Ladies and gentlemen, thank you for your continued patience. Your meeting will begin shortly. If you do need assistance at any time today, please press star zero and a member of our team will be happy to help you. Thanks again, everyone. Ladies and gentlemen, again, thank you for your continued patience. Your meeting will begin shortly. Again, if you do need assistance at any time today, please press star zero and a member of our team will be happy to help you. Thanks again, everyone.
Welcome to the Entegris third quarter 2026 earnings conference call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for your questions following the presentation. If you would like to ask a question at that time, please press star one on your telephone keypad. If at any point your question has been answered, you may remove yourself from the queue by pressing star two. So others can hear your questions clearly, we ask that you pick up your handset for best sound quality. Lastly, if you should require operator assistance, please press star zero. I would now like to turn the call over to Jeffrey Schnell, VP of Investor Relations.
Good morning, everyone. Earlier today, we announced the financial results for the third quarter of 2026. Before we begin, I would like to remind listeners that our comments today will include some forward-looking statements. These statements involve a number of risks and uncertainties, and actual results could differ materially from those projected in the forward-looking statements. Additional information regarding these risks and uncertainties is contained in our most recent annual report and subsequent quarterly reports that we have filed with the SEC. Please refer to the information on the disclaimer slide in the presentation. On this call, we will also refer to non-GAAP financial measures as defined by the SEC in Regulation G. You can find reconciliation tables in today's news release, as well as on the IR page of our website at entegris.com. Joining me on the call today are Dave Reeder, our CEO, and Sukhi Nagesh, our CFO.
With that, I'll hand the call over to Dave.
Thanks, Jeff, and good morning. Entegris had a strong third quarter. Revenue increased approximately 25% year-over-year to a record of slightly more than $1 billion, and adjusted gross margin improved materially more than expected, almost reaching 49%. Demand remains strong across advanced logic, advanced memory, and throughout the semiconductor ecosystem, supported by continued investment in AI infrastructure. As customers ramp increasingly complex technologies, they are relying more on Entegris for technical performance, quality, and reliability. Our ability to deliver on those commitments is strengthening our customer partnerships and creating new opportunities across the portfolio. Commercial engagement across Entegris has never been stronger. We are engaging earlier in our customers' technology roadmaps and seeing a clear progression from co-development to qualifications and plan of record wins. That is increasing our content opportunities and strengthening our leadership position in the industry's most important technology transitions.
While the demand environment remains constructive, the quarter also reflects the progress we are making operationally. We are focused on increasing manufacturing output, improving productivity and yield, strengthening and centralizing procurement, and generating a higher return from our installed capacity. Our teams are identifying and resolving emerging constraints and we are improving our ability to convert strong customer demand into revenue. Growth continued to broaden in the quarter, with both APS and MS delivering strong double-digit growth. Regionally, growth was strongest in the markets investing at the leading edge. Taiwan remained our largest growth contributor, but we also had strong momentum across Korea and Southeast Asia. Additionally, double-digit growth in North America highlights the breadth of the growth we are seeing across the semiconductor ecosystem. Unit-driven revenue accelerated from approximately 6% in the first quarter to 20% in the third quarter.
That is roughly twice the rate of underlying wafer start growth we expect for the year. This revenue growth reflects both higher industry volumes and increasing Entegris content as semiconductor processes become more complex, require new materials, and new plans of record move into production. That is only one side of our portfolio. Across our CapEx-related businesses, revenue increased from a modest decline at the beginning of the year to more than 35% growth in the third quarter, particularly with respect to WFE. We anticipated some of this strengthening and have been working for several quarters to unlock the significant embedded capacity across our manufacturing network by adding headcount, improving productivity and increasing inventory to better support customer demand and manage lead times. Those efforts delivered in the third quarter. Our teams increased production, exceeding our expectations and converted more backlog into revenue, resulting in growth above expectation.
Our commercial activity is also translating into tangible wins across the portfolio. Let me give you a few examples. In APS, we recently won a significant EUV filtration application at 2 nm. In MS, we earned an advanced materials plan of record with a major smartphone and technology provider. Additionally, we won multiple CMP plans of record in the quarter with leading memory providers. These new plans of record are important proof points. They span both of our segments and multiple technology applications, demonstrating the breadth of opportunities we can address as semiconductor technologies become more complex. As these design wins move into production, they expand Entegris' content opportunity and support future growth. Reflecting the strong demand, book-to-bill remains significantly above one, with backlog up more than 35% sequentially and more than doubling compared to last year.
Customers are also providing longer planning horizons, giving us greater visibility into their capacity ramps and the Entegris content required to support those ramps. Turning to profitability, we delivered another quarter of adjusted gross margin improvement, reaching 48.9%, while adjusted EBITDA margin exceeded 30%. Adjusted gross margin has expanded more than 500 basis points from a year ago and reached the highest level in more than 25 years. This improvement reflects higher volumes, improved yields, and our continued focus on productivity. They were also achieved despite continued investment to support future incremental customer demand and higher performance-based compensation. These strong results are independent of any material pricing benefit. The operational improvements we are making are strengthening the underlying earnings power of the business and reinforcing our confidence in additional margin expansion over time. Stronger earnings are also translating to stronger cash generation and faster de-leveraging.
During the quarter, we fully repaid the 2029 term loan, another important step in strengthening the balance sheet and increasing our financial flexibility. Sukhi will provide more detail in the financial section. Turning to the outlook, the industry backdrop remains supportive of continued growth and is consistent with the framework we've discussed throughout the year. We expect approximately 8% wafer starts growth in 2026. Leading-edge logic and memory have experienced the strongest growth this year, with utilization at advanced nodes remaining high. We are also seeing gradual improvement in mainstream utilization, although that part of the market remains the most underutilized. Industry CapEx trends continue to strengthen. Projects are progressing from construction to equipment installation and ultimately to production. The breadth of our portfolio allows us to create value across multiple phases of the investment cycle as customers build and equip new capacity and as those fabs move into production.
The areas attracting the greatest investment, particularly advanced logic and advanced memory, are also among the most materials- and purity-intensive areas of semiconductor manufacturing. As technology complexity increases, so do the opportunities for greater Entegris content, reinforcing the value of our full portfolio. We are encouraged by what we are seeing across the two drivers of Entegris' business: healthy wafer demand and significant investment in the capacity that will then subsequently support future wafer growth. In summary, the third quarter was another strong step forward for Entegris. Growth is accelerating and broadening across the business. Customer engagement is translating into new plans of record, and improved execution is translating to stronger financial performance. The progress we are making is tangible. We are winning with technology and solutions, increasing the output and productivity of our manufacturing network, and strengthening our financial position.
There is more work ahead, but the team is delivering against our priorities, and I am encouraged by the progress we've made over the last 62 weeks. I want to thank our employees around the world for their hard work, dedication, and commitment to our customers. Before I close, I want to remind you that we will be hosting our Capital Markets Day on November 9th, and we look forward to seeing many of you there. We have focused today on our third quarter performance and the progress we are making across the business. At our Capital Markets Day, we will discuss why we believe Entegris is uniquely positioned to capitalize on the next phase of semiconductor growth, our AI-native strategy, and our roadmap for long-term value creation. We look forward to seeing you there, and if you have any questions regarding the event, please reach out to Jeff.
With that, let me turn the call over to Sukhi to discuss the financials.
Thanks, Dave, and good morning, everyone. Q3 results provide strong evidence of the operating leverage and earnings power we see in the business. We delivered record sales of $1.006 billion in Q3, an increase of 25% year-over-year and 14% sequentially. The strong revenue performance was broad-based, with APS up 31% and MS up 16% year-over-year. GAAP net income was $158 million, and non-GAAP net income was $190 million, an increase of 73% from a year ago. Both our top and bottom line results exceeded our guidance. GAAP gross margin was 49.7% and adjusted gross margin was 48.9%, an improvement of 130 basis points sequentially and 530 basis points year-over-year. Sequentially, adjusted gross profit increased approximately 17%, outpacing our revenue growth of 14%. The sequential underlying margin improvement reflects higher volumes, fixed cost absorption, improved yield, and productivity.
This gross margin improvement also offset a 30% year-over-year increase in direct factory headcount, as well as higher performance-based compensation and other investments to support customer demand. Operating expenses on a GAAP basis were approximately $270 million and approximately $223 million on a non-GAAP basis, or 22.1% of sales. The year-over-year increase primarily reflects higher performance-based compensation associated with our stronger results. Adjusted EBITDA was $303 million, or 30.2% of sales, compared with 27.3% a year ago and 28.4% in the second quarter. That represents approximately 290 basis points of year-over-year margin expansion. The GAAP tax rate in Q3 was 15%, and the non-GAAP tax rate was 16%. GAAP diluted EPS was $1.03 per share, and non-GAAP EPS was $1.23 per share, an increase of 71% year-over-year.
The combination of approximately 25% revenue growth, 530 basis points of adjusted gross margin expansion, and 71% growth in non-GAAP EPS demonstrates the earnings leverage we are generating as improved execution translates higher volumes into stronger profitability. Now, switching to our segments. Materials Solutions delivered third quarter sales of $404 million, up 16% year-over-year and 9% sequentially. Growth accelerated meaningfully from the second quarter, and the segment delivered its highest quarterly revenue since the third quarter of 2023. This growth was broad-based and for all major product categories and regions, reflecting stronger production volumes at advanced nodes and increasing demand for materials used to manufacture at the leading edge. The strength was evident across CMP consumables, advanced deposition materials, specialty gases, and coatings. MS adjusted segment margin was approximately 20.4%.
Higher volume and improved productivity drove the margin expansion, offset by continued investments in capacity and resources needed to support customer demand. APS delivered Q3 sales of $605 million, up 31% year-over-year and 18% sequentially, reaching a new quarterly record. Growth was broad across most products and geographies, reflecting the dual exposure of the APS portfolio. Higher production, advanced nodes transitions, and the incremental contamination control requirements drove increased demand for our filtration purification products while accelerating capital investments primarily centered around leading edge capacity, drove demand for our microenvironments, fluid management, and CapEx related products. Adjusted operating margin for our APS segment was 34.4% for the quarter, expanding both year-over-year and sequentially. The improvement was driven by higher production volumes, driving operating leverage, along with productivity improvement and favorable mix.
These benefits more than offset higher performance-based compensation and the additional resources we are adding to support customer demand. Switching next to cash flow and balance sheet. We delivered record operating cash flow and record free cash flow of $224 million in the third quarter, or 22.2% of sales. This reflects higher earnings, lower capital spending, and continued working capital improvements. The strength of our cash flow generation enabled us to fully retire our term loan in Q3 ahead of schedule. As a result, net leverage improved to 2.9 times at the end of Q3. We now expect to end the year at approximately 2.7 times, reflecting more than a turn of improvement from where we began the year.
The combination of stronger earnings, improved cash generation, and debt repayment is increasing our financial flexibility and positioning us to invest in future growth opportunities while maintaining a disciplined approach to capital allocation. Moving on to the details of our fourth quarter outlook. We expect Q4 sales to range between $1.025 billion and $1.055 billion. At the midpoint, this represents a year-over-year increase of approximately 26%, building on the strong performance we delivered in Q3. Gross margin is expected to be between 49.2% and 49.7%, both on a GAAP and non-GAAP basis. At the midpoint, this represents approximately 50 basis points of improvement sequentially and approximately 550 basis points of improvement year-over-year.
At the midpoint, we expect GAAP operating expenses of approximately $272 million and non-GAAP operating expenses of approximately $227 million, reflecting higher variable compensation and investments to support the growth we are seeing across our portfolio. At the midpoint, we expect Q4 adjusted EBITDA margin to be approximately 31%, which represents more than 40% growth in adjusted EBITDA year-over-year, significantly outpacing revenue growth and providing further evidence of the operating leverage in our model. Additionally, we expect net interest expense to be approximately $40 million, a non-GAAP tax rate of approximately 15%, and depreciation at approximately $34 million. Based on these assumptions and approximately 154 million shares, we expect GAAP EPS between $1.09 and $1.17 per share, and non-GAAP EPS between $1.32 and $1.40 per share. Finally, we expect our CapEx to be approximately $200 million for 2026 or about one third lower than last year.
Looking ahead to our first quarter revenue expectations, we expect the momentum to continue. Based on our current visibility, fewer days in Q1 versus Q4, and typical industry seasonality, we expect revenue to decline by a mid-single-digit percentage compared to Q4, but an increase of more than 20% year-over-year. Stepping back, the financial progression of the business is clear and increasingly visible in our results. We are translating strong revenue growth into even stronger earnings and cash flow growth while continuing to strengthen our balance sheet. Our fourth quarter outlook reflects continued operating progress and a strong close to the year that we expect to build on in 2027. We look forward to sharing more with you at our Capital Markets Day on November 9th. With that, operator, let's open the line for questions.
The floor is now open for questions. At this time, if you have a question or comment, please press star one on your telephone keypad. If at any point your question is answered, you may remove yourself from the queue by pressing star two. Again, we ask that you pick up your handset when posing your questions to provide optimal sound quality. Thank you. Our first question is coming from Melissa Weathers with Deutsche Bank. Your line is open.
Hi there. Thanks for letting me ask you a question. Congrats on the billion-dollar mark. It's very exciting.
Thanks, Melissa.
I guess if we could just unpack the upside in the quarter versus what you had guided to. I just want to understand how much of this was incremental supply coming on, how much of it was demand strengthening, and, yeah, just any other help on the supply side that you can provide.
Morning, Melissa. Look, the revenue beat for the third quarter really just came down to execution. Demand was strong. The teams increased production and throughput really beyond our expectations, which allowed us to convert more demand to backlog into revenue. From a strength perspective, we saw strength across the portfolio, particularly in our CapEx-related businesses, as you would expect. Internally, we're continuing to strengthen our ability to serve that demand and that backlog that we see both today as well as in the future. Our commercial engagements remain very strong. Customers are providing longer planning horizons, longer lead times. We're continuing to win new plans of record across both segments of the business. And we're unlocking the capacity that we talked about, essentially this time last year in 2025. We're improving productivity. We're increasing, ultimately, our output. And we're being a stronger, more responsive, more reliable partner.
Sukhi, anything you'd add to that?
Yeah, sure. Hi, Melissa. In addition to the revenue growth, it really translated to gross margin expansion about 130 basis points sequentially. And that improvement was mainly due to the higher sales volume that Dave just mentioned here, which generated also a meaningful operating leverage for the company. So really, the strong production output, factory absorption, all of the yield initiatives that we're doing, lower E&O, inventory scrap, rework, all of those things added benefit to the margin. This despite we had higher incentive compensation, labor, and overhead investment to support the ramp. So if you're taking all this all together, I think we're pretty pleased with how we landed on the gross margin for the quarter.
Melissa, did you have a follow-up?
I did. Thank you, guys. I guess, I appreciate the help you're giving us on the first quarter of next year. It sounds like that might be, I do not know if that is a seasonal down or there is anything else to unpack there, but, if I could get greedy, any initial outlook for how you are thinking about 2027, any ways that we should be thinking about MSI and CapEx growth relative to WFE?
Sure. Look, for 2027, obviously we are not going to provide that guidance today, but we think the industry setup is incredibly constructive really across all of our major demand drivers. The demand that we are seeing today gives us increasing confidence that the momentum that we are exiting 2026 with will carry over and extend well into 2027. On the unit side, industry forecasts are calling for MSI growth to broadly be consistent with what we saw this year, and ultimately all of that CapEx that we are adding will eventually turn into wafer starts. I think that bodes very well for MSI, both from 2026 migrating into 2027, as well as 2027 migrating into 2028 and beyond. Next year on the CapEx side, all of our indications certainly seem to point to another strong double-digit growth year for both WFE as well as for fab construction.
Really, based on everything we see today and the momentum that we have in the business, we think it is a good setup for us and the industry exiting 2026 with momentum and carrying us into 2027. We will talk a little bit more about all of that at Capital Markets Day.
Perfect, thanks.
We'll take our next question from Elizabeth Sun with Citi. Your line is open.
Hey, good morning. Thanks for taking my question, and congrats on the good result and good execution. My first question is, you have like 25% year-over-year growth in Q3, and you are looking at more than 20% growth in Q4 and Q1 as well. I'm just curious, given your strong backlog, growing backlog, is there any reason for us to think that this kind of strength is not going to continue into next year? Also, given your strong backlog, are your suppliers ready for that? Any emerging constraints on that front?
Thanks, Elizabeth. Look, we're really happy with the momentum in the business. As you mentioned, Q3 +25% year-over-year growth at midpoint of guidance, a similar number for fourth quarter, and then also a somewhat similar number that we've indicated for first quarter of next year, even with seasonally down moving from Q4 to Q1. So there's just an incredible amount of momentum in the business in the second half of the year. A little bit of that is market-driven. The lion's share of that is really our performance. We're pleased with the demand environment and I would say even more pleased with the way the team has responded to the initiatives that we put in place in the latter half of 2025. Those initiatives are starting to bear fruit for us, here in 2026 and I think bode well for 2027.
From a supplier perspective, if I was to broaden that out just a little bit, when you think about this time last year, I said that we had significantly greater than $1 billion of incremental capacity in our network. I chose those words fairly carefully, to indicate that we had well over to support 2027 demand and even beyond. Obviously, we will have to spend a little bit to kind of unravel some of those pinch points that you inevitably get. But we feel quite good about our ability to be able to satisfy the demand.
From a supplier perspective, we have really been working with our customers closely to, one, understand their demand, test their demand, and then take that internally, compare that to our capacity, and then even further take that down into our supply chain to make sure that our supply chain is also ready to be able to support the demand that we see in front of us.
We feel good about that. There will inevitably be some pinch points. We have already proactively identified some, and we have been able to work some of those. There will be more in the future, I am sure. But I think what we all feel good about is how we have been able to kind of ramp to where we are today, identify the ramp that we need for Q4 and Q1, and now we are working on those additional pinch points. Did you have any follow-up, Elizabeth?
Yes. Thanks for the color. For my follow-up, it will be a high-level question. Lam recently highlighted that AI is driving demand for different tiers of NAND. They are talking about QLC, TLC, and especially they are talking about SLC is emerging as a new tier for AI storage in the agentic AI area. I am just curious for Entegris, obviously it is good for, they do talk about every point of the demand shifting towards SLC. It is roughly two points more wafer capacity, so that is good on a wafer start side. But just curious on the content side, how does Entegris content barriers across these kind of different technologies?
As you know, and as we have long talked about, at Entegris, we welcome technology transitions. We are fairly ubiquitous across, as a provider or as a supplier to all the memory providers, as well as both mainstream and advanced logic for that matter. As the technology becomes more complex, that really gives us the opportunity to outperform with more content, more layers, as you mentioned, more wafer growth in addition to that. We are excited to see the technology transitions that are being driven by the complexity and the performance that is required to satisfy AI. We think that that bodes well for Entegris.
Great. Thanks, Dave.
Thanks, Elizabeth.
We can move to the next question, please.
We'll take our next question now from Brian Chin with Stifel. Brian, please go ahead.
Hi there. Good morning. Thanks for letting us ask a few questions, and congratulations on the strong results. Maybe for the first question, there was some third-party reporting on MSI recently that pointed to 2026 growth possibly being in the low teens this year, which is an acceleration from that kind of prior high single-digit forecast that I think you have also cited. Do you feel this provided any tailwind to the unit-driven business segments in second half? Or to your point, Dave, about the execution and conversion being bigger near-term factors, could this tick up, and MSI in the back half of this year actually provide more tailwind to you in the earlier phases of next year?
Yeah, we probably subscribe to many of the same MSI third-party reports that you do. We tend to take those reports as content and as context. MSI measures really the wafer shipments in and not the actual wafer starts, and then shipments out. There typically is a little bit of a mismatch between shipments in and then ultimately those wafers moving into production. Because of that, we believe that MSI for the year is probably going to be in the mid to high single digits, call it 7%, 8%, maybe even 9%, but somewhere in that type of ZIP code is our expectations for the year. We do expect it to be a little bit more weighted to the second half, probably, 52% in the second half, 48% in the first half, something to that effect from an annual MSI perspective. So slightly more weighted to the second half.
We are encouraged by the trends in wafer growth. We did see a slight pickup in mainstream. As you know, advanced logic is pretty fully utilized. As you know, memory is pretty fully utilized. So we did see a little bit of pickup in mainstream, which is probably where the most available capacity kind of resides today. We are encouraged by that. As you know, our MS business has been accelerating. So in the third quarter, it grew about 16% on a year-over-year basis, and it has kind of continued to accelerate as we have progressed through the year. So I do think it provides some tailwinds to us. Particularly, I think the CapEx that is going into place, as that CapEx goes from kind of construction to fab build-out and kit up for tools to fab production, I think that bodes well for longer-term MSI as well.
We feel like we are well-positioned. The team is performing, and customer engagement has never been stronger. Brian, did you have a follow-up?
Yeah. I appreciate that. That's great color, Dave. Maybe going back to something you mentioned, and maybe also in the prepared remarks. In terms of mainstream, obviously comprising a lot of wafers in terms of unit driven volume. I think you made mentions that geographies like Korea, maybe Southeast Asia, that might not have been specific to unit driven, it might have been more broader. We have heard that of some sincere pickup in wafer utilization rates, I would say actually in China, where obviously they've had a lot of investment and capacity over the years. Is that something that you can corroborate? Is that something that maybe gives you some encouragement in terms of what mainstream could look like moving into next year?
Mainstream, we did see, let's talk broadly first. Mainstream, we did see a little bit of a pickup in mainstream demand, particularly the portions of mainstream that are most tied to AI, so kind of power management. We did see some good performance in kind of industrial automotive. I do think that there was a little bit of pickup in those portions of the market for mainstream. Again, I'm speaking very broadly at this point. I think for mainstream, we have talked about this kind of all year, is that a lot of those mainstream applications or maybe end markets, they require memory. As you know, memory's incredibly tight.
If the end market requires memory, I think you ultimately have to look and say, "Well, how much total memory is available, and where is it going to go and be allocated?" I do think that it kind of creates an upper ceiling perhaps on maybe what we can expect from mainstream over the near term until more capacity comes online for memory. Specifically to China. China, we were flat in the quarter. I think we were up 6% sequentially if memory serves. We're now flat for the year in China, which I think is good momentum because if you remember, we had some tough comps to Liberation Day from a year ago, and so we've kind of picked up momentum as we went through the year with China.
Obviously the rest of the world that's more tied to the most advanced manufacturing has grown the fastest. I do think that China has kind of picked up a little bit throughout the year, and I think that's probably true broadly as well as for us specifically. Thank you for the question, Brian.
Thank you.
Thank you. We'll go next now to Aleksey Yefremov at Barclays.
Good morning. Congrats on a great quarter. I wanted to ask you, first question about the incremental margins. They were quite strong. Is it something we should expect near term, given potential need for investments to support this growth? Also, if you could address the differences in incremental margins between the two segments.
Yeah. Aleksey, thank you for the question. Look, as you pointed out, our incremental gross margin of close to 60% and our incremental EBITDA margin of greater than 40% is in line with our targets. I think we've mentioned this before. That's how we want to run our operations. I think it was a bunch of little execution items that we did. A lot of this was self-help, right? We talked a little bit about productivity and yield initiatives and how we were able to even control inventory and scrap. There was a lot of folks and our manufacturing people did a fantastic job in actually producing more out of our factories in the quarter, and we think this trend is likely going to continue as we head into next year. Did you have a follow-up, Aleksey?
Yes. Thank you. Dave, you mentioned that some of the pickup in sales sequentially was due to being able to unlock some manufacturing capacity or just productivity. To what extent was the sequential increase market pull versus your internal ability to serve that market demand that maybe already was there?
I think the vast majority of it was our ability to be able to satisfy some demand that was already in front of us, but we were unsure if we were going to be able to complete it in the quarter. We made a couple of comments about how the book to bill has been quite robust. If you look at where we significantly outperformed, yes, we outperformed on the CapEx side of the business, but we also outperformed on units as well. I would say that CapEx was kind of the biggest contributor, or the CapEx related revenue, I should say, is the biggest contributor to the outperformance. Then as we kind of progressed through the quarter, we did have more unit pull than we originally expected as well.
Both demand that was in front of us as well as kind of, let's call it quarterly consumption, both of those performed well, but probably slightly higher weighted towards the CapEx business versus the unit-driven business for Q3.
Thank you, Aleksey.
Thank you. We'll go next now to Timothy Arcuri with UBS.
Thanks a lot. Dave, I know you're probably going to talk about this. Definitely going to talk about this at the Analyst Day, but can you maybe give us a little bit of a sneak peek on what the rubric is for growth versus the market? I know you used to say 4 to 6 points of outgrowth, but it's been kind of all over the map lately. You were mostly undergrowing. You undergrew in 2025 and during the first half of this year. But in this most recent quarter, you were like eight points above the market. Can you give us some breadcrumbs in terms of how to think about this rubric? Is it still 4 to 6 points? Is it less than that? Thanks.
Thanks for the question, Tim. I'm going to give you an unsatisfying answer, but I won't make you wait completely for Capital Markets Day. For the more complete answer, please show up November 9th at Capital Markets Day. For the short answer, just to help you out a little bit in the interim. Look, it'll be somewhat consistent to what we've articulated in the past, and we'll give you much more color around that at Capital Markets Day.
Okay. Sukhi, can you just speak to the impact from Colorado and KSP on the margins? You're doing great, and I think KSP is still dilutive this year and probably still next year. Colorado is still in qual, and I think it's supposed to be break even maybe in late 2027, early 2028. Can you talk to the impact from those? I guess I'm trying to get what a clean gross margin would be if those weren't dilutive.
Yeah. Well, good question, Timothy. Let me just say on KSP, we are actually in Q3, we reached breakeven. Big accomplishment for the team here. We actually reached breakeven in Q3. As we look into next year, this quarter and in Q4 and next year, we are pretty excited about the ramp we are going to be seeing in KSP South. I think we mentioned about Colorado that we are currently focused on customer qualifications. The facility is actually operational. It is producing samples right now. We expect revenue to begin in next year. So it is about a 12-month lag time between Rockrimmon and KSP South. But KSP South is now breakeven on a gross profit standpoint, and it will continue to improve as we head into next year.
If I could just build on that briefly. So KSP specifically to Entegris gross margins dilutive now through most of 2027. As we exit 2027, it should be somewhat neutral with respect to enterprise gross margin. Colorado is going to run about a year behind kind of what we see happening in KSP. So the numbers that we are delivering today are with that.
Both of those.
Yeah, fully burdened with both of those facilities in the P&L. We will give you more color on where we think long-term gross margins could reside at Capital Markets Day. Thank you for the question, Timothy.
Thank you. We'll go next now to Jim Schneider with Goldman Sachs.
Good morning. Thanks for taking my question. Just to follow up on the prior question, maybe could you just give us your overall view on if we continue to get increases on the revenue side for the next couple of years as the industry seems to think we can, do you have enough capacity with what you're ramping in Colorado, KSP, et cetera? Are you at all rethinking any of the sort of shutdowns or optimization on the existing manufacturing base at all?
Good morning, Jim. Look, as you mentioned, we do have strong demand. We have strong momentum. We have run that demand profile essentially against our internal capacity models. We feel quite good about our positioning for 2027. We feel pretty good about what we think 2028 could be. We feel good about our four-wall capacity. We think we have a lot of capacity left in the network to optimize and deliver through really the four main points that I've always spoken about. It's network optimization, the centralization of procurement with all of our suppliers yield, and then of course, the productivity initiatives, both through labor as well as equipment. So we feel quite good about that capacity. We're going to constantly evaluate that, and we also recognize that there will be areas where we do get pinch points.
We'll work to relieve those, and we'll selectively spend CapEx to be able to unlock those. Did you have a follow-up, Jim?
Yes, please. I realize this may be something you tackle at the Investor Day, but I am curious. A little over a year ago, when you came into the company, I think you talked about potentially expanding the aperture of customer focus and expanding the catchment of sales and the kind of customers Entegris pursues. Could you give us any kind of update on how that evaluation is going?
Sure. The summarized update, and we'll go into more details at Capital Markets Day, but the summarized update is we have never had more customer engagement and engineering engagements than we have today. We feel like we're communicating with our customers and engaging with our customers earlier in the process than ever. That's enabling us to then engage in the roadmaps earlier than ever, and then we think that that's turning into plan of record wins, both for the long-term roadmap as well as quick spins and derivative product that you inevitably release based upon new and kind of half-node manufacturing that occurs in the fab. So we're incredibly happy with those efforts. I think you're seeing some early signs of those efforts bearing fruit, and we'll talk more about it at Capital Markets Day.
Thank you.
Thank you, Jim.
We'll go next now to Chris Parkinson with Wolfe Research.
Great. I'll do my best not to ask a Capital Markets Day spoiler. Real quick, to drill into MS and CMP, there's been a lot of debate over the last couple of weeks and months on share gains, momentum, and your position in both slurries and, to a lesser extent, pads. I'd love to hear your updated thoughts on where those businesses are trending relative to expectations, whether or not there are any differences based on the competitive environments in various geographies. I'd just love to hear your broader thoughts as we progress towards the end of the year. Thank you.
Sure. Maybe we'll just talk geographies really quickly, and I'll speak broadly and then maybe directly kind of target your question. For the third quarter, on a year-over-year basis, North America was up 22%, Taiwan 41%, Southeast Asia 51%, Japan 29%. I could go on. But we performed well across the geographies. We performed well in the areas where the most advanced manufacturing occurs, that's both logic and memory. Moving that conversation specifically to the MS division and CMP, MS has picked up momentum as we've gone through this year. You saw us in the early part of the year, we were growing in the low single digits. We moved into the mid to high single digits, and now we're squarely into the teens, if not migrating into the upper teens.
That business is anchored by CMP and the CMP process, so we feel very good about our position in slurries. If there's an area where I wish we had a bit more capacity, it is pads. So that's an area where we have a small pinch point, and we're unlocking that as quickly as we can. But we feel quite good about that business, and we'll talk about it more at Capital Markets Day. Do you have a follow-up, Chris?
Yeah, I'd love to also hear your quick thoughts. You've consistently been speaking about this incremental billion dollars that you can unlock over the next several years. You gave us some helpful color on KSP as well as Colorado. I'd love to just hear your kind of broader thoughts now that you've been in the role for just over a year on your overall asset base utilization, perhaps how you're doing things a little bit differently, just given the growth trajectory and how that continues to evolve. Just a year and a half in or so, just a preliminary assessment would be particularly helpful. Thank you so much.
Sure. Thanks, Chris. Look, I'll try to be brief on this one. We can certainly go into it in more depth at Capital Markets Day. The way I think about it, there's no more attractive dollar than investing in CapEx at a brownfield site, so at a site that already exists. The reason why that is because that's where you get the most fixed cost absorption. You get to leverage the existing team, the existing infrastructure, and so each incremental dollar at existing sites to drive additional scale is a dollar that returns incredibly quickly. What you're actually seeing us do is you're seeing us invest dollars, and we are investing to expand capacity today. We're investing at the current sites where we're already located and have critical mass. We are not standing pat on exactly the capacity that we entered the year with.
Even though we've closed three dilutive facilities, we actually have more capacity right now than we did when we entered the year. We're optimizing the network. We're investing in the places where we have the most scale. Those are the dollars with the highest return, and those are the dollars that unlock the most capacity for us. That's what we're going to continue to do, is drive scale, efficiency, and critical mass at those brownfield sites that exist, and then ultimately, we'll also continue to optimize the network. Thank you for your question, Chris.
Thank you.
Thank you. We'll go next now to Charles Shi with Needham.
Hi. Thanks for taking my questions. Maybe the first one. Dave, I know this is going to be your second guidance to Q1. You guided a mid-single digit, but I look back the financial history of Entegris, -5% sequential down in Q1, that's not norm. Your normal seasonality is way less than that, and we would love to think maybe in a very big up cycle like this year, maybe going into next year, seasonality should be thrown out of the window. Why you think Q1 will be down 5%, based on what you're seeing right now?
Hey, Charles. I'll start, and then I'll turn it over to Sukhi for the details. As you know, we really only guide one quarter at a time, and that's fourth quarter, that we guided up at midpoint about 25%. We were trying to give you some early indications of color for Q1. Sukhi, maybe do you want to build on that?
Yeah. Look, like you said, we do guide one quarter at a time. Based on our visibility, Charles, that we have today, and we continue to see very healthy demand and strong momentum, right? If you look at our Q1, it really reflects normal seasonality and fewer selling days for us. Nothing more than that, especially given that 75% of our business is unit-driven. That's why I think we wanted to give you some extra color on how Q1 is going to trend. But the underlying momentum, the orders, what we're hearing from our customers are pretty strong.
Did you have a follow-up, Charles?
Yes. Maybe not trying to ask you more forward-looking, but then maybe looking back 2026, 8% MSI, let's say CapEx is a 30% up year, that the blended market growth is somewhere about 14%. If the math is right, you did have 300 bps of outperformance relative to the market this year. Last year, I don't think you had outperformance. I want to ask you, if you look back 2026, based on your current guidance, out of that 300 bps outperformance, what you see as sustaining, what you see maybe as a little bit transitory at this point? Thank you.
Sure. I guess the first comment I would make is 30%, roughly 30% of our revenue is driven by CapEx. But the majority of that is actually driven by fab starts and fab construction, which doesn't really fall in period for us, for 2026. I would characterize our outperformance as probably a little bit higher than the number referenced. But, that's neither here or there. I think looking back at 2026, I think CapEx remains strong as we roll into 2027. Certainly, all the third-party forecasts seem to indicate that direction. I think fab construction that didn't fall into period for us for 2026 would probably fall into period for 2027. So I think that bodes well for us. I think MSI, it's improving, and it's improving because of the CapEx that's being put online.
It's also improving because the mainstream picked up just a little bit. So, I think we all kind of know which fabs are under construction, which fabs are moving into the tooling and production and qualification stage. I think we can take those, and we can map those out over time and make assumptions on how they ramp. All of which I think bodes well. I think the wild card is MSI, 55% of MSI is driven by mainstream logic. I think the wild card is where does utilization go for mainstream logic. It improves slightly, I think that helps in the second half of this year. Does that improvement continue in 2027? If so, then I think that's another plus in the positive column. Thank you for your question, Charles.
Thank you. We'll go next now to Edward Yang with Oppenheimer.
Hi, Dave, Sukhi, thanks for the time. Just a final question on this first quarter revenue moderation you're seeing, chalking up the seasonality. Could you split that between MS and APS? I would think it would be weighted more on the CapEx side of the business.
Actually, it'll be both. I think what we do see will be a double-digit growth for both MS and APS division, Q4 and Q1. I think overall, if you think about our normal seasonality and the number of— It's lesser selling days, right? That's why we're going to see a slight dip there. But, the underlying momentum from customers, the orders are pretty strong. Do you have a follow-up?
Yeah, perfect. Maybe a question for Dave. In the past, again, you've described a multi-wave demand cycle, fab construction followed by WFE, ultimately higher wafer starts. Just wanted to get a sense, with revenue now accelerating beyond your prior expectations, which inning are we in each of those three waves, and are they starting to overlap?
Each individual fab is kind of its own wave. I really think that we're probably in the earlier part of the innings. Staying with the World Series theme, I think we're in the earlier part of the innings here, just simply because of the fab construction that we've seen, and how much has been broken ground, how much has been completed with shell, how much is then being facilitized in tools. I think we're in the earlier part of these innings and not the latter part. I think this CapEx that I think everyone is anticipating to occur in 2027, I think probably the biggest part of units are more like 2028, 2029, not 2027. So I think we're still in the CapEx portion of the cycle, and perhaps that inflects maybe at the end of 2027, perhaps middle of 2028. Something like that would be my expectation.
But we'll see how it goes. As you know, semi is very dynamic. Thank you for the question.
We'll go next now to John Roberts with Mizuho.
Hi, this is Saurabh on the behalf of John Roberts. Thanks for taking my question. Can you provide some insights from your conversations from your customers that would suggest that they're open to give some pricing?
Yeah, look, on pricing, our approach hasn't really changed much on pricing. We have really deep, long-standing relationships with our customers, and our priority is right now to support them as the demand accelerates while being appropriately compensated for the value we provide. It's really important to note that our conversations with the customers right now are around the commercial engagements and how to get the product to them faster. But we always evaluate pricing at the product and customer level. But as we said, as Dave mentioned in his prepared remarks, we have not included any material pricing actions in the quarter for Q3 or for Q4. To the extent there's any pricing actions, it'll be on new orders, but not on existing backlog.
If there's something that I'm incredibly excited about is, on a year-over-year basis, we've improved adjusted gross margin by 530 bps year over year, independent of any pricing action. So, the self-help initiatives that we talked about in the latter part of 2025 are starting to bear fruit. As Sukhi mentioned, we'll have ongoing conversations with customers with respect to making sure that we can deliver products and receive value for that product.
Correct.
Did you have a follow-up?
Yeah. Are you expecting to receive more tax refunds in Q4, and what would be the magnitude for that?
No, we're not.
Okay, got it. Thanks.
Thank you.
Thank you. We'll go next now to Pete Osterland at Truist.
Hey, good morning. Thanks for taking the questions. Just wanted to dig into the segment margins a bit. Just starting with the significant step-up that you saw from margins in APS. At the revenue levels you are expecting in the near term, are 34%+ segment margins sustainable? Were there any unusually favorable margin dynamics around mix or anything else in the third quarter?
No. Look, from an APS perspective, we do not talk a lot about individual. We do not optimize for the segments at Entegris. But the APS business is performing incredibly well. There were really no unusual one-time items that flowed through the APS segment. The team performed well.
My expectation is the team will continue to perform well. I think what you are seeing on the MS side of the business, just for completeness, is you are seeing leverage in the MS side of the business. In fact, I think gross margins were up, I do not know, around 350 bps on a year-over-year basis. I think it was 60 bps sequentially in MS. But we just see tremendous opportunity in that business, and we are increasingly convinced that it is our right to win in the MS business, so we are making some significant investments there to capture those opportunities.
Did you have a follow-up, Pete?
Yes, very helpful. Thank you. Also wanted to just ask on cash flow expectations, do you expect to deliver higher free cash flow in fourth quarter versus third quarter? I guess any working capital considerations to call out? Just wondering overall, what is a reasonable normalized free cash flow conversion rate that you are expecting going forward?
Yeah, look, we'll provide more information on our free cash flow targets at a Capital Markets Day. But more near term for Q4, we do have some CapEx spending and working capital requirements to support the growth that we're seeing from our customers, and that's what's embedded in our guidance that we provided to you.
Thank you, Pete.
Thanks a lot.
Thank you. We'll go next now to Mike Harrison with Seaport Research Partners.
Hey, good morning. Congrats on a nice quarter. You mentioned in APS that you were seeing good growth in microenvironments, but then you also said you were benefiting from better mix. I guess my question is that microenvironments business a better margin business than it used to be, or should we still think of that as being kind of below segment average margin?
Yeah. Hey, we don't talk about margins in a specific product line, honestly. But I think when we sell our products, we expect to get the value for our products, and most of our products are pretty good margin structure. Dave, you want to add anything to that?
Yeah, I think just talking briefly about the microenvironments business. When you think about new fab construction and you think about those fabs that need overhead transport for wafers for the protection, security and the contamination control environment of those wafers. We invented the FOUPs 30-plus years ago as a company. That's an area where we have a very significant market share in that market. It is a market that is growing meaningfully. That's an area where we're participating, as you would expect, as the market leader in that space. So quite happy with that business and the way that it's growing and the way the team is executing. We look forward to ramping that Colorado facility, where we're going to get a lot of those new units for the Americas. So, happy with how that business is performing. Did you have a follow-up, Mike?
Yeah, just another one on APS and the filtration and purification opportunity. You guys in the past have projected that advanced nodes would be kind of multiples of prior nodes in terms of the purity requirements and the revenue associated with that. As you're seeing some of these new nodes actually move into production and starting to move into higher volume manufacturing, just curious how the filtration and purification revenue is comparing to your projections. Is it tracking expectations, or is it maybe even a little bit better than you anticipated?
I think when you think about migrating down to 2 nm and even below, 2 nm is 20 Å, and a large molecule is about 5 Å. So, you're essentially down at the atomic scale. I know we've talked about it a while, but we're truly down to the atomic scale. I think contamination requirements have increased something like three orders of magnitude over the last 25 years. It's incredible how tight the controls are for contamination for the latest generation of semiconductor manufacturing. As the leader in filtration and purification, we think that bodes well for us. We've talked about this for a long time, about how advanced manufacturing drives higher requirements, both on the Materials Solutions side, so that you can enable performance, and on the purity side, so that you can protect yield.
I think both divisions, you're starting to see them really come together from a company perspective, where you can no longer just worry about one. Increasingly, you need both of those divisions to have a successful process. The promise of the business looks like it's finally coming to fruition. I think you're seeing that on the contamination control side as you referenced, and we're very happy with the performance and trajectory of the business, and we certainly look forward to talking more about that at Capital Markets Day. Thank you.
Thank you. Gentlemen, it appears we have no further questions this morning, so that will bring us to the conclusion of Entegris' third quarter 2026 conference call. We'd like to thank you all so much for joining us today, and wish you all a wonderful day. Goodbye.