Entegris, Inc. — Q2 2020 Form 10-Q
Business context and period. Entegris develops and supplies microcontamination-control products, specialty chemicals and advanced materials-handling solutions, primarily for semiconductor and other high-technology manufacturing. This unaudited report covers the quarter ended June 27, 2020, and the six months then ended; comparisons are with the corresponding 2019 periods.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $448.4 million | $378.9 million | $860.7 million | $769.9 million |
| Gross profit / margin | $207.4 million / 46.2% | $166.3 million / 43.9% | $392.9 million / 45.6% | $343.7 million / 44.6% |
| Operating income / margin | $94.7 million / 21.1% | $54.9 million / 14.5% | $175.5 million / 20.4% | $102.4 million / 13.3% |
| Net income | $68.0 million | $124.0 million | $129.0 million | $156.7 million |
| Diluted GAAP EPS | $0.50 | $0.91 | $0.95 | $1.15 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $141.4 million | $228.4 million |
Q2 sales rose 18% year over year and 9% sequentially. Management attributed growth primarily to greater semiconductor-market demand; acquisitions contributed $12.4 million and favorable currency translation $0.4 million in Q2. Higher factory utilization and favorable mix lifted gross margin. For the first half, sales increased 12%, while operating income rose substantially.
Q2 net income declined year over year despite stronger operating results, principally because Q2 2019 included $122.0 million of net proceeds from the terminated Versum merger. Adjusted EBITDA, a non-GAAP measure, was $131.5 million in Q2 (29.3% of sales), versus $95.4 million (25.2%) a year earlier; six-month adjusted EBITDA was $251.8 million versus $204.3 million. Non-GAAP diluted EPS was $0.60 for Q2 and $1.15 for the six months; these measures exclude specified items and should be considered alongside GAAP results.
Segments and material changes
- Specialty Chemicals and Engineered Materials: Q2 sales of $146.2 million, up from $127.6 million; segment profit of $32.9 million, up from $24.0 million. Growth in advanced deposition materials and cleaning chemistries, plus acquisitions, was partly offset by weakness in aerospace and handset-related markets.
- Microcontamination Control: Q2 sales of $183.8 million versus $150.2 million; segment profit of $62.1 million versus $43.1 million. Liquid and gas filtration improved; gas purification sales declined.
- Advanced Materials Handling: Q2 sales of $126.4 million versus $107.5 million; segment profit of $22.8 million versus $15.0 million, reflecting higher sales and lower operating expenses.
Q2 sales growth included volume, pricing and mix of $56.6 million, acquired-business sales of $12.4 million and currency benefit of $0.4 million. For the six months, acquisition contributions were $27.8 million. SG&A fell 14% for the first half, largely because the 2019 period included costs associated with the terminated Versum transaction. The effective tax rate for the first half was 15.1%, compared with 23.7% in 2019, which included discrete tax items.
Cash, debt and liquidity
- At June 27, 2020, cash and equivalents were $532.7 million, versus $351.9 million at year-end 2019; working capital was $950.9 million versus $668.0 million.
- Total debt carrying value was $1.184 billion, up from $936.5 million at year-end. Principal debt comprised $400 million of 4.375% notes due 2028, $550 million of 4.625% notes due 2026 and $245 million outstanding on the term loan due 2025. The $300 million revolving facility had no borrowings outstanding.
- In April, Entegris issued the $400 million 2028 notes and used proceeds in part to repay approximately $142 million of revolving borrowings and $151 million of term-loan borrowings. The company reported compliance with applicable financial covenants.
- First-half operating cash flow was $141.4 million, down from $228.4 million, primarily due to lower net income and an $81.9 million use of cash from working capital and other balance-sheet changes. Cash used in investing was $122.3 million, including $75.6 million for Sinmat and $46.9 million of capital expenditures. Cash provided by financing was $163.8 million.
- Management expected 2020 capital expenditures of approximately $120 million and said domestic cash plus anticipated operating cash flow should cover ordinary-course needs for the next 12 months. This is management’s assessment, not a guarantee.
Outlook, risks and unusual items
The filing provides no specific numerical sales or earnings guidance. Management said COVID-19 continued to create substantial uncertainty and made forecasting the remainder of 2020 less reliable. Leading-edge demand tied to servers and data centers was strong, while some mainstream fabs and end markets including automotive, aerospace and mobile phones were weak. Management cautioned that some recent customer orders may reflect inventory build-ahead and could reduce future demand.
- All facilities were operating at the filing date; the Malaysian plant had returned to full capacity after temporary staffing restrictions. The company reported limited supply-chain disruption to date, but described supplier, transport, workforce and customer risks.
- To mitigate potential supply interruptions, Entegris increased certain inventory levels. Inventory rose to $332.9 million from $287.1 million at year-end, and the filing notes potential future excess or obsolete inventory charges.
- In March, the company suspended its share repurchase program. The board declared a $0.08-per-share quarterly dividend in July, payable August 19, 2020.
- On July 10, 2020, after quarter-end, Entegris acquired GMTI and Clean Room Plastics for approximately $36 million in cash, subject to customary adjustments.
- Other principal risks include semiconductor cyclicality, customer concentration, single- and limited-source suppliers, international operations, foreign-exchange movements, trade restrictions and export controls. Ordinary-course legal claims were not expected by management to have a material adverse effect.
Most important facts to verify
- Whether semiconductor demand remains strong after accounting for possible customer inventory build-ahead, and how COVID-19 affects end-market demand and operations.
- Whether working-capital absorption, including receivables and inventory, reverses and supports cash generation in subsequent quarters.
- Debt repayment and financing terms, interest burden, covenant headroom and the company’s stated 12-month liquidity outlook.
- 2020 capital expenditure expectations, acquisition integration and returns, including the post-quarter GMTI and Clean Room Plastics acquisition.
- Reconciliation and assumptions underlying non-GAAP measures; GAAP net income comparisons are significantly affected by the 2019 Versum termination proceeds.