Entegris, Inc. — Q3 2016 Form 10-Q
Business and period: Entegris supplies specialty chemicals and advanced materials solutions for semiconductor and other high-technology industries. This unaudited report covers the 13-week quarter ended October 1, 2016, and the nine months then ended; comparisons are with the corresponding 2015 periods unless noted.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $296.7m | $270.3m | $866.8m | $814.3m |
| Gross profit / margin | $123.0m / 41.5% | $116.3m / 43.0% | $376.9m / 43.5% | $360.9m / 44.3% |
| Operating income / margin | $34.7m / 11.7% | $31.1m / 11.5% | $110.6m / 12.8% | $98.0m / 12.0% |
| Net income | $21.9m | $23.4m | $71.0m | $62.7m |
| Diluted EPS | $0.15 | $0.17 | $0.50 | $0.44 |
| Operating cash flow | — | $150.5m | $68.7m | |
| Capital expenditures | — | $45.3m | $55.7m |
Q3 sales increased 10% year over year; management attributed $7.5m of the increase to favorable currency translation, with sales up 7% excluding that effect. Sales declined 2% sequentially from Q2 2016, or 3% excluding a $3.0m favorable currency effect. For the first nine months, sales grew 6%, or 5% excluding $9.9m of favorable currency translation.
Q3 adjusted EBITDA, a non-GAAP measure, was $67.7m (22.8% of sales), versus $58.2m (21.5%) a year earlier. Nine-month adjusted EBITDA was $193.5m (22.3%), versus $181.0m (22.2%). Non-GAAP diluted EPS was $0.24 for Q3 and $0.69 for the nine-month period; these measures exclude specified costs and should be considered alongside GAAP results.
Segments and changes versus prior periods
- Critical Materials Handling (CMH): Q3 sales rose 16% to $192.7m and segment profit rose 22% to $45.4m, reflecting stronger 300mm transport module and liquid filtration sales, plus favorable currency. Nine-month sales grew 9% to $553.9m; segment profit increased to $135.8m from $122.2m.
- Electronic Materials (EM): Q3 sales were essentially flat at $103.9m, while segment profit declined to $20.5m from $23.9m. Nine-month sales rose 2% to $312.9m, but segment profit was $69.5m versus $72.7m, reflecting unfavorable mix, partly offset by lower operating expenses.
- Q3 gross margin fell to 41.5% from 43.0%; the company recorded $6.3m of equipment impairment and severance charges, which reduced gross margin by 2.1 percentage points. Nine-month gross margin was 43.5%, down from 44.3%; the charges reduced it by 0.7 points.
- Q3 GAAP net income and diluted EPS declined year over year despite higher revenue and operating income. The prior-year quarter included substantially higher other income, mainly foreign-currency transaction gains ($5.5m versus $0.6m in Q3 2016). Nine-month net income and EPS improved.
Cash, debt, liquidity, and outlook
- At October 1, 2016, cash and cash equivalents were $411.8m, up from $349.8m at year-end 2015. Working capital was $563.4m. Nine-month operating cash flow was $150.5m; investing activities used $46.8m, chiefly $45.3m for property and equipment, and financing activities used $53.5m, including a $50.0m term-loan payment.
- Reported debt carrying value, including current maturities, was $608.8m, versus $656.0m at December 31, 2015. This comprised $360m principal of 6% senior unsecured notes due 2022 and $258.9m principal outstanding under the term loan; $100m was classified as current. The $75m asset-based revolving facility had no borrowings and $0.2m of letters of credit outstanding. The company reported compliance with applicable debt covenants.
- Management expected 2016 capital expenditures of $60m–$65m and believed cash, available credit facilities, and operating cash flow would meet working-capital and investment needs for at least the next 12 months. No sales or earnings guidance is provided in the filing. Management noted that $239.6m of cash was held by foreign subsidiaries, some of which could be subject to U.S. tax if repatriated.
- Key risks include semiconductor-industry cyclicality, pricing and competitive pressures, manufacturing and fixed-cost exposure, foreign-exchange and interest-rate movements, and the company’s indebtedness. A 100-basis-point interest-rate change could affect annual net income by approximately $1.0m. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Investor verification priorities
- Assess whether Q3’s sequential sales decline and weaker EM segment profit indicate a sustained slowdown, despite year-over-year growth.
- Separate underlying margin performance from the $6.3m impairment and severance charges, and check whether further charges arise.
- Monitor receivables and inventory: DSO increased to 52 days from 48 at the start of the year, and higher receivables and inventories absorbed cash.
- Review debt repayment and liquidity assumptions, including the $100m current debt classification, facility availability subject to borrowing-base terms, and overseas cash considerations.
- Track delivery against the $60m–$65m 2016 capital-spending expectation and the adoption impact of new revenue-recognition and lease-accounting standards.