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 otherSEC filings 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
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, CMP slurries, CMP pads, 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. As of the date of this Quarterly Report on Form 10-Q, our business is organized and operated in four operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials segment, or SCEM, provides advanced materials enabling complex chip designs and improved device electrical performance, including 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 advanced filtration solutions that improve customers' yield, device reliability and cost, by filtering and purifying critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries.The Advanced Materials Handling segment, or AMH, develops solutions that improve customers' yields by protecting critical materials during manufacturing, transportation, and storage, including products that 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. The Advanced Planarization Solutions segment, or APS, provides complementary chemical mechanical planarization solutions, advanced materials and high-purity wet chemicals; including CMP slurries, pads, formulated cleans and other electronic chemicals that are critical to semiconductor manufacturing processes and that enhance device yields. 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 segments to create new, co-optimized and increasingly integrated solutions for our customers. We believe that our recent acquisition of CMC Materials and the inclusion of CMP slurries, pads and formulated cleans to our product portfolio will further support our strategy of collaboration between segments and the development of new and co-optimized solutions. See Note 13 to the condensed consolidated financial statements for additional information on the Company's four 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 end onApril 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
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gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company's sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuations. •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), foreign currency fluctuations, 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. Infection rates vary across the countries in which we operate, and governmental authorities have continued to implement numerous and constantly evolving measures to try to contain the virus. Continuing impacts of the pandemic include a more challenging supply chain and global logistics environment. While 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, we have not experienced significant adverse impacts to our global operations. 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 global markets. We source a few raw materials fromRussia andUkraine , and we have been able to obtain an adequate supply of these materials to serve our customers, albeit at increased cost. We 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 and historically we have not had significant revenue in this region. The ultimate impact of the conflict on the global economy, supply chains, logistics, fuel prices, raw material pricing and our business remains uncertain. We cannot currently predict the ultimate impact of the conflict on our financial condition, results of operations or cash flows. Refer to Part II, Item 1A. "Risk Factors" in our Quarterly Report on Form 10-Q for the quarter endedApril 2, 2022 for more information.
Impact of New Export Control Regulations
OnOctober 7, 2022 , theU.S Department of Commerce ,Bureau of Industry and Security ("BIS") announced new export control regulations that restrict the sale of certain products and services to some companies and domestic fabs inChina . Since these rules were published, we have assembled a global, cross-functional team to interpret the regulations, analyze how they may impact Entegris and determine how to best serve our customers going forward in compliance with these rules. At a high-level, these new rules restrict the sale of products and the provision of service to domestic fabs inChina operating at or above certain advanced technology nodes. We currently estimate that the new regulations will reduce our fourth-quarter nets sales by approximately$40 to 50 million. We intend to apply for export licenses where appropriate.
Recent Events
On the Closing Date, we completed the acquisition of CMC Materials. We acquired all of the issued and outstanding common shares of CMC Materials for$133.00 in cash and 0.4506 shares of our common stock per share, representing a total purchase price (inclusive of debt retired and cash assumed) at close was$6.0 billion (based on our closing price onJune 30, 2022 ), including$3.8 billion in cash paid to CMC Materials' shareholders, the issuance of 12.9 million shares of our common stock (excluding unvested CMC stock options and unvested CMC restricted stock units, restricted shares and performance share units equity awards assumed),$0.9 billion of debt retired and approximately$0.3 billion of acquired cash. We financed the cash portion of the purchase price through debt financing. See Note 7 to our condensed consolidated financial statements for further discussion of the debt financing that occurred prior to and on the Closing Date of the acquisition. 28
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During the three months endedOctober 1, 2022 , the Company realigned its financial reporting structure reflecting management and organizational changes. Beginning with this report, the Company will report its financial performance based on four reportable segments: Specialty Chemicals and Engineered Materials, Microcontamination Control, Advanced Material Handling and Advanced Planarization Solutions. See note 13 to the condensed consolidated financial statements for additional information on the Company's four segments OnJuly 28, 2022 , we entered into an interest rate swap agreement. The interest rate swap is a floating-to-fixed interest rate swap contract to hedge the variability in SOFR-based interest payments associated with$1.95 billion of our$2.495 billion Initial Term Loan Facility. The notional amount is scheduled to decrease quarterly and will expire onDecember 30, 2025 . See Note 9 to our condensed consolidated financial statements for further discussion. OnAugust 16, 2022 , theU.S. government enacted the Inflation Reduction Act of 2022 ("IRA") that includes, among other provisions, changes to theU.S. corporate income tax system, including a 15% minimum tax based on "adjusted financial statement income" exceeding$1 billion and a 1% excise tax on net repurchases of stock afterDecember 31, 2022 , as well as tax credits for clean energy initiatives. We are evaluating the IRA and its requirements, as well as any potential impact on our business.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of our Annual Report on Form 10-K for the year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onFebruary 4, 2022 . On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to business acquisitions. There have been no material changes in these critical accounting policies and estimates.
Three and Nine Months Ended
The following table compares operating results for the three and nine months endedOctober 1, 2022 andOctober 2, 2021 , both in dollars and as a percentage of net sales, for each caption. Three months ended Nine months ended (Dollars in thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021 Net sales$ 993,828 100.0 %$ 579,493 100.0 %$ 2,335,963 100.0 %$ 1,663,689 100.0 % Cost of sales 622,157 62.6 315,289 54.4 1,344,075 57.5 899,115 54.0 Gross profit 371,671 37.4 264,204 45.6 991,888 42.5 764,574 46.0 Selling, general and administrative expenses 226,446 22.8 71,032 12.3 404,239 17.3 215,042 12.9 Engineering, research and development expenses 64,990 6.5 41,972 7.2 160,953 6.9 121,692 7.3 Amortization of intangible assets 65,346 6.6 11,843 2.0 90,491 3.9 35,616 2.1 Operating income 14,889 1.5 139,357 24.0 336,205 14.4 392,224 23.6 Interest expense 84,150 8.5 9,395 1.6 129,027 5.5 31,744 1.9 Interest income (1,395) (0.1) (56) - (2,065) (0.1) (181) - Other expense, net 12,852 1.3 1,917 0.3 27,373 1.2 29,807 1.8 (Loss) income before income taxes (80,718) (8.1) 128,101 22.1 181,870 7.8 330,854 19.9 Income tax (benefit) expense (7,015) (0.7) 10,640 1.8 30,377 1.3 39,947 2.4 Net (loss) income$ (73,703) (7.4) %$ 117,461 20.3 %$ 151,493 6.5 %$ 290,907 17.5 % Net sales For the three months endedOctober 1, 2022 , net sales increased by 71% to$993.8 million , compared to$579.5 million for the three months endedOctober 2, 2021 . An analysis of the factors underlying the increase in net sales is presented 29
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in the following table: (In thousands) Net sales in the quarter endedOctober 2, 2021 $
579,493
Increase mainly associated with volume exclusive of CMC Materials 136,693 Increase associated with acquired businesses
315,405
Decrease associated with effect of foreign currency translation (37,763)
Net sales in the quarter ended
$ 993,828
Total net sales increased primarily driven by the inclusion of sales from the acquisition of CMC Materials for the three-month period subsequent to the Closing Date. Growth was also driven in our unit driven solutions, including liquid filtration, formulated cleans and advanced deposition materials, which are of growing importance to our customers' technology. Growth was also strong in many of our CAPEX driven solutions, which are linked to new investments in additional fab capacity. Total net sales also reflected unfavorable foreign currency translation effects of$37.8 million , mainly due to the significant weakening of the Japanese yen and the Korean won relative to theU.S. dollar. On a geographic basis, sales percentage by customers' country or region for the three months endedOctober 1, 2022 andOctober 2, 2021 and the percentage increase in sales for the three months endedOctober 1, 2022 compared to the sales for the three months endedOctober 2, 2021 were as follows: Three months ended October 1, 2022 October 2, 2021 Percentage increase in sales North America 25 % 24 % 80 % Taiwan 18 % 20 % 60 % China 17 % 15 % 98 % South Korea 12 % 13 % 56 % Japan 9 % 13 % 17 % Europe 10 % 10 % 81 % Southeast Asia 8 % 5 % 165 % The increases in sales to customers for all countries and regions in the table above were principally driven by the inclusion of sales from the CMC Materials acquisition. Net sales for the nine months endedOctober 1, 2022 were$2,336.0 million , up 40% from$1,663.7 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 October 2, 2021 $
1,663,689
Increase mainly associated with volume exclusive of CMC Materials 415,130 Decrease associated with effect of foreign currency translation (67,792) Increase associated with acquired businesses
324,936
Net sales in the nine months endedOctober 1, 2022 $
2,335,963
Total net sales increased primarily driven by the inclusion of sales from the acquisition of CMC Materials for the three-month period subsequent to the Closing Date and the Company's strong sales growth across all four segments, as we benefited from robust industry conditions and record demand for our products and solutions. Total net sales also reflected unfavorable foreign currency translation effects of$67.8 million , mainly due to the significant weakening of the Japanese yen and the Korean Won relative to theU.S. dollar.
On a geographic basis, sales percentage by customers' country or region for the
nine months ended
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nine months ended
Nine months ended
October 1, 2022 October 2, 2021 Percentage increase in sales
North America 24 % 24 % 39 %
Taiwan 21 % 19 % 51 %
South Korea 13 % 14 % 26 %
Japan 11 % 13 % 17 %
China 16 % 16 % 42 %
Europe 9 % 9 % 52 %
Southeast Asia 7 % 5 % 80 %
The increases in sales to customers for all countries and regions in the table
above were principally driven by the inclusion of sales from the CMC Materials
acquisition and a general increase in demand for products.
Gross margin The following table sets forth gross margin as a percentage of net
revenues:
Three months ended Nine months ended
October 1, 2022 October 2, 2021 Percentage point change October 1, 2022 October 2, 2021 Percentage point change
Gross margin as a
percentage of net
revenues: 37.4 % 45.6 % (8.2) 42.5 % 46.0 % (3.5)
Gross margin decreased by 8.2 percentage points for the three months ended
October 1, 2022 , compared to the same period in the prior year. Gross margin
declined primarily due to a $61.9 million charge or 6.2 percentage point change
for fair value write-up of acquired CMC Materials inventory sold during the
quarter and inclusion of CMC Materials products, which have aggregate lower
gross margins.
For the nine months ended October 1, 2022 , the Company's gross margin decreased
by 3.5 percentage points compared to the same period in the prior year. Gross
margin declined primarily due to a $61.9 million charge or 2.6 percentage point
change for fair value write-up of acquired CMC Materials inventory sold during
the quarter and inclusion of CMC Materials products, which have aggregate lower
gross margins.
Selling, general and administrative expenses Selling, general and
administrative, or SG&A, expenses were $226.4 million in the three months ended
October 1, 2022 , compared to $71.0 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 October 2,
2021 36,223
Employee costs, exclusive of CMC Materials 2,452 Deal and transaction costs 31,867 Integration costs 19,472 Contractual and non-cash integration costs
58,411
Professional costs, exclusive of CMC Materials
1,589
Travel costs, exclusive of CMC Materials
1,617
Other increases, net, exclusive of CMC Materials
3,783
Selling, general and administrative expenses in the quarter endedOctober 1, 2022 $ 226,446 31
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SG&A expenses were
(In thousands)
Selling, general and administrative expenses in the nine months ended
215,042
SG&A expense recorded by CMC Materials and included in Company's condensed financial statements after the date of the acquisition
36,223
Employee costs, exclusive of CMC Materials 10,909 Deal and transaction costs 39,285 Integration costs 28,207 Contractual and non-cash integration costs
58,411
Absence of gain on sale of non-core intangibles occurred in the year-ago period, exclusive of CMC Materials
5,100
Professional costs, exclusive of CMC Materials
2,488
Travel costs, exclusive of CMC Materials
3,121
Other increases, net, exclusive of CMC Materials
5,453
Selling, general and administrative expenses in the nine months endedOctober 1, 2022 $ 404,239 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 55% to$65.0 million in the three months endedOctober 1, 2022 compared to$42.0 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 endedOctober 2, 2021
12,897
Employee costs, exclusive of CMC Materials
5,356
Project materials, exclusive of CMC Materials
2,546
Other increases, net
2,219
Engineering, research and development expenses in the quarter ended
ER&D expenses increased 32% to$161.0 million in the first nine months of 2022, compared to$121.7 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 endedOctober 2, 2021
12,897
Employee costs, exclusive of CMC Materials
14,734
Project materials, exclusive of CMC Materials
7,353
Other increases, net
4,277
Engineering, research and development expenses in the nine months ended
Amortization expenses Amortization of intangible assets was
Amortization of intangible assets was$90.5 million in the nine months endedOctober 1, 2022 , compared to$35.6 million for the nine months endedOctober 2, 2021 . The increase primarily reflects the additional amortization expense associated with the recent acquisition of CMC Materials.
Interest expense Interest expense includes interest associated with debt
outstanding and the amortization of debt issuance costs associated with such
borrowings. Interest expense was
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$9.4 million in the three months ended October 2, 2021 . The increase primarily
reflects higher interest expense related to the debt financing of the CMC
Materials acquisition.
Interest expense was $129.0 million in the nine months ended October 1, 2022 ,
compared to $31.7 million in the nine months ended October 2, 2021 . The increase
primarily reflects higher interest expense related to the debt financing of the
CMC Materials acquisition.
Other expense, net Other expense, net was
Other expense, net was$27.4 million in the nine months endedOctober 1, 2022 and consisted mainly of foreign currency transaction losses of$28.3 million . 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 and foreign currency transaction losses of$6.3 million . Income tax (benefit) expense Income tax benefit of$7.0 million and income tax expense of$30.4 million in the three and nine months endedOctober 1, 2022 , respectively, compared to income tax expense of$10.6 million and$39.9 million in the three and nine months endedOctober 2, 2021 , respectively. The Company's year-to-date effective income tax rate atOctober 1, 2022 was 16.7%, compared to 12.1% atOctober 2, 2021 . The increase in the year-to-date effective income tax rate from 2021 to 2022 primarily relates to a reduction in creditable foreign withholding taxes which was partially offset by certain acquisition related expenses that were recorded discretely in the period endedOctober 1, 2022 . The effective tax rate for the nine months endedOctober 2, 2021 included the reversal of a valuation allowance on foreign tax credits generated during 2020 and 2021 of$6.2 million and the recognition of a capital loss tax benefit of$3.8 million . These tax benefits were offset in part by tax recorded on the sale of intangible property of$3.5 million . Additionally, the income tax expense for the nine months endedOctober 1, 2022 andOctober 2, 2021 includes discrete benefits of$4.3 million and$13.1 million , respectively, recorded in connection with share-based compensation. Net (loss) income Due mainly to the fair value of inventory sold charge, transaction, deal and integrations costs related to the Merger as noted above, the Company recorded net loss of$73.7 million , or$0.50 per diluted share, in the three months endedOctober 1, 2022 , compared to net income of$117.5 million , or$0.86 per diluted share, in the three months endedOctober 2, 2021 . In the nine months endedOctober 1, 2022 , the Company recorded net income of$151.5 million , or$1.08 per diluted share, compared to net income of$290.9 million , or$2.13 per diluted share, in the nine months endedOctober 2, 2021 . 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 70% to
Adjusted EBITDA increased 42% to$712.0 million in the nine months endedOctober 1, 2022 , compared to$499.8 million in the nine months endedOctober 2, 2021 . In the nine months endedOctober 1, 2022 , adjusted EBITDA, as a percentage of net sales, increased to 30.5% from 30.0% in the year-ago period.
Adjusted operating income increased 66% to
Adjusted operating income increased 43% to$618.5 million in the nine months endedOctober 1, 2022 , compared to$432.3 million in the nine months endedOctober 2, 2021 . In the nine months endedOctober 1, 2022 , adjusted operating income, as a percentage of net sales, increased to 26.5% from 26.0% in the year-ago period. 33
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Non-GAAP earnings per share decreased 8% to
The increases in adjusted EBITDA and adjusted operating income for the three and nine months endedOctober 1, 2022 compared to the year-ago periods are generally attributable to the increases in sales and gross profit. The decrease in non-GAAP earnings per share for the three and nine months endedOctober 1, 2022 compared to the year-ago period is attributable to higher interest expense associated withe debt financing in connection with the CMC Merger.
Segment Analysis
During the three months endedOctober 1, 2022 , the Company realigned its financial reporting structure reflecting management and organizational changes. Beginning with this report, the Company will report its financial performance based on four reportable segments: Specialty Chemicals and Engineered Materials, Microcontamination Control, Advanced Material Handling and Advanced Planarization Solutions. See note 13 to the condensed consolidated financial statements for additional information on the Company's four segments. The following is a discussion of the results of operations of these four business segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments, along with unallocated general and administrative expenses, for the three and nine months endedOctober 1, 2022 andOctober 2, 2021 . Three months ended Nine months ended October 1, (In thousands) 2022 October 2, 2021 October 1, 2022 October 2, 2021 Specialty Chemicals and Engineered Materials Net sales$ 224,192 $ 154,605 $ 569,380 $ 460,707 Segment profit 34,228 33,552 107,459 98,760 Microcontamination Control Net sales$ 280,550 $ 225,877 $ 821,320 $ 660,497 Segment profit 105,335 78,399 304,062 227,097 Advanced Materials Handling Net sales$ 210,405 $ 186,200 $ 632,602 $ 507,243 Segment profit 42,077 40,503 135,693 114,691 Advanced Planarization Solutions Net sales$ 293,854 $ 21,775$ 352,816 $ 62,580 Segment profit 18,903 7,539 40,241 21,832
Unallocated general and administrative expenses
8,793 $ 160,759 $ 34,540
Specialty Chemicals and Engineered Materials (SCEM)
For the third quarter of 2022, SCEM net sales increased to$224.2 million , up 45% compared to$154.6 million in the comparable period last year. The sales increase primarily reflects the inclusion of sales of$48.5 million from the inclusion of certain product lines from the acquisition of CMC Materials, while the remainder reflects modestly improved sales of advanced deposition materials, formulated cleans, selective etch and specialty coatings products. SCEM reported a segment profit of$34.2 million in the third quarter of 2022, up 2% from$33.6 million in the year-ago period. The segment profit increase was primarily associated with higher sales levels reflecting the sales of CMC Materials products and increased sales volume, partially offset by a 30% increase in operating expenses, primarily due to the expenses incurred by the inclusion of certain product lines of CMC Materials and a$5.1 million charge for a fair value write-up of acquired CMC Materials inventory sold. For the nine months endedOctober 1, 2022 , SCEM net sales increased to$569.4 million , up 24% compared to$460.7 million in the comparable period last year. The sales increase primarily reflects the inclusion of sales of$48.5 million from inclusion of certain product lines from the acquisition of CMC Materials, while the remainder reflects modestly improved sales of advanced deposition materials, formulated cleans, selective etch and specialty coatings products. SCEM reported a segment profit of$107.5 million in the nine months endedOctober 1, 2022 , up 9% from$98.8 million in the year-ago period. The segment profit increase was primarily associated with higher sales level reflecting the sales of CMC Materials products and increased sales volume, partially offset by unfavorable foreign exchange effects, a 23% increase in operating expenses, primarily due to the expenses incurred by the inclusion of certain product lines of CMC Materials, a$5.1 million charge for a fair value write-up of acquired CMC Materials inventory sold and the absence of a gain on sale of non-core intangibles. 34
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Microcontamination Control (MC)
For the third quarter of 2022, MC net sales increased to$280.6 million , up 24% compared to$225.9 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$105.3 million in the third quarter of 2022, up 34% from$78.4 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 23% increase in operating expenses primarily due to higher compensation costs. For the nine months endedOctober 1, 2022 , MC net sales increased to$821.3 million , up 24% compared to$660.5 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$304.1 million in the nine months endedOctober 1, 2022 , up 34% from$227.1 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 unfavorable foreign exchange effects and a 17% increase in operating expenses due to higher compensation costs.
Advanced Materials Handling (AMH)
For the third quarter of 2022, AMH net sales increased to$210.4 million , up 13% compared to$186.2 million in the comparable period last year. The sales increase was mainly due to improved sales from wafer handling and fluid handling. AMH reported a segment profit of$42.1 million in the third quarter of 2022, up 4% from$40.5 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, primarily due to higher compensation costs. For the nine months endedOctober 1, 2022 , AMH net sales increased to$632.6 million , up 25% compared to$507.2 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$135.7 million in the nine months endedOctober 1, 2022 , up 18% from$114.7 million in the year-ago period. The segment profit increase was primarily due to higher sales volume, partially offset by unfavorable foreign exchange effects and a 17% increase in operating expenses, primarily due to higher compensation costs.
Advanced Planarization Solutions (APS)
For the third quarter of 2022, APS net sales increased to$293.9 million , compared to$21.8 million in the comparable period last year. The sales increase was mainly due to sales attributed to the CMC Materials acquisition. APS reported a segment profit of$18.9 million in the third quarter of 2022, from$7.5 million in the year-ago period. The segment profit increase was primarily due to the segment profit attributed to the CMC Materials acquisition, partially offset by a$56.8 million charge for a fair value write-up of acquired CMC Materials inventory sold. For the nine months endedOctober 1, 2022 , APS net sales increased to$352.8 million , compared to$62.6 million in the comparable period last year. The sales increase was mainly due to sales attributed to the CMC Materials acquisition. APS reported a segment profit of$40.2 million in the nine months endedOctober 1, 2022 , from$21.8 million in the year-ago period. The segment profit increase was primarily due to the segment profit attributed to the CMC Materials acquisition, partially offset by a$56.8 million charge for a fair value write-up of acquired CMC Materials inventory sold.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled$120.3 million in the third quarter of 2022, compared to$8.8 million in the comparable period last year. The$111.5 million increase is primarily due to a$77.9 million and$31.9 million increase in integration related and deal and transaction costs, respectively, related to the acquisition of CMC Materials.
Unallocated general and administrative expenses for the nine months ended
Liquidity and Capital Resources
We consider the following when assessing our liquidity and capital resources: In thousands
October 1, 2022 December 31, 2021
Cash and cash equivalents including restricted cash $ 754,667 $ 402,565
Working capital 1,381,255 934,369
Total debt, net of unamortized discount and debt
issuance costs 5,847,485 937,027
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. On April 14, 2022 , the Company, via a wholly-owned escrow subsidiary,
completed a private offering of $1.6 billion aggregate principal amount of
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the 2029 Notes. On June 30, 2022 , the Company, via a wholly-owned escrow
subsidiary, completed a private offering of $0.9 billion aggregate principal
amount of the 2030 Notes. In connection with the acquisition of CMC Materials on
the Closing Date, the Company borrowed $2.495 billion under the Initial Term
Loan Facility and increased commitments by $175.0 million under the Revolving
Facility (from $400.0 million to $575.0 million ). The Company used a portion of
the proceeds of the offering to repay the remaining principal amount of the
$145.0 million senior secured term loan facility due 2025. In addition, on the
Closing Date, the Company entered into a 364-Day Bridge Credit Agreement and
borrowed $275 million aggregate principal amount with a pricing of SOFR plus
4.55%. During the quarter, the Company made a $70.0 million principal payment on
the Bridge Credit Facility.
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 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 1, 2022 October 2, 2021
Net cash provided by operating activities $ 320,230 $ 284,474
Net cash used in investing activities (4,792,637) (131,820)
Net cash provided by (used in) financing activities 4,846,009 (254,513)
Increase (decrease) in cash, cash equivalents and
restricted cash 352,102 (105,141)
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 $320.2 million in the nine months
ended October 1, 2022 , compared to $284.5 million in the nine months ended
October 2, 2021 . The increase was driven by a $19.0 million increase of Net
(loss) income adjusted for non-cash reconciling items and by $16.8 million of
changes in operating assets and liabilities.
Changes in operating assets and liabilities for the nine months ended October 1,
2022 were driven primarily by increases in inventories and accounts payable and
accrued liabilities, and decreases in trade receivables and income taxes payable
and refundable income taxes. The change for inventory was driven by an increase
in business activity and need for raw material safety stock. The change for
accounts payable and accrued liabilities was driven by an increase in accrued
interest payable related to the debt financing in connection with the CMC
Materials acquisition. The change for trade receivables was mainly due to a
lower increase in sales compared to that of the comparable previous period. The
change for income taxes payable and refundable income taxes was primarily driven
by a recorded tax impact of Section 174 R&D cost capitalization in 2022 only.
Investing activities Cash flows used in investing activities totaled $4,792.6
million in the nine months ended October 1, 2022 , compared to $131.8 million in
the nine months ended October 2, 2021 . The change resulted primarily from higher
cash paid for acquisition of property, plant and equipment and the cash paid for
the acquisition of CMC Materials. See Note 3 to the Company's condensed
consolidated financial statements for additional discussion on the acquisition
of CMC Materials.
Financing activities Cash provided by financing activities totaled $4,846.0
million during the nine months ended October 1, 2022 , compared to cash used in
financing activities of $254.5 million during the nine months ended October 2,
2021 . The change was primarily due to the net long-term debt activity, which was
a source of cash of $4.9 billion in 2022 compared to a use of cash of $174.1
million , and the absence of $50.0 million of repurchase and retirement of common
stock. See Note 7 to the Company's condensed consolidated financial statements
for further discussion of the debt financing that occurred during the quarter.
In anticipation of its 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 or resuming a
repurchase program in 2022.
Our total dividend payments were $42.4 million in the nine months ended
October 1, 2022 , compared to $32.7 million in the nine months ended October 2,
2021 . We have paid a cash dividend in each quarter since the fourth quarter of
2017. On October
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19, 2022, the Company's Board of Directors declared a quarterly cash dividend of
$0.10 per share to be paid on November 23, 2022 to shareholders of record on the
close of business on November 2, 2022 .
Other Liquidity and Capital Resources Considerations
Debt
(In thousands) October 1, 2022 December 31, 2021 Senior secured term loan facility due 2029$ 2,495,000 $ - Senior secured notes due 2029 at 4.75% 1,600,000 - Senior unsecured notes due 2030 at 5.95% 895,000 - Senior unsecured notes due 2029 at 3.625% 400,000 400,000 Senior unsecured notes due 2028 at 4.375% 400,000 400,000 Bridge credit facility due 2023 205,000 - Senior secured term loan facility due 2025 at 2.457% - 145,000 Revolving facility due 2026 - - Total debt (par value)$ 5,995,000 $ 945,000 In connection with the acquisition of CMC Materials, the Company obtained the following financing: On the Closing Date, the Company entered into a Term Loan B Facility of$2.495 billion with a pricing at SOFR plus 3.00%. The Company previously syndicated the Initial Term Loan Facility onMarch 2, 2022 and incurred ticking fees through the close of the acquisition. The Company used a portion of the proceeds of the offering to repay the remaining principal amount of the$145.0 million senior secured term loan facility due 2025. For the three and nine months endedOctober 1, 2022 , the Company incurred$0.4 million and$12.0 million in ticking fees, respectively, which were recorded to interest expense in the condensed consolidated statement of operations. The senior secured term loan facility due 2025 was paid in full on the day of acquisition. On the Closing Date, the Company entered into a$275 million senior unsecured Bridge Credit Facility with a pricing of SOFR plus 4.55%. During the quarter, the Company made a$70.0 million principal payment on the Bridge Credit Facility. OnJune 30, 2022 , the Company issued, via a wholly-owned escrow subsidiary,$895 million aggregate principal amount of the 2030 Notes. OnApril 14, 2022 , the Company also issued, via a wholly-owned escrow subsidiary,$1.6 billion aggregate principal amount of the 2029 Notes. The Company increased the commitments under the Revolving Facility by$175.0 million (from$400.0 million to$575.0 million ) in connection with the closing of the acquisition of CMC Materials on the Closing Date. 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 SOFR, plus, in each case, an applicable margin. AtOctober 1, 2022 , there was no balance outstanding under the Revolving Facility and we had undrawn outstanding letters of credit of$0.2 million . OnJuly 28, 2022 , the Company entered into a floating-to-fixed interest rate swap agreement to hedge the variability in SOFR-based interest payments associated with$1.95 billion of its$2.495 billion Initial Term Loan Facility. The notional amount is scheduled to decrease quarterly and will expire onDecember 30, 2025 .
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$6.9 million . There were no outstanding borrowings under this line of credit atOctober 1, 2022 . 37
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Table of Contents Cash and cash requirements (In thousands) October 1, 2022 December 31, 2021 U.S.$ 335,627 $ 107,814 Non-U.S. 417,160 294,751 Cash and cash equivalents 752,787 402,565 Restricted cash - U.S. 1,880 -
Cash, cash equivalents and restricted cash
402,565
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.
Our restricted cash represents cash held in a "Rabbi" trust and is not available for general corporate purposes. See Note 4 to the condensed consolidated financial statements for additional information.
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 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 acquisition of CMC Materials on the Closing Date. The Company financed the cash portion of the purchase price for this acquisition through debt financing. See Note 7 to the Company's condensed consolidated financial statements for further discussion of the debt financing that occurred during the quarter and on the Closing Date of the acquisition. The following table summarizes the short and long-term cash requirements for long-term debt and interest expense as ofOctober 1, 2022 . Due within 3 months of Due later than one year (In thousands) Total October 1, 2022 from December 31, 2022 Long-term debt$ 5,995,000 $ - $ 5,995,000 Interest payments on long-term debt 2,116,019 79,646 2,036,373 Total$ 8,111,019 $ 79,646 $ 8,031,373 OnJuly 28, 2022 , the Company entered into a floating-to-fixed interest rate swap agreement to hedge the variability in SOFR-based interest payments associated with$1.95 billion of its$2.495 billion Initial Term Loan Facility. The notional amount is scheduled to decrease quarterly and will expire onDecember 30, 2025 . As ofOctober 1, 2022 , we believe our cash, cash equivalents, restricted cash, 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
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(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 Net Income 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)
Interest expense, net (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. Non-GAAP EPS is defined as our
Non-GAAP Net Income divided by our diluted weighted-average shares outstanding
The Company provides supplemental non-GAAP financial measures to help management
and investors to better understand our 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 our
business.
In addition, and as a consequence of the importance of these non-GAAP financial
measures in managing our business, the Company's Board of Directors uses
non-GAAP financial measures in the evaluation process to determine management
compensation.
The Company believes that certain analysts and investors use adjusted EBITDA,
adjusted operating income and non-GAAP EPS as supplemental measures to evaluate
the overall operating performance of firms in the Company's industry.
Additionally, lenders or potential lenders use adjusted EBITDA measures to
evaluate the Company's creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in
isolation, as a substitute for, or superior to, financial measures or
information provided in accordance with GAAP. Management strongly encourages
investors to review the Company's condensed consolidated financial statements in
their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations, including but not limited to:
First, non-GAAP financial measures are not standardized. Accordingly, the
methodology used to produce the Company's non-GAAP financial measures is not
computed under GAAP and may differ notably from the methodology used by other
companies. For example, the Company's non-GAAP measure of adjusted EBITDA may
not be directly comparable to EBITDA or an adjusted EBITDA measure reported by
other companies.
Second, the Company's non-GAAP financial measures exclude items such as
amortization and depreciation that are recurring. Amortization of intangibles
and depreciation have been, and will continue to be for the foreseeable future,
a significant recurring expense with an impact upon the Company's results of
operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance that the Company will not have future charges for
fair value write-up of acquired inventory, restructuring activities, deal costs,
integration costs, or similar items and, therefore, may need to record
additional charges (or credits) associated with such items, including the tax
effects thereon. The exclusion of these items in the Company's non-GAAP measures
should not be construed as an implication that these costs are unusual,
infrequent or non-recurring.
Management considers these limitations by providing specific information
regarding the GAAP amounts excluded from these non-GAAP financial measures and
evaluating these non-GAAP financial measures together with their most directly
comparable financial measures calculated in accordance with GAAP. The
calculations of adjusted EBITDA, adjusted operating income, and
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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
(In thousands) October 1, 2022 October 2, 2021 October 1, 2022 October 2, 2021
Net sales $ 993,828 $ 579,493 $ 2,335,963 $ 1,663,689
Net (loss) income $ (73,703) $
117,461
(7.4 %) 20.3 % 6.5 % 17.5 %
Adjustments to net (loss) income
Income tax (benefit) expense (7,015) 10,640 30,377 39,947
Interest expense 84,150 9,395 129,027 31,744
Interest income (1,395) (56) (2,065) (181)
Other expense, net 12,852 1,917 27,373 29,807
GAAP - Operating income 14,889 139,357 336,205 392,224
Operating margin - as a % of net sales 1.5 % 24.0 % 14.4 % 23.6 %
Deal and transaction costs 31,867 - 39,285 -
Integration costs 20,762 1,290 32,173 3,966
Contractual and non-cash integration costs 58,411 - 58,411 -
Charge for fair value write-up of acquired
inventory sold 61,932 - 61,932 -
Severance and restructuring costs - 206 - 529
Amortization of intangible assets 65,346 11,843 90,491 35,616
Adjusted operating income 253,207 152,696 618,497 432,335
Adjusted operating margin - as a % of net
sales 25.5 % 26.3 % 26.5 % 26.0 %
Depreciation 45,203 22,841 93,489 67,510
Adjusted EBITDA $ 298,410 $
175,537
Adjusted EBITDA - as a % of net sales 30.0 % 30.3 % 30.5 % 30.0 %
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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 1 ,
2022 2021 2022 2021
Net (loss) income $ (73,703) $ 117,461 $ 151,493 $ 290,907
Adjustments to net (loss) income
Deal and transaction costs 31,867 - 39,285 -
Integration costs 20,762 1,290 32,173 3,966
Contractual and non-cash integration costs 58,411 - 58,411 -
Charge for fair value of acquired inventory
sold 61,932 - 61,932 -
Severance and restructuring costs - 206 - 529
Loss on extinguishment of debt and modification 2,235 - 2,235 23,338
Interest expense, net 2,397 - 29,822 -
Amortization of intangible assets 65,346 11,843 90,491 35,616
Tax effect of adjustments to net (loss) income
and certain discrete tax items1 (41,477) (5,417) (56,123) (16,749)
Non-GAAP net income $ 127,770 $ 125,383 $ 409,719 $ 337,607 Diluted (loss) earnings per common share
1.35 0.06 1.83 0.34
Diluted non-GAAP earnings per common share
Diluted weighted averages shares outstanding 148,570 136,631 140,892 136,556 Effect of adjustment to diluted weighted average shares outstanding 1,099 - - - Diluted non-GAAP weighted average shares outstanding 149,669 136,631 140,892 136,556
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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