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, 2020 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 supplier of advanced materials and process solutions for the semiconductor and other high-technology industries. Our mission is to help our customers improve their productivity, performance and technology by providing solutions for the most advanced manufacturing environments. We leverage our unique breadth of capabilities to create mission-critical microcontamination control products, specialty chemicals and advanced materials handling solutions that maximize manufacturing yields, reduce manufacturing costs and enable higher device performance for our customers. Our customized materials solutions enable the highest levels of performance essential to the manufacture of semiconductors. As our customers introduce more complex architectures and search for new materials with better electrical and structural properties to improve the performance of their devices, they rely on Entegris as a trusted partner to address these challenges. We understand these challenges and have solutions to address them, such as our advanced deposition materials, implant gases, formulated cleaning chemistries and selective etch chemistries. Our customers also require greater end-to-end materials purity and integrity in their manufacturing processes that, when combined with smaller dimensions and more complex architectures, can be challenging to achieve. To enable the use of new metals and the further miniaturization of chips, and to maximize yield and increase long-term device reliability, we provide products such as our advanced liquid and gas filtration and purification products that help to selectively remove new classes of contaminants throughout the semiconductor supply chain. In addition, to ensure purity levels are maintained across the entire supply chain, from bulk manufacturing, to transportation to and delivery through a fab, to application onto the wafer, we provide high-purity packaging and materials handling products. Our business is organized and operated in three operating segments, which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, 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, life sciences and other high-technology industries. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. With the technology, capabilities and complementary product portfolios from these segments, we believe we are uniquely positioned to collaborate across divisions to create new, co-optimized and increasingly integrated solutions for our customers. For example, our SCEM segment offers a highly selective nitride etch chemistry, our MC segment provides a liquid filter that is specifically matched to that formulation and our AMH segment ensures the integrity of the product as it is moved to and through the fab environment. See note 8 to the condensed consolidated financial statements for additional information on the Company's three segments. The Company's fiscal year is the calendar period ending eachDecember 31 . The Company's fiscal quarters consist of 13-week or 14-week periods that end on a Saturday. The Company's fiscal quarters in 2021 endApril 3, 2021 ,July 3, 2021 ,October 2, 2021 andDecember 31, 2021 . Unaudited information for the three months endedApril 3, 2021 andMarch 28, 2020 and the financial position as ofApril 3, 2021 andDecember 31, 2020 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 19 -------------------------------------------------------------------------------- Table of Contents 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), 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 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, masking recommendations and mandates, 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 in the local area. 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 that COVID-19 may have 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, the development, distribution, efficacy and acceptance of vaccines and how quickly and to what extent normal economic and operating conditions can resume. Health and Safety Commencing in the first quarter of 2020, 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, 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 and other access controls 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 inthe United States ,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, inMarch 2020 the government ofMalaysia issued an order that significantly reduced the number of employees who could be physically present to operate our Malaysian plant, which temporarily reduced the productivity of that plant. The government ofMalaysia issued a similar order restricting movement throughout that country inJanuary 2021 . Our Malaysian plant is operating at normal capacity as of the date of this filing. In addition to reduced productivity, constraints and limits imposed on our operations may slow or diminish our research and development and customer qualification activities. During 2020, we experienced brief interruptions in operations at our sites inHangzhou, China ,San Luis Obispo, California andBedford, Massachusetts and so far during 2021 we have experienced minor interruptions in operations at our site inSan Luis Obispo, California and a brief construction delay to an expansion of our facility inToronto, Canada . While governmental measures may be modified, extended or reimposed, we expect that, absent a significant surge in infections in the relevant local area or within our workforce or those of our suppliers, our manufacturing and research and development facilities will remain operational, largely at or near normal 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. We do not currently expect that our operations will be materially adversely affected by significant absenteeism. In addition, we have incurred incremental employee compensation related to the COVID-19 pandemic. For example, since April 20 -------------------------------------------------------------------------------- Table of Contents 2020, we have awarded certain of our employees who are required to physically report to a manufacturing facility in order to perform their jobs during the COVID-19 crisis with a special appreciation bonus for their efforts in sustaining our production continuity. 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 difficulties maintaining operations in light of government-ordered restrictions, shelter-in-place mandates and outbreaks of infection within their workforces. As the pandemic continues, our suppliers may face challenges in maintaining their level of supply as a result of these or other factors. For example, as a result of the COVID-19 pandemic, during the first half of 2020, 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 to obtain raw materials or components required to manufacture our products and thus require us to increase our safety stocks of certain raw materials or components, adversely affecting our operations. To mitigate the risk of potential supply interruptions from the COVID-19 pandemic, during 2020 and into 2021, 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 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 While the COVID-19 pandemic has caused economic and demand uncertainty, during the first quarter of 2021 we continued to see strong demand from leading-edge customers associated with end-uses in servers and other data center applications. We believe that a portion of the orders that we received in the first quarter of 2021 may have been a result of customers increasing their inventory to reduce their exposure to risks of future supply disruptions due to COVID-19 or global logistics constraints, which could offset demand for our products in the future. We anticipate that the pandemic will continue to contribute to global economic uncertainty, which could ultimately harm demand for our products. Liquidity Although there is uncertainty regarding the 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. InApril 2021 , we announced and priced a private offering of$400 million aggregate principal amount of 3.625% senior unsecured notes due 2029, or the 2029 Notes. We plan to use the proceeds of the offering, together with cash on hand and approximately$75 million borrowed under our senior secured revolving facility due 2023, or the Revolving Facility, to pay the redemption price in full of the$550 million aggregate principal amount of 4.625% senior unsecured notes due 2026 that are currently outstanding, or the 2026 Notes, and to pay certain fees and expenses related to the offering. In addition, 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 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, which totaled$171.9 million as ofApril 3, 2021 , and our currently anticipated operating cash flows, after taking into account the anticipated issuance of the 2029 Notes and the use of net proceeds, cash on hand and borrowings to fund the redemption of the 2026 Notes, 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 and requirements or as we otherwise see fit to protect the health and safety of our employees, customers, partners and suppliers. 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. See Item 1A, "Risk Factors," in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for additional information regarding risks associated with the COVID-19 pandemic, including under the caption "The COVID-19 pandemic and ensuing governmental responses could materially adversely affect our financial condition and results of operations." 21 -------------------------------------------------------------------------------- Table of Contents Overall Summary of Financial Results For the three months endedApril 3, 2021 , net sales increased 24% to$512.8 million , compared to$412.3 million for the three months endedMarch 28, 2020 . Total net sales increased primarily as a result of strong industry conditions, several node transitions and strong overall demand for the Company's products and solutions. Net sales for the three months endedApril 3, 2021 included sales of$3.2 million from acquired businesses and favorable foreign currency translation effects of$5.4 million . The Company's gross profit for the three months endedApril 3, 2021 increased to$235.0 million , up from$185.5 million for the three months endedMarch 28, 2020 . The Company experienced a 45.8% gross margin for the three months endedApril 3, 2021 , compared to 45.0% 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 Company's selling, general and administrative, or SG&A, expense increased by$12.5 million for the three months endedApril 3, 2021 compared to the year-ago quarter, mainly due to higher employee costs resulting from increased headcount, benefits and merit increases. As a result of the aforementioned factors, the Company reported net income of$84.7 million , or$0.62 per diluted share, for the quarter endedApril 3, 2021 , compared to net income of$61.0 million , or$0.45 per diluted share, a year ago. OnApril 16, 2021 , the Company announced that it had priced its private offering of the 2029 Notes. The 2029 Notes will be senior unsecured obligations of the Company and will be guaranteed by certain subsidiaries of the Company. The issuance of the 2029 Notes is expected to close onApril 30, 2021 , subject to customary closing conditions. Cash and cash equivalents were$548.5 million atApril 3, 2021 , compared with cash and cash equivalents of$580.9 million atDecember 31, 2020 . The Company had outstanding long-term debt (excluding current maturities) of$1,086.2 million atApril 3, 2021 , compared to$1,085.8 million atDecember 31, 2020 . Critical Accounting Policies Management's discussion and analysis of financial condition and results of operations are based upon the Company's condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States . The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company's condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year endedDecember 31, 2020 , filed with theSecurities and Exchange Commission onFebruary 5, 2021 . On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to business acquisitions. There have been no material changes in these aforementioned critical accounting policies. 22 -------------------------------------------------------------------------------- Table of Contents Three Months EndedApril 3, 2021 Compared to Three Months EndedMarch 28, 2020 The following table compares operating results for the three months endedApril 3, 2021 andMarch 28, 2020 both in dollars and as a percentage of net sales, for each caption. Three months ended (Dollars in thousands) April 3, 2021 March 28, 2020 Net sales$ 512,844 100.0 %$ 412,327 100.0 % Cost of sales 277,858 54.2 226,849 55.0 Gross profit 234,986 45.8 185,478 45.0 Selling, general and administrative expenses 71,389 13.9 58,891 14.3 Engineering, research and development expenses 37,748 7.4 29,632 7.2 Amortization of intangible assets 11,871 2.3 16,211 3.9 Operating income 113,978 22.2 80,744 19.6 Interest expense 11,652 2.3 10,559 2.6 Interest income (71) - (321) (0.1) Other expense, net 4,330 0.8 878 0.2 Income before income taxes 98,067 19.1 69,628 16.9 Income tax expense 13,391 2.6 8,622 2.1 Net income$ 84,676 16.5 %$ 61,006 14.8 % Net sales For the three months endedApril 3, 2021 , net sales increased by 24% to$512.8 million , compared to$412.3 million for the three months endedMarch 28, 2020 . 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 March 28, 2020 $ 412,327
Increase associated with volume, pricing and mix 91,865
Increase associated with effect of foreign currency translation 5,411
Increase associated with acquired businesses 3,241
Net sales in the quarter ended April 3, 2021 $ 512,844
The Company's sales benefited from strong industry conditions, several node transitions and strong overall demand for the Company's products and solutions compared to the year-ago quarter. Total net sales also reflected net sales associated with recent acquisitions of$3.2 million and favorable foreign currency translation effects of$5.4 million . On a geographic basis, sales percentage by customers' country or region for the three months endedApril 3, 2021 andMarch 28, 2020 and the percentage increase (decrease) in sales for the three months endedApril 3, 2021 compared to the sales for the three months endedMarch 28, 2020 were as follows: Three months ended Percentage increase April 3, 2021 March 28, 2020 (decrease) in sales North America 23 % 25 % 18 % Taiwan 20 % 22 % 10 % China 16 % 11 % 83 % South Korea 14 % 13 % 30 % Japan 14 % 13 % 28 % Europe 8 % 8 % 14 % Southeast Asia 5 % 7 % (5 %) The increase in sales to customers inNorth America ,Taiwan ,South Korea ,Japan andChina was primarily driven by a general increase in demand for products in all three of the Company's segments. The increase in sales fromEurope primarily relates to higher sales of Advanced Materials Handling products. The decrease in sales fromSoutheast Asia primarily relates to lower demand for products from our SCEM segment. Gross profit The Company's gross profit increased 27% for the three months endedApril 3, 2021 to$235.0 million , compared to$185.5 million for the three months endedMarch 28, 2020 . The Company experienced a 45.8% gross margin rate for the 23 -------------------------------------------------------------------------------- Table of Contents three months endedApril 3, 2021 , compared to 45.0% 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. Selling, general and administrative expenses SG&A expenses were$71.4 million in the three months endedApril 3, 2021 , compared to$58.9 million in the year-ago period. An analysis of the factors underlying the change in SG&A expenses is presented in the following table: (In thousands) Selling, general and administrative expenses in the quarter ended March 28, 2020$ 58,891 Employee costs 12,687 Integration costs 1,996 Deal and transaction costs (1,431) Other decreases, net (754)
Selling, general and administrative expenses in the quarter ended
Engineering, research and development expenses The Company's engineering, research and development, or ER&D, efforts focus on the support or extension of current product lines and the development of new products and manufacturing technologies. ER&D expenses were$37.7 million in the three months endedApril 3, 2021 compared to$29.6 million in the year-ago period. An analysis of the factors underlying the increase in ER&D is presented in the following table: (In thousands) Engineering, research and development expenses in the quarter ended March 28, 2020$ 29,632 Employee costs 5,640 Project materials 1,835 Other increases, net 641 Engineering, research and development expenses in the quarter ended April 3, 2021$ 37,748 Amortization expenses Amortization of intangible assets was$11.9 million in the three months endedApril 3, 2021 , compared to$16.2 million for the three months endedMarch 28, 2020 . The decrease primarily reflects the elimination of amortization expense of$5.0 million for identifiable intangible assets acquired in acquisitions that became fully amortized in previous periods, partially offset by additional amortization expense of$0.5 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$11.7 million in the three months endedApril 3, 2021 , compared to$10.6 million in the three months endedMarch 28, 2020 . The increase primarily reflects higher average debt levels. Interest income Interest income was$0.1 million in the three months endedApril 3, 2021 , compared to$0.3 million in the three months endedMarch 28, 2020 . The decrease reflects lower average interest rates. Other expense, net Other expense, net was$4.3 million in the three months endedApril 3, 2021 and consisted mainly of foreign currency transaction losses of$4.3 million . Other expense, net was$0.9 million in the three months endedMarch 28, 2020 and consisted mainly of foreign currency transaction losses of$0.6 million . Income tax expense Income tax expense was$13.4 million in the three months endedApril 3, 2021 , compared to income tax expense of$8.6 million in the three months endedMarch 28, 2020 , respectively. The Company's year-to-date effective tax rate atApril 3, 2021 was 13.7%, compared to 12.4% atMarch 28, 2020 . The income tax expense for the three months endedApril 3, 2021 andMarch 28, 2020 include discrete benefits of$7.5 million and$5.0 million , respectively, recorded in connection with share-based compensation. The increase in the effective tax rate from 2020 to 2021 primarily relates to a valuation allowance on federal foreign tax credits generated in 2021 of$1.4 million . Net income Due to the factors noted above, the Company recorded net income of$84.7 million , or$0.62 per diluted share, in the three-month period endedApril 3, 2021 , compared to net income of$61.0 million , or$0.45 per diluted share, in the three months endedMarch 28, 2020 . In the three months endedApril 3, 2021 , net income, as a percentage of net sales, increased to 16.5% from 14.8% in the year-ago period. Non-GAAP Financial MeasuresThe Company's condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted inthe United States , or GAAP. The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company's business and results of operations. See the section "Non-GAAP Information" included 24 -------------------------------------------------------------------------------- Table of Contents 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 25% to$150.1 million in the three months endedApril 3, 2021 , compared to$120.3 million in the three months endedMarch 28, 2020 . In the three months endedApril 3, 2021 , Adjusted EBITDA, as a percentage of net sales, was flat at 29% compared to the year-ago period. Adjusted Operating Income increased 29% to$128.0 million in the three months endedApril 3, 2021 , compared to$99.6 million in the three months endedMarch 28, 2020 . Adjusted Operating Income, as a percentage of net sales, increased to 25% from 24% in the year-ago period. Non-GAAP Earnings Per Share increased 27% to$0.70 in the three months endedApril 3, 2021 , compared to$0.55 in the three months endedMarch 28, 2020 . The increases in adjusted EBITDA, adjusted operating income and non-GAAP earnings per share are generally attributable to the increases in sales and gross profit. Segment Analysis The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. See note 8 to the condensed consolidated financial statements for additional information on the Company's three segments. The following table presents selected net sales and segment profit data for the Company's three reportable segments, along with unallocated general and administrative expenses, for the three months endedApril 3, 2021 andMarch 28, 2020 . Three months ended (In thousands) April 3, 2021 March 28, 2020
Specialty Chemicals and Engineered Materials Net sales$ 166,541 $ 144,214 Segment profit 34,556 32,670 Microcontamination Control Net sales$ 207,099 $ 159,261 Segment profit 70,566 50,167 Advanced Materials Handling Net sales$ 148,541 $ 116,137 Segment profit 32,095 20,632 Unallocated general and administrative expenses$ 11,368 $ 6,514 Specialty Chemicals and Engineered Materials (SCEM) For the first quarter of 2021, SCEM net sales increased to$166.5 million , compared to$144.2 million in the comparable period last year. The sales increase was due to increased sales of advanced deposition materials, cleaning chemistries, specialty gases and advanced coatings. SCEM reported a segment profit of$34.6 million in the first quarter of 2021, up 6% from$32.7 million in the year-ago period. The segment profit increase was primarily due to higher gross profit related to increased sales volume, partially offset by a 17% increase in operating expenses, primarily due to higher compensation costs. Microcontamination Control (MC) For the first quarter of 2021, MC net sales increased to$207.1 million , compared to$159.3 million in the comparable period last year. The sales increase was mainly due to improved sales from liquid filtration and gas filtration products. MC reported a segment profit of$70.6 million in the first quarter of 2021, up 41% from$50.2 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to increased sales volume and favorable product mix, partially offset by a 24% increase in operating expenses due to higher compensation costs. Advanced Materials Handling (AMH) For the first quarter of 2021, AMH net sales increased to$148.5 million , compared to$116.1 million in the comparable period last year. The sales increase was mainly due to improved sales from all major semi-related product platforms, sales of our Aramus high purity bags, as well as additional sales of$2.7 million attributable to the acquisition of Global Measurement 25 -------------------------------------------------------------------------------- Table of ContentsTechnologies, Inc. , or GMTI, in the third quarter of 2020. AMH reported a segment profit of$32.1 million in the first quarter of 2021, up 56% from$20.6 million in the year-ago period. The segment profit increase was primarily due to higher sales volume and favorable product mix, partially offset by a 16% increase in operating expenses due to higher compensation costs. Unallocated general and administrative expenses Unallocated general and administrative expenses totaled$11.4 million in the first quarter of 2021, compared to$6.5 million in the comparable period last year. The$4.9 million increase mainly reflects a$5.1 million increase in employee costs. Liquidity and Capital Resources We consider the following when assessing our liquidity and capital resources: In thousands April 3, 2021 December 31, 2020 Cash and cash equivalents$ 548,520 $ 580,893 Working capital 978,335 931,631 Total debt 1,086,186 1,085,783 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. OnApril 16, 2021 , we agreed to sell$400 million of our 2029 Notes. The sale of the 2029 Notes is expected to close onApril 30, 2021 , subject to customary closing conditions. We intend to use the net proceeds of the offering, together with cash on hand and approximately$75 million borrowed under the Revolving Facility, to pay the redemption price for the redemption in full of the 2026 Notes and to pay certain fees and expenses related to the offering. The redemption of the 2026 Notes is conditioned on the Company's receipt of$400 million of proceeds from a new offering of unsecured notes, such as the 2029 Notes. Although there is uncertainty regarding the impact of the COVID-19 pandemic on the Company's future results, we believe our business model and our current cash reserves 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, after taking into account the anticipated issuance of the 2029 Notes and the use of net proceeds, cash on hand and borrowings to fund the redemption of the 2026 Notes, will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months and for the longer term. We may seek to take advantage of opportunities to raise additional capital through additional debt financing or through public or private sales of securities. If in the future our available liquidity is not sufficient to meet the Company's operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company's cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, in fiscal 2021, we have not experienced difficulty accessing the capital and credit markets as evidenced by our recent announcement of our$400 million note offering; however, future volatility in the capital and credit markets may increase costs associated with issuing debt instruments or affect our ability to access those markets. In addition, it is possible that our ability to access the capital and credit markets could be limited at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions. In summary, our cash flows for each period were as follows: Three months ended (in thousands) April 3, 2021 March 28, 2020 Net cash provided by operating activities$ 53,115 $ 11,403 Net cash used in investing activities (43,258) (98,210) Net cash (used in) provided by financing activities (39,375) 71,685 Decrease in cash and cash equivalents (32,373) (16,834) 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$53.1 million in the three months endedApril 3, 2021 , compared to$11.4 million in the three months endedMarch 28, 2020 . The increase in cash provided by operating activities was primarily due to higher net income and a lower net change in working capital and other assets and liabilities. The net change in 26 -------------------------------------------------------------------------------- Table of Contents working capital and other assets and liabilities resulted in a decrease to cash provided by operations of$80.8 million for the three months endedApril 3, 2021 compared to a decrease of$97.0 million for the three months endedMarch 28, 2020 . Changes in working capital and other assets and liabilities for the three months endedApril 3, 2021 were driven primarily by increases in inventories, accounts receivable and accounts payable and decreases in accrued liabilities. The change for accounts receivable was primarily due to the timing of collections. The change for inventory was driven by an increase in business activity. The change for accounts payable and accrued liabilities was primarily driven by a higher accounts payables due to timing of payments and higher accrued bonuses in 2021, partially offset by a higher payment of the previous year incentive compensation. Investing activities Cash flows used in investing activities totaled$43.3 million in the three months endedApril 3, 2021 , compared to$98.2 million in the three months endedMarch 28, 2020 . The change was due to less cash paid for acquisitions of businesses, partially offset by higher cash paid for acquisition of property, plant and equipment. Acquisition of property, plant and equipment totaled$43.3 million in the three months endedApril 3, 2021 , which primarily reflected investments in equipment and tooling, compared to$22.6 million in the three months endedMarch 28, 2020 , which primarily reflected investments in equipment and tooling. In the three months endedMarch 28, 2020 , the Company acquired Sinmat. The cash used to acquire Sinmat for the three months endedMarch 28, 2020 was$75.6 million , net of cash acquired. The transaction is described in further detail in note 3 to the Company's condensed consolidated financial statements. As ofApril 3, 2021 , the Company expects its full-year capital expenditures in 2021 to be approximately$225.0 million for growth capacity investments and the initial phase of the previously announced investment in our new facility inTaiwan . As ofApril 3, 2021 , the Company had outstanding capital purchase obligations of$55.5 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 used in financing activities totaled$39.4 million during the three months endedApril 3, 2021 , compared to$71.7 million during the three months endedMarch 28, 2020 . The change was primarily due to absence of net short-term debt activity during the three months endedApril 3, 2021 , compared to a net source of cash of$142.0 million in the comparable period in 2020, and a$3.6 million increase in cash used to pay taxes for net share settlements of equity awards, offset in part by the absence of a$16.1 million deferred acquisition payment related to our acquisition ofDigital Specialty Chemicals in 2020 and a decrease of$14.6 million in repurchases of the Company's common stock. Our total dividend payments were$10.9 million in the three months endedApril 3, 2021 , compared to$10.8 million in the three months endedMarch 28, 2020 . We have paid a cash dividend in each of the past 14 quarters. OnApril 14, 2021 , the Board declared a quarterly cash dividend of$0.08 per share of common stock, payable onMay 19, 2021 to stockholders of record onApril 28, 2021 . Other Liquidity and Capital Resources ConsiderationsThe Company's Term Loan Facility matures onNovember 6, 2025 and bore interest at a rate per annum of 2.1% atApril 3, 2021 . As ofApril 3, 2021 , 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 onNovember 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. In connection with our issuance of the 2029 Notes, we intend to amend the Revolving Facility to provide for lending commitments in an aggregate principal amount of up to$400.0 million and to extend the maturity toApril 30, 2026 . AtApril 3, 2021 , there was no balance outstanding under the Revolving Facility and we had undrawn outstanding letters of credit of$0.2 million . As ofApril 3, 2021 , we had$550.0 million aggregate principal amount of 2026 Notes and$400.0 million aggregate principal amount of 4.375% senior unsecured notes dueApril 15, 2028 outstanding. ThroughApril 3, 2021 , the Company was in compliance with all applicable financial covenants under its credit facilities. The Company also has a line of credit with one bank that provides for borrowings of Japanese yen for the Company's Japanese subsidiary, equivalent to an aggregate of approximately$9.0 million . There were no outstanding borrowings under this line of credit atApril 3, 2021 . As ofApril 3, 2021 , the Company's sources of available funds were its cash and cash equivalents of$548.5 million , funds available under the Revolving Facility and international credit facilities and cash flow generated from operations. As ofApril 3, 2021 , the amount of cash and cash equivalents held in certain of our foreign operations totaled approximately$376.6 million . If we repatriate such funds, we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes 27 -------------------------------------------------------------------------------- Table of Contents on those amounts during the period when such repatriation occurs. We have accrued taxes for the tax effect of repatriating the funds tothe United States . Off-Balance Sheet Arrangements As ofApril 3, 2021 , 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 endedDecember 31, 2020 . Recently adopted accounting pronouncements Refer to note 1 to the Company's condensed consolidated financial statements for a discussion of recently adopted accounting pronouncements. Recently issued accounting pronouncements Refer to note 1 to the Company's condensed consolidated financial statements for a discussion of recently issued but not yet adopted accounting pronouncements. Non-GAAP InformationThe 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, 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, as applicable, (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 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, as applicable, (1) charge for fair value write-up of acquired inventory sold, (2) deal and transaction costs, (3) integration costs, (4) severance and restructuring costs, (5) loss on debt extinguishment, (6) amortization of intangible assets, (7) tax effect of legal entity restructuring and (8) 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. 28 -------------------------------------------------------------------------------- Table of Contents 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. 29
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Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted
EBITDA
Three months ended
(In thousands) April 3, 2021 March 28, 2020
Net sales $ 512,844 $ 412,327
Net income $ 84,676 $ 61,006
Net income - as a % of net sales 16.5 % 14.8 %
Adjustments to net income
Income tax expense 13,391 8,622
Interest expense 11,652 10,559
Interest income (71) (321)
Other expense, net 4,330 878
GAAP - Operating income 113,978 80,744
Operating margin -as a % of net sales 22.2 % 19.6 %
Charge for fair value write-up of acquired inventory sold - 361
Deal and transaction costs - 1,431
Integration costs 2,044 48
Severance and restructuring costs 143 843
Amortization of intangible assets 11,871 16,211
Adjusted operating income 128,036 99,638
Adjusted operating margin - as a % of net sales 25.0 % 24.2 %
Depreciation 22,095 20,648
Adjusted EBITDA $ 150,131 $ 120,286
Adjusted EBITDA - as a % of net sales 29.3 % 29.2 %
Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and Earnings per Share
Three months ended
(In thousands, except per share data) April 3, 2021 March 28, 2020
Net income $ 84,676 $ 61,006
Adjustments to net income
Charge for fair value write-up of acquired inventory sold - 361
Deal and transaction costs - 1,431
Integration costs 2,044 48
Severance and restructuring costs 143 843
Amortization of intangible assets 11,871 16,211
Tax effect of adjustments to net income and certain discrete tax
items1 (3,221) (4,329)
Non-GAAP net income $ 95,513 $ 75,571
Diluted earnings per common share $ 0.62 $ 0.45
Effect of adjustments to net income 0.08 0.11
Diluted non-GAAP earnings per common share $ 0.70 $ 0.55
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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