Entegris, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; nine-month results compared with the period ended October 1, 2022. Entegris supplies advanced materials and process solutions to semiconductor and other high-technology industries. Its realigned segments are Materials Solutions (MS), Microcontamination Control (MC), and Advanced Materials Handling (AMH). Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $888.2 million | $993.8 million | $2,711.6 million | $2,336.0 million |
| Gross margin | 41.3% | 37.4% | 42.5% | 42.5% |
| Operating income | $117.1 million | $14.9 million | $398.1 million | $336.2 million |
| Net income (loss) | $33.2 million | ($73.7 million) | $142.7 million | $151.5 million |
| Diluted EPS | $0.22 | ($0.50) | $0.95 | $1.08 |
| Adjusted EBITDA (non-GAAP) | $235.3 million | $298.4 million | $731.5 million | $712.0 million |
| Adjusted EBITDA margin (non-GAAP) | 26.5% | 30.0% | 27.0% | 30.5% |
For Q3, lower semiconductor-market demand reduced sales by $88.0 million year over year; the QED divestiture and foreign exchange reduced sales by a further $13.8 million and $3.8 million, respectively. Gross margin improved year over year largely because the prior-year quarter included a $61.9 million acquired-inventory fair-value charge. Despite that improvement, adjusted EBITDA fell 21% and adjusted operating income fell 23%, reflecting lower sales and gross profit. Nine-month sales growth primarily reflects $537.8 million of CMC Materials sales included in the period; excluding that contribution, management cited lower market volumes. Nine-month GAAP earnings also reflect significant transaction-related and other unusual items.
Segment sales, Q3 year-over-year: MS $435.5 million, down 16%; MC $286.2 million, up 2%; AMH $180.2 million, down 14%. Segment profit was $57.0 million for MS, $101.1 million for MC, and $31.6 million for AMH. MS profit included a $15.9 million EC goodwill impairment; MC cited lower factory utilization and Taiwan facility ramp-up costs; AMH cited lower volumes and utilization.
Cash flow, balance sheet and debt
- Operating cash flow: $478.9 million for the first nine months, versus $320.2 million a year earlier. Inventory reduction contributed to working-capital cash generation.
- Investing cash flow: $22.7 million used, including $328.2 million of capital expenditures; offset in part by $134.3 million from the QED sale and $169.3 million of proceeds related to the alliance termination. Prior-year investing cash use included the CMC Materials acquisition.
- Financing cash flow: $410.0 million used, including $469.0 million of long-term debt repayments and $45.2 million of dividends. Cash, cash equivalents and restricted cash increased $30.6 million to $594.0 million.
- Liquidity: Working capital was $2.260 billion; current assets were $2.944 billion and current liabilities $683.2 million. The company reported $575 million available under its revolving facility and no outstanding revolver borrowings at quarter-end.
- Debt: Net carrying value was $5.425 billion ($5.538 billion par value), down from $5.785 billion net at December 31, 2022. Long-term debt was reported due thereafter, principally in 2028–2030. The company said it was in compliance with financial covenants at September 30.
Material changes, unusual items and outlook
- Q3 GAAP net income improved from a prior-year loss, while nine-month net income declined. The comparisons include acquisition effects and sizable nonrecurring or noncash items; reported non-GAAP EPS was $0.68 for Q3 and $2.00 for nine months, versus $0.85 and $2.91, respectively.
- Nine-month results include a $154.8 million gain from terminating the MacDermid Enthone alliance, $104.8 million of EC goodwill impairment, and $28.6 million of loss on sale/held-for-sale assets. The QED divestiture generated $134.3 million in proceeds and a $14.9 million pretax loss. The planned PIM sale agreement was terminated; Entegris received a net $10.9 million termination fee.
- Entegris completed the sale of its Electronic Chemicals business on October 2, 2023, after quarter-end, receiving $737.1 million gross cash proceeds or $694.3 million net proceeds, subject to final adjustments. It repaid $287.2 million of term-loan borrowings on October 6 and $362.6 million on October 31, and said remaining proceeds were intended for early debt repayment.
- The term-loan amendments reduced the applicable SOFR margin from 3.00% to 2.75%, then to 2.50%. Nine-month interest expense rose to $244.9 million from $129.0 million, mainly because of CMC acquisition financing.
- Management gave no specific forward revenue or earnings guidance in the supplied filing text. It said existing cash and expected operating cash flows should cover ordinary-course needs for the next twelve months and longer term. A quarterly dividend of $0.10 per share was declared after quarter-end.
- Key risks include semiconductor-market weakness, substantial acquisition-related debt and interest-rate exposure, customer concentration, supply and labor constraints, foreign-exchange movements, geopolitical uncertainty, and expanded U.S. export controls affecting certain China-related sales or services. Management noted uncertainty around the Israel-Hamas conflict’s broader economic and supply-chain effects. The filing reported no material change in previously disclosed risk factors and no legal proceedings expected to have a material adverse effect.
- Management reported effective disclosure controls and no significant quarter changes to internal control over financial reporting. Integration of former CMC financial systems onto Entegris’s SAP platform was completed during the quarter, except for systems used in businesses held for sale.
Important facts for investors to verify
- Whether semiconductor demand and volumes recover, particularly in MS and AMH, and how that affects margins and utilization.
- Final EC sale adjustments, use of remaining proceeds, and resulting debt, interest expense and covenant headroom after the disclosed repayments.
- Underlying operating performance excluding the alliance gain, goodwill impairment, divestiture losses, acquisition/integration costs and other adjustments; assess non-GAAP reconciliations alongside GAAP results.
- Costs and execution risks from the Taiwan facility ramp-up and capital spending, and potential consequences of export-control changes and currency movements.
- Whether the PIM business remains held for sale and the status of the remaining $30 million alliance-termination payment, which is subject to customer transitions and adjustments.