ENTEGRIS, INC. The following discussion and analysis of the Company's consolidated financial condition and results of operations should be read along with the consolidated financial statements and the accompanying notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements that involve numerous risks and uncertainties, including, but not limited to, those described in Item 1A. "Risk Factors" and the "Cautionary Statements" sections of this Item 7 below. You should review Item 1A "Risk Factors" of this Annual Report on Form 10-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. Cautionary Statements This Annual Report on Form 10-K and the documents incorporated by reference in this Annual Report on Form 10-K contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The words "believe," "expect," "anticipate," "intend," "estimate," "forecast," "project," "should," "may," "will," "would" or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements may include statements about future period guidance or projections; the Company's performance relative to its markets; market and technology trends, including the duration and drivers of any growth trends; the development of new products and the success of their introductions; the focus of the Company's engineering, research and development projects; the Company's ability to execute on its business strategies; the Company's capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repayments and potential acquisitions; the effect of the Tax Cuts and Jobs Act; the impact of the acquisitions the Company has made and commercial partnerships the Company has established; future capital and other expenditures, including estimates thereof; the Company's expected tax rate; the impact, financial or otherwise, of any organizational changes; the impact of accounting pronouncements; quantitative and qualitative disclosures about market risk; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this Annual Report on Form 10-K, are not guarantees of future performance and involve substantial risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, but are not limited to, the risk factors and additional information described in this Annual Report on Form 10-K under the caption "Risk Factors," elsewhere in this Annual Report on Form 10-K and in the Company's other periodic filings. Except as required under the federal securities laws and the rules and regulations of theSEC , the Company undertakes no obligation to update publicly any forward-looking statements or information contained herein, which speak as of their respective dates. Overview This overview is not a complete discussion of the Company's financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of its financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows, and must be read in its entirety in order to fully understand the Company's financial condition and results of operations. The Company is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. We leverage our unique breadth of capabilities to create value for our customers by developing mission-critical solutions to maximize manufacturing yields, reduce manufacturing costs and enable higher device performance. Our technology portfolio includes advanced materials and high-purity chemistries, with optimized packaging and delivery systems and in-process filtration and purification solutions that ensure high-value liquid chemistries and gases are free from contaminants use. Our standard customized productions and solutions enable the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes, or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity. Our business is organized and operated in three operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. We leverage our 31
--------------------------------------------------------------------------------
Table of Contents
expertise from these three segments and complementary product portfolios to create new and increasingly integrated solutions for our customers. Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of the Company, include: • Level of sales Since a significant portion of the Company's product costs
(except for raw materials, purchased components and direct labor) are
largely fixed in the short-to-medium term, an increase or decrease in sales
affects gross profits and overall profitability significantly. Also,
increases or decreases in sales and operating profitability affect certain
costs such as incentive compensation and commissions, which are highly
variable in nature. The Company's sales are subject to the effects of
industry cyclicality, technological change, substantial competition,
pricing pressures and foreign currency fluctuation.
• 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 theCompany's sales mix, purchase prices of raw material (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 insales 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.
Overall Summary of Financial Results for the Year EndedDecember 31, 2019 Total net sales for the year endedDecember 31, 2019 were$1,591.1 million , up$40.6 million , or 3%, from sales of$1,550.5 million for the year endedDecember 31, 2018 . Exclusive of net sales associated with acquisitions and divestitures of$87.6 million and unfavorable foreign currency translation effects of$4.5 million , the Company's sales decreased by$42.6 million to$1,507.9 million , or 3%, reflecting a decrease in overall demand for the Company's products from semiconductor industry customers, particularly in the sale of fluid handling products, liquid chemistry filtration solutions and certain specialty materials products. The Company announced organizational changes in the third quarter of 2019 intended to enable us to be more responsive to our customers, increase our competitiveness, allow for scalable growth and result in cost savings. These changes were primarily focused on optimizing our customer-facing organization. As a result of this announcement, the Company recorded restructuring charges within cost of goods sold, selling, general and administrative (SG&A) and engineering, research and development of$1.0 million ,$6.1 million and$1.4 million , respectively, for the twelve months endedDecember 31, 2019 . The actions associated with the restructuring plan, including employee separations, were completed by the end of 2019, and the Company does not anticipate any additional material charges for the following year relating to the restructuring costs. The Company's gross profit declined by$8.2 million for the year endedDecember 31, 2019 , to$711.7 million , down from$719.8 million for the year endedDecember 31, 2018 . Accordingly, the Company reported a 44.7% gross margin rate compared to 46.4% in 2018. The gross profit and gross margin decrease reflects lower factory utilization associated with weaker sales levels and an unfavorable sales mix. The Company's selling, general and administrative (SG&A) and engineering, research and development (ER&D) expenses increased in 2019, mainly reflecting higher deal costs, the cost of integration activities and restructuring charges. OnJanuary 28, 2019 , the Company and Versum announced that they had entered into an Agreement and Plan of Merger, dated as ofJanuary 27, 2019 (the "Merger Agreement"), pursuant to which they agreed to combine in a merger of equals. OnApril 8, 2019 , Versum announced that its Board of Directors had received a proposal from Merck KGaA to acquire Versum and that its Board of Directors had deemed such proposal as a "Superior Proposal" defined in the merger agreement. OnApril 12, 2019 , the Company received a termination notice from Versum terminating the Merger Agreement. In accordance with the terms of the Merger Agreement, Entegris received a$140.0 million termination fee from Versum in the second quarter of 2019. Also in the second quarter of 2019, the Company paid a fee of$18.0 million to the third-party financial adviser it had engaged to assist with the transaction. As a result of the aforementioned and other factors discussed below, net income for 2019 was$254.9 million , or$1.87 per diluted share, compared to net income of$240.8 million , or$1.69 per diluted share, in 2018. 32
--------------------------------------------------------------------------------
Table of Contents
OnMarch 8, 2019 , the Company acquiredDigital Specialty Chemicals Limited (DSC), which provides advanced materials to the specialty chemical, technology and pharmaceutical industries. The total purchase price of the acquisition was$64.1 million , net of cash acquired. The Company funded the acquisition from its available cash. OnJuly 15, 2019 , the Company acquired MPD Chemicals, a provider of advanced materials to the specialty chemical, technology, and life sciences industries. The Company acquired MPD Chemicals for approximately$161.0 million , net of cash acquired, subject to revision for customary working capital adjustments. The Company funded the acquisition from its available cash. OnSeptember 17, 2019 , the Company acquiredHangzhou Anow Microfiltration Co., Ltd. , (Anow) a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. The Company acquired Anow for$72.8 million , net of cash acquired. The Company funded the acquisition from its available cash. During 2019, the Company's operating activities provided cash flow of$382.3 million . Cash and cash equivalents, and short-term investments were$351.9 million atDecember 31, 2019 compared with$482.1 million atDecember 31, 2018 . The Company had long-term borrowings, including current maturities, of$936.5 million atDecember 31, 2019 compared with$938.9 million atDecember 31, 2018 . Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these 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. At each balance sheet date, management evaluates its estimates, including, but not limited to, those related to long-lived assets (property, plant and equipment, and identified intangible assets), goodwill, income taxes and business combinations. The Company bases its estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. If management made different judgments or utilized different estimates, this could result in material differences in the amount and timing of the Company's results of operations for any period. In addition, actual results could be different from the Company's current estimates, possibly resulting in increased future charges to earnings. The critical accounting policies that are most significantly affected by estimates, assumptions and judgments used in the preparation of the Company's consolidated financial statements are discussed below. Impairment of Long-Lived Assets As ofDecember 31, 2019 , the Company had$479.5 million of net property, plant and equipment and$334.0 million of net intangible assets. The Company routinely considers whether indicators of impairment of the value of its long-lived assets, particularly its manufacturing equipment, and its intangible assets, are present. A long-lived asset (or asset group) must be tested for recoverability whenever events or changes in circumstances (triggering events) indicate that its carrying amount may not be recoverable. The following are examples of such events or changes in circumstances: a. A significant decrease in the market price of a long-lived asset (or asset group);
b. A significant adverse change in the extent or manner in which a long-lived
asset (or asset group) is being used or in its physical condition;
c. A significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset (or asset group),
including an adverse action or assessment by a regulator;
d. An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset (or
asset group);
e. A current-period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast thatdemonstrates continuing losses associated with the use of a long-lived
asset (or asset group); and
f. A current expectation that, more likely than not, a long-lived asset (orasset group) will be sold or otherwise disposed of significantly before
the end of its previously estimated useful life.
If any such indicators are present, it is determined whether the sum of the
estimated undiscounted cash flows attributable to the asset group in question is
less than its carrying value. If less, an impairment loss is recognized based on
the excess of the carrying amount of the assets in the group over its respective
fair value. Fair value is determined by discounting estimated future cash flows,
appraisals or other methods deemed appropriate. If the asset groups determined
to be impaired are to be held and used, the Company recognizes an impairment
charge to the extent the fair value attributable to the asset group is less than
the assets' carrying value. The fair value of the assets then becomes the
assets' new carrying value, which is depreciated or amortized over the remaining
estimated useful life of the assets.
33--------------------------------------------------------------------------------
Table of Contents
The Company's long-lived assets are grouped with other assets and liabilities at the lowest level (asset groups) for which the identifiable cash flows are largely independent of the cash flows of other assets and liabilities. As described above, the evaluation of the recoverability of long-lived assets requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to, the identification of the asset group at the lowest level of independent cash flows, the primary asset of the group and long-range forecasts of revenue and costs, reflecting management's assessment of general economic and industry conditions, operating income, depreciation and amortization and working capital requirements. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. In addition, changes in the underlying assumptions would have a significant impact on the conclusion that an asset group's carrying value is recoverable, or the determination of any impairment charge if it was determined that the asset values were indeed impaired. The Company regularly monitors circumstances and events to determine whether asset impairment testing is warranted. It is possible that in the future the Company may conclude that there is impairment of certain of its long-lived assets, and that significant impairment charges of long-lived assets may occur in future periods. GoodwillGoodwill is not subject to amortization and is tested for impairment annually and whenever events or changes in circumstances indicate that impairment may have occurred. The Company performs its annual impairment test as ofAugust 31 . The Company first assesses qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, after assessing qualitative factors, the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then a two-step impairment test is performed to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized, if any. As ofAugust 31, 2019 , the Company's assessment of qualitative factors informed its conclusion that it was more likely than not that a goodwill impairment did not occur. The significant qualitative factors considered include a significant increase in the Company's share price, increasing revenues and operating cash flow for each of the Company's reporting units combined with solid demand in the semiconductor industry driven by the Internet of Things, 5G, autonomous car and artificial intelligence/machine learning applications. The Company noted that a significant number of its very largest customers purchase from all of the Company's reporting units. For example, approximately 25 customers, accounting for approximately 56% of net sales, purchase from all of the Company's reporting units. Income Taxes In the preparation of the Company's consolidated financial statements, the income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management's best assessment of estimated current and future taxes to be paid. The Company is subject to income taxes in boththe United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, which will result in taxable or deductible amounts in the future. In evaluating the Company's ability to recover its deferred tax assets within the jurisdiction from which they arise, management considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, the Company begins with historical results and incorporates assumptions about the amount of future state, federal and foreign pretax operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates management is using to manage the underlying business. In evaluating the objective evidence that historical results provide, the Company considers three years of cumulative operating income. The Company has deferred tax assets related to certain state and foreign credit carryforwards and net operating loss carryforwards of$22.3 million and$18.8 million as ofDecember 31, 2019 and 2018, respectively. Management believes it is more likely than not that the benefit from a portion of these carryforwards will not be realized. In recognition of this risk, the Company provided a valuation allowance of$20.1 million and$18.1 million as ofDecember 31, 2019 and 2018, respectively, relating to these carryforwards. If the Company's assumptions change and it determines it will be able to realize these carryforwards, the tax benefits relating to any reversal of the valuation allowance on the deferred tax assets will be recognized as a reduction of income tax expense. The calculation of tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. A tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. Resolution of these uncertainties in a manner inconsistent with management's expectations could have a material impact on the Company's financial condition and operating results. Business Acquisitions 34
--------------------------------------------------------------------------------
Table of Contents
The Company accounts for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired and liabilities assumed, as well as asset lives, can materially impact net income. Accordingly, for significant items, the Company typically obtains assistance from a third-party valuation firm. There are several methods that can be used to determine the fair value of assets acquired and liabilities assumed in a business combination. For intangible assets, the Company normally utilizes the "income method." This method starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Depending on the asset valued, the key assumptions included one or more of the following: (1) future revenue growth rates, (2) future gross margin, (3) future selling general and administrative expense, (4) royalty rates, and (5) discount rates. Estimating the useful life of an intangible asset also requires judgment. For example, different types of intangible assets will have different useful lives, influenced by the nature of the asset, competitive environment, and rate of change in the industry. Certain assets may even be considered to have indefinite useful lives. All of these judgments and estimates can significantly impact the determination of the amortization period of the intangible asset, and thus net income. Results of Operations Year endedDecember 31, 2019 compared to year endedDecember 31, 2018 The following table sets forth the results of operations and the relationship between various components of operations, stated as a percent of net sales, for the years endedDecember 31, 2019 and 2018. 2019 2018 (Dollars in thousands) % of net sales % of net sales Net sales$ 1,591,066 100.0 %$ 1,550,497 100.0 % Cost of sales 879,413 55.3 830,666 53.6 Gross profit 711,653 44.7 719,831 46.4 Selling, general and administrative expenses 284,807 17.9 246,534 15.9 Engineering, research and development expenses 121,140 7.6 118,456 7.6 Amortization of intangible assets 66,428 4.2 62,152 4.0 Operating income 239,278 15.0 292,689 18.9 Interest expense 46,962 3.0 34,094 2.2 Interest income (4,652 ) (0.3 ) (3,839 ) (0.2 ) Other (income) expense, net (121,081 ) (7.6 ) 8,002 0.5 Income before income taxes 318,049 20.0 254,432 16.4 Income tax expense 63,189 4.0 13,677 0.9 Net income$ 254,860 16.0$ 240,755 15.5 Net sales For the year endedDecember 31, 2019 , net sales were$1,591.1 million , up$40.6 million , or 3%, from sales for the year endedDecember 31, 2018 . An analysis of the factors underlying the increase in net sales is presented in the following table: (In thousands) Net sales in 2018$ 1,550,497
Increase, net associated with acquired businesses and divestiture 95,003 Decrease associated with volume and pricing
(42,574 )
Decrease associated with divestiture (7,377 )
Decrease associated with effect of foreign currency translation (4,483 )
Net sales in 2019 $ 1,591,066
The Company's sales increase was primarily due to sales associated with the
Company's recent acquisitions of $95.0 million , offset primarily by the absence
of sales associated with a divestiture of an entity in 2018 and net unfavorable
foreign currency translation effects of $4.5 million , mainly due to the
weakening of the Korean won, Euro and Taiwanese dollar relative to the
35--------------------------------------------------------------------------------
Table of Contents
U.S. dollar. Exclusive of these factors, sales decreased$42.6 million , or 3% to$1,508 million for the year, mainly from a decreased customer demand from the semiconductor market compared to the year ago. Sales percentage on a geographic basis for the years endedDecember 31, 2019 and 2018 and the percentage increase (decrease) in sales for the year endedDecember 31, 2019 compared to the sales for the year endedDecember 31, 2018 were as follows: Year ended Percentage increase (decrease) in December 31, 2019 December 31, 2018 sales Taiwan 19 % 19 % 7 % North America 24 % 22 % 10 % South Korea 15 % 16 % 1 % Japan 13 % 14 % (2 )% China 13 % 13 % 5 % Europe 8 % 9 % (4 )% Southeast Asia 7 % 8 % (12 )% The increase in sales forNorth America andChina was primarily driven by sales from acquisitions. The increase in sales from Taiwan was primarily driven from strong recovery from a major customer in 2019 compared to 2018. The decrease in sales fromEurope relates to the absence of sales from the divestiture of a business in the fourth quarter of 2018. The decrease in sales fromSoutheast Asia relates to lower sales of specialty materials products. Demand drivers for the Company's business primarily consist of semiconductor fab utilization and production (unit-driven) as well as capital spending for new or upgraded semiconductor fabrication equipment and facilities (capital-driven). The Company analyzes sales of its products by these two key drivers. Sales of unit-driven products represented 70% of total sales and sales of capital-driven products represented 30% of total sales in both 2019 and 2018. Gross profit Gross profit for 2019 decreased by$8.2 million , to$711.7 million , a decrease of 1% from$719.8 million for 2018. The gross margin rate for 2019 was 44.7% versus 46.4% for 2018. The gross profit and gross margin decrease reflects lower factory utilization associated with weaker sales levels and an unfavorable sales mix. The gross profit and gross margin figures include an incremental cost of sales charge of$7.5 million and$6.9 million , respectively, associated with the sale of inventory acquired in recent business acquisitions for the years endedDecember 31, 2019 and 2018 and$1.3 million and$0.5 million of restructuring charges for the year endedDecember 31, 2019 and 2018, respectively. Excluding those charges, the Company's gross profit and gross margin for the year endedDecember 31, 2019 and 2018 were$720.5 million and$727.2 million , respectively, and 45.3% and 46.9%, respectively. Selling, general and administrative expenses Selling, general and administrative expense (SG&A) consists primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and sales and marketing costs. SG&A expenses for 2019 increased$38.3 million , or 16%, to$284.8 million from$246.5 million in 2018. SG&A expenses, as a percent of net sales, increased to 17.9% from 15.9% a year earlier, reflecting primarily from the increase in deal and integration costs. An analysis of the factors underlying the increase in SG&A is presented in the following table: (In thousands) Selling, general and administrative expenses in 2018$ 246,534 Deal costs 21,043 Severance and restructuring costs 9,193 Integration costs 6,695 Professional fees 2,715 Travel costs (2,192 ) Other increases, net 819
Selling, general and administrative expenses in 2019
Engineering, research and development expenses Engineering, research and development (ER&D) expenses consist of expenses for the support of current product lines and the development of new products and manufacturing technologies. These expenses were$121.1 million and$118.5 million in 2019 and 2018, respectively. ER&D expenses as a percent of net sales were 7.6% in both 2019 and 2018. 36
--------------------------------------------------------------------------------
Table of Contents
An analysis of the factors underlying the increase ER&D is presented in the following table: (In thousands) Engineering, research and development expense in 2018$ 118,456 Employee costs 3,769 Severance and restructuring costs 1,965 Project related costs (5,698 ) Other increases, net 2,648
Engineering, research and development expense in 2019
The Company's overall ER&D efforts will continue to focus on the support or extension of current product lines, the development of its technologies to create differentiated and high-value products for the most advanced and demanding semiconductor applications and leveraging its unique and diverse technology portfolio to develop innovative, integrated solutions for unmet customer needs. The Company expects ER&D costs to stay relatively stable as a percentage of net sales. Amortization of intangible assets Amortization of intangible assets was$66.4 million in 2019 compared to$62.2 million for 2018. The increase reflects the additional amortization expense of$6.6 million associated with the Company's recent 2019 and 2018 acquisitions as discussed in note 3 to the consolidated financial statements, offset primarily by the elimination of amortization expense of$2.0 million for identifiable developed technology and customer relationship assets acquired in the Poco acquisition. Interest expense Interest expense was$47.0 million and$34.1 million in the years endedDecember 31, 2019 and 2018, respectively. Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. The increase primarily reflects higher average debt levels in 2019 and a$1.6 million charge related the adjustment of the fair value of the fixed deferred payment owed to the sellers of its DSC acquisition. The Company entered into a settlement agreement to accelerate a fixed deferred payment of$16.1 million to no later thanMarch 8, 2020 . The Company adjusted the fair value of the fixed deferred payment from its fair value to the stated value resulting in the additional aforementioned charge. Interest income Interest income was$4.7 million and$3.8 million in the years endedDecember 31, 2019 and 2018, respectively. The increase reflects higher averageU.S. cash levels earning a higher rate of interest. Other (income) expense, net Other income, net, was$121.1 million in 2019 compared to other expense, net, of$8.0 million in 2018. In 2019, other income, net consisted mainly of net proceeds received of$122.0 million resulting from the termination of the merger agreement with Versum (see note 9 to the Company's consolidated financial statements). In 2018, other expense, net, included foreign currency transaction losses of$4.4 million , a loss of extinguishment of debt of$2.3 million associated with the redemption of the Company's senior secured term loan facility due 2021 and asset-based revolving credit facility (see note 8 to the Company's consolidated financial statements) and penalty charges of$1.1 million . Income tax expense The Company recorded income tax expense of$63.2 million in 2019 compared to income tax expense of$13.7 million in 2018. The Company's effective tax expense rate was 19.9% in 2019, compared to an effective tax rate of 5.4% in 2018. The increase in the effective tax rate in 2019 from 2018 reflects several factors. The increase in the effective tax rate is primarily due to a$25.1 million benefit related to foreign tax credit generation and a$9.4 million benefit related to a dividends received deduction based on restructuring to simplify the legal entity structure in 2018 which did not recur in 2019. Additionally, the tax rate in 2019 includes a discrete tax charge of$9.4 million related to the reversal of the dividend received deduction benefit recorded in 2018. This discrete charge was recorded based on the issuance of final regulations during the second quarter of 2019. The discrete charge was partially offset by a benefit of$5.3 million recorded in the third quarter of 2019 based on the filing of the federal tax return. Additionally, in the second quarter 2019, the Company received a termination fee fromVersum Materials, Inc. based on the termination of the Versum Merger Agreement. As a result of the termination fee, the Company released a valuation allowance on federal capital loss carryforwards and recorded a discrete benefit of$2.9 million . Net income Net income was$254.9 million , or$1.87 per diluted share, in 2019 compared to net income of$240.8 million , or$1.69 per diluted share, in 2018. The increase reflects the Company's aforementioned operating results described in greater detail above. Non-GAAP Financial Measures InformationThe Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States (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 37
--------------------------------------------------------------------------------
Table of Contents
reflect trends affecting the Company's business and results of operations. See "Non-GAAP Information" included below in this section for additional detail, including the reconciliation of the Company's non-GAAP measures to the most directly comparable GAAP measures. The Company's non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related percentage changes, and non-GAAP Earnings Per Share (EPS). Adjusted EBITDA was flat at$436.8 million in 2019, compared to$436.1 million in 2018. Adjusted EBITDA, as a percent of net sales, was 27.5% in 2019 compared to 28.1% in 2018. Adjusted Operating Income decreased 2% to$361.8 million in 2019, compared to$371.0 million in 2018. Adjusted Operating Income, as a percent of net sales, was 22.7% in 2019 compared to 23.9% in 2018. Non-GAAP Earnings Per Share increased 2% to$1.93 in 2019, compared to$1.89 in 2018. The decline in the Adjusted EBITDA and Adjusted Operating Income as a percentage of net sales reflects the decrease in gross profit. In addition, Non-GAAP Earnings Per Share was positively affected by lower diluted weighted average shares outstanding from the stock repurchases during 2019. Segment Analysis The Company reports its financial performance based on three reporting segments. In the first quarter of 2019, the Company changed its definition of segment profit to include inter-segment sales. Prior quarter information has been recast to reflect the change in the Company's definition of segment profit. See note 16 to the consolidated financial statements for additional information on the Company's three segments. The following table and discussion concern the results of operations of the Company's three reportable segments for the years endedDecember 31, 2019 and 2018. (In thousands) 2019 2018 Specialty Chemicals and Engineered Materials Net sales$ 526,519 $ 530,241 Segment profit 98,327 127,080 Microcontamination Control Net sales$ 633,664 $ 553,838 Segment profit 194,398 166,852 Advanced Materials Handling Net sales$ 458,290 $ 493,404 Segment profit 75,173 92,327 Specialty Chemicals and Engineered Materials (SCEM) For the year endedDecember 31, 2019 , SCEM net sales decreased to$526.5 million , down 1%, from$530.2 million in the comparable period last year. The sales decrease was mainly due to decreased sales of specialty materials, specialty gases and surface prep and integration products, partially offset by$10.9 million of sales from the acquisition of DSC in the first quarter of 2019,$16.7 million sales from the acquisition of MPD in the third quarter of 2019 and improved sales from advanced deposition products. SCEM reported a segment profit of$98.3 million for the year endedDecember 31, 2019 , down 23%, compared to a$127.1 million segment profit in the year-ago period. The decrease in the SCEM's profit in 2019 was primarily due to decreased sales, an incremental cost of sales charge of$6.9 million associated with the sale of inventory acquired in recent business acquisitions, unfavorable product mix and higher operating expenses of 3% mainly due to higher employee costs and R&D spending. Microcontamination Control (MC) For the year endedDecember 31, 2019 , MC net sales increased to$633.7 million , up 14%, from$553.8 million in the comparable period last year. The sales increase was due to the acquisition of SPG in the second quarter of 2018, which contributed an additional$61.3 million of sales,$5.1 million of sales from the acquisition of Anow in the third quarter of 2019, and improved sales from liquid chemistry filters for wet, etch and clean applications and photolithography products, partially offset by weakened sales from gas microcontamination products. MC reported a segment profit of$194.4 million for the year endedDecember 31, 2019 , up 17%, compared to a$166.9 million segment profit in the year-ago period. The increase in MC's profit in 2019 reflects increased sales, partially offset by higher operating expenses of 8%, primarily due to higher employee costs, increased R&D spending and SPG operating infrastructure. Advanced Materials Handling (AMH) For the year endedDecember 31, 2019 , AMH net sales decreased 7% to$458.3 million , from$493.4 million in 2018. This decrease was mainly due to decreased sales of fluid handling products, liquid packaging and dispense products, wafer and reticle handling products and wafer shipping products. 38
--------------------------------------------------------------------------------
Table of Contents
AMH reported a segment profit of$75.2 million for the year endedDecember 31, 2019 , down 19% compared to a$92.3 million segment profit in the year-ago period. The decrease in the AMH's profit in 2019 was primarily due to lower sales. Unallocated general and administrative expenses Unallocated general and administrative expenses for the year endedDecember 31, 2019 totaled$62.2 million compared to$31.4 million for the year endedDecember 31, 2018 . The$30.8 million increase mainly reflects the deal and integration costs of$27.7 million in the discussion of SG&A above. Results of Operations Year endedDecember 31, 2018 compared to year endedDecember 31, 2017 The following table sets forth the results of operations and the relationship between various components of operations, stated as a percent of net sales, for the years endedDecember 31, 2018 and 2017. The Company's historical financial data was derived from its consolidated financial statements and related notes included elsewhere in this annual report. 2018 2017 (Dollars in thousands) % of net sales % of net sales Net sales$ 1,550,497 100.0 %$ 1,342,532 100.0 % Cost of sales 830,666 53.6 733,547 54.6 Gross profit 719,831 46.4 608,985 45.4 Selling, general and administrative expenses 246,534 15.9 216,194 16.1 Engineering, research and development expenses 118,456 7.6 106,951 8.0 Amortization of intangible assets 62,152 4.0 44,023 3.3 Operating income 292,689 18.9 241,817 18.0 Interest expense 34,094 2.2 32,343 2.4 Interest income (3,839 ) (0.2 ) (715 ) (0.1 ) Other expense, net 8,002 0.5 25,458 1.9 Income before income taxes 254,432 16.4 184,731 13.8 Income tax expense 13,677 0.9 99,665 7.4 Net income$ 240,755 15.5$ 85,066 6.3 Net sales For the year endedDecember 31, 2018 , net sales were$1,550.5 million , up$208.0 million , or 15%, from sales for the year endedDecember 31, 2017 . An analysis of the factors underlying the increase in net sales is presented in the following table: (In thousands) Net sales in 2017$ 1,342,532 Organic growth associated with volume and pricing 119,820 Increase associated with acquired businesses 79,980
Increase associated with effect of foreign currency translation 8,165 Net sales in 2018
$ 1,550,497 The Company's sales increase was due to strong across-the-board demand for the Company's products from semiconductor industry customers, reflecting both higher industry fab utilization and semiconductor industry capital spending compared to the year-ago period. This sales increase reflected improved sales of fluid handling products, liquid chemistry filtration solutions and certain specialty materials products. Exclusive of the sales of the acquired businesses of$80.0 million of revenue for 2018 and the favorable currency translation effects of$8.2 million for the year, mainly due to the strengthening of the Japanese yen, Korean won and Euro relative to theU.S. dollar, the Company's sales grew 9% in 2018 when compared to 2017. On a geographic basis, in 2018, total sales to Taiwan were 19%, toNorth America were 22%, toSouth Korea were 16%, toJapan were 14%, toChina were 13%, toEurope were 9% and toSoutheast Asia were 7%. In 2017, total sales to Taiwan were 22%, toNorth America were 21%, toSouth Korea were 16%, toJapan were 13%, toChina were 11%, toEurope were 9%, and toSoutheast Asia were 8%. From 2017 to 2018, net sales to customers inSouth Korea ,China ,Europe ,North America ,Japan andSoutheast Asia increased 12%, 37%, 15%, 21%, 24%, and 7%, respectively, while net sales to customers inTaiwan were flat. Demand drivers for the Company's business primarily consist of semiconductor fab utilization and production (unit-driven) as well as capital spending for new or upgraded semiconductor fabrication equipment and facilities (capital-driven). The Company 39
--------------------------------------------------------------------------------
Table of Contents
analyzes sales of its products by these two key drivers. Sales of unit-driven products represented 70% of total sales and sales of capital-driven products represented 30% of total sales in 2018. This compares to a unit-driven to capital-driven ratio of 74%:26% for 2017 as a result of the acquisition of thePure Gas business in 2018. Gross profit Gross profit for 2018 increased by$110.8 million , to$719.8 million , an increase of 18% from$609.0 million for 2017. The gross margin rate for 2018 was 46.4% versus 45.4% for 2017. The gross profit and gross margin improvements reflect the improved factory utilization associated with strong sales levels and a slightly favorable sales mix. These factors were partly offset by an incremental cost of sales charge of$6.9 million associated with the sale of inventory acquired in theSAES Pure Gas business acquisition and price erosion for certain products in response to normal competitive pressures. In addition, the gross profit and gross margin figures include impairment charges of$0.4 million and$6.1 million for the year endedDecember 31, 2018 and 2017, respectively, related to equipment-related and severance related to organization realignment charges. Selling, general and administrative expenses Selling, general and administrative expense (SG&A) consists primarily of payroll and related expenses for the sales and administrative staff, professional fees (including accounting, legal and technology costs and expenses), and sales and marketing costs. SG&A expenses for 2018 increased$30.3 million , or 14%, to$246.5 million from$216.2 million in 2017. SG&A expenses, as a percent of net sales, decreased to 15.9% from 16.1% a year earlier, reflecting the increase in net sales. An analysis of the factors underlying the increase in SG&A is presented in the following table: (In thousands) Selling, general and administrative expenses in 2017$ 216,194 Deal costs 5,121 Integration costs 3,237 Employee costs 15,181 Professional fees 2,842 Travel costs 2,164
Impairment charge related to acquired intangible assets recorded in prior year
(3,866 )
Other increases, net 5,661
Selling, general and administrative expenses in 2018 $
246,534
Engineering, research and development expenses Engineering, research and development (ER&D) expenses related to the support of current product lines and the development of new products and manufacturing technologies was$118.5 million and$107.0 million in 2018 and 2017, respectively. ER&D expenses as a percent of net sales were 7.6% compared to 8.0% a year ago, reflecting the increase in net sales, offset by the increase in ER&D expenditures levels, primarily due to higher employee costs of$7.8 million and project costs of$3.5 million . The Company's overall ER&D efforts will continue to focus on the support or extension of current product lines, the development of its technologies to create differentiated and high-value products for the most advanced and demanding semiconductor applications and leveraging its unique and diverse technology portfolio to develop innovative, integrated solutions for unmet customer needs. The Company expects ER&D costs to stay relatively stable as a percentage of net sales. Amortization of intangible assets Amortization of intangible assets was$62.2 million in 2018 compared to$44.0 million for 2017. The increase reflects the the additional amortization expense associated with the PSS acquisition completed in the first quarter of 2018 and the SPG acquisition completed in the second quarter of 2018. Interest expense Interest expense was$34.1 million and$32.3 million in the years endedDecember 31, 2018 and 2017, respectively. Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. The increase in 2018 reflects higher average debt levels. Interest income Interest income was$3.8 million and$0.7 million in the years endedDecember 31, 2018 and 2017, respectively. The increase reflects higher averageU.S. cash levels earning a higher rate of interest. Other expense, net Other expense, net, was$8.0 million in 2018 compared to other expense, net, of$25.5 million in 2017. In 2018, other expense, net, included a loss of extinguishment of debt of$2.3 million associated with the redemption of the Company's senior secured term loan facility due 2021 and asset-based revolving credit facility (see note 8 to the Company's consolidated financial statements), foreign currency transaction losses of$4.4 million and penalty charges of$1.1 million . In 2017, other expense, net, included an impairment charge of$2.8 million , a loss of extinguishment of debt of$20.7 million associated with the redemption of the Company's 2022 Notes (see note 8 to the Company's consolidated financial statements), and foreign currency transaction losses of$2.3 million . 40
--------------------------------------------------------------------------------
Table of Contents
Income tax expense The Company recorded income tax expense of$13.7 million in 2018 compared to income tax expense of$99.7 million in 2017. The Company's effective tax expense rate was 5.4% in 2018, compared to an effective tax rate of 54.0% in 2017. The decrease in the effective tax rate in 2018 from 2017 reflects several factors. The decrease in the effective rate is primarily due to the reduction in theU.S. corporate tax rate from 35% in 2017 to 21% in 2018. Additionally, in 2018, the Company recorded a$25.1 million benefit related to foreign tax credit generation and a$9.4 million benefit related to a dividend received deduction based on a restructuring to simplify its legal entity structure. In 2017, the effective tax rate increased due to the recognition of the one-time mandatory repatriation transition tax of$73.0 million on the net accumulated earnings and profits of the Company's foreign subsidiaries and$4.0 million of incremental tax related to no longer asserting that a significant portion of the Company's undistributed earnings are considered indefinitely invested overseas. The increase was partially offset by the remeasurement of theU.S. deferred taxes of$10.3 million to reflect the lowerU.S. federal tax rate. The$9.4 million tax benefit for the dividends received deduction was based on the Company's assessment of the treatment under the provisions of the Tax Cuts and Jobs Act.Congress or theDepartment of Treasury may provide legislative or regulatory updates which would change the Company's assessment. If legislative or regulatory updates are issued related to this item, the timing of which is uncertain, the Company may be required to recognize additional tax expense up to the full amount of the$9.4 million in the period such updates are issued. Net income Net income was$240.8 million , or$1.69 per diluted share, in 2018 compared to net income of$85.1 million , or$0.59 per diluted share, in 2017. The decrease reflects the Company's aforementioned operating results described in greater detail above. Non-GAAP Measures InformationThe Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States (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 "Non-GAAP Information" included below in this section for additional detail, including the reconciliation of GAAP measures to the Company's non-GAAP measures. The Company's non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share (EPS). Adjusted EBITDA increased 22% to$436.1 million in 2018, compared to$357.1 million in 2017. Adjusted EBITDA, as a percent of net sales, was 28.1% in 2018 compared to 26.6% in 2017. Adjusted Operating Income increased 24% to$371.0 million in 2018, compared to$298.9 million in 2017. Adjusted Operating Income, as a percent of net sales, was 23.9% in 2018 compared to 22.3% in 2017. Non-GAAP Earnings Per Share increased 31% to$1.89 in 2018, compared to$1.44 in 2017. The improvement in the Adjusted EBITDA and Adjusted Operating Income reflects the increase in net sales and related increase in gross profit. In addition, Non-GAAP Earnings Per Share was positively affected by a lower adjusted effective tax rate. Segment Analysis The Company reports its financial performance based on three reporting segments. In the first quarter of 2019, the Company changed its definition of segment profit to include inter-segment sales. Prior quarter information has been recast to reflect the change in the Company's definition of segment profit. See note 16 to the consolidated financial statements for additional information on the Company's three segments. The following table and discussion concern the results of operations of the Company's three reportable segments for the years endedDecember 31, 2018 and 2017. (In thousands) 2018 2017 Specialty Chemicals and Engineered Materials Net sales$ 530,241 $ 485,470 Segment profit 127,080 109,571 Microcontamination Control Net sales$ 553,838 $ 436,812 Segment profit 166,852 134,439 Advanced Materials Handling Net sales$ 493,404 $ 444,743 Segment profit 92,327 69,043
Specialty Chemicals and Engineered Materials (SCEM)
For the year ended
41--------------------------------------------------------------------------------
Table of Contents
SCEM reported a segment profit of$127.0 million for the year endedDecember 31, 2018 , up 16%, compared to a$109.6 million segment profit in the year-ago period. The increase in the SCEM's profit in 2018 was primarily due to increased sales, partially offset by higher operating expenses of 8% mainly due to higher employee costs and R&D spending. Microcontamination Control (MC) For the year endedDecember 31, 2018 , MC net sales increased to$553.8 million , up 27%, from$436.8 million in the comparable period last year. The sales increase primarily reflects strength in photolithography applications, liquid chemistry filters for wet, etch and clean driven by strong industry tool shipments, and the acquisition of SPG in the second quarter of 2018, which contributed$62.4 million of sales. MC reported a segment profit of$166.9 million for the year endedDecember 31, 2018 , up 24%, compared to a$134.4 million segment profit in the year-ago period. The increase in MC's profit in 2018 reflects increased sales, partially offset by higher operating expenses of 21%, primarily due to higher employee costs, increased R&D spending and SPG operating infrastructure. Advanced Materials Handling (AMH) For the year endedDecember 31, 2018 , AMH net sales increased 11% to$493.4 million , from$444.7 million in 2017. The increase primarily reflects strong sales of fluid handling products and liquid packaging and dispense products, and the acquisition of PSS in the first quarter of 2018, which contributed$16.0 million of sales. AMH reported a segment profit of$92.3 million for the year endedDecember 31, 2018 , up 34% compared to a$69.0 million segment profit in the year-ago period. The increase in the AMH's profit in 2018 was due to higher sales, partially offset by a 9% increase in operating expenses primarily related to higher employee costs and the absence of$7.1 million of impairment and severance related to organizational realignment from 2017. Unallocated general and administrative expenses Unallocated general and administrative expenses for the year endedDecember 31, 2018 totaled$31.4 million compared to$27.2 million for the year endedDecember 31, 2017 . The$4.2 million increase mainly reflects the deal and integration costs of$8.4 million in the discussion of SG&A above, partially offset by the absence of$3.9 million of impairment charges related to certain acquired intangible assets recorded in 2017. 42
--------------------------------------------------------------------------------
Table of Contents
Quarterly Results of Operations The following table presents selected data from the Company's consolidated statements of operations for the eight quarters endedDecember 31, 2019 . This unaudited information has been prepared on the same basis as the audited consolidated financial statements appearing elsewhere in this annual report. All adjustments that management considers necessary for the fair presentation of the unaudited information have been included in the quarters presented. QUARTERLY STATEMENTS OF OPERATIONS DATA 2018 2019 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (In thousands) Net sales$ 367,199 $ 383,059 $ 398,597 $ 401,642 $ 391,047 $ 378,874 $ 394,147 $ 426,998 Gross profit 175,997 182,378 181,716 179,740 177,393 166,274 170,350 197,636 Selling, general and administrative expenses 58,269 65,200 62,358 60,707 82,254 64,150 71,232 67,171 Engineering, research and development expenses 27,586 30,231 29,964 30,675 28,991 30,624 31,173 30,352 Amortization of intangible assets 11,669 12,014 21,419 17,050 18,657 16,591 15,152 16,028 Operating income 78,473 74,933 67,975 71,308 47,491 54,909 52,793 84,085 Net income 57,562 54,349 48,060 80,784 32,658 123,997 40,767 57,438 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 (Percent of net sales) Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Gross profit 47.9 47.6 45.6 44.8 45.4 43.9 43.2 46.3 Selling, general and administrative expenses 15.9 17.0 15.6 15.1 21.0 16.9 18.1 15.7 Engineering, research and development expenses 7.5 7.9 7.5 7.6 7.4 8.1 7.9 7.1 Amortization of intangibles 3.2 3.1 5.4 4.2 4.8 4.4 3.8 3.8 Operating income 21.4 19.6 17.1 17.8 12.1 14.5 13.4 19.7 Net income 15.7 14.2 12.1 20.1 8.4 32.7 10.3 13.5 The Company's quarterly results of operations have been, and will likely continue to be, subject to significant fluctuations due to a myriad of factors, many of which are beyond the Company's control. The variability in sales, and its corresponding effect on gross profit, are generally the most important factors underlying the changes in the Company's operating income and net income over the past eight quarters. Liquidity and Capital Resources We consider the following when assessing our liquidity and capital resources: In thousands December 31, 2019 December 31, 2018 Cash and cash equivalents $ 351,911 $ 482,062 Working capital 667,964 759,670 Total debt 936,484 938,863 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 summary, our cash flows for each period were as follows: Years ended December 31, December 31, December 31, (in thousands) 2019 2018 2017 Net cash provided by operating activities$ 382,298 $ 312,576 $ 293,373 Net cash used in investing activities (385,840 ) (485,944 ) (112,455 ) Net (used in) provided by cash financing activities (126,820 ) 34,411 27,251 (Decrease) increase in cash and cash equivalents$ (130,151 ) $ (143,346 ) $ 219,019
Operating activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.
43--------------------------------------------------------------------------------
Table of Contents
For 2019 compared to 2018, the$69.7 million increase in cash provided by operating activities was primarily due to higher net income, depreciation and changes in working capital. Depreciation expense increased due to higher levels of capital spending in recent years. Changes in working capital for 2019 were driven by income taxes and inventories, offset by accounts payable and other accrued liabilities. The change for taxes was primarily the result in 2018 tax credits that were utilized against a one time toll charge accrual recorded in 2017. The change for inventory is due to lower production activity in 2019 compared to 2018. The decrease in accounts payable and accrued liabilities is due to lower accrued bonuses in 2019 and lower payables due to timing of payments. For 2018 compared to 2017, the$19.2 million increase in cash provided by operating activities was primarily due to higher net income, offset by changes in working capital. Changes in working capital were driven by inventory and taxes. The increases in inventory were primarily the result of increased sales and production activity. The change for taxes was primarily related to a one time toll charge accrual recorded in 2017 as result of the tax reform and the utilization of tax credits against this accrual in 2018. Investing activities Investing cash flows consist primarily of capital expenditures, cash used for acquisitions and proceeds from sales of property and equipment. The decrease in cash used in investing activities in 2019 compared to 2018 was primarily due to lower cash paid on acquisitions. This was partially offset by increased capital expenditures and lower proceeds from sales of property and equipment. The increase in cash used in investing activities in 2018 compared to 2017 was primarily due to higher cash paid on acquisitions and increased capital expenditures. Acquisition of property and equipment totaled$112.4 million , which primarily reflected investments in equipment and tooling. Capital expenditures in 2019 generally reflected more normalized capital spending levels. The Company expects its capital expenditures in 2020 to be approximately$120 million . OnMarch 8, 2019 , the Company acquired DSC, which provides advanced materials to the specialty chemical, technology and pharmaceutical industries. The total purchase price of the acquisition was$64.1 million , net of cash acquired. The transaction is described in further detail in note 3 to the Company's consolidated financial statements. OnJuly 15, 2019 , the Company acquired MPD Chemicals, a provider of advanced materials to the specialty chemical, technology, and life sciences industries. The Company acquired MPD Chemicals for approximately$161.0 million , subject to revision for customary working capital adjustments. The transaction is described in further detail in note 3 to the Company's consolidated financial statements. OnSeptember 17, 2019 , the Company acquired Anow, a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. The Company acquired Anow for$72.8 million , net of cash acquired. The transaction is described in further detail in note 3 to the Company's consolidated financial statements. Financing activities Financing cash flows consist primarily of repurchases of common stock, payment of dividends to stockholders, issuance and repayment of short-term and long-term debt, and proceeds from the sale of shares of common stock through employee equity incentive plans. In 2019, there was$126.8 million of cash used in financing activities compared to$34.4 million cash provided by financing activities in 2018. The change was primarily due to net long-term debt activity, which was a use of cash of$4.0 million in 2019 compared to a source of cash of$266.2 million in 2018, primarily offset by decreased repurchases of common stock. During 2019, we repurchased$80.3 million of common stock under our authorized common stock repurchase program, compared to$173.8 million in 2018. Our total dividend payments were$40.6 million in 2019 compared to$39.6 million in 2018. We have paid a cash dividend in each of the past 9 quarters. In Q1 2020, the Board declared a quarterly cash dividend of$0.08 per share of common stock, payable onFebruary 19, 2020 to stockholders of record onJanuary 29, 2020 . The increase in cash provided by financing activities in 2018 compared to 2017 was primarily due to net long-term debt activity, which was a source of cash of$266.2 million compared to a source of cash of$90.0 million in 2017 and the absence of$16.2 million of debt extinguishment costs of in 2017 related to the redemption of the Company's senior secured term loan facility due 2021, primarily, offset by increased repurchases of common stock. During 2018, we repurchased$173.8 million of common stock under our authorized common stock repurchase program, compared to$28.0 million in 2017. Also, offsetting the increase were dividend payments of$39.6 million in 2018 compared to$9.9 million in 2017. The Board declared its first quarterly dividend in the fourth quarter of 2017. 44
--------------------------------------------------------------------------------
Table of Contents
Other Liquidity and Capital Resources Considerations InOctober 2019 , the Company amended its credit and guaranty agreement (the "Credit Agreement") dated as ofNovember 6, 2018 . The amendment changed the agency bank fromGoldman Sachs Bank USA , as administrative agent and collateral agent, a to Morgan Stanley, and adds two additional lenders to the Company's Credit Agreement. There was no change to the total commitment or the term length for either the Term Loan Facility or the Revolving Facility as defined in note 8 to the Company's consolidated financial statement under Senior Secured Credit Facilities. However, the amendment changed the amount committed for each of the previous lenders. The Company's Term Loan Facility has a principal amount of$396 million outstanding that matures onNovember 6, 2025 and bears an interest rate of 3.80% atDecember 31, 2019 . The Company's Revolving Facility has a senior secured revolving commitment facility in an aggregate amount of$300 million maturingNovember 6, 2023 . The Revolving Facility bears interest at a rate per annum equal to, at the Company's option, a base rate (such as prime rate or LIBOR) plus, an applicable margin. AtDecember 31, 2019 , the only outstanding amounts under the Revolving Facility were undrawn outstanding letters of credit of$0.2 million . We have$550 million aggregate principal amount of 4.625% senior unsecured notes dueFebruary 10, 2026 outstanding. ThroughDecember 31, 2019 , the Company was in compliance with all applicable financial covenants included in the terms of its credit facilities. The Company also has lines of credit with two banks that provide for borrowings of Japanese yen for the Company's Japanese subsidiary equivalent to an aggregate of approximately$11.0 million . There were no outstanding borrowings under these lines of credit atDecember 31, 2019 . As ofDecember 31, 2019 , the Company's sources of available funds were its cash and cash equivalents of$351.9 million , funds available under the Revolving Facility and international credit facilities and cash flow generated from operations. As ofDecember 31, 2019 , the amount of cash and cash equivalents held in certain of our foreign operations totaled approximately$180.4 million . As ofDecember 31, 2019 , we had not repatriated any of these funds to theU.S. However, to the extent we repatriate these funds to theU.S. , we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. We have accrued taxes for the tax effect of repatriating the funds to theU.S. The Company believes its existing balances of domestic cash and cash equivalents and operating cash flows will be sufficient to meet the Company's domestic cash needs arising in the ordinary course of business for the next twelve months. If available liquidity is not sufficient to meet the Company's operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company's cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. New Accounting Pronouncements Recently adopted accounting pronouncements Refer to note 1 to the Company's consolidated financial statements for a discussion of accounting pronouncements implemented in 2019. Other than the adoption of ASU 2016-02 Leases, there were no recently issued accounting pronouncements adopted in 2019. Recently issued accounting pronouncements Refer to note 1 of the Company's consolidated financial statements for a discussion of accounting pronouncements recently issued but not yet adopted. 45
--------------------------------------------------------------------------------
Table of Contents
Contractual Obligations The following table summarizes the maturities of the Company's significant financial obligations as ofDecember 31, 2019 : (In thousands) Total 2020 2021 2022 2023 2024 Thereafter Long-term debt1$ 946,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 926,000 Interest2 256,422 40,482 40,330 40,178 40,026 39,874 55,532 Pension obligations 6,036 40 225 113 201 399 5,058 Capital purchase obligations3 27,064 27,064 - - - - - Supply purchase obligations4 15,785 7,506 7,506 773 - - - Operating leases 67,548 12,407 10,221 6,909 6,055 5,052 26,904 Total$ 1,318,855 $ 91,499 $ 62,282 $ 51,973 $ 50,282 $ 49,325 $ 1,013,494 Unrecognized tax benefits5 1Debt obligations are classified based on their stated maturity date, regardless of their classification on the Company's consolidated balance sheets. 2Interest projections on both variable and fixed rate long-term debt are based on interest rates effective as ofDecember 31, 2019 and do not include$9.5 million for net unamortized discounts and debt issuance costs. 3Capital purchase obligations represent commitments for the construction or purchase of property, plant and equipment. They were not recorded as liabilities on the Company's consolidated balance sheet as ofDecember 31, 2019 , as the Company had not yet received the related goods or taken title to the property. 4Supply purchase obligations represent commitments, including take-or-pay contracts, that are not presented as capital purchase commitments above. 5The Company had$16.2 million of total gross unrecognized tax benefits atDecember 31, 2019 . The timing of any payments associated with these unrecognized tax benefits will depend on a number of factors. Accordingly, the Company cannot make reasonably reliable estimates of the amount and period of potential cash settlements, if any, with taxing authorities and are not included in the table above. 46
--------------------------------------------------------------------------------
Table of Contents
Non-GAAP InformationThe Company's consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States (GAAP). The Company also provides 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 (EPS), as well as certain other supplemental non-GAAP financial measures included in the discussion of the Company's financial results. Adjusted EBITDA, a non-GAAP financial measure, is defined by the Company as net income before (1) income tax expense, (2) interest expense, (3) interest income, (4) other (income) expense, net, (5) charge for fair value write-up of acquired inventory sold, (6) deal costs, (7) integration costs, (8) severance and restructuring costs, (9) impairment of equipment and intangibles, (10) loss on sale of subsidiary, (11) amortization of intangible assets and (12) depreciation. Adjusted Operating Income, another non-GAAP financial measure, is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP financial measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company's net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively. Non-GAAP EPS, a non-GAAP financial measure, is defined by the Company as net income before (1) charge for fair value write-up of inventory sold, (2) deal costs, (3) integration costs, (4) severance and restructuring costs, (5) impairment of equipment and intangibles, (6) loss on debt extinguishment and modification, (7) Versum termination fee, net, (8) loss on sale of subsidiary, (9) amortization of intangible assets, (10) the tax effect of those adjustments to net income and discrete tax items, (11) the tax effect of legal entity restructuring and (12) the Tax Cuts and Jobs Act, divided by diluted weighted average shares outstanding. The Company provides supplemental non-GAAP financial measures to better understand and manage 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 its business segments and to make operating decisions. Management believes the Company's non-GAAP measures help indicate the Company's baseline performance before certain gains, losses or other charges that may not be indicative of the Company's business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors' overall understanding of the Company's results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans, measures and evaluates the Company's business performance. Management believes that the inclusion of non-GAAP measures provides greater consistency in its financial reporting and facilitates investors' understanding of the Company's historical operating trends by providing an additional basis for comparisons to prior periods. Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company's operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company's capacity to fund capital expenditures, secure financing and expand its business. In addition, and as a consequence of the importance of these non-GAAP financial measures in managing its business, the Company's Board of Directors uses non-GAAP financial measures in the evaluation process to determine management compensation. The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company's industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company's creditworthiness. The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company's 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: 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. 47
--------------------------------------------------------------------------------
Table of Contents
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 the Company will not have future restructuring activities, gains or losses on sale of equity investments, contingent consideration fair value adjustments 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 from 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. The reconciliation of GAAP measures to Adjusted Operating Income and Adjusted EBITDA for the years endedDecember 31, 2019 , 2018 and 2017 are presented below: In thousands 2019 2018 2017 Net sales$ 1,591,066 $ 1,550,497 $ 1,342,532 Net income$ 254,860 $ 240,755 $ 85,066 Adjustments to net income Income tax expense 63,189 13,677 99,665 Interest expense 46,962 34,094 32,343 Interest income (4,652 ) (3,839 ) (715 ) Other (income) expense, net (121,081 ) 8,002 25,458 GAAP - Operating income 239,278 292,689 241,817 Charge for fair value write-up of acquired inventory sold 7,544 6,868 - Deal costs 26,164 5,121 - Integration costs 9,932 3,237 - Severance and restructuring costs 12,494 460 2,700 Impairment of equipment and intangibles 1 - - 10,400 Loss on sale of subsidiary - 466 - Amortization of intangible assets 66,428 62,152 44,023 Adjusted operating income 361,840 370,993 298,940 Depreciation 74,975 65,116 58,208 Adjusted EBITDA$ 436,815 $ 436,109 $ 357,148 Net income - as a % of net sales 16.0 % 15.5 % 6.3 % Adjusted operating margin 22.7 % 23.9 % 22.3 % Adjusted EBITDA - as a % of net sales 27.5 %
28.1 % 26.6 %
1Includes product line impairment charges of$5,330 classified as cost of sales for the years endedDecember 31, 2017 . Includes intangible impairment charge of$3,866 classified as selling, general and administrative expense for the year endedDecember 31, 2017 . Includes product line impairment charge of$320 classified as selling, general and administrative expense for the year endedDecember 31, 2017 . Includes product line impairment charge of$884 classified as engineering, research and development expense for the year endedDecember 31, 2017 . 48
--------------------------------------------------------------------------------
Table of Contents
The reconciliation of GAAP measures to Non-GAAP Earnings per share for the years
ended
2019 2018 2017
Net income$ 254,860 $ 240,755 $ 85,066 Adjustments to net income: Charge for fair value write-up of acquired inventory sold 7,544 6,868 - Deal costs 26,575 5,121 - Integration costs 9,932 3,237 - Severance and restructuring costs 12,494 460
2,700
Impairment of equipment and intangibles1 - -
13,200
Loss on debt extinguishment and modification 1,980 2,319 20,687 Versum termination fee, net (122,000 ) - - Loss on sale of subsidiary - 466 - Amortization of intangible assets 66,428 62,152
44,023
Tax effect of adjustments to net income and discrete tax items 2 (3,124 ) (17,812 ) (26,046 ) Tax effect of legal entity restructuring 9,398 (34,478 ) - Tax effect of Tax Cuts and Jobs Act - 683
66,713
Non-GAAP net income$ 264,087 $ 269,771 $ 206,343 Diluted earnings per common share$ 1.87 $ 1.69 $ 0.59 Effect of adjustments to net income$ 0.07 $ 0.20 $ 0.85 Diluted non-GAAP earnings per common share$ 1.93 $ 1.89
1Includes product line impairment charges of$5,330 classified as cost of sales for the years endedDecember 31, 2017 .. Includes intangible impairment charge of$3,866 classified as selling, general and administrative expense for the year endedDecember 31, 2017 . Includes product line impairment charge of$320 classified as selling, general and administrative expense for the year endedDecember 31, 2017 . Includes product line impairment charge of$884 classified as engineering, research and development expense for the year endedDecember 31, 2017 . Includes product line impairment charge of$2,800 classified as other expense for the year endedDecember 31, 2017 . 2The tax effect of the non-GAAP adjustments was calculated using the applicable marginal tax rate during the respective years. Item 7A. Quantitative and Qualitative Disclosure About Market Risks Entegris' principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company's interest-bearing cash equivalents and variable rate debt are subject to interest rate fluctuations. The Company's cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately$0.3 million annually. The cash flows and results of operations of the Company's foreign-based operations are subject to fluctuations in foreign exchange rates. We have sales denominated in the South Korean Won, NewTaiwan Dollar , Chinese Renmibi, Canadian Dollar Malayisan Ringgit, Singapore Dollar, Euro, Israeli Shekel and the Japanese Yen. Approximately 22.6% of the Company's sales are denominated in these currencies. Financial results therefore will be affected by changes in currency exchange rates. If all foreign currencies were to see a 10% reduction versus theU.S. dollar during the year endedDecember 31, 2019 the operating income would be negatively impacted by approximately$36.0 million . The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. AtDecember 31, 2019 , the Company had no net exposure to any foreign currency forward contracts. 49
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
