progress in Q3, Q4 and at a high level, we expect these initiatives to have substantially mitigated the China tariff headwinds by the end of the year.
So hopefully, Melissa that provides the context you were looking for when thinking about the overall business trends and going into Q2.
Melissa Weathers
Great. Thank you for all that color. That's really helpful. And I totally understand you guys pulling your 2025 guide, given that uncertainty. Maybe a bigger picture question then. On the moly side, it was good to hear that you're engaged with all of the main memory players on moly.
But given the macro uncertainty and the tariff uncertainty, has there been any change in your customer discussions about their willingness to adopt moly? How has the timing of that moly ramp changed in your mind at all?
Bertrand Loy
Well, it's a great question. I think that despite the uncertainty that we are all experiencing, the good news is that all major node transitions are still on track. It's true for the moly adoption in memory. As a matter of fact, all our discussions with the market leaders in 3D NAND suggests that actually not all of them, but most of them will be transitioning to moly in the second half of the year, so it's good for moly.
But that statement also applies to logic. In logic, we also expect N2 and 18A to ramp in the second half of 2025. And for all of those node transitions, both in logic and memory, we are very well positioned, and we are ready to capitalize on the incremental opportunities in the back half of the year. And then of course, as more wafers are produced at those nodes going into 2026, that should have a positive impact on our business in 2026 as well.
Melissa Weathers
Great. Thank you.
Operator
Charles Shi, Needham.
Charles Shi
Hi, good morning, that one, Linda. Maybe I want to go back to the question on China tariff -- retaliatory tariffs impact on the lost sales for Q2. I recall going back a few quarters, you were expecting maybe China revenue as a percentage of the total to go above 20% from somewhere around the mid-teens given the increased production -- semi production in China.
But how much of the $50 million loss, let's say, in Q2 is recoverable, let's say, in Q3 and Q4 because do they -- do your Chinese customers really have alternative? Or do you think that there will be some market share loss going forward? The reason why I'm asking this really is about how much of the loss is irreversible and somehow much of that you think is a reversal or maybe give it two or three more quarters? Thank you.
Bertrand Loy
Yes, Charles, fair question. I -- we believe that this is a temporary impact, as Linda mentioned, and I absolutely believe it is. As we've said many times before, our China business is strong. There are competitors in China for sure, but we believe that we've been competing very effectively. Our brand is strong.
We continue to be viewed as valued partners by our customers and remember that our solutions really help our customers improve their device performance, improve their yields. This is really at the heart of our value proposition. And this value proposition is appreciated in China as it is anywhere else in the world. So we are in active discussions with our China customers.
And when I say China customers, by the way, we're talking about international companies operating in China as well as domestic Chinese customers, right? And they have a practical experience of some of our other Asia manufacturing centers. They just need to fully qualify certain products coming from those centers and start placing their future demand on those manufacturing centers. So we know it's going to take a little bit of time, but we believe it's entirely recoverable.
Charles Shi
Got it. Thanks. Maybe a follow-up question. I really want to go back to the Q1 results. And I think we focused a lot on the Q2 what the tariff impact could be on the Q2 guidance, but your Q1 results still coming a little bit below, I believe, the low end of the guidance, which you guided in February. Wonder what exactly happened, why it came in a little bit below your expectation?
And I think you mentioned the CapEx products, fluid handling poops, we want some of the weakness. But what exactly we are seeing in terms of customer behavior, assuming Q1, that's all pre-tariff, right? Thank you.
Bertrand Loy
Yeah, Charles. Yeah, so the Q1 performance has nothing to do with tariffs indeed. The top line came in slightly below guidance. And as we've said, it really comes from much softer demand than originally expected for our fluid handling and food products. That these products -- I mean demand for these products is linked to new fab construction.
We have seen a significant slowdown in new fab construction activity in all markets, frankly, but that's especially true in China, in Japan, in Korea, and as a result, we've seen a much more significant contraction in the revenue for those products in Q1.
Having said that, I remember that we grew in spite of this CapEx headwind, we grew 5% year on year. As I mentioned, strong performance from material solutions, up 8% and strong performance of APS. I mean macro contamination had a very solid quarter. It was offset, obviously, by the decline in the CapEx products that I mentioned.
And then finally, one thing that I just want to be sure you remember, Charles, when you're looking at our Q1 performance, especially the year on year. Remember that there were new US export restrictions announced in December, and we had quantified that impact to be about $10 million on a quarterly basis. So we saw that in Q1 and then we had some adverse impact from foreign exchange as well. And I think Linda mentioned that year on year was about $5 million.
So certainly, those last two points don't explain the myths, right? I mean we're expecting these impacts when sending guidance. But I think it's useful context when you look at Q1 results on a year on year basis. And I would argue that the overall performance is pretty solid in that context.
Charles Shi
Thanks, Bertrand.
Operator
Atif Malik, Citi.
Atif Malik
Thank you for taking my question. The first one for Linda. Linda, can you walk us through -- you talked about the revenue impact from China. But on the gross margin, the 100 basis points sequential decline to the June quarter. Can you help us understand the puts and takes on the cost side impact from tariffs?
Linda Lagorga
Yes, thank you for that question. So let me first, since you framed it, and let me frame it overall, we're in a dynamic environment. And our guidance is capturing that dynamic environment. To your point on how the tariffs play into gross margin, we do have tariffs on US imports and we do import some raw materials and finished goods.
So we are very confident in the plan we have to mitigate those tariff impacts over time on US imports through select pricing surcharges, different duty programs, focus on regionalized in sourcing to limit that tariff impact. But in the near term, there is likely to be some modest impact to our Q2 gross margins as we progress our mitigation plans because there is a bit of a timing lag, and this is reflected in our guidance.
So getting back to a little bit more of a big picture between Q1 and Q2 on the margin, you're correct in saying there's a bit of an impact from tariffs. But as we look across gross margins and look forward, there's going to be puts and takes.
So I want to bring you back to looking forward there's the volume leverage as we progress throughout the year. We're going to continue to focus on productivity, we'll continue to have inefficiencies this year in Taiwan and Colorado, but we're going to get most of that behind us by 2026. And we're going to continue to manage our cost structure, including gross margin in the context of our Analyst Day.
So while there's slightly lower gross margins in Q2, we still would expect that in 2025, our overall gross margins will be up modestly compared to 2024.
Atif Malik
Very helpful. And one for Bertrand. Bertrand, I fully understand you guys are not commenting on full year given the macro uncertainty. But just kind of broad strokes, if -- how do you see the CapEx environment going on for second half, some of the CapEx peers have talked about maybe flattish outlook for CapEx in second half, some of them are down in second half versus first half. If you can just kind of give your big picture thoughts on the CapEx trend.
Bertrand Loy
Yeah. I mean, look, I mean, remember that when we started the year pre impact from tariffs and the growing uncertainty around that. We probably already had some fairly conservative expectations when it comes to the industry CapEx.
I would argue that the current prevailing uncertainty is, in my opinion, going to put some additional pressure on CapEx in the second half of the year. Having said that, we expect that to be somewhat offset by the steady improvement that we expect to see in wafer starts.
So again, all of that is are high-level considerations that do not really incorporate any considerations and any changes coming from the uncertainty around the tariff and indirect impact from tariffs.
Atif Malik
Thank you.
Operator
Timothy Arcuri, UBS.
Timothy Arcuri
Thanks a lot. Bertrand, I also wanted to add about how quickly this revenue can come back. I mean, why does this not sort of -- is this not the match that lights the fire for them to qualify local alternatives? I know that not all of what you sell, there's not a local alternative for -- all the way you sell, obviously, but there are local alternatives for some of what you sell.
And so do they actually have enough inventory on hand to just outright be able to continue to operate with China not accepting shipments? I mean, this is a pretty big number relative to what you're trying to exposure is. So yeah, thanks.
Bertrand Loy
Yeah, look it's a fair question, Tim. I think the burden could be on us to be very proactive and very effective in transitioning the China demand to some of those alternate Asia sites. I think that those Asia manufacturing alternatives have a lot to offer. I mean, think about the big investment we made in Taiwan, recent investments in Japan and Korea.
So we are really offering state-of-the-art manufacturing capabilities, we believe we are offering again, products that are very uniquely enabling device performance and very uniquely enabling the yields of our customers, and that has value and we certainly hope that this is a point of view that our China customers share with us.
And again, all indications are based on the discussions we've been having with them in the last months, all indications are that they are very eager to qualify those alternatives. I mean the proof will be in the pudding, obviously, but I am optimistic.
Timothy Arcuri
Okay. Got it. And then just a two part question. So one, what is the clean revenue guide then for June. So is the clean revenue guide something like $800 million minus this issue. So is that the baseline that we should then kind of -- I mean, obviously, we have to assume how quickly this [$50 million] comes back. But is the $800 million like that's the real sort of demand-based guidance for June? That's the first part of the question.
And then the second part is, what is your NAND exposure right now? Do you think any of the weak June quarter is related to NAND? Thanks.
Bertrand Loy
Yeah. So in reverse order, the NAND exposure right now for us is about 10% of our revenue roughly. And in terms of breaking down our key to guidance between China and China, I mean, I think we've provided a lot of details. I'm not going to go into a lot more details than my answer to the first question. But directionally, the way you think about it is not too far off.
Timothy Arcuri
Okay. Thank you.
Operator
Chris Parkinson, Wolfe Research.
Chris Parkinson
Great. Thank you so much. You hit on a few of these, but just to dig down a little bit deeper. In terms of your second half assumptions of just what you're looking at from the customer level, can you sit on some nontariff-related factors, specifically moly, node transitions.
Is there anything that has actually changed in the last five to six weeks that would ultimately further evolve your views on that? And then perhaps just a quick update on the Taiwan ramp as well would be very helpful. Thank you.
Bertrand Loy
Yeah. So in terms of the benefits that we expect to get from the node transitions, as I said, we are very encouraged by our recent discussions with our customers, all of the major node transitions we're expecting in memory and logic seems to be still on time. And that's positive because it provides an opportunity for us to increase our content per wafer and that actually help us sustain very attractive revenue levels in the second half of the year.
Having said that, I mean, you're right that today, there's still a lot of unknown around the indirect impact coming from tariffs. I mean there is session, which usually could correlate with a slower demand environment for semiconductors, but nobody has been able to really quantify that, and I'm certainly not equipped to do that either. So that's something we're going to be obviously keeping an eye on. And then there was a third part to your question, which I forgot.
Chris Parkinson
Taiwan.
Bertrand Loy
Taiwan. Yes so Taiwan, yeah, we're making actually really good progress in our Kaohsiung facility. Remember that in 2024, we completed a number of product qualifications, high-purity containers, deposition materials and we initiated qualifications of our liquid filters.
In '25, the focus is to complete the remaining qualifications for all major liquid filters. And when it's all said and done, I would say that I would expect the run rate -- the revenue run rate exiting 2025 out of Kaohsiung to exceed $120 million. Remember, the last year, the revenue on a full year basis were something closer to $15 million. So a lot of progress is expected in 2025.
Chris Parkinson
That's very helpful. And just in terms of the intermediate term, obviously, once again, I understand the world is changing, but the -- as we sit here today, how are you thinking about the US market just in the rhetoric of the current administration, trade, the potential for increases in foreign investment? Just any updated thoughts just holistically on those topics would be helpful and just how that relates to your thoughts on the Colorado Springs opportunity. Thank you.
Bertrand Loy
Yeah, that's a fair question. I think this is something that we are keeping a very, very close eye on external market research and our own views is that the new fab construction activity will be significantly down this year in '25. It's true, as I mentioned, in China, Japan, but also we'll be likely true here in North America.
So right now, when it comes to our Colorado investment, we are going full speed ahead with our phase one investment, we have actually hit a number of milestones. So feeling really good about the progress, and we're going to be starting customer qualifications in the second half of this year. We expect production late this year, early next year.
Now when it comes to the timing of phase two, so the next phase of investment, we going to be looking at the level of new fab activity in the US. We're going to take that into consideration, and we will finalize our decisions later this year. So no decision at this point.
Chris Parkinson
Very helpful. Thank you so much.
Operator
John Roberts, Mizuho.
John Roberts
Thank you. Sometimes you characterized the business at a high level in terms of mainstream versus advanced applications. I assume advanced is not that affected by China or much less affected, but maybe you could just give us kind of the tone of business in those kind of two big buckets?
Bertrand Loy
Yeah. I mean, look, our advanced logic business remain very, very strong. I mean if you look at our Q1 performance, revenue in Taiwan was very strong year on year as we would expect. And as we capitalized on increased demand linked to AI and advanced logic application, but it's true that we continue to face some headwind from still fairly reduced levels of operations in mainstream fabs and it was true pretty much around the world, including China in Q1.
John Roberts
Yeah. And then I think the comment period ends today to the new semiconductor tariffs. Have the consultants summarize that for you? Or is there anything that kind of maybe sticks out as unexpected and what may have been submitted in terms of public comments?
Bertrand Loy
No. As I said, I think right now, there's just a lot of unknown, a lot of uncertainty. I think most of our customers are taking a very prudent approach, frankly, when you think about the balance of the year. And that's the reason why we didn't feel equipped to update our annual guidance. I think, hopefully, things will settle down and hopefully, in a few months, we will be in a better position to update our full year guidance.
John Roberts
Thank you.
Operator
Mike Harrison, Seaport Research Partners.
Mike Harrison
Hi, good morning. I was hoping we could dig in a little bit on the growth that you're seeing within the micro contamination control portion of the APS segment. I feel like sometimes you have pretty good visibility on your ability to grow in that business. How is visibility today compared to what you think of as normal?
Are you seeing any delays or changes in customer order patterns? Any change in filter usage or anything that suggests that maybe your customers are trying to thrift or extend the life of some of those filters? Any color there would be appreciated.
Bertrand Loy
Yes. It's a good question, Mike. And as I think you know the answer to the question, I think in advanced logic, there's still this intense focus on defect management which is really driving the right behaviors when it comes to using the most advanced filters, proactively changing them and doing the right level of preventing -- preventative maintenance.
We are seeing that same behavior now in HPM, and I mentioned that in my prepared remarks, highlighting a new IPA purifier opportunities. So it's great to see that as device complexity increases, we are starting to see a greater focus, a greater interest in the micro contamination control solutions.
In the case of this HPM opportunity, we were looking -- we were asked to help reduce the level of trace metal contaminations from [3 parts per trillion to something less than 1 part per trillion. I think our solutions actually help the customer get to 0.5 parts per trillion], which put that in context, there's about half a drop of water in a 20 Olympic sized swimming port. So they are the types of solutions that we are developing. We are very proud of the value proposition that our products offer.
And we are pleased to see this greater level of focus on purity. But you're right that utilization levels are low as they are right now in mainstream customers will try to stretch the lifetime of the filters. And that's one of the many reasons why our mainstream business has been sluggish and frankly, in the last couple of years now.
Mike Harrison
All right. And then for Linda, I know you don't typically talk about the FX impact. You mentioned, I believe, some top line impacts in the first quarter. But with the big swings that we've seen in the dollar. Can you talk a little bit about the impact you might expect to see in the second quarter in other parts of the P&L and at the EBITDA level. Is that something that's leading to some margin weakness in the second quarter as well?
Linda Lagorga
Yeah. Thanks, Mike. First, historically, we have not had a meaningful impact on our business from FX. And again, you're asking about other parts of the P&L. But as I mentioned, on the sales side, greater than 75% of our sales are USD.
When you get below sales into the gross margin, which could flow down into EBITDA we do have significant and fast moves, we do see some impact, but it has been manageable. So there could be a little bit of impact in Q2, but that is not the primary reason why I'm projecting -- what we're projecting for Q2 on our gross margin, as I said, primarily, I'd focus on some of the volume deleveraging and then the impact of the direct tariffs from US imports and a bit of a timing lag.
Mike Harrison
Thanks very much.
Operator
Aleksey Yefremov, KeyBanc Capital Markets.
Thanks and good morning, Bertrand. This is Ryan on for Aleksey. I just wanted to ask one on China first. Did you guys see any evidence of prebuying kind of ahead of all the restrictions that have gone in. I understand you mentioned that they're eager to qualify some of your product from alternative sourcing. Just wondering if there was any pre-buying that you kind of saw ahead of all this?
Bertrand Loy
No, we didn't really see much of that. And when it comes to Q2, obviously, as I said, I think right now, all of our shipments ex US are on hold. So there's absolutely no prebuying going on right now. And there was none of that in Q1 either.
Understood. Okay, thank you. And then I just wanted to ask on advanced packaging. I mean it seems like growth is kind of accelerating across the space. I was hoping you might be able to remind us what the size of that business for you today? Maybe what growth kind of looked like in 1Q and kind of what your outlook is like? Thank you.
Bertrand Loy
Yeah. Good question, Ryan. So advanced packaging for us is still a fairly small market, right? But as we have mentioned, multiple times, it's growing very fast. It actually did more than double in 2024. We saw actually a doubling in Q1 versus actually more than a doubling in Q1 of this year versus Q1 of last year.
When we think about the full year 2025, we expect this business year on year to grow more than 25%. And the two big drivers for us in '25 are expected to be of high viscosity dispense solutions that's an APS product, and then the other one would be HPM slurries for [TD applications]. So again, feeling good about the momentum, feeling good about our ability to uncover new areas where we can contribute value, still small, but growing very, very fast.
Operator
And there are no further questions on the line at this time. I'll turn the program back to Bill Seymour for any closing remarks.
Bill Seymour
Thank you for joining our call today. Please reach out to me personally if you need to follow up. With that, have a great day, and you can disconnect.
Operator
Thank you. This concludes today's Entegris first quarter 2025 earnings conference call. Please disconnect your line at this time, and have a wonderful day.
