Entegris, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 1, 2017; comparisons are primarily with the three months ended April 2, 2016. Entegris supplies microcontamination-control products, specialty chemicals and advanced materials-handling solutions, primarily to semiconductor and other high-technology manufacturers.
Financial results and liquidity
| Metric | Q1 2017 | Prior-year quarter |
|---|---|---|
| Net sales | $317.4 million | $267.0 million |
| Gross profit / gross margin | $139.6 million / 44.0% | $114.7 million / 43.0% |
| Operating income / operating margin | $50.9 million / 16.0% | $29.6 million / 11.1% |
| Net income | $32.5 million | $16.2 million |
| Diluted GAAP EPS | $0.23 | $0.11 |
| Operating cash flow | $33.4 million | $17.3 million |
| Capital expenditures | $22.2 million | $17.8 million |
Adjusted EBITDA, a non-GAAP measure, was $75.8 million, or 23.9% of sales, versus $54.5 million, or 20.4%. Non-GAAP diluted EPS was $0.28 versus $0.17; these measures are supplemental and are not substitutes for GAAP results.
At April 1, cash and cash equivalents were $391.2 million, down from $406.4 million at year-end 2016. Working capital was $555.5 million. Debt, including current maturities, was $560.3 million, compared with $584.7 million at year-end; its fair value was reported as $577.9 million. The company made a $25.0 million term-loan payment during the quarter. It had no borrowings on its $75 million asset-based revolver and reported compliance with applicable debt covenants. Management said available cash, credit facilities and operating cash flows should cover working-capital and investment needs for at least 12 months.
Material changes and operating performance
- Sales rose 19% year over year, including $1.1 million of favorable currency translation; sales increased 18% excluding that effect. Management attributed growth mainly to strong semiconductor demand, high fab utilization and increased customer capital spending. Sequential sales increased 3% from Q4 2016.
- Gross margin improved to 44.0% from 43.0%, reflecting better factory utilization, a slightly favorable mix and the absence of prior-year i2M qualification and start-up costs, partly offset by competitive price erosion.
- All segments grew sales year over year: Specialty Chemicals and Engineered Materials (SCEM) $114.4 million, up from $101.1 million; Microcontamination Control (MC) $100.1 million, up from $77.6 million; Advanced Materials Handling (AMH) $102.9 million, up from $88.3 million. Segment profit was $28.1 million for SCEM, $35.6 million for MC and $18.3 million for AMH. AMH profit declined from $18.9 million, primarily on mix, price erosion and higher expenses.
- Interest expense declined to $8.5 million from $9.2 million, reflecting lower borrowings. SG&A and research and development expenses increased, mainly due to employee costs.
Outlook, risks and notable items
- Management expected 2017 capital expenditures of approximately $90 million to $100 million. Capital purchase obligations not yet recorded were $27.5 million at quarter-end.
- On April 24, 2017, Entegris acquired W.L. Gore & Associates’ microelectronic water and chemical filtration product line for $20 million in cash; the filing says this was not a material business combination.
- Q1 income tax expense included a $2.5 million discrete benefit related to share-based compensation and a $3.6 million discrete charge to correct an error involving tax effects of intercompany sales and related profit. The reported effective tax rate was 21.9%, versus 23.1% a year earlier.
- Approximately $296.1 million of cash was held by foreign subsidiaries; some funds associated with indefinitely reinvested earnings could be subject to U.S. tax if repatriated. Management did not anticipate needing those funds for ordinary domestic liquidity needs.
- Key disclosed business risks include semiconductor-industry cyclicality, competition and pricing pressure, changes in sales mix and raw-material costs, fixed-cost exposure, foreign-currency movements and debt-related risks. The company reported ordinary-course legal matters that it believed would not materially adversely affect its financial statements.
- The company adopted stock-compensation accounting guidance in 2017, recording a $2.5 million tax benefit in the income statement during the quarter. It was assessing new revenue-recognition and lease standards; it preliminarily expected no material impact from the revenue standard but had not selected a transition method.
Important facts for investors to verify
- Whether semiconductor demand, utilization and customer spending sustain the reported sales growth, and whether margin gains persist despite pricing pressure.
- How working-capital requirements develop: receivables and inventory increased, and days sales outstanding rose to 51 days from 49 at the start of the year.
- Progress on planned capital spending, the $27.5 million of purchase obligations, and the effect of the subsequent $20 million product-line acquisition.
- Debt repayment and liquidity, including the current classification of $100 million of term debt, borrowing availability under the revolver and the location and potential tax treatment of cash.
- The impact of the $3.6 million tax correction and the ongoing assessment and adoption plans for revenue-recognition and lease accounting standards.