Entegris, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. Entegris supplies advanced materials and process solutions to semiconductor and other high-technology industries through Specialty Chemicals and Engineered Materials (SCEM), Microcontamination Control (MC), and Advanced Materials Handling (AMH). The quarter ended July 3, 2021; comparisons are with the quarter ended June 27, 2020. The six-month period is compared with the six months ended June 27, 2020. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $571.4 million | $448.4 million | $1,084.2 million | $860.7 million |
| Gross profit / margin | $265.4 million / 46.4% | $207.4 million / 46.2% | $500.4 million / 46.2% | $392.9 million / 45.6% |
| Operating income / margin | $138.9 million / 24.3% | $94.7 million / 21.1% | $252.9 million / 23.3% | $175.5 million / 20.4% |
| Net income / diluted EPS | $88.8 million / $0.65 | $68.0 million / $0.50 | $173.4 million / $1.27 | $129.0 million / $0.95 |
| Adjusted EBITDA (non-GAAP) | $174.2 million | $131.5 million | $324.3 million | $251.8 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $135.0 million | $141.4 million |
Q2 sales grew 27%; six-month sales grew 26%. Management attributed the increase primarily to strong demand and growth across all three segments, with favorable foreign-exchange translation and acquired-business sales also contributing. Q2 segment sales were SCEM $180.4 million, MC $227.5 million, and AMH $172.5 million. Segment profits increased in each segment; AMH profit rose 85% year over year, MC 26%, and SCEM 36%.
Gross margin improved year over year, which management attributed to higher factory utilization, partly offset by unfavorable sales mix. Net income also benefited from stronger sales and operating leverage. R&D expense rose 29% in Q2 to $42.0 million, while SG&A rose to $72.6 million, primarily reflecting higher employee costs.
Liquidity, cash flow, and debt
- At July 3, 2021, cash and cash equivalents were $401.0 million, versus $580.9 million at December 31, 2020; working capital was $898.7 million, versus $931.6 million.
- Six-month operating cash flow was $135.0 million. Investing used $87.3 million, including $85.1 million of capital expenditures. Financing used $224.0 million, and cash declined by $179.9 million over the period.
- Inventory increased to $387.6 million from $323.9 million at year-end. Management said working-capital changes, including higher inventory, lower accrued liabilities, and income-tax payments, reduced operating cash flow.
- Carrying value of long-term debt was $936.4 million; principal outstanding was $945.0 million. The company issued $400 million of 3.625% notes due 2029 and redeemed $550 million of 4.625% notes due 2026. The refinancing generated a $23.1 million loss on extinguishment of debt, included in other expense.
- The revolving facility was increased from $300 million to $400 million and extended to April 2026. No revolving borrowings were outstanding at quarter-end; the $145 million term loan and $400 million of 2028 notes also remained outstanding. The company reported compliance with debt covenants.
- The board declared a quarterly dividend of $0.08 per share, payable August 18, 2021. The company repurchased $30.0 million of shares during the first half.
Material changes, outlook, and risks
- Management expected 2021 capital expenditures of approximately $225 million, for growth capacity and the initial phase of a new Taiwan facility. Capital purchase obligations not yet recorded were $114.5 million at July 3.
- Management stated that cash, available credit, and anticipated operating cash flows were expected to meet ordinary-course cash needs for the next twelve months and longer term. No specific sales or earnings guidance was provided in the supplied filing text.
- Management reported strong Q2 demand for leading-edge products, driven largely by digitalization, 5G applications, and high-performance computing. It had not experienced significant COVID-19-related operational or supply-chain disruption to date, but noted that future effects remained difficult to predict.
- Risks highlighted include semiconductor-industry and regional economic cyclicality; rapid demand changes; customer concentration; technology and product-development demands; raw-material, labor, and supplier constraints; international, trade, and currency risks; and uncertainty from COVID-19. About 23.4% of Q2 sales were denominated in foreign currencies; a hypothetical 10% decline in those currencies versus the U.S. dollar would have reduced quarterly revenue by an estimated $12.6 million.
- The company cited ordinary-course legal claims and said their outcome was not expected to have a material adverse effect. It reported no material off-balance-sheet arrangements. Disclosure controls were deemed effective, with no material change in internal control over financial reporting identified.
Most important facts for investors to verify
- Whether strong semiconductor demand and growth across all three segments persist, and whether the reported margin improvement holds as sales mix and factory utilization change.
- Whether elevated inventory, receivables, and capital spending convert into cash as planned; operating cash flow declined year over year despite higher net income.
- The cash and earnings effects of the Taiwan facility investment, the $114.5 million of outstanding capital purchase obligations, and the planned $225 million of 2021 capital expenditures.
- The effects of the 2021 debt refinancing, ongoing debt service, and the company’s ability to maintain covenant compliance and access credit markets.
- Exposure to foreign exchange, customer concentration, supplier and labor constraints, and the uncertain course of COVID-19 and industry conditions.
- When comparing performance, distinguish GAAP results from non-GAAP measures; management’s adjusted EBITDA and non-GAAP EPS exclude specified costs, including recurring depreciation or amortization in certain measures and the debt-extinguishment loss in non-GAAP EPS.