Entegris, Inc. — Q1 2021 Form 10-Q
Business and period: Entegris supplies advanced materials and process solutions to semiconductor and other high-technology industries. This unaudited report covers the three months ended April 3, 2021, compared with the three months ended March 28, 2020. Its three segments are Specialty Chemicals and Engineered Materials (SCEM), Microcontamination Control (MC), and Advanced Materials Handling (AMH).
Financial results
| Metric | Q1 2021 | Prior-year quarter |
|---|---|---|
| Net sales | $512.8 million | $412.3 million |
| Gross profit / margin | $235.0 million / 45.8% | $185.5 million / 45.0% |
| Operating income / margin | $114.0 million / 22.2% | $80.7 million / 19.6% |
| Net income / margin | $84.7 million / 16.5% | $61.0 million / 14.8% |
| Diluted GAAP EPS | $0.62 | $0.45 |
| Operating cash flow | $53.1 million | $11.4 million |
| Capital expenditures | $43.3 million | $22.6 million |
- Sales rose 24%; management attributed the increase primarily to strong industry conditions, node transitions, and demand. The increase included $5.4 million of favorable currency translation and $3.2 million from acquired businesses; the balance was principally volume, pricing, and mix.
- Gross margin improved 0.8 percentage point, which management attributed to higher factory utilization and favorable sales mix. SG&A increased to $71.4 million from $58.9 million, largely reflecting employee costs. Research and development expense rose to $37.7 million from $29.6 million.
- Segment sales and profit: SCEM $166.5 million and $34.6 million; MC $207.1 million and $70.6 million; AMH $148.5 million and $32.1 million. Sales increased in all segments; MC and AMH segment profit grew 41% and 56%, respectively, while SCEM profit increased 6%.
- Adjusted EBITDA, a non-GAAP measure, was $150.1 million (29.3% of sales), versus $120.3 million (29.2%). Adjusted operating income was $128.0 million versus $99.6 million; non-GAAP diluted EPS was $0.70 versus $0.55. These company-defined measures exclude specified items and should be considered alongside GAAP results.
Cash, debt, and liquidity
- Cash and cash equivalents were $548.5 million at April 3, 2021, down from $580.9 million at year-end 2020. Working capital was $978.3 million.
- Reported long-term debt, excluding current maturities, was $1,086.2 million, nearly unchanged from $1,085.8 million at December 31, 2020. The company also disclosed $145 million outstanding under its term loan, $550 million of 2026 notes, and $400 million of 2028 notes. No borrowings were outstanding on its $300 million revolving facility.
- Operating cash flow improved year over year, but working-capital movements reduced Q1 2021 operating cash flow by $80.8 million, principally reflecting increases in inventory and receivables and changes in payables and accrued liabilities. Cash used in investing was $43.3 million; cash used in financing was $39.4 million. Cash decreased by $32.4 million during the quarter.
- Inventory increased to $358.8 million from $323.9 million at year-end. Entegris said it had raised some inventory levels to mitigate supply-disruption risk.
Outlook, risks, and notable items
- Management expected 2021 capital expenditures of approximately $225 million, including growth-capacity investments and the initial phase of a new Taiwan facility. Capital purchase obligations not yet recorded were $55.5 million at quarter-end.
- Management said current cash, expected operating cash flows, and planned financing were expected to meet ordinary-course cash needs for the next 12 months and longer term. No specific revenue or earnings guidance is provided in the supplied filing text.
- COVID-19 remained a source of uncertainty. Facilities were operating, with the Malaysian plant reported at normal capacity, but management cited possible impacts from future outbreaks, supplier constraints, logistics, absenteeism, and customer demand. Strong leading-edge demand included possible customer inventory-building that could pull demand forward.
- Other risks include semiconductor-industry cyclicality, concentrated customers, rapid demand shifts, sole- or limited-source suppliers, raw-material shortages and price increases, international and China-related trade restrictions, foreign-exchange movements, and debt obligations.
- Subsequent financing: After quarter-end, Entegris priced $400 million of 3.625% senior unsecured notes due 2029, expected to close April 30, 2021. It intended to combine the proceeds with cash and approximately $75 million of revolving-facility borrowings to redeem its $550 million 4.625% notes due 2026. The planned redemption was expected to generate a $23.1 million debt-extinguishment loss. The company also intended to increase revolving commitments to $400 million and extend maturity to April 2026.
- Q1 other expense included $4.3 million, mainly foreign-currency transaction losses. The effective tax rate was 13.7%, including a $7.5 million discrete share-based-compensation tax benefit; a $1.4 million valuation allowance on federal foreign tax credits contributed to the higher rate versus the prior-year quarter.
- Ordinary-course legal claims were not expected by the company to have a material adverse effect. The filing reported no material off-balance-sheet arrangements, and management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the 2029 notes offering and planned redemption of the 2026 notes closed on the anticipated terms, including the resulting debt-extinguishment charge and revolving-facility amendment.
- Whether strong Q1 demand persisted, or whether customer inventory-building and supply-chain constraints affected later-period demand, sales, and margins.
- Whether inventory growth, receivables, and the planned $225 million capital-spending program convert into cash flow and capacity as expected.
- How segment growth and profitability evolve, particularly whether MC and AMH’s Q1 profit gains are sustained.
- The effects of foreign-exchange exposure, supplier concentration, COVID-19 developments, and other risks identified in the filing.