MKS INSTRUMENTS, INC.
This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934 regarding the future financial performance, business prospects and growth
of MKS. These statements are only predictions based on current assumptions and
expectations. Any statements that are not statements of historical fact
(including statements containing the words "will," "projects," "intends,"
"believes," "plans," "anticipates," "expects," "estimates," "forecasts,"
"continues" and similar expressions) should be considered to be forward-looking
statements. Actual events or results may differ materially from those in the
forward-looking statements set forth herein.
Among the important factors that could cause actual events to differ materially
from those in the forward-looking statements are manufacturing and sourcing
risks, including the impact and duration of supply chain disruptions and
component shortages, the ability of MKS to complete its acquisition of Atotech
Limited ("Atotech"), the terms of MKS' existing term loan, the terms and
availability of financing for the Atotech acquisition, the substantial
indebtedness MKS expects to incur in connection with the Atotech acquisition and
the need to generate sufficient cash flows to service and repay such debt, MKS'
entry into Atotech's chemicals technology business, in which MKS does not have
experience and which may expose it to significant additional liabilities, the
risk of litigation relating to the Atotech acquisition, the risk that disruption
from the Atotech acquisition materially and adversely affects the respective
businesses and operations of MKS and Atotech, the ability of MKS to realize the
anticipated synergies, cost savings and other benefits of the Atotech
acquisition, competition from larger or more established companies in MKS' and
Atotech's respective markets, the ability of MKS to successfully grow its
business and the businesses of Atotech, Photon Control Inc. ("Photon Control"),
which it acquired in July 2021 , and Electro Scientific Industries, Inc. ("ESI"),
which it acquired in February 2019 , potential adverse reactions or changes to
business relationships resulting from the announcement, pendency or completion
of the Atotech acquisition, conditions affecting the markets in which MKS and
Atotech operate, including the fluctuations in capital spending in the
semiconductor industry and other advanced manufacturing markets, and
fluctuations in sales to MKS' and Atotech's major customers, the ability to
anticipate and meet customer demand, the challenges, risks and costs involved
with integrating the operations of the companies we have acquired, potential
fluctuations in quarterly results, dependence on new product development, rapid
technological and market change, acquisition strategy, volatility of stock
price, international operations, financial risk management, and the other
factors described in MKS' Annual Report on Form 10-K for the year ended
December 31, 2020 and any subsequent Quarterly Reports on Form 10-Q, as filed
with the U.S. Securities and Exchange Commission (the "SEC"). MKS is under no
obligation to, and expressly disclaims any obligation to, update or alter these
forward-looking statements, whether as a result of new information, future
events or otherwise after the date of this report.
The Management's Discussion and Analysis of Financial Condition and Results of
Operations, or MD&A, describes principal factors affecting the results of our
operations, financial condition and liquidity, as well as our critical
accounting policies and estimates that require significant judgment and thus
have the most significant potential impact on our consolidated financial
statements. This section provides an analysis of our financial results for the
three and nine months ended September 30, 2021 compared to the three and nine
months ended September 30, 2020 .
Overview
We are a global provider of instruments, systems, subsystems and process control solutions that measure, monitor, deliver, analyze, power and control critical parameters of advanced manufacturing processes to improve process performance and productivity for our customers. Our products are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, vacuum technology, temperature sensing, lasers, photonics, optics, precision motion control, vibration control and laser-based manufacturing systems solutions. We also provide services relating to the maintenance and repair of our products, installation services and training. Our primary served markets include semiconductor, industrial technologies, life and health sciences, and research and defense. Recent Events OnJuly 15, 2021 , we completed our previously announced acquisition of Photon Control (the "Photon Control Acquisition"), pursuant to a definitive agreement. Photon Control designs, manufactures and distributes a wide range of optical sensors and systems to measure temperature and position used in semiconductor wafer fabrication. At the effective time of the Photon Control Acquisition, each share of Photon Control's common stock issued and outstanding as of immediately prior to the effective time of the Photon Control Acquisition was converted into the right to receiveCAD 3.60 per share in cash, without interest and subject to deduction for any required withholding tax. We paid to the former Photon Control securityholders aggregate consideration ofCAD 378.6 million orUSD 302.7 million , excluding related transaction fees and expenses. We funded the payment of the aggregate consideration with available cash on hand. Photon Control is included in our Light & Motion ("L&M") segment. 33 -------------------------------------------------------------------------------- OnJuly 1, 2021 , we entered into a definitive agreement (as amended from time to time, the "Implementation Agreement") to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay$16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech, for total cash and stock consideration of approximately$5.1 billion . The acquisition is expected to close by the end of 2021, subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals, approval by theRoyal Court of Jersey and approval by Atotech's shareholders. Our obligations to complete the acquisition are not subject to any financing condition. We intend to fund the cash portion of the transaction with a combination of available cash on hand and committed term loan debt financing. In connection with entering into the Implementation Agreement, we entered into (a) a commitment letter (the "Initial Commitment Letter"), dated as ofJuly 1, 2021 , withJPMorgan Chase Bank, N.A . and Barclays Bank PLC (collectively, the "Initial Commitment Parties") and (b) joinders to the Initial Commitment Letter to add certain additional lender parties (the "Commitment Letter Joinders" and, together with the Initial Commitment Letter, the "Commitment Letter") dated as ofJuly 23, 2021 , with the Initial Commitment Parties and the additional lenders party thereto (collectively, the "Supplemental Commitment Parties" and, together with the Initial Commitment Parties, the "Commitment Parties"), pursuant to which, subject to the terms and conditions set forth therein, the Commitment Parties committed to provide (i) a senior secured term loan credit facility in an aggregate principal amount of$5.3 billion (the "New Term Loan Facility") and (ii) a senior secured revolving credit facility with aggregate total commitments of$500 million (the "New Revolving Credit Facility"). The New Term Loan Facility and New Revolving Credit Facility would refinance the Term Loan Facility and ABL Facility, respectively, and the New Term Loan Facility would be used to finance a portion of the acquisition and to refinance certain existing indebtedness of Atotech. OnOctober 22, 2021 , we completed the syndication of the New Term Loan Facility, comprised of two tranches: aUSD 4.7 billion loan at LIBOR plus 2.25%, a floor of 0.50% and 0.25% of original issue discount, and a Euro tranche ofEUR 0.5 billion (approximatelyUSD 0.6 billion ) at EURIBOR plus 2.75%, a floor of 0.00% and 0.25% of original issue discount. Proceeds from the anticipated New Term Loan Facility will be used to finance a portion of the acquisition of Atotech and to repay our existing Term Loan Facility and certain existing indebtedness of Atotech. The Commitment Parties' obligations under the Commitment Letter and the closing and initial funding under the New Term Loan Facility are subject to certain customary conditions including, without limitation, the consummation of the acquisition of Atotech in accordance with the Implementation Agreement, the accuracy of specified representations and warranties of us and other customary closing conditions. Segments and Markets The Vacuum & Analysis ("V&A") segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in pressure measurement and control, flow measurement and control, gas and vapor delivery, gas composition analysis, electronic control technology, reactive gas generation and delivery, power generation and delivery, and vacuum technology.
The Light & Motion ("L&M") segment provides a broad range of instruments, components and subsystems which are derived from our core competencies in lasers, photonics, optics, temperature sensing, precision motion control and vibration control.
The Equipment & Solutions ("E&S") segment provides a range of products including
laser-based systems for printed circuit board ("PCB") manufacturing, which
include flexible interconnect PCB processing systems and high-density
interconnect solutions for rigid PCB manufacturing and substrate processing and
multi-layer ceramic capacitor test systems.
Semiconductor Market
A significant portion of our sales is derived from products sold to semiconductor capital equipment manufacturers and semiconductor device manufacturers. Our products are used in major semiconductor processing steps, such as depositing thin films of material onto silicon wafer substrates, etching, cleaning, lithography, metrology and inspection.
Approximately 61% and 60% of our net revenues for the nine months ended
We anticipate that the semiconductor market will continue to account for a
substantial portion of our sales. While the semiconductor device manufacturing
market is global, major semiconductor capital equipment manufacturers are
concentrated in
Net revenues in our semiconductor market increased by$128.9 million , or 36%, for the three months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to an increase of$113.2 million and$23.7 million from our V&A and L&M segments, respectively, offset by a decrease of$8.0 million from our E&S segment. Net revenues in our semiconductor market increased by$337.5 million , or 34%, for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to an increase of$327.2 million and$33.8 million from our V&A and L&M segments, respectively, offset by a 34
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decrease of
The semiconductor capital equipment industry is subject to rapid demand shifts, which are difficult to predict, and we cannot be certain as to the timing or extent of future demand or any future weakness in the semiconductor capital equipment industry. During the nine months endedSeptember 30, 2021 , we experienced supply chain disruptions and component shortages in our semiconductor market due to global capacity constraints compounded by increasing global demand as well as the ongoing COVID-19 pandemic. We expect these disruptions and shortages to continue in the near-term while our suppliers adjust to significant increases in demand and respond to the challenges posed by the COVID-19 pandemic, all of which may negatively impact revenue from our semiconductor market for the three months endingDecember 31, 2021 . Advanced Markets
In addition to the semiconductor market, our products are used in the industrial technologies, life and health sciences, and research and defense markets.
Industrial Technologies
Industrial technologies encompasses a wide range of diverse applications, such as flexible and rigid PCB processing/fabrication, glass coating, laser marking, measurement and scribing, natural gas and oil production, environmental monitoring and electronic thin films. Electronic thin films are a primary component of numerous electronic products including flat panel displays, light emitting diodes, solar cells and data storage media. Industrial technologies manufacturers are located in developed and developing countries across the globe.
Life and Health Sciences
Our products for life and health sciences are used in a diverse array of applications, including bioimaging, medical instrument sterilization, medical device manufacturing, analytical, diagnostic and surgical instrumentation, consumable medical supply manufacturing and pharmaceutical production. Our life and health sciences customers are located globally.
Research and Defense
Our products for research and defense are sold to government, university and industrial laboratories for applications involving research and development in materials science, physical chemistry, photonics, optics and electronics materials. Our products are also sold for monitoring and defense applications including surveillance, imaging and infrastructure protection. Major equipment providers and research laboratories are concentrated inChina ,Europe ,Japan ,South Korea ,Taiwan , andthe United States .
Approximately 39% and 40% of our net revenues for the nine months ended
Net revenues from customers in our advanced markets increased by$23.3 million , or 10%, for the three months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to increases of$9.1 million ,$8.6 million and$5.6 million from our L&M, V&A and E&S segments, respectively. The increases were primarily due to increases in net revenues from our industrial technologies market, mainly related to electronic component and solar markets. Net revenues from customers in our advanced markets increased by$178.4 million , or 26%, for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to increases of$81.7 million ,$54.2 million and$42.5 million from our E&S, V&A and L&M segments, respectively. The increases were primarily due to increases in net revenues from our industrial technologies market related to PCB manufacturing.
International Markets
A significant portion of our net revenues is from sales to customers in international markets. For the nine months endedSeptember 30, 2021 and 2020, international revenues accounted for approximately 58% and 55%, respectively, of our total net revenues. A significant portion of our international net revenues was fromChina ,Japan ,South Korea andTaiwan . We expect international net revenues will continue to represent a significant percentage of our total net revenues for the foreseeable future. 35 -------------------------------------------------------------------------------- Long-lived assets located outside ofNorth America accounted for approximately 25% and 28% of our total long-lived assets as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Long-lived assets include property, plant and equipment, net, right-of-use assets, and certain other assets and exclude goodwill, intangible assets and long-term tax-related accounts.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements and related disclosures in conformity with accounting principles generally accepted inthe United States requires management to make judgments, assumptions and estimates that affect the amounts reported. There have been no material changes in our critical accounting policies sinceDecember 31, 2020 . For further information about our critical accounting policies, please see the discussion of critical accounting policies in our Annual Report on Form 10-K for the year endedDecember 31, 2020 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."
Results of Operations
The following table sets forth for the periods indicated the percentage of total net revenues of certain line items included in our condensed consolidated statements of operations and comprehensive income data.
Three Months Ended Nine Months Ended
September 30, September 30,
2021 2020 2021 2020
Net revenues:
Products 87.5 % 85.9 % 87.4 % 86.3 %
Services 12.5 14.1 12.6 13.7
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues 46.4 47.6 46.3 47.6
Cost of service revenues 6.6 8.0 6.8 7.6
Total cost of revenues (exclusive of
amortization shown separately below) 53.0 55.6 53.1 55.2
Gross profit 47.0 44.4 46.9 44.8
Research and development 7.0 7.2 6.8 7.7
Selling, general and administrative 12.9 14.7 13.2 15.6
Acquisition and integration costs 1.2 0.1 0.9 0.2
Restructuring and other 0.3 0.5 0.5 0.4
Amortization of intangible assets 2.0 2.1 1.8 2.5
COVID-19 related net credits - - - 0.1
Asset impairment - - - (0.1 )
Income from operations 23.6 19.8 23.7 18.4
Interest income - - - 0.1
Interest expense 0.8 1.1 0.9 1.4
Other expense, net 0.4 0.2 0.5 0.2
Income before income taxes 22.4 18.5 22.3 16.9
Provision for income taxes 4.6 2.9 3.9 2.9
Net income 17.8 % 15.6 % 18.4 % 14.0 %
Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Products $ 649.1 $ 506.8 $ 1,910.8 $ 1,441.0
Services 92.8 83.0 274.9 228.8
Total net revenues $ 741.9 $ 589.8 $ 2,185.7 $ 1,669.8
36
-------------------------------------------------------------------------------- Net product revenues increased$142.3 million and$469.8 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year. These increases were primarily attributed to increases in net product revenues from our semiconductor customers, primarily due to volume increases, of$119.6 million and$300.3 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, and increases in net product revenues from customers in advanced markets of$22.7 million and$169.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year. Net service revenues consisted mainly of fees for services related to the maintenance and repair of our products, sales of spare parts, and installation and training. Net service revenues increased$9.8 million and$46.1 million during the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year. These increases were primarily due to increases of$9.3 million and$37.2 million in net service revenues from our semiconductor customers for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year. Total international net revenues outside ofNorth America , including product and service, were$393.5 million and$1,263.0 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to$308.6 million and$912.1 million for the three and nine months endedSeptember 30, 2020 , respectively. These increases were primarily attributed to increases in net revenues inChina ,South Korea andTaiwan .
The following table sets forth our net revenues by reportable segment:
Nine Months Ended
Three Months Ended September 30 , September 30 ,(dollars in millions) 2021 2020 2021 2020 Net revenues: Vacuum & Analysis $ 483.1 $ 361.3$ 1,376.6 $ 995.1 Light & Motion 208.7 175.9 583.6 507.3 Equipment & Solutions 50.1 52.6 225.5 167.4 Total net revenues $ 741.9 $ 589.8$ 2,185.7 $ 1,669.8 Net revenues from our V&A segment increased$121.8 million and$381.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, due to volume increases in net revenues from our semiconductor customers of$113.2 million and$327.2 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, and increases in net revenues from customers in our advanced markets of$8.6 million and$54.3 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily from customers in our industrial technologies market. Net revenues from our L&M segment increased$32.8 million and$76.3 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, due to volume increases in net revenues from our semiconductor customers of$23.7 million and$33.8 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, and increases in net revenues from customers in our advanced markets of$9.1 million and$42.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year. Net revenues from our E&S segment decreased$2.5 million for the three months endedSeptember 30, 2021 , compared to the same period in the prior year. Net revenues increased$58.1 million for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily from customers in our industrial technologies market. Gross Margin Three Months Ended Nine Months Ended September 30, September 30, % Points % Points 2021 2020 Change 2021 2020 Change Gross margin as a percentage of net revenues: Products 46.9 % 44.6 % 2.3 % 47.0 % 44.9 % 2.1 % Services 47.2 43.2 4.0 46.1 44.4 1.7 Total gross margin 47.0 % 44.4 % 2.6 % 46.9 % 44.8 % 2.1 % 37
-------------------------------------------------------------------------------- Gross margin for our products increased by 2.3 and 2.1 percentage points for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes and favorable product mix, partially offset by higher freight and duty costs and higher consumable expenses as well as unfavorable overhead absorption. Gross margin for our services increased by 4.0 and 1.7 percentage points for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to favorable absorption on products serviced partially offset by unfavorable product mix. The following table sets forth gross margin as a percentage of net revenues by reportable segment: Three Months Ended Nine Months Ended September 30, September 30, % Points % Points 2021 2020 Change 2021 2020 Change Gross margin as a percentage of net revenues: Vacuum & Analysis 46.8 % 45.3 % 1.5 % 46.8 % 44.6 % 2.2 % Light & Motion 48.3 43.1 5.2 46.7 44.9 1.8 Equipment & Solutions 42.6 43.0 (0.4 ) 48.4 45.4 3.0 Total gross margin 47.0 % 44.4 % 2.6 % 46.9 % 44.8 % 2.1 % Gross margin for our V&A segment increased by 1.5 and 2.2 percentage points for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes. Gross margin for our L&M segment increased by 5.2 and 1.8 percentage points for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to higher revenue volumes, favorable product mix and lower excess and obsolete inventory charges, partially offset by unfavorable absorption. Gross margin for our E&S segment decreased by 0.4 percentage points for the three months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to unfavorable absorption. Gross margin for our E&S segment increased by 3.0 percentage points for the nine months endedSeptember 30, 2021 compared to the same period in the prior year, primarily due to favorable absorption and product mix. Research and Development Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2021 2020 2021 2020 Research and development$ 51.7 $ 42.5 $ 148.9 $ 127.7 Research and development expenses increased$9.2 million for the three months endedSeptember 30, 2021 , compared to the same period in the prior year. The increase was primarily related to an increase of$6.2 million in compensation-related costs, an increase of$1.3 million in project material costs and an increase of$1.1 million in occupancy costs. Research and development expenses increased$21.2 million for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year. The increase was primarily related to increases of$15.6 million in compensation-related costs,$3.7 million in project material costs and$2.2 million in occupancy costs. The acquisition of Photon Control accounted for$1.6 million of the increase in the three and nine months endedSeptember 30, 2021 , compared to the same periods in the prior year. Our research and development efforts are primarily focused on developing and improving our instruments, components, subsystems and process control solutions to improve process performance and productivity. We have thousands of products and our research and development efforts primarily consist of a large number of projects related to these products, none of which is individually material to us. Current projects typically have durations of 3 to 30 months, depending upon whether the product is an enhancement of existing technology or a new product. Our products have continuously advanced as we strive to meet our customers' evolving needs. We have developed, and continue to develop, new products to address industry trends, such as the shrinking of integrated circuit critical dimensions and technology inflections, and, in the flat panel display and solar markets, the transition to larger substrate sizes, which require more advanced processing and process control technology, the continuing drive toward more complex and accurate components and devices within the handset and tablet market, the transition to 5G for both devices and infrastructure, supporting the growth in units and via counts of the high density interconnect PCB drilling market, and the industry transition to electric cars in the automotive market. In addition, we have developed, and continue to develop, products that support the migration to new classes of materials, ultra-thin layers, and 3D structures that are used in small geometry manufacturing. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in 38 --------------------------------------------------------------------------------
research and development, fees paid to consultants, material costs for prototypes and other expenses related to the design, development, testing and enhancement of our products.
We believe that the continued investment in research and development and ongoing development of new products are essential to the expansion of our markets. We expect to continue to make significant investment in research and development activities. We are subject to risks from products not being developed in a timely manner, as well as from rapidly changing customer requirements and competitive threats from other companies and technologies. Our success primarily depends on our products being designed into new generations of equipment for the semiconductor industry and advanced technology markets. We develop products that are technologically advanced so that they are positioned to be chosen for use in each successive generation of semiconductor capital equipment and advanced market applications. If our products are not chosen to be designed into our customers' products, our net revenues may be reduced during the lifespan of those products.
Selling, General and Administrative
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Selling, general and administrative
Selling, general and administrative expenses increased$8.8 million for the three months endedSeptember 30, 2021 , compared to the same period in the prior year. The increase was primarily related to an increase of$7.2 million in compensation-related costs and$2.2 million in commissions expense. Selling, general and administrative expenses increased$28.6 million for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year. The increase was primarily related to an increase of$25.7 million in compensation-related costs and$5.1 million in commissions expense, partially offset by a decrease of$1.7 million in consulting and professional fees. The acquisition of Photon Control accounted for$1.7 million of the selling, general and administrative expense for the three and nine months endedSeptember 30, 2021 .
Acquisition and Integration Costs
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Acquisition and integration costs
Acquisition and integration costs during the three months endedSeptember 30, 2021 primarily related to consulting and professional fees related to our acquisition of Photon Control, which closed inJuly 2021 , and the announced acquisition of Atotech. Acquisition and integration costs during the nine months endedSeptember 30, 2021 related to consulting and professional fees in connection with our recent acquisition of Photon Control, the announced acquisition of Atotech and our proposed acquisition of Coherent, Inc. Acquisition and integration costs during the three and nine months endedSeptember 30, 2020 consisted of integration costs related to the acquisition of ESI (the "ESI Merger"), consisting primarily of cash bonus and stock-based compensation for certain ESI executives assisting in the integration process. Restructuring and Other Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2021 2020 2021 2020
Restructuring and other
Restructuring and other costs during the three and nine months endedSeptember 30, 2021 primarily related to duplicate facility costs attributed to entering into new leases, severance costs due to a global cost saving initiative, severance costs relating to the pending closure of two facilities inEurope and the movement of certain product manufacturing to low cost regions. Restructuring and other costs during the three and nine months endedSeptember 30, 2020 primarily related to duplicate facility costs attributed to entering into new leases, costs related to the exit of certain product groups and costs related to the closure of a facility inEurope . Such costs for the nine months endedSeptember 30, 2020 were partially offset by an insurance reimbursement related to a legal settlement. 39
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Amortization of Intangible Assets
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Amortization of intangible assets
$ 42.6 Amortization of intangible assets increased by$2.5 million for the three months endedSeptember 30, 2021 , compared to the same period in the prior year, primarily due to amortization expense from our acquisition of Photon Control. The decrease in amortization of intangible assets of$2.5 million for the nine months endedSeptember 30, 2021 , compared to the same period in the prior year, was due to certain intangible assets in our L&M segment that became fully amortized, partially offset by amortization from our acquisition of Photon Control. Interest Expense, Net Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2021 2020 2021 2020
Interest expense, net
Interest expense, net, decreased by$0.3 million and$2.9 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to lower interest rates and lower average debt balances as a result of payments made. Other Expense, Net Three Months Ended Nine Months Ended September 30, September 30, (dollars in millions) 2021 2020 2021 2020 Other expense, net$ 2.9 $ 1.1 $ 11.5 $ 3.0 Other expense, net, increased by$1.8 million and$8.5 million for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in the prior year, primarily due to higher foreign exchange and fair value losses. The nine months endedSeptember 30, 2021 included a fair value loss of$10.3 million resulting from hedges of the Canadian dollar related to the funding of our purchase of Photon Control inJuly 2021 .
Provision for Income Taxes
Three Months Ended Nine Months Ended
September 30, September 30,
(dollars in millions) 2021 2020 2021 2020
Provision for income taxes
Our effective tax rates for the three and nine months endedSeptember 30, 2021 were 20.4% and 17.6%, respectively. Our effective tax rates for each of the three and nine months endedSeptember 30, 2021 and related income tax expense were lower than theU.S. statutory tax rate mainly due to theU.S. deduction for foreign derived intangible income, windfall benefits from stock compensation, and the geographic mix of income earned by our international subsidiaries being taxed at rates lower than theU.S. statutory tax rate, offset by theU.S. global intangible low-taxed income inclusion and additional withholding taxes on inter-company distributions due to theUnited Kingdom's withdrawal from theEuropean Union OnMarch 11, 2021 ,President Biden signed into law the American Rescue Plan Act of 2021 ("ARPA"). The act contains numerous income tax provisions among other tax and non-tax provisions to provide COVID-19 pandemic relief. We have evaluated the ARPA legislation in relation to income taxes and we do not expect the ARPA income tax provisions to have a material impact on our financial statements in the current year. The ARPA income tax provisions that are effective in future years are being evaluated and we have not yet determined the impact on our consolidated financial statements. OnSeptember 15, 2021 , theHouse Ways and Means Committee approved tax proposals, including a series of corporate and international tax provisions one of which would increase the corporate tax rate from 21% to 26.5%. If this tax proposal is enacted in its current form, we expect our income tax expense would materially increase. 40
-------------------------------------------------------------------------------- As ofSeptember 30, 2021 andDecember 31, 2020 , the total amount of gross unrecognized tax benefits, which excludes interest and penalties, was approximately$47.3 million and$47.0 million , respectively. We accrue interest expense, and if applicable, penalties, for any uncertain tax positions. Interest and penalties are classified as a component of income tax expense. As ofSeptember 30, 2021 andDecember 31, 2020 , we had accrued interest on unrecognized tax benefits of approximately$0.9 million and$0.7 million , respectively. Over the next 12 months it is reasonably possible that we may recognize approximately$3.8 million of previously net unrecognized tax benefits, excluding interest and penalties, related toU.S. federal and state as well as foreign tax positions as a result of the expiration of statutes of limitation. TheU.S. federal statute of limitations remains open for tax years 2017 through present. The statute of limitations for our tax filings in other jurisdictions varies between fiscal years 2015 through the present. We also have certain federal credit carryforwards and state tax loss and credit carryforwards that are open to examination for tax years 2000 through the present.
On a quarterly basis, we evaluate both positive and negative evidence that affects the realizability of net deferred tax assets and assess the need for a valuation allowance. The future benefit to be derived from our deferred tax assets is dependent upon our ability to generate sufficient future taxable income in each jurisdiction of the right type to realize the assets.
Our future effective tax rate depends on various factors, including the impact of tax legislation, further interpretations and guidance fromU.S. federal and state governments on the impact of proposed regulations issued by the Internal Revenue Service, further interpretations and guidance from foreign governments, the geographic composition of our pre-tax income, and changes in income tax reserves for unrecognized tax benefits. We monitor these factors and timely adjust our estimates of the effective tax rate accordingly. We expect that the geographic mix of pre-tax income will continue to have a favorable impact on our effective tax rate. However, the geographic mix of pre-tax income can change based on multiple factors, resulting in changes to the effective tax rate in future periods. While we believe we have adequately provided for all tax positions, amounts asserted by taxing authorities could materially differ from our accrued positions as a result of uncertain and complex application of tax law and regulations. Additionally, the recognition and measurement of certain tax benefits include estimates and judgment by management. Accordingly, we could record additional provisions or benefits forU.S. federal, state, and foreign tax matters in future periods as new information becomes available.
Liquidity and Capital Resources
On
Cash and cash equivalents and short-term marketable investments totaled$879.6 million atSeptember 30, 2021 , compared to$836.0 million atDecember 31, 2020 . The primary driver in our current and anticipated future cash flows is and will continue to be cash generated from operations, consisting primarily of our net income, excluding non-cash charges and changes in operating assets and liabilities. In periods when our sales are growing, higher sales to customers will result in increased trade receivables, and inventories will generally increase as we build products for future sales. This may result in lower cash generated from operations. Conversely, in periods when our sales are declining, our trade accounts receivable and inventory balances will generally decrease, resulting in increased cash from operations. Net cash provided by operating activities was$445.2 million for the nine months endedSeptember 30, 2021 and resulted from net income of$401.2 million , which included non-cash charges of$126.6 million , offset by a net increase in working capital of$82.6 million . The net increase in working capital was primarily due to a decrease in income tax payable of$28.7 million , an increase in trade accounts receivable of$51.3 million and an increase in inventories of$61.7 million , partially offset by an increase in accounts payable of$38.2 million and an increase in other current and non-current liabilities of$18.6 million . Net cash used in investing activities was$351.2 million for the nine months endedSeptember 30, 2021 , including the purchase of Photon Control for$268.4 million , net of cash acquired, the purchases of production-related equipment of$63.3 million and the net purchases of investments of$19.5 million . Net cash used in financing activities was$61.7 million for the nine months endedSeptember 30, 2021 and was primarily due to dividend payments of$35.5 million , net payments on short and long-term borrowings of$11.8 million and net payments related to tax payments on the vesting of employee stock awards of$14.4 million . OnJuly 25, 2011 , our Board of Directors approved a share repurchase program for the repurchase of up to an aggregate of$200 million of our outstanding common stock from time to time in open market purchases, privately negotiated transactions or through other appropriate means. The timing and quantity of any shares repurchased depends upon a variety of factors, including business conditions, stock market conditions and business development activities, including but not limited to merger and acquisition opportunities. These repurchases may be commenced, suspended or discontinued at any time without prior notice. We have 41 -------------------------------------------------------------------------------- repurchased approximately 2.6 million shares of common stock for approximately$127 million pursuant to the program since its adoption. During the three and nine months endedSeptember 30, 2021 and 2020, there were no repurchases of common stock. Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. In addition, we accrue dividend equivalents on the restricted stock units we assumed in the ESI Merger when dividends are declared by our Board of Directors. During the first quarter of 2021, our Board of Directors declared a cash dividend of$0.20 per share. During each of the second and third quarters of 2021, our Board of Directors declared a cash dividend of$0.22 per share. The total amount of the dividends declared in 2021 was$35.5 million , or$0.64 per share. During each of the first, second, and third quarters of 2020, our Board of Directors declared a cash dividend of$0.20 per share, which totaled$33.0 million , or$0.60 per share. OnOctober 25, 2021 , our Board of Directors declared a quarterly cash dividend of$0.22 per share to be paid onDecember 10, 2021 to stockholders of record as ofNovember 29, 2021 . Future dividend declarations, if any, as well as the record and payment dates for such dividends, are subject to the final determination of our Board of Directors. In addition, under the terms of our Term Loan Facility and ABL Facility, each as defined and described further below, we may be restricted from paying dividends under certain circumstances.
Senior Secured Term Loan Credit Facility
In connection with the completion of the acquisition ofNewport Corporation ("Newport") in 2016 (the "Newport Merger"), we entered into a term loan credit agreement (as amended, the "Term Loan Credit Agreement") with Barclays Bank PLC, as administrative agent and collateral agent, and the lenders from time to time party thereto, which provided a senior secured term loan credit facility (the "Term Loan Facility") in the original principal amount of$780.0 million . We have entered into seven amendments to the Term Loan Credit Agreement since 2016, including most recently the May Term Loan Amendment (as defined below). The Term Loan Facility is subject to increase at our option and subject to receipt of lender commitments in accordance with the Term Loan Credit Agreement. The maturity date of the Term Loan Facility isFebruary 2, 2026 . As ofSeptember 30, 2021 , borrowings under the Term Loan Facility bear interest per annum at one of the following rates selected by us: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the "prime rate" quoted in The Wall Street Journal, (3) aLondon Interbank Offered Rate ("LIBOR") rate determined by reference to the costs of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%, and (4) a floor of 1.00%, plus, in each case, an applicable margin of 0.75%; or (b) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a LIBOR rate floor of 0.0%, plus an applicable margin of 1.75%. We have elected the interest rate as described in clause (b) of the foregoing sentence. The Term Loan Credit Agreement provides that, unless an alternate rate of interest is agreed, all loans will be determined by reference to the base rate if the LIBOR rate cannot be ascertained, if regulators impose material restrictions on the authority of a lender to make LIBOR rate loans, or for other reasons. InMay 2021 , we entered into an amendment (the "May Term Loan Amendment") to the Term Loan Credit Agreement. The May Term Loan Amendment amends the Term Loan Facility to, among other things, (i) increase our ability to incur additional incremental debt facilities to (x) the greater of (1)$600.0 million and (2) 100% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the Term Loan Facility, plus (z) an additional unlimited amount subject to pro forma compliance with a secured leverage ratio test of 3.25:1.00, and (ii) increase our flexibility under certain debt, lien, investment, restricted payment and disposition baskets. The fees incurred, including certain customary lender consent fees, in connection with the May Term Loan Amendment were immaterial. As ofSeptember 30, 2021 , we have incurred an aggregate amount of$42.6 million of deferred finance fees, original issue discount and repricing fees related to the term loans under the Term Loan Facility, which are included in long-term debt in the accompanying condensed consolidated balance sheets and are being amortized to interest expense over the estimated life of the term loans using the effective interest method. As ofSeptember 30, 2021 , the remaining balance of deferred finance fees, original issue discount and repricing fees related to the term loans under the Term Loan Facility was$8.0 million . A portion of the deferred finance fees, original issue discount and repricing fees have been accelerated in connection with the various debt prepayments and amendments between 2016 and 2021.
We are required to make scheduled quarterly amortization payments each equal to 0.25% of the original principal amount of the Term Loan Facility.
As ofSeptember 30, 2021 , after giving effect to all amendments and repayments prior to such date, the outstanding principal amount of the Term Loan Facility was$826.7 million , and the interest rate was 1.8%. Under the Term Loan Credit Agreement, we are required to prepay outstanding term loans, subject to certain exceptions, with portions of our annual excess cash flow as well as with the net cash proceeds of certain of our asset sales, certain casualty and condemnation events and the incurrence or issuance of certain debt. 42 -------------------------------------------------------------------------------- All obligations under the Term Loan Facility are guaranteed by certain of our domestic subsidiaries and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions. The Term Loan Credit Agreement contains customary representations and warranties, affirmative and negative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the Term Loan Facility will be entitled to take various actions, including the acceleration of amounts due under the Term Loan Facility and all actions generally permitted to be taken by a secured creditor. AtSeptember 30, 2021 , we were in compliance with all covenants under the Term Loan Credit Agreement.
Interest Rate Swap Agreements
We entered into various interest rate swap agreements as described further in Note 6 to the Condensed Consolidated Financial Statements that exchange the variable LIBOR interest rate to a fixed rate in order to manage the exposure to interest rate fluctuations associated with the variable LIBOR interest rate paid on the outstanding balance of the Term Loan Facility.
Senior Secured Asset-Based Revolving Credit Facility
InFebruary 2019 , in connection with the completion of the ESI Merger, we entered into an asset-based revolving credit agreement with Barclays Bank PLC, as administrative agent and collateral agent, the other borrowers from time to time party thereto, and the lenders and letters of credit issuers from time to time party thereto (the "ABL Credit Agreement"), that provides a senior secured asset-based revolving credit facility of up to$100.0 million , subject to a borrowing base limitation (the "ABL Facility"). We have entered into two amendments to the ABL Credit Agreement since 2019. As ofSeptember 30, 2021 , after giving effect to all amendments, the borrowing base for the ABL Facility at any time equals the sum of: (a) 85% of certain eligible accounts; plus (b) prior to certain notice and field examination and appraisal requirements, the lesser of (i) 20% of net book value of eligible inventory inthe United States and (ii) 30% of the borrowing base, and after the satisfaction of such requirements, the lesser of (i) the lesser of (A) 65% of the lower of cost or market value of certain eligible inventory and (B) 85% of the net orderly liquidation value of certain eligible inventory and (ii) 30% of the borrowing base; minus (c) reserves established by the administrative agent, in each case, subject to additional limitations and examination requirements for eligible accounts and eligible inventory acquired in an acquisition afterFebruary 1, 2019 . The ABL Facility includes borrowing capacity in the form of letters of credit up to$25.0 million . We have not borrowed against the ABL Facility to date. As ofSeptember 30, 2021 , any borrowings under the ABL Facility bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) a base rate determined by reference to the highest of (1) the federal funds effective rate plus 0.50%, (2) the "prime rate" quoted in The Wall Street Journal, (3) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00% and (4) a floor of 0.00%, plus, in each case, an applicable margin ranging from 0.25% to 0.50%; and (b) a LIBOR rate determined by reference to the costs of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs, with a floor of 0.00%, plus, in each case, an applicable margin ranging from 1.25% to 1.50%. The applicable margin for borrowings thereunder is subject to upward or downward adjustment each fiscal quarter, based on the average historical excess availability during the preceding quarter.
In addition to paying interest on any outstanding principal under the ABL Facility, we are required to pay a commitment fee in respect of the unutilized commitments thereunder equal to 0.25% per annum. We must also pay customary letter of credit fees and agency fees.
Under the ABL Facility, we are required to prepay amounts outstanding under the ABL Facility (1) if amounts outstanding under the ABL Facility exceed the lesser of (a) the commitment amount and (b) the borrowing base, in an amount required to reduce such shortfall, (2) if amounts outstanding under the ABL Facility in any currency other thanU.S. dollars exceed the sublimit for such currency, in an amount required to reduce such shortfall, and (3) during any period in which we have excess availability less than the greater of (a) 10.0% of the lesser of (x) the commitment amount and (y) the borrowing base (the "Line Cap") and (b)$8.5 million for 3 consecutive business days, until the time when we have excess availability equal to or greater than the greater of (A) 10.0% of the Line Cap and (B)$8.5 million for 30 consecutive days, or during the continuance of an event of default, with immediately available funds in our blocked accounts. There is no scheduled amortization under the ABL Facility. Any principal amount outstanding under the ABL Facility is due and payable in full on the fifth anniversary of the closing date, subject to a springing maturity in the event that term loans under the Term Loan Facility in an aggregate amount of at least$100.0 million have an earlier maturity date than the ABL Facility. All obligations under the ABL Facility are guaranteed by certain of our domestic subsidiaries and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions. 43 -------------------------------------------------------------------------------- From the time when we have excess availability less than the greater of (a) 10.0% of the Line Cap and (b)$8.5 million until the time when we have excess availability equal to or greater than the greater of (a) 10.0% of the Line Cap and (b)$8.5 million for 30 consecutive days, or during the continuance of an event of default, the ABL Credit Agreement requires that we maintain a fixed charge coverage ratio, tested on the last day of each fiscal quarter, of at least 1.0 to 1.0. The ABL Credit Agreement also contains customary representations and warranties, affirmative covenants and provisions relating to events of default. If an event of default occurs, the lenders under the ABL Facility will be entitled to take various actions, including the acceleration of amounts due under the ABL Facility and all actions permitted to be taken by a secured creditor.
Lines of Credit and Borrowing Arrangements
Our Japanese subsidiaries have lines of credit and a financing facility with various financial institutions, many of which generally expire and are renewed at three-month intervals with the remaining having no expiration date. The lines of credit and financing facility provided for aggregate borrowings as ofSeptember 30, 2021 of up to an equivalent of$29.9 million U.S. dollars. There were no borrowings outstanding under these arrangements atSeptember 30, 2021 . Total borrowings outstanding under these arrangements were$5.5 million atDecember 31, 2020 .
Atotech Acquisition
OnJuly 1, 2021 , we entered into an Implementation Agreement to acquire Atotech, a leading process chemicals technology company and a market leader in advanced electroplating solutions. Pursuant to the Implementation Agreement, we agreed to pay$16.20 per share in cash and 0.0552 of a share of our common stock for each outstanding common share of Atotech, for total cash and stock consideration of approximately$5.1 billion . The acquisition is expected to close by the end of 2021, subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals, approval by theRoyal Court of Jersey and approval by Atotech's shareholders. Our obligations to complete the acquisition are not subject to any financing condition. Additional information regarding the funding of the acquisition and the related syndication of the New Term Loan Facility is discussed under "Recent Events" above.
Off-Balance Sheet Arrangements
We do not have any financial partnerships with unconsolidated entities, such as entities often referred to as structured finance, special purpose or variable interest entities, which are often established for the purpose of facilitating off-balance sheet arrangements or for other contractually narrow or limited purposes. Accordingly, we have no off-balance sheet arrangements that have or are reasonably expected to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Contractual Obligations
There have been no other changes outside the ordinary course of business to our contractual obligations as disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Recently Issued Accounting Pronouncements
InOctober 2021 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, "Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers" ("ASU No. 2021-08"). ASU No. 2021-08 will require companies to apply the definition of a performance obligation under ASC Topic 606 to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Under currentU.S. GAAP, an acquirer generally recognizes assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No. 2021-08 will result in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. ASU No. 2021-08 is effective for fiscal years beginning afterDecember 15, 2022 , with early adoption permitted. We are currently evaluating the impact of this ASU on our financial statements. InMarch 2020 , the FASB issued ASU 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This standard provides temporary optional expedients and exceptions to accounting guidance on contract modifications and hedge accounting to ease entities' financial reporting burdens, as the market transitions from the LIBOR and other interbank offered rates to alternative reference rates. The standard was effective upon issuance and generally can be applied throughDecember 31, 2022 . InJanuary 2021 , the FASB issued ASU 2021-01, "Reference Rate Reform (Topic 848): Scope." The amendments in this update clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivative instruments that use an interest rate for margining, discounting, or contract price alignment that is 44 -------------------------------------------------------------------------------- modified as a result of reference rate reform. Amendments in this update to the expedients and exceptions in Topic 848 capture the incremental consequences of the scope clarification and tailor the existing guidance to derivative instruments affected by the discounting transition. The amendments in this update do not apply to contract modifications made afterDecember 31, 2022 , new hedging relationships entered into afterDecember 31, 2022 , and existing hedging relationships evaluated for effectiveness in periods afterDecember 31, 2022 , except for hedging relationships existing as ofDecember 31, 2022 , that apply certain optional expedients in which the accounting effects are recorded through the end of the hedging relationship (including periods afterDecember 31, 2022 ). Our adoption of the requirements of these standards has not resulted in a material impact on our financial position, results of operations and cash flows, but the adoption of the requirements may impact us in the future. 45
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