ENTEGRIS, INC. — Q1 2019 Form 10-Q
Business and period: Entegris develops and supplies contamination-control products, specialty chemicals and materials-handling solutions, primarily for semiconductor and other high-technology manufacturing. This unaudited quarter ended March 30, 2019; comparisons below are to the three months ended March 31, 2018, unless noted.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $391.0 million | $367.2 million |
| Gross profit / margin | $177.4 million / 45.4% | $176.0 million / 47.9% |
| Operating income / margin | $47.5 million / 12.1% | $78.5 million / 21.4% |
| Net income | $32.7 million | $57.6 million |
| Diluted EPS | $0.24 | $0.40 |
| Operating cash flow | $(2.5) million | $38.8 million |
- Sales rose 6% year over year, but acquisitions added $36.0 million and foreign exchange reduced sales by $3.2 million; excluding these effects, sales declined 2%. Sales were down 3% sequentially from Q4 2018, excluding acquisitions and currency effects.
- Gross profit increased slightly, while gross margin fell 2.5 percentage points. Management attributed the margin decline to less favorable mix and $2.2 million of acquired-inventory step-up costs.
- SG&A rose $24.0 million to $82.3 million, including $19.1 million of deal costs and $2.9 million of integration costs. Amortization also increased to $18.7 million from $11.7 million, largely reflecting acquisitions.
- Adjusted EBITDA, a non-GAAP measure, increased 3% to $108.9 million, while its margin declined to 27.8% from 28.9%. Non-GAAP diluted EPS was $0.50 versus $0.47; these measures exclude specified costs and other items and are not substitutes for GAAP results.
Balance sheet, cash flow and segments
- Cash and equivalents were $342.4 million at March 30, down from $482.1 million at year-end. Working capital was $710.0 million, versus $759.7 million at year-end.
- Debt outstanding was $938.3 million, approximately unchanged from year-end. The $300 million revolving facility was essentially undrawn (only $0.2 million in letters of credit); the company reported compliance with debt covenants. Management said available cash, facilities and operating cash flow should cover needs for at least 12 months.
- Operating cash flow was negative, principally reflecting working-capital outflows, including lower payables/accruals after payment of 2018 incentive compensation and cash used for taxes. Investing cash outflow was $84.1 million, including $34.5 million of capital expenditures and $49.8 million net cash paid for the DSC acquisition. Financing cash outflow was $52.9 million, including $35.3 million of share repurchases and $9.5 million of dividends.
- Segment results were mixed: Microcontamination Control sales increased to $157.7 million and profit to $47.3 million, helped by the SAES Pure Gas acquisition and liquid-chemistry filter demand. Specialty Chemicals and Engineered Materials sales fell to $124.5 million and profit to $24.4 million; Advanced Materials Handling sales fell to $116.1 million and profit to $22.4 million.
Outlook, developments and risks
- Management expected 2019 capital expenditures of approximately $110 million; outstanding capital-purchase obligations were $23.8 million. The filing provides no specific revenue or earnings guidance.
- Entegris acquired Digital Specialty Chemicals on March 8 for approximately $64.5 million net of acquired cash. The purchase price included deferred and contingent consideration; goodwill was approximately $35.1 million and was expected to be nondeductible for tax purposes.
- After quarter-end, Versum terminated its merger agreement with Entegris on April 12 following a competing Merck proposal. Entegris received the contractual $140.0 million termination fee. The fee was a subsequent event, not part of Q1 reported earnings.
- Management cited softer semiconductor-market demand. Principal risks include semiconductor and broader economic cyclicality, rapid demand shifts, customer concentration, competition and pricing pressure, supplier dependence and input-cost changes, technology execution, international operations, acquisitions, and debt obligations. Foreign exchange and interest-rate movements are additional market risks.
- The company adopted the new lease standard on January 1, 2019, recording operating lease right-of-use assets and liabilities; management said the adoption materially affected the balance sheet but not earnings or cash flows. Disclosure controls were reported effective; SPG integration into internal financial controls was ongoing.
Important facts for investors to verify
- Whether semiconductor demand and organic sales stabilize, and whether segment trends—especially the weakness in SCEM and AMH—continue.
- Whether gross margin recovers as acquired-inventory charges and integration costs change, and how recurring acquisition-related amortization affects GAAP earnings.
- How working capital, cash generation, acquisition spending, capital expenditures, repurchases and dividends affect liquidity and debt levels.
- The final accounting for acquisitions and the use and tax treatment of the Versum termination fee; confirm how management reports the fee in subsequent periods.
- Whether the company achieves its stated capital-spending plan and maintains covenant compliance and adequate liquidity amid market and operating risks.