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 that we make are the need to generate sufficient cash flows to service and repay our substantial indebtedness we have incurred in connection with our acquisition ofAtotech Limited ("Atotech" and such transaction, the "Atotech Acquisition"), which we acquired inAugust 2022 , the terms of our existing term loans under which we incurred such debt, our entry into the chemicals technology business through our acquisition of Atotech, 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, the ability to realize the anticipated synergies, cost savings and other benefits of the Atotech Acquisition, competition from larger, more advanced or more established companies in our markets, the ability to successfully grow our business and the businesses ofAtotech andElectro Scientific Industries, Inc. , which we acquired inFebruary 2019 and financial risks associated with those and potential future acquisitions, including goodwill and intangible asset impairments, potential adverse reactions or changes to business relationships resulting from the completion of the Atotech Acquisition, manufacturing and sourcing risks, including those associated with limited and sole source suppliers and the impact and duration of supply chain disruptions and component shortages, and changes in global demand and the impact of COVID-19 or any other pandemic with respect to such disruptions, shortages and increases, risks associated with doing business internationally, including trade compliance, regulatory restrictions on our products or components and unfavorable currency exchange and tax rate fluctuations, which risks become more significant as we grow our business internationally and inChina specifically, conditions affecting the markets in which we operate, including fluctuations in capital spending in the semiconductor industry and other advanced manufacturing markets, and fluctuations in sales to our major customers or disruptions or delays from third-party service providers upon which our operations may rely, the ability to anticipate and meet customer demand, the challenges, risks and costs involved with integrating or transitioning local and international operations of the companies we have acquired, risks associated with the attraction and retention of key personnel, potential fluctuations in quarterly results, dependence on new product development, rapid technological and market change, acquisition strategy, volatility of stock price, risks associated with chemical manufacturing and environmental regulation compliance, risks related to our products resulting from defects, which would increase our costs and seriously harm our business, financial condition, operating results and customer relationships, financial and legal risk management, risks related to cybersecurity and data privacy threats and the challenges associated with intellectual property protection, and the other important factors described in Part II, Item 1A of this Quarterly Report on Form 10-Q. We are 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, even if subsequent events cause our views to change. 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.
Overview
We enable technologies that transform our world. We deliver foundational
technology solutions to leading edge semiconductor manufacturing, advanced
electronics and specialty industrial applications. We apply our broad science
and engineering capabilities to create instruments, subsystems, systems, process
control solutions and specialty chemicals technology that improve process
performance, optimize productivity and enable unique innovations for many of the
world's leading technology and industrial companies. Our solutions are critical
to addressing the challenges of miniaturization and complexity in advanced
device manufacturing by enabling increased power, speed and feature enhancement
for optimized connectivity. Our solutions are also critical to addressing
ever-increasing performance requirements across a wide array of specialty
industrial applications.
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--------------------------------------------------------------------------------Acquisition of Atotech
OnAugust 17, 2022 , (the "Effective Date"), we completed the Atotech Acquisition, through the acquisition of the entire issued share capital of Atotech byAtotech Manufacturing, Inc. ("Bidco"), aDelaware corporation and indirect wholly owned subsidiary of the Company. The Atotech Acquisition was implemented by means of a scheme of arrangement under the laws of Jersey (the "Scheme") pursuant to the definitive agreement entered into by us and Atotech onJuly 1, 2021 , as amended by the Letter Agreement datedOctober 29, 2021 by and among us, Atotech and Bidco and as further amended by the Amendment to the Implementation Agreement datedApril 1, 2022 by and among us, Atotech and Bidco (together, the "Implementation Agreement"). On the Effective Date, pursuant to the Scheme and in accordance with terms and conditions of the Implementation Agreement, Bidco acquired each issued and outstanding ordinary share of Atotech in exchange for per share consideration of$16.20 in cash and 0.0552 of a share of Company common stock. Atotech develops leading process and manufacturing technologies for advanced surface modification, electroless and electrolytic plating, and surface finishing. Applying a comprehensive systems-and-solutions approach, Atotech's portfolio includes chemistry, equipment, software, and services for innovative and high-technology applications in a wide variety of end markets. Atotech further broadens our capabilities by bringing leadership in critical chemistry solutions for advanced electronics and specialty industrial applications. The total preliminary net purchase price, including cash consideration, net of cash acquired, value of MKS shares issued, repayment of Atotech debt and settlement of certain Atotech share-based awards totaled$5.7 billion . We funded the payment of the aggregate cash consideration with a combination of cash on hand and the proceeds from the New Term Loan Facility, as defined below. As a result of the Atotech Acquisition, we issued an aggregate of 10.7 million shares of our common stock to the former Atotech shareholders.
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 , other than the policies outlined below that were updated as a result of the Atotech Acquisition.
Revenue Recognition
We account for revenue using Accounting Standards Codification 606 ("ASC 606"). We apply ASC 606 using the following steps:
•
Identify the contract with a customer
•
Identify the performance obligations in the contract
•
Determine the transaction price
•
Allocate the transaction price to performance obligations in the contract
•
Recognize revenue when or as we satisfy a performance obligation
Revenue is recognized when or as obligations under the terms of a contract with
our customer has been satisfied and control has transferred to the customer. The
majority of our performance obligations, and associated revenue, are transferred
to customers at a point in time, generally upon shipment of a product to the
customer or receipt of the product by the customer and without significant
judgments. We recognize revenue over time for contracts relating to the
manufacturing, modifications and retrofits of our plating equipment, as the
equipment is built to customer specification, and we have an enforceable right
to payment for the performance completed to date. For these sales, we use the
cost-to-cost input method to measure progress. In cases, where cost-to-cost is
not proportionate to our progress in satisfying the performance obligation
because of uninstalled materials, we adjust the measure of progress and
recognize revenue to the extent of cost incurred to satisfy the performance
obligation under the contract.
Installation services, other than those related to our plating equipment, are
not significant, are usually completed in a short period of time and, therefore,
are recorded at a point in time when the installation services are completed,
rather than over time as they are not material. Extended warranty, service
contracts, and repair services, which are transferred to the customer over time,
are recorded as revenue as the services are performed. For repair services, we
make an accrual at each quarter end based upon historical repair times within
our product groups to record revenue based upon the estimated number of days
completed to date, which is consistent with ratable recognition.
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Revenue is measured as the amount of consideration we expect to receive in
exchange for transferring goods or providing services. Performance obligations
promised in a contract are identified based on the products or services that
will be transferred to the customer that are both capable of being distinct,
whereby the customer can benefit from the product or service either on its own
or together with other resources that are readily available from third parties
or from us, and are distinct in the context of the contract, whereby the
transfer of the product or service is separately identifiable from other
promises in the contract. Sales, value add, and other taxes we collect
concurrent with revenue-producing activities are excluded from revenue. Our
normal payment terms are 30 to 60 days but vary by the type and location of our
customers and the products or services offered. The time between invoicing and
when payment is due is not significant. For certain products and services and
customer types, we require payment before the products or services are delivered
to, or performed for, the customer. None of our contracts in each of the periods
presented contained a significant financing component.
We periodically enter into contracts with our customers in which a customer may
purchase a combination of goods and or services, such as products with
installation services or extended warranties. These contracts include multiple
deliverables that we evaluate to determine if the deliverables are separate
performance obligations. Once we determine the performance obligations, we then
determine the transaction price, which includes estimating the amount of
variable consideration to be included in the transaction price, if any. To the
extent the transaction price includes variable consideration, we estimate the
amount of variable consideration that should be included in the transaction
price utilizing either the expected value method or the most likely amount
method, depending on the method we expect to better predict the amount of
consideration to which we will be entitled. There are no constraints on the
variable consideration recorded. We then allocate the transaction price to each
performance obligation in the contract based on a relative stand-alone selling
price charged separately to customers or using an expected cost-plus margin
method. The corresponding revenues are recognized when or as the related
performance obligations are satisfied, which are noted above. The impact of
variable consideration was immaterial in each of the periods presented.
We sell separately priced service contracts and extended warranty contracts
related to certain of our products, in particular related to our plating and
laser-based products. These separately priced contracts generally range from 12
to 60 months. We recognize revenue over the term of the agreement in proportion
to the costs expected to be incurred in satisfying the obligations under the
contract.
We monitor and track the amount of product returns, provide for sales return
allowances and reduce revenue at the time of shipment for the estimated amount
of such future returns, based on historical experience. While product returns
have historically been within our expectations and established provisions, there
is no assurance that we will continue to experience the same return rates that
we have in the past. Any significant increase in product return rates could have
a material adverse impact on our operating results for the period in which such
returns materialize.
While we maintain a credit approval process, significant judgments are made by
management in connection with assessing our customers' ability to pay at the
time of shipment. Despite this assessment, from time to time, our customers are
unable to meet their payment obligations. We continuously monitor our customers'
credit-worthiness and use our judgment in establishing a provision for estimated
credit losses based upon our historical experience and any specific customer
collection issues that we have identified. While such credit losses have
historically been within our expectations and the provisions established, there
is no assurance that we will continue to experience the same credit loss rates
that we have in the past. A significant change in the liquidity or financial
position of our customers could have a material adverse impact on the
collectability of accounts receivable and our future operating results. Bad debt
expense was immaterial in each of the periods presented.
Derivatives
As a result of our global operating activities and variable interest rate borrowings, we are exposed to market risks from changes in foreign currency exchange rates and interest rates, which may adversely affect our operating results and financial position. We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments and those utilized as economic hedges. We do not enter into derivative instruments for trading or speculative purposes.
We have used derivative instruments, such as foreign exchange forward contracts
and options, to manage certain foreign currency exposure, and interest rate
swaps and interest rate caps to manage interest rate exposure. Changes in fair
value of derivative instruments are recognized in the consolidated statement of
operations or, if hedge accounting is applied, in other comprehensive income for
the effective portion of the changes in fair value. All derivatives are stated
at fair value in the balance sheet.
Accounting principles for qualifying hedges require detailed documentation that
describes the relationship between the hedging instrument and the hedged item,
including, but not limited to, the risk management objectives and hedging
strategy and the methods to assess the effectiveness of the hedging
relationship. We assess the hedging relationships, both at the inception of the
hedge and on an ongoing basis, using either the critical terms matching approach
or a regression analysis approach to determine whether the designated hedging
instrument is highly effective in offsetting changes in the value of the hedged
item.
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By nature, all financial instruments involve market and credit risks. We enter
into derivative instruments with major investment grade financial institutions,
for which no collateral is required. We have policies to monitor the credit risk
of these counterparties. While there can be no assurance, we do not anticipate
any material non-performance by any of these counterparties.
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 ended December 31, 2021 in the section captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Critical Accounting Policies and Estimates."
Segments
In the first quarter of 2022, we updated the names of our then-three divisions
in order to simplify our naming convention. These divisions, formerly known as
the Vacuum & Analysis Division, the Light & Motion Division and the Equipment &
Solutions Division, were renamed the Vacuum Solutions Division ("VSD"), the
Photonics Solutions Division ("PSD") and the Equipment Solutions Division
("ESD"), respectively. On August 17, 2022 , we completed the Atotech Acquisition
and refer to Atotech as our Materials Solutions Division ("MSD"). During the
third quarter of 2022, we consolidated our Equipment Solutions business,
previously ESD, into a component of PSD and prior periods were recast to reflect
this change. Our reportable segments now consist of our three divisions, VSD,
PSD and MSD.
VSD delivers foundational technology solutions to leading edge semiconductor
manufacturing, advanced electronics and specialty industrial applications. VSD
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, and vacuum technology.
PSD provides a full range of solutions including lasers, beam measurement and
profiling, precision motion control, vibration isolation systems, photonics
instruments, temperature sensing, opto-mechanical components, optical elements,
systems for flexible printed circuit board ("PCB") laser processing, high-speed
multilayer ceramic capacitor testing, and laser-based systems for high density
interconnect PCB and IC substrate manufacturing.
MSD develops leading process and manufacturing technologies for advanced surface
modification, electroless and electrolytic plating, and surface finishing.
Atotech is now a brand within MSD. Applying a comprehensive
systems-and-solutions approach, MSD's portfolio includes chemistry, equipment,
software, and services for innovative and high-technology applications in a wide
variety of end-markets.
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 Advanced Electronics end market and
Specialty Industrial end market. Our Semiconductor end market remained
unchanged.
Net Revenues by Market
Three Months Ended Nine Months Ended
September 30 ,
September September
(dollars in millions) 2022 % Total June 30, 2022 % Total 30, 2022 % Total 30, 2021 % Total
Semiconductor $ 541 57 % $ 515 67 % $ 1,545 63 % $ 1,331 61 %
Advanced Electronics 185 19 % 77 10 % 344 14 % 342 16 %
Specialty Industrial 228 24 % 173 23 % 572 23 % 513 23 %
Total net revenues $ 954 100 % $ 765 100 % $ 2,461 100 % $ 2,186 100 %
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.
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For the three months ended September 30, 2022 , net revenues in our semiconductor
market increased by $26 million or 5%, compared to the prior quarter, and for
the nine months ended September 30, 2022 , net revenues increased by $214 million
or 16%, compared to the same period in the prior year. The increases in net
revenues were mainly due to strong demand and 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 for the nine
months ended September 30, 2022 , compared to the prior year, was partially due
to our acquisition of Photon Control Inc. ("Photon Control") in July 2021 .
In October 2022 , the U.S. Department of Commerce's Bureau of Industry and
Security ("BIS") published regulations that introduce new and novel restrictions
related to end-uses in semiconductor, semiconductor manufacturing,
supercomputer, and advanced computing, along with certain equipment used to
develop and produce them (the "New BIS Rules"). The New BIS Rules restrict our
direct and indirect sales to China and primarily impact our Semiconductor
Market. Based on our preliminary assessment of the New BIS Rules, we expect an
overall annualized reduction of net revenues in the range of $250 million to
$350 million . While we continue to adjust our policies and practices to ensure
compliance with these regulations, and we will seek to mitigate their impact,
there can be no assurances that the New BIS Rules will not have an effect on our
business greater than our preliminary assessment.
Advanced Electronics Market
This market relates to sales of products for PCB manufacturing, solar, display and electronic component applications, as well as plating chemistry, equipment, services and software used in the manufacturing of electronics components. 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 endedSeptember 30, 2022 , net revenues in our advanced electronics market increased by$108 million or 140%, compared to the prior quarter, and for the nine months endedSeptember 30, 2022 , net revenues increased by$2 million or 1%, compared to the same period in the prior year. These increases were driven primarily by the Atotech Acquisition, with MSD contributing$110 million for the three and nine months endedSeptember 30, 2022 . These increases were offset by a decrease of$6 million from customers in VSD for the three months endedSeptember 30, 2022 and$111 million from customers in PSD for the nine months endedSeptember 30, 2022 . PSD has been impacted by decreased industry demand for flexible PCB via drilling systems as customers have temporarily slowed capacity expansion. Demand for flexible PCB via drilling systems, which we report in PSD, and for chemistry solutions, which we report in MSD, have softened due to a decline in end market demand for electronics, such as smartphones and personal computers.
Specialty Industrial Market
This market primarily relates to sales of products for industrial, life and health sciences, and research and defense applications.
Industrial
Industrial technologies encompass a wide range of diverse applications, such as laser marking, measurement and scribing, natural gas and oil production and environmental monitoring, as well as functional coatings for corrosion and wear resistance and industrial surface modification and plating.
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.
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. For the three months endedSeptember 30, 2022 , net revenue in our specialty industrial market increased by$55 million or 32% compared to the prior quarter and for the nine months endedSeptember 30, 2022 , net revenues increased$59 million or 12% compared to the same period in the prior year. These increases were driven primarily by the Atotech Acquisition, with MSD contributing$61 million for the three and nine months endedSeptember 30, 2022 . Though demand across our Specialty Industrial Market remained relatively stable, our general metal finishing business, which we report in MSD, continues to be impacted by supply chain constraints in the automotive market. 34 --------------------------------------------------------------------------------
International Markets
A significant portion of our net revenues is from sales to customers in international markets. For the nine months endedSeptember 30, 2022 and 2021, international revenues accounted for approximately 55% and 58%, respectively, of our total net revenues. A significant portion of our international net revenues was fromChina ,South Korea andGermany . We expect international net revenues will increase due to the Atotech Acquisition and 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 53% and 28% of our total long-lived assets as ofSeptember 30, 2022 andDecember 31, 2021 , respectively. The increase as ofSeptember 30, 2022 compared toDecember 31, 2021 , was primarily a result of increased long-lived assets as a result of the Atotech Acquisition, with MSD accounting for approximately 66% of our total international long-lived assets as ofSeptember 30, 2022 . The increase was also due to increased long-lived assets in one of ourMexico facilities and a 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.
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, September
2022 June 30, 2022 2022 30, 2021
Net revenues:
Products 88.2 % 86.8 % 87.5 % 87.4 %
Services 11.8 13.2 12.5 12.6
Total net revenues 100.0 100.0 100.0 100.0
Cost of revenues:
Cost of product revenues 53.0 49.3 50.5 46.3
Cost of service revenues 6.1 6.5 6.3 6.8
Total cost of revenues (exclusive of
amortization shown separately below) 59.1 55.8 56.8 53.1
Gross profit 40.9 44.2 43.2 46.9
Research and development 6.6 6.9 6.8 6.8
Selling, general and administrative 13.2 13.2 13.0 13.2
Acquisition and integration costs 3.2 0.3 1.7 0.9
Restructuring and other 0.5 0.4 0.4 0.5
Amortization of intangible assets 4.9 2.0 3.1 1.8
Gain on sale of long-lived assets - - (0.3 ) -
Income from operations 12.5 21.4 18.5 23.7
Interest income 0.1 0.1 0.1 -
Interest expense 8.4 0.9 3.8 0.9
Other (income) expense, net (0.1 ) 0.3 (0.2 ) 0.5
Income before income taxes 4.3 20.3 15.0 22.3
Provision for income taxes 3.6 3.4 3.6 3.9
Net income 0.7 % 16.9 % 11.4 % 18.4 %
Net Revenues
Three Months Ended Nine Months Ended
September 30, September 30, September
(dollars in millions) 2022 June 30, 2022 2022 30, 2021
Products $ 841 $ 664 $ 2,153 $ 1,911
Services 113 101 308 275
Total net revenues $ 954 $ 765 $ 2,461 $ 2,186
35-------------------------------------------------------------------------------- For the three months endedSeptember 30, 2022 , net product revenues increased$177 million compared to the prior quarter, and for the nine months endedSeptember 30, 2022 , net product revenues increased$242 million compared to the same period in the prior year. These increases were primarily due to the Atotech Acquisition with MSD contributing$164 million for the three and nine months endedSeptember 30, 2022 . Additional increases for the nine months endedSeptember 30, 2022 , were primarily due to volume increases in sales to our semiconductor market in VSD and PSD, partially offset by decreases in sales to our advanced electronics market, primarily in PSD due to decreased industry demand for flexible PCB via drilling systems 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 endedSeptember 30, 2022 , net service revenues increased$12 million compared to the prior quarter and were primarily related to increases in our advanced electronics and specialty industrial markets, mainly as a result of the Atotech Acquisition. For the nine months endedSeptember 30, 2022 , net service revenues increased$33 million compared to the same period in the prior year and were partially related to the Atotech Acquisition, as well as increases in VSD and PSD from increases in our semiconductor and advanced electronics markets.
The following table sets forth our net revenues by reportable segment:
Three Months Ended Nine Months Ended
September 30, September 30, September
(dollars in millions) 2022 June 30, 2022 2022 30, 2021
Net revenues:
Vacuum Solutions Division $ 510 $ 507 $ 1,491 $ 1,377
Photonics Solutions Division 267 258 793 809
Materials Solutions Division 177 - 177 -
Total net revenues $ 954 $ 765 $ 2,461 $ 2,186
For the nine months ended September 30, 2022 , net revenues from VSD increased
$114 million compared to the same period in the prior year. This increase was
largely reflective of volume increases in the semiconductor market.
For the three months ended September 30, 2022 , net revenues from PSD increased
$9 million compared to the prior quarter, primarily due to increases in net
revenues from our semiconductor market. For the nine months ended September 30,
2022 , net revenues decreased $16 million compared to the same period in the
prior year due to decreases in our advanced electronics market primarily due to
decreased industry demand for flexible PCB via drilling systems and other
products for the consumer electronics market offset by volume increases in the
semiconductor market.
For the three and nine months ended September 30, 2022 , net revenues from MSD
increased $177 million compared to the prior quarter and the same period in the
prior year, primarily due to increases in revenue from our advanced electronics
and specialty industrial markets. Revenues from this segment consist of revenues
from the Atotech business from August 17, 2022 through September 30, 2022 .
Gross margin
Three Months Ended Nine Months Ended
September 30, % Points September 30, September 30, % Points
2022 June 30, 2022 Change 2022 2021 Change
Gross margin as a
percentage of net
revenues:
Products 39.8 % 43.2 % (3.4 )% 42.3 % 47.0 % (4.7 )%
Services 48.5 50.0 (1.5 ) 49.4 46.1 3.3
Total gross margin 40.8 % 44.2 % (3.4 )% 43.1 % 46.9 % (3.8 )%
Gross margin for our products decreased for the three and nine months ended
September 30, 2022 , compared to the prior quarter and compared to the same
period in the prior year. 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. Additionally, as a result of
the Atotech Acquisition, we preliminarily incurred an $89 million step-up to
fair value adjustment on acquired inventory, of which $39 million was amortized
during the three and nine months ended September 30, 2022 and negatively
impacted our gross margin. The remaining step-up to fair value adjustment on
acquired inventory will be amortized during the three months ending December 31,
2022 . The decreases in our gross margin for the
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three and nine months ended September 30, 2022 compared to the three months
ended June 30, 2022 and the same period in the prior year, was partially offset
by higher revenue volumes and, for the nine months ended September 30, 2022 ,
favorable product mix.
Gross margin for our services decreased for the three months ended September 30,
2022 , compared to the prior quarter primarily due to higher materials costs and
unfavorable absorption. Gross margin for our services increased for the nine
months ended September 30, 2022 , compared to the same period in the prior year,
which 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 on
service-related parts.
The following table sets forth gross margin as a percentage of net revenues by reportable segment:
Three Months Ended Nine Months Ended
September 30, % Points September 30, September 30, % Points
2022 June 30, 2022 Change 2022 2021 Change
Gross margin as a
percentage of net
revenues:
Vacuum Solutions
Division 43.1 % 43.2 % (0.1 )% 43.3 % 46.8 % (3.5 )%
Photonics Solutions
Division 46.9 46.0 0.9 46.9 47.2 (0.3 )
Materials Solutions
Division 25.1 - 25.1 25.1 - 25.1
Total gross margin 40.8 % 44.2 % (3.4 )% 43.1 % 46.9 % (3.8 )%
Gross margin for VSD decreased for the nine months ended September 30, 2022
compared to the same period in the prior year, primarily due to higher material
costs reflective of global component shortages, higher logistics costs and
unfavorable overhead absorption. This decrease in gross margin was partially
offset by favorable product mix and higher revenue volumes.
Gross margin for PSD increased for the three months ended September 30, 2022 ,
compared to the prior quarter, primarily due to higher revenue volumes. Gross
margin for PSD decreased for the nine months ended September 30, 2022 , compared
to the same period in the prior year, primarily due to higher material costs
reflective of global component shortages, higher logistics costs and unfavorable
overhead absorption. This decrease in gross margin was partially offset by
favorable product mix.
Gross margin for MSD was 25.1% of net revenues for the three and nine months
ended September 30, 2022 . This included a charge of $39 million of inventory
step-up amortization related to the Atotech Acquisition.
Research and development
Three Months Ended Nine Months Ended
June 30, September 30,
(dollars in millions) September 30, 2022 2022 2022 September 30, 2021
Research and development $ 63 $ 53 $ 168 $ 149
For the three months ended September 30, 2022 , research and development expenses
increased $10 million compared to the prior quarter, primarily due to the
Atotech Acquisition. For the nine months ended September 30, 2022 , research and
development expenses increased $19 million compared to the same period in the
prior year, primarily due to an increase of $10 million resulting from the
Atotech Acquisition. The remaining increase of $9 million was primarily due to
increases of $5 million in compensation-related costs, $2 million in occupancy
and depreciation costs and $1 million in consulting costs.
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. Projects typically have a duration of less than 36 months but may be
extended for development of new products. 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. In our chemistry and equipment plating businesses, a majority of
our R&D investment supports existing customers' product improvement needs and
their short-term R&D goals, which enables us to pioneer new high-value solutions
while limiting commercial risk. 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.
37
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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 Nine Months Ended
September 30, September 30,
(dollars in millions) 2022 June 30, 2022 2022 September 30, 2021
Selling, general and administrative $ 126 $ 101 $ 319 $
289
For the three months ended September 30, 2022 , selling, general and
administrative expenses increased $25 million compared to the prior quarter,
primarily due to an increase of $33 million from the Atotech Acquisition.
Excluding MSD, VSD and PSD had a decrease of $7 million , primarily related to a
decrease of $5 million in compensation-related costs. For the nine months ended
September 30, 2022 , selling, general and administrative expenses increased $30
million compared to the same period in the prior year, primarily due to an
increase of $33 million from the Atotech Acquisition. Excluding MSD, the
remaining VSD and PSD businesses decreased $3 million , primarily due to a
decrease of $4 million in compensation-related costs.
Acquisition and integration costs
Three Months Ended Nine Months Ended
June 30,
(dollars in millions)September 30, 2022
2022
31 $ 2 $ 41 $ 21
Acquisition and integration costs during the three months ended September 30,
2022 and June 30, 2022 and the nine months ended September 30, 2022 , were
primarily related to consulting and professional fees related to the Atotech
Acquisition. Acquisition and integration costs for the nine months ended
September 30, 2021 , were primarily related to consulting and professional fees
related to our acquisition of Photon Control, the then-pending acquisition of
Atotech and a proposed acquisition that was not consummated.
Restructuring and other
Three Months Ended Nine Months Ended
(dollars in millions) September 30, 2022 June
30, 2022
$ 5 $ 3 $ 10 $ 10
Restructuring and other costs during the three months ended September 30, 2022
were primarily related to executive payments made related to the Atotech
Acquisition. Restructuring and other costs during the nine months ended
September 30, 2022 were primarily related to severance costs due to a global
cost-saving initiative and the closure of two facilities in Europe as well as
executive payments related to the Atotech Acquisition. Restructuring and other
costs during the nine months ended September 30, 2021 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
closure of two facilities in Europe and the movement of certain products to
low-cost regions.
Amortization of intangible assets
Three Months Ended Nine Months Ended
June 30 ,
(dollars in millions) September 30, 2022 2022
47 $ 15 $ 77 $ 40
For the three months ended September 30, 2022 , amortization of intangible assets
increased by $32 million compared to the prior quarter, due to amortization of
intangible assets from the Atotech Acquisition. For the nine months ended
September 30, 2022 , amortization of intangible assets increased by $37 million ,
compared to the same period in the prior year, due to amortization of intangible
assets from the Atotech Acquisition and the acquisition of Photon Control.
38
--------------------------------------------------------------------------------Gain on sale of long-lived assets
Three Months Ended Nine Months Ended
September 30,
(dollars in millions) September 30, 2022 June 30, 2022 September 30, 2022 2021
Gain on sale of long-lived assets $ - $ - $ (7 ) $ -
For the nine months ended
Interest expense, net
Three Months Ended Nine Months Ended
June 30,
(dollars in millions)September 30, 2022
2022
$ 79 $ 6 $ 91 $ 18
For the three and nine months ended September 30, 2022 , interest expense, net
increased compared to the three months ended June 30, 2022 and the nine months
ended September 30, 2021 , respectively, primarily due to borrowings on the New
Term Loan Facility we entered into in connection with the Atotech Acquisition.
Other (income) expense, net
Three Months Ended Nine Months Ended
June 30 ,
(dollars in millions) September 30, 2022 2022
$ (1 ) $ 2 $ (4 ) $ 12
Other (income) expense, net, for the three and nine months ended September 30,
2022 and the three months ended June 30, 2022 , consist primarily of net foreign
exchange and fair value gains and losses. The nine months ended September 30,
2021 included a fair value loss of $10 million resulting from hedges of the
Canadian dollar related to the funding of our acquisition of Photon Control.
Three Months Ended Nine Months Ended
June 30,
(dollars in millions) September 30, 2022
2022
$ 34 $ 26 $ 88 $ 86
Our effective tax rates for the three months ended September 30, 2022 and June
30, 2022 were 85.5% and 17.0%, respectively. The effective tax rate for the
three months ended September 30, 2022 was higher than the U.S. statutory tax
rate mainly due to additional estimated accrued withholding taxes related to our
change in indefinite reinvestment assertion, non-deductibility of certain costs
associated with to the Atotech Acquisition, and the U.S. global intangible
low-taxed income ("GILTI") inclusion, offset by the U.S. deduction for foreign
derived intangible income ("FDII") and the geographic mix of income earned by
the our international subsidiaries being taxed at rates lower than the U.S.
statutory tax rate. The effective tax rate for the three months ended June 30,
2022 was lower than the U.S. statutory tax rate mainly due to the U.S. deduction
for 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 GILTI inclusion.
Our effective tax rates for the nine months ended September 30, 2022 and
September 30, 2021 were 24.1% and 17.6%, respectively. The effective tax rates
for the nine months ended September 30, 2022 was higher than the U.S. statutory
tax rate mainly due to additional withholding taxes related to our change in
indefinite reinvestment assertion, non-deductibility of certain costs associated
with the Atotech Acquisition, and the GILTI inclusion, offset by the U.S.
deduction for FDII and the geographic mix of income earned by the our
international subsidiaries being taxed at rates lower than the U.S. statutory
tax rate The effective tax rate for the nine months ended September 30, 2021 was
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 rate, benefits of stock compensation, and the
U.S. deduction for FDII offset by the U.S. tax effects of the 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
39
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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.
The Company changed its indefinite reinvestment assertion with respect to
certain subsidiaries resulting from the expected increase in debt service costs
after the Atotech Acquisition. This resulted in a one-time charge to tax expense
of $30 million in the three and nine months ended September 30, 2022 to accrue
for expected taxes on accumulated earnings of the relevant subsidiaries.
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 have an unfavorable impact on our effective tax rate after the Atotech Acquisition, since Atotech operates primarily in jurisdictions with tax rates higher than theU.S. 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
Cash and cash equivalents and short-term marketable investments atSeptember 30, 2022 andDecember 31, 2021 totaled$885 million and$1.0 billion , respectively. The decrease primarily related to the use of cash to fund the payment of a portion of the purchase price for the Atotech Acquisition. 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$345 million for the nine months endedSeptember 30, 2022 , resulting from net income of$279 million , which included non-cash charges of$252 million , offset by a net increase in working capital of$186 million . The net increase in working capital was primarily due to increases in inventory of$188 million and trade accounts receivable of$37 million , as a result of increased business levels and timing of sales, a decrease of$37 million in accrued compensation resulting from the payment of variable compensation, and a decrease in income taxes payable of$27 million . These increases in working capital were partially offset by an increase in accounts payable of$55 million and other current and non-current liabilities of$46 million . Net cash used in investing activities was$4.5 billion for the nine months endedSeptember 30, 2022 , primarily due to$4.5 billion used for the Atotech Acquisition and$109 million in capital expenditures, partially offset by$76 million in maturities of investments. Net cash used in financing activities was$4.1 billion for the nine months endedSeptember 30, 2022 , primarily due to$5.0 billion in net proceeds from the New Term Loan Facility offset by$835 million of payments of borrowings, primarily related to payment of the Prior Term Loan Facility,$37 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, second and third quarters of 2022, which totaled$37 million . OnOctober 24, 2022 , our Board of Directors declared a quarterly cash dividend of$0.22 per share to be paid onDecember 9, 2022 to stockholders of record as ofNovember 28, 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 New Term Loan Facility and New Revolving Facility, each as defined and described further below, we may be restricted from paying dividends under certain circumstances.
Atotech Acquisition
OnAugust 17, 2022 , we completed the Atotech Acquisition. The total preliminary net purchase price, including cash consideration, net of cash acquired, value of MKS shares issued, repayment of Atotech debt and settlement of share-based awards 40 -------------------------------------------------------------------------------- totaled$5.7 billion . We funded the payment of the aggregate cash consideration with a combination of cash on hand and the proceeds from the New Term Loan Facility, as defined below. As a result of the Atotech Acquisition, we issued an aggregate of 10.7 million shares of our common stock to the former Atotech shareholders. Additional information regarding the funding of the Atotech Acquisition and the New Term Loan Facility, the New Revolving Facility and the replacement of the Prior Term Loan Facility and the Prior ABL Credit Facility, is discussed under "Acquisition of Atotech" above and in Note 10 to the Notes to the Condensed Consolidated Financial Statements. In connection with the completion of the Atotech Acquisition, we entered into a credit agreement withJPMorgan Chase Bank, N.A ., as administrative agent and collateral agent, Barclays Bank PLC, and the lenders from time to time party thereto (the "New Credit Agreement"). The New Credit Agreement provides for (i) a senior secured term loan facility (the "New Term Loan Facility") comprised of three tranches: aUSD 1 billion loan (the "USD Tranche A"), aUSD 3.6 billion loan (the "USD Tranche B") and aEUR 600 million loan (the "Euro Tranche B"), each of which were borrowed in full on the Effective Date, and (ii) a senior secured revolving credit facility ofUSD 500 million (the "New Revolving Facility" and, together with the New Term Loan Facility, the "New Credit Facilities"), with the commitments under each of the foregoing facilities subject to increase from time to time subject to certain conditions. Borrowings under the New Credit Facilities bear interest at a rate per annum equal to, at our option, any of the following, plus, in each case, an applicable margin: (a) with respect to the USD Tranche A, the USD Tranche B and the New Revolving Facility, (x) a base rate determined by reference to t the highest of (1) the federal funds effective rate plus 0.50%, (2) the prime rate quoted in The Wall Street Journal, or (3) a forward-looking term rate based on the secured overnight financing rate ("Term SOFR") (plus an applicable credit spread adjustment) for an interest period of one month, plus 1.00%; and (y) a Term SOFR rate (plus an applicable credit spread adjustment) for the interest period relevant to such borrowing, subject, solely with respect to the USD Tranche B, to a rate floor of 0.50%; and (b) with respect to the Euro Tranche B, a EURIBOR rate determined by reference to the costs of funds for Euro deposits for the interest period relevant to such borrowing adjusted for certain additional costs, subject to a EURIBOR rate floor of 0.0%. The USD Tranche A was issued with original issue discount of 0.25% of the principal amount thereof. The USD Tranche B and the Euro Tranche B were issued with original issue discount of 2.00% of the principal amount thereof. The applicable margin for borrowings under the USD Tranche A is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings. The applicable margin for borrowings under the USD Tranche B is 1.75% with respect to base rate borrowings and 2.75% with respect to Term SOFR borrowings. The applicable margin for borrowings under the Euro Tranche B is 3.00%. The initial applicable margin for borrowings under the New Revolving Facility is 1.50% with respect to base rate borrowings and 2.50% with respect to Term SOFR borrowings. Commencing with the delivery of financial statements with respect to the first quarter ending after the closing of the New Credit Agreement, the applicable margin for borrowings under the New Revolving Facility is subject to adjustment each fiscal quarter, based on our first lien net leverage ratio as of the end of the preceding quarter. In addition to paying interest on outstanding principal under the New Credit Facilities, we are required to pay a commitment fee in respect of the unutilized commitments under the New Revolving Facility. The initial commitment fee is 0.375% per annum. Commencing with the delivery of financial statements with respect to the first quarter ending after the closing of the New Credit Agreement, the commitment fee is subject to downward adjustment based on our first lien net leverage ratio as of the end of the preceding quarter. We must also pay customary letter of credit fees and agency fees. We incurred$242 million of deferred financing fees and original issue discount fees related to the term loans under the New Term Loan Facility, which are included in long-term debt in the accompanying 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, 2022 , the remaining balance of deferred financing fees and original issue discount of the New Term Loan Facility was$204 million . A portion of the deferred financing fees and original issue discount has been accelerated in connection with the debt prepayment and extinguishment of the Prior Term Loan Facility (as defined below). Under the New 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 incurrences or issuances of certain debt. If at any time the aggregate amount of outstanding loans, unreimbursed letter of credit drawings and undrawn letters of credit under the New Revolving Facility exceeds the aggregate commitments under the New Revolving Facility, we are required to repay outstanding loans and/or cash collateralize letters of credit, with no reduction of the commitment amount. We may voluntarily prepay outstanding loans under the New Credit Facilities from time to time, subject to certain conditions, without premium or penalty other than customary "breakage" costs with respect to Term SOFR or EURIBOR loans; provided, however, that subject to certain exceptions, if on or prior to the date that is twelve months after the closing date of the New Term Loan Facility, we prepay any loans under the USD Tranche B or the Euro Tranche B in connection with a repricing transaction, we must pay a prepayment premium of 1.00% of the aggregate principal amount of the loans so prepaid. Additionally, we may voluntarily reduce the unutilized portion of the commitment amount under the New Revolving Facility. 41 -------------------------------------------------------------------------------- We are required to make scheduled quarterly payments each equal to 1.25% of the original principal amount of the USD Tranche A (increasing to 1.875% in years 3 and 4 and 2.50% in year 5) and 0.25% of the original principal amount of the USD Tranche B and the Euro Tranche B, beginning with the fiscal quarter endingDecember 31, 2022 , with the balance due thereunder on the fifth anniversary of the closing date in the case of the USD Tranche A and the seventh anniversary of the closing date in the case of the USD Tranche B and the Euro Tranche B.
There is no scheduled amortization under the New Revolving Facility. Any principal amount outstanding under the New Revolving Facility is due and payable in full on the fifth anniversary of the closing date.
We incurred$7 million of costs in connection with the New Revolving Facility, which were capitalized and included in other assets in the accompanying consolidated balance sheet and are being amortized to interest expense over the estimated life of four years. As a result of our Prior ABL Credit Facility (as defined below) being terminated concurrently with our entry into the New Revolving Facility, we wrote off an immaterial amount of previously capitalized debt issuance costs. All obligations under the New Credit Facilities are guaranteed by certain of our wholly-owned domestic subsidiaries and are required to be guaranteed by certain of our future wholly-owned domestic subsidiaries and are secured by substantially all of our assets and the assets of such subsidiaries, subject to certain exceptions and exclusions. Under the New Credit Agreement, we have the ability to incur additional incremental debt facilities in an amount up to (x) the greater of (1)$1.01 billion and (2) 75% of consolidated EBITDA, plus (y) an amount equal to the sum of all voluntary prepayments of term loans under the New Term Loan Facility, plus (z) an additional unlimited amount subject to pro forma compliance with certain leverage ratio tests (based on the security and priority of such incremental debt). Under the USD Tranche A and the New Revolving Facility, so long as any USD Tranche A loans (or commitments in respect thereof) are outstanding as of the end of any fiscal quarter, we may not allow our total net leverage ratio as of the end of such fiscal quarter to be greater than 5.50 to 1.00, with an annual step-down of 0.25:1.00 and subject to a step-up of 0.50:1.00 for the four full fiscal quarter period following any material acquisition, not to exceed 5.50 to 1.00. In addition, in the event there are no loans outstanding under the USD Tranche A, as of the end of any fiscal quarter of ours when the aggregate amount of loans outstanding under the New Revolving Facility (net of (a) all letters of credit (whether cash collateralized or not) and (b) unrestricted cash of ours and our restricted subsidiaries) exceeds 35% of the aggregate amount of all commitments under the New Revolving Facility in; effect as of such date, we may not allow our first lien net leverage ratio as of the end of each such fiscal quarter to be greater than 6.00 to 1.00.
The USD Tranche B and the Euro Tranche B are not subject to financial maintenance covenants.
The New Credit Agreement contains a number of negative covenants that, among other things and subject to certain exceptions, restrict our ability and each of our subsidiaries to incur additional indebtedness; pay dividends on our capital stock or redeem, repurchase or retire our capital stock or our subordinated indebtedness; make investments, loans and acquisitions; create restrictions on the payment of dividends or other amounts to us from our restricted subsidiaries or restrictions on the ability of our restricted subsidiaries to incur liens; engage in transactions with our affiliates; sell assets, including capital stock of our subsidiaries; materially alter the business it conducts; consolidate or merge; incur liens; and engage in sale-leaseback transactions. The New 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 New Credit Facilities will be entitled to take various actions, including the acceleration of amounts due under the New Credit Facilities and all actions permitted to be taken by a secured creditor. AtSeptember 30, 2022 , we were in compliance with all covenants under the New Credit Agreement. The proceeds of the New Term Loan Facility were used on the Effective Date, among other things, to fund a portion of the consideration payable in connection with the Atotech Acquisition and to refinance the Prior Term Loan Facility, the Prior ABL Credit Facility and certain indebtedness of Atotech. We also paid certain customary fees and expenses ofJPMorgan Chase Bank, N.A ., Barclays Bank PLC,BofA Securities Inc. ,Citigroup Global Markets Inc. ,HSBC Securities (USA) Inc. andMizuho Bank, Ltd. in their respective capacities as lead arrangers and bookrunners in connection with the New Credit Facilities. On the Effective Date, in connection with the entry into the New Credit Agreement described above, we terminated and prepaid the prior term loan credit facility under that certain Term Loan Credit Agreement, date as ofApril 29, 2016 , by and among us, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the "Prior Term Loan Credit Agreement" and the term loan credit facility thereunder, the "Prior Term Loan Facility") and terminated the prior revolving credit facility under that certain ABL Credit Agreement, dated as ofFebruary 1, 2019 , by and among the us, Barclays Bank PLC and the other financial institutions from time to time party thereto (as amended, the "Prior ABL Credit Agreement" and the revolving credit facility thereunder, the "Prior ABL Credit Facility"). At the time of termination, there were approximately$820 million in borrowings outstanding under the Prior Term Loan Facility that were prepaid and no borrowings outstanding under the Prior ABL Credit Facility. We have determined the termination to be a full extinguishment of debt and have written off to expense the immaterial remaining balance of deferred finance costs and debt issuance costs related to the Prior Term Loan Facility and Prior ABL Credit Facility. 42 -------------------------------------------------------------------------------- As ofSeptember 30, 2022 , the outstanding principal amount of the New Term Loan Facility was$5.2 billion and the weighted average interest rate was 5.6%. As ofSeptember 30, 2022 , there were no borrowings under the New Revolving Facility.
Lines of Credit and Borrowing Arrangements
Certain of 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, 2022 of up to an equivalent of$23 million . Total borrowings outstanding under these arrangements were$2 million as ofSeptember 30, 2022 . There were no borrowings under these arrangements atDecember 31, 2021 .
Interest Rate Swap and Interest Rate Cap Agreements
We have various interest rate swap agreements as described further in Note 5 to the Condensed Consolidated Financial Statements that exchange the variable Term SOFR rate to a fixed rate in order to manage the exposure to interest rate fluctuations associated with the variable Term SOFR rate paid on the outstanding balance of the New Term Loan Facility. We acquired USD LIBOR interest rate cap agreements as a result of the Atotech Acquisition and we are utilizing these agreements to offset the variable Term SOFR rate on our New Term Loan Facility. Our USD LIBOR based swaps and USD LIBOR based interest rate caps will convert to Term SOFR after LIBOR's termination inJune 2023 according to the terms of each instrument. 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 endedDecember 31, 2021 , other than those described below which relate to the Atotech Acquisition. Purchase Commitments As ofSeptember 30, 2022, MSD had purchase commitments for certain inventory components and other equipment and services used in normal operations totaling$95 million . The majority of these purchase commitments covered by these arrangements are for periods of less than one year.
Leases
We have various operating and finance leases for real estate and non-real estate
items. The non-real estate leases are mainly comprised of automobiles but also
include office equipment and other lower-valued items. Future payments related
to operating and finance leases are as follows:
(dollars in millions) Operating Leases Finance Leases
2022 (remaining) $ 7 $ 3
2023 24 6
2024 21 5
2025 19 5
2026 16 4
Thereafter 164 22
Total lease payments 251 45
Less: imputed interest 47 2
Total lease liabilities $ 204 $ 43
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Debt
Contractual maturities of our debt obligations as ofSeptember 30, 2022 are as follows: (dollars in millions) Year Amount 2022 (remaining) $ 26 2023 92 2024 98 2025 117 2026 123 2027 767 Thereafter 3,969 Pension As a result of the Atotech Acquisition, we have additional defined benefit plans which mainly cover current and former employees inGermany . As ofSeptember 30, 2022 , the estimated benefit payments related to these plans over the next 10 years amount to approximately$80 million . 44
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