Entegris, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended April 1, 2017 unless noted. Entegris develops and supplies microcontamination-control products, specialty chemicals, and materials-handling solutions, principally for semiconductor and other high-technology manufacturing.
Financial results
| Metric | Q1 2018 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $367.2 million | $317.4 million | +16% |
| Gross profit / margin | $176.0 million / 47.9% | $139.6 million / 44.0% | Margin +3.9 percentage points |
| Operating income / margin | $78.5 million / 21.4% | $50.9 million / 16.0% | Higher |
| Net income / diluted EPS | $57.6 million / $0.40 | $32.5 million / $0.23 | Higher |
| Operating cash flow | $38.8 million | $33.4 million | Higher |
| Capital expenditures | $21.0 million | $22.2 million | Lower |
- Sales growth reflected broad demand, especially from semiconductor customers, supported by high fab utilization and increased capital spending. Excluding $4.8 million of acquired-business sales and $6.5 million of favorable currency translation, sales grew 12%.
- Gross margin improved primarily because higher sales increased factory utilization; management noted some offset from competitive price erosion. SG&A rose 15% to $58.3 million, mainly from compensation costs and professional fees. R&D was $27.6 million.
- All three segments grew year over year: SCEM sales were $130.7 million and segment profit $31.6 million; MC sales were $118.6 million and profit $42.0 million; AMH sales were $117.8 million and profit $23.1 million.
- Non-GAAP measures: Adjusted EBITDA was $106.0 million, or 28.9% of sales, versus $75.8 million and 23.9%; adjusted operating income was $90.1 million versus $61.9 million; non-GAAP diluted EPS was $0.47 versus $0.28. These company-defined measures exclude items including recurring amortization and depreciation and should be considered alongside GAAP results.
Cash, debt, and capital allocation
- Cash and cash equivalents were $550.2 million at March 31, down from $625.4 million at year-end. Current assets were $1.011 billion and current liabilities $266.5 million; working capital was $744.6 million.
- Total debt, including current maturities, was $649.8 million, down from $674.4 million at year-end; cash less debt was approximately negative $99.6 million. The debt fair value was $637.3 million. The company had no ABL borrowings, and reported compliance with applicable debt covenants.
- Quarterly cash use included $37.7 million to acquire Particle Sizing Systems (PSS), $25.0 million of term-loan repayment, $9.9 million of dividends, and $10.0 million of share repurchases. Operating cash flow was partly absorbed by working-capital investment, including inventory growth and payment of prior-year incentive compensation.
- Management expected 2018 capital expenditures of approximately $100–$120 million; outstanding capital purchase obligations were $35.7 million. Management said cash, available credit, and operating cash flow should meet working-capital and investment needs for at least the next 12 months.
Changes, outlook, and risks
- Sequential sales increased 5% from Q4 2017, including $3.9 million each from acquisitions and favorable currency effects. The filing provides no specific revenue or earnings guidance.
- Entegris acquired PSS on January 22 for approximately $37.7 million cash. PSS results are included in AMH from that date. The purchase-price allocation was preliminary, including $15.4 million of goodwill, and was expected to be finalized in Q2.
- The company adopted the new revenue-recognition standard using the modified retrospective method. The opening retained-earnings adjustment was a $0.6 million reduction; management said the standard’s quantitative effect on Q1 line items was immaterial. Prior-year figures were not restated.
- The Q1 effective tax rate was 19.0%, versus 21.9%. The 2018 rate reflects the lower U.S. corporate tax rate and GILTI, among other items. Accounting for certain Tax Cuts and Jobs Act effects remained provisional; management expected to complete its analysis in the second half of 2018, and adjustments could materially affect tax expense or the effective rate.
- Key risks include semiconductor-industry cyclicality and demand shifts, customer concentration, competition and pricing pressure, technology and new-product execution, supplier concentration and input-cost increases, international and currency exposure, acquisition integration, and indebtedness. A 100-basis-point interest-rate change could affect annual net income by approximately $3.4 million. Ordinary-course legal matters were not expected by the company to have a material adverse effect.
Important facts for investors to verify
- Whether elevated semiconductor demand, fab utilization, and capital spending continue, and how much future growth is organic versus acquisition- or currency-driven.
- Whether gross-margin gains from factory utilization persist amid price erosion, rising operating costs, and changes in product or geographic mix.
- Cash conversion and working-capital trends, particularly inventory, receivables, and payable movements, alongside the planned capital expenditures and purchase obligations.
- Debt repayment and liquidity needs, including the $100 million of term-loan maturities classified as current and the company’s ability to maintain covenant compliance.
- Final PSS purchase accounting and integration, and completion of the provisional tax accounting, including potential effects on reported earnings and tax rates.