ENTEGRIS INC - Quarter Report: 2023 April (Form 10-Q)
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 April 1, 2023
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.
| 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 May 8, 2023, there were 149,685,161 shares of the registrant’s common stock outstanding.
ENTEGRIS, INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
FOR THE QUARTER ENDED APRIL 1, 2023
| 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.” 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 supply chain matters; inflationary pressures; future period guidance or projections; the Company’s performance relative to its markets, including the drivers of such performance; 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 our business strategies, including with respect to Company’s expansion of its manufacturing presence in Taiwan and in Colorado Springs; 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 impact of the acquisitions the Company has made and commercial partnerships the Company has established, including the acquisition of CMC Materials, Inc. (now known as CMC Materials LLC) (“CMC Materials”); the closing of any announced divestitures, including the timing thereof; trends relating to the fluctuation of currency exchange rates; 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 level of, and obligations associated with, the Company’s indebtedness, including the debts incurred in connection with the acquisition of CMC Materials; risks related to the acquisition and integration of CMC Materials, including unanticipated difficulties or expenditures relating thereto, the ability to achieve the anticipated synergies and value-creation contemplated by the acquisition of CMC Materials and the diversion of management time on transaction-related matters; raw material shortages, supply and labor constraints, price increases, inflationary pressures and rising interest rates; operational, political and legal risks of the Company’s international operations; the Company’s dependence on sole source and limited source suppliers; 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;
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substantial competition; the Company’s concentrated customer base; the Company’s ability to identify, complete and integrate acquisitions, joint ventures, divestitures or other similar transactions; the Company’s ability to consummate pending transactions on a timely basis or at all and the satisfaction of the conditions precedent to consummation of such pending transactions, including the satisfaction of regulatory conditions on the terms expected, at all or in a timely manner; the Company’s ability to effectively implement any organizational changes; the Company’s ability to protect and enforce intellectual property rights; the ongoing conflict in Ukraine and the global response thereto; the increasing complexity of certain manufacturing processes; changes in government regulations of the countries in which the Company operates, including the imposition of tariffs, export controls and other trade laws and restrictions and changes to national security and international trade policy, especially as they relate to China; fluctuation of currency exchange rates; fluctuations in the market price of the Company’s stock; and other risk factors and additional information described in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including under the heading “Risk Factors” in Item 1A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022, filed on February 23, 2023, and in the Company’s other SEC filings. Except as required under the federal securities laws and the rules and regulations of the SEC, 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) | April 1, 2023 | December 31, 2022 | |||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 707,838 | $ | 561,559 | |||||||
| Restricted cash | 1,194 | 1,880 | |||||||||
Trade accounts and notes receivable, net of allowance for credit losses of $5,341 and $5,443 | 511,435 | 535,485 | |||||||||
| Inventories, net | 830,939 | 812,815 | |||||||||
| Deferred tax charges and refundable income taxes | 38,845 | 47,618 | |||||||||
| Assets held-for-sale | 247,932 | 246,531 | |||||||||
| Other current assets | 118,864 | 129,297 | |||||||||
| Total current assets | 2,457,047 | 2,335,185 | |||||||||
Property, plant and equipment, net of accumulated depreciation of $820,644 and $770,093 | 1,464,420 | 1,393,337 | |||||||||
| Other assets: | |||||||||||
| Right-of-use assets | 91,383 | 94,940 | |||||||||
| Goodwill | 4,247,504 | 4,408,331 | |||||||||
Intangible assets, net of accumulated amortization of $691,514 and $636,872 | 1,742,336 | 1,841,955 | |||||||||
| Deferred tax assets and other noncurrent tax assets | 29,795 | 28,867 | |||||||||
| Other | 34,602 | 36,242 | |||||||||
| Total assets | $ | 10,067,087 | $ | 10,138,857 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Short-term debt, including current portion of long-term debt | $ | 159,045 | $ | 151,965 | |||||||
| Accounts payable | 167,177 | 172,488 | |||||||||
| Accrued payroll and related benefits | 94,166 | 142,340 | |||||||||
| Accrued interest payable | 66,192 | 25,571 | |||||||||
| Liabilities held-for-sale | 11,617 | 10,637 | |||||||||
| Other accrued liabilities | 179,525 | 160,873 | |||||||||
| Income taxes payable | 103,901 | 98,057 | |||||||||
| Total current liabilities | 781,623 | 761,931 | |||||||||
Long-term debt, excluding current maturities, net of unamortized discount and debt issuance costs of $131,245 and $140,107 | 5,634,710 | 5,632,928 | |||||||||
| Pension benefit obligations and other liabilities | 55,449 | 54,090 | |||||||||
| Deferred tax liabilities and other noncurrent tax liabilities | 349,763 | 391,192 | |||||||||
| Long-term lease liability | 77,319 | 80,716 | |||||||||
| Equity: | |||||||||||
Preferred stock, par value $.01; 5,000,000 shares authorized; none issued and outstanding as of April 1, 2023 and December 31, 2022 | — | — | |||||||||
Common stock, par value $.01; 400,000,000 shares authorized; issued and outstanding shares as of April 1, 2023: 149,869,777 and 149,667,377, respectively; issued and outstanding shares as of December 31, 2022: 149,339,486 and 149,137,086, respectively | 1,499 | 1,493 | |||||||||
Treasury stock, at cost: 202,400 shares held as of April 1, 2023 and December 31, 2022 | (7,112) | (7,112) | |||||||||
| Additional paid-in capital | 2,244,984 | 2,205,325 | |||||||||
| Retained earnings | 928,133 | 1,031,391 | |||||||||
| Accumulated other comprehensive loss | 719 | (13,097) | |||||||||
| Total equity | 3,168,223 | 3,218,000 | |||||||||
| Total liabilities and equity | $ | 10,067,087 | $ | 10,138,857 | |||||||
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 | |||||||||||
| (In thousands, except per share data) | April 1, 2023 | April 2, 2022 | |||||||||
| Net sales | $ | 922,396 | $ | 649,646 | |||||||
| Cost of sales | 520,711 | 339,826 | |||||||||
| Gross profit | 401,685 | 309,820 | |||||||||
| Selling, general and administrative expenses | 169,867 | 87,108 | |||||||||
| Engineering, research and development expenses | 71,906 | 46,715 | |||||||||
| Amortization of intangible assets | 57,574 | 12,651 | |||||||||
| Goodwill Impairment | 88,872 | — | |||||||||
| Operating income | 13,466 | 163,346 | |||||||||
| Interest expense | 86,146 | 12,876 | |||||||||
| Interest income | (1,325) | (12) | |||||||||
| Other (income) expense, net | (4,658) | 4,902 | |||||||||
| (Loss) income before income tax expense | (66,697) | 145,580 | |||||||||
| Income tax expense | 21,469 | 19,875 | |||||||||
| Net (loss) income | $ | (88,166) | $ | 125,705 | |||||||
| Basic (loss) earnings per common share | $ | (0.59) | $ | 0.93 | |||||||
| Diluted (loss) earnings per common share | $ | (0.59) | $ | 0.92 | |||||||
| Weighted shares outstanding: | |||||||||||
| Basic | 149,426 | 135,670 | |||||||||
| Diluted | 149,426 | 136,552 | |||||||||
See the accompanying notes to condensed consolidated financial statements.
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited)
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Net (loss) income | $ | (88,166) | $ | 125,705 | |||||||
| Other comprehensive income (loss), net of tax | |||||||||||
| Foreign currency translation adjustments | 23,734 | (2,128) | |||||||||
| Pension liability adjustments | 37 | 73 | |||||||||
Interest rate swap - cash flow hedge, change in fair value - loss, net of tax benefit of $2,903 | (9,955) | — | |||||||||
| Other comprehensive income (loss) | 13,816 | (2,055) | |||||||||
| Comprehensive (loss) income | $ | (74,350) | $ | 123,650 | |||||||
See the accompanying notes to condensed consolidated financial statements.
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
| (In thousands) | Common shares outstanding | Common stock | Treasury shares | Treasury stock | Additional paid-in capital | Retained earnings | Foreign currency translation adjustments | Defined benefit pension adjustments | Interest Rate Swap - Cash flow hedge | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | 135,719 | $ | 1,357 | 202 | $ | (7,112) | $ | 879,845 | $ | 879,776 | $ | (38,863) | $ | (1,222) | $ | — | $ | 1,713,781 | |||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock plans | 366 | 4 | — | — | (12,742) | — | — | — | — | (12,738) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 9,285 | — | — | — | — | 9,285 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | — | (13,660) | — | — | — | (13,660) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustment | — | — | — | — | — | — | — | 73 | — | 73 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | (2,128) | — | — | (2,128) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 125,705 | — | — | — | 125,705 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 2, 2022 | 136,085 | 1,361 | 202 | (7,112) | 876,388 | 991,821 | (40,991) | (1,149) | — | 1,820,318 | |||||||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | Common shares outstanding | Common stock | Treasury shares | Treasury stock | Additional paid-in capital | Retained earnings | Foreign currency translation adjustments | Defined benefit pension adjustments | Interest Rate Swap - Cash flow hedge | Total | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | 149,339 | 1,493 | 202 | $ | (7,112) | $ | 2,205,325 | $ | 1,031,391 | $ | (49,083) | $ | (83) | $ | 36,069 | $ | 3,218,000 | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued under stock plans | 530 | 6 | — | — | 8,981 | — | — | — | — | 8,987 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation expense | — | — | — | — | 30,678 | — | — | — | — | 30,678 | |||||||||||||||||||||||||||||||||||||||||||||||||
Dividends declared ($0.10 per share) | — | — | — | — | — | (15,092) | — | — | — | (15,092) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Interest Rate Swap - Cash flow hedge | — | — | — | — | — | — | — | — | (9,955) | (9,955) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Pension liability adjustment | — | — | — | — | — | — | — | 37 | — | 37 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | — | — | — | — | — | — | 23,734 | — | — | 23,734 | |||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | — | (88,166) | — | — | — | (88,166) | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at April 1, 2023 | 149,869 | 1,499 | 202 | (7,112) | 2,244,984 | 928,133 | (25,349) | (46) | 26,114 | 3,168,223 | |||||||||||||||||||||||||||||||||||||||||||||||||
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Operating activities: | |||||||||||
| Net (loss) income | $ | (88,166) | $ | 125,705 | |||||||
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: | |||||||||||
| Depreciation | 46,775 | 23,905 | |||||||||
| Amortization | 57,574 | 12,651 | |||||||||
| Share-based compensation expense | 30,678 | 9,285 | |||||||||
| Provision for deferred income taxes | (34,826) | (11,230) | |||||||||
| Impairment of goodwill | 88,872 | — | |||||||||
| Loss on extinguishment of debt | 2,787 | — | |||||||||
| Loss from sale of business | 13,642 | — | |||||||||
| Charge for excess and obsolete inventory | 13,287 | 5,811 | |||||||||
| Other | 14,439 | 5,614 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Trade accounts and notes receivable | 8,379 | (31,171) | |||||||||
| Inventories | (34,852) | (77,476) | |||||||||
| Accounts payable and accrued liabilities | 20,043 | (22,323) | |||||||||
| Other current assets | 2,538 | 2,629 | |||||||||
| Income taxes payable and refundable income taxes | 15,867 | 16,760 | |||||||||
| Other | (5,166) | 3,628 | |||||||||
| Net cash provided by operating activities | 151,871 | 63,788 | |||||||||
| Investing activities: | |||||||||||
| Acquisition of property, plant and equipment | (133,992) | (84,405) | |||||||||
| Proceeds from sale of business | 133,527 | — | |||||||||
| Other | 108 | 1,123 | |||||||||
| Net cash used in investing activities | (357) | (83,282) | |||||||||
| Financing activities: | |||||||||||
| Proceeds from revolving credit facility and short-term debt | — | 79,000 | |||||||||
| Payments of revolving credit facility and short-term debt | — | (79,000) | |||||||||
| Proceeds from long-term debt | 117,170 | — | |||||||||
| Payments of long-term debt | (117,170) | — | |||||||||
| Payments for dividends | (15,170) | (13,895) | |||||||||
| Issuance of common stock | 18,393 | 3,379 | |||||||||
| Taxes paid related to net share settlement of equity awards | (9,406) | (16,117) | |||||||||
| Other | (299) | (962) | |||||||||
| Net cash used in financing activities | (6,482) | (27,595) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 561 | (2,744) | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 145,593 | (49,833) | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | 563,439 | 402,565 | |||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 709,032 | $ | 352,732 | |||||||
See the accompanying notes to condensed consolidated financial statements.
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ENTEGRIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
| Supplemental Cash Flow Information | Three months ended | ||||||||||
| (unaudited) | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Non-cash transactions: | |||||||||||
| Due from buyer on sale of business | $ | 1,330 | $ | — | |||||||
| Equipment purchases in accounts payable | 22,041 | 18,629 | |||||||||
| Dividend payable | 576 | 423 | |||||||||
| Schedule of interest and income taxes paid: | |||||||||||
| Interest paid less capitalized interest | 38,146 | 1,002 | |||||||||
| Income taxes paid, net of refunds received | 42,424 | 12,867 | |||||||||
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 supplier of advanced materials and process solutions for 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 April 1, 2023 and December 31, 2022, and the results of operations and comprehensive income for the three months ended April 1, 2023 and April 2, 2022, the equity statements as of and for the three months ended April 1, 2023 and April 2, 2022, and cash flows for the three months ended April 1, 2023 and April 2, 2022.
Our recently acquired subsidiary, CMC Materials LLC (formerly known as CMC Materials, Inc.) (“CMC Materials”), follows a monthly reporting calendar. The first quarter of 2023 for CMC Materials refers to the three months ended March 31, 2023, whereas the Company’s first quarter is April 1, 2023. The Company believes that use of the different fiscal periods for this entity has not had a material impact on the Company’s consolidated financial position, results of operations, or liquidity. All significant intercompany balances and transactions have been eliminated in consolidation.
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 Quarterly Report on 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 Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for the three months ended April 1, 2023 are not necessarily indicative of the results to be expected for the full year.
Recently Adopted Accounting Pronouncements The Company currently has no material recently adopted accounting pronouncements.
Recently Issued Accounting Pronouncements The Company currently has no material recent accounting pronouncements yet to be adopted.
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2. REVENUES
The following table provides information about current contract liabilities from contracts with customers. The contract liabilities are included in other accrued liabilities balance in the condensed consolidated balance sheet.
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Balance at beginning of period | $ | 60,476 | $ | 23,050 | |||||||
| Revenue recognized that was included in the contract liability balance at the beginning of the period | (20,367) | (11,426) | |||||||||
Increases due to cash received, excluding amounts recognized as revenue during the period | 43,270 | 15,987 | |||||||||
| Contract liabilities included as part of disposition | (6,226) | — | |||||||||
| Balance at end of period | $ | 77,153 | $ | 27,611 | |||||||
3. GOODWILL IMPAIRMENT
During the first quarter of 2023, while the criteria had not been met to classify the reporting unit as held for sale, the Company was exploring market interest in a potential sale of the Electronic Chemicals (“EC”) reporting unit within the Advanced Planarization Solutions segment. In connection with the sale process, management determined that certain impairment indicators were present and evaluated goodwill, intangible assets, and long-lived assets for impairment in connection with the quarter ending April 1, 2023.
Long-lived assets, including finite-lived intangible assets
The Company compared the estimated undiscounted future cash flows generated by the asset group to the carrying amount of the asset group for the reporting unit and determined that the undiscounted cash flows are expected to exceed the carrying value on a held and used basis, therefore no impairment was recorded on the long-lived asset or finite-lived intangible assets. The Company considered if the triggering event would cause a potential change to the useful life of the assets and did not consider a modification to the useful life necessary.
Goodwill
The Company compared the reporting unit’s fair value to its carrying amount, including goodwill as of April 1, 2023. As the reporting unit’s carrying amount, including goodwill, exceeded its fair value the Company determined the goodwill was impaired and recorded an impairment of $88.9 million during the quarter. The impairment is classified as goodwill impairment in the Company's condensed consolidated statement of operations. The goodwill impairment is non-taxable. The fair value of the reporting unit was determined using a market-based approach, which was aligned to the expected selling price of approximately $700.0 million. We consider this a Level 3 measurement in the fair value hierarchy.
4. ACQUISITION
CMC Materials
On July 6, 2022 (the “Closing Date”), the Company completed its acquisition of CMC Materials for approximately $6.0 billion in cash and stock (the “Acquisition”) pursuant to an Agreement and Plan of Acquisition dated as of December 14, 2021 (the “Acquisition Agreement”). As a result of the Acquisition, CMC Materials became a wholly owned subsidiary of the Company. The Acquisition was accounted for under the acquisition method of accounting and the results of operations of CMC Materials are included in the Company's condensed consolidated financial statements as of and since July 6, 2022. CMC Materials reports into the Advanced Planarization Solutions and Specialty Chemicals and Engineered Materials segments of the Company. Direct costs of $39.3 million associated with the acquisition of CMC Materials, consisting primarily of professional and consulting fees, were expensed as incurred in fiscal year 2022. These costs are classified as selling, general and administrative expense in the Company's condensed consolidated statement of operations.
CMC Materials is a global supplier of consumable materials, primarily to semiconductor manufacturers. The Company's products play a critical role in the production of advanced semiconductor devices, helping to enable the manufacture of smaller, faster and more complex devices by its customers. The acquisition broadened the Company’s solutions set and enables the Company to bring to market a broader array of innovative and high-value solutions, at a faster pace, to help customers improve productivity, performance and total cost of ownership.
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The purchase price of CMC Materials consisted of the following:
| (In thousands): | |||||
| Cash paid to CMC Materials’ shareholders | $ | 3,836,983 | |||
| Stock paid to CMC Materials’ shareholders | 1,265,690 | ||||
| Repayment of CMC Materials’ indebtedness | 918,578 | ||||
| Total purchase price | 6,021,251 | ||||
| Less cash and cash equivalents acquired | 280,636 | ||||
| Total purchase price, net of cash acquired | $ | 5,740,615 | |||
Under the terms of the Acquisition Agreement, the Company paid $133.00 per share for all outstanding shares of CMC Materials (excluding treasury shares). In addition, the Company settled all outstanding share-based compensation awards held by CMC Materials’ employees at the same per share price except for certain unvested performance units that were replaced by the Company’s restricted share units. The acquisition method of accounting requires the Company to include the amount associated with pre-combination service as purchase price for the acquisition, reflected in the table immediately above.
The Acquisition was funded with existing cash balances as well as funds raised by the Company through the issuance of debt in the form of a new term loan facility in the aggregate principal amount of $2,495.0 million, senior secured notes due 2029 in an aggregate principal amount of $1,600.0 million, senior unsecured notes due 2030 in an aggregate principal amount of $895.0 million, and a 364-Day Bridge Credit Facility in the aggregate principal amount of $275.0 million (collectively “CMC Materials Acquisition Financing”).
The following table summarizes the allocation of the purchase price to the fair values assigned to the assets acquired and liabilities assumed at the date of the Acquisition:
| (In thousands): | July 6, 2022 | |||||||
| Cash and cash equivalents | $ | 280,636 | ||||||
| Accounts receivable and other current assets | 204,589 | |||||||
| Inventory | 256,598 | |||||||
| Property, plant and equipment | 537,387 | |||||||
| Identifiable intangible assets | 1,736,219 | |||||||
| Other noncurrent assets | 39,741 | |||||||
| Current liabilities | (211,417) | |||||||
| Deferred tax liabilities and other noncurrent liabilities | (444,936) | |||||||
| Net assets acquired | 2,398,817 | |||||||
| Goodwill | 3,622,434 | |||||||
| Total purchase price | $ | 6,021,251 | ||||||
The fair value of acquired inventories was $256.6 million and was valued at the estimated selling price less the cost of disposal and reasonable profit for the selling effort. The fair value write-up of acquired finished goods inventory was $61.9 million. This amount was recorded as an incremental cost of sales charge, amortized over the expected turn of the acquired inventory, during the year ended December 31, 2022.
The fair value of acquired property, plant and equipment of $537.4 million is valued at its fair value assuming held and used,
unless market data was available supporting the fair value.
The Company recognized the following provisional intangible assets as part of the acquisition of CMC Materials and finite lived assets are amortized on a straight-line basis:
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| (In thousands) | Amount | Weighted average life in years | |||||||||
| Developed technology | $ | 1,043,000 | 7.3 | ||||||||
| Trademarks and trade names | 236,600 | 14.9 | |||||||||
| Customer relationships | 414,300 | 18.3 | |||||||||
In-process research and development (1) | 31,400 | ||||||||||
| Other | 10,919 | 1.0 | |||||||||
| $ | 1,736,219 | 11.0 | |||||||||
(1) In-process research and development assets are treated as indefinite-lived until the completion or abandonment of the associated research and development project, at which time the appropriate useful lives would be determined.
The fair value of acquired identifiable finite intangible assets was determined using an income method, which utilizes discounted cash flows to identify the fair value each of the identifiable intangible assets. The Company normally utilizes the “income method,” which starts with a forecast of all of the expected future net cash flows attributable to the subject intangible asset. These cash flows are then adjusted to present value by applying an appropriate discount rate that reflects the risk factors associated with the cash flow streams. Depending on the asset valued, the key assumptions included one or more of the following: (1) future revenue growth rates, (2) future gross margin, (3) future selling, general and administrative expenses, (4) royalty rates, and (5) discount rates. 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 in the fair value hierarchy.
The purchase price of CMC Materials exceeded the fair value of the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed by $3,622.4 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 tax purposes.
The final valuation of assets acquired and liabilities assumed is expected to be completed as soon as possible, but no 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 finalized. In addition to identifiable intangible assets, for the reasons noted above, the Company's valuation of the CMC Materials’ tax accounts is provisional pending the completion of and the Company's review of CMC Materials’ tax returns to be filed for periods up to the acquisition date. To the extent that the Company's estimates require adjustment, the Company will modify the value.
Pro Forma Results (Unaudited)
The following unaudited pro forma financial information presents the combined results of operations of the Company as if the acquisition of CMC Materials had occurred January 1, 2021. The unaudited pro forma financial information is not necessarily indicative of what the Company’s consolidated results of operations actually would have been had the acquisition occurred at the beginning of each year. In addition, the unaudited pro forma financial information does not attempt to project the future results of operations of the combined company. The pro forma information does not include any potential revenue enhancements, cost synergies or other operating efficiencies that could result from the acquisition.
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| Three months ended | ||||||||
| (In thousands, except share data) | April 2, 2022 | |||||||
| Net sales | $ | 969,091 | ||||||
| Net income | $ | 100,264 | ||||||
| Per share amounts: | ||||||||
| Net income per common share - basic | $ | 0.67 | ||||||
| Net income per common share - diluted | $ | 0.66 | ||||||
The unaudited pro forma financial information above gives effect to the following:
•The elimination of transactions between Entegris and CMC Materials, which upon completion of the Acquisition would be considered intercompany. This reflects the elimination of intercompany sales and associated intercompany accounts.
•Incremental amortization and depreciation expense related to the estimated fair value of identifiable intangible assets and property, plant and equipment from the purchase price allocation.
•Interest expense on the new debt raised to fund in part the consideration paid to effect the Acquisition using the effective interest rates.
•The elimination of interest expense associated with the repayment of the $145.0 million senior secured term loan facility due 2025.
•The amortization of deferred financing costs and original issue discount associated with the aggregate new debt facilities.
•Transaction and integration costs directly attributable to the Acquisition were reclassed as of the beginning of the comparable prior annual reporting period.
•The income tax effect of the transaction accounting adjustments related to the Acquisition calculated using a blended statutory income tax rate of 22.5%.
5. ASSET HELD-FOR-SALE AND DIVESTITURE
Asset Held-For-Sale
On October 11, 2022, the Company entered into a definitive agreement with Infineum USA L.P. (“Infineum”) for the sale of its Pipeline and Industrials Materials (“PIM”) business, which became part of the Company with the acquisition of CMC Materials. The PIM business reports into the Specialty Chemicals and Engineered Materials segment of the Company. Effective February 10, 2023, the Company terminated the definitive agreement. In accordance with the terms of the agreement, the Company received a $12.0 million termination fee from Infineum in the first quarter of 2023 and incurred a transaction adviser fee of $1.1 million. The net amount of $10.9 million is recorded in Other (income) expense, net in the condensed consolidated statement of operations. At the time of the termination, the transaction had not received clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”).
During the fourth quarter of 2022, the related assets and liabilities were classified as held-for-sale in the Company’s consolidated balance sheet and measured at the lower of their carrying amount or fair value less cost to sell. The assets and liabilities continue to be classified as held-for-sale at April 1, 2023.
The planned disposition of the PIM business did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements since the disposition did not represent a strategic shift that had, or will have, a major effect on the Company’s operations and financial results.
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Assets-held-for sale comprise the following as of April 1, 2023:
| (In thousands) | ||||||||
| Assets: | April 1, 2023 | |||||||
| Accounts Receivable | $ | 25,838 | ||||||
| Inventory | 23,674 | |||||||
| Other current assets | 396 | |||||||
| Property, Plant and Equipment, net | 109,865 | |||||||
| Intangible assets, net | 76,692 | |||||||
| Goodwill | 10,213 | |||||||
| Other assets | 1,254 | |||||||
| Total assets-held-for sale | $ | 247,932 | ||||||
| Liabilities: | ||||||||
| Accounts payable | $ | 4,829 | ||||||
| Accrued expenses | 5,447 | |||||||
| Long-term liabilities | 1,341 | |||||||
| Total liabilities-held-for sale | $ | 11,617 | ||||||
Income before income taxes attributable to the PIM business was $8.6 million for the three months ended April 1, 2023.
Divestiture
During the first quarter of 2023, the Company announced entry into a definitive agreement to sell QED Technologies International, Inc. (“QED”), which offers magnetorheological finishing polishing and subaperture stitching interferometry metrology manufacturing solutions. QED was a part of Specialty Chemicals and Engineered Materials segment and became part of the Company with the acquisition of CMC Materials.
The Company completed the divestiture of the QED on March 1, 2023 and received proceeds of $134.8 million after adjustments with respect to cash, working capital, indebtedness and transaction expenses. The disposition of QED did not meet the criteria to be classified as a discontinued operation in the Company’s financial statements since the disposition did not represent a strategic shift that had a major effect on the Company’s operations and financial results. The following table summarizes the fair value of the sale proceeds received in connection with the divestiture, which are subject to further post-closing adjustment:
| (In thousands) | April 1, 2023 | |||||||
| Fair value of sale consideration | $ | 137,500 | ||||||
| Preliminary working capital adjustment | 1,602 | |||||||
| Cash transferred to the buyer on the closing balance sheet | (1,465) | |||||||
| Direct costs to sell | (2,780) | |||||||
| Fair value of sale consideration | $ | 134,857 | ||||||
The net sales proceeds received from the QED business divestiture presented under cash flows from investing activities represent the cash portion of the sale consideration, which was determined as the fair value of sale consideration reduced by the amount held in escrow. We expect that the amount held in escrow should be paid out within the next six months. The following table summarizes the different components of net proceeds received from the QED business divestiture presented under Cash flows from investing activities:
| (In thousands) | April 1, 2023 | |||||||
| Fair value of sale consideration | $ | 134,857 | ||||||
| Amount held in escrow | 1,330 | |||||||
| Net sales proceeds received from business divestiture | $ | 133,527 | ||||||
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The carrying amount of net assets associated with the QED business was approximately $148.5 million. The major classes of assets and liabilities sold consisted of the following:
| (In thousands) | April 1, 2023 | |||||||
| Assets: | ||||||||
| Trade accounts receivable, net | $ | 4,818 | ||||||
| Inventories, net | 8,658 | |||||||
| Other current assets | 5,743 | |||||||
| Property, plant and equipment, net | 2,663 | |||||||
| Goodwill | 89,271 | |||||||
| Intangible assets, net | 48,661 | |||||||
| ROU assets | 806 | |||||||
| Other long-term assets | 37 | |||||||
| Total assets | $ | 160,657 | ||||||
| Liabilities: | ||||||||
| Accounts payable | $ | 1,340 | ||||||
| Short-term lease obligation | 271 | |||||||
| Accrued expenses and other current liabilities | 6,922 | |||||||
| Payroll and related costs | 1,557 | |||||||
| Long-term lease obligation | 517 | |||||||
| Other long-term liabilities | 1,551 | |||||||
| Total liabilities | $ | 12,158 | ||||||
As a result of the QED divestiture, the Company recognized a pre-tax loss of approximately $13.6 million presented in selling, general and administrative expenses on the Condensed Consolidated Statements of Operations for the quarter ended April 1, 2023. The Company also recognized the income tax expense associated with the QED divestiture of approximately $17.0 million based on preliminary estimates as of April 1, 2023. We consider this a Level 3 measurement in the fair value hierarchy.
6. RESTRICTED CASH
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheet that sum to the total of the same amounts shown in the condensed consolidated statement of cash flows.
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Cash and cash equivalents | $ | 707,838 | $ | 561,559 | |||||||
| Restricted cash | 1,194 | 1,880 | |||||||||
| Total cash, cash equivalents and restricted cash | $ | 709,032 | $ | 563,439 | |||||||
The restricted cash represents cash held in a “Rabbi” trust. Prior to the acquisition of CMC Materials, CMC Materials’ change in control severance protection agreements required CMC Materials to establish a Rabbi trust prior to a change in control and fully fund the trust to cover all the severance benefits that may become payable under the agreements.
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7. INVENTORIES
Inventories consist of the following:
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Raw materials | $ | 349,380 | $ | 337,576 | |||||||
| Work-in-process | 58,886 | 60,182 | |||||||||
Finished goods (1) | 422,673 | 415,057 | |||||||||
| Total inventories, net | $ | 830,939 | $ | 812,815 | |||||||
(1) Includes consignment inventories held by customers of $44.4 million and $46.2 million at April 1, 2023 and December 31, 2022, respectively.
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill activity for each of the Company’s reportable segments that carry goodwill, Specialty Chemicals and Engineered Materials (“SCEM”),Advanced Planarization Solutions (“APS”), Microcontamination Control (“MC”), and Advanced Materials Handling (“AMH”), and was as follows:
| (In thousands) | SCEM | APS | MC | AMH | Total | ||||||||||||||||||||||||
| December 31, 2022 | $ | 561,328 | $ | 3,530,813 | $ | 242,088 | $ | 74,102 | $ | 4,408,331 | |||||||||||||||||||
| Goodwill impairment | — | (88,872) | — | — | (88,872) | ||||||||||||||||||||||||
| Disposition of business | (89,271) | — | — | — | (89,271) | ||||||||||||||||||||||||
| Purchase accounting adjustments | 10,435 | (16,458) | — | — | (6,023) | ||||||||||||||||||||||||
| Assets held-for-sale | (1,390) | — | — | — | (1,390) | ||||||||||||||||||||||||
| Foreign currency translation | (3) | 24,107 | 625 | — | 24,729 | ||||||||||||||||||||||||
| April 1, 2023 | $ | 481,099 | $ | 3,449,590 | $ | 242,713 | $ | 74,102 | $ | 4,247,504 | |||||||||||||||||||
Our goodwill balances reflect the goodwill impairment of our EC reporting unit of $88.9 million, see Note 3. In addition, the Company sold its QED business and the related goodwill of the business of $89.3 million was included in the disposition, see Note 5.
Identifiable intangible assets at April 1, 2023 and December 31, 2022 consist of the following:
| April 1, 2023 | |||||||||||||||||
| (In thousands) | Gross carrying amount | Accumulated amortization | Net carrying value | ||||||||||||||
| Developed technology | $ | 1,300,557 | $ | 351,751 | $ | 948,806 | |||||||||||
| Trademarks and trade names | 244,090 | 33,404 | 210,686 | ||||||||||||||
| Customer relationships | 832,016 | 286,038 | 545,978 | ||||||||||||||
In-process research and development (1) | 31,400 | — | 31,400 | ||||||||||||||
| Other | 25,787 | 20,321 | 5,466 | ||||||||||||||
| $ | 2,433,850 | $ | 691,514 | $ | 1,742,336 | ||||||||||||
| December 31, 2022 | |||||||||||||||||
| (In thousands) | Gross carrying amount | Accumulated amortization | Net carrying value | ||||||||||||||
| Developed technology | $ | 1,302,101 | $ | 313,876 | $ | 988,225 | |||||||||||
| Trademarks and trade names | 250,473 | 29,565 | 220,908 | ||||||||||||||
| Customer relationships | 863,947 | 273,039 | 590,908 | ||||||||||||||
In-process research and development (1) | 31,100 | — | 31,100 | ||||||||||||||
| Other | 31,206 | 20,392 | 10,814 | ||||||||||||||
| $ | 2,478,827 | $ | 636,872 | $ | 1,841,955 | ||||||||||||
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(1) Intangible assets acquired in a business combination that are in-process and used in research and development activities are considered indefinite-lived until the completion or abandonment of the research and development efforts. Once the research and development efforts are completed, we determine the useful life and begin amortizing the assets.
Future amortization expense relating to intangible assets currently recorded in the Company’s condensed consolidated balance sheets is estimated to be the following at April 1, 2023:
| (In thousands) | Remaining 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
| Future amortization expense | $ | 168,531 | 210,501 | 203,951 | 201,015 | 197,507 | 760,831 | $ | 1,742,336 | ||||||||||||||||||||||||||||||||
9. DEBT
The Company’s debt as of April 1, 2023 and December 31, 2022 consists of the following:
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Senior secured term loan facility due 2029 | 2,495,000 | 2,495,000 | |||||||||
| Senior secured notes due 2029 | 1,600,000 | 1,600,000 | |||||||||
| Senior unsecured notes due 2030 | 895,000 | 895,000 | |||||||||
| Senior unsecured notes due 2029 | 400,000 | 400,000 | |||||||||
| Senior unsecured notes due 2028 | 400,000 | 400,000 | |||||||||
| Bridge credit facility due 2023 | 135,000 | 135,000 | |||||||||
| Total debt (par value) | 5,925,000 | 5,925,000 | |||||||||
| Unamortized discount and debt issuance costs | 131,245 | 140,107 | |||||||||
| Total debt, net | $ | 5,793,755 | $ | 5,784,893 | |||||||
| Less short-term debt, including current portion of long-term debt | 159,045 | 151,965 | |||||||||
| Total long-term debt, net | $ | 5,634,710 | $ | 5,632,928 | |||||||
Annual maturities of long-term debt, excluding unamortized discount and issuance costs, due as of April 1, 2023 are as follows:
| (In thousands) | Remaining 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | ||||||||||||||||||||||||||||||||||
Contractual debt obligation maturities(1) | $ | 153,713 | 24,950 | 24,950 | 24,950 | 24,950 | 5,671,487 | $ | 5,925,000 | ||||||||||||||||||||||||||||||||
(1) Subject to Excess Cash Flow payments to the lenders.
On March 10, 2023, the Company and certain of its subsidiaries entered into Amendment No. 1 (the “Amendment”) with the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent, which amended the Credit and Guaranty Agreement, dated as of November 6, 2018 (as amended and restated as of July 6, 2022 and as further amended, restated, amended and restated, supplemented, modified and otherwise in effect prior to the effectiveness of the Amendment, the “Existing Credit Agreement” and, the Existing Credit Agreement as amended by the Amendment, the “Amended Credit Agreement”), by and among the Company, as borrower, certain subsidiaries of the Company party thereto, as guarantors, the lenders party thereto and Morgan Stanley Senior Funding, Inc., as administrative agent and collateral agent.
The Amendment provides for, among other things, the refinancing of the Company’s outstanding term B loans under the Existing Credit Agreement in an aggregate principal amount of $2.495 billion (the “Original Tranche B Term Loans”) with a new tranche of term B loans under the Amended Credit Agreement in an aggregate principal amount of $2.495 billion (the “New Tranche B Term Loans”). The New Tranche B Term Loans will bear interest under the Amended Credit Agreement, at a rate per annum equal to, at the Company’s option, either (i) Term SOFR plus an applicable margin of 2.75% or (ii) a base rate plus an applicable margin of 1.75%. Consistent with the Original Tranche B Term Loans, the new Tranche B Term Loans will mature on July 6, 2029. Other than as described herein (and more fully described in the Amendment), the terms of the Amended Credit Agreement are substantially similar to the terms of the Existing Credit Agreement.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is required to record certain assets and liabilities at fair value. The valuation methods used for determining the fair value of these financial instruments by hierarchy are as follows:
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Level 1 Cash and cash equivalents consist of various bank accounts used to support our operations and investments in institutional money-market funds that are traded in active markets. The restricted cash represents cash held in a “Rabbi” trust, further described in Note 6.
Level 2 Derivative financial instruments include an interest rate swap contract and foreign exchange contracts. The fair value of our derivative instruments is estimated using standard valuation models and market-based observable inputs over the contractual term, including the prevailing SOFR based yield curves for the interest rate swap, and forward rates and/or the Overnight Index Swap curve for forward foreign exchange contracts, among others.
Level 3 No Level 3 financial instruments.
The following table presents financial instruments, other than debt, that we measure at fair value on a recurring basis. See Note 9 of this Report on Form 10-Q for a discussion of our debt. In instances where the inputs used to measure the fair value of an asset fall into more than one level of the hierarchy, we have classified it based on the lowest level input that is significant to the determination of the fair value.
| Fair Value Measurements at Reporting Date Using | |||||||||||||||||||||||||||||||||||
| (In thousands): | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||||||||||
| Assets: | April 1, 2023 | December 31, 2022 | April 1, 2023 | December 31, 2022 | April 1, 2023 | December 31, 2022 | April 1, 2023 | December 31, 2022 | |||||||||||||||||||||||||||
| Cash and cash equivalents | $ | 707,838 | $ | 561,559 | $ | — | $ | — | $ | — | $ | — | $ | 707,838 | $ | 561,559 | |||||||||||||||||||
| Restricted cash | 1,194 | 1,880 | — | — | — | — | 1,194 | 1,880 | |||||||||||||||||||||||||||
| Derivative financial instruments - Interest rate swap - cash flow hedge | — | — | 33,731 | 46,589 | — | — | 33,731 | 46,589 | |||||||||||||||||||||||||||
| Derivative financial instruments -Forward exchange contracts | — | — | 234 | 726 | — | — | 234 | 726 | |||||||||||||||||||||||||||
| Total Assets | $ | 709,032 | $ | 563,439 | $ | 33,965 | $ | 47,315 | $ | — | $ | — | $ | 742,997 | $ | 610,754 | |||||||||||||||||||
| Liabilities: | |||||||||||||||||||||||||||||||||||
| Derivative financial instruments - Forward exchange contracts | $ | — | $ | — | $ | 71 | $ | 193 | $ | — | $ | — | $ | 71 | $ | 193 | |||||||||||||||||||
| Total Liabilities | $ | — | $ | — | $ | 71 | $ | 193 | $ | — | $ | — | $ | 71 | $ | 193 | |||||||||||||||||||
Other Fair Value Disclosures
The estimated fair value and carrying value of our debt as of April 1, 2023 and December 31, 2022 were as follows:
| April 1, 2023 | December 31, 2022 | |||||||||||||||||||
| (In thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||||||
| Total debt, net | $ | 5,793,755 | $ | 5,573,511 | $ | 5,784,893 | $ | 5,428,900 | ||||||||||||
11. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks, including risks associated with interest rates and foreign currency exchange rates. One objective of the Company's risk management program is to mitigate these risks using derivative instruments.
Cash Flow Hedges - Interest Rate Swap Contract
In July 2022, the Company entered into a floating-to-fixed swap agreement on its variable rate debt under the Term Loan Facility. The interest rate swap was designated specifically to the Term Loan Facility and qualifies as a cash flow hedge. The notional amount is scheduled to decrease quarterly and will expire on December 30, 2025. As cash flow hedges, unrealized
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gains are recognized as assets and unrealized losses are recognized as liabilities. Unrealized gains and losses are designated as effective or ineffective based on a comparison of the changes in fair value of the interest rate swaps and changes in fair value of the underlying exposures being hedged. The effective portion is recorded as a component of accumulated other comprehensive income (loss) and will be reflected in earnings during the period the hedged transaction effects earnings, while the ineffective portion is recorded as a component of Interest expense.
Foreign Currency Contracts Not Designated as Hedges
The Company enters into foreign exchange contracts in an effort to mitigate the risks associated with currency fluctuations on certain foreign currency balance sheet exposures. These foreign exchange contracts do not qualify for hedge accounting. The Company recognizes the change in fair value of its foreign currency forward contracts in the condensed consolidated statement of operations.
The notional amounts of our derivative instruments are as follows:
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Derivatives designated as hedging instruments: | |||||||||||
| Interest rate swap contract - cash flow hedge | $ | 1,950,000 | $ | 1,950,000 | |||||||
| Derivatives not designated as hedging instruments: | |||||||||||
| Foreign exchange contracts to purchase U.S. dollars | $ | 4,400 | $ | 3,995 | |||||||
| Foreign exchange contracts to sell U.S. dollars | 20,055 | 26,225 | |||||||||
The fair values of our derivative instruments included in the condensed consolidated balance sheets are as follows:
| (In thousands) | Derivative Assets | Derivative Liabilities | |||||||||||||||||||||
| Condensed Consolidated Balance Sheet Location | April 1, 2023 | December 31, 2022 | April 1, 2023 | December 31, 2022 | |||||||||||||||||||
| Derivatives designated as hedging instruments - Interest rate swap contract -cash flow hedge | |||||||||||||||||||||||
| Other current assets | $ | 28,213 | $ | 32,481 | $ | — | $ | — | |||||||||||||||
| Other assets - long-term | 5,518 | 14,108 | — | — | |||||||||||||||||||
| Derivatives not designated as hedging instruments -Foreign exchange contracts | |||||||||||||||||||||||
| Other current assets | $ | 234 | 726 | $ | — | $ | — | ||||||||||||||||
| Other accrued liabilities | — | — | 71 | 193 | |||||||||||||||||||
The following table summarizes the effects of our derivative instruments on our condensed consolidated statements of operations:
| (Gain) Loss Recognized in Condensed Consolidated Statements of Income | ||||||||||||||
| (In thousands) | Condensed Consolidated Statements of Operations Location | Three Months Ended | ||||||||||||
| Derivatives designated as hedging instruments: | April 1, 2023 | April 2, 2022 | ||||||||||||
| Interest rate swap contract-cash flow hedge | Interest expense, net | $ | (7,913) | $ | — | |||||||||
| Derivatives not designated as hedging instruments: | ||||||||||||||
| Foreign exchange contracts | Other expense, net | $ | 129 | $ | — | |||||||||
The following table summarizes the effects of our derivative instruments on Accumulated Other Comprehensive Income:
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| Loss recognized in Other Comprehensive Income | |||||||||||
| (In thousands) | Three Months Ended | ||||||||||
| Derivatives designated as hedging instruments: | April 1, 2023 | April 2, 2022 | |||||||||
| Interest rate swap contract - Cash flow hedge | $ | (9,955) | $ | — | |||||||
We expect approximately $28.2 million to be reclassified from accumulated other comprehensive income into interest expense, net during the next twelve months related to our interest rate swap based on projected rates of the SOFR forward curve as of April 1, 2023.
12. (LOSS) EARNINGS PER COMMON SHARE
Basic (loss) earnings per common share (“EPS”) is calculated based on the weighted average number of shares of common stock outstanding during the applicable period. Diluted earnings per common share is calculated based on the weighted average number of shares of common stock outstanding plus potentially dilutive shares of common stock outstanding during the applicable period. The following table presents a reconciliation of the share amounts used in the computation of basic and diluted earnings per common share:
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Basic—weighted common shares outstanding | 149,426 | 135,670 | |||||||||
| Weighted common shares assumed upon exercise of stock options and vesting of restricted common stock | — | 882 | |||||||||
| Diluted—weighted common shares and common shares equivalent outstanding | 149,426 | 136,552 | |||||||||
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 months ended April 1, 2023 and April 2, 2022:
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Shares excluded from calculations of diluted EPS | 1,747 | 140 | |||||||||
13. OTHER (INCOME) EXPENSE, NET
Other (income) expense, net for the three months ended April 1, 2023 and April 2, 2022 consists of the following:
| Three months ended | ||||||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | ||||||||||||
| Infineum termination fee, net | $ | (10,876) | $ | — | ||||||||||
| Loss on foreign currency transactions | 2,401 | 4,577 | ||||||||||||
| Loss on extinguishment of debt and modification | 3,880 | — | ||||||||||||
| Other, net | (63) | 325 | ||||||||||||
| Other (income) expense, net | $ | (4,658) | $ | 4,902 | ||||||||||
Infineum termination fee, net
On October 11, 2022, the Company and Infineum entered into a definitive agreement for the sale of the Company’s PIM business. On February 10, 2023, the Company terminated the definitive agreement. In accordance with the terms of the definitive agreement, the Company received a $12.0 million termination fee from Infineum in the first quarter of 2023 and incurred a transaction fee of $1.1 million to the third-party financial adviser it had engaged to assist with the transaction.
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14. SEGMENT REPORTING
The Company’s financial segment reporting reflects an organizational alignment intended to leverage the Company’s unique breadth of capabilities to create mission-critical microcontamination control products, specialty chemicals and advanced materials handling solutions that maximize manufacturing yields, reduce manufacturing costs and enable higher device performance for its customers. 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 four segments to create new and increasingly integrated solutions for its customers. The Company reports its financial performance in the following segments:
•Specialty Chemicals and Engineered Materials: SCEM provides high-performance and high-purity process chemistries, gases and materials, and safe and efficient materials delivery systems to support semiconductor and other advanced manufacturing processes.
•Advanced Planarization Solutions: APS provides complementary chemical mechanical planarization solutions, advanced materials and high-purity wet chemicals; including CMP slurries, pads, formulated cleans and other electronic chemicals.
•Microcontamination Control: MC offers solutions to filter and purify critical liquid and gaseous chemistries used in semiconductor manufacturing processes and other high-technology industries.
•Advanced Materials Handling: AMH develops solutions to monitor, protect, transport and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry, life sciences and other high-technology industries.
Summarized financial information for the Company’s reportable segments is shown in the following tables.
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Net sales | |||||||||||
| SCEM | $ | 198,004 | $ | 165,776 | |||||||
| APS | 250,326 | 30,645 | |||||||||
| MC | 269,297 | 266,637 | |||||||||
| AMH | 218,853 | 198,113 | |||||||||
| Inter-segment elimination | (14,084) | (11,525) | |||||||||
| Total net sales | $ | 922,396 | $ | 649,646 | |||||||
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Segment profit (loss) | |||||||||||
| SCEM | $ | 3,268 | $ | 37,692 | |||||||
APS (1) | (32,790) | 11,159 | |||||||||
| MC | 95,997 | 98,618 | |||||||||
| AMH | 48,165 | 46,690 | |||||||||
| Total segment profit | $ | 114,640 | $ | 194,159 | |||||||
(1) APS segment loss is inclusive of $88.9 million goodwill impairment charge. See Note 3.
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The following table reconciles total segment profit (loss) to income before income tax (benefit) expense:
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Total segment profit | $ | 114,640 | $ | 194,159 | |||||||
| Less: | |||||||||||
| Amortization of intangible assets | 57,574 | 12,651 | |||||||||
| Unallocated general and administrative expenses | 43,600 | 18,162 | |||||||||
| Operating income | 13,466 | 163,346 | |||||||||
| Interest expense | 86,146 | 12,876 | |||||||||
| Interest income | (1,325) | (12) | |||||||||
| Other (income) expense, net | (4,658) | 4,902 | |||||||||
| (Loss) income before income tax expense | $ | (66,697) | $ | 145,580 | |||||||
In the following tables, revenue is disaggregated by customers’ country or region based on the ship to location of the customer for the three months ended April 1, 2023 and April 2, 2022, respectively.
| Three months ended April 1, 2023 | |||||||||||||||||||||||||||||||||||
| (In thousands) | SCEM | APS | MC | AMH | Inter-segment | Total | |||||||||||||||||||||||||||||
| North America | $ | 81,319 | $ | 66,010 | $ | 41,766 | $ | 75,598 | $ | (14,084) | $ | 250,609 | |||||||||||||||||||||||
| Taiwan | 24,034 | 34,159 | 54,236 | 36,661 | — | 149,090 | |||||||||||||||||||||||||||||
| China | 16,347 | 31,613 | 55,671 | 31,800 | — | 135,431 | |||||||||||||||||||||||||||||
| South Korea | 20,645 | 35,726 | 29,829 | 34,456 | — | 120,656 | |||||||||||||||||||||||||||||
| Japan | 20,277 | 9,079 | 49,753 | 11,316 | — | 90,425 | |||||||||||||||||||||||||||||
| Europe | 23,156 | 40,271 | 27,004 | 21,984 | — | 112,415 | |||||||||||||||||||||||||||||
| Southeast Asia | 12,226 | 33,468 | 11,038 | 7,038 | — | 63,770 | |||||||||||||||||||||||||||||
| $ | 198,004 | $ | 250,326 | $ | 269,297 | $ | 218,853 | $ | (14,084) | $ | 922,396 | ||||||||||||||||||||||||
| Three months ended April 2, 2022 | |||||||||||||||||||||||||||||||||||
| (In thousands) | SCEM | APS | MC | AMH | Inter-segment | Total | |||||||||||||||||||||||||||||
| North America | $ | 50,112 | $ | 7,192 | $ | 35,355 | $ | 64,341 | $ | (11,525) | $ | 145,475 | |||||||||||||||||||||||
| Taiwan | 27,263 | 5,241 | 78,043 | 33,718 | — | 144,265 | |||||||||||||||||||||||||||||
| China | 22,544 | 3,980 | 40,521 | 26,828 | — | 93,873 | |||||||||||||||||||||||||||||
| South Korea | 18,405 | 6,049 | 33,692 | 30,009 | — | 88,155 | |||||||||||||||||||||||||||||
| Japan | 22,514 | 785 | 47,659 | 12,864 | — | 83,822 | |||||||||||||||||||||||||||||
| Europe | 11,231 | 2,458 | 18,374 | 22,246 | — | 54,309 | |||||||||||||||||||||||||||||
| Southeast Asia | 13,707 | 4,940 | 12,993 | 8,107 | — | 39,747 | |||||||||||||||||||||||||||||
| $ | 165,776 | $ | 30,645 | $ | 266,637 | $ | 198,113 | $ | (11,525) | $ | 649,646 | ||||||||||||||||||||||||
15. SUBSEQUENT EVENTS
Dividend
On April 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share to be paid on May 24, 2023 to shareholders of record on the close of business on May 3, 2023.
Debt Repayment
On April 20, 2023, the Company repaid the remaining principal of $135.0 million on the Bridge Credit Facility.
Disposition
On May 10, 2023, the Company announced the execution of a definitive agreement to sell its Electronic Chemicals (“EC”) business, which became part of the Company with the recent acquisition of CMC Materials, to FUJIFILMS Holdings America
23
Corporation for $700.0 million, subject to customary adjustments with respect to cash, working capital, indebtedness and transaction expenses. The EC business specializes in purification, formulation, blending, packaging and distribution of high-purity chemicals used within the semiconductor and microelectronic manufacturing processes. The divestiture is currently expected to close before the end of 2023, subject to receipt of required regulatory approvals and other customary closing conditions. The Company does not expect a material gain or loss from the sale of the EC business.
24
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 thereto included elsewhere in this Quarterly Report on Form 10-Q. The information, except for historical information, contained in this discussion and analysis or set forth elsewhere in this Quarterly Report on Form 10-Q includes forward-looking statements that involve risks and uncertainties. You should review the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 as well as in our other SEC filings 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 or set forth elsewhere in this Quarterly Report on Form 10-Q. 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
The Company is a leading supplier of advanced materials and process solutions for the semiconductor and other high technology industries. We help our customers maximize manufacturing yields, reduce manufacturing costs, and enable higher device performance by leveraging our unique breadth of capabilities to provide mission critical enhanced materials and process solutions for the most advanced manufacturing environments.
Our business is organized and operated in four operating segments, which align with the key elements of the advanced
semiconductor manufacturing ecosystem.
•The Specialty Chemicals and Engineered Materials segment, or SCEM, provides high-performance and high-purity process chemistries, gases and materials, and safe and efficient materials delivery systems to support semiconductor and other advanced manufacturing processes.
•The Advanced Planarization Solutions segment, or APS, provides complementary chemical mechanical planarization solutions, advanced materials and high-purity wet chemicals including CMP slurries, pads, formulated cleans and other electronic chemicals.
•The Microcontamination Control segment, or MC, offers solutions to filter and purify critical liquid and gaseous chemistries used in semiconductor manufacturing processes and other high-technology industries.
•The Advanced Materials Handling segment, or AMH, develops solutions to monitor, protect, transport and deliver critical liquid chemistries, wafers and other substrates for a broad set of applications in the semiconductor industry, life sciences and other high-technology industries.
These segments share common business systems and processes, technology centers and technology roadmaps. With the complementary capabilities across these segments, we believe we are uniquely positioned to create new, co-optimized and increasingly integrated solutions for our customers. For example, after the acquisition of CMC Materials, we now offer an end- to-end offering for our customers consisting of advanced deposition materials from our SCEM segment, CMP slurries, pads and post-CMP cleaning chemistries from our APS segment, CMP slurry filters from our MC segment, and CMP slurry high-purity packaging and fluid monitoring systems from our AMH segment.
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 a Saturday. The Company’s fiscal quarters in 2023 end on April 1, 2023, July 1, 2023, September 30, 2023 and December 31, 2023.
Impact of Export Control Regulations
On October 7, 2022, the U.S Department of Commerce, Bureau of Industry and Security (“BIS”) announced export control regulations that restrict the sale of certain products and services to some companies and domestic fabs in China. These new rules restrict the sale of products and the provision of service to domestic fabs in China operating at or above certain advanced technology nodes. See Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2022 for additional information regarding risk associated with the impact of new export control regulations, including under the caption “Tariffs, export controls and other trade laws and restrictions resulting from international trade disputes, strained international relations and changes to foreign and national security policy, especially as they relate to China, could have an adverse impact on our operations and reduce the competitiveness or availability of our products relative to local and global competitors.”
25
Recent Events
On February 10, 2023, the Company terminated the definitive agreement with Infineum to sell its PIM business. At the time of the termination, the transaction had not received clearance under the HSR Act. In accordance with the terms of the definitive agreement, the Company received a $12.0 million termination fee from Infineum in the first quarter of 2023. Also in the first quarter of 2023, the Company incurred a fee of $1.1 million to the third-party financial adviser it had engaged to assist with the transaction.
On March 1, 2023, the Company completed its divestiture of the QED business. The QED business was part of the SCEM segment. The QED business became part of the Company with the acquisition of CMC Materials. The Company received proceeds of $134.8 million subject to certain post-closing adjustments. See Note 5 to our condensed consolidated financial statements for further discussion.
On March 10, 2023, the Company amended its Amended Credit Agreement. The amendment provides for, among other things, the refinancing of the Company’s outstanding term B loans under the Existing Credit Agreement in an aggregate principal amount of $2.495 billion (the “Original Tranche B Term Loans”) with a new tranche of term B loans under the Amended Credit Agreement in an aggregate principal amount of $2.495 billion (the “New Tranche B Term Loans”). The New Tranche B Term Loans will bear interest under the Amended Credit Agreement, at a rate per annum equal to, at the Company’s option, either (i) Term SOFR plus an applicable margin of 2.75% or (ii) a base rate plus an applicable margin of 1.75%. Consistent with the Original Tranche B Term Loans, the new Tranche B Term Loans will mature on July 6, 2029. See Note 9 to our condensed consolidated financial statements for further discussion.
On May 10, 2023, the Company announced the execution of a definitive agreement to sell its Electronic Chemicals (“EC”) business, which became part of the Company with the recent acquisition of CMC Materials, to FUJIFILM Holdings America Corporation for $700.0 million, subject to customary adjustments with respect to cash, working capital, indebtedness and transaction expenses. The EC business specializes in purification, formulation, blending, packaging and distribution of high-purity chemicals used within the semiconductor and microelectronic manufacturing processes. The divestiture is currently expected to close before the end of 2023, subject to receipt of required regulatory approvals and other customary closing conditions. The Company does not expect a material gain or loss from the sale of the EC business.
Critical Accounting Policies and Estimates
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 our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on February 23, 2023. On an ongoing basis, the Company evaluates the critical accounting policies used to prepare its condensed consolidated financial statements, including, but not limited to, those related to business acquisitions. There have been no material changes in these critical accounting policies and estimates.
26
Three Months Ended April 1, 2023 Compared to Three Months Ended April 2, 2022
The following table compares operating results for the three months ended April 1, 2023 and April 2, 2022, both in dollars and as a percentage of net sales, for each caption.
| Three months ended | |||||||||||||||||||||||
| (Dollars in thousands) | April 1, 2023 | April 2, 2022 | |||||||||||||||||||||
| Net sales | $ | 922,396 | 100.0 | % | $ | 649,646 | 100.0 | % | |||||||||||||||
| Cost of sales | 520,711 | 56.5 | 339,826 | 52.3 | |||||||||||||||||||
| Gross profit | 401,685 | 43.5 | 309,820 | 47.7 | |||||||||||||||||||
| Selling, general and administrative expenses | 169,867 | 18.4 | 87,108 | 13.4 | |||||||||||||||||||
| Engineering, research and development expenses | 71,906 | 7.8 | 46,715 | 7.2 | |||||||||||||||||||
| Amortization of intangible assets | 57,574 | 6.2 | 12,651 | 1.9 | |||||||||||||||||||
| Goodwill impairment | 88,872 | 9.6 | — | — | |||||||||||||||||||
| Operating income | 13,466 | 1.5 | 163,346 | 25.1 | |||||||||||||||||||
| Interest expense | 86,146 | 9.3 | 12,876 | 2.0 | |||||||||||||||||||
| Interest income | (1,325) | (0.1) | (12) | — | |||||||||||||||||||
| Other (income) expense, net | (4,658) | (0.5) | 4,902 | 0.8 | |||||||||||||||||||
| (Loss) Income before income taxes | (66,697) | (7.2) | 145,580 | 22.4 | |||||||||||||||||||
| Income tax expense | 21,469 | 2.3 | 19,875 | 3.1 | |||||||||||||||||||
| Net (loss) income | $ | (88,166) | (9.6) | % | $ | 125,705 | 19.3 | % | |||||||||||||||
Net sales For the three months ended April 1, 2023, net sales increased by 42% to $922.4 million, compared to $649.6 million for the three months ended April 2, 2022. An analysis of the factors underlying the increase in net sales is presented in the following table:
| (In thousands) | |||||
Net sales in the quarter ended April 2, 2022 | $ | 649,646 | |||
| Increase associated with acquired businesses | 273,843 | ||||
| Increase mainly associated with volume exclusive of CMC Materials | 16,969 | ||||
| Decrease associated with effect of foreign currency translation | (18,062) | ||||
Net sales in the quarter ended April 1, 2023 | $ | 922,396 | |||
Total net sales increased primarily driven by the inclusion of sales from the acquisition of CMC Materials for the three-months ended April 1, 2023 subsequent to the Closing Date. Growth was also driven in part by our strong position at the leading-edge technology nodes, led by solutions like our liquid filtration products that are of growing importance to our customers’ technology roadmaps. Total net sales also reflected unfavorable foreign currency translation effects of $18.1 million, mainly due to the significant weakening of the Japanese yen relative to the U.S. dollar.
On a geographic basis, sales percentage by customers’ country or region for the three months ended April 1, 2023 and April 2, 2022 and the percentage increase in sales for the three months ended April 1, 2023 compared to the sales for the three months ended April 2, 2022 were as follows:
| Three months ended | |||||||||||||||||
| April 1, 2023 | April 2, 2022 | Percentage increase in sales | |||||||||||||||
| North America | 27 | % | 22 | % | 72 | % | |||||||||||
| Taiwan | 16 | % | 22 | % | 3 | % | |||||||||||
| China | 15 | % | 14 | % | 44 | % | |||||||||||
| South Korea | 13 | % | 14 | % | 37 | % | |||||||||||
| Japan | 10 | % | 13 | % | 8 | % | |||||||||||
| Europe | 12 | % | 8 | % | 107 | % | |||||||||||
| Southeast Asia | 7 | % | 6 | % | 60 | % | |||||||||||
The increases in sales to customers for all countries and regions in the table above were principally driven by the inclusion of sales from the CMC Materials acquisition.
27
Gross margin The following table sets forth gross margin as a percentage of net revenues:
| Three months ended | |||||||||||||||||
| April 1, 2023 | April 2, 2022 | Percentage point change | |||||||||||||||
| Gross margin as a percentage of net revenues: | 43.5 | % | 47.7 | % | (4.2) | ||||||||||||
Gross margin decreased by 4.2 percentage points for the three months ended April 1, 2023, compared to the same period in the prior year. Gross margin declined primarily due to the inclusion of CMC Materials products, which have aggregate lower gross margins. In addition, the Company had restructuring costs of $7.4 million in the quarter.
Selling, general and administrative expenses Selling, general and administrative, or SG&A, expenses were $169.9 million in the three months ended April 1, 2023, compared to $87.1 million in the year-ago period. An analysis of the factors underlying the change in SG&A expenses is presented in the following table:
| (In thousands) | |||||
Selling, general and administrative expenses in the quarter ended April 2, 2022 | $ | 87,108 | |||
| Employee costs other than share based compensation costs, mainly driven by the inclusion of CMC Materials | 20,127 | ||||
| Share based compensation costs | 17,827 | ||||
| Integration costs | 15,729 | ||||
| Loss on sale of QED business | 13,642 | ||||
| Restructuring costs | 3,865 | ||||
| Depreciation expense, mainly driven by the inclusion of CMC Materials | 4,573 | ||||
| Professional fees | 4,290 | ||||
| Transaction and deal costs | (2,007) | ||||
| Other increases, net | 4,713 | ||||
Selling, general and administrative expenses in the quarter ended April 1, 2023 | $ | 169,867 | |||
Engineering, research and development expenses The Company’s engineering, research and development, or ER&D, efforts focus on the support or extension of current product lines and the development of new products and manufacturing technologies. ER&D expenses increased 54% to $71.9 million in the three months ended April 1, 2023 compared to $46.7 million in the year-ago period. An analysis of the factors underlying the increase in ER&D expenses is presented in the following table:
| (In thousands) | |||||
Engineering, research and development expenses in the quarter ended April 2, 2022 | $ | 46,715 | |||
| Employee costs, mainly driven by the inclusion of CMC Materials | 17,007 | ||||
| Project materials, mainly driven by the inclusion of CMC Materials | 2,773 | ||||
| Depreciation expense, mainly driven by the inclusion of CMC Materials | 3,794 | ||||
| Other increases, net | 1,617 | ||||
Engineering, research and development expenses in the quarter ended April 1, 2023 | $ | 71,906 | |||
Amortization expenses Amortization of intangible assets was $57.6 million in the three months ended April 1, 2023, compared to $12.7 million for the three months ended April 2, 2022. The increase primarily reflects additional amortization expense associated with the recent acquisition of CMC Materials.
Goodwill impairment The Company recorded a goodwill impairment charge of $88.9 million in the three months ended April 2, 2022. See Note 3 to our condensed consolidated financial statements for further discussion.
Interest expense Interest expense includes interest associated with debt outstanding and the amortization of debt issuance costs associated with such borrowings. Interest expense was $86.1 million in the three months ended April 1, 2023, compared to $12.9 million in the three months ended April 2, 2022. The increase primarily reflects higher interest expense related to the debt financing of the CMC Materials acquisition.
Other (income) expense, net Other income, net was $4.7 million in the three months ended April 1, 2023 and consisted mainly of net proceeds received of $10.9 million resulting from the termination of the definitive agreement with Infineum, partially offset by a loss of extinguishment and modification of debt of $3.9 million associated with the amendment of the Company’s
28
Amended Credit Agreement (see Note 9 to the Company’s condensed consolidated financial statements) and foreign currency transaction losses of $2.4 million. Other expense, net was $4.9 million in the three months ended April 2, 2022 and consisted mainly of foreign currency transaction losses of $4.6 million.
Income tax expense Income tax expense of $21.5 million in the three months ended April 1, 2023, compared to income tax expense of $19.9 million in the three months ended April 2, 2022, respectively. The Company’s year-to-date effective income tax rate at April 1, 2023 was (32.2)%, compared to 13.7% at April 2, 2022.
The change in the effective tax rate for the three months ended April 1, 2023, compared to the prior year primarily relates to non-deductible goodwill impairment charge and tax expense of $17.0 million on the sale of the QED business unit recorded during the quarter ended April 1, 2023. The year-to-date income tax expense in 2023 and 2022 includes discrete expense of $0.1 million and a discrete benefit of $4.3 million, respectively, recorded in connection with share-based compensation.
Net (loss) income Due to the factors noted above, the Company recorded net loss of $88.2 million, or $0.59 per diluted share, in the three months ended April 1, 2023, compared to net income of $125.7 million, or $0.92 per diluted share, in the three months ended April 2, 2022.
Non-GAAP Financial Measures The Company’s condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States, or GAAP. The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. See the section entitled “Non-GAAP Information” below for additional detail, including the definition of certain non-GAAP financial measures and the reconciliation of these non-GAAP measures to the Company’s GAAP measures.
The Company’s principal non-GAAP financial measures are adjusted EBITDA and adjusted operating income, together with related measures thereof, and non-GAAP earnings per share.
Adjusted EBITDA increased 22% to $251.5 million in the three months ended April 1, 2023, compared to $206.2 million in the three months ended April 2, 2022. In the three months ended April 1, 2023, adjusted EBITDA, as a percentage of net sales, decreased to 27.3% from 31.7% in the year-ago period.
Adjusted operating income increased 12% to $204.8 million in the three months ended April 1, 2023, compared to $182.3 million in the three months ended April 2, 2022. Adjusted operating income, as a percentage of net sales, decreased to 22.2% from 28.1% in the year-ago period.
Non-GAAP earnings per share decreased 39% to $0.65 in the three months ended April 1, 2023, compared to $1.06 in the three months ended April 2, 2022.
The increases in adjusted EBITDA and adjusted operating income for the three months ended April 1, 2023 compared to the year-ago period is generally attributable to the increases in sales and gross profit. The decrease in non-GAAP earnings per share for the three months ended April 1, 2023 compared to the year-ago period is attributable to higher interest expense associated with debt financing in connection with the CMC acquisition.
Segment Analysis
The Company reports its financial performance based on four reportable segments: Specialty Chemicals and Engineered Materials, Advanced Planarization Solutions, Microcontamination Control and Advanced Material Handling. See Note 14 to
29
the condensed consolidated financial statements for additional information on the Company’s four segments. The following is a discussion of the results of operations of these four business segments.
The following table presents selected net sales and segment profit (loss) data for the Company’s four reportable segments, along with unallocated general and administrative expenses, for the three months ended April 1, 2023 and April 2, 2022.
| Three months ended | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Specialty Chemicals and Engineered Materials | |||||||||||
| Net sales | $ | 198,004 | $ | 165,776 | |||||||
| Segment profit | 3,268 | 37,692 | |||||||||
| Advanced Planarization Solutions | |||||||||||
| Net sales | $ | 250,326 | $ | 30,645 | |||||||
| Segment (loss) profit | (32,790) | 11,159 | |||||||||
| Microcontamination Control | |||||||||||
| Net sales | $ | 269,297 | $ | 266,637 | |||||||
| Segment profit | 95,997 | 98,618 | |||||||||
| Advanced Materials Handling | |||||||||||
| Net sales | $ | 218,853 | $ | 198,113 | |||||||
| Segment profit | 48,165 | 46,690 | |||||||||
| Unallocated general and administrative expenses | $ | 43,600 | $ | 18,162 | |||||||
Specialty Chemicals and Engineered Materials (SCEM)
For the first quarter of 2023, SCEM net sales increased to $198.0 million, up 19% compared to $165.8 million in the comparable period last year. The sales increase primarily reflects the inclusion of sales of $49.7 million from the inclusion of certain product lines from the acquisition of CMC Materials, partially offset by a sales decline seen across most other product lines which was primarily driven by the softening in the semiconductor market. SCEM reported a segment profit of $3.3 million in the first quarter of 2023, down 91% from $37.7 million in the year-ago period. The segment profit decrease was primarily associated with a 71% increase in operating expenses, which was primarily due to a $13.6 million loss on sale of QED business,$6.5 million related to restructuring charges and higher compensation costs.
Advanced Planarization Solutions (APS)
For the first quarter of 2023, APS net sales increased to $250.3 million, compared to $30.6 million in the comparable period last year. The sales increase was mainly due to sales attributed to the CMC Materials acquisition. APS reported a segment loss of $32.8 million in the first quarter of 2023, compared to segment profit of $11.2 million in the year-ago period. The segment loss in the current year was due to the goodwill impairment charge of $88.9 million related to the EC reporting unit, see Note 3 to our condensed consolidated financial statements for further discussion, partially offset by the segment profit attributed to the CMC Materials acquisition.
Microcontamination Control (MC)
For the first quarter of 2023, MC net sales increased to $269.3 million, up 1% compared to $266.6 million in the comparable period last year. The sales increase was mainly due to improved sales from liquid microcontamination products, partially offset by gas microcontamination products. MC reported a segment profit of $96.0 million in the first quarter of 2023, down 3% from $98.6 million in the year-ago period. The segment profit decline was primarily due to a 21% increase in operating expenses primarily due to higher compensation costs.
Advanced Materials Handling (AMH)
For the first quarter of 2023, AMH net sales increased to $218.9 million, up 10% compared to $198.1 million in the comparable period last year. The sales increase was mainly due to improved sales from wafer handling and fluid handling. AMH reported a segment profit of $48.2 million in the first quarter of 2023, up 3% from $46.7 million in the year-ago period. The segment
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profit increase was primarily due to higher sales volume, partially offset by an 18% increase in operating expenses, primarily due to higher compensation costs.
Unallocated general and administrative expenses
Unallocated general and administrative expenses totaled $43.6 million in the first quarter of 2023, compared to $18.2 million in the comparable period last year. The $25.4 million increase is primarily due to a $15.7 million increase in integration related costs related to the acquisition of CMC Materials and a $14.0 million increase in employee related costs, driven by higher higher stock based compensation costs, partially offset by the absence of $2.0 million of deal costs in the prior comparable period.
Liquidity and Capital Resources
We consider the following when assessing our liquidity and capital resources:
| In thousands | April 1, 2023 | December 31, 2022 | |||||||||
| Cash and cash equivalents including restricted cash | $ | 709,032 | $ | 563,439 | |||||||
| Working capital | 1,675,424 | 1,573,254 | |||||||||
| Total debt, net of unamortized discount and debt issuance costs | 5,793,755 | 5,784,893 | |||||||||
The Company has historically financed its operations and capital requirements through cash flow from its operating activities, long-term loans, lease financing, revolving credit facility and borrowings under domestic and international short-term lines of credit.
Based on our analysis, we believe our existing balances of domestic cash and cash equivalents and our currently anticipated operating cash flows will be sufficient to meet our cash needs arising in the ordinary course of business for the next twelve months and for the longer term.
We may seek to take advantage of opportunities to raise additional capital through additional debt financing or through public or private sales of securities. If in the future our available liquidity is not sufficient to meet the Company’s operating and debt service obligations as they come due, management would need to pursue alternative arrangements through additional equity or debt financing in order to meet the Company’s cash requirements. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, in fiscal 2023, we have not experienced difficulty accessing capital and credit markets, but future volatility in the capital and credit markets may increase costs associated with issuing debt instruments or affect our ability to access those markets. In addition, it is possible that our ability to access the capital and credit markets could be limited at a time when we would like, or need, to do so, which could have an adverse impact on our ability to refinance maturing debt and/or react to changing economic and business conditions.
In summary, our cash flows for each period were as follows:
| Three months ended | |||||||||||
| (in thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Net cash provided by operating activities | $ | 151,871 | $ | 63,788 | |||||||
| Net cash used in investing activities | (357) | (83,282) | |||||||||
| Net cash used in financing activities | (6,482) | (27,595) | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 145,593 | (49,833) | |||||||||
Operating activities Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities. Cash provided by operating activities totaled $151.9 million in the three months ended April 1, 2023, compared to $63.8 million in the three months ended April 2, 2022. The increase was driven by a $114.8 million of changes in operating assets and liabilities, partially offset by $26.7 million decrease of net (loss) income adjusted for non-cash reconciling items.
Changes in operating assets and liabilities for the three months ended April 1, 2023 were driven by changes in accounts payable and accrued liabilities, trade accounts and notes receivable and inventories. The change for trade receivables was mainly due to timing of customer collections. The change for accounts payable and accrued liabilities was driven by an increase in accrued interest payable related to the debt financing in connection with the CMC Materials acquisition and advanced payments from customers.
Investing activities Cash flows used in investing activities totaled $0.4 million in the three months ended April 1, 2023, compared to $83.3 million in the three months ended April 2, 2022. The change resulted primarily from proceeds from the sale of the QED business, partially offset by higher cash paid for acquisition of property, plant and equipment.
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Financing activities Cash used in financing activities totaled $6.5 million during the three months ended April 1, 2023, compared to cash used in financing activities of $27.6 million during the three months ended April 2, 2022. The change was primarily due to higher proceeds received from stock option exercises.
Our total dividend payments were $15.2 million in the three months ended April 1, 2023, compared to $13.9 million in the three months ended April 2, 2022. We have paid a cash dividend in each quarter since the fourth quarter of 2017. On April 19, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.10 per share to be paid on May 24, 2023 to shareholders of record on the close of business on May 3, 2023.
Other Liquidity and Capital Resources Considerations
Debt
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| Senior secured term loan facility due 2029 | $ | 2,495,000 | $ | 2,495,000 | |||||||
| Senior secured notes due 2029 at 4.75% | 1,600,000 | 1,600,000 | |||||||||
| Senior unsecured notes due 2030 at 5.95% | 895,000 | 895,000 | |||||||||
| Senior unsecured notes due 2029 at 3.625% | 400,000 | 400,000 | |||||||||
| Senior unsecured notes due 2028 at 4.375% | 400,000 | 400,000 | |||||||||
| Bridge credit facility due 2023 | 135,000 | 135,000 | |||||||||
| Revolving facility due 2027 | — | — | |||||||||
| Total debt (par value) | $ | 5,925,000 | $ | 5,925,000 | |||||||
On March 10, 2023, the Company amended its Amended Credit Agreement. The amendment provides for, among other things, the refinancing of the Company’s outstanding term B loans under the Existing Credit Agreement in an aggregate principal amount of $2.495 billion (the “Original Tranche B Term Loans”) with a new tranche of term B loans under the Amended Credit Agreement in an aggregate principal amount of $2.495 billion (the “New Tranche B Term Loans”). The New Tranche B Term Loans will bear interest under the Amended Credit Agreement, at a rate per annum equal to, at the Company’s option, either (i) Term SOFR plus an applicable margin of 2.75% or (ii) a base rate plus an applicable margin of 1.75%. Consistent with the Original Tranche B Term Loans, the new Tranche B Term Loans will mature on July 6, 2029. See Note 9 to our condensed consolidated financial statements for further discussion.
Through April 1, 2023, the Company was in compliance with the financial covenants under its debt arrangements.
The Company has commitments under the Revolving Facility of $575.0 million. The Revolving Facility bears interest at a rate per annum equal to, at the Company’s option, either a base rate (such as prime rate) or SOFR, plus, in each case, an applicable margin. During the three months ended April 1, 2023, there were no borrowings under this Revolving Facility and no balance was outstanding at April 1, 2023.
The Company also has a line of credit with one bank that provides for borrowings in Japanese yen for the Company’s Japanese subsidiaries, equivalent to an aggregate of approximately $7.5 million. During the three months ended April 1, 2023, there were no borrowings under this line of credit and no balance was outstanding at April 1, 2023.
Cash, cash equivalents and restricted cash and cash requirements
| (In thousands) | April 1, 2023 | December 31, 2022 | |||||||||
| U.S. | $ | 286,726 | $ | 136,262 | |||||||
| Non-U.S. | 421,112 | 425,297 | |||||||||
| Cash and cash equivalents | 707,838 | 561,559 | |||||||||
| Restricted cash - U.S. | 1,194 | 1,880 | |||||||||
| Cash, cash equivalents and restricted cash | $ | 709,032 | $ | 563,439 | |||||||
Our cash and cash equivalents include cash on hand and highly liquid debt securities with original maturities of three months or less, which are valued at cost and approximate fair value. We utilize a variety of funding strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We have accrued taxes on any earnings that are not indefinitely reinvested. No additional withholding taxes have been accrued for any indefinitely reinvested earnings.
Our restricted cash represents cash held in a “Rabbi” trust and is not available for general corporate purposes. See Note 6 to the condensed consolidated financial statements for additional information.
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Cash requirements
We have cash requirements to support working capital needs, capital expenditures, business acquisitions, contractual obligations, commitments, principal and interest payments on debt and other liquidity requirements associated with our operations. We generally intend to use available cash and funds generated from our operations to meet these cash requirements, but in the event that additional liquidity is required we may also borrow under our Revolving Facility.
There were no material changes to the cash requirements from our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
Recently adopted accounting pronouncements Refer to Note 1 to the Company’s condensed consolidated financial statements for a discussion of recently adopted accounting pronouncements.
Recently issued accounting pronouncements Refer to Note 1 to the Company’s condensed consolidated financial statements for a discussion of recently issued but not yet adopted accounting pronouncements.
Non-GAAP Information The Company’s condensed consolidated financial statements are prepared in conformity with GAAP.
The Company also utilizes certain non-GAAP financial measures as a complement to financial measures provided in accordance with GAAP in order to better assess and reflect trends affecting the Company’s business and results of operations. These non-GAAP financial measures include adjusted EBITDA and adjusted operating income, together with related measures thereof, and non-GAAP earnings per share, as well as certain other supplemental non-GAAP financial measures included in the discussion of the Company’s financial results.
Adjusted EBITDA is defined by the Company as net (loss) income before, as applicable, (1) income tax expense, (2) interest expense, (3) interest income, (4) other (income) expense, net, (5) goodwill impairment, (6) deal and transaction costs, (7) integration costs, (8) restructuring costs, (9) loss on sale of business (10) amortization of intangible assets and (11) depreciation. Adjusted operating income 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 Net Income is defined by the Company as net (loss) income before, as applicable, (1) goodwill impairment, (2) deal and transaction costs, (3) integration costs, (4) restructuring costs, (5) loss on extinguishment of debt and modification, (6) loss on sale of business, (7) Infineum termination fee, net, (8) Interest expense, net, (9) amortization of intangible assets, (10) the tax effect of the foregoing adjustments to net (loss) income, stated on a per share basis and (11) tax effect of legal entity restructuring. Non-GAAP EPS is defined as our Non-GAAP Net Income divided by our diluted weighted-average shares outstanding.
The Company provides supplemental non-GAAP financial measures to help management and investors to better understand our business and believes these measures provide investors and analysts additional and meaningful information for the assessment of the Company’s ongoing results. Management also uses these non-GAAP measures to assist in the evaluation of the performance of the Company’s business segments and to make operating decisions.
Management believes the Company’s non-GAAP measures help indicate the Company’s baseline performance before certain gains, losses or other charges that may not be indicative of the Company’s business or future outlook and offer a useful view of business performance in that the measures provide a more consistent means of comparing performance. The Company believes the non-GAAP measures aid investors’ overall understanding of the Company’s results by providing a higher degree of transparency for such items and providing a level of disclosure that will help investors understand how management plans, measures and evaluates the Company’s business performance. Management believes that the inclusion of non-GAAP measures provides greater consistency in its financial reporting and facilitates investors’ understanding of the Company’s historical operating trends by providing an additional basis for comparisons to prior periods.
Management uses adjusted EBITDA and adjusted operating income to assist it in evaluations of the Company’s operating performance by excluding items that management does not consider as relevant in the results of its ongoing operations. Internally, these non-GAAP measures are used by management for planning and forecasting purposes, including the preparation of internal budgets; for allocating resources to enhance financial performance; for evaluating the effectiveness of operational strategies; and for evaluating the Company’s capacity to fund capital expenditures, secure financing and expand our business.
In addition, and as a consequence of the importance of these non-GAAP financial measures in managing our 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.
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The presentation of non-GAAP financial measures is not meant to be considered in isolation, as a substitute for, or superior to, financial measures or information provided in accordance with GAAP. Management strongly encourages investors to review the Company’s condensed consolidated financial statements in their entirety and to not rely on any single financial measure.
Management notes that the use of non-GAAP measures has limitations, including but not limited to:
First, non-GAAP financial measures are not standardized. Accordingly, the methodology used to produce the Company’s non-GAAP financial measures is not computed under GAAP and may differ notably from the methodology used by other companies. For example, the Company’s non-GAAP measure of adjusted EBITDA may not be directly comparable to EBITDA or an adjusted EBITDA measure reported by other companies.
Second, the Company’s non-GAAP financial measures exclude items such as amortization and depreciation that are recurring. Amortization of intangibles and depreciation have been, and will continue to be for the foreseeable future, a significant recurring expense with an impact upon the Company’s results of operations, notwithstanding the lack of immediate impact upon cash flows.
Third, there is no assurance that the Company will not have future charges for goodwill impairment, 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 | |||||||||||
| (In thousands) | April 1, 2023 | April 2, 2022 | |||||||||
| Net sales | $ | 922,396 | $ | 649,646 | |||||||
| Net (loss) income | $ | (88,166) | $ | 125,705 | |||||||
| Net (loss) income - as a % of net sales | (9.6) | % | 19.3 | % | |||||||
| Adjustments to net (loss) income | |||||||||||
| Income tax expense | 21,469 | 19,875 | |||||||||
| Interest expense | 86,146 | 12,876 | |||||||||
| Interest income | (1,325) | (12) | |||||||||
| Other (income) expense, net | (4,658) | 4,902 | |||||||||
| GAAP – Operating income | 13,466 | 163,346 | |||||||||
| Operating margin - as a % of net sales | 1.5 | % | 25.1 | % | |||||||
Goodwill impairment 1 | 88,872 | — | |||||||||
Deal and transaction costs 2 | 3,001 | 5,008 | |||||||||
| Integration costs: | |||||||||||
Professional fees 3 | 11,988 | 796 | |||||||||
Severance costs 4 | 1,362 | — | |||||||||
Retention costs 5 | 1,280 | — | |||||||||
Other costs 6 | 2,345 | 450 | |||||||||
Restructuring costs 7 | 11,242 | — | |||||||||
Loss on sale of business 8 | 13,642 | — | |||||||||
Amortization of intangible assets 9 | 57,574 | 12,651 | |||||||||
| Adjusted operating income | 204,772 | 182,251 | |||||||||
| Adjusted operating margin - as a % of net sales | 22.2 | % | 28.1 | % | |||||||
| Depreciation | 46,775 | 23,905 | |||||||||
| Adjusted EBITDA | $ | 251,547 | $ | 206,156 | |||||||
| Net (loss) income - as a % of net sales | (9.6) | % | 19.3 | % | |||||||
| Operating margin | 1.5 | % | 25.1 | % | |||||||
| Adjusted operating income – as a % of net sales | 22.2 | % | 28.1 | % | |||||||
| Adjusted EBITDA – as a % of net sales | 27.3 | % | 31.7 | % | |||||||
1 Non-cash impairment charges associated with goodwill.
2 Deal and transaction costs associated with CMC acquisition and completed and announced divestitures.
3 Represents professional and vendor fees recorded in connection with services provided by consultants, accountants, lawyers and other vendors to assist us in integrating recently acquired CMC into our operations. These fees arise outside of the ordinary course of our continuing operations.
4 Represent severance charges resulting from cost saving initiatives in connection with the CMC acquisition
5 Represents retention charges related directly to the CMC acquisition and completed and announced divestitures, and are not part of our normal, recurring cash operating expenses.
6 Represents other employee related costs and other costs incurred relating to the CMC acquisition and the completed and announced divestitures. These costs arise outside of the ordinary course of our continuing operations.
7 Restructuring charges resulting from cost saving initiatives.
8 Loss from the sale of QED.
9 Non-cash amortization expense associated with intangibles acquired in acquisitions.
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Reconciliation of GAAP Net Income and Earnings per Share to Non-GAAP Net Income and Earnings per Share
| Three months ended | |||||||||||
| (In thousands, except per share data) | April 1, 2023 | April 2, 2022 | |||||||||
| Net (loss) income | $ | (88,166) | $ | 125,705 | |||||||
| Adjustments to net (loss) income | |||||||||||
Goodwill impairment 1 | 88,872 | — | |||||||||
Deal and transaction costs 2 | 3,001 | 5,008 | |||||||||
| Integration costs: | |||||||||||
Professional fees 3 | 11,988 | 796 | |||||||||
Severance costs 4 | 1,362 | — | |||||||||
Retention costs 5 | 1,280 | — | |||||||||
Other costs 6 | 2,345 | 450 | |||||||||
Restructuring costs 7 | 11,242 | — | |||||||||
Loss on extinguishment of debt and modification 8 | 3,880 | — | |||||||||
Loss on sale of business 9 | 13,642 | — | |||||||||
Infineum termination fee, net 10 | (10,877) | — | |||||||||
Interest expense, net 11 | — | 4,683 | |||||||||
Amortization of intangible assets 12 | 57,574 | 12,651 | |||||||||
Tax effect of adjustments to net (loss) income and certain discrete tax items13 | 1,639 | (4,160) | |||||||||
| Non-GAAP net income | $ | 97,782 | $ | 145,133 | |||||||
| Diluted (loss) earnings per common share | $ | (0.59) | $ | 0.92 | |||||||
| Effect of adjustments to net (loss) income | 1.24 | 0.14 | |||||||||
| Diluted non-GAAP earnings per common share | $ | 0.65 | $ | 1.06 | |||||||
| Diluted weighted averages shares outstanding | 149,426 | 136,552 | |||||||||
| Effect of adjustment to diluted weighted average shares outstanding | 955 | — | |||||||||
| Diluted non-GAAP weighted average shares outstanding | 150,381 | 136,552 | |||||||||
1 Non-cash impairment charges associated with goodwill.
2 Deal and transaction costs associated with the CMC acquisition and completed and announced divestitures
3 Represents professional and vendor fees recorded in connection with services provided by consultants, accountants, lawyers and other vendors to assist us in integrating the recently acquired CMC into our operations. These fees arise outside of the ordinary course of our continuing operations.
4 Represent severance charges resulting from cost saving initiatives from the CMC acquisition.
5 Represents retention charges related directly to the CMC acquisition and completed and announced divestitures, and are not part of our normal, recurring cash operating expenses.
6 Represents other employee related costs and other costs incurred relating to the CMC acquisition and completed and announced divestitures. These costs arise outside of the ordinary course of our continuing operations.
7 Restructuring charges resulting from cost saving initiatives.
8 Non-recurring loss on extinguishment of debt and modification of our Credit Amendment.
9 Loss from the sale of QED.
10 Non-recurring gain from the termination fee with Infineum.
11 Non-recurring interest costs related to the financing of the CMC acquisition.
12 Non-cash amortization expense associated with intangibles acquired in acquisitions.
13 The tax effect of pre-tax adjustments to net (loss) income was calculated using the applicable marginal tax rate for each respective year.
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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, cash equivalents, restricted cash and senior secured financing obligations 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 $0.2 million and $1.6 million as of April 1, 2023 and April 2, 2022, respectively. On July 28, 2022, the Company entered into a floating-to-fixed interest rate swap agreement to hedge the variability in SOFR-based interest payments associated with $1.95 billion of its $2.495 billion Initial Term Loan Facility. The notional amount is scheduled to decrease quarterly and will expire on December 30, 2025.
The cash flows and results of operations of the Company’s foreign-based operations are subject to fluctuations in foreign exchange rates. We have sales denominated in the South Korean Won, New Taiwan Dollar, Chinese Renminbi, Malaysian Ringgit, Canadian Dollar, Great British Pound, Euro, Singapore Dollar, Israeli Shekel and the Japanese Yen. Approximately 23.4% and 23.8% of the Company’s sales for the quarters ended April 1, 2023 and April 2, 2022, respectively, are denominated in these currencies. Financial results therefore can be and have been affected by changes in currency exchange rates, as seen in the Company’s results in this quarter. If all foreign currencies had experienced a 10% reduction versus the U.S. dollar during the three months ended April 1, 2023 and April 2, 2022, revenue for the quarters would have been negatively impacted by approximately $25.7 million and $14.1 million, respectively.
The Company occasionally uses derivative financial instruments to manage the foreign currency exchange rate risks associated with its foreign-based operations. However, we are unlikely to be able to hedge these exposures completely. We do not enter into forward contracts or other derivative instruments for speculative or trading purposes. At April 1, 2023, the Company had no material 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, or CEO, and Chief Financial Officer, or 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, or the Exchange Act) as of April 1, 2023. The term “disclosure controls and procedures” means controls and other procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange 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 Exchange 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 April 1, 2023, 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 Exchange 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.
As discussed in Note 4 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, the Company completed its acquisition of CMC Materials on July 6, 2022. As permitted by interpretive guidance for newly acquired businesses issued by the SEC Staff, management has excluded the internal control over financial reporting of CMC Materials from the evaluation of the Company’s effectiveness of its disclosure controls and procedures as of April 1, 2023. Since the date of the acquisition, CMC Materials’ financial results are included in the Company's condensed consolidated financial statements. As part of our post-closing integration activities, we are engaged in the process of assessing the internal controls. The Company has begun to integrate policies, processes, people, technology and operations for the post-acquisition combined company, and it will continue to evaluate the impact of any related changes to internal control over financial reporting.
37
Other than the items discussed above, 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 Exchange 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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
As of April 1, 2023, 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 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report, you should carefully consider the risk factors and other cautionary statements described in Part I, Item 1A. “Risk Factors” in our Annual Report, which could materially affect our business, financial condition or future results. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our business, financial condition or future results. There have been no material changes in our risk factors from those described in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The Company did not purchase any of its equity securities during the quarter ended April 1, 2023.
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.
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Item 6. Exhibits
EXHIBIT INDEX
A.The Company hereby incorporates by reference as exhibits to this Quarterly Report on Form 10-Q the following documents:
| Reg. S-K Item 601(b) Reference | Document Incorporates | Referenced Document on file with the Commission | ||||||||||||
| (4) | Exhibit 10.1 to Entegris, Inc. Current Report on Form 8-K filed with the Securities and Exchange Commission on March 13,2023 | |||||||||||||
B.The Company hereby files as exhibits to this Quarterly Report on Form 10-Q the following documents:
| Reg. S-K Item 601(b) Reference | Exhibit No. | Document Filed Herewith | ||||||||||||
| (10) | 10.1 | |||||||||||||
| (10) | 10.2 | |||||||||||||
| (31) | 31.1 | |||||||||||||
| (31) | 31.2 | |||||||||||||
| (32) | 32.1 | |||||||||||||
| (101) | 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) | 101.SCH | XBRL Taxonomy Extension Schema Document | ||||||||||||
| (101) | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||||||||||||
| (101) | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||||||||||||
| (101) | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||||||||||||
| (101) | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | ||||||||||||
| (104) | 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||||||||||
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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: May 11, 2023 | /s/ Gregory B. Graves | |||||||
| Gregory B. Graves | ||||||||
| Executive Vice President and Chief Financial | ||||||||
| Officer (on behalf of the registrant and as | ||||||||
| principal financial officer) | ||||||||
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