ENTEGRIS, INC. The following discussion and analysis of the Company's condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes thereto included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should review the section entitled "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 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 eachDecember 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 endMarch 28, 2020 ,June 27, 2020 ,September 26, 2020 andDecember 31, 2020 . Unaudited information for the three and nine months endedSeptember 26, 2020 andSeptember 28, 2019 and the financial position as ofSeptember 26, 2020 andDecember 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), 25 -------------------------------------------------------------------------------- Table of Contents 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 inWuhan, China inDecember 2019 , and subsequently declared a pandemic by theWorld 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 employeeswho 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 employeeswho 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 theU.S. ,Japan ,Korea ,China ,Malaysia , andTaiwan , 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 ofMalaysia issued an order that significantly reduced the number of employeeswho 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 inHangzhou, China ,San Luis Obispo, California andBedford, 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 employeeswho 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 26 -------------------------------------------------------------------------------- Table of Contents 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. OnApril 30, 2020 , we issued$400 million aggregate principal amount of 4.375% senior unsecured notes dueApril 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 endedSeptember 26, 2020 , net sales increased 22% to$481.0 million , compared to$394.1 million for the three months endedSeptember 28, 2019 . Net sales for the three months endedSeptember 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 endedSeptember 26, 2020 increased to$226.0 million , up from$170.4 million for the three months endedSeptember 28, 2019 . The Company experienced a 47.0% gross margin for the three months endedSeptember 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 endedSeptember 26, 2020 , compared to net income of$40.8 million , or$0.30 per diluted share, a year ago. 27 -------------------------------------------------------------------------------- Table of Contents OnJuly 10, 2020 , the Company acquiredGlobal Measurement Technologies, Inc. , or GMTI, an analytical instrument provider for critical processes in semiconductor production, and its manufacturing partnerClean 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 atSeptember 26, 2020 , compared with cash and cash equivalents of$351.9 million atDecember 31, 2019 . The Company had outstanding debt of$1,085.4 million atSeptember 26, 2020 , compared to$936.5 million atDecember 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 inthe United States . The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSecurities 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. 28 -------------------------------------------------------------------------------- Table of Contents Three and Nine Months EndedSeptember 26, 2020 Compared to Three and Nine Months EndedSeptember 28, 2019 and Three Months EndedJune 27, 2020 The following table compares operating results for the three and nine months endedSeptember 26, 2020 with results for the three and nine months endedSeptember 28, 2019 and three months endedJune 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, 2020 September 28, 2019 June 27, 2020 September 26, 2020 September 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 endedSeptember 26, 2020 , net sales increased by 22% to$481.0 million , compared to$394.1 million for the three months endedSeptember 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 endedSeptember 26, 2020 andSeptember 28, 2019 and the percentage increase in sales for the three months endedSeptember 26, 2020 compared to the sales for the three months endedSeptember 28, 2019 were as follows: 29
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Table of Contents
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 endedSeptember 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 endedSeptember 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 endedSeptember 26, 2020 andSeptember 28, 2019 and the percentage increase in sales for the nine months endedSeptember 26, 2020 compared to the sales for the nine months endedSeptember 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 inNorth 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 inTaiwan was primarily driven by demand for our Advanced Materials Handling and Microcontamination Control products. The increase in sales to customers inJapan was primarily driven by demand for our 30 -------------------------------------------------------------------------------- Table of Contents Microcontamination Control and Specialty Chemicals and Engineered Materials products. The increase in sales to customers inChina 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 inEurope was driven by demand for our Microcontamination Control products. Gross profit The Company's gross profit increased 33% for the three months endedSeptember 26, 2020 to$226.0 million , compared to$170.4 million for the three months endedSeptember 28, 2019 . The Company experienced a 47.0% gross margin rate for the three months endedSeptember 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 endedSeptember 26, 2020 andSeptember 28, 2019 , respectively. For the nine months endedSeptember 26, 2020 , the Company's gross profit increased 20% to$618.9 million , compared to$514.0 million for the nine months endedSeptember 28, 2019 . The Company experienced a 46.1% gross margin rate for the nine months endedSeptember 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 endedSeptember 26, 2020 andSeptember 28, 2019 , respectively. Selling, general and administrative expenses SG&A expenses were flat at$71.2 million for both the three months endedSeptember 26, 2020 andSeptember 28, 2019 . An analysis of the factors underlying the change in SG&A is presented in the following table: (In thousands) Selling, general and administrative expenses in the quarter ended September 28, 2019$ 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
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 endedSeptember 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
Deal and transaction costs were$22.6 million lower in the nine months endedSeptember 26, 2020 compared to the nine months endedSeptember 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 endedSeptember 26, 2020 compared to$31.2 million in the year-ago period. An analysis of the factors underlying the increase in ER&D is presented in the following table: 31 -------------------------------------------------------------------------------- Table of Contents (In thousands) Engineering, research and development expenses in the quarter ended September 28, 2019$ 31,173 Employee costs 3,403 Depreciation 415 Project materials 1,218 Other increases, net 86
Engineering, research and development expenses in the quarter
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
Amortization expenses Amortization of intangible assets was$11.7 million in the three months endedSeptember 26, 2020 , compared to$15.2 million for the three months endedSeptember 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 endedSeptember 26, 2020 , compared to$50.4 million for the nine months endedSeptember 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 endedSeptember 26, 2020 compared to$11.4 million in the three months endedSeptember 28, 2019 . The increase primarily reflects higher average debt levels. Interest expense was$36.3 million in the nine months endedSeptember 26, 2020 , compared to$33.6 million in the nine months endedSeptember 28, 2019 . The increase reflects higher average debt levels. Interest income Interest income was$0.1 million in the three months endedSeptember 26, 2020 , compared to$1.2 million in the three months endedSeptember 28, 2019 . The decrease reflects lower average interest rates. Interest income was$0.7 million in the nine months endedSeptember 26, 2020 , compared to$4.0 million in the nine months endedSeptember 28, 2019 . The decrease reflects lower average interest rates. Other (income) expense, net Other income, net was$1.8 million in the three months endedSeptember 26, 2020 and consisted mainly of foreign currency transaction gains of$2.9 million , partially offset by loss on debt extinguishment costs of$0.9 million associated with payments on the Term Loan Facility. Other expense, net was$0.9 million in the three months endedSeptember 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 endedSeptember 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 endedSeptember 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 endedSeptember 26, 2020 , respectively, compared to income tax expense of$0.9 million and$49.5 million in the three and nine months endedSeptember 28, 2019 , respectively. The Company's year-to-date effective tax rate atSeptember 26, 2020 was 16.0%, compared to 20.1% atSeptember 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 atSeptember 28, 2019 included a discrete tax charge of$9.4 million related to the reversal of a dividend received 32 -------------------------------------------------------------------------------- Table of Contents deduction that was recorded in 2018. This discrete charge was recorded based on the issuance of final regulations during the quarter endedJune 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 atSeptember 26, 2020 andSeptember 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 endedSeptember 26, 2020 , compared to net income of$40.8 million , or$0.30 per diluted share, in the three months endedSeptember 28, 2019 . In the three months endedSeptember 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 endedSeptember 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 endedSeptember 28, 2019 . In the nine months endedSeptember 26, 2020 , net income, as a percentage of net sales, decreased to 15.5% from 17.0% in the year-ago period. Non-GAAP MeasuresThe Company's condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States , or GAAP. The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company's business and results of operations. See the section "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 endedSeptember 26, 2020 , compared to$107.5 million in the three months endedSeptember 28, 2019 . In the three months endedSeptember 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 endedSeptember 26, 2020 , compared to$311.8 million in the nine months endedSeptember 28, 2019 . In the nine months endedSeptember 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 endedSeptember 26, 2020 , compared to$88.2 million in the three months endedSeptember 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 endedSeptember 26, 2020 , compared to$257.2 million in the nine months endedSeptember 28, 2019 . In the nine months endedSeptember 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 endedSeptember 26, 2020 , compared to$0.50 in the three months endedSeptember 28, 2019 . Non-GAAP Earnings Per Share increased 32% to$1.83 in the nine months endedSeptember 28, 2019 , compared to$1.39 in the nine months endedSeptember 28, 2019 . 33 -------------------------------------------------------------------------------- Table of Contents Segment Analysis The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See note 10 to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments and unallocated general and administrative expenses for the three months endedSeptember 26, 2020 ,September 28, 2019 andJune 27, 2020 , and the nine months endedSeptember 26, 2020 andSeptember 28, 2019 . Three months ended Nine months ended September 26, September 28, September 26, September 28, (In thousands) 2020 2019 June 27, 2020 2020 2019 Specialty Chemicals and Engineered Materials Net sales$ 150,480 $
127,750
32,600 17,074 32,938 98,208 65,505
Microcontamination Control
Net sales $ 193,541 $
155,979
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
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 endedSeptember 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 ofDigital 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 endedSeptember 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 endedSeptember 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 endedSeptember 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 34 -------------------------------------------------------------------------------- Table of Contents 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 endedSeptember 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 endedSeptember 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 endedSeptember 26, 2020 totaled$28.7 million , down from$51.6 million in the nine months endedSeptember 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 dueApril 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: 35
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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
$ 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,
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
1The tax effect of pre-tax adjustments to net income was calculated using the applicable marginal tax rate for each respective year.
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