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, 2020 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 or set forth elsewhere in this Quarterly Report on Form 10-Q. 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 supplier of advanced materials and process solutions for the semiconductor and other high-technology industries. Our mission is to help our customers improve their productivity, performance and technology by providing solutions for the most advanced manufacturing environments. We leverage our unique breadth of capabilities to create mission-critical microcontamination control products, specialty chemicals and advanced materials handling solutions that maximize manufacturing yields, reduce manufacturing costs and enable higher device performance for our customers. Our customized materials solutions enable the highest levels of performance essential to the manufacture of semiconductors. As our customers introduce more complex architectures and search for new materials with better electrical and structural properties to improve the performance of their devices, they rely on Entegris as a trusted partner to address these challenges. We understand these challenges and have solutions to address them, such as our advanced deposition materials, implant gases, formulated cleaning chemistries and selective etch chemistries. Our customers also require greater end-to-end materials purity and integrity in their manufacturing processes that, when combined with smaller dimensions and more complex architectures, can be challenging to achieve. To enable the use of new metals and the further miniaturization of chips, and to maximize yield and increase long-term device reliability, we provide products such as our advanced liquid and gas filtration and purification products that help to selectively remove new classes of contaminants throughout the semiconductor supply chain. In addition, to ensure purity levels are maintained across the entire supply chain, from bulk manufacturing, to transportation to and delivery through a fab, to application onto the wafer, we provide high-purity packaging and materials handling products. 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 segment, or SCEM, 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 segment, or MC, 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 segment, or AMH, develops solutions to monitor, protect, transport and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor, life sciences 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. With the technology, capabilities and complementary product portfolios from these segments, we believe we are uniquely positioned to collaborate across divisions to create new, co-optimized and increasingly integrated solutions for our customers. For example, our SCEM segment offers a highly selective nitride etch chemistry, our MC segment provides a liquid filter that is specifically matched to that formulation and our AMH segment ensures the integrity of the product as it is moved to and through the fab environment. 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 a Saturday. The Company's fiscal quarters in 2021 endApril 3, 2021 ,July 3, 2021 ,October 2, 2021 andDecember 31, 2021 . Key operating factors Key factors that 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 22 -------------------------------------------------------------------------------- Table of Contents Company's sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuations. •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 The COVID-19 pandemic continues to impact the global economy and cause significant macroeconomic uncertainty. Infection rates vary across the countries in which we operate. Governmental authorities have continued to implement numerous and constantly evolving measures to try to contain the virus, such as travel bans and restrictions, masking recommendations and mandates, vaccine recommendations and mandates, limits on gatherings, quarantines, shelter-in-place orders and business shutdowns. We have taken proactive, aggressive action to protect the health and safety of our employees, customers, partners and suppliers, consistent with the latest and evolving governmental guidelines. We expect to continue to implement appropriate measures until the COVID-19 pandemic is adequately contained. 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 and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers. While certain of our operations have from time-to-time been temporarily affected by government-mandated restrictions, to date we have not experienced significant adverse impacts to our global operations as a result of the COVID-19 pandemic. Broader impacts of the pandemic have included a more dynamic supply chain and global logistics environment, and we have experienced instances of raw material constraints, higher freight costs and delivery delays in both inbound shipments of raw materials and outgoing shipments of finished products to customers. While we continue to focus on mitigating risks to our operations and supply chain in the current industry environment, we expect some of the foregoing challenges to linger. From a demand perspective, during the third quarter of 2021 we continued to see strong demand for our leading-edge products, largely driven by accelerated digitalization, 5G applications and high-performance computing. In the current circumstances, given the dynamic nature of the situation, any impact on our financial condition, results of operations or cash flows in the future continues to be difficult to estimate and predict, as it depends on future events 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 emergence of more virulent or more dangerous strains of the virus, the actions taken to mitigate the virus or its impact, the development, distribution, efficacy and acceptance of vaccines worldwide, how quickly and to what extent normal economic and operating conditions can resume, the broader impact that the pandemic is having on the economy and our industry and specific implications the pandemic may have on our suppliers and on global logistics. See Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional information regarding risks associated with the COVID-19 pandemic, including under the caption "The COVID-19 pandemic and ensuing governmental responses could materially adversely affect our financial condition and results of operations." Overall Summary of Financial Results For the three months endedOctober 2, 2021 , net sales increased 20% to$579.5 million , compared to$481.0 million for the three months endedSeptember 26, 2020 . Total net sales increased primarily as a result of strong growth across all three segments, as we benefited from robust industry conditions and record demand for our products and solutions. Net sales for the three months endedOctober 2, 2021 included sales of$0.7 million from acquired businesses and favorable foreign currency translation effects of$0.2 million . The Company experienced a 45.6% gross margin for the three months endedOctober 2, 2021 , compared to 47.0% in the comparable year-ago period. The gross margin decrease was primarily due to an unfavorable sales mix and higher materials, labor and freight costs, partially offset by higher sales levels. As a result of the aforementioned factors, the Company reported net income of$117.5 million , or$0.86 per diluted share, for the quarter endedOctober 2, 2021 , compared to net income of$79.3 million , or$0.58 per diluted share, a year ago. 23 -------------------------------------------------------------------------------- Table of Contents Cash and cash equivalents were$475.8 million atOctober 2, 2021 , compared with$580.9 million atDecember 31, 2020 . The Company had outstanding long-term debt (excluding current maturities) of$936.7 million atOctober 2, 2021 , compared to$1,085.8 million atDecember 31, 2020 . Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 5, 2021 . On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to business acquisitions. There have been no material changes in these aforementioned critical accounting policies. Three and Nine Months EndedOctober 2, 2021 Compared to Three and Nine Months EndedSeptember 26, 2020 The following table compares operating results for the three and nine months endedOctober 2, 2021 andSeptember 26, 2020 , both in dollars and as a percentage of net sales, for each caption. Three months ended Nine months ended (Dollars in thousands) October 2, 2021 September 26, 2020 October 2, 2021 September 26, 2020 Net sales$ 579,493 100.0 %$ 480,987 100.0 %$ 1,663,689 100.0 %$ 1,341,719 100.0 % Cost of sales 315,289 54.4 254,987 53.0 899,115 54.0 722,869 53.9 Gross profit 264,204 45.6 226,000 47.0 764,574 46.0 618,850 46.1 Selling, general and administrative expenses 71,032 12.3 71,195 14.8 215,042 12.9 196,958 14.7 Engineering, research and development expenses 41,972 7.2 36,295 7.5 121,692 7.3 98,499 7.3 Amortization of intangible assets 11,843 2.0 11,749 2.4 35,616 2.1 41,176 3.1 Operating income 139,357 24.0 106,761 22.2 392,224 23.6 282,217 21.0 Interest expense 9,395 1.6 12,781 2.7 31,744 1.9 36,345 2.7 Interest income (56) - (130) - (181) - (664) - Other expense (income), net 1,917 0.3 (1,752) (0.4) 29,807 1.8 (1,351) (0.1) Income before income taxes 128,101 22.1 95,862 19.9 330,854 19.9 247,887 18.5 Income tax expense 10,640 1.8 16,559 3.4 39,947 2.4 39,542 2.9 Net income$ 117,461 20.3 %$ 79,303 16.5 %$ 290,907 17.5 %$ 208,345 15.5 % Net sales For the three months endedOctober 2, 2021 , net sales increased by 20% to$579.5 million , compared to$481.0 million for the three months endedSeptember 26, 2020 . An analysis of the factors underlying the increase in net sales is presented in the following table: (In thousands) Net sales in the quarter ended September 26, 2020$ 480,987 Increase mainly associated with volume 97,650
Increase associated with effect of foreign currency translation 161 Increase associated with acquired businesses
695
Net sales in the quarter ended October 2, 2021 $ 579,493
Total net sales increased primarily as a result of strong growth across all
three divisions, as we benefited from robust industry conditions and record
demand for our products and solutions. Total net sales also reflected favorable
foreign currency translation effects of $0.2 million and net sales associated
with recent acquisitions of $0.7 million .
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On a geographic basis, sales percentage by customers' country or region for the
three months ended October 2, 2021 and September 26, 2020 and the percentage
increase in sales for the three months ended October 2, 2021 compared to the
sales for the three months ended September 26, 2020 were as follows:
Three months ended
October 2, 2021 September 26, 2020 Percentage increase in sales
North America 24 % 28 % 4 %
Taiwan 20 % 17 % 38 %
China 15 % 14 % 27 %
South Korea 13 % 15 % 3 %
Japan 13 % 13 % 28 %
Europe 10 % 8 % 45 %
Southeast Asia 5 % 5 % 26 %
The increase in sales to customers in North America primarily relates to higher
sales of Advanced Materials Handling products of 26% and Specialty Chemicals and
Engineering Materials products of 14%, partially offset by lower sales of
Microcontamination Control products of 25%. The increase in sales to customers
in Taiwan , China and Southeast Asia was primarily driven by a general increase
in demand for products in all three of the Company's segments. The increase in
sales in Japan primarily relates to higher sales of Microcontamination Control
products. The increase in sales in Europe primarily relates to higher sales of
Advanced Materials Handling products.
Net sales for the nine months ended October 2, 2021 were $1,663.7 million , up
24% from $1,341.7 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 nine months ended September 26, 2020 $ 1,341,719
Increase mainly associated with volume
305,097
Increase associated with effect of foreign currency translation 9,496 Increase associated with acquired businesses
7,377
Net sales in the nine months endedOctober 2, 2021 $
1,663,689
The Company's sales growth was strong across all three divisions, as we benefited from robust industry conditions and record demand for our products and solutions. Total net sales also reflected favorable foreign currency translation effects of$9.5 million and net sales associated with recent acquisitions of$7.4 million . On a geographic basis, sales percentage by customers' country or region for the nine months endedOctober 2, 2021 andSeptember 26, 2020 and the percentage increase in sales for the nine months endedOctober 2, 2021 compared to the sales for the nine months endedSeptember 26, 2020 were as follows: Nine months ended October 2, 2021 September 26, 2020 Percentage increase in sales North America 24 % 26 % 15 % Taiwan 19 % 20 % 21 % South Korea 14 % 15 % 19 % Japan 13 % 13 % 25 % China 16 % 13 % 52 % Europe 9 % 8 % 28 % Southeast Asia 5 % 6 % 19 % The increase in sales to customers inNorth America primarily relates to higher sales of Microcontamination Control products. The increase in sales to customers inTaiwan ,South Korea ,Japan andChina was primarily driven by a general increase in demand for products in all three of the Company's segments. The increase in sales fromEurope primarily relates to higher sales of Advanced Materials Handling products. The increase in sales fromSoutheast Asia primarily relates to higher sales of Microcontamination Control products. Gross margin The following table sets forth gross margin as a percentage of net revenues: 25
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Three months ended Nine months ended
October 2, 2021 September 26, 2020 Percentage point change October 2, 2021 September 26, 2020 Percentage point change
Gross margin as a
percentage of net
revenues: 45.6 % 47.0 % (1.4) 46.0 % 46.1 % (0.1)
Gross margin decreased by 1.4 and 0.1 percentage points for the three and nine
months ended October 2, 2021 , respectively, compared to the same periods in the
prior year, primarily due to an unfavorable sales mix and higher materials,
labor and freight costs, partially offset by higher sales levels.
Selling, general and administrative expenses Selling, general and
administrative, or SG&A, expenses were $71.0 million in the three months ended
October 2, 2021 , compared to $71.2 million in the year-ago period. An analysis
of the factors underlying the change in SG&A expenses is presented in the
following table:
(In thousands)
Selling, general and administrative expenses in the quarter ended
September 26, 2020 $ 71,195
Employee costs 2,371
Other decreases, net (2,534)
Selling, general and administrative expenses in the quarter ended October 2,
2021 $ 71,032
SG&A expenses were $215.0 million for the first nine months of 2021,
representing a 9% increase compared to SG&A expenses of $197.0 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 nine months ended
September 26, 2020 $ 196,958
Employee costs 21,424
Other decreases, net (3,340)
Selling, general and administrative expenses in the nine months ended
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 increased 16% to$42.0 million in the three months endedOctober 2, 2021 compared to$36.3 million in the year-ago period. An analysis of the factors underlying the increase in ER&D expenses is presented in the following table: (In thousands) Engineering, research and development expenses in the quarter ended September 26, 2020$ 36,295 Employee costs 2,963 Project materials 2,186 Other increases, net 528 Engineering, research and development expenses in the quarter ended October 2, 2021$ 41,972 ER&D expenses increased 24% to$121.7 million in the first nine months of 2021, compared to$98.5 million in the year-ago period. An analysis of the factors underlying the increase in ER&D expenses is presented in the following table: (In thousands) Engineering, research and development expenses in the nine months ended September 26, 2020$ 98,499 Employee costs 12,820 Project materials 7,773 Other increases, net 2,600
Engineering, research and development expenses in the nine months ended
Amortization expenses Amortization of intangible assets was$11.8 million in the three months endedOctober 2, 2021 , compared to$11.7 million for the three months endedSeptember 26, 2020 . The increase primarily reflects additional amortization expense associated with recent acquisitions. Amortization of intangible assets was$35.6 million in the nine months endedOctober 2, 2021 , compared to$41.2 million for the nine months endedSeptember 26, 2020 . The decrease primarily reflects the elimination of amortization expense of$6.7 26 -------------------------------------------------------------------------------- Table of Contents million for acquired identifiable intangible assets that became fully amortized in previous periods, partially offset by additional amortization expense of$1.3 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$9.4 million in the three months endedOctober 2, 2021 , compared to$12.8 million in the three months endedSeptember 26, 2020 . The decrease primarily reflects lower average debt levels and interest rates. Interest expense was$31.7 million in the nine months endedOctober 2, 2021 , compared to$36.3 million in the nine months endedSeptember 26, 2020 . The decrease reflects lower average debt levels and interest rates. Interest income Interest income of$0.1 million in the three months endedOctober 2, 2021 was flat compared to$0.1 million in the three months endedSeptember 26, 2020 . Interest income was$0.2 million in the nine months endedOctober 2, 2021 , compared to$0.7 million in the nine months endedSeptember 26, 2020 . The decrease reflects lower average interest rates and cash levels. Other expense (income), net Other expense, net was$1.9 million in the three months endedOctober 2, 2021 and consisted mainly of foreign currency transaction losses of$1.9 million . Other income, net was$1.8 million in the three months endedSeptember 26, 2020 and consisted mainly of foreign currency transaction gains of$2.9 million , partially offset by loss on debt extinguishment costs of$0.9 million associated with payments on the Company's senior secured term loan facility due 2025, or the Term Loan Facility. Other expense, net was$29.8 million in the nine months endedOctober 2, 2021 and consisted mainly of a loss on extinguishment of debt of$23.1 million associated with the redemption of the Company's$550 million aggregate principal amount of senior unsecured notes due 2026, or the 2026 Notes (see note 6 to the Company's condensed consolidated financial statements), and foreign currency transaction losses of$6.3 million . Other income, net was$1.4 million in the nine months endedSeptember 26, 2020 and consisted primarily of foreign currency transaction gains of$4.2 million , partially offset by losses on debt extinguishment costs of$2.4 million associated with payments on the Term Loan Facility. Income tax expense Income tax expense was$10.6 million and$39.9 million in the three and nine months endedOctober 2, 2021 , respectively, compared to income tax expense of$16.6 million and$39.5 million in the three and nine months endedSeptember 26, 2020 , respectively. The Company's year-to-date effective income tax rate atOctober 2, 2021 was 12.1%, compared to 16.0% atSeptember 26, 2020 . The decrease in the year-to-date effective income tax rate from 2020 to 2021 primarily relates to the reversal of a valuation allowance on foreign tax credits generated during 2020 and 2021 of$9.4 million , the recognition of a capital loss tax benefit of$3.8 million recorded during the nine months endedOctober 2, 2021 and a decrease in the foreign effective tax rate due to a change in the foreign income mix. These benefits were offset in part by tax recorded on the sale of intangible property of$3.5 million in the quarter endedJuly 3, 2021 and a valuation allowance of$3.4 million on federal foreign tax credits recorded in the quarter endedSeptember 26, 2020 . Additionally, the income tax expense for the nine months endedOctober 2, 2021 andSeptember 26, 2020 includes discrete benefits of$13.1 million and$12.0 million , respectively, recorded in connection with share-based compensation. Net income Due to the factors noted above, the Company recorded net income of$117.5 million , or$0.86 per diluted share, in the three months endedOctober 2, 2021 , compared to net income of$79.3 million , or$0.58 per diluted share, in the three months endedSeptember 26, 2020 . In the three months endedOctober 2, 2021 , net income, as a percentage of net sales, increased to 20.3% from 16.5% in the year-ago period. In the nine months endedOctober 2, 2021 , the Company recorded net income of$290.9 million , or$2.13 per diluted share, compared to net income of$208.3 million , or$1.53 per diluted share, in the nine months endedSeptember 26, 2020 . In the nine months endedOctober 2, 2021 , net income, as a percentage of net sales, increased to 17.5% from 15.5% in the year-ago period. Non-GAAP Financial 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 entitled "Non-GAAP Information" below 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. 27 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA increased 23% to$175.5 million in the three months endedOctober 2, 2021 , compared to$142.4 million in the three months endedSeptember 26, 2020 . In the three months endedOctober 2, 2021 , adjusted EBITDA, as a percentage of net sales, was flat at 30% compared to the year-ago period. Adjusted EBITDA increased 27% to$499.8 million in the nine months endedOctober 2, 2021 , compared to$394.1 million in the nine months endedSeptember 26, 2020 . In the nine months endedOctober 2, 2021 , adjusted EBITDA, as a percentage of net sales, increased to 30% from 29% in the year-ago period. Adjusted operating income increased 26% to$152.7 million in the three months endedOctober 2, 2021 , compared to$121.6 million in the three months endedSeptember 26, 2020 . Adjusted operating income, as a percentage of net sales, increased to 26% from 25% in the year-ago period. Adjusted operating income increased 30% to$432.3 million in the nine months endedOctober 2, 2021 , compared to$332.1 million in the nine months endedSeptember 26, 2020 . In the nine months endedOctober 2, 2021 , adjusted operating income, as a percentage of net sales, increased to 26% from 25% in the year-ago period. Non-GAAP earnings per share increased 37% to$0.92 in the three months endedOctober 2, 2021 , compared to$0.67 in the three months endedSeptember 26, 2020 . Non-GAAP earnings per share increased 35% to$2.47 in the nine months endedSeptember 26, 2020 , compared to$1.83 in the nine months endedSeptember 26, 2020 . The increases in adjusted EBITDA, adjusted operating income and non-GAAP earnings per share for the three and nine months endedOctober 2, 2021 compared to the year-ago periods are generally attributable to the increases in sales and gross profit. Segment Analysis The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See note 10 to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments, along with unallocated general and administrative expenses, for the three and nine months endedOctober 2, 2021 andSeptember 26, 2020 . Three months ended Nine months ended October 2, September 26, September 26, (In thousands) 2021 2020 October 2, 2021 2020 Specialty Chemicals and Engineered Materials Net sales$ 176,380 $ 150,480 $ 523,287 $ 440,907 Segment profit 41,091 32,600 120,592 98,208 Microcontamination Control Net sales$ 225,877 $ 193,541 $ 660,497 $ 536,560 Segment profit 78,399 64,915 227,097 177,219 Advanced Materials Handling Net sales$ 186,200 $ 144,370 $ 507,243 $ 386,941 Segment profit 40,503 33,266 114,691 76,707
Unallocated general and administrative expenses
$ 34,540 $ 28,741
Specialty Chemicals and Engineered Materials (SCEM)
For the third quarter of 2021, SCEM net sales increased to $176.4 million , up
17% compared to $150.5 million in the comparable period last year. The sales
increase was primarily due to increased sales of specialty gases and advanced
deposition materials. SCEM reported a segment profit of $41.1 million in the
third quarter of 2021, up 26% from $32.6 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 an 11% increase in operating
expenses, primarily due to higher compensation costs.
For the nine months ended October 2, 2021 , SCEM net sales increased to $523.3
million , up 19% compared to $440.9 million in the comparable period last year.
The sales increase was mainly due to increased sales of specialty gases and
advanced deposition materials. SCEM reported a segment profit of $120.6
million in the nine months ended October 2, 2021 , up 23% from $98.2 million in
the year-ago period also due to higher sales levels and a gain on a sale of
non-core intangibles, partially offset by an 11% increase in operating expenses.
Microcontamination Control (MC)
For the third quarter of 2021, MC net sales increased to $225.9 million , up 17%
compared to $193.5 million in the comparable period last year. The sales
increase was mainly due to improved performance across substantially all
platforms, with growth
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especially strong in liquid filtration and gas microcontamination products. MC
reported a segment profit of $78.4 million in the third quarter of 2021, up 21%
from $64.9 million in the year-ago period. The segment profit improvement was
primarily due to higher gross profit related to increased sales volume,
partially offset by a 4% increase in operating expenses due to higher
compensation costs.
For the nine months ended October 2, 2021 , MC net sales increased to $660.5
million , up 23% compared to $536.6 million in the comparable period last year.
The sales increase was mainly due to improved performance across substantially
all platforms, with growth especially strong in liquid filtration and gas
filtration products. MC reported a segment profit of $227.1 million in the nine
months ended October 2, 2021 , up 28% from $177.2 million in the year-ago period.
The segment profit improvement was primarily due to higher gross profit related
to the increased sales volume, partially offset by a 13% increase in operating
expenses due to higher compensation costs.
Advanced Materials Handling (AMH)
For the third quarter of 2021, AMH net sales increased to $186.2 million , up 29%
compared to $144.4 million in the comparable period last year. The sales
increase was mainly due to improved sales from wafer handling, fluid handling
and measurement products and sales of our Aramus high purity bags, as well as
additional sales of $0.7 million attributable to the Company's acquisition of
Global Measurement Technologies, Inc. , or GMTI. AMH reported a segment profit of
$40.5 million in the third quarter of 2021, up 22% from $33.3 million in the
year-ago period. The segment profit increase was primarily due to higher sales
volume, partially offset by a 14% increase in operating expenses due to higher
compensation costs.
For the nine months ended October 2, 2021 , AMH net sales increased to $507.2
million , up 31% compared to $386.9 million in the comparable period last year.
The sales increase was mainly due to improved sales from wafer handling, fluid
handling and measurement products and sales of our Aramus high purity bags, as
well as additional sales of $6.8 million attributable to the acquisition of
GMTI. AMH reported a segment profit of $114.7 million in the nine months ended
October 2, 2021 , up 50% from $76.7 million in the year-ago period. The segment
profit increase was primarily due to higher sales volume, partially offset by a
16% increase in operating expenses, primarily due to higher compensation costs.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $8.8 million in the
third quarter of 2021, compared to $12.3 million in the comparable period last
year. The $3.5 million decrease mainly reflects a $2.0 million decrease in
charitable donation costs and a $1.0 million decrease in deal and integration
costs from the comparable period last year.
Unallocated general and administrative expenses for the nine months ended
October 2, 2021 totaled $34.5 million , up from $28.7 million in the nine months
ended September 26, 2020 . The $5.8 million increase mainly reflects higher
employee costs.
Liquidity and Capital Resources
We consider the following when assessing our liquidity and capital resources:
In thousands October 2, 2021 December 31, 2020
Cash and cash equivalents $ 475,752 $ 580,893
Working capital 966,292 931,631
Total debt 936,704 1,085,783
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. On April 30, 2021 , the Company issued $400.0 million aggregate principal
amount of 3.625% senior unsecured notes due May 1, 2029 , or the 2029 Notes. The
Company used the net proceeds of the offering, together with cash on hand and
borrowings under the Company's senior secured revolving credit facility, or the
Revolving Facility, to redeem all of the 2026 Notes. The redemption of the 2026
Notes resulted in a loss on extinguishment of debt of $23.1 million . In
connection with our issuance of the 2029 Notes, we amended the Revolving
Facility to provide for, among other things, lending commitments in an aggregate
principal amount of up to $400.0 million (up from $300.0 million ) and to extend
the maturity date to April 30, 2026 .
Although there is uncertainty regarding the 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 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 and for the longer term.
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
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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 2021, we have not experienced difficulty accessing the capital
and credit markets, but 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:
Nine months ended
(in thousands) October 2, 2021 September 26, 2020
Net cash provided by operating activities $ 284,474 $ 242,656
Net cash used in investing activities (131,820) (190,440)
Net cash (used in) provided by financing activities (254,513) 44,352
(Decrease) increase in cash and cash equivalents (105,141) 96,061
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 $284.5 million in the nine months
ended October 2, 2021 , compared to $242.7 million in the nine months ended
September 26, 2020 . The increase in cash provided by operating activities was
primarily due to higher net income, net of non-cash adjustments, including the
loss on debt extinguishment and modifications, partially offset by the net
change 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 operating activities of $153.0 million for the nine months ended
October 2, 2021 compared to a decrease of $118.6 million for the nine months
ended September 26, 2020 .
Changes in working capital and other assets and liabilities for the nine months
ended October 2, 2021 were driven primarily by increases in inventories,
accounts payable and income taxes payable. The change for inventory was driven
by an increase in business activity. The change for accounts payable was due to
timing of payments. The change for income taxes payable was primarily driven by
higher income taxes paid.
Investing activities Cash flows used in investing activities totaled $131.8
million in the nine months ended October 2, 2021 , compared to $190.4 million in
the nine months ended September 26, 2020 . The change resulted primarily from a
reduction in cash paid for acquisitions of businesses, partially offset by
higher cash paid for acquisition of property, plant and equipment.
Acquisition of property, plant and equipment totaled $134.0 million in the nine
months ended October 2, 2021 , which primarily reflected investments in
facilities, equipment and tooling, compared to $79.6 million in the nine months
ended September 26, 2020 , which primarily reflected investments in equipment and
tooling.
In the nine months ended October 2, 2021 , the Company acquired a business for
$2.5 million , net of cash acquired. In the nine months ended September 26, 2020 ,
the Company used cash to acquire the Sinmat business and GMTI for $111.1
million , net of cash acquired. The transactions are described in further detail
in note 3 to the Company's condensed consolidated financial statements.
As of October 2, 2021 , the Company expects its full-year capital expenditures in
2021 to be approximately $225.0 million for growth capacity investments and the
initial phase of the previously announced investment in our new facility in
Taiwan . As of October 2, 2021 , the Company had outstanding capital purchase
obligations of $192.4 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 used in financing activities totaled $254.5 million
during the nine months ended October 2, 2021 , compared to cash provided by
financing activities of $44.4 million during the nine months ended September 26,
2020 . The change was primarily due to a $318.1 million increase in payments on
long-term debt and debt extinguishment and a $20.4 million increase in
repurchase and retirement of common stock. The Company made a payment of $569.1
million related to the redemption of the $550.0 million aggregate principal
amount of 2026 Notes during the nine months ended October 2, 2021 , compared to a
payment of $251.0 million of outstanding borrowings under the Term Loan Facility
in the nine months ended September 26, 2020 . The increase in cash flows used in
financing activities was offset in part by the absence of a $16.1 million
deferred acquisition payment related to our acquisition of Digital Specialty
Chemicals in 2020, a $13.0 million increase in proceeds from the issuance of
common stock and a $9.2 million decrease in taxes paid related to net share
settlement of equity awards.
Our total dividend payments were $32.7 million in the nine months ended
October 2, 2021 , compared to $32.4 million in the nine months ended
September 26, 2020 . We have paid a cash dividend in each of the past 16
quarters. On October 13, 2021 , the
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Company's Board of Directors declared a quarterly cash dividend of $0.08 per
share to be paid on November 17, 2021 to shareholders of record on the close of
business on October 27, 2021 .
Other Liquidity and Capital Resources Considerations
On April 30, 2021 , the Company issued $400.0 million aggregate principal amount
of the 2029 Notes. The Company used the net proceeds of the offering, together
with cash on hand and borrowings under the Revolving Facility, to redeem all of
the 2026 Notes. We capitalized $4.1 million of third-party expenses related to
the issuance of the 2029 as debt issuance costs. At October 2, 2021 , we had
$400.0 million aggregate principal amount outstanding on the 2029 Notes.
The Company voluntarily redeemed its $550.0 million aggregate principal amount
of 2026 Notes at a redemption price of 103.469% (expressed as percentage of
principal amount), plus accrued and unpaid interest of $5.6 million . The
redemption of the 2026 Notes resulted in a loss on extinguishment of debt of
$23.1 million .
In connection with our issuance of the 2029 Notes, we amended the Revolving
Facility to provide for, among other things, lending commitments in an aggregate
principal amount of up to $400.0 million (up from $300.0 million ) and to extend
the maturity date to April 30, 2026 . The Revolving Facility bears interest at a
rate per annum equal to, at the Company's option, either a base rate (such as
prime rate) or LIBOR plus, in each case, an applicable margin. At October 2,
2021 , there was no balance outstanding under the Revolving Facility and we had
undrawn outstanding letters of credit of $0.2 million .
The Company's Term Loan Facility matures on November 6, 2025 and bore interest
at a rate per annum of 2.1% at October 2, 2021 . As of October 2, 2021 , the
aggregate principal amount outstanding under the Term Loan Facility was $145.0
million .
As of October 2, 2021 , we had $400.0 million aggregate principal amount of
4.375% senior unsecured notes due April 15, 2028 outstanding.
Through October 2, 2021 , the Company was in compliance with all applicable
financial covenants under its debt arrangements.
The Company also has a line of credit with one bank that provides for borrowings
in Japanese yen for the Company's Japanese subsidiaries, equivalent to an
aggregate of approximately $9.0 million . There were no outstanding borrowings
under this line of credit at October 2, 2021 .
As of October 2, 2021 , the Company's sources of available funds were its cash
and cash equivalents of $475.8 million , funds available under the Revolving
Facility and international credit facilities and cash flow generated from
operations. As of October 2, 2021 , the amount of cash and cash equivalents held
in certain of our foreign operations totaled approximately $330.8 million . If we
repatriate such funds, we may 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 on any earnings that
are not indefinitely reinvested. We estimate that no material withholding taxes
would be incurred if any indefinitely reinvested earnings were distributed.
Off-Balance Sheet Arrangements
As of October 2, 2021 , 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, 2020 ,
except for long-term debt. On April 30, 2021 , the Company issued $400.0 million
aggregate principal amount of 2029 Notes. On May 4, 2021 , the Company redeemed
the $550.0 million aggregate principal amount of 2026 Notes. Refer to note 6 to
the Company's condensed consolidated financial statements for a discussion of
recent debt activity.
Recently adopted accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of recently adopted
accounting pronouncements.
Recently issued accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of recently issued
but not yet adopted accounting pronouncements.
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,
as well as certain other supplemental non-GAAP financial measures included in
the discussion of the Company's financial results.
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Adjusted EBITDA is defined by the Company as net income before, as applicable,
(1) income tax expense, (2) interest expense, (3) interest income, (4) other
expense (income), 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 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 is defined by the Company as net income before, as applicable, (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 extinguishment of debt and modification, (6) amortization of
intangible assets, (7) the tax effect of the foregoing adjustments to net
income, stated on a per share basis and (8) tax effect of legal entity
restructuring.
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 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
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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.
Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted
EBITDA
Three months ended Nine months ended
September 26,
(In thousands) October 2, 2021 2020 October 2, 2021 September 26, 2020
Net sales $ 579,493 $
480,987
$ 117,461 $
79,303
20.3 % 16.5 % 17.5 % 15.5 %
Adjustments to net income
Income tax expense 10,640 16,559 39,947 39,542
Interest expense 9,395 12,781 31,744 36,345
Interest income (56) (130) (181) (664)
Other expense (income), net 1,917 (1,752) 29,807 (1,351)
GAAP - Operating income 139,357 106,761 392,224 282,217
Operating margin - as a % of net sales 24.0 % 22.2 % 23.6 % 21.0 %
Charge for fair value write-up of acquired
inventory sold - 229 - 590
Deal and transaction costs - 642 - 2,576
Integration costs 1,290 1,260 3,966 1,663
Severance and restructuring costs 206 971 529 3,863
Amortization of intangible assets 11,843 11,749 35,616 41,176
Adjusted operating income 152,696 121,612 432,335 332,085
Adjusted operating margin - as a % of net
sales 26.3 % 25.3 % 26.0 % 24.8 %
Depreciation 22,841 20,777 67,510 62,064
Adjusted EBITDA $ 175,537 $
142,389
Adjusted EBITDA - as a % of net sales 30.3 % 29.6 % 30.0 % 29.4 %
Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income
and Earnings per Share
Three months ended Nine months ended
October 2, 2021 2020 2021 2020
Net income $ 117,461 $ 79,303 $ 290,907 $ 208,345
Adjustments to net income
Charge for fair value write-up of acquired
inventory sold - 229 - 590
Deal and transaction costs - 642 - 2,576
Integration costs 1,290 1,260 3,966 1,663
Severance and restructuring costs 206 971 529 3,863
Loss on extinguishment of debt and modification - 908 23,338 2,378
Amortization of intangible assets 11,843 11,749 35,616 41,176
Tax effect of adjustments to net income and
certain discrete tax items1 (5,417) (3,602) (16,749) (11,979)
Non-GAAP net income $ 125,383 $ 91,460 $ 337,607 $ 248,612
Diluted earnings per common share $ 0.86 $ 0.58 $ 2.13 $ 1.53
Effect of adjustments to net income 0.06 0.09 0.34 0.30
Diluted non-GAAP earnings per common share $ 0.92 $
0.67
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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