Entegris, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter ended June 29, 2019; comparisons are primarily with the quarter ended June 30, 2018. Amounts are in U.S. dollars.
Business context and results
Entegris supplies microcontamination-control products, specialty chemicals and advanced-materials-handling solutions to semiconductor and other high-technology markets. Its three segments are Specialty Chemicals and Engineered Materials (SCEM), Microcontamination Control (MC), and Advanced Materials Handling (AMH).
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $378.9 million | $383.1 million | $769.9 million | $750.3 million |
| Gross margin | 43.9% | 47.6% | 44.6% | 47.8% |
| Operating income | $54.9 million | $74.9 million | $102.4 million | $153.4 million |
| Net income | $124.0 million | $54.3 million | $156.7 million | $111.9 million |
| Diluted EPS | $0.91 | $0.38 | $1.15 | $0.78 |
| Adjusted EBITDA margin | 25.2% | 28.5% | 26.5% | 28.7% |
Q2 sales declined 1% year over year; excluding acquired-business sales of $32.3 million and unfavorable currency effects of $2.8 million, sales fell 9%, reflecting weaker semiconductor demand. Sequential sales declined 3%. For the first half, reported sales rose 3%, but volume, pricing and mix reduced sales by $42.6 million and currency by $6.0 million; acquisitions added $68.3 million.
Lower factory utilization and unfavorable mix reduced gross margin. Q2 adjusted operating income declined 18% to $76.8 million, and adjusted EBITDA declined 13% to $95.4 million. Non-GAAP diluted EPS was $0.39 versus $0.49; first-half non-GAAP diluted EPS was $0.89 versus $0.96.
Segments and material changes
- SCEM: Q2 sales fell to $127.6 million from $134.3 million; segment profit declined 35% to $24.0 million, principally on lower sales and unfavorable mix.
- MC: Q2 sales increased to $150.2 million from $124.9 million, mainly reflecting the SAES Pure Gas acquisition; segment profit rose 16% to $43.1 million.
- AMH: Q2 sales fell to $107.5 million from $130.6 million; segment profit declined 41% to $15.0 million.
Net income was boosted by a $122.0 million net Versum termination fee. Entegris received a $140.0 million fee after Versum terminated their merger agreement, and Entegris paid its financial adviser $18.0 million. The reported earnings increase therefore does not reflect underlying operating improvement. Q2 income tax expense also included discrete items; the first-half effective tax rate was 23.7%, compared with 17.2% a year earlier.
Cash flow, debt and liquidity
- First-half operating cash flow was $228.4 million, compared with $137.1 million. Investing cash outflow was $109.2 million, including $60.1 million of capital expenditures and $49.3 million for DSC, net of cash acquired. Financing cash outflow was $79.2 million.
- Cash and equivalents were $521.4 million at June 29, 2019, up from $482.1 million at year-end. Working capital was $833.3 million.
- Debt, including current maturities, was $937.7 million, versus $938.9 million at year-end. The $300 million revolving facility had no material borrowings; $0.2 million of letters of credit was outstanding. The company reported compliance with debt covenants.
- During the first half, Entegris paid $19.0 million in dividends and repurchased $50.3 million of shares. Management said cash, available credit and operating cash flow should cover working-capital and investment requirements for at least 12 months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expected 2019 capital expenditures of approximately $110 million; $60.1 million had been spent in the first half, with $29.4 million of outstanding capital purchase obligations.
- On July 15, 2019, after quarter-end, Entegris acquired MPD Chemicals for approximately $165 million, funded from cash. The March 2019 DSC acquisition cost approximately $64.0 million net of cash acquired.
- The company adopted the new lease standard on January 1, 2019, recognizing $44.2 million of right-of-use assets and $49.4 million of lease liabilities at quarter-end. Management said adoption materially affected the balance sheet but not materially the income statement or cash flows.
- Key risks cited include semiconductor-market cyclicality and weakening demand, rapid demand shifts, customer concentration, competition and pricing pressure, reliance on limited-source suppliers, raw-material availability and pricing, foreign-exchange exposure, international operating risks, and indebtedness. Management noted that a 100-basis-point interest-rate change could affect annual net income by approximately $1.0 million.
- Management reported effective disclosure controls. It stated that legal claims arising in the ordinary course were not expected to have a material adverse effect. Integration of the SAES Pure Gas business into internal financial controls was ongoing.
Important facts for investors to verify
- How much of future sales and profitability depends on semiconductor demand recovering, given Q2’s 9% underlying sales decline and lower margins?
- How should the $122.0 million Versum termination fee and related tax effects be separated from recurring earnings? Compare GAAP results with the company’s non-GAAP reconciliations.
- What are the acquired businesses’ ongoing contributions, integration costs and cash requirements, including MPD Chemicals’ post-quarter acquisition?
- How will debt service, capital spending, dividends and buybacks affect liquidity after the acquisitions?
- Do the filing’s stated supplier, customer-concentration, currency and market risks change materially in subsequent reports?