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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Entegris, Inc.    ENTG

ENTEGRIS, INC.

(ENTG)
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ENTEGRIS : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

10/22/2020 | 04:01pm EST
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 ended December 31, 2019 as well as in our Quarterly Reports on Form
10-Q and Current Reports on Form 8-K for a discussion of important factors that
could cause actual results to differ materially from the results described in or
implied by the forward-looking statements contained in the following discussion
and analysis. The Company assumes no obligation to publicly release the results
of any revision or updates to these forward-looking statements to reflect future
events or unanticipated occurrences.
Overview
This overview is not a complete discussion of the Company's financial condition,
changes in financial condition or results of operations; it is intended merely
to facilitate an understanding of the most salient aspects of the Company's
financial condition and operating performance and to provide a context for the
detailed discussion and analysis that follows. The discussion and analysis must
be read in its entirety in order to fully understand the Company's financial
condition and results of operations.
The Company is a leading global developer, manufacturer and supplier of
microcontamination control products, specialty chemicals and advanced materials
handling solutions for manufacturing processes in the semiconductor and other
high-technology industries. We leverage our unique breadth of capabilities to
create value for our customers by developing mission-critical solutions to
maximize manufacturing yields, reduce manufacturing costs and enable higher
device performance.
Our technology portfolio includes advanced materials and high-purity
chemistries, with optimized packaging and delivery systems and in-process
filtration and purification solutions that ensure high-value liquid chemistries
and gases are free from contaminants before use. Our standard and customized
products and solutions enable the highest levels of purity and performance that
are essential to the manufacture of semiconductors, flat panel displays, light
emitting diodes, high-purity chemicals, solar cells, gas lasers, optical and
magnetic storage devices, and critical components for aerospace, glass
manufacturing and biomedical applications. The majority of our products are
consumed at various times throughout the manufacturing process, with demand
driven in part by the level of semiconductor and other manufacturing activity.
Our business is organized and operated in three operating segments, which align
with the key elements of the advanced semiconductor manufacturing ecosystem. The
Specialty Chemicals and Engineered Materials, or SCEM, segment provides
high-performance and high-purity process chemistries, gases, and materials, and
safe and efficient delivery systems to support semiconductor and other advanced
manufacturing processes. The Microcontamination Control, or MC, segment offers
solutions to filter and purify critical liquid chemistries and gases used in
semiconductor manufacturing processes and other high-technology industries. The
Advanced Materials Handling, or AMH, segment develops solutions to monitor,
protect, transport, and deliver critical liquid chemistries, wafers and other
substrates for a broad set of applications in the semiconductor industry and
other high-technology industries. While these segments have separate products
and technical know-how, they share common business systems and processes,
technology centers, and strategic and technology roadmaps. We leverage our
expertise from these three segments and complementary product portfolios to
create new and increasingly integrated solutions for our customers. See note 10
to the condensed consolidated financial statements for additional information on
the Company's three segments.
The Company's fiscal year is the calendar period ending each December 31. The
Company's fiscal quarters consist of 13-week or 14-week periods that end on
Saturday. The Company's fiscal quarters in 2020 end March 28, 2020, June 27,
2020, September 26, 2020 and December 31, 2020. Unaudited information for the
three and nine months ended September 26, 2020 and September 28, 2019 and the
financial position as of September 26, 2020 and December 31, 2019 are included
in this Quarterly Report on Form 10-Q.
Key operating factors Key factors, which management believes have the largest
impact on the overall results of operations of the Company, include:
•Level of sales Since a significant portion of the Company's product costs
(except for raw materials, purchased components and direct labor) are largely
fixed in the short-to-medium term, an increase or decrease in sales affects
gross profits and overall profitability significantly. Also, increases or
decreases in sales and operating profitability affect certain costs such as
incentive compensation and commissions, which are highly variable in nature. The
Company's sales are subject to the effects of industry cyclicality,
technological change, substantial competition, pricing pressures and foreign
currency fluctuations.
•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),
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domestic and international competition, direct labor costs, and the efficiency
of the Company's production operations, among others.
•Fixed cost structure The Company's operations include a number of large fixed
or semi-fixed cost components, which include salaries, indirect labor and
benefits, facility costs, lease expenses, and depreciation and amortization. It
is not possible to vary these costs easily in the short-term as volumes
fluctuate. Accordingly, increases or decreases in sales volume can have a large
effect on the usage and productivity of these cost components, resulting in a
large impact on the Company's profitability.
Impact of COVID-19 on our Business
A novel strain of coronavirus (COVID-19) was first identified in Wuhan, China in
December 2019, and subsequently declared a pandemic by the World Health
Organization. As a result of the COVID-19 pandemic, governmental authorities
have implemented and are continuing to implement numerous and constantly
evolving measures to try to contain the virus, such as travel bans and
restrictions, limits on gatherings, quarantines, shelter-in-place orders, and
business shutdowns. In some cases, governmental re-opening plans have been
delayed or reversed due to spikes in the number of infections. We continue to
monitor the situation regarding the COVID-19 pandemic, which remains fluid and
uncertain, and to proactively manage and adapt our responses in collaboration
with our employees, customers and suppliers. However, we are unable to
accurately predict the full impact of COVID-19 on our business, results of
operations, financial condition, liquidity and cash flows, which will depend on
future developments that are highly uncertain and cannot be predicted with
accuracy, including, but not limited to, the duration and continued spread of
the outbreak, its severity, potential additional waves of infection, the actions
to mitigate the virus or its impact, and how quickly and to what extent normal
economic and operating conditions can resume.
Health and Safety
From the earliest signs of the outbreak, we have taken, and continue to take,
proactive, aggressive action to protect the health and safety of our employees,
customers, partners and suppliers. We enacted rigorous safety measures in all of
our sites in accordance with applicable laws, including social distancing
protocols, encouraging employees who do not need to be physically present on the
manufacturing floor or in a lab to perform their work to work from home,
suspending non-essential travel, implementing temperature checks at the
entrances to our facilities, extensively and frequently disinfecting our
workspaces and providing masks to employees who are physically present at our
facilities. We expect to continue to implement these measures until the COVID-19
pandemic is adequately contained, and we may take further actions as government
authorities require or recommend or as we determine to be in the best interests
of our employees, customers, partners and suppliers. We expect that the pandemic
may abate at different times in different regions, and accordingly our health
and safety protocols may vary across regions.
Operations
We have important manufacturing operations in the U.S., Japan, Korea, China,
Malaysia, and Taiwan, all of which have been affected by the outbreak and have
taken measures to try to contain it. Measures providing for business shutdowns
have generally excluded certain essential services, and those essential services
have commonly included critical infrastructure and the businesses that support
that critical infrastructure. While all of our facilities currently remain
operational, these measures have impacted and may further impact our workforce
and operations, as well as those of our customers, suppliers and other third
parties with which we do business. For example, the government of Malaysia
issued an order that significantly reduced the number of employees who could be
physically present to operate our Malaysian plant, which had reduced the
productivity of that plant for a period of time. As of the date of this filing,
our Malaysian plant is back to full capacity. In addition to reduced
productivity, constraints and limits imposed on our operations may slow or
diminish our research and development and customer qualification activities. We
also experienced brief interruptions in operations at our sites in Hangzhou,
China, San Luis Obispo, California and Bedford, Massachusetts. While
governmental measures may be modified, extended or reimposed, we expect that,
absent a significant surge in infections in the relevant local area, our
manufacturing and research and development facilities will remain operational,
largely at or near full capacity. In connection with the COVID-19 pandemic, we
have experienced limited absenteeism from employees who are required to be
on-site to perform their jobs, and we have incurred incremental employee
compensation related to the COVID-19 pandemic. We do not currently expect that
our operations will be adversely affected by significant absenteeism.
Supply
We have not yet experienced any significant impacts or interruptions to our
supply chain as a result of the COVID-19 pandemic. However, certain of our
suppliers have faced and, as the pandemic continues, may continue to face,
difficulties maintaining operations in light of government-ordered restrictions
and shelter-in-place mandates and may face challenges in maintaining their level
of supply. For example, earlier in the year, one of our critical valve suppliers
was shut down and was unable to supply us with valves for certain of our gas
purification products. In this instance we were able to procure this critical
part from a second, pre-qualified source. Although we regularly monitor the
financial health of companies in our supply chain, financial hardship on our
suppliers or sub-suppliers caused by the COVID-19 pandemic could cause a
disruption in our ability
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to obtain raw materials or components required to manufacture our products,
adversely affecting our operations. To mitigate the risk of potential supply
interruptions from the COVID-19 pandemic, earlier in the year we chose to
increase certain inventory levels, causing us to hold more inventory than we
might have otherwise maintained. We may decide to take similar actions going
forward, which may result in increased charges for excess or obsolete inventory,
which would have the effect of reducing our profitability. Additionally,
restrictions or disruptions of transportation, such as reduced availability of
air transport, port closures and increased border controls or closures, have
resulted, in certain instances, in higher costs and delays, both on obtaining
raw materials and shipping finished goods to customers. If these restrictions
and disruptions continue, they could harm our profitability, make our products
less competitive, or cause our customers to seek alternative suppliers.
Demand
The COVID-19 pandemic has significantly increased economic and demand
uncertainty. During the first three quarters of 2020, we have seen strong demand
from leading-edge customers associated with end-uses in servers and other data
center applications. We believe that a portion of recent orders we have received
may be a result of customers increasing their inventory to reduce their exposure
to risks of future supply disruptions, which could offset demand for our
products in the future. We continue to see weakness in some mainstream fabs
associated with the slowdown in sales of automotive, aerospace, mobile phone,
and other applications. We anticipate that the pandemic will continue to
contribute to the current global economic slowdown, and it is possible that it
could cause a global recession. In the event of a recession, demand for our
products would decline and our business would be adversely affected.
Liquidity
Although there is uncertainty related to the anticipated impact of the COVID-19
pandemic on our future results, we believe our business model, our current cash
reserves and our balance sheet leave us well-positioned to manage our business
through this crisis as we expect it to unfold. We have taken recent steps to
strengthen our balance sheet. On April 30, 2020, we issued $400 million
aggregate principal amount of 4.375% senior unsecured notes due April 15, 2028.
We used a portion of the net proceeds of the offering to repay approximately
$142 million of borrowings under our senior secured revolving facility due 2023,
or the Revolving Facility, representing the entire aggregate principal amount
outstanding thereunder. We also used a portion of the net proceeds of the
offering to repay approximately $251 million of outstanding borrowings under our
senior secured term loan facility, or the Term Loan Facility.
We have reviewed numerous potential scenarios in connection with the impact of
COVID-19 on the global economy and the semiconductor industry. Based on our
analysis, we believe our existing balances of domestic cash and cash equivalents
and our currently anticipated operating cash flows will be sufficient to meet
our cash needs arising in the ordinary course of business for the next twelve
months.
We continue to monitor the rapidly evolving situation and guidance from
international and domestic authorities, including federal, state and local
public health authorities, and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our
control requiring us to adjust our operating plan. As such, given the dynamic
nature of this situation, we cannot reasonably estimate the impacts that
COVID-19 may have on our financial condition, results of operations or cash
flows in the future. In addition, see Part II-Item 1A, "Risk Factors," included
herein for updates to our risk factors regarding risks associated with the
COVID-19 pandemic.
Overall Summary of Financial Results
For the three months ended September 26, 2020, net sales increased 22% to $481.0
million, compared to $394.1 million for the three months ended September 28,
2019. Net sales for the three months ended September 26, 2020 included sales of
$9.7 million from acquired businesses and favorable foreign currency translation
effects of $2.0 million. In addition to these factors, the increase in revenue
primarily resulted from strong customer demand from the semiconductor market
compared to the year-ago quarter.
Sales were up $32.6 million, or 7%, on a sequential basis over sales of $448.4
million in the second quarter of 2020, including favorable foreign currency
translation effects of $2.2 million and sales attributable to acquired
businesses of $3.0 million. The increase in revenue resulted primarily from
strong customer demand from the semiconductor market compared to the previous
quarter.
The Company's gross profit for the three months ended September 26, 2020
increased to $226.0 million, up from $170.4 million for the three months ended
September 28, 2019. The Company experienced a 47.0% gross margin for the three
months ended September 26, 2020, compared to 43.2% in the comparable year-ago
period. The gross profit and gross margin increases reflect higher factory
utilization associated with higher sales levels and a favorable sales mix.
As a result of the aforementioned factors, the Company reported net income of
$79.3 million, or $0.58 per diluted share, for the quarter ended September 26,
2020, compared to net income of $40.8 million, or $0.30 per diluted share, a
year ago.
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On July 10, 2020, the Company acquired Global Measurement Technologies, Inc., or
GMTI, an analytical instrument provider for critical processes in semiconductor
production, and its manufacturing partner Clean Room Plastics, Inc., for an
aggregate purchase price of $36.3 million in cash. The Company funded the
acquisition from its available cash on hand. GMTI will be a part of the AMH
segment. The acquisition does not constitute a material business combination.
Cash and cash equivalents were $448.0 million at September 26, 2020, compared
with cash and cash equivalents of $351.9 million at December 31, 2019. The
Company had outstanding debt of $1,085.4 million at September 26, 2020, compared
to $936.5 million at December 31, 2019.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's condensed consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these condensed
consolidated financial statements requires the Company to make estimates,
assumptions and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses and related disclosure of contingent assets
and liabilities. Actual results may differ from these estimates under different
assumptions or conditions.
The critical accounting policies affected most significantly by estimates,
assumptions and judgments used in the preparation of the Company's condensed
consolidated financial statements are described in Item 7 of its Annual Report
on Form 10-K for the year ended December 31, 2019 filed with the Securities and
Exchange Commission. On an ongoing basis, the Company evaluates the critical
accounting policies used to prepare its condensed consolidated financial
statements, including, but not limited to, those related to impairment of
long-lived assets, goodwill, income taxes and business acquisitions. There have
been no material changes in these aforementioned critical accounting policies.
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Three and Nine Months Ended September 26, 2020 Compared to Three and Nine Months
Ended September 28, 2019 and Three Months Ended June 27, 2020
The following table compares operating results for the three and nine months
ended September 26, 2020 with results for the three and nine months ended
September 28, 2019 and three months ended June 27, 2020 both in dollars and as a
percentage of net sales, for each caption.
                                                                           Three months ended                                                                                                                                                          Nine months ended
(Dollars in thousands)             September 26, 2020September 28, 2019June 27, 2020September 26, 2020September 28, 2019
Net sales                    $  480,987             100.0  %       $ 394,147                  100.0  %       $ 448,405             100.0  %       $  1,341,719             100.0  %       $ 1,164,068                  100.0  %
Cost of sales                   254,987              53.0            223,797                   56.8            241,033              53.8               722,869              53.9              650,051                   55.8
Gross profit                    226,000              47.0            170,350                   43.2            207,372              46.2               618,850              46.1              514,017                   44.2
Selling, general and
administrative expenses          71,195              14.8             71,232                   18.1             66,872              14.9               196,958              14.7              217,636                   18.7
Engineering, research and
development expenses             36,295               7.5             31,173                    7.9             32,572               7.3                98,499               7.3               90,788                    7.8
Amortization of intangible
assets                           11,749               2.4             15,152                    3.8             13,216               2.9                41,176               3.1               50,400                    4.3
Operating income                106,761              22.2             52,793                   13.4             94,712              21.1               282,217              21.0              155,193                   13.3
Interest expense                 12,781               2.7             11,388                    2.9             13,005               2.9                36,345               2.7               33,587                    2.9
Interest income                    (130)                -             (1,172)                  (0.3)              (213)                -                  (664)                -               (4,020)                  (0.3)
Other (income) expense, net      (1,752)             (0.4)               934                    0.2               (477)             (0.1)               (1,351)             (0.1)            (121,329)                 (10.4)
Income before income taxes       95,862              19.9             41,643                   10.6             82,397              18.4               247,887              18.5              246,955                   21.2
Income tax expense               16,559               3.4                876                    0.2             14,361               3.2                39,542               2.9               49,533                    4.3
Net income                   $   79,303              16.5  %       $  40,767                   10.3  %       $  68,036              15.2  %       $    208,345              15.5  %       $   197,422                   17.0  %


Net sales For the three months ended September 26, 2020, net sales increased by
22% to $481.0 million, compared to $394.1 million for the three months ended
September 28, 2019. An analysis of the factors underlying the increase in net
sales is presented in the following table:

(In thousands)

    Net sales in the quarter ended September 28, 2019                 $ 

394,147

    Increase associated with acquired businesses                          

9,736

    Increase associated with volume, pricing and mix                     

75,147

Increase associated with effect of foreign currency translation 1,957

    Net sales in the quarter ended September 26, 2020                 $ 

480,987



The Company's sales increase was primarily due to strong customer demand from
the semiconductor market compared to the year-ago quarter, sales of $9.7 million
from the Company's recent acquisitions and favorable foreign currency
translation effects of $2.0 million.
On a geographic basis, sales percentage by customers' country or region for the
three months ended September 26, 2020 and September 28, 2019 and the percentage
increase in sales for the three months ended September 26, 2020 compared to the
sales for the three months ended September 28, 2019 were as follows:
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                               Three months ended
                   September 26, 2020      September 28, 2019      Percentage increase in sales
North America                    28  %                   26  %                             33  %
Taiwan                           17  %                   19  %                             10  %
South Korea                      15  %                   17  %                             13  %
Japan                            13  %                   12  %                             26  %
China                            14  %                   13  %                             31  %
Europe                            8  %                    8  %                             30  %
Southeast Asia                    5  %                    6  %                              2  %


The increase in sales to customers in North America was primarily driven by
sales from our recent acquisition of GMTI and demand for our Microcontamination
Control and Advanced Materials Handling products. The increase in sales to
customers in Taiwan was primarily driven by demand for our Specialty Chemicals
and Engineered Materials products and Microcontamination Control products. The
increase in sales to South Korea was primarily driven by demand for our Advanced
Materials Handing products. The increase in sales to customers in Japan was
primarily driven by demand for our Microcontamination Control and Specialty
Chemicals and Engineered Materials products. The increase in sales to customers
in China was due to a general increase in demand for products from each of our
segments. The increase in sales to customers in Europe was driven by demand for
our Microcontamination Control products.
Sales were up $32.6 million, or 7%, on a sequential basis over sales of $448.4
million for the second quarter of 2020, primarily due to strong customer demand
from the semiconductor market, favorable foreign currency translation effects of
$2.2 million and sales attributable to acquired businesses of $3.0 million.

Net sales for the nine months ended September 26, 2020 were $1,341.7 million, up
15% from $1,164.1 million in the comparable year-ago period. An analysis of the
factors underlying the increase in net sales is presented in the following
table:

(In thousands)

   Net sales in the nine months ended September 28, 2019             $ 

1,164,068

   Increase associated with volume, pricing and mix                      

138,005

Increase associated with effect of foreign currency translation 2,082

   Increase associated with acquired businesses                           

37,564

   Net sales in the nine months ended September 26, 2020             $ 

1,341,719



The Company's sales increase was primarily due to strong customer demand from
the semiconductor market compared to the year-ago period, sales of $37.6 million
from the Company's recent acquisitions and favorable foreign currency
translation effects of $2.1 million.
On a geographic basis, sales percentage by customers' country or region for the
nine months ended September 26, 2020 and September 28, 2019 and the percentage
increase in sales for the nine months ended September 26, 2020 compared to the
sales for the nine months ended September 28, 2019 were as follows:
                               Nine months ended
                   September 26, 2020      September 28, 2019      Percentage increase in sales
North America                    26  %                   24  %                             23  %
Taiwan                           20  %                   19  %                             20  %
South Korea                      15  %                   16  %                              3  %
Japan                            13  %                   13  %                             19  %
China                            13  %                   13  %                             14  %
Europe                            8  %                    8  %                             14  %
Southeast Asia                    6  %                    6  %                              1  %


The increase in sales to customers in North America was primarily driven by
sales from our recent acquisitions of MPD, GMTI and Sinmat and demand for our
Microcontamination Control and Specialty Chemicals and Engineered Materials
products. The increase in sales to customers in Taiwan was primarily driven by
demand for our Advanced Materials Handling and Microcontamination Control
products. The increase in sales to customers in Japan was primarily driven by
demand for our
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Microcontamination Control and Specialty Chemicals and Engineered Materials
products. The increase in sales to customers in China was due to a general
increase in demand for products from each of our segments and sales from our
recent acquisition of Anow. The increase in sales to customers in Europe was
driven by demand for our Microcontamination Control products.
Gross profit The Company's gross profit increased 33% for the three months ended
September 26, 2020 to $226.0 million, compared to $170.4 million for the three
months ended September 28, 2019. The Company experienced a 47.0% gross margin
rate for the three months ended September 26, 2020, compared to 43.2% in the
comparable year-ago period. The gross profit and gross margin increases reflect
higher factory utilization associated with higher sales levels and a favorable
sales mix. The gross profit and gross margin figures include incremental cost of
sales charges of $0.2 million and $4.5 million associated with the sale of
inventory acquired in recent business acquisitions for the three months ended
September 26, 2020 and September 28, 2019, respectively.
For the nine months ended September 26, 2020, the Company's gross profit
increased 20% to $618.9 million, compared to $514.0 million for the nine months
ended September 28, 2019. The Company experienced a 46.1% gross margin rate for
the nine months ended September 26, 2020, compared to 44.2% in the comparable
year-ago period. The gross profit and gross margin increases reflect higher
factory utilization associated with higher sales levels and a favorable sales
mix. The gross profit and gross margin figures include incremental cost of sales
charges of $0.6 million and $7.3 million associated with the sale of inventory
acquired in recent business acquisitions for the nine months ended September 26,
2020 and September 28, 2019, respectively.
Selling, general and administrative expenses SG&A expenses were flat at $71.2
million for both the three months ended September 26, 2020 and September 28,
2019. An analysis of the factors underlying the change in SG&A is presented in
the following table:
(In thousands)
Selling, general and administrative expenses in the quarter ended September
28, 2019                                                                       $   71,232
Deal and transaction costs                                                         (4,249)
Integration costs                                                                  (1,138)
Employee costs                                                                      4,017
Provision for bad debt                                                                448
Other increases, net                                                                  885

Selling, general and administrative expenses in the quarter ended September 26, 2020

$ 71,195



SG&A expenses were $197.0 million for the first nine months of 2020, down 10%
compared to SG&A expenses of $217.6 million in the year-ago period. An analysis
of the factors underlying changes in SG&A is presented in the following table:
(In thousands)
Selling, general and administrative expenses in the nine months ended
September 28, 2019$  217,636
Deal and transaction costs                                                        (22,615)
Integration costs                                                                  (3,362)
Employee costs                                                                      5,101
Provision for bad debt                                                              1,886
Other decreases, net                                                               (1,688)

Selling, general and administrative expenses in the nine months ended September 26, 2020

$ 196,958



Deal and transaction costs were $22.6 million lower in the nine months ended
September 26, 2020 compared to the nine months ended September 28, 2019, mainly
due to the deal costs associated with the terminated Versum transaction.
Engineering, research and development expenses The Company's engineering,
research and development, or ER&D, efforts focus on the support or extension of
current product lines and the development of new products and manufacturing
technologies. ER&D expenses were $36.3 million in the three months ended
September 26, 2020 compared to $31.2 million in the year-ago period. An analysis
of the factors underlying the increase in ER&D is presented in the following
table:
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(In thousands)
Engineering, research and development expenses in the quarter ended September
28, 2019                                                                      $   31,173
Employee costs                                                                     3,403
Depreciation                                                                         415
Project materials                                                                  1,218
Other increases, net                                                                  86

Engineering, research and development expenses in the quarter September 26, 2020

$ 36,295



ER&D expenses increased 8% to $98.5 million in the first nine months of 2020,
compared to $90.8 million in the year ago period. An analysis of the factors
underlying the increase in ER&D is presented in the following table:
(In thousands)
Engineering, research and development expenses in the nine months ended
September 28, 2019                                                            $   90,788
Employee costs                                                                     6,032
Depreciation                                                                       1,498
Project materials                                                                    967
Other decreases, net                                                                (786)

Engineering, research and development expenses in the nine months ended September 26, 2020

$ 98,499



Amortization expenses Amortization of intangible assets was $11.7 million in the
three months ended September 26, 2020, compared to $15.2 million for the three
months ended September 28, 2019. The decrease primarily reflects the elimination
of amortization expense of $5.2 million for identifiable intangible assets
acquired in acquisitions that became fully amortized in previous periods,
partially offset by additional amortization expense of $2.0 million associated
with recent acquisitions.
Amortization of intangible assets was $41.2 million in the nine months ended
September 26, 2020, compared to $50.4 million for the nine months ended
September 28, 2019. The decrease primarily reflects the elimination of
amortization expense of $16.2 million for identifiable intangible assets
acquired in acquisitions that became fully amortized in previous periods,
partially offset by additional amortization expense of $7.1 million associated
with recent acquisitions.
Interest expense Interest expense includes interest associated with debt
outstanding and the amortization of debt issuance costs associated with such
borrowings. Interest expense was $12.8 million in the three months ended
September 26, 2020 compared to $11.4 million in the three months ended
September 28, 2019. The increase primarily reflects higher average debt levels.
Interest expense was $36.3 million in the nine months ended September 26, 2020,
compared to $33.6 million in the nine months ended September 28, 2019. The
increase reflects higher average debt levels.
Interest income Interest income was $0.1 million in the three months ended
September 26, 2020, compared to $1.2 million in the three months ended
September 28, 2019. The decrease reflects lower average interest rates.
Interest income was $0.7 million in the nine months ended September 26, 2020,
compared to $4.0 million in the nine months ended September 28, 2019. The
decrease reflects lower average interest rates.
Other (income) expense, net Other income, net was $1.8 million in the three
months ended September 26, 2020 and consisted mainly of foreign currency
transaction gains of $2.9 million, partially offset by loss on debt
extinguishment costs of $0.9 million associated with payments on the Term Loan
Facility. Other expense, net was $0.9 million in the three months ended
September 28, 2019 and consisted mainly of foreign currency transaction losses
of $0.7 million.
Other income, net was $1.4 million in the nine months ended September 26, 2020
and consisted mainly of foreign currency transaction gains of $4.2 million,
partially offset by loss on debt extinguishment costs of $2.4 million associated
with payments on the Term Loan Facility. Other income, net was $121.3 million in
the nine months ended September 28, 2019 and consisted mainly of net proceeds of
$122.0 million received from the termination of the merger agreement with
Versum.
Income tax expense Income tax expense was $16.6 million and $39.5 million in the
three and nine months ended September 26, 2020, respectively, compared to income
tax expense of $0.9 million and $49.5 million in the three and nine months ended
September 28, 2019, respectively. The Company's year-to-date effective tax rate
at September 26, 2020 was 16.0%, compared to 20.1% at September 28, 2019.
The decrease in the year-to-date effective tax rate from 2019 to 2020 primarily
relates to a discrete share-based compensation benefit of $12.0 million and
lower accrued withholding taxes on foreign earnings. This decrease was partially
offset by a valuation allowance on foreign tax credit carryforwards of $3.4
million recorded during the quarter. The year-to-date effective tax rate at
September 28, 2019 included a discrete tax charge of $9.4 million related to the
reversal of a dividend received
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deduction that was recorded in 2018. This discrete charge was recorded based on
the issuance of final regulations during the quarter ended June 29, 2019, and
was partially offset by a benefit of $5.3 million recorded in the quarter based
on the filing of the federal tax return. Additionally, in 2019 the Company
received a termination fee from Versum based on the termination of the Versum
merger agreement and recorded a discrete charge of $23.5 million related to the
termination fee, net of associated expenses. As a result of the termination fee,
the Company released a valuation allowance on federal capital loss carryforwards
and recorded a discrete benefit of $2.9 million. The year-to-date income tax
expense at September 26, 2020 and September 28, 2019 includes discrete benefits
of $12.0 million and $3.3 million, respectively, recorded in connection with
share-based compensation.
Net income Due to the factors noted above, the Company recorded net income of
$79.3 million, or $0.58 per diluted share, in the three-month period ended
September 26, 2020, compared to net income of $40.8 million, or $0.30 per
diluted share, in the three months ended September 28, 2019. In the three months
ended September 26, 2020, net income, as a percentage of net sales, increased to
16.5% from 10.3% in the year-ago period.
In the nine months ended September 26, 2020, the Company recorded net income of
$208.3 million, or $1.53 per diluted share, compared to net income of $197.4
million, or $1.45 per diluted share, in the nine months ended September 28,
2019. In the nine months ended September 26, 2020, net income, as a percentage
of net sales, decreased to 15.5% from 17.0% in the year-ago period.
Non-GAAP Measures The Company's condensed consolidated financial statements are
prepared in conformity with accounting principles generally accepted in the
United States, or GAAP. The Company also utilizes certain non-GAAP financial
measures as a complement to financial measures provided in accordance with GAAP
in order to better assess and reflect trends affecting the Company's business
and results of operations. See the section "Non-GAAP Information" included below
in this section for additional detail, including the definition of certain
non-GAAP financial measures and the reconciliation of these non-GAAP measures to
the Company's GAAP measures.
The Company's principal non-GAAP financial measures are Adjusted EBITDA and
Adjusted Operating Income, together with related measures thereof, and non-GAAP
Earnings Per Share.
Adjusted EBITDA increased 32% to $142.4 million in the three months ended
September 26, 2020, compared to $107.5 million in the three months ended
September 28, 2019. In the three months ended September 26, 2020, Adjusted
EBITDA, as a percentage of net sales, increased to 30% from 27% in the year-ago
period.
Adjusted EBITDA increased 26% to $394.1 million in the nine months ended
September 26, 2020, compared to $311.8 million in the nine months ended
September 28, 2019. In the nine months ended September 26, 2020, Adjusted
EBITDA, as a percentage of net sales, increased to 29% from 27% in the year-ago
period.
Adjusted Operating Income increased 38% to $121.6 million in the three months
ended September 26, 2020, compared to $88.2 million in the three months ended
September 28, 2019. Adjusted Operating Income, as a percentage of net sales,
increased to 25% from 22% in the year-ago period.
Adjusted Operating Income increased 29% to $332.1 million in the nine months
ended September 26, 2020, compared to $257.2 million in the nine months ended
September 28, 2019. In the nine months ended September 26, 2020, Adjusted
Operating Income, as a percentage of net sales, increased to 25% from 22% in the
year-ago period.
Non-GAAP Earnings Per Share increased 34% to $0.67 in the three months ended
September 26, 2020, compared to $0.50 in the three months ended September 28,
2019. Non-GAAP Earnings Per Share increased 32% to $1.83 in the nine months
ended September 28, 2019, compared to $1.39 in the nine months ended
September 28, 2019.
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Segment Analysis
The Company reports its financial performance based on three reporting segments.
The following is a discussion of the results of operations of these three
business segments. See note 10 to the condensed consolidated financial
statements for additional information on the Company's three segments.
The following table presents selected net sales and segment profit data for the
Company's three reportable segments and unallocated general and administrative
expenses for the three months ended September 26, 2020, September 28, 2019 and
June 27, 2020, and the nine months ended September 26, 2020 and September 28,
2019.
                                                                 Three months ended                                                                    Nine months ended
                                              September 26,       September 28,                               September 26,       September 28,
(In thousands)                                    2020                2019              June 27, 2020             2020                2019
Specialty Chemicals and Engineered Materials
Net sales                                     $  150,480          $  

127,750 $ 146,213$ 440,907$ 379,772 Segment profit

                                    32,600              17,074                  32,938              98,208              65,505
Microcontamination Control
Net sales                                     $  193,541          $  

155,979 $ 183,758$ 536,560$ 463,870 Segment profit

                                    64,915              46,792                  62,137             177,219             137,241
Advanced Materials Handling
Net sales                                     $  144,370$  117,256$      126,434$  386,941$  340,835
Segment profit                                    33,266              17,077                  22,809              76,707              54,487

Unallocated general and administrative
expenses                                      $   12,271          $   

12,998 $ 9,956$ 28,741$ 51,640



Specialty Chemicals and Engineered Materials (SCEM)
For the third quarter of 2020, SCEM net sales increased to $150.5 million,
compared to $127.8 million in the comparable period last year. The sales
increase was due to increased sales of advanced deposition materials, cleaning
chemistries and advanced coatings, as well as additional sales of $3.0 million
attributable to the acquisitions of MPD in the third quarter of 2019 and Sinmat
in the first quarter of 2020. SCEM reported a segment profit of $32.6 million in
the third quarter of 2020, up 91% from $17.1 million in the year-ago period. The
segment profit increase was primarily due to higher gross profit related to
increased sales volume and the absence of cost of sales charge of $4.5 million
associated with the sale of inventory acquired in recent business acquisitions
that were recorded in the third quarter of 2019, partially offset by a 5%
increase in operating expenses, primarily due to recent acquisitions and higher
compensation costs.

For the nine months ended September 26, 2020, SCEM net sales increased to $440.9
million, compared to $379.8 million in the comparable period last year. The
sales increase was due to increased sales of advanced deposition materials,
cleaning chemistries and advanced coatings, as well as additional sales of $23.6
million attributable to the acquisitions of Digital Specialty Chemicals Limited,
or DSC, in the first quarter of 2019, MPD in the third quarter of 2019 and
Sinmat in the first quarter of 2020. SCEM reported a segment profit of $98.2
million in the nine months ended September 26, 2020, up 50% from $65.5
million in the year-ago period also due to higher sales levels, $5.1 million
less cost of sales charges associated with the sale of inventory acquired in
recent business acquisitions, partially offset by a 6% increase in operating
expenses, primarily due to recent acquisitions and higher compensation costs.
Microcontamination Control (MC)
For the third quarter of 2020, MC net sales increased to $193.5 million,
compared to $156.0 million in the comparable period last year. The sales
increase was mainly due to improved sales from liquid filtration and gas
filtration products, as well as additional sales of $3.7 million attributable to
the acquisition of Anow in the third quarter of 2019, MC reported a segment
profit of $64.9 million in the third quarter of 2020, up 39% from $46.8 million
in the year-ago period. The segment profit improvement was primarily due to
higher gross profit related to the increased sales volume and favorable product
mix, partially offset by a 16% increase in operating expenses due to recent
acquisitions and higher compensation costs.
For the nine months ended September 26, 2020, MC net sales increased to $536.6
million, compared to $463.9 million in the comparable period last year. The
sales increase was due to improved sales from liquid filtration and gas
purification products, as well as additional sales of $11.0 million attributable
to the acquisition of Anow in the third quarter of 2019. MC reported a segment
profit of $177.2 million in the nine months ended September 26, 2020,
up 29% from $137.2 million in the year-ago period. The segment profit
improvement was primarily due to higher gross profit related to the increased
sales volume and favorable product mix and $1.9 million less cost of sales
charges associated with the sale of inventory acquired in recent
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business acquisitions, partially offset by a 10% increase in operating expenses
due to recent acquisitions and higher compensation costs.
Advanced Materials Handling (AMH)
For the third quarter of 2020, AMH net sales increased to $144.4 million,
compared to $117.3 million in the comparable period last year. The sales
increase was mainly due to improved sales from high purity liquid containers,
fluid management products, sensing and control products and wafer handling
products, as well as additional sales of $3.0 million attributable to the
acquisition of GMTI in the third quarter of 2020. AMH reported a segment profit
of $33.3 million in the third quarter of 2020, up 95% from $17.1 million in the
year-ago period. The segment profit increase was primarily due to higher sales
volume, favorable product mix and a 3% decrease in operating expenses, primarily
due to lower spending and restructuring initiatives from the previous year.
For the nine months ended September 26, 2020, AMH net sales increased to $386.9
million, compared to $340.8 million in the comparable period last year. The
sales increase was mainly due to improved sales from high purity liquid
containers, fluid management products, sensing and control products and wafer
handling products, as well as additional sales of $3.0 million attributable to
the acquisition of GMTI in the third quarter of 2020. AMH reported a segment
profit of $76.7 million in the nine months ended September 26, 2020,
up 41% from $54.5 million in the year-ago period. The segment profit increase
was primarily due to higher sales volume, favorable product mix and a 6%
decrease in operating expenses, primarily due to lower spending and
restructuring initiatives from the previous year.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $12.3 million in the
third quarter of 2020, compared to $13.0 million in the comparable period last
year. The $0.7 million decrease mainly reflects a $5.4 million decrease in deal
and integration costs referenced in the discussion of SG&A above, offset
primarily by increased employee costs of $2.3 million.
Unallocated general and administrative expenses for the nine months ended
September 26, 2020 totaled $28.7 million, down from $51.6 million in the nine
months ended September 26, 2020. The $22.9 million decrease mainly reflects a
$26.0 million decrease in deal and integration costs referenced in the
discussion of SG&A above, offset primarily by increased employee costs of $1.4
million.

Liquidity and Capital Resources
We consider the following when assessing our liquidity and capital resources:
In thousands                   September 26, 2020      December 31, 2019
Cash and cash equivalents     $          447,972      $          351,911
Working capital                          899,077                 667,964
Total debt                             1,085,380                 936,484


The Company has historically financed its operations and capital requirements
through cash flow from its operating activities, long-term loans, lease
financing and borrowings under domestic and international short-term lines of
credit. Although there is uncertainty related to the anticipated impact of the
COVID-19 pandemic on the Company's future results, we believe our business
model, our current cash reserves and the recent steps we have taken to
strengthen our balance sheet, such as our issuance of $400 million aggregate
principal amount of 4.375% senior unsecured notes due April 15, 2028 and related
repayments under the Revolving Facility and Term Loan Facility, will help us to
manage our business through this crisis as we expect it to unfold. We have
reviewed numerous potential scenarios in connection with the impact of COVID-19
on the global economy and the semiconductor industry. Based on our analysis, we
believe our existing balances of domestic cash and cash equivalents and our
currently anticipated operating cash flows will be sufficient to meet our cash
needs arising in the ordinary course of business for the next twelve months. As
the opportunity arises, we may seek to take advantage of opportunities to raise
additional capital through additional debt financing or through public or
private sales of securities. If in the future our available liquidity is not
sufficient to meet the Company's operating and debt service obligations as they
come due, management would need to pursue alternative arrangements through
additional equity or debt financing in order to meet the Company's cash
requirements. There can be no assurance that any such financing would be
available on commercially acceptable terms, or at all. To date, in fiscal 2020,
we have not experienced difficulty accessing the capital and credit markets;
however, future volatility in the capital and credit markets may increase costs
associated with issuing debt instruments or affect our ability to access those
markets. In addition, it is possible that our ability to access the capital and
credit markets could be limited at a time when we would like, or need, to do so,
which could have an adverse impact on our ability to refinance maturing debt
and/or react to changing economic and business conditions.
In summary, our cash flows for each period were as follows:
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                                                                            Nine months ended
(in thousands)                                               September 26, 2020          September 28, 2019
Net cash provided by operating activities                   $          242,656          $          253,654
Net cash used in investing activities                                 (190,440)                   (349,981)
Net cash provided by (used in) financing activities                     44,352                    (101,828)
Increase (decrease) in cash and cash equivalents                        96,061                    (199,314)


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 $242.7 million in the nine months ended
September 26, 2020 compared to cash flows provided by operating activities of
$253.7 million in the nine months ended September 28, 2019. The decrease in cash
provided by operating activities was primarily due to changes in working capital
and other assets and liabilities, offset partially by higher net income. The net
change in working capital and other assets and liabilities resulted in a
decrease to cash provided by operations of $118.6 million for the nine months
ended September 26, 2020 compared to a decrease of $75.8 million for the nine
months ended September 28, 2019.
Changes in working capital and other assets and liabilities for the nine months
ended September 26, 2020 were driven by increases in accounts receivable,
inventories, accounts payable and refundable income taxes. The change for
accounts receivable was primarily due to the Company's quarter closing date
occurring several days prior to the end of the calendar month, the period during
which receivable collections are typically heavy, particularly for the Company's
Asia operations, as compared to the nine months ended September 28, 2019. The
change for inventory was driven by an increase in raw material purchases to
provide a buffer related to any potential supply chain issues related to
COVID-19 and any increase in business activity. The change for accounts payable
and accrued liabilities was primarily driven by the timing of payments of
accounts payable. In addition, the Company paid out a lower incentive
compensation payment for the nine months ended September 26, 2020 compared to
the Company's analogous payment for the nine months ended September 28, 2019.
Furthermore, the Company's incentive compensation accrual is higher at
September 26, 2020 than its incentive compensation accrual at September 28,
2019. The increase in refundable income taxes is due to a provision to return
true up related to the 2019 tax return.
Investing activities Cash flows used in investing activities totaled $190.4
million in the nine months ended September 26, 2020 compared to cash flows used
in investing activities of $350.0 million in the nine months ended September 28,
2019. The change was due to lower cash paid for acquisitions of businesses and
acquisition of property, plant and equipment.
Acquisition of property, plant and equipment totaled $79.6 million in the nine
months ended September 26, 2020, which primarily reflected investments in
equipment and tooling, compared to $86.4 million in the nine months ended
September 28, 2019, which primarily reflected investments in equipment and
tooling.
In the nine months ended September 26, 2020, the Company acquired Sinmat and
GMTI. The cash used to acquire Sinmat and GMTI for the nine months ended
September 26, 2020 was $111.1 million, net of cash acquired. The transactions
are described in further detail in note 3 to the Company's condensed
consolidated financial statements.
In the nine months ended September 28, 2019, the Company acquired DSC, MPD and
Anow. The cash used to acquire DSC, MPD and Anow for the nine months ended
September 28, 2019 was $266.4 million, net of cash acquired. These transactions
are described in further detail in note 3 to the Company's condensed
consolidated financial statements.
As of September 26, 2020, the Company expects its full-year capital expenditures
in 2020 to be approximately $120.0 million. As of September 26, 2020, the
Company had outstanding capital purchase obligations of $47.3 million for the
construction or purchase of plant and equipment not yet recorded in the
Company's condensed consolidated financial statements as the Company had not
received the related goods or property as of such date.
Financing activities Cash flows provided by financing activities totaled $44.4
million during the nine months ended September 26, 2020 compared to cash flows
used in financing activities of $101.8 million during the nine months ended
September 28, 2019. The change was primarily due to net long-term debt activity,
which was a net source of cash of $149.0 million in the nine months ended
September 26, 2020, compared to a net use of cash of $2.0 million in the
comparable period in 2019, and a $35.8 million decrease of repurchases of the
Company's common stock, partially offset by a $16.1 million deferred acquisition
payment related to our DSC acquisition, a $16.0 million increase in cash used to
pay taxes for net share settlements of equity awards and $4.0 million increase
in payments for debt issuance costs. In March 2020, the Company suspended its
share repurchase program, and beginning in the fourth quarter of 2020 the
Company recommenced its share repurchase program.
Our total dividend payments were $32.4 million in the nine months ended
September 26, 2020 compared to $29.8 million in the nine months ended
September 28, 2019. We have paid a cash dividend in each of the past 12
quarters. On October 14, 2020, the
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Board declared a quarterly cash dividend of $0.08 per share of common stock,
payable on November 18, 2020 to stockholders of record on October 28, 2020.
Other Liquidity and Capital Resources Considerations
The Company's Term Loan Facility matures on November 6, 2025 and bears interest
at a rate per annum of 2.2% at September 26, 2020. During the nine months ended
September 26, 2020, the Company made payments of $251.0 million on the Term Loan
Facility and had losses on debt extinguishment of $2.4 million. As of
September 26, 2020, the aggregate principal amount outstanding under the Term
Loan Facility was $145.0 million.
The Company's Revolving Facility provides for lending commitments in an
aggregate principal amount of up to $300.0 million maturing on November 6, 2023.
The Revolving Facility bears interest at a rate per annum equal to, at the
Company's option, either a base rate (such as prime rate) or LIBOR plus, in each
case, an applicable margin. At September 26, 2020, there was no balance
outstanding under the Revolving Facility and we had undrawn outstanding letters
of credit of $0.2 million.
Through September 26, 2020, the Company was in compliance with all applicable
financial covenants under its credit facilities.
As of September 26, 2020, we had $550.0 million aggregate principal amount of
4.625% senior unsecured notes due February 10, 2026 outstanding.
On April 30, 2020, the Company issued $400.0 million aggregate principal amount
of 4.375% senior unsecured notes due April 15, 2028. The Company paid debt
issuance costs of $4.0 million in connection with the issuance of the notes
during the nine months ended September 26, 2020. The transaction is described in
further detail in note 6 to the Company's condensed consolidated financial
statements.
The Company also has lines of credit with one banks that provide for borrowings
of Japanese yen for the Company's Japanese subsidiary, equivalent to an
aggregate of approximately $9.5 million. There were no outstanding borrowings
under these lines of credit at September 26, 2020.
As of September 26, 2020, the Company's sources of available funds were its cash
and cash equivalents of $448.0 million, funds available under the Revolving
Facility and international credit facilities and cash flow generated from
operations. As of September 26, 2020, the amount of cash and cash equivalents
held in certain of our foreign operations totaled approximately $231.3 million.
If we repatriate such funds, we will be required to pay income taxes in certain
U.S. states and applicable foreign withholding taxes on those amounts during the
period when such repatriation occurs. We have accrued taxes for the tax effect
of repatriating the funds to the U.S.
Off-Balance Sheet Arrangements
As of September 26, 2020, we did not have any off-balance sheet arrangements
that have, or are reasonably likely to have, a material current or future effect
on our financial condition, results of operations, liquidity, capital
expenditures or capital resources.
Contractual Obligations
There have been no significant changes to the contractual obligations reported
in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,
except for long-term debt. On April 30, 2020, the Company issued $400.0 million
aggregate principal amount of 4.375% senior unsecured notes due April 15, 2028.
The Company paid down $251.0 million on the Term Loan Facility during the nine
months ended September 26, 2020.
Recently adopted accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of accounting
pronouncements recently adopted.
Recently issued accounting pronouncements Refer to note 1 to the Company's
condensed consolidated financial statements for a discussion of accounting
pronouncements recently issued but not yet adopted.
Non-GAAP Information The Company's condensed consolidated financial statements
are prepared in conformity with GAAP.
The Company also utilizes certain non-GAAP financial measures as a complement to
financial measures provided in accordance with GAAP in order to better assess
and reflect trends affecting the Company's business and results of operations.
These non-GAAP financial measures include Adjusted EBITDA and Adjusted Operating
Income, together with related measures thereof, and non-GAAP Earnings Per Share,
or EPS, as well as certain other supplemental non-GAAP financial measures
included in the discussion of the Company's financial results.
Adjusted EBITDA, a non-GAAP financial measure, is defined by the Company as net
income before (1) income tax expense, (2) interest expense, (3) interest income,
(4) other (income) expense, net, (5) charge for fair value write-up of acquired
inventory sold, (6) deal and transaction costs, (7) integration costs, (8)
severance and restructuring costs, (9) amortization of intangible assets and
(10) depreciation. Adjusted Operating Income, another non-GAAP financial
measure, is defined by the
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Company as Adjusted EBITDA exclusive of the depreciation addback noted above.
The Company also utilizes non-GAAP financial measures whereby Adjusted EBITDA
and Adjusted Operating Income are each divided by the Company's net sales to
derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.
Non-GAAP EPS, a non-GAAP financial measure, is defined by the Company as net
income before (1) charge for fair value write-up of acquired inventory sold, (2)
deal and transaction costs, (3) integration costs, (4) severance and
restructuring costs, (5) loss on debt extinguishment, (6) Versum termination
fee, net, (7) amortization of intangible assets, (8) tax effect of legal entity
restructuring and (9) the tax effect of the foregoing adjustments to net income,
stated on a per share basis.
The Company provides supplemental non-GAAP financial measures to help management
and investors to better understand its business and believes these measures
provide investors and analysts additional and meaningful information for the
assessment of the Company's ongoing results. Management also uses these non-GAAP
measures to assist in the evaluation of the performance of the Company's
business segments and to make operating decisions.
Management believes the Company's non-GAAP measures help indicate the Company's
baseline performance before certain gains, losses or other charges that may not
be indicative of the Company's business or future outlook and offer a useful
view of business performance in that the measures provide a more consistent
means of comparing performance. The Company believes the non-GAAP measures aid
investors' overall understanding of the Company's results by providing a higher
degree of transparency for such items and providing a level of disclosure that
will help investors understand how management plans, measures and evaluates the
Company's business performance. Management believes that the inclusion of
non-GAAP measures provides greater consistency in its financial reporting and
facilitates investors' understanding of the Company's historical operating
trends by providing an additional basis for comparisons to prior periods.
Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in
evaluations of the Company's operating performance by excluding items that
management does not consider as relevant in the results of its ongoing
operations. Internally, these non-GAAP measures are used by management for
planning and forecasting purposes, including the preparation of internal
budgets; for allocating resources to enhance financial performance; for
evaluating the effectiveness of operational strategies; and for evaluating the
Company's capacity to fund capital expenditures, secure financing and expand its
business.
In addition, and as a consequence of the importance of these non-GAAP financial
measures in managing its business, the Company's Board of Directors uses
non-GAAP financial measures in the evaluation process to determine management
compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA,
Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate
the overall operating performance of firms in the Company's industry.
Additionally, lenders or potential lenders use Adjusted EBITDA measures to
evaluate the Company's creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in
isolation, as a substitute for, or superior to, financial measures or
information provided in accordance with GAAP. Management strongly encourages
investors to review the Company's condensed consolidated financial statements in
their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations, including
but not limited to:
First, non-GAAP financial measures are not standardized. Accordingly, the
methodology used to produce the Company's non-GAAP financial measures is not
computed under GAAP and may differ notably from the methodology used by other
companies. For example, the Company's non-GAAP measure of Adjusted EBITDA may
not be directly comparable to EBITDA or an adjusted EBITDA measure reported by
other companies.
Second, the Company's non-GAAP financial measures exclude items such as
amortization and depreciation that are recurring. Amortization of intangibles
and depreciation have been, and will continue to be for the foreseeable future,
a significant recurring expense with an impact upon the Company's results of
operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance that the Company will not have future charges for
fair value write-up of acquired inventory, restructuring activities, deal costs,
integration costs, or similar items and, therefore, may need to record
additional charges (or credits) associated with such items, including the tax
effects thereon. The exclusion of these items in the Company's non-GAAP measures
should not be construed as an implication that these costs are unusual,
infrequent or non-recurring.
Management considers these limitations by providing specific information
regarding the GAAP amounts excluded from these non-GAAP financial measures and
evaluating these non-GAAP financial measures together with their most directly
comparable financial measures calculated in accordance with GAAP. The
calculations of Adjusted EBITDA, Adjusted Operating Income, and non-GAAP EPS,
and reconciliations between these financial measures and their most directly
comparable GAAP equivalents, are presented below in the accompanying tables.
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Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted
EBITDA
                                                     Three months ended                                              Nine months ended
                                              September 26,       September 28,
(In thousands)                                    2020                2019             September 26, 2020         September 28, 2019
Net sales                                     $  480,987          $ 

394,147 $ 1,341,719$ 1,164,068 Net income

                                    $   79,303          $   

40,767 $ 208,345 $ 197,422 Net income - as a % of net sales

                    16.5  %             10.3  %                    15.5  %                    17.0  %
Adjustments to net income
Income tax expense                                16,559                 876                     39,542                     49,533
Interest expense                                  12,781              11,388                     36,345                     33,587
Interest income                                     (130)             (1,172)                      (664)                    (4,020)
Other (income) expense, net                       (1,752)                934                     (1,351)                  (121,329)
GAAP - Operating income                          106,761              52,793                    282,217                    155,193
Operating margin -as a % of net sales               22.2  %             13.4  %                    21.0  %                    13.3  %
Charge for fair value write-up of acquired
inventory sold                                       229               4,483                        590                      7,333
Deal and transaction costs                           642               4,891                      2,576                     25,191
Integration costs                                  1,260               2,398                      1,663                      6,582
Severance and restructuring costs                    971               8,503                      3,863                     12,494

Amortization of intangible assets                 11,749              15,152                     41,176                     50,400
Adjusted operating income                        121,612              88,220                    332,085                    257,193
Adjusted operating margin - as a % of net
sales                                               25.3  %             22.4  %                    24.8  %                    22.1  %
Depreciation                                      20,777              19,306                     62,064                     54,623
Adjusted EBITDA                               $  142,389          $  

107,526 $ 394,149 $ 311,816


Adjusted EBITDA - as a % of net sales               29.6  %             27.3  %                    29.4  %                    26.8  %


Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income
and Earnings per Share
                                                        Three months ended                                    Nine months ended
                                                September 26,       

September 28, September 26, September 28, (In thousands, except per share data)

                2020                2019                2020                2019
Net income                                      $    79,303$   40,767$  208,345$  197,422
Adjustments to net income
Charge for fair value write-up of acquired
inventory sold                                          229               4,483                 590               7,333
Deal and transaction costs                              642               4,891               2,576              25,602
Integration costs                                     1,260               2,398               1,663               6,582
Severance and restructuring costs                       971               8,503               3,863              12,494
Loss on debt extinguishment                             908                   -               2,378                   -
Versum termination fee, net                               -                   -                   -            (122,000)

Amortization of intangible assets                    11,749              15,152              41,176              50,400
Tax effect of legal entity restructuring                  -                   -                   -               9,398
Tax effect of adjustments to net income and
certain discrete tax items1                          (3,602)             (8,015)            (11,979)              2,274

Non-GAAP net income                             $    91,460$   68,179$  248,612$  189,505

Diluted earnings per common share               $      0.58$     0.30$     1.53$     1.45
Effect of adjustments to net income                    0.09                0.20                0.30               (0.06)

Diluted non-GAAP earnings per common share $ 0.67$ 0.50$ 1.83$ 1.39

1The tax effect of pre-tax adjustments to net income was calculated using the applicable marginal tax rate for each respective year.

                                       39

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