ENTEGRIS, INC. The following discussion and analysis of the Company's condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should review the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The Company assumes no obligation to publicly release the results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences. Overview This overview is not a complete discussion of the Company's financial condition, changes in financial condition or results of operations; it is intended merely to facilitate an understanding of the most salient aspects of the Company's financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows. The discussion and analysis must be read in its entirety in order to fully understand the Company's financial condition and results of operations. The Company is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. We leverage our unique breadth of capabilities to create value for our customers by developing mission-critical solutions to maximize manufacturing yields, reduce manufacturing costs and enable higher device performance. Our technology portfolio includes advanced materials and high-purity chemistries, with optimized packaging and delivery systems and in-process filtration and purification solutions that ensure high-value liquid chemistries and gases are free from contaminants before use. Our standard and customized products and solutions enable the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity. Our business is organized and operated in three operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. We leverage our expertise from these three segments and complementary product portfolios to create new and increasingly integrated solutions for our customers. See note 10 to the condensed consolidated financial statements for additional information on the Company's three segments. The Company's fiscal year is the calendar period ending eachDecember 31 . The Company's fiscal quarters consist of 13-week or 14-week periods that end on Saturday. The Company's fiscal quarters in 2020 endMarch 28, 2020 ,June 27, 2020 ,September 26, 2020 andDecember 31, 2020 . Unaudited information for the three and six months endedJune 27, 2020 andJune 29, 2019 and the financial position as ofJune 27, 2020 andDecember 31, 2019 are included in this Quarterly Report on Form 10-Q. Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of the Company, include: •Level of sales Since a significant portion of the Company's product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short-to-medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company's sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuations. 23 -------------------------------------------------------------------------------- Table of Contents •Variable margin on sales The Company's variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company's sales mix, purchase prices of raw materials (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company's production operations, among others. •Fixed cost structure The Company's operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short-term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company's profitability. Impact of COVID-19 on our Business A novel strain of coronavirus (COVID-19) was first identified inWuhan, China inDecember 2019 , and subsequently declared a pandemic by theWorld Health Organization . As a result of the COVID-19 pandemic, governmental authorities have implemented and are continuing to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, limits on gatherings, quarantines, shelter-in-place orders, and business shutdowns. In some cases, governmental re-opening plans have been delayed or reversed due to spikes in the number of infections. We continue to monitor the situation regarding the COVID-19 pandemic, which remains fluid and uncertain, and to proactively manage and adapt our responses in collaboration with our employees, customers and suppliers. However, we are unable to accurately predict the full impact of COVID-19 on our business, results of operations, financial condition, liquidity and cash flows, which will depend on future developments that are highly uncertain and cannot be predicted with accuracy, including, but not limited to, the duration and continued spread of the outbreak, its severity, potential additional waves of infection, the actions to mitigate the virus or its impact, and how quickly and to what extent normal economic and operating conditions can resume. Health and Safety From the earliest signs of the outbreak, we have taken, and continue to take, proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers. We enacted rigorous safety measures in all of our sites in accordance with applicable laws, including social distancing protocols, encouraging employeeswho do not need to be physically present on the manufacturing floor or in a lab to perform their work to work from home, suspending non-essential travel, implementing temperature checks at the entrances to our facilities, extensively and frequently disinfecting our workspaces and providing masks to employeeswho are physically present at our facilities. We expect to continue to implement these measures until the COVID-19 pandemic is adequately contained, and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, partners and suppliers. We expect that the pandemic may abate at different times in different regions, and accordingly our health and safety protocols may vary across regions. Operations We have important manufacturing operations in theU.S. ,Japan ,Korea ,China ,Malaysia , andTaiwan , all of which have been affected by the outbreak and have taken measures to try to contain it. Measures providing for business shutdowns have generally excluded certain essential services, and those essential services have commonly included critical infrastructure and the businesses that support that critical infrastructure. While all of our facilities currently remain operational, these measures have impacted and may further impact our workforce and operations, as well as those of our customers, suppliers and other third parties with which we do business. For example, the government ofMalaysia issued an order that significantly reduced the number of employeeswho could be physically present to operate our Malaysian plant, which had reduced the productivity of that plant for a period of time. As of the date of this filing, our Malaysian plant is back to full capacity. In addition to reduced productivity, constraints and limits imposed on our operations may slow or diminish our research and development and customer qualification activities. We also experienced brief interruptions in operations at our sites inHangzhou, China ,San Luis Obispo, California andBedford, Massachusetts . While governmental measures may be modified, extended or reimposed, we expect that, absent a significant surge in infections in the relevant local area, our manufacturing and research and development facilities will remain operational, largely at or near full capacity. In connection with the COVID-19 pandemic, we have experienced limited absenteeism from employeeswho are required to be on-site to perform their jobs, and we have incurred incremental employee compensation related to the COVID-19 pandemic. We do not currently expect that our operations will be adversely affected by significant absenteeism. Supply We have not yet experienced any significant impacts or interruptions to our supply chain as a result of the COVID-19 pandemic. However, certain of our suppliers have faced and, as the pandemic continues, may continue to face, difficulties maintaining operations in light of government-ordered restrictions and shelter-in-place mandates and may face challenges in 24 -------------------------------------------------------------------------------- Table of Contents maintaining their level of supply. For example, earlier in the year, one of our critical valve suppliers was shut down and was unable to supply us with valves for certain of our gas purification products. In this instance we were able to procure this critical part from a second, pre-qualified source. Although we regularly monitor the financial health of companies in our supply chain, financial hardship on our suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a disruption in our ability to obtain raw materials or components required to manufacture our products, adversely affecting our operations. To mitigate the risk of potential supply interruptions from the COVID-19 pandemic, we chose to increase certain inventory levels during the second quarter, and we continue to hold more inventory than we might otherwise seek to maintain. These actions may result in increased charges for excess or obsolete inventory, which would have the effect of reducing our profitability. We may decide to take similar actions going forward. Additionally, restrictions or disruptions of transportation, such as reduced availability of air transport, port closures and increased border controls or closures, have resulted, in certain instances, in higher costs and delays, both on obtaining raw materials and shipping finished goods to customers. If these restrictions and disruptions continue, they could harm our profitability, make our products less competitive, or cause our customers to seek alternative suppliers. Demand The COVID-19 pandemic has significantly increased economic and demand uncertainty. During the first and second quarters of 2020, we have seen strong demand from leading-edge customers associated with end-uses in servers and other data center applications. We believe that a portion of recent orders we have received may be a result of customers increasing their inventory to reduce their exposure to risks of future supply disruptions, which could offset demand for our products in the future. We continue to see weakness in some mainstream fabs associated with the slowdown in sales of automotive, aerospace, mobile phone, and other applications. Across our three divisions, certain customers impacted by governmental reactions to COVID-19 pushed out product deliveries and acceptance inspections from the first quarter of 2020 to the second quarter of 2020. We anticipate that the pandemic will continue to contribute to the current global economic slowdown, and it is possible that it could cause a global recession. In the event of a recession, demand for our products would decline and our business would be adversely affected. Liquidity Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on our future results, we believe our business model, our current cash reserves and our balance sheet leave us well-positioned to manage our business through this crisis as we expect it to unfold. We have taken recent steps to strengthen our balance sheet. OnApril 30, 2020 , we issued$400 million aggregate principal amount of 4.375% senior unsecured notes dueApril 15, 2028 . We used a portion of the net proceeds of the offering to repay approximately$142 million of borrowings under our senior secured revolving facility due 2023, or the Revolving Facility, representing the entire aggregate principal amount outstanding thereunder. We also used a portion of the net proceeds of the offering to repay approximately$151 million of outstanding borrowings under our senior secured term loan facility, or the Term Loan Facility. We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on the global economy and the semiconductor industry. Based on our analysis, we believe our existing balances of domestic cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. We continue to monitor the rapidly evolving situation and guidance from international and domestic authorities, including federal, state and local public health authorities, and may take additional actions based on their recommendations. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the dynamic nature of this situation, we cannot reasonably estimate the impacts that COVID-19 may have on our financial condition, results of operations or cash flows in the future. In addition, see Part II-Item 1A, "Risk Factors," included herein for updates to our risk factors regarding risks associated with the COVID-19 pandemic. Overall Summary of Financial Results For the three months endedJune 27, 2020 , net sales increased 18% to$448.4 million , compared to$378.9 million for the three months endedJune 29, 2019 . Net sales for the three months endedJune 27, 2020 included sales of$12.4 million from acquired businesses and favorable foreign currency translation effects of$0.4 million . In addition to these factors, the increase in revenue primarily resulted from increased customer demand from the semiconductor market compared to the year-ago quarter. Sales were up$36.1 million , or 9%, on a sequential basis over sales of$412.3 million in the first quarter of 2020, including favorable foreign currency translation effects of$0.1 million and sales attributable to acquired businesses of$2.0 million . The increase in revenue resulted primarily from increased customer demand from the semiconductor market compared to the previous quarter. The Company's gross profit for the three months endedJune 27, 2020 increased to$207.4 million , up from$166.3 million for the three months endedJune 29, 2019 . The Company experienced a 46.2% gross margin for the three months endedJune 27, 2020 , compared to 43.9% in the comparable year-ago period. The gross profit and gross margin increases reflect higher factory utilization associated with higher sales levels and a favorable sales mix. 25 -------------------------------------------------------------------------------- Table of Contents The Company's selling, general and administrative (SG&A) expenses increased by$2.7 million for the three months endedJune 27, 2020 compared to the year-ago quarter, mainly due to higher employee costs. The Company's other income, net decreased by$121.5 million for the three months endedJune 27, 2020 compared to the year-ago quarter, mainly due to the net proceeds of$122.0 million received from the termination of the merger agreement with Versum in the three months endedJune 29, 2019 . See note 8 to the Company's condensed consolidated financial statements for additional information. As a result of the aforementioned factors, the Company reported net income of$68.0 million , or$0.50 per diluted share, for the quarter endedJune 27, 2020 , compared to net income of$124.0 million , or$0.91 per diluted share, a year ago. OnApril 30, 2020 , the Company issued$400 million aggregate principal amount of 4.375% senior unsecured notes dueApril 15, 2028 . The transaction is described in further detail in note 6 to the Company's condensed consolidated financial statements. OnJuly 10, 2020 , the Company acquiredGlobal Measurement Technologies, Inc. , or GMTI, an analytical instrument provider for critical processes in semiconductor production, and its manufacturing partnerClean Room Plastics, Inc. , for an aggregate purchase price of approximately$36 million in cash, subject to customary purchase price adjustments. The Company funded the acquisition from its available cash on hand. GMTI will be a part of the AMH segment. The acquisition does not constitute a material business combination. Cash and cash equivalents were$532.7 million atJune 27, 2020 , compared with cash and cash equivalents of$351.9 million atDecember 31, 2019 . The Company had outstanding debt of$1,184.0 million atJune 27, 2020 , compared to$936.5 million atDecember 31, 2019 . Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities and Exchange Commission . On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to impairment of long-lived assets, goodwill, income taxes and business acquisitions. There have been no material changes in these aforementioned critical accounting policies. 26 -------------------------------------------------------------------------------- Table of Contents Three and Six Months EndedJune 27, 2020 Compared to Three and Six Months EndedJune 29, 2019 and Three Months EndedMarch 28, 2020 The following table compares operating results for the three and six months endedJune 27, 2020 with results for the three and six months endedJune 29, 2019 and three months endedMarch 28, 2020 both in dollars and as a percentage of net sales, for each caption. Three months ended Six months ended (Dollars in thousands)June 27, 2020 June 29, 2019 March 28, 2020 June 27, 2020 June 29, 2019 Net sales$ 448,405 100.0 %$ 378,874 100.0 %$ 412,327 100.0 %$ 860,732 100.0 %$ 769,921 100.0 % Cost of sales 241,033 53.8 212,600 56.1 226,849 55.0 467,882 54.4 426,254 55.4 Gross profit 207,372 46.2 166,274 43.9 185,478 45.0 392,850 45.6 343,667 44.6 Selling, general and administrative expenses 66,872 14.9 64,150 16.9 58,891 14.3 125,763 14.6 146,404 19.0 Engineering, research and development expenses 32,572 7.3 30,624 8.1 29,632 7.2 62,204 7.2 59,615 7.7 Amortization of intangible assets 13,216 2.9 16,591 4.4 16,211 3.9 29,427 3.4 35,248 4.6 Operating income 94,712 21.1 54,909 14.5 80,744 19.6 175,456 20.4 102,400 13.3 Interest expense 13,005 2.9 11,315 3.0 10,559 2.6 23,564 2.7 22,199 2.9 Interest income (213) - (1,623) (0.4) (321) (0.1) (534) (0.1) (2,848) (0.4) Other (income) expense, net (477) (0.1) (122,015) (32.2) 878 0.2 401 - (122,263) (15.9) Income before income taxes 82,397 18.4 167,232 44.1 69,628 16.9 152,025 17.7 205,312 26.7 Income tax expense 14,361 3.2 43,235 11.4 8,622 2.1 22,983 2.7 48,657 6.3 Net income$ 68,036 15.2 %$ 123,997 32.7 %$ 61,006 14.8 %$ 129,042 15.0 %$ 156,655 20.3 % Net sales For the three months endedJune 27, 2020 , net sales increased by 18% to$448.4 million , compared to$378.9 million for the three months endedJune 29, 2019 . An analysis of the factors underlying the increase in net sales is presented in the following table:
(In thousands)
Net sales in the quarter endedJune 29, 2019 $
378,874
Increase associated with acquired businesses
12,448
Increase associated with volume, pricing and mix
56,649
Increase associated with effect of foreign currency translation 434
Net sales in the quarter endedJune 27, 2020 $
448,405
The Company's sales increase was primarily due to increased customer demand from the semiconductor market compared to the year-ago quarter, sales of$12.4 million from the Company's recent acquisitions and favorable foreign currency translation effects of$0.4 million . On a geographic basis, sales percentage by customers' country or region for the three months endedJune 27, 2020 andJune 29, 2019 and the percentage increase (decrease) in sales for the three months endedJune 27, 2020 compared to the sales for the three months endedJune 29, 2019 were as follows: 27
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Three months ended
Percentage increase
June 27, 2020 June 29, 2019 (decrease) in sales
North America 25 % 23 % 26 %
Taiwan 20 % 17 % 39 %
South Korea 15 % 17 % 3 %
Japan 13 % 14 % 16 %
China 13 % 14 % 11 %
Europe 9 % 9 % 14 %
Southeast Asia 5 % 6 % (2 %)
The increase in sales to customers in North America was primarily driven by
sales from our recent acquisitions of MPD Chemicals, or MPD, and Sinmat and
demand for our Microcontamination Control products. The increase in sales to
customers in Taiwan was primarily driven by demand for our Advanced Materials
Handling and Microcontamination Control products. The increase in sales to
customers in Japan was primarily driven by demand for our Microcontamination
Control and Specialty Chemicals and Engineered Materials products. The increase
in sales to customers in China was due to sales from our acquisition of Hangzhou
Anow Microfiltration Co., Ltd , or Anow. The increase in sales to customers in
Europe was driven by demand for our Microcontamination Control products.
Sales were up $36.1 million , or 9%, on a sequential basis over sales of $412.3
million for the first quarter of 2020, including favorable foreign currency
translation effects of $0.1 million and sales associated attributable to
acquired businesses of $2.0 million . The increase in revenue resulted from
increased customer demand from the semiconductor market compared to the previous
quarter.
Net sales for the six months ended June 27, 2020 were $860.7 million , up 12%
from $769.9 million in the comparable year-ago period. An analysis of the
factors underlying the increase in net sales is presented in the following
table:
(In thousands)
Net sales in the six months endedJune 29, 2019 $
769,921
Increase associated with volume, pricing and mix
62,858
Increase associated with effect of foreign currency translation 125
Increase associated with acquired businesses
27,828
Net sales in the six months endedJune 27, 2020 $
860,732
The Company's sales increase was primarily due to increased customer demand from the semiconductor market compared to the year-ago period, sales of$27.8 million from the Company's recent acquisitions and favorable foreign currency translation effects of$0.1 million . On a geographic basis, sales percentage by customers' country or region for the six months endedJune 27, 2020 andJune 29, 2019 and the percentage increase (decrease) in sales for the six months endedJune 27, 2020 compared to the sales for the six months endedJune 29, 2019 were as follows: Six months ended Percentage increase June 27, 2020 June 29, 2019 (decrease) in sales North America 25 % 23 % 18 % Taiwan 21 % 19 % 24 % South Korea 14 % 16 % (3 %) Japan 13 % 13 % 16 % China 12 % 13 % 5 % Europe 8 % 9 % 6 % Southeast Asia 6 % 7 % - % The increase in sales to customers inNorth America was primarily driven by sales from our recent acquisitions of MPD and Sinmat and demand for our Microcontamination Control products. The increase in sales to customers inTaiwan was primarily driven by demand for our Advanced Materials Handling and Microcontamination Control products. The increase in sales to customers inJapan was primarily driven by demand for our Microcontamination Control and Specialty Chemicals and Engineered Materials products. 28 -------------------------------------------------------------------------------- Table of Contents Gross profit The Company's gross profit increased 25% for the three months endedJune 27, 2020 to$207.4 million , compared to$166.3 million for the three months endedJune 29, 2019 . The Company experienced a 46.2% gross margin rate for the three months endedJune 27, 2020 , compared to 43.9% in the comparable year-ago period. The gross profit and gross margin increases reflect higher factory utilization associated with higher sales levels and a favorable sales mix. The gross profit and gross margin figures include a cost of sales charge of$0.7 million associated with the sale of inventory acquired in recent business acquisitions for the three months endedJune 29, 2019 . For the six months endedJune 27, 2020 , the Company's gross profit increased 14% to$392.9 million , compared to$343.7 million for the six months endedJune 29, 2019 . The Company experienced a 45.6% gross margin rate for the six months endedJune 27, 2020 , compared to 44.6% in the comparable year-ago period. The gross profit and gross margin increases reflect higher factory utilization associated with higher sales levels and a favorable sales mix. The gross profit and gross margin figures include incremental cost of sales charges of$0.4 million and$2.9 million associated with the sale of inventory acquired in recent business acquisitions for the six months endedJune 27, 2020 andJune 29, 2019 , respectively. Selling, general and administrative expenses SG&A expenses were$66.9 million for the three months endedJune 27, 2020 , up$2.7 million , or 4%, from the comparable three-month period a year earlier. An analysis of the factors underlying the increase in SG&A is presented in the following table: (In thousands) Selling, general and administrative expenses in the quarter ended June 29, 2019$ 64,150 Deal and transaction costs (661) Integration costs 648 Employee costs 4,457 Travel costs (2,219) Provision for bad debt 1,105 Professional fees (1,005) Other increases, net 397
Selling, general and administrative expenses in the quarter ended
SG&A expenses were$125.8 million for the first six months of 2020, down 14% compared to SG&A expenses of$146.4 million in the year-ago period. An analysis of the factors underlying changes in SG&A is presented in the following table: (In thousands) Selling, general and administrative expenses in the six months endedJune 29, 2019 $ 146,404 Deal and transaction costs (18,366) Integration costs (2,224) Employee costs 1,085 Travel costs (2,954) Provision for bad debt 1,438 Other increases, net 380 Selling, general and administrative expenses in the six months endedJune 27, 2020 $ 125,763 Deal and transaction costs were$18.4 million lower in the six months endedJune 27, 2020 compared to the six months endedJune 29, 2019 , mainly due to the deal costs associated with the terminated Versum transaction. Engineering, research and development expenses The Company's engineering, research and development, or ER&D, efforts focus on the support or extension of current product lines and the development of new products and manufacturing technologies. ER&D expenses were$32.6 million in the three months endedJune 27, 2020 compared to$30.6 million in the year-ago period. An analysis of the factors underlying the increase in ER&D is presented in the following table: (In thousands) Engineering, research and development expenses in the quarter endedJune 29, 2019 $ 30,624 Employee costs 2,839 Travel costs (349) Other decreases, net (542)
Engineering, research and development expenses in the quarter
29
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ER&D expenses increased 4% to $62.2 million in the first six months of 2020,
compared to $59.6 million in the year ago period. An analysis of the factors
underlying the increase in ER&D is presented in the following table:
(In thousands)
Engineering, research and development expenses in the six months ended June
29, 2019 $ 59,615
Employee costs 2,629
Depreciation 1,068
Travel costs (548)
Other decreases, net (560)
Engineering, research and development expenses in the six months ended
Amortization expenses Amortization of intangible assets was$13.2 million in the three months endedJune 27, 2020 , compared to$16.6 million for the three months endedJune 29, 2019 . The decrease primarily reflects the elimination of amortization expense of$6.0 million for identifiable intangible assets acquired in recent acquisitions that became fully amortized in previous periods, partially offset by additional amortization expense of$2.7 million associated with recent acquisitions. Amortization of intangible assets was$29.4 million in the six months endedJune 27, 2020 , compared to$35.2 million for the six months endedJune 29, 2019 . The decrease primarily reflects the elimination of amortization expense of$10.9 million for identifiable intangible assets acquired in recent acquisitions that became fully amortized in previous periods, partially offset by additional amortization expense of$5.3 million associated with recent acquisitions. Interest expense Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. Interest expense was$13.0 million in the three months endedJune 27, 2020 compared to$11.3 million in the three months endedJune 29, 2019 . The increase primarily reflects higher average debt levels. Interest expense was$23.6 million in the six months endedJune 27, 2020 , compared to$22.2 million in the six months endedJune 29, 2019 . The increase reflects higher average debt levels. Interest income Interest income was$0.2 million in the three months endedJune 27, 2020 , compared to$1.6 million in the three months endedJune 29, 2019 . The decrease reflects lower average interest rates. Interest income was$0.5 million in the six months endedJune 27, 2020 , compared to$2.8 million in the six months endedJune 29, 2019 . The decrease reflects lower average interest rates. Other (income) expense, net Other income, net was$0.5 million in the three months endedJune 27, 2020 and consisted mainly of foreign currency transaction gains of$2.0 million , partially offset by loss on debt extinguishment costs of$1.5 million associated with payments on the Term Loan Facility. Other income, net was$122.0 million in the three months endedJune 29, 2019 and consisted of net proceeds of$122.0 million received from the termination of the merger agreement with Versum. Other expense, net was$0.4 million in the six months endedJune 27, 2020 and consisted of loss on debt extinguishment costs of$1.5 million associated with payments on the Term Loan Facility, partially offset by foreign currency transaction gains of$1.3 million . Other income, net was$122.3 million in the six months endedJune 29, 2019 and consisted mainly of net proceeds of$122.0 million received from the termination of the merger agreement with Versum. Income tax expense Income tax expense was$14.4 million and$23.0 million in the three and six months endedJune 27, 2020 , respectively, compared to income tax expense of$43.2 million and$48.7 million in the three and six months endedJune 29, 2019 , respectively. The Company's year-to-date effective tax rate atJune 27, 2020 was 15.1% , compared to 23.7% atJune 29, 2019 . The year-to-date effective tax rate atJune 29, 2019 included a discrete tax charge of$9.4 million related to the reversal of a dividend received deduction that was recorded in 2018. This discrete charge was recorded based on the issuance of final regulations during the quarter endedJune 29, 2019 . Additionally, in 2019 the Company received a termination fee from Versum based on the termination of the Versum merger agreement and recorded a discrete charge of$23.5 million related to the termination fee, net of associated expenses. As a result of the termination fee, the Company released a valuation allowance on federal capital loss carryforwards and recorded a discrete benefit of$2.4 million . Furthermore, the year-to-date effective tax rate decreased fromJune 29, 2019 toJune 27, 2020 due to lower accrued withholding taxes as a result of a portion of the Company's foreign earnings being permanently reinvested in 2020 and an increase in the federal research and development credits. The year-to-date income tax expense atJune 27, 2020 andJune 29, 2019 includes discrete benefits of$6.4 million and$3.1 million , respectively, recorded in connection with share-based compensation. 30 -------------------------------------------------------------------------------- Table of Contents Net income Due to the factors noted above, the Company recorded net income of$68.0 million , or$0.50 per diluted share, in the three-month period endedJune 27, 2020 , compared to net income of$124.0 million , or$0.91 per diluted share, in the three months endedJune 29, 2019 . In the three months endedJune 27, 2020 , net income, as a percentage of net sales, decreased to 15.2% from 32.7% in the year-ago period. In the six months endedJune 27, 2020 , the Company recorded net income of$129.0 million , or$0.95 per diluted share, compared to net income of$156.7 million , or$1.15 per diluted share, in the six months endedJune 29, 2019 . In the six months endedJune 27, 2020 , net income, as a percentage of net sales, decreased to 15.0% from 20.3% in the year-ago period. Non-GAAP MeasuresThe Company's condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States , or GAAP. The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company's business and results of operations. See the section "Non-GAAP Information" included below in this section for additional detail, including the definition of certain non-GAAP financial measures and the reconciliation of these non-GAAP measures to the Company's GAAP measures. The Company's principal non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share. Adjusted EBITDA increased 38% to$131.5 million in the three months endedJune 27, 2020 , compared to$95.4 million in the three months endedJune 29, 2019 . In the three months endedJune 27, 2020 , Adjusted EBITDA, as a percentage of net sales, increased to 29% from 25% in the year-ago period. Adjusted EBITDA increased 23% to$251.8 million in the six months endedJune 27, 2020 , compared to$204.3 million in the six months endedJune 29, 2019 . In the six months endedJune 27, 2020 , Adjusted EBITDA, as a percentage of net sales, increased to 29% from 27% in the year-ago period. Adjusted Operating Income increased 44% to$110.8 million in the three months endedJune 27, 2020 , compared to$76.8 million in the three months endedJune 29, 2019 . Adjusted Operating Income, as a percentage of net sales, increased to 25% from 20% in the year-ago period. Adjusted Operating Income increased 25% to$210.5 million in the six months endedJune 27, 2020 , compared to$169.0 million in the six months endedJune 29, 2019 . In the six months endedJune 27, 2020 , Adjusted Operating Income, as a percentage of net sales, increased to 24% from 22% in the year-ago period. Non-GAAP Earnings Per Share increased 54% to$0.60 in the three months endedJune 27, 2020 , compared to$0.39 in the three months endedJune 29, 2019 . Non-GAAP Earnings Per Share increased 29% to$1.15 in the six months endedJune 29, 2019 , compared to$0.89 in the six months endedJune 29, 2019 . 31 -------------------------------------------------------------------------------- Table of Contents Segment Analysis The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See note 10 to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments and unallocated general and administrative expenses for the three months endedJune 27, 2020 ,June 29, 2019 andMarch 28, 2020 , and the six months endedJune 27, 2020 andJune 29, 2019 . Three months ended Six months ended (In thousands) June 27, 2020 June 29, 2019 March 28, 2020 June 27, 2020 June 29, 2019 Specialty Chemicals and Engineered Materials Net sales$ 146,213 $ 127,552 $ 144,214 $ 290,427 $ 252,022 Segment profit 32,938 24,000 32,670 65,608 48,431 Microcontamination Control Net sales$ 183,758 $ 150,185 $ 159,261 $ 343,019 $ 307,891 Segment profit 62,137 43,126 50,167 112,304 90,449 Advanced Materials Handling Net sales$ 126,434 $ 107,515 $ 116,137 $ 242,571 $ 223,579 Segment profit 22,809 15,043 20,632 43,441 37,410 Unallocated general and administrative expenses$ 9,956 $ 10,669 $ 6,514 $ 16,470 $ 38,642 Specialty Chemicals and Engineered Materials (SCEM) For the second quarter of 2020, SCEM net sales increased to$146.2 million , compared to$127.6 million in the comparable period last year. The sales increase was due to increased sales of advanced deposition materials and cleaning chemistries, as well as additional sales of$8.2 million attributable to the acquisitions of MPD in the third quarter of 2019 and Sinmat in the first quarter of 2020. This growth was offset by declines in non-semi related sales, particularly in end markets that were most impacted by the pandemic, such as aerospace and handsets. SCEM reported a segment profit of$32.9 million in the second quarter of 2020, up 37% from$24.0 million in the year-ago period. The segment profit increase was primarily due to higher gross profit related to increased sales volume, partially offset by a 9% increase in operating expenses, primarily due to recent acquisitions and higher compensation costs. For the six months endedJune 27, 2020 , SCEM net sales increased to$290.4 million , compared to$252.0 million in the comparable period last year. The sales increase was mainly due to increased sales of advanced deposition materials and cleaning chemistries, as well as additional sales of$20.6 million attributable to the acquisitions ofDigital Specialty Chemicals Limited , or DSC, in the first quarter of 2019, MPD in the third quarter of 2019 and Sinmat in the first quarter of 2020. This growth was offset by declines in non-semi related sales, particularly in end markets that were most impacted by the pandemic, such as aerospace and handsets. SCEM reported a segment profit of$65.6 million in the six months endedJune 27, 2020 , up 35% from$48.4 million in the year-ago period also due to higher sales levels, partially offset by a 7% increase in operating expenses, primarily due to recent acquisitions and higher compensation costs. Microcontamination Control (MC) For the second quarter of 2020, MC net sales increased to$183.8 million , compared to$150.2 million in the comparable period last year. The sales increase was mainly due to improved sales from liquid filtration and gas filtration products, as well as additional sales of$4.0 million attributable to the acquisition of Anow in the third quarter of 2019, partially offset by a decrease in sales from gas purification products. MC reported a segment profit of$62.1 million in the second quarter of 2020, up 44% from$43.1 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales volume. For the six months endedJune 27, 2020 , MC net sales increased to$343.0 million , compared to$307.9 million in the comparable period last year. The sales increase was due to improved sales from liquid filtration and gas purification products, as well as additional sales of$7.2 million attributable to the acquisition of Anow in the third quarter of 2019. MC reported a segment profit of$112.3 million in the six months endedJune 27, 2020 , up 24% from$90.4 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales volume. 32 -------------------------------------------------------------------------------- Table of Contents Advanced Materials Handling (AMH) For the second quarter of 2020, AMH net sales increased to$126.4 million , compared to$107.5 million in the comparable period last year. The sales increase was mainly due to improved sales from high purity liquid containers and wafer handling products. AMH reported a segment profit of$22.8 million in the second quarter of 2020, up 52% from$15.0 million in the year-ago period. The segment profit increase was primarily due to higher sales volume and a 5% decrease in operating expenses, primarily due to lower spending and restructuring initiatives from the previous year. For the six months endedJune 27, 2020 , AMH net sales increased to$242.6 million , compared to$223.6 million in the comparable period last year. The sales increase was mainly due to improved sales from high purity liquid containers and wafer handling products. AMH reported a segment profit of$43.4 million in the six months endedJune 27, 2020 , up 16% from$37.4 million in the year-ago period. The segment profit increase was primarily due to higher sales volume and a 7% decrease in operating expenses, primarily due to lower spending and restructuring initiatives from the previous year. Unallocated general and administrative expenses Unallocated general and administrative expenses totaled$10.0 million in the second quarter of 2020, compared to$10.7 million in the comparable period last year. Unallocated general and administrative expenses for the six months endedJune 27, 2020 totaled$16.5 million , down from$38.6 million in the six months endedJune 27, 2020 . The$22.2 million decrease mainly reflects a$20.6 million decrease in deal and integration costs referenced in the discussion of SG&A above. Liquidity and Capital Resources We consider the following when assessing our liquidity and capital resources: In thousands June 27, 2020 December 31, 2019 Cash and cash equivalents$ 532,667 $ 351,911 Working capital 950,892 667,964 Total debt 1,183,992 936,484 The Company has historically financed its operations and capital requirements through cash flow from its operating activities, long-term loans, lease financing and borrowings under domestic and international short-term lines of credit. Although there is uncertainty related to the anticipated impact of the COVID-19 pandemic on the Company's future results, we believe our business model, our current cash reserves and the recent steps we have taken to strengthen our balance sheet, such as our issuance of$400 million aggregate principal amount of 4.375% senior unsecured notes dueApril 15, 2028 and related repayments under the Revolving Facility and Term Loan Facility, will help us to manage our business through this crisis as we expect it to unfold. We have reviewed numerous potential scenarios in connection with the impact of COVID-19 on the global economy and the semiconductor industry. Based on our analysis, we believe our existing balances of domestic cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months. As the opportunity arises, we may seek to take advantage of opportunities to raise additional capital through additional debt financing or through public or private sales of securities. If in the future our available liquidity is not sufficient to meet the Company's operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company's cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, in fiscal 2020, we have not experienced difficulty accessing the capital and credit markets; however, future volatility in the capital and credit markets may increase costs associated with issuing debt instruments or affect our ability to access those markets. In addition, it is possible that our ability to access the capital and credit markets could be limited at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions. In summary, our cash flows for each period were as follows: Six months
ended
(in thousands) June 27, 2020 June 29, 2019 Net cash provided by operating activities$ 141,424 $
228,363
Net cash used in investing activities (122,307)
(109,171)
Net cash provided by (used in) financing activities 163,833
(79,166)
Increase in cash and cash equivalents 180,756
39,320
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Operating activities
Cash provided by operating activities is net income adjusted for certain
non-cash items and changes in assets and liabilities. Cash flows provided by
operating activities totaled $141.4 million in the six months ended June 27,
2020 compared to cash flows provided by operating activities of $228.4 million
in the six months ended June 29, 2019 . The decrease in cash provided by
operating activities was primarily due to lower net income and changes in
working capital and other assets and liabilities. The net change in working
capital and other assets and liabilities resulted in a decrease to cash provided
by operations of $81.9 million for the six months ended June 27, 2020 compared
to a decrease of $14.6 million for the six months ended June 29, 2019 .
Changes in working capital and other assets and liabilities for the six months
ended June 27, 2020 were driven by increases in accounts receivable, inventories
and accounts payable. The change for accounts receivable was primarily due to
the Company's quarter closing date occurring several days prior to the end of
the calendar month, the period during which receivable collections are typically
heavy, particularly for the Company's Asia operations as compared to the six
months ended June 29, 2019 . The change for inventory was driven by an increase
in raw material purchases to provide a buffer related to any potential supply
chain issues related to COVID-19. The change for accounts payable and accrued
liabilities was primarily driven by the timing of payments of accounts payable.
In addition, the Company paid out a lower incentive compensation payment for the
six months ended June 27, 2020 compared to the Company's analogous payment for
the six months ended June 29, 2019 . Furthermore, the Company's incentive
compensation accrual is higher at June 27, 2020 than its incentive compensation
accrual at June 29, 2019 .
Investing activities Cash flows used in investing activities totaled $122.3
million in the six months ended June 27, 2020 compared to cash flows used in
investing activities of $109.2 million in the six months ended June 29, 2019 .
The change was due to higher cash paid for acquisitions, offset in-part by lower
cash paid for acquisition of property, plant and equipment.
Acquisition of property, plant and equipment totaled $46.9 million in the six
months ended June 27, 2020 , which primarily reflected investments in equipment
and tooling, compared to $60.1 million in the six months ended June 29, 2019 ,
which primarily reflected investments in equipment and tooling.
On January 10, 2020 , the Company acquired Sinmat, a CMP slurry manufacturer. The
cash used to acquire Sinmat for the six months ended June 27, 2020 was $75.6
million , net of cash acquired. The transaction is described in further detail in
note 3 to the Company's condensed consolidated financial statements.
In the six months ended June 29, 2019 , the Company acquired DSC, which provides
advanced materials to the specialty chemical, technology and pharmaceutical
industries. The cash used to acquire DSC for the six months ended June 29, 2019
was $49.3 million , net of cash acquired. The transaction is described in further
detail in note 3 to the Company's condensed consolidated financial statements.
As of June 27, 2020 , the Company expects its full-year capital expenditures in
2020 to be approximately $120.0 million . As of June 27, 2020 , the Company had
outstanding capital purchase obligations of $42.1 million for the construction
or purchase of plant and equipment not yet recorded in the Company's condensed
consolidated financial statements as the Company had not received the related
goods or property as of such date.
Financing activities Cash flows provided by financing activities totaled $163.8
million during the six months ended June 27, 2020 compared to cash flows used in
financing activities of $79.2 million during the six months ended June 29, 2019 .
The change was primarily due to net long-term debt activity, which was a source
of cash of $249.0 million in the six months ended June 27, 2020 , compared to a
use of cash of $2.0 million in the comparable period in 2019, and a $20.8
million decrease of repurchases of the Company's common stock, partially offset
by a $16.1 million deferred acquisition payment related to our DSC acquisition,
a $4.4 million increase in cash used to pay taxes for net share settlements of
equity awards and $4.0 million increase in payments for debt issuance costs. In
March 2020 , the Company suspended its share repurchase program.
Our total dividend payments were $21.7 million in the six months ended June 27,
2020 compared to $19.0 million in the six months ended June 29, 2019 . We have
paid a cash dividend in each of the past 11 quarters. On July 15, 2020 , the
Board declared a quarterly cash dividend of $0.08 per share of common stock,
payable on August 19, 2020 to stockholders of record on July 29, 2020 .
Other Liquidity and Capital Resources Considerations
The Company's Term Loan Facility matures on November 6, 2025 and bears interest
rate at a rate per annum of 2.2% at June 27, 2020 . During the six months ended
June 27, 2020 , the Company made payments of $151.0 million on the Term Loan
Facility and had losses on debt extinguishment of $1.5 million . As of June 27,
2020 , the aggregate principal amount outstanding under the Term Loan Facility
was $245 million .
The Company's Revolving Facility provides for lending commitments in an
aggregate principal amount of up to $300 million maturing on November 6, 2023 .
The Revolving Facility bears interest at a rate per annum equal to, at the
Company's option,
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either a base rate (such as prime rate) or LIBOR plus, in each case, an
applicable margin. At June 27, 2020 , there was no balance outstanding under the
Revolving Facility and we had undrawn outstanding letters of credit of $0.2
million .
Through June 27, 2020 , the Company was in compliance with all applicable
financial covenants under its credit facilities.
As of June 27, 2020 , we had $550 million aggregate principal amount of 4.625%
senior unsecured notes due February 10, 2026 outstanding.
On April 30, 2020 , the Company issued $400 million aggregate principal amount of
4.375% senior unsecured notes due April 15, 2028 . The Company paid debt issuance
costs of $4.0 million in connection with the issuance of the notes during the
six months ended June 27, 2020 . The transaction is described in further detail
in note 6 to the Company's condensed consolidated financial statements.
The Company also has lines of credit with two banks that provide for borrowings
of Japanese yen for the Company's Japanese subsidiary, equivalent to an
aggregate of approximately $11.2 million . There were no outstanding borrowings
under these lines of credit at June 27, 2020 .
As of June 27, 2020 , the Company's sources of available funds were its cash and
cash equivalents of $532.7 million , funds available under the Revolving Facility
and international credit facilities and cash flow generated from operations. As
of June 27, 2020 , the amount of cash and cash equivalents held in certain of our
foreign operations totaled approximately $219.5 million . If we repatriate such
funds, we will be required to pay income taxes in certain U.S. states and
applicable foreign withholding taxes on those amounts during the period when
such repatriation occurs. We have accrued taxes for the tax effect of
repatriating the funds to the U.S.
Off-Balance Sheet Arrangements
As of June 27, 2020 , we did not have any off-balance sheet arrangements that
have, or are reasonably likely to have, a material current or future effect on
our financial condition, results of operations, liquidity, capital expenditures
or capital resources.
Contractual Obligations
There have been no significant changes to the contractual obligations reported
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 ,
except for long-term debt. On April 30, 2020 , the Company issued $400 million
aggregate principal amount of 4.375% senior unsecured notes due April 15, 2028 .
The Company paid down $151 million on the Term Loan Facility during the second
quarter of 2020.
Recently adopted accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of accounting
pronouncements recently adopted.
Recently issued accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of accounting
pronouncements recently issued but not yet adopted.
Non-GAAP Information The Company's condensed consolidated financial statements
are prepared in conformity with GAAP.
The Company also utilizes certain non-GAAP financial measures as a complement to
financial measures provided in accordance with GAAP in order to better assess
and reflect trends affecting the Company's business and results of operations.
These non-GAAP financial measures include Adjusted EBITDA and Adjusted Operating
Income, together with related measures thereof, and non-GAAP Earnings Per Share,
or EPS, as well as certain other supplemental non-GAAP financial measures
included in the discussion of the Company's financial results.
Adjusted EBITDA, a non-GAAP financial measure, is defined by the Company as net
income before (1) income tax expense, (2) interest expense, (3) interest income,
(4) other (income) expense, net, (5) charge for fair value write-up of acquired
inventory sold, (6) deal and transaction costs, (7) integration costs, (8)
severance and restructuring costs, (9) amortization of intangible assets and
(10) depreciation. Adjusted Operating Income, another non-GAAP financial
measure, is defined by the Company as Adjusted EBITDA exclusive of the
depreciation addback noted above. The Company also utilizes non-GAAP financial
measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided
by the Company's net sales to derive Adjusted EBITDA Margin and Adjusted
Operating Margin, respectively.
Non-GAAP EPS, a non-GAAP financial measure, is defined by the Company as net
income before (1) charge for fair value write-up of acquired inventory sold, (2)
deal and transaction costs, (3) integration costs, (4) severance and
restructuring costs, (5) loss on debt extinguishment and modification, (6)
Versum termination fee, net, (7) amortization of intangible assets, (8) tax
effect of legal entity restructuring and (9) the tax effect of the foregoing
adjustments to net income, stated on a per share basis.
The Company provides supplemental non-GAAP financial measures to help management
and investors to better understand its business and believes these measures
provide investors and analysts additional and meaningful information for the
assessment
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of the Company's ongoing results. Management also uses these non-GAAP measures
to assist in the evaluation of the performance of the Company's business
segments and to make operating decisions.
Management believes the Company's non-GAAP measures help indicate the Company's
baseline performance before certain gains, losses or other charges that may not
be indicative of the Company's business or future outlook and offer a useful
view of business performance in that the measures provide a more consistent
means of comparing performance. The Company believes the non-GAAP measures aid
investors' overall understanding of the Company's results by providing a higher
degree of transparency for such items and providing a level of disclosure that
will help investors understand how management plans, measures and evaluates the
Company's business performance. Management believes that the inclusion of
non-GAAP measures provides greater consistency in its financial reporting and
facilitates investors' understanding of the Company's historical operating
trends by providing an additional basis for comparisons to prior periods.
Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in
evaluations of the Company's operating performance by excluding items that
management does not consider as relevant in the results of its ongoing
operations. Internally, these non-GAAP measures are used by management for
planning and forecasting purposes, including the preparation of internal
budgets; for allocating resources to enhance financial performance; for
evaluating the effectiveness of operational strategies; and for evaluating the
Company's capacity to fund capital expenditures, secure financing and expand its
business.
In addition, and as a consequence of the importance of these non-GAAP financial
measures in managing its business, the Company's Board of Directors uses
non-GAAP financial measures in the evaluation process to determine management
compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA,
Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate
the overall operating performance of firms in the Company's industry.
Additionally, lenders or potential lenders use Adjusted EBITDA measures to
evaluate the Company's creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in
isolation, as a substitute for, or superior to, financial measures or
information provided in accordance with GAAP. Management strongly encourages
investors to review the Company's condensed consolidated financial statements in
their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations, including
but not limited to:
First, non-GAAP financial measures are not standardized. Accordingly, the
methodology used to produce the Company's non-GAAP financial measures is not
computed under GAAP and may differ notably from the methodology used by other
companies. For example, the Company's non-GAAP measure of Adjusted EBITDA may
not be directly comparable to EBITDA or an adjusted EBITDA measure reported by
other companies.
Second, the Company's non-GAAP financial measures exclude items such as
amortization and depreciation that are recurring. Amortization of intangibles
and depreciation have been, and will continue to be for the foreseeable future,
a significant recurring expense with an impact upon the Company's results of
operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance that the Company will not have future charges for
fair value write-up of acquired inventory, restructuring activities, deal costs,
integration costs, or similar items and, therefore, may need to record
additional charges (or credits) associated with such items, including the tax
effects thereon. The exclusion of these items in the Company's non-GAAP measures
should not be construed as an implication that these costs are unusual,
infrequent or non-recurring.
Management considers these limitations by providing specific information
regarding the GAAP amounts excluded from these non-GAAP financial measures and
evaluating these non-GAAP financial measures together with their most directly
comparable financial measures calculated in accordance with GAAP. The
calculations of Adjusted EBITDA, Adjusted Operating Income, and non-GAAP EPS,
and reconciliations between these financial measures and their most directly
comparable GAAP equivalents, are presented below in the accompanying tables.
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Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted
EBITDA
Three months ended Six months ended
(In thousands) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Net sales $ 448,405 $ 378,874 $ 860,732 $ 769,921
Net income $ 68,036 $
123,997
15.2 % 32.7 % 15.0 % 20.3 %
Adjustments to net income
Income tax expense 14,361 43,235 22,983 48,657
Interest expense 13,005 11,315 23,564 22,199
Interest income (213) (1,623) (534) (2,848)
Other (income) expense, net (477) (122,015) 401 (122,263)
GAAP - Operating income 94,712 54,909 175,456 102,400
Operating margin -as a % of net sales 21.1 % 14.5 % 20.4 % 13.3 %
Charge for fair value write-up of acquired
inventory sold - 695 361 2,850
Deal and transaction costs 503 1,164 1,934 20,300
Integration costs 355 1,264 403 4,184
Severance and restructuring costs 2,049 2,170 2,892 3,991
Amortization of intangible assets 13,216 16,591 29,427 35,248
Adjusted operating income 110,835 76,793 210,473 168,973
Adjusted operating margin - as a % of net sales 24.7 % 20.3 % 24.5 % 21.9 %
Depreciation 20,639 18,596 41,287 35,317
Adjusted EBITDA $ 131,474 $
95,389
Adjusted EBITDA - as a % of net sales 29.3 % 25.2 % 29.2 % 26.5 %
Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and Earnings per Share
Three months ended Six months ended
(In thousands, except per share data) June 27, 2020 June 29, 2019 June 27, 2020 June 29, 2019
Net income $ 68,036 $ 123,997 $ 129,042 $ 156,655
Adjustments to net income
Charge for fair value write-up of acquired inventory
sold - 695 361 2,850
Deal and transaction costs 503 1,164 1,934 20,711
Integration costs 355 1,264 403 4,184
Severance and restructuring costs 2,049 2,170 2,892 3,991
Loss on debt extinguishment and modification 1,470 - 1,470 -
Versum termination fee, net - (122,000) - (122,000)
Amortization of intangible assets 13,216 16,591 29,427 35,248
Tax effect of legal entity restructuring - 9,398 - 9,398
Tax effect of adjustments to net income and certain
discrete tax items1 (4,048) 20,153 (8,377) 10,289
Non-GAAP net income $ 81,581 $ 53,432 $ 157,152 $ 121,326
Diluted earnings per common share $ 0.50
0.10 (0.52) 0.21 (0.26)
Diluted non-GAAP earnings per common share $ 0.60 1The tax effect of pre-tax adjustments to net income was calculated using the applicable marginal tax rate for each respective year.
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