Entegris, Inc. — Q3 2022 Form 10-Q
Business context and reporting period
Entegris supplies advanced materials and process solutions for semiconductor and other high-technology industries. The quarter ended October 1, 2022; comparisons are with the quarter ended October 2, 2021. Results include CMC Materials from its July 6, 2022 acquisition, so year-over-year comparisons are affected by the acquisition and related costs.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $993.8 million | $579.5 million | $2,336.0 million | $1,663.7 million |
| Gross margin | 37.4% | 45.6% | 42.5% | 46.0% |
| Operating income | $14.9 million | $139.4 million | $336.2 million | $392.2 million |
| Net income (loss) | $(73.7) million | $117.5 million | $151.5 million | $290.9 million |
| Diluted GAAP EPS | $(0.50) | $0.86 | $1.08 | $2.13 |
Q3 sales rose 71%, driven mainly by CMC Materials and higher volume, partly offset by $37.8 million of adverse currency translation. Q3 gross margin fell 8.2 percentage points, primarily from CMC’s lower-margin product mix and a $61.9 million acquired-inventory fair-value charge. Deal, integration and other acquisition-related costs, higher amortization, and acquisition debt interest also weighed on GAAP earnings. CMC contributed $312.2 million of sales and $83.9 million of net loss since acquisition, according to the filing.
For the first nine months, operating cash flow was $320.2 million, versus $284.5 million a year earlier. Capital expenditures were $318.8 million. Investing cash outflow was $4.793 billion, largely reflecting $4.475 billion of cash paid for acquisitions, net of cash acquired. Financing provided $4.846 billion, primarily through acquisition-related borrowing. Cash, cash equivalents and restricted cash totaled $754.7 million at quarter-end; working capital was $1.381 billion.
Debt was $5.995 billion at par, or $5.847 billion net of unamortized discount and issuance costs, compared with $945 million at par at year-end 2021. No revolving credit facility balance was outstanding; the $575 million facility had $0.2 million of letters of credit. Management said available cash and anticipated operating cash flows should meet ordinary-course needs for the next 12 months and longer term. The company reported compliance with debt covenants.
Material changes and business drivers
- Entegris completed its approximately $6.0 billion CMC Materials acquisition on July 6, funded with cash, stock and new debt. The acquisition substantially increased goodwill, intangible assets and debt.
- Sales increased across the reported segments. Q3 segment sales were $224.2 million for SCEM, $280.6 million for Microcontamination Control, $210.4 million for Advanced Materials Handling and $293.9 million for Advanced Planarization Solutions; APS growth primarily reflects CMC.
- Q3 non-GAAP adjusted EBITDA was $298.4 million, up 70%, with a 30.0% margin versus 30.3%. Non-GAAP EPS was $0.85 versus $0.92. These company-defined measures exclude significant costs; the filing cautions they are not GAAP substitutes and may not be comparable across companies.
- The company changed to four reportable segments in connection with the acquisition and organizational realignment.
Outlook, commentary and risks
- Management estimated that U.S. export controls announced October 7, 2022 would reduce Q4 2022 sales by approximately $40–50 million; it planned to seek licenses where appropriate. The filing provides no broader numerical earnings or revenue guidance.
- Entegris cited persistent supply-chain and logistics challenges, raw-material constraints and higher costs, inflation, labor constraints, foreign-exchange volatility, and uncertainty from the Russia-Ukraine conflict. It reported adequate supply of affected Russia- and Ukraine-sourced materials to date, at increased cost.
- China is an important market; the filing notes it represented approximately 16% of 2021 sales. Export restrictions, tariffs and other trade measures could limit sales or increase costs.
- Interest expense rose sharply with acquisition financing. A floating-to-fixed swap covered $1.95 billion of the $2.495 billion term loan through December 2025, with a declining notional amount.
- On October 11, 2022, the company announced an agreement to sell CMC’s Pipeline and Industrial Materials business for approximately $240 million, subject to customary adjustments, regulatory approval and other closing conditions. Closing was expected in Q4; no material gain or loss was expected.
- Acquisition purchase accounting remained provisional, including valuations of inventory, property and equipment, intangibles and tax accounts. Management reported disclosure controls were effective; CMC’s internal controls were excluded from the quarter-end evaluation while integration work continued.
Most important facts for investors to verify
- Whether CMC integration delivers anticipated strategic benefits and whether acquisition-related costs and margin effects moderate.
- Q4 and subsequent sales effects of China export controls, including the estimated $40–50 million Q4 reduction.
- Debt-service capacity, variable-rate exposure, refinancing needs and compliance with financing covenants.
- Final CMC purchase-price allocation, goodwill allocation, acquired-asset valuations and related amortization and tax effects.
- Completion and final proceeds of the planned PIM divestiture, and the company’s future operating and cash-flow performance.