Entegris, Inc. — Q2 2017 Form 10-Q
Business and period: Entegris supplies microcontamination-control products, specialty chemicals and materials-handling solutions to semiconductor and other high-technology manufacturers. This unaudited report covers the quarter ended July 1, 2017, and the six months then ended; comparisons are with the corresponding 2016 periods unless noted.
Financial highlights
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $329.0 million | $303.1 million | $646.4 million | $570.1 million |
| Gross profit / margin | $150.3 million / 45.7% | $139.2 million / 45.9% | $289.9 million / 44.8% | $253.9 million / 44.5% |
| Operating income / margin | $59.1 million / 18.0% | $46.4 million / 15.3% | $110.0 million / 17.0% | $76.0 million / 13.3% |
| Net income | $40.0 million | $32.9 million | $72.5 million | $49.1 million |
| Diluted EPS | $0.28 | $0.23 | $0.51 | $0.35 |
| Adjusted EBITDA (non-GAAP) | $88.2 million | $71.3 million | $164.1 million | $125.8 million |
Cash flow and liquidity: First-half operating cash flow was $118.6 million, compared with $78.5 million in 2016. Capital expenditures were $42.5 million; investing cash use was $62.3 million and financing cash use was $61.6 million. Cash was $405.6 million at July 1, versus $406.4 million at year-end 2016. Working capital was $558.0 million.
Debt: Debt, including current maturities, totaled $535.9 million, down from $584.7 million at year-end. The company repaid $50.0 million on its term loan during the half. It had $360 million of 6% senior unsecured notes due 2022 and $183.9 million outstanding under its term loan; $100 million of term-loan debt was classified as current. The $75 million revolving facility had no borrowings. Entegris reported compliance with applicable debt covenants.
Changes and operating drivers
- Q2 sales rose 9% year over year; first-half sales rose 13%. Management attributed growth mainly to broad demand strength, high semiconductor fab utilization and increased customer capital spending. Q2 sales included $1.5 million from the acquired product line and a $0.4 million unfavorable currency effect.
- Q2 gross margin eased 0.2 percentage points year over year, despite higher gross profit. Better factory utilization, favorable mix and the absence of prior-year i2M startup costs were partly offset by price erosion and $2.0 million of 450 mm-related equipment impairment charges.
- Q2 operating income increased to $59.1 million. Net income also benefited from stronger operating results, while the effective tax rate and discrete tax items affected the comparison.
- SCEM and MC segment profits increased year over year in Q2; AMH segment profit declined 13% to $19.6 million despite higher sales, reflecting unfavorable mix, price erosion, $2.3 million of impairment losses and higher operating expenses.
- On April 24, Entegris acquired W.L. Gore’s microelectronic water and chemical filtration product line for $20.0 million cash. It contributed $1.5 million of Q2 revenue. Purchase-price allocation was preliminary, including $7.3 million of goodwill.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expected 2017 capital expenditures of approximately $90–$100 million; $26.4 million of capital purchase obligations were outstanding at July 1.
- Management said cash, available credit and expected operating cash flow should cover working-capital and investment needs for at least the next 12 months. Of the $405.6 million cash balance, $305.1 million was held by foreign subsidiaries; some foreign earnings may incur U.S. tax if repatriated.
- First-half income tax expense included a $3.2 million share-based compensation tax benefit and a $3.6 million discrete charge to correct an error relating to intercompany sales and profit. The year-to-date effective tax rate was 21.7%, versus 17.5% in 2016.
- Key disclosed risks include semiconductor-market cyclicality and demand shifts, customer concentration, pricing and competition, technology and product execution, acquisition integration, supplier constraints and raw-material costs, foreign-exchange movements, international operations, and indebtedness. A 100-basis-point interest-rate change was estimated to affect annual net income by approximately $1.4 million.
- Ordinary-course legal claims were not expected by the company to have a material adverse effect. Management concluded disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Investor facts to verify
- Whether semiconductor demand and customer capital spending sustained the growth drivers cited by management.
- Whether AMH profitability recovered from the reported mix, pricing, impairment and expense pressures.
- The final acquisition valuation and whether the acquired product line contributes as expected.
- Cash conversion, inventory growth, planned capital spending and progress on debt reduction.
- The effects of discrete tax items and the forthcoming revenue-recognition and lease accounting standards.