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ENTEGRIS INC - Quarter Report: 2019 September (Form 10-Q)

Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________________________
FORM 10-Q
________________________________________ 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-32598
 _______________________________________
Entegris, Inc.
(Exact name of registrant as specified in its charter)
 _______________________________________
Delaware
 
41-1941551
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
 
129 Concord Road,
Billerica,
Massachusetts
 
01821
(Address of principal executive offices)
 
(Zip Code)
(978) 436-6500
(Registrant’s telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since last report)
 _______________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common stock, $0.01 par value per share
 
ENTG
 
The Nasdaq Stock Market LLC
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No ý
As of October 21, 2019, there were 134,874,386 shares of the registrant’s common stock outstanding.
 


Table of Contents

ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED SEPTEMBER 28, 2019
Description
Page
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Cautionary Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “forecast,” “project,” “should,” “may,” “will,” “would” or the negative thereof and similar expressions are intended to identify such forward-looking statements. These forward-looking statements may include statements about future period guidance or projections; the Company’s performance relative to its markets; market and technology trends, including the duration and drivers of any growth trends; the development of new products and the success of their introductions; the focus of the Company’s engineering, research and development projects; the Company’s ability to execute on its business strategies; the Company’s capital allocation strategy, which may be modified at any time for any reason, including share repurchases, dividends, debt repayments and potential acquisitions; the effect of the Tax Cuts and Jobs Act; the impact of the acquisitions the Company has made and commercial partnerships the Company has established; future capital and other expenditures, including estimates thereof; the Company’s expected tax rate; the impact, financial or otherwise, of any organizational changes; the impact of accounting pronouncements; quantitative and qualitative disclosures about market risk; and other matters. These forward-looking statements are based on current management expectations and assumptions only as of the date of this Quarterly Report, are not guarantees of future performance and involve substantial risks and uncertainties that are difficult to predict and that could cause actual results to differ materially from the results expressed in, or implied by, these forward-looking statements. These risks and uncertainties include, but are not limited to, weakening of global and/or regional economic conditions, generally or specifically in the semiconductor industry, which could decrease the demand for the Company’s products and solutions; the Company’s ability to meet rapid demand shifts; the Company’s ability to continue technological innovation and introduce new products to meet customers’ rapidly changing requirements; the Company’s concentrated customer base; the Company’s dependence on sole source and limited source suppliers; raw material shortages, supply constraints and price increases; the Company’s ability to identify, effect and integrate acquisitions, joint ventures or other transactions; the Company’s ability to effectively implement any organizational changes; the Company’s ability to protect and enforce intellectual property rights; operational, political and legal risks of the Company’s international operations; the increasing complexity of certain manufacturing processes; changes in governmental regulations of the countries in which the Company operates; fluctuations in currency exchange rates; fluctuations in the market price of the Company’s stock; the level of, and obligations associated with, the Company’s indebtedness; and other risk factors and additional information described in the Company’s filings with the Securities and

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Exchange Commission, including under the heading “Risks Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed on February 11, 2019, and in the Company’s other periodic filings. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission, the Company undertakes no obligation to update publicly any forward-looking statements or information contained herein, which speak as of their respective dates.

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PART 1.
FINANCIAL INFORMATION
Item 1. Financial Statements
ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) 
(In thousands, except share and per share data)
September 28, 2019
 
December 31, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
282,748

 
$
482,062

Trade accounts and notes receivable, net of allowance for doubtful accounts of $1,247 and $893
261,306

 
222,055

Inventories, net
290,270

 
268,140

Deferred tax charges and refundable income taxes
21,825

 
17,393

Other current assets
28,091

 
39,688

Total current assets
884,240

 
1,029,338

Property, plant and equipment, net of accumulated depreciation of $510,316 and $461,222
470,005

 
419,529

Other assets:
 
 
 
Right-of-use assets
48,684

 

Goodwill
659,840

 
550,202

Intangible assets, net of accumulated amortization of $392,262 and $343,088
367,558

 
295,687

Deferred tax assets and other noncurrent tax assets
23,191

 
10,162

Other
14,166

 
12,723

Total assets
$
2,467,684

 
$
2,317,641

LIABILITIES AND EQUITY
 
 
 
Current liabilities:
 
 
 
Long-term debt, current maturities
$
4,000

 
$
4,000

Accounts payable
73,071

 
93,055

Accrued payroll and related benefits
58,646

 
78,288

Other accrued liabilities
74,528

 
62,732

Income taxes payable
2,835

 
31,593

Total current liabilities
213,080

 
269,668

Long-term debt, excluding current maturities, net of unamortized discount and debt issuance costs of $9,920 and $11,137
934,080

 
934,863

Pension benefit obligations and other liabilities
52,906

 
31,795

Deferred tax liabilities and other noncurrent tax liabilities
103,326

 
69,290

Long-term lease liability
44,375

 

Commitments and contingent liabilities

 

Equity:
 
 
 
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of September 28, 2019 and December 31, 2018

 

Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of September 28, 2019: 135,141,486 and 134,939,086, respectively; issued and outstanding shares as of December 31, 2018: 136,179,381 and 135,976,981, respectively
1,351

 
1,362

Treasury stock, at cost: 202,400 shares held as of September 28, 2019 and December 31, 2018
(7,112
)
 
(7,112
)
Additional paid-in capital
837,212

 
837,658

Retained earnings
332,579

 
213,753

Accumulated other comprehensive loss
(44,113
)
 
(33,636
)
Total equity
1,119,917

 
1,012,025

Total liabilities and equity
$
2,467,684

 
$
2,317,641

See the accompanying notes to condensed consolidated financial statements.

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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands, except per share data)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
$
394,147

 
$
398,597

 
$
1,164,068

 
$
1,148,855

Cost of sales
223,797

 
216,881

 
650,051

 
608,764

Gross profit
170,350

 
181,716

 
514,017

 
540,091

Selling, general and administrative expenses
71,232

 
62,358

 
217,636

 
185,827

Engineering, research and development expenses
31,173

 
29,964

 
90,788

 
87,781

Amortization of intangible assets
15,152

 
21,419

 
50,400

 
45,102

Operating income
52,793

 
67,975

 
155,193

 
221,381

Interest expense
11,388

 
7,987

 
33,587

 
24,442

Interest income
(1,172
)
 
(309
)
 
(4,020
)
 
(2,613
)
Other expense (income), net
934

 
810

 
(121,329
)
 
4,826

Income before income tax expense
41,643

 
59,487

 
246,955

 
194,726

Income tax expense
876

 
11,427

 
49,533

 
34,755

Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

 
 
 
 
 
 
 
 
Basic net income per common share
$
0.30

 
$
0.34

 
$
1.46

 
$
1.13

Diluted net income per common share
$
0.30

 
$
0.34

 
$
1.45

 
$
1.12

 
 
 
 
 
 
 
 
Weighted shares outstanding:
 
 
 
 
 
 
 
Basic
135,092

 
141,556

 
135,256

 
141,613

Diluted
136,530

 
143,033

 
136,601

 
143,308

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

Other comprehensive loss, net of tax
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6,005
)
 
(1,432
)
 
(10,504
)
 
(10,223
)
Pension liability adjustments
17

 
17

 
27

 
70

Other comprehensive loss
(5,988
)
 
(1,415
)
 
(10,477
)
 
(10,153
)
Comprehensive income
$
34,779

 
$
46,645

 
$
186,945

 
$
149,818

See the accompanying notes to condensed consolidated financial statements.


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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In thousands)
Common
shares
outstanding
 
Common
stock
 
Treasury shares
 
Treasury stock
 
Additional
paid-in
capital
 
Retained earnings
(deficit)
 
Foreign currency translation adjustments
 
Defined benefit pension adjustments
 
Total
Balance at December 31, 2017
141,283

 
$
1,413

 

 
$

 
$
867,699

 
$
147,418

 
$
(22,593
)
 
$
(919
)
 
$
993,018

Shares issued under stock plans
815

 
8

 

 

 
(13,658
)
 

 

 

 
(13,650
)
Share-based compensation expense

 

 

 

 
4,128

 

 

 

 
4,128

Repurchase and retirement of common stock
(296
)
 
(3
)
 

 

 
(1,809
)
 
(8,187
)
 

 

 
(9,999
)
Dividends declared ($0.07 per share)

 

 

 

 
13

 
(9,926
)
 

 

 
(9,913
)
Pension liability adjustment

 

 

 

 

 

 

 
4

 
4

Foreign currency translation

 

 

 

 

 

 
3,835

 

 
3,835

Cumulative effect of change in accounting principle

 

 

 

 

 
(591
)
 

 

 
(591
)
Net income

 

 

 

 

 
57,562

 

 

 
57,562

Balance at March 31, 2018
141,802

 
$
1,418

 

 
$

 
$
856,373

 
$
186,276

 
$
(18,758
)
 
$
(915
)
 
$
1,024,394

Shares issued under stock plans
171

 
1

 

 

 
2,263

 

 

 

 
2,264

Share-based compensation expense

 

 

 

 
4,429

 

 

 

 
4,429

Repurchase and retirement of common stock
(282
)
 
(2
)
 

 

 
(1,708
)
 
(8,291
)
 

 

 
(10,001
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,953
)
 

 

 
(9,953
)
Pension liability adjustment

 

 

 

 

 

 

 
49

 
49

Foreign currency translation

 

 

 

 

 

 
(12,626
)
 

 
(12,626
)
Net income

 

 

 

 

 
54,349

 

 

 
54,349

Balance at June 30, 2018
141,691

 
$
1,417

 

 
$

 
$
861,357

 
$
222,381

 
$
(31,384
)
 
$
(866
)
 
$
1,052,905

Shares issued under stock plans
11

 

 
 
 

 
(137
)
 

 

 

 
(137
)
Share-based compensation expense

 

 

 

 
4,170

 

 

 

 
4,170

Repurchase of common stock
(95
)
 
(1
)
 
(202
)
 
(7,112
)
 
(581
)
 
(2,306
)
 

 

 
(10,000
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,912
)
 

 

 
(9,912
)
Pension liability adjustment

 

 

 

 

 

 

 
17

 
17

Foreign currency translation

 

 

 

 

 

 
(1,432
)
 

 
(1,432
)
Net income

 

 

 

 

 
48,060

 

 

 
48,060

Balance at September 29, 2018
141,607

 
$
1,416

 
(202
)
 
$
(7,112
)
 
$
864,809

 
$
258,223

 
$
(32,816
)
 
$
(849
)
 
$
1,083,671



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Table of Contents

(In thousands)
Common
shares
outstanding
 
Common
stock
 
Treasury shares
 
Treasury stock
 
Additional
paid-in
capital
 
Retained earnings
(deficit)
 
Foreign currency translation adjustments
 
Defined benefit pension adjustments
 
Total
Balance at December 31, 2018
136,179

 
$
1,362

 
(202
)
 
$
(7,112
)
 
$
837,658

 
$
213,753

 
$
(32,776
)
 
$
(860
)
 
$
1,012,025

Shares issued under stock plans
572

 
5

 
 
 

 
(6,817
)
 

 

 

 
(6,812
)
Share-based compensation expense

 

 

 

 
4,653

 

 

 

 
4,653

Repurchase and retirement of common stock
(1,035
)
 
(10
)
 

 

 
(6,364
)
 
(23,413
)
 

 

 
(29,787
)
Dividends declared ($0.07 per share)

 

 

 

 
7

 
(9,517
)
 

 

 
(9,510
)
Pension liability adjustment

 

 

 

 

 

 

 
24

 
24

Foreign currency translation

 

 

 

 

 

 
(2,787
)
 

 
(2,787
)
Net income

 

 

 

 

 
32,658

 

 

 
32,658

Balance at March 30, 2019
135,716

 
$
1,357

 
(202
)
 
$
(7,112
)
 
$
829,137

 
$
213,481

 
$
(35,563
)
 
$
(836
)
 
$
1,000,464

Shares issued under stock plans
49

 

 
 
 

 
(572
)
 

 

 

 
(572
)
Share-based compensation expense

 

 

 

 
4,936

 

 

 

 
4,936

Repurchase and retirement of common stock
(422
)
 
(4
)
 

 

 
(2,579
)
 
(12,417
)
 

 

 
(15,000
)
Dividends declared ($0.07 per share)

 

 

 

 

 
(9,550
)
 

 

 
(9,550
)
Pension liability adjustment

 

 

 

 

 

 

 
(14
)
 
(14
)
Foreign currency translation

 

 

 

 

 

 
(1,712
)
 

 
(1,712
)
Net income

 

 

 

 

 
123,997

 

 

 
123,997

Balance at June 29, 2019
135,343

 
$
1,353

 
(202
)
 
$
(7,112
)
 
$
830,922

 
$
315,511

 
$
(37,275
)
 
$
(850
)
 
$
1,102,549

Shares issued under stock plans
156

 
2

 
 
 

 
3,156

 

 

 

 
3,158

Share-based compensation expense

 

 

 

 
5,326

 

 

 

 
5,326

Repurchase and retirement of common stock
(358
)
 
(4
)
 

 

 
(2,206
)
 
(12,790
)
 

 

 
(15,000
)
Dividends declared ($0.08 per share)

 

 

 

 
14

 
(10,909
)
 

 

 
(10,895
)
Pension liability adjustment

 

 

 

 

 

 

 
17

 
17

Foreign currency translation

 

 

 

 

 

 
(6,005
)
 

 
(6,005
)
Net income

 

 

 

 

 
40,767

 

 

 
40,767

Balance at September 28, 2019
135,141

 
$
1,351

 
(202
)
 
$
(7,112
)
 
$
837,212

 
$
332,579

 
$
(43,280
)
 
$
(833
)
 
$
1,119,917



See the accompanying notes to condensed consolidated financial statements.

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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
Operating activities:
 
 
 
Net income
$
197,422

 
$
159,971

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
54,623

 
48,236

Amortization
50,400

 
45,102

Share-based compensation expense
14,915

 
12,727

Provision for deferred income taxes
(2,123
)
 
(1,066
)
Other
14,251

 
10,584

Changes in operating assets and liabilities:
 
 
 
Trade accounts and notes receivable
(30,405
)
 
(8,713
)
Inventories
(5,689
)
 
(28,788
)
Accounts payable and accrued liabilities
(31,911
)
 
(9,440
)
Other current assets
11,284

 
1,390

Income taxes payable and refundable income taxes
(20,574
)
 
(9,193
)
Other
1,461

 
439

Net cash provided by operating activities
253,654

 
221,249

Investing activities:
 
 
 
Acquisition of property, plant and equipment
(86,423
)
 
(75,337
)
Acquisition of businesses, net of cash acquired
(266,373
)
 
(380,268
)
Other
2,815

 
5,014

Net cash used in investing activities
(349,981
)
 
(450,591
)
Financing activities:
 
 
 
Payments of long-term debt
(2,000
)
 
(27,000
)
Payments for dividends
(29,779
)
 
(29,701
)
Issuance of common stock
4,351

 
3,029

Repurchase of common stock
(65,321
)
 
(30,000
)
Taxes paid related to net share settlement of equity awards
(8,577
)
 
(14,552
)
Other
(502
)
 
1,254

Net cash used in financing activities
(101,828
)
 
(96,970
)
Effect of exchange rate changes on cash and cash equivalents
(1,159
)
 
(4,203
)
Decrease in cash and cash equivalents
(199,314
)
 
(330,515
)
Cash and cash equivalents at beginning of period
482,062

 
625,408

Cash and cash equivalents at end of period
$
282,748

 
$
294,893

Supplemental Cash Flow Information
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
Non-cash transactions:
 
 
 
Deferred acquisition payments
$
32,462

 
$

Contingent consideration obligation
$
686

 
$

Equipment purchases in accounts payable
$
3,431

 
$
9,464

Dividends payable
$
307

 
$
77

Schedule of interest and income taxes paid:
 
 
 
Interest paid
$
37,366

 
$
23,070

Income taxes paid, net of refunds received
$
66,474

 
$
44,249

See the accompanying notes to condensed consolidated financial statements.

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ENTEGRIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations Entegris, Inc. (“Entegris”, “the Company”, “us”, “we”, or “our”) is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries.
Principles of Consolidation The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Intercompany profits, transactions and balances have been eliminated in consolidation.
Use of Estimates The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, particularly receivables, inventories, property, plant and equipment, right-of-use assets, goodwill, intangibles, accrued expenses, short-term and long-term lease liability, income taxes and related accounts, and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Basis of Presentation The condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States and contain all adjustments considered necessary, and are of a normal recurring nature, to present fairly the financial position as of September 28, 2019 and December 31, 2018, and the results of operations and comprehensive income for the three and nine months ended September 28, 2019 and September 29, 2018, the equity statements as of and for the three and nine months ended September 28, 2019 and September 29, 2018, and cash flows for the nine months ended September 28, 2019 and September 29, 2018.
The condensed consolidated financial statements and accompanying notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2018. The results of operations for the three and nine months ended September 28, 2019 are not necessarily indicative of the results to be expected for the full year.
Leases The Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets include operating leases. Lease liabilities for operating leases are classified in “Other accrued liabilities” and “Long-term lease liabilities” in our condensed consolidated balance sheet. We do not have material financing leases.
Operating assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The ROU assets includes prepaid lease payments and excludes lease incentives. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Lease and non-lease components are generally accounted for separately for real estate leases. For non-real estate leases, we account for the lease and non-lease components as a single lease component.
Fair Value of Financial Instruments The carrying value of cash equivalents, accounts receivable, accounts payable, accrued payroll and related benefits, and other accrued liabilities approximates fair value due to the short maturity of those items. The fair value of long-term debt, including current maturities, was $959.1 million at September 28, 2019, compared to the carrying amount of long-term debt, including current maturities, of $938.1 million at September 28, 2019.
Recent Accounting Pronouncements Adopted in 2019 In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (ASU) No. 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU No. 2018-10, Codification Improvements to Topic 842, Leases; and ASU No. 2018-11, Targeted Improvements. The new standard establishes a right-of-use (ROU) model that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and expense recognition in the income statement.
The Company adopted ASU No. 2016-02 using the modified retrospective method. See Note 9 Leases to the condensed consolidated financial statements for further details.

10

Table of Contents

2. REVENUES
Revenue Recognition Revenue is measured based on consideration specified in a contract with a customer, and excludes any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product or service to a customer.
Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by the Company from a customer, are excluded from revenue.
Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
The Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less.
When the Company receives consideration, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a sales contract, the Company records deferred revenue, which represents a contract liability. Such deferred revenue typically results from advance payments received on sales of the Company’s products. The Company makes the required disclosures below.
The Company does not disclose information about remaining performance obligations that have original expected durations of one year or less.
Nature of goods and services The following is a description of principal activities from which the Company generates its revenues. The Company has three reportable segments. For more detailed information about reportable segments, see note 10 to the condensed consolidated financial statements. For each of the three reportable segments, the recognition of revenue regarding the nature of goods and services provided by the segments are similar and described below. The Company recognizes revenue for product sales at a point in time following the transfer of control of such products to the customer, which generally occurs upon shipment or delivery, depending on the terms of the underlying contracts. For product sales contracts that contain multiple performance obligations, the Company allocates the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognizes the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.
The Company generally recognizes revenue for sales of services when the Company has satisfied the performance obligation.
The Company also enters into arrangements to license its intellectual property. These arrangements typically permit the customer to use a specialized manufacturing process and in return the Company receives a royalty fee. If applicable, the Company recognizes revenue when the subsequent sale or usage occurs.
The Company offers certain customers cash discounts and volume rebates as sales incentives. The discounts and volume rebates are recorded as a reduction in sales at the time revenue is recognized in an amount estimated based on historical experience and contractual obligations. The Company periodically reviews the assumptions underlying its estimates of discounts and volume rebates and adjusts its revenues accordingly.
In addition, the Company offers free product rebates to certain customers. The Company utilizes an adjusted market approach to estimate the stand-alone selling price of the loyalty program and allocates a portion of the consideration received to the free product offering. The free product offering is redeemable upon future purchases of the Company’s products. The amount associated with free product rebates is deferred in the balance sheet and is recognized as revenue when the free product is redeemed or when the likelihood of redemption is remote. The Company deems the amount immaterial for disclosure.
The Company provides for the estimated costs of fulfilling our obligations under product warranties at the time the related revenue is recognized. The Company estimates the costs based on historical failure rates, projected repair costs, and knowledge of specific product failures (if any). The specific warranty terms and conditions vary depending upon the product sold and the country in which we do business, but generally include parts and labor over a period generally ranging from 90 days to one year. The Company regularly reevaluates its estimates to assess the adequacy of the recorded warranty liabilities and adjust the amounts as necessary.
The Company’s contracts are generally short-term in nature. Most contracts do not exceed twelve months. Payment terms vary by the type and location of the Company’s customers and the products or services offered. The term between invoicing and when payment is due is not significant. For certain products or services and customer types, the Company requires payment before the products or services are delivered to the customer. Those customers that prepay are represented by the contract liabilities below until the performance obligations are satisfied.
The following table provides information about contract liabilities from contracts with customers. The contract liabilities are included in other accrued liabilities balance in the condensed consolidated balance sheet.

11

Table of Contents

(In thousands)
September 28, 2019
 
December 31, 2018
Contract liabilities - current
$
10,734

 
$
15,364


Significant changes in the contract liabilities balances during the period are as follows:
 
Nine months ended
(In thousands)
September 28, 2019
Revenue recognized that was included in the contract liability balance at the beginning of the period
$
(14,565
)
Increases due to cash received, excluding amounts recognized as revenue during the period
9,936


3. ACQUISITIONS
Hangzhou Anow Microfiltration Co., Ltd.
On September 17, 2019, the Company acquired Hangzhou Anow Microfiltration Co., Ltd. (Anow), a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. Anow reports into the Microcontamination Control division of the Company. The acquisition was accounted for under the acquisition method of accounting and the results of Anow are included in the Company’s condensed consolidated financial statements as of and since September 17, 2019. Costs associated with the acquisition of Anow were $2.0 million and $2.3 million for the three and nine months ended September 28, 2019, respectively, and were expensed as incurred. These costs are included in selling, general and administrative expenses in the Company’s condensed consolidated statement of operations. The acquisition does not constitute a material business combination.
The purchase price for Anow is $73.0 million, net of cash acquired. The purchase price includes (1) cash consideration of $62.8 million, or $59.1 million net of cash acquired (subject to revision for certain adjustments), which was funded from the Company’s existing cash on hand, (2) deferred payments due to the seller of $10.2 million that are due within one year, and (3) $3.7 million deferred payments due to the seller at the earliest date of September 18, 2021.
The purchase price of Anow exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $25.2 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. This additional investment value resulted in goodwill, which is expected to be non-deductible for income tax purposes.
The following table summarizes the provisional allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the acquisition date:
(In thousands):
As of September 17, 2019
Trade accounts and note receivable, net
$
3,455

Inventories, net
4,242

Other current assets
202

Property, plant and equipment
8,863

Identifiable intangible assets
42,179

Other noncurrent assets
1,565

Accounts payable and accrued liabilities
(1,814
)
Noncurrent deferred tax liabilities
(10,890
)
       Net assets acquired
47,802

Goodwill
25,212

Total purchase price, net of cash acquired
$
73,014




12


The Company recognized the following finite-lived intangible assets as part of the acquisition of Anow:
(In thousands)
Amount
 
Weighted
average life in
years
Developed technology
$
2,430

 
10.0
Trademarks and trade names
2,598

 
10.0
Customer relationships
36,449

 
20.0
Other
702

 
3.0
 
$
42,179

 
19.0

The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but not later than one year from the acquisition date. Given the size and complexity of the acquisition, the valuation of certain assets and liabilities is still being completed and is subject to final review. To the extent that the Company’s estimates require adjustment, the Company will modify the values.
MPD Chemicals
On July 15, 2019, the Company acquired MPD Chemicals (MPD), a provider of advanced materials to the specialty chemical, technology, and life sciences industries. MPD reports into the Specialty Chemicals and Engineered Material division of the Company. The acquisition was accounted for under the acquisition method of accounting and the results of MPD are included in the Company’s condensed consolidated financial statements as of and since July 15, 2019. Costs associated with the acquisition of MPD were $2.9 million and $4.0 million for the three and nine months ended September 28, 2019, respectively, and were expensed as incurred. These costs are included in selling, general and administrative expense in the Company’s condensed consolidated statement of operations. The acquisition does not constitute a material business combination.
The purchase price for MPD is $162.4 million, net of cash acquired. The purchase price includes (1) cash consideration of $157.9 million (subject to revision for customary working capital adjustments), which was funded from the Company’s existing cash on hand, and (2) a fixed deferred payment of $5.0 million that is due on January 15, 2022, recorded at $4.5 million, which represents the fair value of this fixed deferred payment as of the acquisition date.
The fair value of the fixed deferred payment was determined by taking the present value of this fixed deferred payment based on the term and a discount factor. The fixed deferred payment is reflected in pension benefit obligations and other liabilities in the Company’s condensed consolidated balance sheets.
The purchase price of MPD exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $51.5 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
The following table summarizes the provisional allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the acquisition date:
(In thousands):
As of July 15, 2019
Trade accounts and note receivable, net
$
3,575

Inventories, net
21,899

Other current assets
318

Property, plant and equipment
14,571

Identifiable intangible assets
74,900

Right-of-use assets
3,677

Accounts payable and accrued liabilities
(2,440
)
Short-term lease liabilities
(144
)
Long-term lease liabilities
(4,016
)
Other noncurrent liabilities
(1,416
)
       Net assets acquired
110,924

Goodwill
51,457

Total purchase price, net of cash acquired
$
162,381





13


The Company recognized the following finite-lived intangible assets as part of the acquisition of MPD:
(In thousands)
Amount
 
Weighted
average life in
years
Developed technology
$
13,520

 
12.0
Trademarks and trade names
680

 
2.0
Customer relationships
60,700

 
17.0
 
$
74,900

 
16.0

The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but not later than one year from the acquisition date. Given the size and complexity of the acquisition, the valuation of certain assets and liabilities is still being completed and is subject to final review. To the extent that the Company’s estimates require adjustment, the Company will modify the values.
Digital Specialty Chemicals
On March 8, 2019, the Company acquired Digital Specialty Chemicals Limited (DSC), a Toronto, Canada-based provider of advanced materials to the specialty chemical, technology, and pharmaceutical industries. DSC reports into the Specialty Chemicals and Engineered Materials division of the Company. The acquisition was accounted for under the acquisition method of accounting and the results of operations of DSC are included in the Company’s condensed consolidated financial statements as of and since March 8, 2019. Costs associated with the acquisition of DSC were $2.1 million for the nine months ended September 28, 2019 and were expensed as incurred. These costs are included in selling, general and administrative expense in the Company’s condensed consolidated statements of operations. The acquisition does not constitute a material business combination.
The purchase price for DSC is $64.1 million, net of cash acquired. The purchase price includes (1) cash consideration of $49.9 million, or $49.4 million net of cash acquired, which was funded from the Company’s existing cash on hand, (2) a fixed deferred payment of $16.1 million that is due on March 31, 2022, recorded at $14.0 million representing the fair value of this fixed deferred payment as of the acquisition date, and (3) an earnout-based contingent consideration of $0.7 million based on the operating performance of DSC for a twelve-month period ended March 31, 2021.
The fair value of the fixed deferred payment was determined by taking the present value of this fixed deferred payment based on the term and a discount factor. The fixed deferred payment is reflected in pension benefit obligations and other liabilities in the Company’s condensed consolidated balance sheets.
Upon closing the acquisition, the Company recorded a contingent consideration obligation of $0.7 million, which represents the fair value of the earnout-based contingent consideration. This amount was estimated based on a Black Scholes model. Subsequent changes in the fair value of this obligation will be recognized as adjustments to the contingent consideration obligation and reflected within the Company’s condensed consolidated statements of operations.
The purchase price of DSC exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $36.5 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. This additional investment value resulted in goodwill, which is expected to be non-deductible for income tax purposes.
The following table summarizes the provisional allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the acquisition and as adjusted as of September 28, 2019:

14


(In thousands):
As of March 8, 2019
 
As of September 28, 2019
Trade accounts and note receivable, net
$
1,840

 
$
1,840

Inventories, net
5,523

 
4,307

Other current assets
1,389

 
1,389

Property, plant and equipment
16,791

 
16,654

Identifiable intangible assets
7,976

 
6,870

Right-of-use assets
79

 
79

Deferred tax asset
1,104

 
996

Other noncurrent assets

 
28

Accounts payable and accrued liabilities
(2,461
)
 
(2,474
)
Deferred tax liabilities
(2,861
)
 
(2,070
)
Long-term lease liability
(37
)
 
(37
)
       Net assets acquired
29,343

 
27,582

Goodwill
35,133

 
36,539

Total purchase price, net of cash acquired
$
64,476

 
$
64,121



The allocation of the purchase price to the assets acquired and liabilities assumed is complete with the exception of the value allocated to income tax accounts. To the extent that the Company's estimates require adjustment, the Company will modify the values.
Flex Concepts
On June 26, 2018, the Company acquired Flex Concepts, Inc. (Flex), a technology company focused on single-use fluid handling bags, tubing manifolds and hardware for the life sciences industry. Flex reports into the AMH division of the Company.The purchase price of Flex was for cash consideration of $1.9 million. The transaction was accounted for under the acquisition method of accounting and the results of operations of Flex are included in the Company’s condensed consolidated financial statements since June 26, 2018. The acquisition does not constitute a material business combination.
During the year ended December 31, 2018, the Company finalized its fair value determinations of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed was based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management.
SAES Pure Gas
On June 25, 2018, the Company acquired the SAES Pure Gas business (SPG) from SAES Getters S.p.A. for approximately $352.7 million in cash, or $341.5 million net of cash acquired, funded from the Company’s existing cash on hand. The acquisition was accounted for under the acquisition method of accounting and the results of operations of SPG are included in the Company’s condensed consolidated financial statements as of and since June 25, 2018. Direct costs of $4.8 million associated with the acquisition of SPG, consisting mainly of professional and consulting fees, were expensed as incurred for the year ended December 31, 2018. These costs are included in selling, general and administrative expense in the Company’s condensed consolidated statements of operations.
SPG, based in San Luis Obispo, California, is a leading provider of high-capacity gas purification systems used in semiconductor manufacturing and adjacent markets, and reports into the Microcontamination Control Division of the Company. This acquisition expands the gas purification solutions portfolio in our Microcontamination Control Division with high-capacity products suited for bulk chemical purification applications. 
The following table summarizes the final allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at December 31, 2018 and as adjusted as of June 29, 2019:

15


(In thousands):
As of December 31, 2018
 
As of June 29, 2019
Trade accounts and note receivable, net
$
19,173

 
$
19,173

Inventories, net
42,758

 
42,758

Other current assets
1,322

 
706

Property, plant and equipment
6,653

 
6,653

Identifiable intangible assets
150,430

 
150,430

Deferred tax assets
831

 
734

Other noncurrent assets
12

 
12

Current liabilities
(26,473
)
 
(26,473
)
Deferred tax liabilities
(35,533
)
 
(35,271
)
Other noncurrent liabilities
(1,412
)
 
(1,412
)
       Net assets acquired
157,761

 
157,310

Goodwill
183,729

 
184,180

Total purchase price, net of cash acquired
$
341,490

 
$
341,490

The fair value of acquired inventories of $42.8 million is valued at the estimated selling price less cost of disposal and reasonable profit for the selling effort. The fair value write-up of acquired work-in-process and finished goods inventory was $8.9 million, the amount of which was amortized over the expected turn of the acquired inventory. Accordingly, $0.0 million and $2.0 million incremental cost of sales charge associated with the fair value write-up of inventory acquired in the acquisition of SPG was recorded for the three and six months ended June 29, 2019, respectively.
The fair value of acquired property, plant and equipment of $6.7 million is valued at its value-in-use.
The Company recognized the following finite-lived intangible assets as part of the acquisition of SPG:
(In thousands)
Amount
 
Weighted
average life in
years
Developed technology
$
20,070

 
8.0
Trademarks and trade names
6,670

 
12.0
Customer relationships
107,790

 
12.0
Other
15,900

 
0.9
 
$
150,430

 
10.0
The acquired identifiable intangible assets are being amortized on a straight-line basis. The fair value of acquired identifiable intangible assets was determined using the “income approach”. In performing these valuations, the key underlying probability-adjusted assumptions of the discounted cash flows were projected revenues, gross margin expectations and operating cost estimates. The valuations were based on the information that was available as of the acquisition date and the expectations and assumptions that have been deemed reasonable by the Company’s management. There are inherent uncertainties and management judgment required in these determinations. The fair value measurements of the assets acquired and liabilities assumed were based on valuations involving significant unobservable inputs, or Level 3 inputs in the fair value hierarchy.
The purchase price of SPG exceeded the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $184.2 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. The purchase price also included the fair values of other assets that were not identifiable, not separately recognizable under accounting rules (e.g., assembled workforce) or of immaterial value in addition to a going-concern element that represents the Company’s ability to earn a higher rate of return on the group of assets than would be expected on the separate assets as determined during the valuation process. This additional investment value resulted in goodwill. No amount of goodwill is expected to be deductible for income tax purposes.
During the quarter ended June 29, 2019, the Company finalized its fair value determination of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed was based on the information that was available as of the acquisitions date, and the expectations and assumptions that have been deemed reasonable by the Company’s management.
Particle Sizing Systems
On January 22, 2018, the Company acquired Particle Sizing Systems, LLC (PSS), which provides particle sizing instrumentation for liquid applications to the semiconductor and life science industries. The acquired assets and assumed liabilities became part of the Company’s Advanced Materials Handling (AMH) segment. The transaction was accounted for

16


under the acquisition method of accounting and the results of operations of PSS are included in the Company’s condensed consolidated financial statements since January 22, 2018. The acquisition does not constitute a material business combination.
The purchase price for PSS was cash consideration of $37.3 million, funded from the Company’s existing cash on hand. Costs associated with the acquisition of the product line were not significant and were expensed as incurred.
The purchase price of PSS exceeds the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $8.8 million. Cash flows used to determine the purchase price included strategic and synergistic benefits (investment value) specific to the Company, which resulted in a purchase price in excess of the fair value of identifiable net assets. This additional investment value resulted in goodwill, which is expected to be deductible for income tax purposes.
During the year ended December 31, 2018, the Company finalized its fair value determinations of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed was based on the information that was available as of the acquisition date, and the expectations and assumptions that have been deemed reasonable by the Company’s management.
4. INVENTORIES
Inventories consist of the following:
 
(In thousands)
September 28, 2019
 
December 31, 2018
Raw materials
$
94,522

 
$
100,770

Work-in process
34,851

 
31,412

Finished goods
160,897

 
135,958

Total inventories, net
$
290,270

 
$
268,140


5. GOODWILL AND INTANGIBLE ASSETS
Goodwill activity for each period was as follows:
(In thousands)
Specialty Chemicals and Engineered Materials
 
Microcontamination Control
 
Advanced Materials Handling
 
Total
December 31, 2018
$
301,423

 
191,708

 
$
57,071

 
$
550,202

Addition due to acquisitions
86,590

 
25,214

 

 
111,804

Purchase accounting adjustments
1,406

 
451

 

 
1,857

Foreign currency translation
(3,749
)
 
(274
)
 

 
(4,023
)
September 28, 2019
$
385,670

 
$
217,099

 
$
57,071

 
$
659,840


Identifiable intangible assets at September 28, 2019 and December 31, 2018 consist of the following:
September 28, 2019
(In thousands)
Gross  carrying
Amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
268,593

 
$
197,176

 
$
71,417

Trademarks and trade names
28,856

 
15,767

 
13,089

Customer relationships
425,371

 
152,937

 
272,434

Other
37,000

 
26,382

 
10,618

 
$
759,820

 
$
392,262

 
$
367,558


17

Table of Contents

December 31, 2018
(In thousands)
Gross  carrying
amount
 
Accumulated
amortization
 
Net  carrying
value
Developed technology
$
248,776

 
$
176,421

 
$
72,355

Trademarks and trade names
25,643

 
14,749

 
10,894

Customer relationships
328,050

 
133,068

 
194,982

Other
36,306

 
18,850

 
17,456

 
$
638,775

 
$
343,088

 
$
295,687


Future amortization expense during the remainder of 2019, the next four years and thereafter relating to intangible assets currently recorded in the Company’s condensed consolidated balance sheets is estimated at September 28, 2019 to be the following:
(In thousands)
Remaining 2019
 
2020
 
2021
 
2022
 
2023
 
Thereafter
 
Total
Future amortization expense
$
16,016

 
50,731

 
41,587

 
40,997

 
39,005

 
179,222

 
$
367,558


6. INCOME TAX
The Company recorded income tax expense of $0.9 million and $49.5 million, respectively, in the three and nine months ended September 28, 2019, compared to income tax expense of $11.4 million and $34.8 million, respectively in the three and nine months ended September 29, 2018. The Company’s year-to-date effective tax rate was 20.1% in 2019, compared to 17.8% in 2018.
The increase in the effective tax rate from 2018 to 2019 primarily relates to a discrete charge of $9.4 million in the second quarter of 2019 related to the reversal of a dividend received deduction benefit recorded in 2018. This discrete charge was recorded as a result of the issuance of final regulations during the second quarter. The discrete charge was partially offset by a benefit of $5.3 million recorded in the third quarter based on the filing of the federal tax return. Additionally, in the second quarter of 2019, the Company received a termination fee from Versum Materials, Inc. (“Versum”) based on the termination of the merger agreement with Versum and recorded a discrete charge of $23.5 million related to the termination fee, net of associated expenses. As a result of the termination fee, the Company released a valuation allowance on federal capital loss carryforwards and recorded a discrete benefit of $2.9 million. The year-to-date income tax expense in 2019 and 2018 includes discrete benefits of $3.3 million and $6.1 million, respectively, recorded in connection with share-based compensation.
7. EARNINGS PER COMMON SHARE
The following table presents a reconciliation of the denominators used in the computation of basic and diluted earnings per common share (EPS): 
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Basic—weighted common shares outstanding
135,092

 
141,556

 
135,256

 
141,613

Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock
1,438

 
1,477

 
1,345

 
1,695

Diluted—weighted common shares and common shares equivalent outstanding
136,530

 
143,033

 
136,601

 
143,308


The Company excluded the following shares underlying stock-based awards from the calculations of diluted EPS because their inclusion would have been anti-dilutive for the three and nine months ended September 28, 2019 and September 29, 2018:
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Shares excluded from calculations of diluted EPS
6

 
295

 
261

 
253


8. OTHER EXPENSE (INCOME), NET

18


Other expense (income), net for the three and nine months ended September 28, 2019 and September 29, 2018 consists of the following:
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Versum termination fee, net
$

 
$

 
$
(122,000
)
 
$

Loss (gain) on foreign currency remeasurement
701

 
695

 
(222
)
 
3,637

Other, net
233

 
115

 
893

 
1,189

Other expense (income), net
$
934

 
$
810

 
$
(121,329
)
 
$
4,826



Versum termination fee, net
On January 28, 2019, the Company and Versum announced that they had entered into an Agreement and Plan of Merger, dated as of January 27, 2019 (the “Merger Agreement”), pursuant to which they agreed to combine in a merger of equals. On April 8, 2019, Versum announced that its Board of Directors had received a proposal from Merck KGaA to acquire Versum and that its Board of Directors had deemed such proposal as a “Superior Proposal” defined in the merger agreement. On April 12, 2019, the Company received a termination notice from Versum terminating the Merger Agreement. In accordance with the terms of the Merger Agreement, Entegris received a $140.0 million termination fee from Versum in the second quarter of 2019. Also in the second quarter of 2019, the Company paid a fee of $18.0 million to the third-party financial adviser it had engaged to assist with the transaction.
9. LEASES
Adoption of ASC ASU No. 2016-02, Leases On January 1, 2019, the Company adopted ASU No. 2016-02 using the modified retrospective method applied to existing leases in place as of January 1, 2019. Leases entered into after January 1, 2019 are presented under the provisions of ASU No. 2016-02, while prior periods are not adjusted and continue to be reported in accordance with previous accounting guidance. Leases commencing or renewing after the adoption date are evaluated based on the guidance in ASU No. 2016-02 and may result in more finance leases being recognized even for the renewal of previously classified operating leases.
The Company elected to adopt the ‘package of practical expedients’, which permitted the Company not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The Company also elected the practical expedient pertaining to land easements, which allowed the Company to exclude evaluation of all existing land easements in connection with the adoption of the new lease requirements to assess whether they meet the definition of a lease. The Company did not elect the use-of-hindsight practical expedient and therefore did not reassess the lease terms for purposes of calculation of the lease liabilities and right-of-use assets at the adoption date. The Company elected the short-term lease recognition exemption for all leases that qualified. This means, for those leases that qualified, the Company did not recognize right-of-use assets or lease liabilities, and this included not recognizing right-of-use assets or lease liabilities for existing short-term leases of those assets in transition. The Company also elected the practical expedient to not separate lease and non-lease components for all leases other than leases of real estate, and this included not separating lease and non-lease components for all leases other than leases of real estate in transition.
The Company adopted ASU 2016-02 using the modified retrospective method, recognizing the cumulative effect of application as an adjustment to the opening balance sheet. The standard had a material impact on our condensed consolidated balance sheets, but did not have a material impact on our condensed consolidated statement of income or cash flows. The most significant impact was the recognition of the right-of-use asset and lease liabilities for operating leases. As of September 28, 2019, we do not have any material finance leases.
The details of the impact of the changes made to the Company’s condensed consolidated balance sheet date as of January 1, 2019, the date of adoption, are reflected in the following table.

19

Table of Contents

(In thousands)
Debit/(Credit)
Right-of-use assets
$
46,162

Prepaid rent
(646
)
Short-term lease liability
(8,892
)
Short-term deferred rent
274

Long-term lease liability
(42,639
)
Long-term deferred rent
5,741

Deferred tax asset
11,629

Deferred tax liability
(11,629
)

Leases As of September 28, 2019, the Company was obligated under operating lease agreements for certain sales offices and manufacturing facilities, manufacturing equipment, vehicles, information technology equipment and warehouse space. Our leases have remaining lease terms of 1 year to 14 years, some of which may include options to extend the lease for up to 6 years, and some of which may include options to terminate the leases within 1 year. For the nine months ended September 28, 2019, the Company has obtained $5.8 million of operating lease assets in exchange for lease obligations.
As of September 28, 2019, the Company’s operating lease components with initial or remaining terms in excess of one year were classified on the condensed consolidated balance sheet as follows:
(In thousands)
Classification
September 28, 2019
Assets
 
 
Right-of-use assets
Right-of-use assets
$
48,684

Liabilities
 
 
Short-term lease liability
Other accrued liabilities
8,775

Long-term lease liability
Long-term lease liability
44,375

Total lease liabilities
 
$
53,150


Expense for leases less than 12 months for the three and nine months ended September 28, 2019 were not material. The components of lease expense for the three and nine months ended September 28, 2019 are as follows:
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 28, 2019
Operating lease cost
$
3,334

 
$
9,146


The Company combines the amortization of the ROU assets and the change in the operating lease liability in the same line item in the Statement of Cash Flows. Other information related to the Company’s operating leases was as follows:
(In thousands)
September 28, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from leases
$
8,107

Lease Term and Discount Rate
 
Weighted average remaining lease term (years)
8.78

Weighted average discount rate
5.17
%


20

Table of Contents

Future minimum lease payments for noncancellable operating leases as of September 28, 2019, were as follows:
(In thousands)
Operating Leases
Remaining 2019
$
3,074

2020
10,679

2021
8,721

2022
6,846

2023
6,140

Thereafter
32,052

Total
$
67,512

Less: Interest
14,362

Present value of lease liabilities
$
53,150



Future minimum lease payments for noncancellable operating leases as of December 31, 2018, were as follows:
(In thousands)
Operating Leases
2019
$
11,360

2020
8,906

2021
6,836

2022
5,431

2023
5,208

Thereafter
27,153

Total
$
64,894



10. SEGMENT REPORTING
The Company’s financial segment reporting reflects an organizational alignment intended to leverage the Company’s unique portfolio of capabilities to create value for its customers by developing mission-critical solutions to maximize manufacturing yields and enable higher performance of devices. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. The Company leverages its expertise from these three segments to create new and increasingly integrated solutions for its customers. The Company’s business is reported in the following segments:
Specialty Chemicals and Engineered Materials (SCEM): SCEM provides high-performance and high-purity process chemistries, gases, and materials and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes.
Microcontamination Control (MC): MC solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries.
Advanced Materials Handling (AMH): AMH develops solutions to monitor, protect, transport, and deliver critical liquid chemistries, wafers, and substrates for a broad set of applications in the semiconductor industry and other high-technology industries.
In the first quarter of 2019, the Company changed its definition of segment profit to include inter-segment sales. The Company updated its recognition of inter-segment sales to recognize the revenue and profit associated with products and components produced in one segment and supplied to another, before being sold to the ultimate end customer. The Company accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at approximate market prices. Inter-segment sales are presented as an elimination below. Segment profit is defined as net sales less direct and indirect segment operating expenses, including certain general and administrative costs for the Company’s human resources, finance and information technology functions. The remaining unallocated expenses consist mainly of the Company’s corporate functions as well as interest expense, amortization of intangible assets and income tax expense. Prior quarter information has been recast to reflect the change in the Company’s definition of segment profit.
Summarized financial information for the Company’s reportable segments is shown in the following tables.

21


 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
 
 
 
 
 
 
 
SCEM
$
127,750

 
$
131,234

 
$
379,772

 
$
396,313

MC
155,979

 
151,478

 
463,870

 
395,338

AMH
117,256

 
123,227

 
340,835

 
377,877

Inter-segment elimination
(6,838
)
 
(7,342
)
 
(20,409
)
 
(20,673
)
Total net sales
$
394,147

 
$
398,597

 
$
1,164,068

 
$
1,148,855

 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Segment profit
 
 
 
 
 
 
 
SCEM
$
17,074

 
$
31,210

 
$
65,505

 
$
98,859

MC
46,792

 
42,448

 
137,241

 
119,973

AMH
17,077

 
22,226

 
54,487

 
73,231

Total segment profit
$
80,943

 
$
95,884

 
$
257,233

 
$
292,063


The following table reconciles total segment profit to income before income taxes:
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Total segment profit
$
80,943

 
$
95,884

 
$
257,233

 
$
292,063

Less:
 
 
 
 
 
 
 
Amortization of intangible assets
15,152

 
21,419

 
50,400

 
45,102

Unallocated general and administrative expenses
12,998

 
6,490

 
51,640

 
25,580

Operating income
52,793

 
67,975

 
155,193

 
221,381

Interest expense
11,388

 
7,987

 
33,587

 
24,442

Interest income
(1,172
)
 
(309
)
 
(4,020
)
 
(2,613
)
Other expense (income), net
934

 
810

 
(121,329
)
 
4,826

Income before income tax expense
$
41,643

 
$
59,487

 
$
246,955

 
$
194,726


In the following tables, revenue is disaggregated by country or region for the three and nine months ended September 28, 2019 and September 29, 2018, respectively.
 
Three months ended September 28, 2019
 
Nine months ended September 28, 2019
(In thousands)
SCEM
 
MC
 
AMH
 
Inter-segment
 
Total
 
SCEM
 
MC
 
AMH
 
Inter-segment
 
Total
Taiwan
$
23,186

 
$
32,521

 
$
19,164

 
$

 
$
74,871

 
$
69,943

 
$
102,216

 
$
50,027

 
$

 
$
222,186

United States
40,176

 
31,186

 
36,548

 
(6,838
)
 
101,072

 
106,590

 
83,860

 
110,287

 
(20,409
)
 
280,328

South Korea
18,441

 
27,239

 
20,195

 

 
65,875

 
55,463

 
81,585

 
52,939

 

 
189,987

Japan
13,587

 
25,160

 
9,417

 

 
48,164

 
40,354

 
74,976

 
32,761

 

 
148,091

China
14,699

 
23,544

 
12,354

 

 
50,597

 
49,269

 
68,247

 
32,853

 

 
150,369

Europe
7,806

 
9,845

 
12,587

 

 
30,238

 
24,235

 
32,022

 
42,594

 

 
98,851

Southeast Asia
9,855

 
6,484

 
6,991

 

 
23,330

 
33,918

 
20,964

 
19,374

 

 
74,256

 
$
127,750

 
$
155,979

 
$
117,256

 
$
(6,838
)
 
$
394,147

 
$
379,772

 
$
463,870

 
$
340,835

 
$
(20,409
)
 
$
1,164,068


22


 
Three months ended September 29, 2018
 
Nine months ended September 29, 2018
(In thousands)
SCEM
 
MC
 
AMH
 
Inter-segment
 
Total
 
SCEM
 
MC
 
AMH
 
Inter-segment
 
Total
Taiwan
$
25,436

 
$
34,452

 
$
18,745

 
$

 
$
78,633

 
$
79,653

 
$
80,556

 
$
50,942

 
$

 
$
211,151

United States
33,014

 
24,205

 
35,745

 
(7,342
)
 
85,622

 
99,543

 
65,794

 
111,089

 
(20,673
)
 
255,753

South Korea
21,088

 
18,893

 
19,858

 

 
59,839

 
62,206

 
58,698

 
66,407

 

 
187,311

Japan
12,141

 
27,479

 
12,049

 

 
51,669

 
40,707

 
82,016

 
35,160

 

 
157,883

China
18,667

 
27,360

 
12,263

 

 
58,290

 
50,373

 
56,417

 
38,793

 

 
145,583

Europe
7,579

 
10,873

 
16,899

 

 
35,351

 
23,345

 
30,963

 
49,859

 

 
104,167

Southeast Asia
13,309

 
8,216

 
7,668

 

 
29,193

 
40,486

 
20,894

 
25,627

 

 
87,007

 
$
131,234

 
$
151,478

 
$
123,227

 
$
(7,342
)
 
$
398,597

 
$
396,313

 
$
395,338

 
$
377,877

 
$
(20,673
)
 
$
1,148,855



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of the Company’s condensed consolidated financial condition and results of operations should be read along with the condensed consolidated financial statements and the accompanying notes to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 as well as in our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. The Company assumes no obligation to publicly release the results of any revision or updates to these forward-looking statements to reflect future events or unanticipated occurrences.
Overview
This overview is not a complete discussion of the Company’s financial condition, changes in financial condition and results of operations; it is intended merely to facilitate an understanding of the most salient aspects of the Company’s financial condition and operating performance and to provide a context for the detailed discussion and analysis that follows and must be read in its entirety in order to fully understand the Company’s financial condition and results of operations.
The Company is a leading global developer, manufacturer and supplier of microcontamination control products, specialty chemicals and advanced materials handling solutions for manufacturing processes in the semiconductor and other high-technology industries. Our mission is to leverage our unique breadth of capabilities to create value for our customers by developing mission-critical solutions to maximize manufacturing yields, reduce manufacturing costs and enable higher device performance.
Our technology portfolio includes approximately 21,000 standard and customized products and solutions to achieve the highest levels of purity and performance that are essential to the manufacture of semiconductors, flat panel displays, light emitting diodes or LEDs, high-purity chemicals, solar cells, gas lasers, optical and magnetic storage devices, and critical components for aerospace, glass manufacturing and biomedical applications. The majority of our products are consumed at various times throughout the manufacturing process, with demand driven in part by the level of semiconductor and other manufacturing activity.
Our most significant customers include semiconductor device manufacturers, semiconductor equipment makers, gas and chemical manufacturing companies, leading wafer grower companies and manufacturers of high-precision electronics. We also sell our products to flat panel display equipment makers, materials suppliers and panel manufacturers, and manufacturers of hard disk drive components and devices. We sell our products worldwide, primarily through our direct sales force and strategic independent distributors located in all major semiconductor markets. Independent distributors are also used in other semiconductor market territories and for specific market segments.
Our business is organized and operated in three operating segments which align with the key elements of the advanced semiconductor manufacturing ecosystem. The Specialty Chemicals and Engineered Materials, or SCEM, segment provides high-performance and high-purity process chemistries, gases, and materials, and safe and efficient delivery systems to support semiconductor and other advanced manufacturing processes. The Microcontamination Control, or MC, segment offers solutions to filter and purify critical liquid chemistries and gases used in semiconductor manufacturing processes and other high-technology industries. The Advanced Materials Handling, or AMH, segment develops solutions to monitor, protect, transport, and deliver

23

Table of Contents

critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry and other high-technology industries. While these segments have separate products and technical know-how, they share common business systems and processes, technology centers, and strategic and technology roadmaps. We leverage our expertise from these three segments to create new and increasingly integrated solutions for our customers. See note 10 to the condensed consolidated financial statements for additional information on the Company’s three segments.
The Company’s fiscal year is the calendar period ending each December 31. The Company’s fiscal quarters consist of 13-week or 14-week periods that end on Saturday. The Company’s fiscal quarters in 2019 end March 30, 2019, June 29, 2019, September 28, 2019 and December 31, 2019. Unaudited information for the three and nine months ended September 28, 2019 and September 29, 2018 and the financial position as of September 28, 2019 and December 31, 2018 are included in this Quarterly Report on Form 10-Q.
Key operating factors Key factors, which management believes have the largest impact on the overall results of operations of the Company, include:
Level of sales Since a significant portion of the Company’s product costs (except for raw materials, purchased components and direct labor) are largely fixed in the short-to-medium term, an increase or decrease in sales affects gross profits and overall profitability significantly. Also, increases or decreases in sales and operating profitability affect certain costs such as incentive compensation and commissions, which are highly variable in nature. The Company’s sales are subject to the effects of industry cyclicality, technological change, substantial competition, pricing pressures and foreign currency fluctuations.
Variable margin on sales The Company’s variable margin on sales is determined by selling prices and the costs of manufacturing and raw materials. This is affected by a number of factors, which include the Company’s sales mix, purchase prices of raw material (especially polymers, membranes, stainless steel and purchased components), domestic and international competition, direct labor costs, and the efficiency of the Company’s production operations, among others.
Fixed cost structure The Company’s operations include a number of large fixed or semi-fixed cost components, which include salaries, indirect labor and benefits, facility costs, lease expenses, and depreciation and amortization. It is not possible to vary these costs easily in the short-term as volumes fluctuate. Accordingly, increases or decreases in sales volume can have a large effect on the usage and productivity of these cost components, resulting in a large impact on the Company’s profitability.
Overall Summary of Financial Results
For the three months ended September 28, 2019, net sales decreased 1% to $394.1 million, compared to $398.6 million for the three months ended September 29, 2018. Included in the quarterly sales were net sales primarily associated from acquired businesses of $9.1 million and favorable foreign currency translation effects of $0.2 million. Exclusive of those factors, the Company’s sales decreased by $13.7 million to $384.9 million or 3%. The decrease in revenue resulted from decreased customer demand from the semiconductor market compared to the year-ago quarter.
Sales were up $15.3 million, or 4% on a sequential basis over sales of $378.9 million in the second quarter of 2019, including favorable foreign currency translation effects of $0.4 million and sales from acquisitions of $8.7 million. Exclusive of those factors, the Company’s sales increased $6.2 million or 2%. The increase in revenue resulted from increased customer demand from the semiconductor market compared to the prior quarter.
The Company announced organizational changes in the third quarter of 2019 that are intended to enable us to be more responsive to our customers, increase our competitiveness, allow for scalable growth and result in significant cost savings. These changes are primarily focused on optimizing our customer-facing organization. As a result of this announcement the Company recorded restructuring charges within cost of goods sold, selling, general and administrative (SG&A) and engineering, research and development of $1.0 million, $5.8 million and $1.7 million, respectively, for the three months ended September 28, 2019. The actions associated with the restructuring plan, including employee separations, are expected to be substantially complete by the end of 2019, and the Company does not anticipate any additional material charges for the remainder of the year.

Reflecting the net sales decrease, the Company’s gross profit for the three months ended September 28, 2019 decreased to $170.4 million, down from $181.7 million for the three months ended September 29, 2018. The Company experienced a 43.2% gross margin for the three months ended September 28, 2019, compared to 45.6% in the comparable year-ago period. The gross profit and gross margin figures include an incremental cost of sales charge of $4.5 million and $3.4 million, respectively, associated with the sale of inventory acquired in recent business acquisitions for the three months ended September 28, 2019 and September 29, 2018 and $1.0 million of restructuring charges for the three months ended September 28, 2019 as noted

24

Table of Contents

above. Excluding those charges, the Company’s gross profit and gross margin for the three months ended September 28, 2019 and September 29, 2018 were $175.9 million and $185.1 million, respectively, and 44.6% and 46.4%, respectively.
The Company’s SG&A expenses increased by $8.9 million for the three months ended September 28, 2019 compared to the year-ago quarter, mainly due to higher deal costs and restructuring charges.
As a result of the aforementioned factors, the Company reported net income of $40.8 million, or $0.30 per diluted share, for the quarter ended September 28, 2019, compared to net income of $48.1 million, or $0.34 per diluted share, a year ago.
On July 15, 2019, the Company acquired MPD Chemicals, a provider of advanced materials to the specialty chemical, technology, and life sciences industries. The Company acquired MPD Chemicals for approximately $162.4 million, net of cash acquired, subject to revision for customary working capital adjustments. The Company funded the acquisition from its available cash. The acquisition does not constitute a material business combination.
On September 17, 2019, the Company acquired Hangzhou Anow Microfiltration Co., Ltd., (Anow) a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. The Company acquired Anow for $73.0 million, net of cash acquired, subject to revision for certain adjustments. The Company funded the acquisition from its available cash. The acquisition does not constitute a material business combination.
Cash and cash equivalents were $282.7 million at September 28, 2019, compared with cash and cash equivalents of $482.1 million at December 31, 2018. The Company had outstanding debt of $938.1 million at September 28, 2019, compared to $938.9 million at December 31, 2018.
Critical Accounting Policies
Management’s discussion and analysis of financial condition and results of operations are based upon the Company’s condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these condensed consolidated financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
The critical accounting policies affected most significantly by estimates, assumptions and judgments used in the preparation of the Company’s condensed consolidated financial statements are described in Item 7 of its Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to impairment of long-lived assets, goodwill, income taxes and business acquisitions. There have been no material changes in these aforementioned critical accounting policies.

Three and Nine Months Ended September 28, 2019 Compared to Three and Nine Months Ended September 29, 2018 and Three Months Ended June 29, 2019
The following table compares operating results for the three and nine months ended September 28, 2019 with results for the three and nine months ended September 29, 2018 and three months ended June 29, 2019 both in dollars and as a percentage of net sales, for each caption.

25

Table of Contents

 
Three months ended
 
Nine months ended
(Dollars in thousands)
September 28, 2019
 
September 29, 2018
 
June 29, 2019
 
September 28, 2019
 
September 29, 2018
Net sales
$
394,147

 
100.0
 %
 
$
398,597

 
100.0
 %
 
$
378,874

 
100.0
 %
 
$
1,164,068

 
100.0
 %
 
$
1,148,855

 
100.0
 %
Cost of sales
223,797

 
56.8

 
216,881

 
54.4

 
212,600

 
56.1

 
650,051

 
55.8

 
608,764

 
53.0

Gross profit
170,350

 
43.2

 
181,716

 
45.6

 
166,274

 
43.9

 
514,017

 
44.2

 
540,091

 
47.0

Selling, general and administrative expenses
71,232

 
18.1

 
62,358

 
15.6

 
64,150

 
16.9

 
217,636

 
18.7

 
185,827

 
16.2

Engineering, research and development expenses
31,173

 
7.9

 
29,964

 
7.5

 
30,624

 
8.1

 
90,788

 
7.8

 
87,781

 
7.6

Amortization of intangible assets
15,152

 
3.8

 
21,419

 
5.4

 
16,591

 
4.4

 
50,400

 
4.3

 
45,102

 
3.9

Operating income
52,793

 
13.4

 
67,975

 
17.1

 
54,909

 
14.5

 
155,193

 
13.3

 
221,381

 
19.3

Interest expense
11,388

 
2.9

 
7,987

 
2.0

 
11,315

 
3.0

 
33,587

 
2.9

 
24,442

 
2.1

Interest income
(1,172
)
 
(0.3
)
 
(309
)
 
(0.1
)
 
(1,623
)
 
(0.4
)
 
(4,020
)
 
(0.3
)
 
(2,613
)
 
(0.2
)
Other expense (income), net
934

 
0.2

 
810

 
0.2

 
(122,015
)
 
(32.2
)
 
(121,329
)
 
(10.4
)
 
4,826

 
0.4

Income before income taxes
41,643

 
10.6

 
59,487

 
14.9

 
167,232

 
44.1

 
246,955

 
21.2

 
194,726

 
16.9

Income tax expense
876

 
0.2

 
11,427

 
2.9

 
43,235

 
11.4

 
49,533

 
4.3

 
34,755

 
3.0

Net income
$
40,767

 
10.3
 %
 
$
48,060

 
12.1
 %
 
$
123,997

 
32.7
 %
 
$
197,422

 
17.0
 %
 
$
159,971

 
13.9
 %
Net sales For the three months ended September 28, 2019, net sales decreased by 1% to $394.1 million, compared to $398.6 million for the three months ended September 29, 2018. An analysis of the factors underlying the decrease in net sales is presented in the following table:
(In thousands)
 
Net sales in the quarter ended September 29, 2018
$
398,597

Decrease associated with volume, pricing and mix
(13,737
)
Increase associated with effect of foreign currency translation
196

Increase, net associated with acquired businesses and divestitures
9,091

Net sales in the quarter ended September 28, 2019
$
394,147

Included in the sales decrease were net sales primarily associated with acquisitions of $9.1 million. In addition, there were favorable foreign currency translation effects of $0.2 million, mainly due to the strengthening of the Japanese yen relative to the U.S. dollar, offset primarily by the weakening of the Korean won relative to the U.S. dollar. Exclusive of these factors, sales decreased $13.7 million, or 3% to $384.9 million for the quarter, mainly from a decreased customer demand from the semiconductor market compared to the year-ago quarter.
Sales percentage on a geographic basis for the three months ended September 28, 2019 and September 29, 2018 and the percentage increase (decrease) in sales for the three months ended September 28, 2019 compared to the sales for the three months ended September 29, 2018 were as follows:
 
Three months ended
 
 
 
September 28, 2019
 
September 29, 2018
 
Percentage increase (decrease) in sales
Taiwan
19
%
 
20
%
 
(5
)%
North America
25
%
 
21
%
 
18
 %
South Korea
17
%
 
15
%
 
10
 %
Japan
12
%
 
13
%
 
(7
)%
China
13
%
 
15
%
 
(13
)%
Europe
8
%
 
9
%
 
(14
)%
Southeast Asia
6
%
 
7
%
 
(20
)%
Sales were up $15.3 million, or 4% on a sequential basis over sales of $378.9 million for the second quarter of 2019, including favorable foreign currency translation effects of $0.4 million and sales associated with acquisitions of $8.7 million. Exclusive of those

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factors, the Company’s sales increased $6.2 million, or 2%, to $385.1 million. The increase in revenue resulted from increased customer demand from the semiconductor market compared to the previous quarter.
Net sales for the nine months ended September 28, 2019 were $1,164.1 million, up 1% from $1,148.9 million in the comparable year-ago period. An analysis of the factors underlying the increase in net sales is present in the following table:
(In thousands)
 
Net sales in the nine months ended September 29, 2018
$
1,148,855

Decrease associated with volume, pricing and mix
(50,972
)
Decrease associated with effect of foreign currency translation
(5,802
)
Increase, net associated with acquired businesses and divestitures
71,987

Net sales in the nine months ended September 28, 2019
$
1,164,068

Gross profit The Company’s gross profit declined 6% for the three months ended September 28, 2019 to $170.4 million, compared to $181.7 million for the three months ended September 29, 2018. The Company experienced a 43.2% gross margin rate for the three months ended September 28, 2019, compared to 45.6% in the comparable year-ago period. The gross profit and gross margin decrease reflects lower factory utilization associated with weaker sales levels and an unfavorable sales mix. The gross profit and gross margin figures include an incremental cost of sales charge of $4.5 million and $3.4 million, respectively, associated with the sale of inventory acquired in recent business acquisitions for the three months ended September 28, 2019 and September 29, 2018 and $1.0 million of restructuring charges for the three months ended September 28, 2019 as noted above. Excluding those charges, the Company’s gross profit and gross margin for the three months ended September 28, 2019 and September 29, 2018 were $175.9 million and $185.1 million, respectively, and 44.6% and 46.4%, respectively.
For the nine months ended September 28, 2019, the Company’s gross profit declined 5% to $514.0 million, compared to $540.1 million for the nine months ended September 29, 2018. The Company experienced a 44.2% gross margin rate for the nine months ended September 28, 2019, compared to 47.0% in the comparable year-ago period. The gross profit and gross margin decrease reflects lower factory utilization associated with weaker sales levels and an unfavorable sales mix. The gross profit and gross margin figures include an incremental cost of sales charge of $7.3 million and $3.5 million, respectively, associated with the sale of inventory acquired in recent business acquisitions for the nine months ended September 28, 2019 and September 29, 2018 and $1.3 million of restructuring charges for the nine months ended September 28, 2019. Excluding those charges, the Company’s gross profit and gross margin for the nine months ended September 28, 2019 and September 29, 2018 were $522.7 million and $543.6 million, respectively, and 44.9% and 47.3%, respectively.
Selling, general and administrative expenses Selling, general and administrative (SG&A) expenses were $71.2 million for the three months ended September 28, 2019, up $8.9 million, or 14%, from the comparable three-month period a year earlier. An analysis of the factors underlying the increase in SG&A is presented in the following table:
(In thousands)
 
Selling, general and administrative expenses in the quarter ended September 29, 2018
$
62,358

Deal costs
4,891

Integration costs
1,646

Restructuring costs
5,817

Employee costs
(1,192
)
Other decreases, net
(2,288
)
Selling, general and administrative expenses in the quarter ended September 28, 2019
$
71,232

SG&A expenses were $217.6 million for the first nine months of 2019, up 17%, compared to SG&A expenses of $185.8 million in the year-ago period. An analysis of the factors underlying changes in SG&A is presented in the following table:
(In thousands)
 
Selling, general and administrative expenses in the nine months ended September 29, 2018
$
185,827

Deal costs
20,070

Integration costs
4,633

Restructuring costs
8,887

Professional fees
916

Employee costs
(1,298
)
Travel costs
(2,108
)
Other increases, net
709

Selling, general and administrative expenses in the nine months ended September 28, 2019
$
217,636


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Engineering, research and development expenses The Company’s engineering, research and development (ER&D) efforts focus on the support or extension of current product lines, and the development of new products and manufacturing technologies. ER&D expenses were $31.2 million in the three months ended September 28, 2019 compared to $30.0 million in the year-ago period. The increase for the quarter was mainly due to higher employee costs and the acquired SPG business ER&D infrastructure, offset by lower project costs.
ER&D expenses increased 3% to $90.8 million in the first nine months of 2019, compared to $87.8 million in the year ago period, primarily due to higher employee costs and the acquired SPG business ER&D infrastructure, offset by lower project costs.
Amortization expenses Amortization of intangible assets was $15.2 million in the three months ended September 28, 2019 compared to $21.4 million for the three months ended September 29, 2018. The decrease primarily reflects the elimination of amortization expense of $6.4 million for an identifiable backlog intangible asset acquired in the SPG acquisition that became fully amortized in the second quarter of 2019, offset by additional amortization expense of $1.3 million associated with the MPD acquisition acquired in the third quarter of 2019 and the DSC acquisition acquired in the first quarter of 2019.
Amortization of intangible assets was $50.4 million in the first nine months ended September 28, 2019 compared to $45.1 million for the first nine months ended September 29, 2018. The increase reflects additional amortization of $7.0 million for the SPG acquisition, MPD acquisition and DSC acquisition, offset primarily by the elimination of amortization expense of $1.4 million for identifiable developed technology and customer relationships assets acquired in the Poco acquisition.
Interest income Interest income was $1.2 million and $4.0 million in the three and nine months ended September 28, 2019, respectively, compared to $0.3 million and $2.6 million in the three and nine months ended September 29, 2018, respectively. The increase in interest income for the three and nine months ended September 28, 2019 compared to comparable previous year periods was due to higher average cash levels earning a higher interest rate.
Interest expense Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. Interest expense was $11.4 million in the three months ended September 28, 2019 compared to $8.0 million in the three months ended September 29, 2018. The increase primarily reflects higher average debt levels.
Interest expense was $33.6 million in the nine-month period ended September 28, 2019, compared to $24.4 million in the nine-month period ended September 29, 2018. The increase reflects higher average debt levels.
Other expense (income), net Other expense, net was $0.9 million in the three months ended September 28, 2019 and consisted mainly of foreign currency transaction losses of $0.7 million. Other income, net was $121.3 million in the nine months ended September 28, 2019 and consisted mainly of net proceeds received of $122.0 million resulting from the termination of the merger agreement with Versum.
Other expense, net was $0.8 million in the three months ended September 29, 2018 and consisted mainly of foreign currency transaction losses. Other expense, net was $4.8 million in the nine months ended September 29, 2018 and consisted mainly of foreign currency transaction losses of $3.6 million and penalty charges of $1.0 million.
Income tax expense The Company recorded income tax expense of $0.9 million and $49.5 million, respectively, in the three and nine months ended September 28, 2019, compared to income tax expense of $11.4 million and $34.8 million, respectively, in the three and nine months ended September 29, 2018. The Company’s year-to-date effective tax rate was 20.1% in 2019, compared to 17.8% in 2018. The tax rate in 2019 includes a discrete tax charge of $9.4 million related to the reversal of a dividend received deduction recorded in 2018. This discrete charge was recorded as a result of the issuance of final regulations during the second quarter. The discrete charge was partially offset by a benefit of $5.3 million recorded in the third quarter based on the filing of the federal tax return. Additionally, in the second quarter of 2019, the Company received a termination fee from Versum based on the termination of the merger agreement with Versum and recorded a discrete charge of $23.5 million related to the termination fee, net of associated expenses. As a result of the termination fee, the Company released a valuation allowance on federal capital loss carryforwards and recorded a discrete benefit of $2.9 million.
Net income Due to the factors noted above, the Company recorded net income of $40.8 million, or $0.30 per diluted share, in the three-month period ended September 28, 2019, compared to net income of $48.1 million, or $0.34 per diluted share, in the three-month period ended September 29, 2018. In the three-month period ended September 28, 2019, net income, as a percent of net sales, decreased to 10.3% from 12.1% in the year-ago period. In the nine-month period ended September 28, 2019, the Company recorded net income of $197.4 million, or $1.45 per diluted share, compared to net income of $160.0 million, or $1.12 per diluted share, in the nine-month period ended September 29, 2018. In the nine-month period ended September 28, 2019, net income, as a percent of net sales, increased to 17.0% from 13.9% in the year-ago period.
Non-GAAP Measures The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP). The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the

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Company’s business and results of operations. See the section “Non-GAAP Information” included below in this section for additional detail, including the definition of certain non-GAAP financial measures and the reconciliation of these non-GAAP measures to the Company’s GAAP measures.
The Company’s principal non-GAAP financial measures are Adjusted EBITDA and Adjusted Operating Income, together with related measures thereof, and non-GAAP Earnings Per Share.
Adjusted EBITDA decreased 3% to $107.5 million in the three-month period ended September 28, 2019, compared to $110.4 million in the three-month period ended September 29, 2018. In the three month-period ended September 28, 2019, Adjusted EBITDA, as a percent of net sales, decreased to 27.3% from 27.7% in the year-ago period. Adjusted EBITDA decreased 4% to $311.8 million in the nine-month period ended September 28, 2019, compared to $325.7 million in the nine-month period ended September 29, 2018. In the nine-month period ended September 28, 2019, Adjusted EBITDA, as a percent of net sales, decreased to 26.8% from 28.4% in the year-ago period.

Adjusted Operating Income decreased 6% to $88.2 million in the three-month period ended September 28, 2019, compared to $93.9 million in the three-month period ended September 29, 2018. Adjusted Operating Income, as a percent of net sales, decreased to 22.4% from 23.6% in the year-ago period. Adjusted Operating Income decreased 7% to $257.2 million in the nine-month period ended September 28, 2019, compared to $277.5 million in the nine-month period ended September 29, 2018. In the nine-month period ended September 28, 2019, Adjusted Operating Income, as a percent of net sales, decreased to 22.1% from 24.2% in the year-ago period.

Non-GAAP Earnings Per Share was $0.50 in the three-month period ended September 28, 2019, compared to $0.46 in the three-month period ended September 29, 2018. Non-GAAP Earnings Per Share was $1.39 in the nine-month period ended September 28, 2019, compared to $1.42 in the nine-month period ended September 29, 2018.

Segment Analysis
The Company reports its financial performance based on three reporting segments. The following is a discussion of the results of operations of these three business segments. In the first quarter of 2019, the Company changed its definition of segment profit to include inter-segment sales. The Company updated its recognition of inter-segment sales to recognize the revenue and profit associated with products and components produced in one segment and supplied to another, before being sold to the ultimate end customer. The Company accounts for inter-segment sales and transfers as if the sales or transfers were to third parties, that is, at approximate market prices. Prior quarter information has been recast to reflect the change in the Company’s definition of segment profit. See note 10 to the condensed consolidated financial statements for additional information on the Company’s three segments.
The following table presents selected net sales and segment profit data for the Company’s three reportable segments for the three months ended September 28, 2019, September 29, 2018 and June 29, 2019 and nine months ended September 28, 2019 and September 29, 2018.
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
June 29, 2019
 
September 28, 2019
 
September 29, 2018
Specialty Chemicals and Engineered Materials
 
 
 
 
 
 
 
 
 
Net sales
$
127,750

 
$
131,234

 
$
127,552

 
$
379,772

 
$
396,313

Segment profit
17,074

 
31,210

 
24,000

 
65,505

 
98,859

Microcontamination Control
 
 
 
 
 
 
 
 
 
Net sales
155,979

 
151,478

 
150,185

 
463,870

 
395,338

Segment profit
46,792

 
42,448

 
43,126

 
137,241

 
119,973

Advanced Materials Handling
 
 
 
 
 
 
 
 
 
Net sales
117,256

 
123,227

 
107,515

 
340,835

 
377,877

Segment profit
17,077

 
22,226

 
15,043

 
54,487

 
73,231

Specialty Chemicals and Engineered Materials (SCEM)
For the third quarter of 2019, SCEM net sales decreased to $127.8 million, compared to $131.2 million in the comparable period last year. The sales decrease was due to decreased sales of specialty materials, specialty gases and surface prep and integration products, partially offset by sales from the acquisition of DSC in the first quarter of 2019 and the acquisition of MPD in the third quarter of 2019. SCEM reported a segment profit of $17.1 million in the third quarter of 2019, down 45% from $31.2 million in the year-ago period. The segment profit decrease was primarily due to lower gross profit related to the

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decreased sales, an incremental cost of sales charge of $4.5 million associated with the sale of inventory acquired in recent business acquisitions, unfavorable product mix and a 7% increase in operating expenses, primarily due to restructuring charges.
For the nine months ended September 28, 2019, SCEM net sales decreased to $379.8 million, compared to $396.3 million in the comparable period last year. The sales decrease was mainly due to decreased sales of specialty materials, specialty gases and surface prep and integration products, partially offset by sales from the acquisition of DSC in the first quarter of 2019 and the acquisition of MPD in the third quarter of 2019 and improved sales from advanced deposition products. SCEM reported a segment profit of $65.5 million in the nine months ended September 28, 2019, down 34% from $98.9 million in the year-ago period also due to lower sales levels, an incremental cost of sales charge of $7.3 million associated with the sale of inventory acquired in recent business acquisitions, unfavorable product mix and a 2% increase in operating expenses compared to the same period a year-ago.
Microcontamination Control (MC)
For the third quarter of 2019, MC net sales increased to $156.0 million, compared to $151.5 million in the comparable period last year. The sales increase was mainly due to improved sales from gas microcontamination products and photolithography products, offset partially by weakened sales from new market development products and liquid chemistry filters for wet, etch and clean applications. MC reported a segment profit of $46.8 million in the third quarter of 2019, up 10% from $42.4 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales, partially offset by a 1% increase in operating expenses.
For the nine months ended September 28, 2019, MC net sales increased to $463.9 million, compared to $395.3 million in the comparable period last year. The sales increase was due to the acquisition of SPG in the second quarter of 2018, which contributed an additional $66.1 million of sales, and improved sales from liquid chemistry filters for wet, etch and clean applications and photolithography products, partially offset by weakened sales from gas microcontamination products. MC reported a segment profit of $137.2 million in the nine months ended September 28, 2019, up 14% from $120.0 million in the year-ago period. The segment profit improvement was primarily due to higher gross profit related to the increased sales, partially offset by a 8% increase in operating expenses, primarily due to higher employee costs and SPG operating infrastructure.
Advanced Materials Handling (AMH)
For the third quarter of 2019, AMH net sales decreased to $117.3 million, compared to $123.2 million in the comparable period last year. The sales decrease was mainly due to decreased sales of fluid handling products and wafer and reticle handling products. AMH reported a segment profit of $17.1 million in the third quarter of 2019, down 23% from $22.2 million in the year-ago period. The segment profit decrease was primarily due to lower gross profit related to the decreased sales and an increase of 5% in operating expenses, primarily due to restructuring charges.
For the nine months ended September 28, 2019, AMH net sales decreased to $340.8 million, compared to $377.9 million in the comparable period last year. This decrease was mainly due to decreased sales of fluid handling products, liquid packaging and dispense products, wafer and reticle handling products and wafer shipping products. AMH reported a segment profit of $54.5 million in the nine months ended September 28, 2019, down 26% from $73.2 million in the year-ago period. The segment profit decrease was primarily due to lower gross profit related the decreased sales.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $13.0 million in the third quarter of 2019, compared to $6.5 million in the third quarter of 2018. The $6.5 million increase mainly reflects an increase in deal and integration costs of $6.5 million referenced in the discussion of SG&A above.
Unallocated general and administrative expenses for the nine months ended September 28, 2019 totaled $51.6 million, up from $25.6 million in the nine months ended September 29, 2018. The $26.1 million increase mainly reflects the deal costs and integration costs of $24.7 million referenced in the discussion of SG&A above.

Liquidity and Capital Resources
Operating activities Cash flows provided by operating activities totaled $253.7 million in the nine months ended September 28, 2019. Operating cash flows reflecting net income adjusted for non-cash expenses (such as depreciation, amortization and share-based compensation) was offset by a net reduction in operating assets and liabilities of $75.8 million, mainly reflecting decreases in accounts payable and accrued liabilities, deferred tax liabilities and income tax payable and increases in accounts receivable.
Accounts receivable increased by $39.3 million during the nine months ended September 28, 2019, or $30.4 million after accounting for foreign currency translation and receivables acquired from acquisitions, mainly reflecting the increase in the Company’s DSO. The Company’s DSO was 60 days at September 28, 2019, compared to 50 days at December 31, 2018. The

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increase was primarily due to the Company's quarter closing date occurring several days prior to the end of the calendar month, the period during which receivable collections are typically heavy, particularly for the Company's Asia operations.
Inventories increased by $22.1 million during the nine months ended September 28, 2019, or $5.7 million after accounting for foreign currency translation, inventory acquired from acquisitions and the provision for excess and obsolete inventory. The increase reflects higher levels of work-in-progress and finished goods offset by lower levels of raw materials.
Accounts payable and accrued liabilities decreased $27.8 million during the nine months ended September 28, 2019, or $31.9 million after accounting for foreign currency translation and liabilities assumed from acquisitions. The key component of the decrease reflects lower levels of accounts payable and higher incentive compensation payment paid out in 2019 compared to the comparable previous period.
Working capital at September 28, 2019 was $671.2 million, compared to $759.7 million as of December 31, 2018, and included $282.7 million in cash and cash equivalents, compared to cash and cash equivalents of $482.1 million as of December 31, 2018.

Investing activities Cash flows used in investing activities totaled $350.0 million in the nine-month period ended September 28, 2019. Acquisition of property, plant and equipment totaled $86.4 million, which primarily reflected investments in equipment and tooling. As of September 28, 2019, the Company expects its full-year capital expenditures in 2019 to be approximately $110 million. As of September 28, 2019, the Company had outstanding capital purchase obligations of $35.3 million for the construction or purchase of plant and equipment not yet recorded in the Company’s condensed consolidated financial statements as the Company had not yet received the related goods or property.
On March 8, 2019, the Company acquired DSC, which provides advanced materials to the specialty chemical, technology and pharmaceutical industries. The total purchase price of the acquisition was $64.1 million. The transaction is described in further detail in note 3 to the Company’s condensed consolidated financial statements.
On July 15, 2019, the Company acquired MPD Chemicals, a provider of advanced materials to the specialty chemical, technology, and life sciences industries. The Company acquired MPD Chemicals for approximately $162.4 million, subject to revision for customary working capital adjustments. The transaction is described in further detail in note 3 to the Company’s condensed consolidated financial statements.
On September 17, 2019, the Company acquired Anow, a filtration company for diverse industries including semiconductor, pharmaceutical, and medical. The Company acquired Anow for $73.0 million, subject to revision for certain adjustments. The transaction is described in further detail in note 3 to the Company’s condensed consolidated financial statements.
Financing activities Cash flows used in financing activities totaled $101.8 million during the nine-month period ended September 28, 2019. This included the Company’s payment of $2 million on its senior secured term loan, cash dividends of $29.8 million and the Company’s repurchase of shares of the Company’s common stock at a total cost of $65.3 million under the stock repurchase program authorized by the Company’s Board of Directors. In addition, the Company expended $8.6 million for taxes related to the net share settlement of equity awards under the Company’s stock plans, offset in part by proceeds of $4.4 million in connection with common shares issued under the Company’s stock plans.
As of September 28, 2019, the Company had outstanding long-term debt, including the current portion thereof, of $938.1 million, related to debt issued by the Company.
The Company has a senior secured revolving commitment facility (the “Revolving Facility”) in an aggregate amount of $300 million maturing November 6, 2023. The Revolving Facility bears interest at a rate per annum equal to, at the Company’s option, a base rate (such as prime rate or LIBOR) plus, an applicable margin. At September 28, 2019, the only outstanding amounts under the Revolving Facility were undrawn outstanding letters of credit of $0.2 million.
Through September 28, 2019, the Company was in compliance with all applicable financial covenants included in the terms of its debt obligations.
The Company also has lines of credit with two banks that provide for borrowings of Japanese yen for the Company’s Japanese subsidiary, equivalent to an aggregate of approximately $11.0 million. There were no outstanding borrowings under these lines of credit at September 28, 2019.
The Company believes that its cash and cash equivalents, funds available under its Revolving Facility and international credit facilities and cash flow generated from operations will be sufficient to meet its working capital and investment requirements for at least the next twelve months. If available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms.

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At September 28, 2019, the Company’s shareholders’ equity was $1,119.9 million, up from $1,012.0 million at the beginning of the year. The increase mainly reflects net income of $197.4 million, an increase to additional paid-in capital of $14.9 million associated with the Company’s share-based compensation expense and proceeds of $4.4 million in connection with common shares issued under the Company’s stock plan. These increases were offset partly by the repurchase of the Company’s common stock at a total cost of $59.8 million, cash dividends declared of $30.0 million, the payment of $8.6 million for taxes related to the net share settlement of equity awards under the Company’s stock plans and foreign currency translation effects of $10.5 million, mainly associated with the strengthening of the U.S. dollar versus the Korean won.
As of September 28, 2019, the Company’s resources included cash and cash equivalents of $282.7 million, funds available under its $300 million Revolving Facility and international credit facilities, and cash flow generated from operations. As of September 28, 2019, the amount of cash and cash equivalents held by foreign subsidiaries was $178.6 million. These amounts held by foreign subsidiaries, certain of which are associated with indefinitely reinvested foreign earnings, may be subject to U.S. income taxation on repatriation to the United States. The Company does not anticipate the need to repatriate funds associated with indefinitely reinvested foreign earnings to the United States to satisfy domestic liquidity needs arising in the ordinary course of business. The Company believes its existing balances of domestic cash and cash equivalents, available cash and cash equivalents held by foreign subsidiaries not associated with indefinitely reinvested foreign earnings and operating cash flows will be sufficient to meet the Company’s domestic cash needs arising in the ordinary course of business for the next twelve months.
Recently adopted accounting pronouncements Refer to note 1 to the Company’s condensed consolidated financial statements for a discussion of accounting pronouncements recently adopted.
Recently issued accounting pronouncements Refer to note 1 to the Company’s condensed consolidated financial statements for a discussion of accounting pronouncements recently issued by not yet adopted.
Non-GAAP Information The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States (GAAP).
The Company also provides certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. These non-GAAP financial measures include Adjusted EBITDA and Adjusted Operating Income together with related measures thereof, and non-GAAP Earnings Per Share (EPS), as well as certain other supplemental non-GAAP financial measures included in the discussion of the Company’s financial results.
Adjusted EBITDA, a non-GAAP financial measure, is defined by the Company as net income before (1) income tax expense, (2) interest expense, (3) interest income, (4) other expense (income), net, (5) charge for fair value write-up of acquired inventory sold, (6) deal costs, (7) integration costs, (8) loss on sale of subsidiary (9) severance and restructuring costs, (10) amortization of intangible assets and (11) depreciation. Adjusted Operating Income, another non-GAAP financial measure, is defined by the Company as Adjusted EBITDA exclusive of the depreciation addback noted above. The Company also utilizes non-GAAP financial measures whereby Adjusted EBITDA and Adjusted Operating Income are each divided by the Company’s net sales to derive Adjusted EBITDA Margin and Adjusted Operating Margin, respectively.
Non-GAAP EPS, a non-GAAP financial measure, is defined by the Company as net income before (1) charge for fair value write-up of acquired inventory sold, (2) deal costs, (3) integration costs, (4) severance and restructuring costs, (5) the Versum termination fee, net, (6) loss on sale of subsidiary, (7) amortization of intangible assets, (8) the tax effect of a legal entity restructuring, (9) the tax effect of those adjustments to net income and certain discrete items and (10) the tax effect of the Tax Cuts and Jobs Act, stated on a per share basis.
The Company provides supplemental non-GAAP financial measures to better understand its business and believes these measures provide investors and analysts additional and meaningful information for the assessment of the Company’s ongoing results. Management also uses these non-GAAP measures to assist in the evaluation of the performance of its business segments and to make operating decisions.
Management believes the Company’s non-GAAP measures help indicate the Company’s baseline performance before certain gains, losses or other charges that may not be indicative of the Company’s business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors’ overall understanding of the Company’s results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans, measures and evaluates the Company’s business performance. Management believes that the inclusion of non-GAAP measures provides greater consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.

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Management uses Adjusted EBITDA and Adjusted Operating Income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand its business.
In addition, and as a consequence of the importance of these non-GAAP financial measures in managing its business, the Company’s Board of Directors uses non-GAAP financial measures in the evaluation process to determine management compensation.
The Company believes that certain analysts and investors use Adjusted EBITDA, Adjusted Operating Income and non-GAAP EPS as supplemental measures to evaluate the overall operating performance of firms in the Company’s industry. Additionally, lenders or potential lenders use Adjusted EBITDA measures to evaluate the Company’s creditworthiness.
The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s condensed consolidated financial statements in their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations:
First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other companies. For example, the Company’s non-GAAP measure of Adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.
Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance the Company will not have future charges for fair value write-up of acquired inventory, restructuring activities, deal costs, integration costs, or similar items and, therefore, may need to record additional charges (or credits) associated with such items, including the tax effects thereon. The exclusion of these items in the Company’s non-GAAP measures should not be construed as an implication that these costs are unusual, infrequent or non-recurring.
Management considers these limitations by providing specific information regarding the GAAP amounts excluded from these non-GAAP financial measures and evaluating these non-GAAP financial measures together with their most directly comparable financial measures calculated in accordance with GAAP. The calculations of Adjusted EBITDA, Adjusted Operating Income, and non-GAAP EPS, and reconciliations between these financial measures and their most directly comparable GAAP equivalents, are presented below in the accompanying tables.

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Reconciliation of GAAP Net Income to Adjusted Operating Income and Adjusted EBITDA
 
Three months ended
 
Nine months ended
(In thousands)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net sales
$
394,147

 
$
398,597

 
$
1,164,068

 
$
1,148,855

Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

Adjustments to net income
 
 
 
 
 
 
 
Income tax expense
876

 
11,427

 
49,533

 
34,755

Interest expense
11,388

 
7,987

 
33,587

 
24,442

Interest income
(1,172
)
 
(309
)
 
(4,020
)
 
(2,613
)
Other expense (income), net
934

 
810

 
(121,329
)
 
4,826

GAAP – Operating income
52,793

 
67,975

 
155,193

 
221,381

Charge for fair value write-up of acquired inventory sold
4,483

 
3,281

 
7,333

 
3,489

Deal costs
4,891

 

 
25,191

 
5,121

Integration costs
2,398

 
752

 
6,582

 
1,949

Loss on sale of subsidiary

 
466

 

 
466

Severance and restructuring costs
8,503

 

 
12,494

 

Amortization of intangible assets
15,152

 
21,419

 
50,400

 
45,102

Adjusted operating income
88,220

 
93,893

 
257,193

 
277,508

Depreciation
19,306

 
16,537

 
54,623

 
48,236

Adjusted EBITDA
$
107,526

 
$
110,430

 
$
311,816

 
$
325,744

 
 
 
 
 
 
 
 
Net income - as a % of net sales
10.3
%
 
12.1
%
 
17.0
%
 
13.9
%
Adjusted operating income – as a % of net sales
22.4
%
 
23.6
%
 
22.1
%
 
24.2
%
Adjusted EBITDA – as a % of net sales
27.3
%
 
27.7
%
 
26.8
%
 
28.4
%
Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and Earnings per Share
 
Three months ended
 
Nine months ended
(In thousands, except per share data)
September 28, 2019
 
September 29, 2018
 
September 28, 2019
 
September 29, 2018
Net income
$
40,767

 
$
48,060

 
$
197,422

 
$
159,971

Adjustments to net income
 
 
 
 
 
 
 
Charge for fair value write-up of acquired inventory sold
4,483

 
3,281

 
7,333

 
3,489

Deal costs
4,891

 

 
25,602

 
5,121

Integration costs
2,398

 
752

 
6,582

 
1,949

Severance and restructuring costs
8,503

 

 
12,494

 

Versum termination fee, net

 

 
(122,000
)
 

Loss on sale of subsidiary

 
466

 

 
466

Amortization of intangible assets
15,152

 
21,419

 
50,400

 
45,102

Tax effect of legal entity restructuring

 

 
9,398

 

Tax effect of adjustments to net income and certain discrete tax items1
(8,015
)
 
(5,797
)
 
2,274

 
(12,209
)
Tax effect of Tax Cuts and Jobs Act
$

 
$
(2,560
)
 
$

 
$
(418
)
Non-GAAP net income
$
68,179

 
$
65,621

 
$
189,505

 
$
203,471

 
 
 
 
 
 
 
 
Diluted earnings per common share
$
0.30

 
$
0.34

 
$
1.45

 
$
1.12

Effect of adjustments to net income
0.20

 
0.12

 
(0.06
)
 
0.30

Diluted non-GAAP earnings per common share
$
0.50

 
$
0.46

 
$
1.39

 
$
1.42

1The tax effect of pre-tax adjustments to net income was calculated using the applicable marginal tax rate for each respective year.

34

Table of Contents

Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s principal financial market risks are sensitivities to interest rates and foreign currency exchange rates. The Company’s interest-bearing cash equivalents and senior secured financing obligation are subject to interest rate fluctuations. The Company’s cash equivalents are instruments with maturities of three months or less. A 100 basis point change in interest rates would potentially increase or decrease annual net income by approximately $0.9 million annually.
The cash flows and results of operations of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. At September 28, 2019, the Company had no net exposure to any foreign currency forward contracts.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
The Company’s management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has conducted an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (the 1934 Act)) as of September 28, 2019. The term “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the 1934 Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on management’s evaluation (with the participation of the Company’s CEO and CFO), as of September 28, 2019, the Company’s CEO and CFO have concluded that the disclosure controls and procedures used by the Company were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the 1934 Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) identified in connection with the foregoing evaluation of disclosure controls and procedures that occurred during the most recently completed fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company acquired Digital Specialty Chemicals Limited (DSC), MPD Chemicals (MPD) and Hangzhou Anow Microfiltration Co., Ltd. (Anow) on March 8, 2019, July 15, 2019 and September 17, 2019, respectively. None of DSC, MPD and Anow is significant to the Company’s financial statements. The Company is continuing to integrate DSC, MPD and Anow into the Company’s internal control over financial reporting, and the foregoing evaluation of the effectiveness of the Company’s disclosure controls and procedures does not include an assessment of those disclosure controls and procedures of DSC, MPD and Anow that are subsumed by internal control over financial reporting.


35

Table of Contents

PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of September 28, 2019, the Company is subject to various claims, legal actions, and complaints arising in the ordinary course of business. The Company believes the final outcome of these matters will not have a material adverse effect on its condensed consolidated financial statements. The Company expenses legal costs as incurred.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information concerning shares of the Company’s Common Stock $0.01 par value purchased during the three months ended September 28, 2019.
Period




(a)
Total Number of Shares Purchased(1)


(b)
Average Price Paid per Share

(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
June 30, 2019 - August 3, 2019
147,200
$39.02
147,200
$125,597,923
August 4, 2019 - August 31, 2019
108,387
$41.82
108,387
$121,064,392
September 1, 2019 - September 28, 2019
102,486
$46.09
102,486
$116,341,259
Total
358,073
$41.89
358,073
$116,341,259

(1) On February 13, 2018, the Company’s Board of Directors authorized a repurchase program covering up to an aggregate of $100 million of the Company’s common stock, during a period of twenty-four months, in open market transactions and in
accordance with one or more pre-arranged stock trading plans to be established in accordance with Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended. On November 19, 2018, the Company’s Board of Directors authorized the repurchase of up to an additional $250 million in aggregate principal amount of the Company’s common stock.

The Company issues common stock awards under its equity incentive plans. In the condensed consolidated financial statements, the Company treats shares of common stock withheld for tax purposes on behalf of its employees in connection with the vesting or exercise of the awards as common stock repurchases because they reduce the number of shares that would have been issued upon vesting or exercise. These withheld shares of common stock are not considered common stock repurchases under the Company’s authorized common stock repurchase plan and accordingly are not included in the common stock repurchase totals in the preceding table.

36

Table of Contents


Item 6. Exhibits
EXHIBIT INDEX
10.1
 
31.1
  
31.2
  
32.1
  
101.INS
  
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document

37

Table of Contents


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
ENTEGRIS, INC.
 
 
 
Date: October 24, 2019
 
/s/ Gregory B. Graves
 
 
Gregory B. Graves
 
 
Executive Vice President and Chief Financial
 
 
Officer (on behalf of the registrant and as
 
 
principal financial officer)


38