Entegris, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. Entegris supplies specialty chemicals and materials, filtration and purification products, and materials-handling solutions, principally to semiconductor manufacturers. Its segments are Specialty Chemicals and Engineered Materials (SCEM), Microcontamination Control (MC), and Advanced Materials Handling (AMH).
Key financial results
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Net sales | $1,591.1 million | $1,550.5 million |
| Gross profit / margin | $711.7 million / 44.7% | $719.8 million / 46.4% |
| Operating income / margin | $239.3 million / 15.0% | $292.7 million / 18.9% |
| Net income | $254.9 million | $240.8 million |
| Diluted EPS | $1.87 | $1.69 |
| Operating cash flow | $382.3 million | $312.6 million |
| Capital expenditures | $112.4 million | $110.2 million |
| Cash and cash equivalents at year-end | $351.9 million | $482.1 million |
| Working capital / current ratio | $668.0 million / 3.53 | $759.7 million / 3.82 |
| Debt carrying value, including current maturities | $936.5 million | $938.9 million |
Reported FY 2019 net income included a $122.0 million net gain from the terminated Versum merger agreement. The effective tax rate was 19.9%, versus 5.4% in 2018. Adjusted EBITDA, a non-GAAP measure, was $436.8 million (27.5% of sales), compared with $436.1 million (28.1%); adjusted operating income was $361.8 million (22.7% of sales), versus $371.0 million (23.9%).
Fourth-quarter snapshot
In Q4 2019, sales were $427.0 million, gross profit was $197.6 million (46.3% margin), operating income was $84.1 million, and net income was $57.4 million, or $0.42 diluted EPS. Q4 2018 sales were $401.6 million, gross profit $179.7 million, operating income $71.3 million, and net income $80.8 million, or $0.57 diluted EPS. The differing net income reflects, in part, the 2019 annual results’ unusual items and quarterly tax and other effects; the filing does not provide a simple standalone Q4 explanation for the year-over-year net income decline.
Changes versus 2018
- Sales rose 3% as reported, but declined 3% excluding acquisition and divestiture effects and unfavorable currency translation; underlying demand weakened, particularly for fluid-handling products, liquid-chemistry filtration, and some specialty materials.
- Gross margin fell 1.7 percentage points, mainly from lower factory utilization and unfavorable product mix. SG&A rose 16% to $284.8 million, with deal, integration, and restructuring costs contributing to the increase.
- Operating income declined 18% even as net income and diluted EPS increased. The $122.0 million net Versum termination fee benefit was a key reason reported net income increased.
- Segment results were mixed: SCEM sales decreased 1% to $526.5 million and segment profit declined 23% to $98.3 million; MC sales increased 14% to $633.7 million and profit rose 17% to $194.4 million; AMH sales decreased 7% to $458.3 million and profit declined 19% to $75.2 million. Acquisitions contributed to sales, particularly in MC and SCEM.
- Operating cash flow increased by $69.7 million. Investing cash outflow was $385.8 million, including $277.4 million for acquisitions; financing cash outflow was $126.8 million, including $80.3 million in share repurchases and $40.6 million in dividends.
Liquidity, debt, and capital allocation
At December 31, 2019, principal debt was approximately $946 million: $396 million of term loans due 2025 and $550 million of 4.625% senior unsecured notes due 2026. The $300 million revolving facility was substantially undrawn, apart from $0.2 million of letters of credit. The company reported compliance with applicable debt covenants. Management stated that domestic cash and operating cash flows should cover ordinary domestic needs for the next 12 months. Cash held in certain foreign operations was approximately $180.4 million; repatriation could involve taxes.
Dividends totaled $40.6 million in 2019. The board declared a $0.08-per-share quarterly dividend in January 2020. Capital expenditures are expected to be approximately $120 million in 2020. The filing provides no specific 2020 revenue or earnings guidance; management expected R&D expense to remain relatively stable as a percentage of sales.
Outlook, risks, and unusual items
- Management cites semiconductor complexity, advanced-node manufacturing, 3D NAND, 5G, cloud computing, AI, and investment in China as potential demand drivers, while emphasizing semiconductor cyclicality, limited order visibility, and customer spending variability.
- Key risks include customer concentration (top ten customers were 43% of 2019 sales; TSMC alone was approximately 12%), reliance on sole- or limited-source suppliers, trade restrictions and tariffs, foreign currency exposure, and manufacturing or supply-chain disruption. International sales were 76% of total sales.
- The filing notes the late-2019/early-2020 coronavirus outbreak and related disruption in China; its potential effect on Entegris was uncertain at the filing date. U.S.–China trade tensions and Japan–Korea trade restrictions were also identified as risks, although the specific 2019 events discussed had not directly materially harmed revenue.
- In 2019, Entegris acquired DSC, MPD Chemicals, and Anow for approximately $298 million in aggregate net purchase price. It acquired Sinmat for approximately $75 million in January 2020. Acquisition integration, valuation, and goodwill/intangible impairment are relevant risks.
- The company recorded $17.5 million of 2019 restructuring charges across cost of sales, SG&A, and R&D; actions were completed by year-end, and no additional material related charges were anticipated. A 2019 ceramic-material supply disruption was resolved, but illustrates supplier risk.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Acquired businesses were excluded from portions of the internal-control assessment while being integrated.
Important facts for investors to verify
- Separate underlying operating performance from the $122.0 million net Versum termination benefit and review the related tax and deal costs.
- Check whether demand, factory utilization, gross margin, and segment profitability recover after the 2019 underlying sales decline.
- Track acquisition integration and returns, including the effects of purchase accounting, acquired intangibles, and goodwill.
- Assess debt service, covenant headroom, cash location and availability, and the effect of capital spending, dividends, and repurchases on liquidity.
- Monitor exposure to large semiconductor customers, constrained raw-material sources, trade policy, foreign exchange, and the developing coronavirus impact.