Entegris, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 28, 2020; comparisons are with the three months ended March 30, 2019 unless otherwise noted. Entegris supplies microcontamination-control products, specialty chemicals and advanced materials-handling solutions to semiconductor and other high-technology industries.
Financial performance
- Revenue: $412.3 million, up 5%. Acquisitions contributed $15.4 million; volume, pricing and mix added $6.2 million; foreign exchange reduced revenue by $0.3 million. Sequentially, sales fell 3% from Q4 2019.
- Profit and margins: Gross profit was $185.5 million; gross margin was 45.0%, down from 45.4%. Operating income was $80.7 million (19.6% margin), versus $47.5 million (12.1%). Net income was $61.0 million, or $0.45 per diluted share, versus $32.7 million, or $0.24. The effective tax rate was 12.4%, versus 14.2%.
- Cash flow: Operating cash flow was $11.4 million, versus cash used of $2.5 million. Investing used $98.2 million, including $75.6 million for the Sinmat acquisition and $22.6 million of capital expenditures. Financing provided $71.7 million. Cash decreased $16.8 million to $335.1 million. Operating cash flow less capital expenditures was negative $11.2 million.
- Liquidity and debt: Working capital was $764.3 million. Total debt carrying value was $1,078.9 million, up from $936.5 million at year-end; cash was $335.1 million. The company drew $142 million on its revolving facility during the quarter. It reported covenant compliance and said cash, anticipated operating cash flow and available facilities should cover ordinary-course needs for the next 12 months.
- Non-GAAP measures: Adjusted EBITDA was $120.3 million (29.2% margin), up 10.5%; adjusted operating income was $99.6 million (24.2% margin), up 8.1%; non-GAAP diluted EPS was $0.55 versus $0.50. These company-defined measures exclude specified items and should be considered alongside GAAP results.
Material changes and business developments
- SCEM revenue rose to $144.2 million from $124.5 million; segment profit increased to $32.7 million from $24.4 million. MC revenue was $159.3 million versus $157.7 million; segment profit was $50.2 million versus $47.3 million. AMH revenue was approximately flat at $116.1 million; segment profit declined to $20.6 million from $22.4 million.
- SG&A fell $23.4 million year over year, principally because the prior-year period included costs related to the terminated Versum transaction and acquisition integration. The prior-year comparison therefore includes unusually high costs.
- On January 10, 2020, Entegris acquired Sinmat for $75.6 million net of cash acquired. The acquisition added $31.8 million of goodwill and $41.7 million of identifiable intangible assets; purchase accounting remains provisional.
- Cash dividends paid were $10.8 million. The company suspended its share-repurchase program in March. On April 15, the board declared a further $0.08-per-share dividend, payable May 20, 2020.
Outlook, risks and contingencies
- Management anticipated a slight decline in gross margin in Q2 2020, citing potential COVID-19 effects on production, productivity and freight costs. It did not provide a clear full-year earnings or revenue forecast and said pandemic-related effects could not reasonably be estimated.
- All facilities remained operational at filing time, but COVID-19 restrictions reduced productivity at the Malaysian plant and caused brief interruptions at sites in China and the United States. Some customers delayed deliveries or acceptance inspections; management expected those sales to be recorded in Q2. Leading-edge demand, including data-center-related demand, was strong, but management cautioned that some bookings could reflect customer inventory buildup rather than lasting demand. Weakness was reported in some mainstream fabs.
- The company increased certain inventory levels to mitigate supply risk. It had not experienced significant overall supply-chain interruption, but a critical valve supplier had temporarily shut down; Entegris obtained supply from a prequalified alternative. Freight disruption, supplier distress, customer demand shifts and semiconductor cyclicality remain risks.
- Management expected 2020 capital expenditures of approximately $120 million; outstanding capital purchase obligations were $32.3 million. Approximately $201.5 million of cash was held in foreign operations. After quarter-end, the company repatriated approximately $38 million to the United States.
- Key risks include pandemic-related economic and operating disruption, semiconductor downturns, customer concentration, limited-source suppliers, foreign exchange, and debt and refinancing exposure. Ordinary-course legal matters were not expected to have a material adverse effect. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether delayed Q1 customer deliveries and acceptance inspections were recognized in Q2, and whether customer inventory-building reverses into weaker demand.
- Whether Q2 gross margin declined as anticipated and how COVID-19 affected production, freight costs, suppliers and customer demand.
- Cash conversion and working-capital trends, particularly receivables and inventory, alongside the increased debt balance and revolver usage.
- Sinmat purchase-accounting estimates, including provisional intangible-asset and goodwill allocations, and the performance of recent acquisitions.
- 2020 capital spending against the approximately $120 million outlook, and the company’s dividend and share-repurchase capital-allocation decisions.