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, component
shortages and price increases, and changes in global demand and the impact of
the COVID-19 pandemic with respect to such disruptions, shortages and price
increases, our ability to complete the acquisition of Atotech Limited
("Atotech"), the terms of our existing term loan, the terms and availability of
financing for the Atotech Acquisition (as defined below), the substantial
indebtedness we expect to incur in connection with the Atotech Acquisition and
the need to generate sufficient cash flows to service and repay such debt, our
entry into Atotech's chemicals technology business, in which we do not have
experience and which may expose us 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 our businesses and
operations and those of Atotech, the ability to realize the anticipated
synergies, cost savings and other benefits of the Atotech Acquisition,
competition from larger or more established companies in our and Atotech's
respective markets, the ability to successfully grow our business and the
businesses of Atotech, Photon Control Inc. ("Photon Control"), which we acquired
in July 2021 , and Electro Scientific Industries, Inc. ("ESI"), which we acquired
in February 2019 , potential adverse reactions or changes to business
relationships resulting from pendency or completion of the Atotech Acquisition,
conditions affecting the markets in which we and Atotech operate, including the
fluctuations in capital spending in the semiconductor industry and other
advanced manufacturing markets, and fluctuations in sales to our 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 our Annual Report
on Form 10-K for the year ended December 31, 2021 and any subsequent Quarterly
Reports on Form 10-Q, as filed with the U.S. Securities and Exchange Commission
(the "SEC"). Additional risk factors may be identified from time to time in MKS'
future filings with the SEC . We are under no obligation to, and expressly
disclaim 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 condensed consolidated
financial statements. Historically, we have compared our current quarter results
to the same period in the prior year. Beginning in the first quarter of 2022,
given the nature of our business, in particular cyclical variations in the
semiconductor market, we have changed our basis of comparison to the prior
quarter.
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, 2021 . 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, 2021 in the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates."
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. We primarily serve the semiconductor,
advanced electronics and specialty industrial markets.
29
--------------------------------------------------------------------------------Pending Acquisition of Atotech
OnJuly 1, 2021 , we entered into a definitive agreement with Atotech (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 (the "Atotech Acquisition"). The final value of the consideration will be determined at the time of the closing of the Atotech Acquisition, which is subject to obtaining the required sanction by theRoyal Court of Jersey and the satisfaction of customary closing conditions. Our obligation to complete the Atotech Acquisition is 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. OnApril 1, 2022 , we entered into an amendment to the Implementation Agreement (the "Amendment"), providing for additional time for the satisfaction of certain closing conditions set forth in the Implementation Agreement, including approval of the Atotech Acquisition by theRoyal Court of Jersey and receipt of regulatory approvals ("Clearances"), such that the Long Stop Date (as defined in the Implementation Agreement) was extended fromMarch 31, 2022 toSeptember 30, 2022 . In addition, the Amendment amended certain provisions related to obtaining the Clearances, the timing of the closing date and the obligations of the parties with respect to the debt financing contemplated in connection with the Atotech Acquisition and provides for the automatic termination of the Implementation Agreement if the closing has not occurred by the Long Stop Date. In connection with the Amendment, we terminated our debt commitment letter, dated as ofJuly 1, 2021 , and entered into (a) a new debt commitment letter, dated as ofApril 1, 2022 , withJPMorgan Chase Bank, N.A . and Barclays Bank PLC (the "Commitment Parties") and (b) joinders to such commitment letter to add certain additional lender parties (together with the Commitment Parties, the "2022 Commitment Parties") dated as ofApril 4, 2022 ((a) and (b) together, the "2022 Commitment Letter"), pursuant to which, among other things, the 2022 Commitment Parties committed to provide us with (i) a senior secured term loan B credit facility consisting of a$4.25 billion term loan B and (ii) a senior secured term loan A credit facility consisting of a$1.0 billion term loan A ((i) and (ii) together, the "2022 New Term Loan Facilities") and (iii) a senior secured revolving credit facility with aggregate total commitments of$500 million (the "2022 New Revolving Credit Facility"). The 2022 New Term Loan Facilities and the 2022 New Revolving Credit Facility would refinance the Term Loan Facility and the ABL Facility (each as defined below), respectively, be used to finance a portion of the Atotech Acquisition, to refinance certain existing indebtedness of Atotech, to pay fees and expenses in connection with the Atotech Acquisition, and, in the case of the 2022 New Revolving Credit Facility, be used for working capital and for general corporate purposes. OnApril 11, 2022 , in connection with the 2022 Commitment Letter, we completed the syndication of the 2022 New Term Loan Facilities, comprised of (i) two tranches of term loan B: a tranche of$3.6 billion at the secured overnight financing rate ("SOFR") plus 2.75%, a floor of 0.50% and 2.0% of original issue discount ("OID"), and a Euro tranche ofEUR 600 million at EURIBOR plus 3.00%, a floor of 0.00% and 2.00% of OID; and (ii) a$1.0 billion term loan A at SOFR plus 2.50%, a floor of 0.00% and 0.25% of OID. The 2022 Commitment Parties' obligations under the 2022 Commitment Letter and the closing and initial funding under the 2022 New Term Loan Facilities and the 2022 New Revolving Credit Facility are subject to certain customary conditions including, without limitation, the consummation of the Atotech Acquisition in accordance with the Implementation Agreement, the accuracy of specified representations and warranties made by us and other customary closing conditions. For additional information about the commitment letter we entered into onJuly 1, 2021 , which we terminated in connection with the 2022 Commitment Letter, see Note 18 to the Condensed Consolidated Financial Statements. OnJuly 28, 2022 , Atotech and we received unconditional merger approval fromChina's State Administration for Market Regulation for the Atotech Acquisition. The Atotech Acquisition has now received all required regulatory clearances and is anticipated to close onAugust 17, 2022 , subject to obtaining the required sanction by theRoyal Court of Jersey and the satisfaction of customary closing conditions. Segments In the first quarter of 2022, we updated the names of our three divisions in order to simplify our naming conventions. Our reportable segments continue to be our three divisions. The Vacuum Solutions Division ("VSD"), formerly the Vacuum & Analysis Division, 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. 30 -------------------------------------------------------------------------------- The Photonics Solutions Division ("PSD"), formerly the Light & Motion Division, 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 Division ("ESD"), formerly the Equipment & Solutions Division, provides a range of laser-based systems and test 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.
Markets
Beginning with the first quarter of 2022, we changed how we present revenue to
better represent the end markets we serve and to enable investors to better
understand the key drivers of our business. We separated what we previously
categorized as Advanced Markets into our
Net Revenues by Market
Three Months Ended Six Months Ended
March 31, June 30, June 30,
(dollars in millions) June 30, 2022 % Total 2022 % Total 2022 % Total 2021 % Total
Semiconductor $ 515 67 % $ 488 66 % $ 1,003 67 % $ 843 58 %
Advanced Electronics 77 10 % 82 11 % 159 10 % 252 18 %
Specialty Industrial 173 23 % 172 23 % 345 23 % 349 24 %
Total net revenues $ 765 100 % $ 742 100 % $ 1,507 100 % $ 1,444 100 %
Semiconductor Market
This market primarily relates to products used in major semiconductor processing
steps, such as depositing thin films of material onto silicon wafer substrates,
etching, cleaning, lithography, metrology and inspection. A significant portion
of our sales is anticipated to continue to be derived from products sold to
semiconductor capital equipment manufacturers and semiconductor device
manufacturers.
While the semiconductor device manufacturing market is global, major
semiconductor manufacturers are concentrated in China , Japan , South Korea ,
Taiwan and the United States . The semiconductor 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 industry.
For the three months ended June 30, 2022 , net revenues in our semiconductor
market increased by $27 million or 6%, compared to the prior quarter and for the
six months ended June 30, 2022 , net revenues increased by $160 million or 19%,
compared to the same period in the prior year. These increases in net revenues
were mainly due to volume increases and were broad-based across VSD and PSD,
although supply constraints continue to affect our ability to fully meet
customer demand. We expect these constraints to continue in the near-term. The
increase in net revenues from PSD included contributions from our acquisition of
Photon Control.
Advanced Electronics Market
This market primarily relates to sales of products for PCB manufacturing, solar,
display and electronic component applications. These applications include
flexible and rigid PCB processing/fabrication, glass coating 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. Advanced electronics manufacturers are located globally.
For the three months ended June 30, 2022 , net revenues in our advanced
electronics market decreased by $5 million or 6%, compared to the prior quarter
and for the six months ended June 30, 2022 , net revenues decreased by $93
million or 37%, compared to the same period in the prior year. This market has
been impacted by decreased industry demand for flexible PCB via drilling
equipment. This demand has continued to soften as customers have temporarily
slowed capacity expansion, due in part to softness in smartphone demand. In
addition, net revenues for our products for the consumer electronics markets
have decreased.
Specialty Industrial Market
This market primarily relates to sales of products for industrial, life and health sciences, and research and defense applications.
Industrial
31
--------------------------------------------------------------------------------Industrial technologies encompass a wide range of diverse applications, such as laser marking, measurement and scribing, natural gas and oil production and environmental monitoring. Our industrial customers are located globally.
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 . For the three months endedJune 30, 2022 , net revenue in our specialty industrial market decreased by$1 million or 1% compared to the prior quarter and for the six months endedJune 30, 2022 , net revenues decreased$4 million or 1% compared to the same period in the prior year. Although revenue in our specialty industrial market decreased slightly, demand across specialty industrial applications was steady.
International Markets
A significant portion of our net revenues is from sales to customers in international markets. For the six months endedJune 30, 2022 and 2021, international revenues accounted for approximately 52% and 60%, respectively, of our total net revenues. A significant portion of our international net revenues was fromChina andSouth Korea . We expect international net revenues will continue to represent a significant percentage of our total net revenues for the foreseeable future. Long-lived assets located outside ofthe United States accounted for approximately 65% and 50% of our total long-lived assets as ofJune 30, 2022 andDecember 31, 2021 , respectively. The increase as ofJune 30, 2022 compared toDecember 31, 2021 , was primarily a result of increased long-lived assets in ourMexico facility and the purchase and expansion of a facility inSouth Korea . 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. 32 --------------------------------------------------------------------------------
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 Six Months Ended
June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Net revenues:
Products 86.8 % 87.4 % 87.1 % 87.4 %
Services 13.2 12.6 12.9 12.6
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues 49.3 48.5 48.9 46.2
Cost of service revenues 6.5 6.5 6.5 6.9
Total cost of revenues (exclusive of
amortization shown separately below) 55.8 55.0 55.4 53.1
Gross profit 44.2 45.0 44.6 46.9
Research and development 6.9 7.0 7.0 6.7
Selling, general and administrative 13.2 12.5 12.8 13.4
Acquisition and integration costs 0.3 1.1 0.7 0.8
Restructuring and other 0.4 0.3 0.3 0.6
Amortization of intangible assets 2.0 2.0 2.0 1.7
Gain on sale of long-lived assets - (1.0 ) (0.5 ) -
Income from operations 21.4 23.1 22.3 23.7
Interest income 0.1 - 0.1 -
Interest expense 0.9 0.8 0.9 0.9
Other expense (income), net 0.3 (0.8 ) (0.2 ) 0.6
Income before income taxes 20.3 23.1 21.7 22.2
Provision for income taxes 3.4 3.8 3.6 3.6
Net income 16.9 % 19.3 % 18.1 % 18.6 %
Net Revenues
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Products $ 664 $ 648 $ 1,312 $ 1,262
Services 101 94 195 182
Total net revenues $ 765 $ 742 $ 1,507 $ 1,444
For the three months ended June 30, 2022 , net product revenues increased $16
million compared to the prior quarter, and for the six months ended June 30,
2022 , net product revenues increased $50 million compared to the same period in
the prior year. These increases were primarily attributable to volume increases
in our semiconductor market, partially offset by decreases in our advanced
electronics market, primarily in ESD due to decreased industry demand for
flexible PCB via drilling equipment and other products for the consumer
electronics markets.
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. For the three months ended June 30, 2022 , net service revenues
increased $7 million compared to the prior quarter, and for the six months ended
June 30, 2022 , net service revenues increased $13 million compared to the same
period in the prior year. We recorded increases in both periods in our
semiconductor and advanced electronics markets.
The following table sets forth our net revenues by reportable segment:
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Net revenues:
Vacuum Solutions Division $ 507 $ 474 $ 981 $ 894
Photonics Solutions Division 228 228 456 375
Equipment Solutions Division 30 40 70 175
Total net revenues $ 765 $ 742 $ 1,507 $ 1,444
33-------------------------------------------------------------------------------- For the three months endedJune 30, 2022 , net revenues from VSD increased$33 million compared to the prior quarter, and for the six months endedJune 30, 2022 , net revenues increased$87 million compared to the same period in the prior year. These increases were largely reflective of volume increases in the semiconductor market. For the three months endedJune 30, 2022 , net revenues from PSD were flat compared to the prior quarter, with increases in net revenues from our semiconductor market offsetting decreases in net revenues from our advanced electronics market. For the six months endedJune 30, 2022 , net revenues increased$81 million compared to the same period in the prior year, reflective of volume increases in the semiconductor market, including contributions from our acquisition of Photon Control. For the three months endedJune 30, 2022 , net revenues from ESD decreased$10 million compared to the prior quarter, and for the six months endedJune 30, 2022 , net revenues decreased$105 million compared to the same period in the prior year. These decreases were due to decreased industry demand for flexible PCB via drilling equipment that has continued to soften as customers have temporarily slowed capacity expansion, due in part to softness in smartphone demand. Gross Margin Three Months Ended Six Months Ended March 31, % Points % Points June 30, 2022 2022 Change June 30, 2022 June 30, 2021 Change Gross margin as a percentage of net revenues: Products 43.2 % 44.4 % (1.2 )% 43.8 % 47.1 % (3.3 )% Services 50.0 49.2 0.8 49.6 45.5 4.1 Total gross margin 44.2 % 45.0 % (0.8 )% 44.6 % 46.9 % (2.3 )% Gross margin for our products decreased for the three and six months endedJune 30, 2022 , compared to the prior quarter and compared to the same period in the prior year, respectively. The decreases in gross margin were primarily due to higher materials costs reflective of global component shortages, higher logistics costs and unfavorable overhead absorption arising from the effect of component shortages on manufacturing efficiencies. The decrease in our product gross margin for the six months endedJune 30, 2022 , compared to the same period in the prior year, was partially offset by higher revenue volumes, favorable product mix and lower warranty costs. Gross margin for our services increased for the three and six months endedJune 30, 2022 , compared to the prior quarter and compared to the same period in the prior year, respectively. The increase in our service gross margin for the six months endedJune 30, 2022 , compared to the same period in the prior year, was reflective of our efforts to transition customers to higher-value offerings such as service contracts and the mix of products serviced. This increase was partially offset by unfavorable overhead efficiency and higher excess and obsolete charges on service-related parts. The following table sets forth gross margin as a percentage of net revenues by reportable segment: Three Months Ended Six Months Ended March 31, % Points % Points June 30, 2022 2022 Change June 30, 2022 June 30, 2021 Change Gross margin as a percentage of net revenues: Vacuum Solutions Division 43.2 % 43.5 % (0.3 )% 43.4 % 46.7 % (3.3 )% Photonics Solutions Division 48.1 49.6 (1.5 ) 48.9 45.9 3.0 Equipment Solutions Division 30.7 36.9 (6.2 ) 34.2 50.1 (15.9 ) Total gross margin 44.2 % 45.0 % (0.8 )% 44.6 % 46.9 % (2.3 )% Gross margin for VSD decreased for the three months endedJune 30, 2022 compared to the prior quarter, and gross margin for VSD decreased for the six months endedJune 30, 2022 compared to the same period in the prior year, in each case primarily due to higher material costs reflective of global component shortages, higher logistics costs and unfavorable overhead absorption. These decreases in gross margin were partially offset by favorable product mix and higher revenue volumes. Gross margin for PSD decreased for the three months endedJune 30, 2022 , compared to the prior quarter, primarily due to higher material costs reflective of global component shortages, higher logistics costs and unfavorable product mix. Gross margin for PSD increased for the six month period endedJune 30, 2022 , compared to the same period in the prior year, primarily due to higher revenue volumes and favorable product mix, partially offset by unfavorable absorption, higher material costs reflective of global component shortages and higher logistics costs. 34 -------------------------------------------------------------------------------- Gross margin for ESD decreased for the three months endedJune 30, 2022 , compared to the prior quarter, and gross margin for ESD decreased for the six months endedJune 30, 2022 compared to the same period in the prior year, in each case primarily due to unfavorable absorption, from lower revenue volumes, unfavorable product mix, and higher logistics costs.
Research and Development
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Research and development $ 53 $ 52 $ 105 $ 97
For the six months ended
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 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 other advanced manufacturing 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 Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 2022 2021
Selling, general and administrative $ 101 $
92
For the three months endedJune 30, 2022 , selling, general and administrative expenses increased$9 million sequentially, with$5 million in increases from annual compensation adjustments, including equity award grants. The remaining increases were primarily for consulting and professional fees, marketing and related travel costs and information technology-related costs.
Acquisition and Integration Costs
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 2022 2021
Acquisition and integration costs $ 2 $
8
Acquisition and integration costs during the three months endedJune 30, 2022 andMarch 31, 2022 and the six months endedJune 30, 2022 , were primarily related to consulting and professional fees related to our pending acquisition of Atotech. Acquisition and integration costs for the six months endedJune 30, 2021 , were primarily related to consulting and professional fees related to our acquisition of Photon Control, the pending acquisition of Atotech and a proposed acquisition that was not consummated. 35 --------------------------------------------------------------------------------
Restructuring and other
Three Months Ended Six Months Ended
March 31, June 30,
(dollars in millions) June 30, 2022 2022 June 30, 2022 2021
Restructuring and other $ 3 $ 2 $ 5 $ 8
Restructuring and other costs during the three and six months ended June 30,
2022 , were primarily related to severance costs due to a global cost-saving
initiative and the closure of two facilities in Europe . Restructuring and other
costs during the three months ended March 31, 2022 were primarily related to the
closure of a facility in Europe . Restructuring and other costs during the three
and six months ended June 30, 2021 were primarily related to duplicate facility
costs attributed to entering into new facility leases, severance costs due to a
global cost-saving initiative, costs related to the pending closure of a
facility in Europe and movement of certain products to low-cost regions.
Amortization of Intangible Assets
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Amortization of intangible assets $ 15 $ 15 $ 30 $ 25
For the six months ended
Gain on sale of long-lived assets
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Gain on sale of long-lived assets $ - $ (7 ) $ (7 ) $ -
For the three months ended
Other Expense (Income), Net
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 June 30, 2022 June 30, 2021
Other expense (income), net $ 2 $ (5 ) $ (3 ) $ 9
Other expense (income), net, for the three months ended June 30, 2022 and six
months ended June 30, 2021 , consisted primarily of net foreign exchange and fair
value losses.
Other expense (income), net, for the three months ended March 31, 2022 and the
six months ended June 30, 2022 , consisted primarily of net foreign exchange and
fair value gains.
Provision for Income Taxes
Three Months Ended Six Months Ended
(dollars in millions) June 30, 2022 March 31, 2022 2022 2021
Provision for income taxes $ 26 $ 28 $ 54 $ 52
Our effective tax rates for the three months ended June 30, 2022 and March 31,
2022 were 17.0% and 16.3%, respectively. The effective tax rates for the three
months ended June 30, 2022 and March 31, 2022 were lower than the U.S. statutory
tax rate mainly due to the U.S. deduction for foreign derived intangible income
("FDII") and the geographic mix of income earned by the Company's international
subsidiaries being taxed at rates lower than the U.S. statutory tax rate, offset
by the U.S. global intangible low-taxed income inclusion ("GILTI").
Our effective tax rates for the six months ended June 30, 2022 and June 30, 2021
were 16.6% and 16.2%, respectively. The effective tax rates for the six months
ended June 30, 2022 and June 30, 2021 were lower than the U.S. statutory tax
rate mainly due to the geographic mix of income earned by the Company's
international subsidiaries being taxed at rates lower than the U.S. statutory
tax
36
--------------------------------------------------------------------------------
rate, benefits of stock compensation, and the U.S. deduction for FDII offset by
the U.S. tax effects of the U.S. GILTI inclusion and the write-off of deferred
tax assets related to certain foreign net operating losses.
Over the next 12 months, it is reasonably possible that we may recognize
approximately $1 million of previously net unrecognized tax benefits, excluding
interest and penalties, related to U.S. federal, state and foreign tax positions
as a result of the expiration of statutes of limitation. The U.S. federal
statute of limitations remains open for tax years 2018 through the present. The
U.S. statute of limitation for the one-time tax reported in 2017 remains open
until 2024. The statute of limitations for our tax filings in other
jurisdictions varies between fiscal years 2016 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 2002 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. OnMarch 28, 2022 , theBiden Administration released its fiscal year 2023 budget blueprint, which includes an increase to the corporate tax rate from 21% to 28%, an increase to GILTI taxes, reductions of the FDII benefit, a new minimum tax based on anOrganization of Economic Co-operation and Development agreement and other provisions. If these tax proposals are enacted in their current form, we expect our income tax expense would materially increase.
Liquidity and Capital Resources
Cash and cash equivalents and short-term marketable investments atJune 30, 2022 andDecember 31, 2021 totaled$1.1 billion and$1.0 billion , respectively. The primary driver in our current and anticipated future cash flows is, and we expect 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$146 million for the six months endedJune 30, 2022 , resulting from net income of$273 million , which included non-cash charges of$84 million , offset by a net increase in working capital of$211 million . The net increase in working capital was primarily due to increases in inventory of$133 million and trade accounts receivable of$53 million , as a result of increased business levels and timing of sales, and a decrease of$49 million in accrued compensation resulting from the payment of variable compensation. These increases in working capital were partially offset by an increase in accounts payable and accrued expenses of$30 million . Net cash used in investing activities was$1 million for the six months endedJune 30, 2022 , primarily due to$83 million in purchases of property, plant and equipment, which included a$42 million purchase and expansion of a facility inSouth Korea , partially offset by$76 million in maturities of investments. Net cash used in financing activities was$31 million for the six months endedJune 30, 2022 , primarily due to$24 million of dividend payments and$5 million related to net tax payments on the vesting of employee stock awards. Holders of our common stock are entitled to receive dividends when and if they are declared by our Board of Directors. Our Board of Directors declared a cash dividend of$0.22 per share during each of the first and second quarters of 2022, which totaled$24 million . OnJuly 25, 2022 , our Board of Directors declared a quarterly cash dividend of$0.22 per share to be paid onSeptember 9, 2022 to stockholders of record as ofAugust 8, 2022 . 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. 37 --------------------------------------------------------------------------------
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. The final value of the consideration will be determined at the time of the closing of the Atotech Acquisition, which is subject to obtaining the required sanction by theRoyal Court of Jersey and the satisfaction of customary closing conditions. Our obligation to complete the Atotech Acquisition is not subject to any financing condition. Additional information regarding the funding of the acquisition and the 2022 New Term Loan Facilities, the 2022 New Revolving Credit Facility and the replacement of the Term Loan Facility and the ABL Facility, is discussed under "Pending Acquisition of Atotech" above and in Note 18 to the Notes to the Condensed Consolidated Financial Statements.
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 million . We have entered into seven amendments to the Term Loan Credit Agreement since 2016. 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 ofJune 30, 2022 , 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) a London 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. Under the Term Loan Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1)$600 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. 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 ofJune 30, 2022 , the remaining balance of deferred finance fees, original issue discount and repricing fees related to the term loans under the Term Loan Facility was$7 million . As ofJune 30, 2022 , after giving effect to all amendments and repayments prior to such date, the outstanding principal amount of the Term Loan Facility was$820 million , and the interest rate was 2.8%. 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. 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. AtJune 30, 2022 , we were in compliance with all covenants under the Term Loan Credit Agreement.
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 the ABL Facility of up to$100 million , subject to a borrowing base limitation. We have entered into two amendments to the ABL Credit Agreement since 2019. As ofJune 30, 2022 , 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 38 -------------------------------------------------------------------------------- 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 million . We have not borrowed against the ABL Facility to date. As ofJune 30, 2022 , 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)$9 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)$9 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 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. From the time when we have excess availability less than the greater of (a) 10.0% of the Line Cap and (b)$9 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)$9 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. 39 --------------------------------------------------------------------------------
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 ofJune 30, 2022 of up to an equivalent of$25 million . Total borrowings outstanding under these arrangements were$2 million atJune 30, 2022 . There were no borrowings outstanding under these arrangements atDecember 31, 2021 .
Interest Rate Swap Agreements
We entered into various interest rate swap agreements as described further in Note 5 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. We expect to enter into interest rate swap agreements in order to manage the exposure to interest rate fluctuations associated with the variable SOFR of the 2022 New Term Loan Facilities.
Contractual Obligations
There have been no changes outside the ordinary course of business to our
contractual obligations as disclosed in our Annual Report on Form 10-K for the
year ended
40--------------------------------------------------------------------------------
© Edgar Online, source
