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, 2021 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 fabrication plant, 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 9 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 2022 endApril 2, 2022 ,July 2, 2022 ,October 1, 2022 andDecember 31, 2022 .
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
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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. For example, in response to an outbreak of infection inShanghai , beginning inMarch 2022 governmental authorities inChina implemented a lockdown order in that city, significantly slowing economic and business activity in that region. 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 from time-to-time have 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, we continued to see strong demand for our leading-edge products, largely driven by accelerated digitalization, 5G applications and high-performance computing. As described above, the lockdown inShanghai may cause demand for our products to be delayed or deferred. At this time, 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 pandemic, its severity, potential additional surges of infection, the emergence of more virulent or more dangerous variants, 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, 2021 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."
Impact of Conflict Between Russia and
The military conflict betweenRussia andUkraine and the sanctions imposed bythe United States and other governments in response to this conflict have caused significant volatility and disruptions to the global markets. While we source a few raw materials fromRussia andUkraine , to date our supply of these materials has not been significantly impacted by the conflict. We continue to monitor the situation closely and are proactively assessing and evaluating alternative sources to bolster our supply of these materials moving forward, in addition to working closely with our customers on any product re-qualification that may be required. Revenue relating to products manufactured from raw materials sourced from this region does not constitute a material portion of our business. Further, while sales to customers inRussia andUkraine do not constitute a material portion of our business, there is uncertainty regarding the ultimate impact the conflict will have on the global economy, supply chains, logistics, fuel prices, raw material pricing and our business. Refer to Part II, Item 1A. "Risk Factors" for more information. 19
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Overall Summary of Financial Results
For the three months endedApril 2, 2022 , net sales increased 27% to$649.6 million , compared to$512.8 million for the three months endedApril 3, 2021 . Total net sales increased primarily as a result of strong growth across all three segments, as we benefited from robust industry growth and more wafers produced for leading-edge solutions, driving record demand for our products and solutions. Net sales for the three months endedApril 2, 2022 included sales of$5.4 million from acquired businesses and unfavorable foreign currency translation effects of$9.7 million . The Company experienced a 47.7% gross margin for the three months endedApril 2, 2022 , compared to 45.8% in the comparable year-ago period. The gross margin increase was driven by strong execution and higher volumes, offset in part by raw material, logistic costs and modest labor inflation. As a result of the factors mentioned above, the Company reported net income of$125.7 million , or$0.92 per diluted share, for the quarter endedApril 2, 2022 , compared to net income of$84.7 million , or$0.62 per diluted share, a year ago. OnApril 14, 2022 ,Entegris Escrow Corporation , aDelaware corporation and wholly-owned subsidiary of Entegris, completed a private offering of$1.6 billion aggregate principal amount of 4.75% Senior Secured Notes due 2029, or the 2029 Secured Notes. The Company expects net proceeds from the offering of approximately$1.57 billion , after deducting estimated commissions and offering fees and expenses, which will be used to finance a portion of the Company's pending acquisition of CMC Materials. Cash and cash equivalents were$352.7 million atApril 2, 2022 , compared with$402.6 million atDecember 31, 2021 . The Company had outstanding long-term debt (excluding current maturities) of$937.3 million atApril 2, 2022 , compared to$937.0 million atDecember 31, 2021 .
Critical Accounting Policies and Estimates
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, 2021 , filed with theSecurities and Exchange Commission onFebruary 4, 2022 . 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 critical accounting policies and estimates. 20
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Three Months Ended
The following table compares operating results for the three months ended
Three months ended
(Dollars in thousands) April 2, 2022 April 3, 2021
Net sales $ 649,646 100.0 % $ 512,844 100.0 %
Cost of sales 339,826 52.3 277,858 54.2
Gross profit 309,820 47.7 234,986 45.8
Selling, general and administrative expenses 87,108 13.4 71,389 13.9
Engineering, research and development expenses 46,715 7.2 37,748 7.4
Amortization of intangible assets 12,651 1.9 11,871 2.3
Operating income 163,346 25.1 113,978 22.2
Interest expense 12,876 2.0 11,652 2.3
Interest income (12) - (71) -
Other expense, net 4,902 0.8 4,330 0.8
Income before income taxes 145,580 22.4 98,067 19.1
Income tax expense 19,875 3.1 13,391 2.6
Net income $ 125,705 19.3 % $ 84,676 16.5 %
Net sales For the three months ended April 2, 2022 , net sales increased by 27%
to $649.6 million , compared to $512.8 million for the three months ended
April 3, 2021 . 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 April 3, 2021 $ 512,844
Increase mainly associated with volume 141,104
Increase associated with acquired businesses 5,406
Decrease associated with effect of foreign currency translation (9,708)
Net sales in the quarter ended
$ 649,646 Total net sales increased primarily as a result of strong growth across all three segments. Growth was driven in large part by our strong position and sales of leading-edge solutions like liquid and gas filtration, specialty coatings, advanced deposition materials, selective etch and other areas of increasing importance to our customers across the semiconductor ecosystem. Total net sales also reflected unfavorable foreign currency translation effects of$9.7 million and net sales associated with recent acquisitions of$5.4 million . On a geographic basis, sales percentage by customers' country or region for the three months endedApril 2, 2022 andApril 3, 2021 and the percentage increase in sales for the three months endedApril 2, 2022 compared to the sales for the three months endedApril 3, 2021 were as follows: Three months ended April 2, 2022 April 3, 2021 Percentage increase in sales North America 22 % 23 % 21 % Taiwan 22 % 20 % 42 % China 14 % 16 % 13 % South Korea 14 % 14 % 22 % Japan 13 % 14 % 18 % Europe 8 % 8 % 38 % Southeast Asia 6 % 5 % 52 % The increases in sales to customers inNorth America ,Taiwan ,China ,Japan andEurope were primarily driven by general increases in demand for products in all three of the Company's segments. The increase in sales inChina primarily relates to higher sales of Advanced Materials Handling products of 30% and Specialty Chemicals and Engineering Materials products of 21
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28%. The increase in sales in
Gross margin The following table sets forth gross margin as a percentage of net
revenues:
Three months ended
April 2, 2022 April 3, 2021 Percentage point change
Gross margin as a percentage of net revenues: 47.7 % 45.8 % 1.9
Gross margin increased by 1.9 percentage points for the three months ended
April 2, 2022 , compared to the same period in the prior year. Gross margins were
better than expected, driven by strong execution and higher volumes, offset in
part by raw material, logistic costs and modest labor inflation.
Selling, general and administrative expenses Selling, general and
administrative, or SG&A, expenses were $87.1 million in the three months ended
April 2, 2022 , compared to $71.4 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 April 3,
2021 $ 71,389
Employee costs 7,206
Deal and transaction costs 5,008
Donation costs 2,963
Other increases, net 542
Selling, general and administrative expenses in the quarter 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 24% to$46.7 million in the three months endedApril 2, 2022 compared to$37.7 million in the year-ago period as planned. An analysis of the factors underlying the increase in ER&D expenses is presented in the following table: (In thousands) Engineering, research and development expenses in the quarter ended April 3, 2021$ 37,748 Employee costs 5,391 Project materials 2,436 Other increases, net 1,140 Engineering, research and development expenses in the quarter ended April 2, 2022$ 46,715 Amortization expenses Amortization of intangible assets was$12.7 million in the three months endedApril 2, 2022 , compared to$11.9 million for the three months endedApril 3, 2021 . The increase primarily reflects additional amortization expense 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$12.9 million in the three months endedApril 2, 2022 , compared to$11.7 million in the three months endedApril 3, 2021 . The increase primarily reflects higher interest expense of$4.7 million related to ticking fees on the secured commitments for$2.495 billion under the Term Loan B Facility secured in connection with the pending acquisition of CMC Materials, partially offset by lower interest expense due to lower average debt levels and interest rates. Other expense, net Other expense, net was$4.9 million in the three months endedApril 2, 2022 and consisted mainly of foreign currency transaction losses of$4.6 million . Other expense, net was$4.3 million in the three months endedApril 3, 2021 and consisted mainly of foreign currency transaction losses of$4.3 million .
Income tax expense Income tax expense was
The 2022 tax rate included benefits from a decrease in the foreign effective tax rate due to a change in foreign income mix and an increase in the foreign derived intangible income deduction which was offset by a reduction in creditable foreign withholding taxes. The 2021 tax rate included a valuation allowance on federal foreign tax credits generated in 2021 of$1.4 22 -------------------------------------------------------------------------------- Table of Contents million. The year-to-date income tax expense in 2022 and 2021 includes discrete benefits of$4.3 million and$7.5 million , respectively, recorded in connection with share-based compensation. Net income Due to the factors noted above, the Company recorded net income of$125.7 million , or$0.92 per diluted share, in the three months endedApril 2, 2022 , compared to net income of$84.7 million , or$0.62 per diluted share, in the three months endedApril 3, 2021 . In the three months endedApril 2, 2022 , net income, as a percentage of net sales, increased to 19.3% from 16.5% 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.
Adjusted EBITDA increased 37% to$206.2 million in the three months endedApril 2, 2022 , compared to$150.1 million in the three months endedApril 3, 2021 . In the three months endedApril 2, 2022 , adjusted EBITDA, as a percentage of net sales, increased to 32% from 29% in the year-ago period.
Adjusted operating income increased 42% to
Non-GAAP earnings per share increased 51% to
The increases in adjusted EBITDA, adjusted operating income and non-GAAP
earnings per share for the three months ended
Segment Analysis The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See note 9 to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments, along with unallocated general and administrative expenses, for the three months endedApril 2, 2022 andApril 3, 2021 . Three months ended (In thousands) April 2, 2022 April 3, 2021 Specialty Chemicals and Engineered Materials Net sales$ 196,421 $ 166,541 Segment profit 48,851 34,556 Microcontamination Control Net sales$ 266,637 $ 207,099 Segment profit 98,618 70,566 Advanced Materials Handling Net sales$ 198,113 $ 148,541 Segment profit 46,690 32,095
Unallocated general and administrative expenses
11,368
Specialty Chemicals and Engineered Materials (SCEM)
For the first quarter of 2022, SCEM net sales increased to$196.4 million , up 18% compared to$166.5 million in the comparable period last year. The sales increase was primarily due to increased sales of advanced deposition materials, selective etch and specialty coatings products, as well as additional sales of$5.4 million attributable to the Company's acquisition of the Precision Microchemicals business from BASF SE. SCEM reported a segment profit of$48.9 million in the first quarter of 2022, up 41% from$34.6 million in the year-ago period. The segment profit increase was primarily due to higher gross profit 23
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Microcontamination Control (MC)
For the first quarter of 2022, MC net sales increased to$266.6 million , up 29% compared to$207.1 million in the comparable period last year. The sales increase was mainly due to improved performance across substantially all product lines. MC reported a segment profit of$98.6 million in the first quarter of 2022, up 40% from$70.6 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 16% increase in operating expenses due to higher compensation costs.
Advanced Materials Handling (AMH)
For the first quarter of 2022, AMH net sales increased to$198.1 million , up 33% compared to$148.5 million in the comparable period last year. The sales increase was mainly due to improved sales from wafer handling, fluid handling and measurement products. AMH reported a segment profit of$46.7 million in the first quarter of 2022, up 45% from$32.1 million in the year-ago period. The segment profit increase was primarily due to higher sales volume, partially offset by a 23% increase in operating expenses due to higher compensation costs.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled$18.2 million in the first quarter of 2022, compared to$11.4 million in the comparable period last year. The$6.8 million increase is primarily due to a$5.0 million increase in deal and transaction costs this quarter related to the pending acquisition of CMC Materials and$3.0 million increase in donation costs from the comparable period last year.
Liquidity and Capital Resources
We consider the following when assessing our liquidity and capital resources: In thousands April 2, 2022 December 31, 2021 Cash and cash equivalents$ 352,732 $ 402,565 Working capital 997,674 934,369 Total debt 937,349 937,027 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. In connection with the pending acquisition of CMC Materials, pursuant to the Commitment Letter the Company has secured commitments of$2.495 billion under the Term Loan B Facility and$895.0 million under the Bridge Facility and increased commitments of$175.0 million under the Revolving Facility (from$400.0 million to$575.0 million ). In addition, onApril 14, 2022 , Entegris, via a wholly-owned escrow subsidiary, completed a private offering of$1.6 billion aggregate principal amount of 4.750% Senior Secured Notes due 2029. 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 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 2022, 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. 24
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In summary, our cash flows for each period were as follows:
Three months ended
(in thousands) April 2, 2022 April 3, 2021
Net cash provided by operating activities
(83,282) (43,258)
Net cash used in financing activities (27,595)
(39,375)
Decrease in cash and cash equivalents (49,833)
(32,373)
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$63.8 million in the three months endedApril 2, 2022 , compared to$53.1 million in the three months endedApril 3, 2021 . The increase in cash provided by operating activities was primarily due to higher net income, partially offset by 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$108.0 million for the three months endedApril 2, 2022 compared to a decrease of$80.8 million for the three months endedApril 3, 2021 . Changes in working capital and other assets and liabilities for the three months endedApril 2, 2022 were driven primarily by increases in inventories, trade accounts receivables and income taxes payable. The change for inventory was driven by an increase in business activity. The change for trade accounts receivable was primarily due to increased sales activity and days sales outstanding. The change in income taxes payable was primarily driven by higher current tax provision. Investing activities Cash flows used in investing activities totaled$83.3 million in the three months endedApril 2, 2022 , compared to$43.3 million in the three months endedApril 3, 2021 . The change resulted primarily from higher cash paid for acquisition of property, plant and equipment. Financing activities Cash used in financing activities totaled$27.6 million during the three months endedApril 2, 2022 , compared to cash provided by financing activities of$39.4 million during the three months endedApril 3, 2021 . The change was primarily due to the absence of$15.0 million of repurchase and retirement of common stock. In connection with its pending acquisition of CMC Materials, the Company suspended its previously announced share repurchase program in the fourth quarter of 2021 and does not anticipate authorizing a new repurchase program in 2022. Our total dividend payments were$13.9 million in the three months endedApril 2, 2022 , compared to$10.9 million in the three months endedApril 3, 2021 . We have paid a cash dividend in each quarter since the fourth quarter of 2017. OnApril 20, 2022 , the Company's Board of Directors declared a quarterly cash dividend of$0.10 per share to be paid onMay 25, 2022 to shareholders of record on the close of business onMay 4, 2022 .
Other Liquidity and Capital Resources Considerations
Debt
(In thousands) April 2, 2022 December 31, 2021 Senior unsecured notes due 2029 at 3.625%$ 400,000 $ 400,000 Senior unsecured notes due 2028 at 4.375% 400,000 400,000 Senior secured term loan facility due 2025 at 2.457% 145,000 145,000 Total debt (par value)$ 945,000 $ 945,000 In connection with the pending acquisition of CMC Materials, onDecember 31, 2021 , Entegris entered into the Commitment Letter with the Financing Sources, pursuant to which the Financing Sources (a) committed to provide Entegris (i) a senior secured first lien term loan B facility in an aggregate principal amount of up to$4.0 billion , and (ii) a senior unsecured bridge term loan facility in an aggregate principal amount of up to$895.0 million and (b) to the extent that such Financing Sources are revolving lenders under Entegris' existing credit agreement, (i) consented to the acquisition and certain amendments to the terms of the Revolving Facility and (ii) committed to provide to Entegris additional revolving credit commitments in an aggregate principal amount of$175.0 million . OnMarch 2, 2022 , the Company launched syndication of the Term Loan B Facility and completed syndication of$2.495 billion of the commitments under the Term Loan B Facility with pricing at SOFR plus 3.00%. The Company began incurring ticking fees associated with the term loan onMarch 2, 2022 and expects to continue to incur ticking fees through the closing date of the acquisition of CMC Materials. The ticking fees will be paid in cash to the term loan lenders on the closing date. During the quarter endedApril 2, 2022 , the Company incurred$4.7 million in ticking fees which were expensed to interest expense in the Condensed Consolidated Statement of Operations. See Note 6 to the Company's consolidated financial statements for additional discussions. 25
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OnApril 14, 2022 , Entegris also issued, via a wholly-owned escrow subsidiary,$1.6 billion aggregate principal amount of new 4.750% Senior Secured Notes due 2029 and in connection therewith, reduced the commitments under the Term Loan B Facility to$2.495 billion . The Company's Revolving Facility has revolving commitments in an aggregate principal amount of$400.0 million that terminate onApril 30, 2026 . The Company intends to increase the commitments under the Revolving Facility by$175.0 million in connection with the closing of the pending acquisition of CMC Materials. 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. AtApril 2, 2022 , there was no balance outstanding under the Revolving Facility and we had undrawn outstanding letters of credit of$0.2 million .
Through
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$8.2 million . There were no outstanding borrowings under this line of credit atApril 2, 2022 . Cash and cash requirements (In thousands) April 2, 2022 December 31, 2021 Cash and cash equivalents$ 352,732 $ 402,565 U.S. 77,877 107,814 Non-U.S. 274,855 294,751 Our cash and cash equivalents include cash on hand and highly liquid debt securities with original maturities of three months or less, which are valued at cost and approximate fair value. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We have accrued taxes on any earnings that are not indefinitely reinvested. No additional withholding taxes have been accrued for any indefinitely reinvested earnings.
Cash requirements
We have cash requirements to support working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt and other liquidity requirements associated with our operations. We generally intend to use available cash and funds generated from our operations to meet these cash requirements, but in the event that additional liquidity is required we may also borrow under our revolving credit facility. There were no material changes to the cash requirements from our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , except for interest payments on long-term debt and new long-term debt. In connection with the pending acquisition of CMC Materials, onMarch 2, 2022 , the Company launched syndication of$2.495 billion of commitments under the Term Loan B Facility. The Company will incur estimated ticking fees that are recorded as interest expense of$33.4 million associated with the Term Loan B Facility during the period ofMarch 2, 2022 to the closing date of the acquisition of CMC Materials. In addition, onApril 14, 2022 , the Company issued, via a wholly-owned escrow subsidiary,$1.6 billion aggregate principal amount of 4.750% senior secured notes due 2029 (see note 10 to the Company's condensed consolidated financial statements) and the Company expects to incur interest expense of$55.3 million during 2022 related to the 2029 Secured Notes. We expect capital expenditure spending to be approximately$500.0 million in 2022, half of which is for our new facility inTaiwan . This new facility will ultimately support all three of our divisions. As ofApril 2, 2022 , the Company had outstanding capital purchase obligations of$324.1 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. Other Planned Uses of Capital. OnDecember 14, 2021 , we entered into an Agreement and Plan of Merger, or the merger agreement, with our wholly-owned subsidiary,Yosemite Merger Sub, Inc. , or merger sub, and CMC Materials. Pursuant and subject to the terms and conditions of the merger agreement, upon completion of the transaction, merger sub will merge with and into CMC Materials, with CMC Materials surviving and continuing as a wholly-owned subsidiary of Entegris. At the effective time of the pending acquisition, each outstanding share of common stock of CMC Materials (with certain exceptions set forth in the merger agreement) will be converted into the right to receive$133.00 in cash and 0.4506 shares of common stock of Entegris, plus cash in lieu of any fractional shares. The transaction is subject to certain conditions, including the receipt of antitrust clearance or approval inChina ,Japan andSingapore and other customary closing conditions. We have agreed to operate our business in the ordinary course during the period between the execution of the merger agreement and the effective time of the pending acquisition, subject to specific exceptions set forth in the merger agreement, and have agreed to certain other customary restrictions on operations, as set forth in the merger agreement. In connection with the merger agreement, Entegris has obtained debt financing commitments fromMorgan Stanley Senior Funding, Inc. and certain other financial 26
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institutions for (i) a senior unsecured bridge term loan facility in an aggregate principal amount of up to$895.0 million and (ii) a senior secured first lien term loan B facility in an aggregate principal amount of$2.495 billion . OnApril 14, 2022 , Entegris also issued, via a wholly-owned escrow subsidiary,$1.6 billion aggregate principal amount of new 4.750% senior secured notes due 2029. The Company intends to use the net proceeds from the secured notes offering, together with the borrowings under the Bridge Facility (or other sources of indebtedness) and the Term Loan B Facility and cash on hand to (a) finance a portion of the cash consideration of the pending acquisition of CMC Materials, (b) pay the fees and expenses related to the merger, the secured notes offering, the Term Loan B Facility, the Bridge Facility and the Amended Revolving Facility, (c) repay certain existing indebtedness of CMC Materials and Entegris and (d) in the case of the Term Loan B Facility, finance working capital and general corporate purposes of Entegris. As ofApril 2, 2022 , we believe our cash and cash equivalents, cash generated from operations, and our ability to access the capital markets will satisfy our cash needs for the foreseeable future both globally and domestically.
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 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.
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) term loan ticking fee
(7) amortization of intangible assets, (8) the tax effect of the foregoing
adjustments to net income, stated on a per share basis and (9) 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.
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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
(In thousands) April 2, 2022 April 3, 2021
Net sales $ 649,646 $ 512,844
Net income $ 125,705 $ 84,676
Net income - as a % of net sales 19.3 % 16.5 %
Adjustments to net income
Income tax expense 19,875 13,391
Interest expense 12,876 11,652
Interest income (12) (71)
Other expense, net 4,902 4,330
GAAP - Operating income 163,346 113,978
Operating margin - as a % of net sales 25.1 % 22.2 %
Deal and transaction costs 5,008 -
Integration costs 1,246 2,044
Severance and restructuring costs - 143
Amortization of intangible assets 12,651
11,871
Adjusted operating income 182,251
128,036
Adjusted operating margin - as a % of net sales 28.1 % 25.0 % Depreciation 23,905 22,095 Adjusted EBITDA$ 206,156 $ 150,131 Adjusted EBITDA - as a % of net sales 31.7 %
29.3 %
Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and Earnings per Share
Three months ended
(In thousands, except per share data) April 2, 2022 April 3, 2021
Net income $ 125,705 $ 84,676
Adjustments to net income
Deal and transaction costs 5,008 -
Integration costs 1,246 2,044
Severance and restructuring costs - 143
Term loan ticking fee 4,683 -
Amortization of intangible assets 12,651 11,871
Tax effect of adjustments to net income and certain discrete tax
items1 (4,160) (3,221)
Non-GAAP net income $ 145,133 $ 95,513
Diluted earnings per common share $ 0.92 $ 0.62
Effect of adjustments to net income 0.14 0.08
Diluted non-GAAP earnings per common share $ 1.06 $ 0.70
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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