ENTEGRIS, INC. — Q3 2019 Form 10-Q
Business 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 filing covers the 13-week quarter ended September 28, 2019, and the nine months then ended; comparisons are with the corresponding 2018 periods unless noted. Amounts are U.S. dollars.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $394.1m | $398.6m | $1,164.1m | $1,148.9m |
| Gross profit / margin | $170.4m / 43.2% | $181.7m / 45.6% | $514.0m / 44.2% | $540.1m / 47.0% |
| Operating income | $52.8m | $68.0m | $155.2m | $221.4m |
| Net income | $40.8m | $48.1m | $197.4m | $160.0m |
| Diluted EPS | $0.30 | $0.34 | $1.45 | $1.12 |
| Adjusted EBITDA (non-GAAP) | $107.5m | $110.4m | $311.8m | $325.7m |
Q3 sales declined 1%; excluding acquisition sales and currency effects, they fell 3%, reflecting weaker semiconductor demand. Sequential sales rose 4% from Q2, or 2% excluding acquisitions and currency. Nine-month sales increased 1%, but included $72.0m of net acquired-business sales; volume, pricing and mix reduced sales by $51.0m.
Q3 adjusted EBITDA margin was 27.3% versus 27.7%; nine-month margin was 26.8% versus 28.4%. Non-GAAP diluted EPS was $0.50 versus $0.46 for Q3 and $1.39 versus $1.42 for nine months. These company-defined non-GAAP measures exclude specified items and should be considered alongside GAAP results.
Cash, liquidity and debt
- Nine-month operating cash flow was $253.7m, versus $221.2m. Capital expenditures were $86.4m; operating cash flow less capital expenditures was approximately $167.2m.
- Cash declined to $282.7m from $482.1m at year-end 2018, principally amid acquisitions, capital investment, share repurchases and dividends. Investing cash outflow was $350.0m; financing cash outflow was $101.8m.
- Reported debt, including current maturities, was $938.1m, little changed from $938.9m at year-end. The $300m revolving facility was substantially undrawn, with $0.2m in letters of credit; the company reported compliance with debt covenants. Operating lease liabilities totaled $53.2m.
- Working capital was $671.2m. Management said available cash, credit facilities and expected operating cash flow should cover working-capital and investment needs for at least 12 months. Cash held by foreign subsidiaries was $178.6m.
- Days sales outstanding rose to 60 days from 50 at year-end; management attributed this partly to quarter-end timing. Inventories were $290.3m, up from $268.1m at year-end.
Material changes and unusual items
- Operating pressure: Lower factory utilization and unfavorable product mix contributed to lower gross profit and margins. Q3 GAAP gross margin included $4.5m of acquired-inventory charges and $1.0m of restructuring costs; excluding these, margin was 44.6% versus 46.4%. Nine-month adjusted-for-these-items gross margin was 44.9% versus 47.3%.
- Segment mix: Q3 MC sales and segment profit rose to $156.0m and $46.8m; SCEM fell to $127.8m and $17.1m; AMH fell to $117.3m and $17.1m. For nine months, MC grew while SCEM and AMH sales and profits declined.
- Versum termination fee: Entegris received a $140m fee after Versum terminated their merger agreement; after $18m paid to its financial adviser, $122m was recorded as nine-month other income. This materially boosted nine-month pretax income and net income and is not an operating revenue item.
- Acquisitions: The company acquired Digital Specialty Chemicals in March, MPD Chemicals in July for approximately $162.4m, and Anow in September for approximately $73.0m, funded from cash. Purchase-price allocations for MPD and Anow were provisional; related goodwill and intangible assets increased.
- Restructuring and costs: Q3 organizational changes generated $8.5m of severance and restructuring charges across cost of sales, SG&A and R&D. The actions were expected to be substantially complete by year-end, with no additional material charges anticipated for the rest of 2019. Deal and integration costs also increased SG&A.
- Taxes: The nine-month effective tax rate was 20.1%, versus 17.8%. Discrete tax items included a $9.4m charge related to reversal of a dividend-received deduction benefit, partly offset by a $5.3m third-quarter benefit, and a $2.9m benefit associated with the Versum fee.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management expected 2019 capital expenditures of approximately $110m and stated its liquidity should meet needs for at least the next 12 months. It described improved semiconductor demand sequentially in Q3, but noted weaker demand versus the prior-year quarter. Principal risks include semiconductor-industry cyclicality and economic weakness, rapid demand shifts, customer concentration, reliance on sole- or limited-source suppliers, raw-material constraints and price increases, acquisition integration, foreign exchange, international operations, and the level and obligations of debt. Management reported ordinary-course legal claims and did not expect them to have a material adverse effect. Disclosure controls were judged effective; no material change in internal control over financial reporting was identified.
Investor verification priorities
- Assess whether sequential semiconductor demand improvement continued and how volume, pricing and product mix affect margins.
- Separate recurring operating performance from the $122m net Versum termination income and other acquisition, integration and restructuring items.
- Track cash conversion, the increase in DSO, working-capital needs and remaining capital spending obligations.
- Review acquisition integration, provisional purchase accounting, acquired goodwill and intangible amortization, and the cash impact of the three 2019 acquisitions.
- Monitor debt, interest expense, covenant headroom, foreign-held cash and capital allocation through repurchases and dividends.