Entegris, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended July 1, 2023. Entegris supplies advanced materials and process solutions to semiconductor and other high-technology industries. Results include CMC Materials, acquired July 6, 2022, so the prior-year periods do not include comparable CMC contribution.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $901.0M | $692.5M | $1,823.4M | $1,342.1M |
| Gross profit / margin | $384.2M / 42.6% | $310.4M / 44.8% | $785.9M / 43.1% | $620.2M / 46.2% |
| Operating income | $267.6M | $158.0M | $281.1M | $321.3M |
| Net income | $197.6M | $99.5M | $109.5M | $225.2M |
| Diluted EPS | $1.31 | $0.73 | $0.73 | $1.65 |
| Adjusted EBITDA / margin | $244.6M / 27.2% | $207.4M / 30.0% | $496.2M / 27.2% | $413.6M / 30.8% |
| Non-GAAP diluted EPS | $0.66 | $1.00 | $1.31 | $2.07 |
Q2 sales rose 30%; first-half sales rose 36%. Management attributed the increases principally to CMC, which added $264.0M of Q2 and $537.8M of first-half sales. Excluding CMC, sales declined by $46.6M in Q2 and $29.6M in the first half, mainly reflecting weaker semiconductor-market demand; foreign exchange also reduced sales. Gross margin fell 2.2 percentage points in Q2 and 3.1 points for the first half, primarily from unfavorable mix and lower factory utilization. First-half results also included $7.4M of restructuring costs.
Reported Q2 earnings benefited from a $154.8M pre-tax gain on terminating a commercial alliance; first-half operating income also included an $88.9M goodwill impairment. Higher acquisition-related interest expense weighed on earnings: Q2 interest expense was $80.9M versus $32.0M, and first-half expense was $167.1M versus $44.9M. Adjusted EBITDA and adjusted operating income increased, but their margins and non-GAAP EPS declined year over year. Non-GAAP measures are company-defined and exclude, among other items, recurring depreciation or amortization and specified transaction, integration, impairment and divestiture items.
Cash flow, debt and liquidity
- First-half operating cash flow was $278.9M, up from $174.7M. Investing activities provided $53.9M, versus $191.0M used in the prior period, including $134.3M of QED sale proceeds and $169.3M from the alliance termination, partly offset by $250.0M of capital expenditures.
- Financing activities used $318.6M, primarily reflecting debt repayments and $30.2M of dividends. Cash, cash equivalents and restricted cash ended at $567.0M; working capital was $2.32B.
- Debt at par was $5.61B ($5.49B carrying value, net of discounts and issuance costs), down from $5.93B at year-end 2022. The company repaid $176.5M of term loans and the $135.0M bridge facility. The $575M revolving facility was undrawn. Management reported compliance with debt covenants and said existing cash and expected operating cash flow should meet ordinary-course needs for the next 12 months and longer term.
- The term loan matures in 2029 and bears, at the company’s option, Term SOFR plus 2.75% or a base rate plus 1.75%. Interest-rate and foreign-exchange exposure remain relevant; a 100-basis-point rate change was estimated to affect annual net income by approximately $0.8M as of July 1, 2023.
Segments and material transactions
Q2 segment sales were SCEM $200.1M, APS $240.6M, Microcontamination Control $283.6M and Advanced Materials Handling $190.4M. APS’s sales increase primarily reflects CMC; AMH sales fell 15%, mainly on lower microenvironment product demand. MC sales rose 3%, while management cited Taiwan-facility ramp costs and increased R&D investment. SCEM segment profit includes the $154.8M alliance-termination gain, so reported segment profit is not representative of ordinary operating performance.
- Entegris agreed to sell its Electronic Chemicals business for $700M, subject to customary adjustments and regulatory approvals; closing was expected before year-end 2023. The company recorded a $13.6M loss on the held-for-sale classification and an $88.9M first-quarter goodwill impairment related to the business.
- The QED divestiture closed March 1, 2023 for net proceeds of $134.3M; a $14.9M first-half pre-tax loss was recorded. The previously planned PIM sale was terminated in February; PIM remained classified as held for sale, and Entegris received a $12.0M termination fee, net of related adviser costs.
- Under the terminated alliance, Entegris received $170M and expects a further $30M after customer transitions, subject to adjustments. The termination produced the $154.8M pre-tax gain.
- In Q3 2023, Entegris planned to realign reporting into three segments, combining SCEM and APS; subsequent periods were to recast comparative segment information. A $0.10-per-share quarterly dividend was declared for payment in August 2023.
Outlook, risks and other matters
The filing provides no specific forward revenue, earnings or margin guidance. Management described softer semiconductor demand and lower factory utilization. Principal risks include semiconductor-market weakness and rapid demand shifts; China-related export controls and trade restrictions; customer and supplier concentration; supply, labor and inflation pressures; foreign-exchange and interest-rate movements; and the substantial debt burden, including integration and synergy risks associated with CMC. The company stated that ordinary-course legal claims were not expected to have a material adverse effect. Disclosure controls were assessed as effective; migration of former CMC financial systems to Entegris’s SAP platform was ongoing.
Key facts for investors to verify
- Underlying demand and margins excluding CMC acquisition effects and the $154.8M alliance gain; track the trend in adjusted and GAAP earnings together.
- Completion, final proceeds and adjustments for the Electronic Chemicals sale, and the status and carrying values of PIM held-for-sale assets.
- Debt service, floating-rate exposure, remaining term-loan repayments and access to the undrawn revolving facility.
- Whether weaker demand, factory utilization and foreign-exchange headwinds persist, and the costs and benefits of the planned segment realignment and CMC integration.