Entegris, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended October 2, 2021, compared with periods ended September 26, 2020. Amounts are in U.S. dollars unless stated otherwise.
Business context
Entegris supplies advanced materials and process solutions to semiconductor and other high-technology industries. Its three segments are Specialty Chemicals and Engineered Materials (SCEM), Microcontamination Control (MC), and Advanced Materials Handling (AMH). Management reported robust industry conditions and record demand, particularly for leading-edge products.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $579.5 million | $481.0 million | $1,663.7 million | $1,341.7 million |
| Gross margin | 45.6% | 47.0% | 46.0% | 46.1% |
| Operating income | $139.4 million | $106.8 million | $392.2 million | $282.2 million |
| Net income | $117.5 million | $79.3 million | $290.9 million | $208.3 million |
| Diluted EPS | $0.86 | $0.58 | $2.13 | $1.53 |
| Operating cash flow | — | $284.5 million | $242.7 million |
- Quarterly sales rose 20%; nine-month sales rose 24%. Growth was primarily volume-driven, with contributions across all three segments. Foreign exchange and acquired businesses contributed modestly.
- Quarterly gross margin declined 1.4 percentage points, mainly due to unfavorable mix and higher materials, labor, and freight costs, partly offset by higher sales. Nine-month gross margin was down 0.1 point.
- Quarterly net margin increased to 20.3% from 16.5%; nine-month net margin increased to 17.5% from 15.5%.
- Non-GAAP results: Q3 adjusted EBITDA was $175.5 million (30.3% margin) and adjusted operating income was $152.7 million (26.3% margin). Nine-month figures were $499.8 million (30.0%) and $432.3 million (26.0%), respectively. Non-GAAP diluted EPS was $0.92 for Q3 and $2.47 for nine months, versus $0.67 and $1.83. These are company-defined measures, not GAAP.
- Segment sales and profit increased year over year in Q3: SCEM sales $176.4 million and profit $41.1 million; MC $225.9 million and $78.4 million; AMH $186.2 million and $40.5 million. AMH had the strongest sales growth, up 29%.
Cash, debt, and liquidity
- Cash and equivalents were $475.8 million at October 2, down from $580.9 million at December 31, 2020. Working capital was $966.3 million.
- Nine-month operating cash flow was $284.5 million; investing cash outflow was $131.8 million, including $134.0 million of capital expenditures; financing cash outflow was $254.5 million. Cash declined $105.1 million during the period. Inventory growth was a significant working-capital use.
- Long-term debt carrying value was $936.7 million, compared with $1,085.8 million at year-end 2020. Principal debt outstanding was $945 million: $400 million of 2029 notes, $400 million of 2028 notes, and a $145 million term loan. No revolving-facility borrowings were outstanding; the facility commitment was increased to $400 million and extended to April 2026.
- Management said available cash and anticipated operating cash flows were expected to meet ordinary-course needs for the next 12 months and longer term. The company was in compliance with applicable debt covenants.
- The company expected 2021 capital expenditures of approximately $225 million, including growth capacity and the initial phase of a new Taiwan facility. It also reported $192.4 million of capital purchase obligations for equipment and plant not yet received.
Changes, outlook, risks, and unusual items
- In April 2021, Entegris issued $400 million of 3.625% notes due 2029 and redeemed $550 million of 2026 notes. The redemption generated a $23.1 million extinguishment loss, contributing to nine-month other expense of $29.8 million.
- The nine-month effective tax rate was 12.1%, versus 16.0% a year earlier. Management attributed the decrease principally to tax-credit valuation allowance reversals, a capital-loss tax benefit, and changes in foreign income mix; certain tax charges partially offset these benefits.
- COVID-19 had not significantly disrupted global operations to date, but management cited raw-material constraints, higher freight costs, and delivery delays, and expected some supply-chain challenges to persist. Management said future pandemic effects remained difficult to predict.
- Other risks identified include semiconductor-industry cyclicality, rapid demand shifts, customer concentration, dependence on sole- or limited-source suppliers, labor and input-cost pressures, international and currency risks, trade restrictions, and indebtedness.
- The board declared a quarterly dividend of $0.08 per share, payable November 17, 2021. The company repurchased $50 million of stock during the first nine months of 2021.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. Ordinary-course legal matters were not expected to have a material adverse effect; no material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether strong semiconductor demand and segment growth continue, and whether supply constraints, freight, labor, and materials costs keep pressuring gross margin.
- Execution and funding of the planned $225 million capital program and Taiwan facility, alongside the $192.4 million of outstanding purchase obligations.
- Cash conversion and working-capital trends, particularly the increase in inventory and the resulting cash use.
- Debt levels, refinancing capacity, covenant compliance, and the effects of the 2029-note refinancing and related redemption loss.
- The sustainability of reported earnings growth, including the impact of discrete tax benefits and the distinction between GAAP and company-defined non-GAAP results.