Business context and reporting period
Entegris, Inc. develops and supplies microcontamination-control products, specialty chemicals and advanced materials-handling solutions for semiconductor and other high-technology manufacturing. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are to the quarter and six months ended July 1, 2017, except where noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $383.1M | $329.0M | $750.3M | $646.4M |
| Gross profit / margin | $182.4M / 47.6% | $150.3M / 45.7% | $358.4M / 47.8% | $289.9M / 44.8% |
| Operating income / margin | $74.9M / 19.6% | $59.1M / 18.0% | $153.4M / 20.4% | $110.0M / 17.0% |
| Net income / diluted EPS | $54.3M / $0.38 | $40.0M / $0.28 | $111.9M / $0.78 | $72.5M / $0.51 |
Q2 sales rose 16%; management attributed growth mainly to volume and pricing, with $3.4M from favorable currency translation and $4.9M from acquired businesses. Excluding those factors, sales increased 14%. Sales were up 4% sequentially from Q1 2018. Gross-margin improvement reflected higher factory utilization, partly offset by normal competitive price erosion. Q2 GAAP results included $5.1M of acquisition deal costs, $1.2M of integration costs and $0.2M of acquired-inventory fair-value step-up expense. Other expense was $3.9M, mainly foreign-currency transaction losses and penalty charges.
Six-month operating cash flow was $137.1M, versus $118.6M in 2017. Investing cash use was $425.8M, including $380.2M for business acquisitions and $47.4M for property and equipment. Financing cash use was $76.7M, including dividends of $19.8M, share repurchases of $20.0M and net term-loan payments. Cash declined to $257.1M at June 30 from $625.4M at year-end 2017. Working capital was $570.0M, compared with $766.6M at year-end.
At June 30, debt was $650.2M, compared with $674.4M at December 31, 2017; cash was $257.1M. Debt fair value was reported as $622.8M. The company had no ABL Facility borrowings and no borrowings under its Japanese credit lines. It reported compliance with debt covenants. Management said available cash, credit facilities and operating cash flow should meet working-capital and investment needs for at least 12 months.
Material changes and business developments
- All three segments grew year over year in Q2: Specialty Chemicals and Engineered Materials sales were $134.3M and segment profit $37.3M; Microcontamination Control sales were $124.7M and segment profit $39.1M; Advanced Materials Handling sales were $124.0M and segment profit $23.1M.
- On June 25, Entegris acquired SAES Pure Gas for approximately $352.5M cash, or $341.2M net of cash acquired. The acquired business contributed $1.0M of Q2 sales. Purchase-price allocation remained provisional, including $178.2M of acquired intangible assets and $162.3M of goodwill; the company said no goodwill was expected to be tax-deductible.
- Entegris acquired Particle Sizing Systems for $37.3M in January and Flex Concepts for $1.9M in June. These acquisitions were described as not material business combinations.
- Revenue standard ASC 606 was adopted January 1, 2018 using the modified retrospective method. The opening retained-earnings adjustment was a $0.6M decrease; the company said current-quarter line-item effects were immaterial. Prior-year amounts were not restated.
- The year-to-date effective tax rate was 17.2%, versus 21.7% in 2017, reflecting the U.S. corporate tax-rate reduction, GILTI and discrete items. The company had not finalized certain provisional Tax Cuts and Jobs Act accounting and expected to complete its analysis in the second half of 2018.
Outlook, risks and contingencies
The filing provides no specific revenue or earnings guidance. Management estimated 2018 capital expenditures of approximately $100M–$120M and disclosed $41.9M of outstanding capital purchase obligations. Management cited strong semiconductor demand, high fab utilization and increased customer capital spending, while noting sales remain exposed to industry cyclicality, rapid demand shifts, technology changes and pricing pressure. Other disclosed risks include customer concentration, dependence on sole- or limited-source suppliers, raw-material shortages or price increases, international operating risks, acquisitions and integration, intellectual-property protection, and indebtedness. Management said ordinary-course legal claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective; SPG was excluded from the internal-control assessment for this quarter, with inclusion required no later than Q2 2019.
Important facts for investors to verify
- Track whether semiconductor demand, utilization and customer capital spending sustain sales growth, and monitor geographic trends, including the reported Q2 sales decline in Taiwan.
- Review SAES Pure Gas integration, acquisition returns, final purchase-price valuations and resulting amortization and goodwill.
- Assess cash conversion and working-capital needs, particularly inventory growth, alongside planned capital spending and purchase commitments.
- Monitor debt service, covenant headroom and liquidity after the large cash-funded acquisition; confirm the availability of committed credit facilities.
- Check final Tax Cuts and Jobs Act accounting and any resulting tax-rate or provision adjustments.
- Compare GAAP performance with non-GAAP measures, noting that the company’s adjustments exclude recurring amortization and other costs and may not be comparable across companies.