Entegris, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended July 2, 2016; comparisons are to the periods ended June 27, 2015. Entegris supplies specialty chemicals and advanced materials solutions, principally for semiconductor and other high-technology manufacturing. Its reportable segments are Critical Materials Handling (CMH) and Electronic Materials (EM).
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $303.1m | $280.7m | $570.1m | $544.1m |
| Gross profit / margin | $139.2m / 45.9% | $128.1m / 45.6% | $253.9m / 44.5% | $244.6m / 45.0% |
| Operating income / margin | $46.4m / 15.3% | $39.3m / 14.0% | $76.0m / 13.3% | $66.9m / 12.3% |
| Net income | $32.9m | $24.4m | $49.1m | $39.3m |
| Diluted EPS | $0.23 | $0.17 | $0.35 | $0.28 |
| Operating cash flow | — | $78.5m | $36.1m | |
| Capital expenditures | — | $32.1m | $34.2m |
Q2 sales rose 8% year over year, including $3.3m of favorable currency translation; excluding that effect, sales increased 7%. Sales were up 13% sequentially from Q1, or 12% excluding currency. Management attributed growth mainly to stronger semiconductor customer demand, higher fab utilization and capital spending. Six-month sales rose 5%, or 4% excluding currency.
Q2 adjusted EBITDA, a company-defined non-GAAP measure, increased 6% to $71.3m, while its margin declined to 23.5% from 23.9%. Adjusted operating income rose 7% to $57.5m, with margin at 19.0% versus 19.1%. Non-GAAP diluted EPS was $0.28 versus $0.24. These measures exclude specified items and should be considered alongside GAAP results.
Segments and material changes
- CMH: Q2 sales increased 12% to $194.9m and segment profit rose 20% to $52.5m. Six-month sales were $361.1m, up 6%; segment profit was $90.4m, up 6%.
- EM: Q2 sales increased 2% to $108.2m, but segment profit declined 4% to $27.5m, primarily due to unfavorable sales mix. Six-month sales rose 3% to $209.0m; segment profit was essentially unchanged at $49.1m.
- Q2 gross margin improved year over year with higher sales and factory utilization. Six-month gross margin declined 0.5 percentage points, reflecting slightly unfavorable mix and higher qualification and start-up costs at the i2M Center.
- Interest expense fell to $9.1m for Q2 and $18.3m for six months, reflecting lower borrowings after prior debt repayments. The six-month effective tax rate was 17.5%, down from 21.7%; 2016 included a $1.1m discrete tax benefit related to consolidation of certain Taiwan entities.
Cash, debt and liquidity
At July 2, 2016, cash and cash equivalents were $373.7m, versus $349.8m at year-end 2015; working capital was $585.0m. Total debt, including current maturities, was $632.2m, down from $656.0m at year-end. The debt included $360m of 6% unsecured notes due 2022 and $233.9m outstanding under the term loan. The $75m asset-based revolver had no borrowings; $0.2m was utilized for letters of credit. The company reported compliance with applicable debt covenants.
Six-month operating cash flow was $78.5m. Receivables and inventory increases absorbed cash; days sales outstanding rose to 54 days from 48 at the start of the year. Capital spending was $32.1m, and management expected 2016 capital expenditures of approximately $75m. The company stated that cash, available facilities and operating cash flow should meet working-capital and investment needs for at least 12 months. Foreign subsidiaries held $197.3m of cash; some foreign earnings may be subject to U.S. tax if repatriated.
Outlook, risks and other items
- No specific revenue or earnings guidance is provided in the filing. Management described improving semiconductor demand and expected approximately $75m in 2016 capital expenditures.
- Management cited sales cyclicality, technological change, competition and pricing pressure, currency movements, raw-material costs and fixed-cost operating leverage as factors affecting results. A 100-basis-point interest-rate change was estimated to affect annual net income by approximately $0.6m.
- Capital purchase obligations not yet recorded were $9.8m. Ordinary-course legal matters were not expected by the company to have a material adverse effect.
- Management identified no material changes to its critical accounting policies. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether semiconductor demand, fab utilization and capital spending continue to support sales growth, particularly given the business’s cyclical exposure.
- Whether receivables collection and DSO improve, and whether inventory growth converts into sales and cash flow.
- Debt repayment capacity, interest-rate exposure, covenant compliance and availability of revolving-credit liquidity.
- Whether gross-margin pressure from product mix and i2M Center qualification and start-up costs persists; compare non-GAAP results with GAAP measures.
- Potential U.S. tax consequences of repatriating foreign-held cash and the future effects of new revenue-recognition and lease-accounting standards.