Entegris, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 29, 2018; comparisons are with the quarter ended September 30, 2017 unless noted. Entegris supplies microcontamination-control products, specialty chemicals and advanced materials-handling solutions, primarily to semiconductor and other high-technology industries.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $398.6 million | $345.6 million | $1,148.9 million | $992.0 million |
| Gross profit / margin | $181.7 million / 45.6% | $155.4 million / 45.0% | $540.1 million / 47.0% | $445.3 million / 44.9% |
| Operating income / margin | $68.0 million / 17.1% | $60.7 million / 17.6% | $221.4 million / 19.3% | $170.7 million / 17.2% |
| Net income | $48.1 million | $40.9 million | $160.0 million | $113.4 million |
| Diluted EPS | $0.34 | $0.28 | $1.12 | $0.79 |
Quarterly sales rose 15%; management attributed the increase to broad-based demand, particularly from semiconductor customers, as well as $33.4 million of acquired-business sales. Excluding acquisitions and unfavorable currency translation, sales increased 6% year over year. Sequentially, reported sales increased 4%, but declined 3% excluding acquisitions and currency effects, reflecting lower customer capital spending. Nine-month sales increased 16%.
Quarterly gross margin improved on product mix, although operating margin declined from 17.6% to 17.1%, with higher amortization and operating expenses. Nine-month gross and operating margins improved, supported by stronger sales and factory utilization. The nine-month effective tax rate was 17.8%, versus 20.6% in 2017.
Segments and material changes
- Specialty Chemicals and Engineered Materials: Q3 sales were $131.2 million and segment profit $31.9 million, versus $124.5 million and $29.5 million. Growth included specialty materials and advanced deposition products.
- Microcontamination Control: Q3 sales were $151.3 million and segment profit $44.5 million, versus $116.1 million and $39.3 million. SAES Pure Gas (SPG) contributed $28.9 million of quarterly sales; liquid chemistry filter demand also strengthened.
- Advanced Materials Handling: Q3 sales were $116.0 million and segment profit $19.5 million, versus $105.0 million and $12.5 million. Results benefited from improved product sales and the absence of prior-year impairment and severance charges.
In June, Entegris acquired SPG for approximately $352.4 million in cash ($341.2 million net of cash acquired), funded from existing cash. The acquisition expanded gas-purification offerings and added $175.5 million of provisional goodwill and $160.9 million of provisional identifiable intangibles. Q3 included a $3.3 million inventory fair-value write-up charge; acquisition-related amortization also increased. Earlier in 2018, Entegris acquired Particle Sizing Systems for $37.3 million and Flex Concepts for $1.9 million.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $221.2 million, compared with $207.6 million in 2017. Working-capital changes used $54.3 million, mainly from higher receivables and inventories and lower payables/accruals.
- Investing cash outflow was $450.6 million, including $380.3 million for acquisitions and $75.3 million for capital expenditures. Financing cash outflow was $97.0 million, including $29.7 million of dividends, $30.0 million of share repurchases and $27.0 million of debt payments.
- Cash was $294.9 million at September 29, down from $625.4 million at year-end 2017. Total debt was $650.6 million, versus $674.4 million at year-end; reported long-term debt carrying value was $650.6 million, and its fair value was $623.8 million. The $550 million senior notes mature in 2026; the term loan balance was $108.9 million and is due in 2021. The $75 million ABL facility had no borrowings.
- Working capital was $609.9 million. Management said cash, available credit and operating cash flow should meet working-capital and investment needs for at least 12 months. Capital expenditures were expected to be approximately $105–$115 million for full-year 2018; purchase commitments for plant and equipment were $40.7 million.
Outlook, risks and notable items
The filing provides no specific revenue or earnings guidance. Management described semiconductor demand as supportive in the year-over-year comparison but noted reduced customer capital spending sequentially. It identified industry cyclicality, rapid demand shifts, pricing pressure, customer concentration, reliance on sole- or limited-source suppliers, raw-material availability and cost, foreign exchange, international operating risks, technology execution, acquisition integration and indebtedness among key risks.
Accounting for the SPG acquisition remained provisional, including certain acquired asset and liability valuations. Entegris had not finalized certain 2017 Tax Cuts and Jobs Act accounting and expected to complete its analysis in Q4 2018; revisions could affect tax expense and the effective tax rate. The company adopted the new revenue-recognition standard in 2018; it said the quarter’s quantitative effects versus prior guidance were immaterial. It planned to adopt the new lease standard on January 1, 2019, with balance-sheet recognition of operating-lease assets and liabilities expected to be the principal effect.
Other notable items: Q3 included a $0.5 million loss on sale of a subsidiary and $0.8 million of other expense, mainly currency losses. The company reported compliance with debt covenants and effective disclosure controls; integration of SPG into internal financial controls was ongoing. Ordinary-course legal matters were not expected by management to have a material adverse effect.
Investor verification priorities
- Assess organic demand and the sequential sales decline excluding acquisitions and currency effects, particularly given lower customer capital spending.
- Track SPG integration, provisional purchase-price valuations, acquired-intangible amortization and the acquired-inventory charge.
- Monitor cash conversion and working capital, especially inventory and receivables growth, alongside planned capital spending and acquisition cash use.
- Review debt levels, interest-rate exposure, covenant headroom and the geographic availability of cash; $185.0 million of cash was held by foreign subsidiaries.
- Check the final Tax Cuts and Jobs Act accounting and the impact of GILTI and other tax items on the effective tax rate.
- Compare GAAP results with management’s non-GAAP measures, which exclude recurring amortization and other adjustments and may not be comparable with other companies’ measures.